Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

31 July 2015

 

 

 Form 6-K

 

The Royal Bank of Scotland Group plc

 

 

Gogarburn

PO Box 1000

Edinburgh EH12 1HQ

Scotland

United Kingdom

 

(Address of principal executive offices)

 

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F  X                                              Form 40-F     

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):__

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):__

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes                                                                 No  X  

 

If "Yes" is marked, indicate below the file number assigned to

the registrant in connection with Rule 12g3-2(b): 82-             

 

This report on Form 6-K shall be deemed incorporated by reference into the company's Registration Statement on Form F-3 (File Nos. 333-203157 and 333-203157-01) and to be a part thereof from the date which it was filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 


 

 

The Royal Bank of Scotland Group plc

 

Contents

Page 

 

 

Forward-looking statements

2

Presentation of information

3

Condensed consolidated income statement

5

Condensed consolidated balance sheet

6

Highlights

7

Letter from the Chairman

16

Analysis of results

17

Segment performance

27

Statutory financial statements

69

Notes

77

 

 

Summary risk factors

126

Statement of directors’ responsibilities

130

 

 

Additional information

131

 

 

Share information

131

Exchange rates

131

Other financial data

132

 

 

Appendix 1 – Capital and risk management

 

Appendix 2 – Balance sheet pre and post disposal groups

 

Appendix 3 – Go-forward Bank profile

 

Appendix 4 – Williams & Glyn

 

 

 

Signature page

 

       

1

 


 

 

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 RBS’s 2014 Annual Report on Form 20-F 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.

2

 


 

 

Presentation of information

 

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

 

Non-GAAP financial information

The directors manage RBS’s performance by class of business, before certain reconciling items, as is presented in the segment performance on pages 27 to 31 (the “non-statutory basis”). The following are reported as reconciling items: own credit adjustments, gain/(loss) on redemption of own debt, write-down of goodwill, strategic disposals and includes the results of Citizens which is classified as a discontinued operations in the statutory results. RFS Holdings minority interest was a reconciling item for the periods ended 30 June 2014.

 

Discussion of RBS’s performance in this report presents RBS’s results on a non-statutory basis as management believes that such measures allow a more meaningful analysis of RBS’s financial condition and the results of its operations. These measures are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Reconciliations of these non-GAAP measures to the closest equivalent GAAP measure are presented throughout this document and in the segment performance on pages 27 to 31. These non-GAAP financial measures are not a substitute for GAAP measures.

 

RBS has divided its operations into “RBS excluding RBS Capital Resolution (RCR)”. Certain measures disclosed in this document for RBS excluding RCR are non-GAAP financial measures used by management as they represent a combination of all reportable segments including Citizens Financial Group (CFG) with the exception of RCR. The presentation of Personal & Business Banking (“PBB”) which combines the reportable segments of UK Personal & Business Banking and Ulster Bank and the presentation of Commercial and Private Banking (“CPB”) which combines the reportable segments of Commercial Banking and Private Banking are non GAAP financial measures. In addition the presentation of operating profit, operating expenses and other performance measures excluding the impact of restructuring costs and litigation and conduct costs is a non-GAAP financial measure and is not a substitute for the equivalent GAAP measure. Lastly, the liquidity coverage ratio, stressed outflow coverage, net stable funding ratio and further metrics included in the Highlights, Analysis of results and Capital and risk management appendix represent non-GAAP financial measures and are being presented for informational purposes given they are metrics that are not yet required to be disclosed by a government, governmental authority or self-regulatory organisation.

 

Following the announcement in February 2015 that RBS is committed to a leaner, less volatile business based around its core franchises of PBB and CPB a number of initiatives have been announced which include, but are not limited to the following:

·

Corporate and Institutional Banking (CIB) is planning to restructure into “CIB Go-forward” and “CIB Capital Resolution” elements, the split is subject to further refinement, reference to these businesses are non-GAAP measures as CIB remains a single reportable segment.

 

 

·

the sale of the “International Private Banking” business which has been reclassified to disposal groups (the retained business Private Banking UK is within the Go-forward Bank(Private Banking Go-forward)), references to these businesses are non-GAAP measures as Private Banking remains a single reportable segment.

 

 

·

the exit of Williams & Glyn (W&G) which is mainly included within UK PBB and is presented on a carve out basis using management analysis and does not reflect the cost base, funding and capital profile of a standalone bank, references to this business are non-GAAP measures as UK PBB remains a single reportable segment.

 

3

 


 

 

Presentation of information

 

In addition the following reportable segments are also included within the Exit Bank

·

the divestment of the remaining stake in Citizens Financial Group

 

 

·

the continued run down of RCR

 

This document contains some information to illustrate the impact on certain key performance measures of these initiatives by showing the future profile of the bank (the ‘Go-forward Bank’(UK PBB excluding W&G, Ulster Bank, Commercial Banking, CIB Go-forward and Private Banking Go-forward)) and the segments, businesses and portfolios which it intends to exit (the ‘Exit-Bank’ (CIB Capital Resolution, W&G, international private banking, Citizens and RCR). References to these combinations of business are non-GAAP measures. This information is presented to illustrate the strategy and its impact on the business and is on a non-statutory basis and should be read in conjunction with the notes attached as well as the section titled “Forward-looking Statements”.

 

 

 

 

4

 


 

 

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

354 

285 

  

674 

(320)

181 

  - Other

35 

  

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) (1)

  

  

  

  

  

  

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

 

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.

 

5

 


 

 

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 

6

 


 

 

 

Highlights

 

Q2 2015 performance

Profit attributable to ordinary and B shareholders of £293 million was reported in Q2 2015 including £1,050 million of restructuring costs as the pace of restructuring accelerated and £459 million of litigation and conduct costs. The profit attributable to ordinary and B shareholders for Q2 2015 was up from a loss attributable to ordinary and B shareholders of £446 million in Q1 2015 and a profit attributable to ordinary and B shareholders  of £230 million in Q2 2014.

 

Total income was £3,737 million, with net interest income down 4% from Q2 2014, with good asset growth in UK mortgages and Commercial Banking partially offsetting declines in other portfolios. Non-interest income was down 3% from Q2 2014, reflecting the reduction in CIB’s scale and with reductions in fees and commissions payable offset by gains in income from trading and other operating income. 

 

Operating expenses totalled £3,689 million an increase of 3% from Q1 2015 and 13% from Q2 2014. Restructuring costs were significantly higher at £1,050 million, principally relating to CIB (£734 million) and to Williams & Glyn separation (£126 million). Litigation and conduct costs in Q2 2015 amounted to £459 million, principally related to mortgage-backed securities litigation in the United States.

 

Credit conditions remained generally benign, with net impairment releases of £192 million, up from £129 million in Q1 2015 and from £124 million in Q2 2014, principally reflecting the improvement in underlying collateral values within RCR.

 

Operating profit before tax was £240 million, up from £53 million in Q1 2015 and down from £736 million in Q2 2014. After a tax charge of £100 million, the profit from continuing operations was £140 million, compared with a loss of £140 million in Q1 2015 and a profit of £458 million in Q2 2014. Operating profit on a non-statutory basis excluding restructuring, litigation and conduct costs of £1,509 million (Q1 2015 - £1,309 million; Q2 2014 £635 million), was £1,813 million, up 11% from Q1 2015 but down 7% from Q2 2014.

 

Profit from discontinued operations of £674 million reflected the rise in the market value of Citizens shares during the quarter.

 

 

 

7

 


 

 

Highlights

 

H1 2015 performance

Loss attributable to ordinary and B shareholders of £153 million was reported for the first half of 2015, including £1,503 million of restructuring costs and £1,315 million of litigation and conduct costs. The loss attributable to ordinary and B shareholders for H1 2015 was down from a profit of £1,425 million in H1 2014 as income attrition in the Exit Bank businesses preceded the delivery of cost reductions and higher restructuring, litigation, and conduct costs were incurred.

 

Total income was £7,256 million, 15% lower than in H1 2014, with net interest income stable with asset growth in UK PBB and Commercial Banking. Non-interest income was down 30%, principally reflecting reduced trading income, in line with CIB’s risk and resource reduction. 

 

Operating expenses were up £1,126 million, 18%, to £7,284 million due to higher litigation and conduct costs of £1,315 million and restructuring costs of £1,503 million. Operating expenses on a non-statutory basis, excluding restructuring costs of £1,503 million (H1 2014 - £514 million) and litigation and conduct costs of £1,315 million (H1 2014 £250 million) were down 14% to £5,485 million reflecting cost reductions of £859 million relative to H1 2014, putting RBS on track to deliver its targeted £800 million of cost savings in 2015.

 

Net impairment releases of £321 million were reported in H1 2015, compared with net impairment losses of £165 million in H1 2014. Net releases were recorded in all reportable segments except Commercial Banking, and CFG where impairments nevertheless remained low at 0.1% and 0.3% respectively of loans and advances.

 

Operating profit before tax in H1 2015 was £293 million down from £2,226 million in H1 2014. Operating profit before tax on a non-statutory basis excluding restructuring, litigation and conduct costs of £2,818 million (H1 2014 - £764 million), was £3,447 million, up 2% from H1 2014. After a tax charge of £293 million, net profit from continuing operations was nil, while results from discontinued operations included a net profit of £354 million relating to Citizens.

 

Balance sheet and capital

Net loans and advances to customers at 30 June 2015 were £315 billion, down 5% from 31 March 2015 and 6% from 31 December 2014. This was driven by run-off in CIB and RCR, partially offset by strong UK mortgage growth.

 

Total assets fell by 8% in the first half of 2015 taking the balance down to £965 billion, principally reflecting run-off in CIB and RCR. Total assets excluding derivatives of £282 billion were £683 billion, down 4% from 31 March 2015 and 2% from 31 December 2014, principally reflecting run-off in CIB and RCR. RWAs decreased to £326 billion, down from £356 billion at the start of the year and £392 billion from 30 June 2014, driven by RCR and CIB.

 

Customer deposits of £342 billion at 30 June 2015 were down 2% from 31 March 2015 and 3% from 31 December 2014, with good growth in UK personal current and savings accounts more than offset by the reduction in scale of CIB and by the impact of the weakening euro on balances in Ulster Bank.

 

Common Equity Tier 1 (CET1) and leverage ratios improved from 11.5% and 4.3% at 31 March 2015 to 12.3% and 4.6% respectively at 30 June 2015, principally driven by asset reduction in CIB and RCR.

 

8

 


 

 

Highlights

 

The Royal Bank of Scotland Group (RBS) continues to deliver on its plan to build a stronger, simpler and fairer bank for both customers and shareholders.

 

A strong operating performance from UK PBB and Ulster Bank (Personal & Business Banking (PBB)) and Commercial Banking and Private Banking (Commercial & Private Banking (CPB)) contributed to a profit attributable to ordinary and B shareholders of £293 million for Q2 2015 (loss attributable to ordinary and B shareholders of £153 million for H1 2015):

Q2 operating profit before tax   was £240 million, compared with £53 million in Q1 2015. Litigation and conduct costs were lower at £459 million compared with £856 million in Q1 2015, while restructuring costs rose to £1,050 million from £453 million in Q1 2015 as the pace of restructuring accelerated.

Operating profit before tax on a non-statutory basis excluding restructuring costs of £1,050 million (Q1 2014 - £453 million) and litigation and conduct costs of £459 million (Q1 2015 - £856 million)  was £1,813 million, up 11% from Q1 2015 but down 7% from Q2 2014, principally driven by reduced income in Corporate & Institutional Banking (CIB) following the planned scaling back of the business. Q2 2015 income benefited from a £205 million credit for IFRS volatility(1), compared with a £123 million charge in Q1 2015. H1 2015 operating profit before tax on a non-statutory basis excluding restructuring costs of £1,503 million (H1 2014 - £514 million) and litigation and conduct costs of £1,315 million (H1 2014 - £250 million) was £3,447 million, up 2% from H1 2014.

Discontinued operations included a fair value gain of £517 million, of which £211 million was attributable to RBS, reflecting the rise in market value of Citizens shares and broadly reversing the loss recorded in Q1 2015.

 

RBS is making good progress against its 2015 targets, moving faster in delivering its plan:

Positive lending momentum across UK Personal & Business Banking (UK PBB) and Commercial Banking.

Statistically significant improvement in Net Promoter Scores (NPS) year-on-year in four of the seven businesses where it is measured.

Adjusted return on equity in the Go-forward Bank(2,3) is estimated at 14% for H1 2015. Return on equity for RBS for H1 2015 is (0.7%).

Capital position strengthened further with Common Equity Tier 1 ratio up 80 basis points in Q2 2015 to 12.3%.

Exit Bank ahead of plan with continuing progress on sales and run-off.

On track to achieve £800 million cost reduction target(4).

 

Creating a strong Go-forward Bank

RBS continues to target lending growth in strategic segments, UK PBB and Commercial Banking, in line with or above nominal UK GDP growth. Annualised growth across these segments was 2% in H1 2015. Investment in these businesses is paying dividends through improving returns.

 

Following a slow start to 2015, the updated mortgage platform enabled RBS to meet increased demand for mortgage products through Q2 2015, with applications up 43% year-on-year and gross new lending up 43% to £5.4 billion relative to the previous quarter. Market share of new mortgages reached 9.7% for Q2 2015, well in excess of RBS’s current stock share of 8.3%. Commercial Banking increased loans and advances by £1.4 billion year-on-year, excluding transfers, while continuing to run down non-strategic books. 

Notes:

(1)

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

(2)

Calculated using operating profit after tax on a non-statutory basis excluding restructuring costs of £1,503 million and litigation and conduct costs of £1,315 million divided by average notional equity (based on 13% of average RWAe). See appendix 3 for more information.

(3)

Provided to illustrate the impact on the RBS ROE of the strategic initiatives announced in February 2015 by showing the ‘Go-forward Bank’ profile which is a non-GAAP measure and should be read in conjunction with the notes attached as well as the section titled “Forward-looking Statements”.  See presentation of information on page 3 and appendix 3 for more information.

(4)

Excluding restructuring, litigation and conduct costs, write-off of intangible assets, and operating expenses of Citizens and Williams & Glyn.

9

 


 

 

Highlights

 

RBS’s ambition is to be the number one bank for customer service, trust and advocacy. Customer NPS across our businesses have seen statistically significant improvement year-on-year, specifically NatWest Personal Banking, NatWest Business Banking, RBS Business Banking and Ulster Bank (Northern Ireland) Personal Banking reflecting recent initiatives to make the bank fairer and simpler to do business with.

 

RBS is focused on improving performance and returns in the remaining Go-forward Bank (Ulster Bank, Private Banking and CIB) by improving service and reducing operating costs and risk where appropriate.

 

The Go-forward Bank is estimated(1) to have generated an adjusted operating profit(1,2) of £1.4 billion in the quarter, up 17% from Q1 2015, with adjusted return on equity estimated(1,2) at 16%, up from 12% in Q1 2015 (see appendix 3). RBS operating profit before tax was £240 million in the quarter (Q1 2015 - £53 million) with a return on equity of 2.7% (Q1 2015 - (4.1%)).

 

Accelerated run-down of the Exit Bank

RBS remains ahead of plans to exit a number of businesses through sale or run-off, with good execution to date. Good momentum has been maintained with risk-weighted assets (RWAs) down by an estimated(1,3) £24 billion since the start of 2015 to £148 billion.

 

CIB is on course to reduce RWAs by £25 billion by the end of 2015, with substantial progress across exit portfolios. 

 

Plans to complete the exit from Citizens remain on track.

 

RBS Capital Resolution (RCR) continued on its path to complete its targeted rundown before the end of 2015, one year ahead of schedule, as it continues to benefit from attractive exit values. RCR total assets fell to £16.5 billion, a reduction of £12.5 billion, or 43%, since the start of the year. RCR funded assets which excluded derivatives of £8 billion  fell by 44% in the first half of 2015 taking the balance down to £8.4 billion. RWAs also decreased 35% to £14.4 billion in the same period.

 

By 30 June 2015 considerable progress had been made toward the disposal of the North American corporate loan portfolio identified for exit, with a substantial proportion sold to Mizuho Bank through two separate transactions. Upon final settlement expected in Q3 2015, RWAs will have been reduced by approximately US$9 billion.

 

RBS has partnered with BNP Paribas to offer existing international customers an alternative to Global Transaction Services (GTS) as part of the decision to refocus the business. Businesses in the UK and Ireland, including those outwith the UK but with significant links to the UK, will continue to receive GTS capabilities from RBS.

 

The majority of the Australian and United Arab Emirates corporate loan books have been sold.

 

The sale of most of the RBS International Private Banking business to Union Bancaire Privée remains on track for Q4 2015.

 

RBS is continuing to work towards the separation of Williams & Glyn in the summer of 2016 and IPO by the end of 2016. In May 2015 the Competition & Markets Authority announced that it had been asked by the Chancellor to advise on the competition implications of the Williams & Glyn divestment. The review is expected to be completed later this year and at this stage its outcome cannot be predicted.

 

Notes:

(1)

Provided to illustrate the impact on RBS operating profit, ROE and RWAs of the strategic initiatives announced in February 2015 by showing the ‘Go-forward Bank’ profile which is a non-GAAP measure and should be read in conjunction with the notes attached as well as the section titled “Forward-looking Statements”.  See presentation of information on page 3 and appendix 3 for more information.

(2)

Excluding restructuring of £1,050 million (Q1 2015 - £453 million) and litigation and conduct costs of £459 million (Q1 2015 - £856 million).

(3)

RBS RWAs £326.4 billion (31 December 2014 - £355.9 billion).

10

 


 

 

Highlights

 

Making RBS safer and dealing with ongoing issues

Balance sheet and capital strength and resilience continue to build. RWAs decreased to £326 billion, down from £356 billion at the start of the year and £392 billion from 30 June 2014, driven by RCR and CIB. A CET1 ratio of 12.3% at 30 June 2015 was up 80 basis points from 31 March 2015 and 110 basis points from 31 December 2014. Citizens Financial Group’s RWAs (£70 billion) remain for the time being fully consolidated for regulatory purposes, although RBS’s holding has been reduced to 40.8% as at 30 June 2015.

 

Risk elements in lending (REIL) fell to £18.7 billion, representing 4.8% of gross customer loans, down from 5.4% at 31 March 2015. REIL for RBS excluding RCR were £11.3 billion, down from £12.1 billion at 31 March 2015.

 

RBS plans to return excess capital to shareholders through dividends or buybacks, subject to regulatory approval. This is dependent on the achievement of certain strategic objectives, including sustained profitability, improved stress test results and resolving our major conduct and litigation issues. As a result we do not expect to be in a position to return capital before Q1 2017 at the earliest.

 

RBS continues to be party to legal proceedings and regulatory and governmental investigations, including with respect to US mortgage-backed securities, foreign exchange trading and its treatment of UK SME customers, and continues to incur conduct related costs, including in relation to payment protection insurance and interest rate hedging products. While addressing these ongoing issues, RBS is continuing its endeavours to embed a strong and comprehensive risk and compliance culture throughout the organisation.

 

In June 2015 RBS experienced an issue with its secure connection used to process BACS payments resulting in a one or two day delay to payments being applied to some customer accounts. RBS has agreed to reimburse customers for any loss suffered as a result. A comprehensive root cause analysis is ongoing and correspondence with our regulators continues.

 

Making good progress on 2015 targets

Strategy Goal

2015 Target

H1 2015 Progress

Strength and sustainability

Reduce RWAs to <£300 billion

£326 billion

RCR exit substantially completed

 Funded assets down 78% since initial pool of assets identified(1)

Citizens deconsolidation

40.8% holding

£2 billion AT1 issuance

Inaugural AT1 to be

launched shortly(2)

Customer experience

Improve NPS in every UK franchise(3)

 Year-on-year, statistically significant improvement in NPS in 4 of the 7 businesses where it is measured

Simplifying the bank

Reduce costs by £800 million(4)

Annualised cost savings of over £700 million achieved in H1 

Supporting growth

Lending growth in strategic segments

≥ nominal UK GDP growth

2% annualised growth  in UK PBB and Commercial Banking

Employee engagement

Raise employee engagement index to within 8% of Global Financial Services (GFS) norm

Annual metric

 

Notes:

(1)

Funded assets are down 71% since 1 January 2014.

(2)

Issuance subject to market conditions.

(3)

Further details are available on page 13.

(4)

Excluding restructuring, litigation and conduct costs, write-off of intangible assets, and operating expenses of Citizens and Williams & Glyn.

11

 


 

 

Highlights

 

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

Investment in new products - Reward, the new current account proposition, was launched in July to a small number of customers. Through the Reward account customers can receive 3% cashback on certain household bills paid by direct debit. Full launch is scheduled for later in the year.

 

 

Continued commitment to be fairer for customers - RBS is making overdrafts more accessible with 600,000 customers now newly eligible for a £100 overdraft. This is in addition to allowing a £250 limit to customers who have had positive behaviour with RBS but historical issues with other lenders.

 

 

Investment in service - The mortgage platform was upgraded and the number of mortgage advisors increased to 869 in UK PBB (up 8% compared with the start of 2015 or 28% compared with Q2 2014) which provides increased lending capacity. The NatWest mobile banking app customer NPS became joint number one in the market(1) during Q2 2015, with real time registration allowing customers to begin using the app as their account is opened. Around 2,800 staff registered for a bespoke lending skills training programme and RBS rolled out a customer relationship management (CRM) tool to around 3,000 staff, allowing them to have a single view of all customer needs and thus improve service.

 

 

Making RBS simpler to do business with - The time to open a personal current account has been halved to 30 minutes as the bank transforms its systems, becoming simpler and quicker. The Commercial Bank has delivered a 75% reduction in customer paperwork and a 25% reduction in the time to open an account.

 

 

Leading on innovation and collaboration - RBS is the first bank to launch TouchID login and adopt Apple Pay whilst launching the first Royal National Institute of Blind People (RNIB) approved cards.

 

 

Backing UK business - RBS launched a mid-market initiative to attract and support more businesses with a turnover of between £10 million and £50 million or borrowing in excess of £1 million. The aim is to achieve 300 new customer relationships, providing the means to grow and support UK business. In partnership with Entrepreneurial Spark, the first of eight business accelerator hubs was opened in Birmingham providing free space, mentoring and financial support to small businesses. A new £2.5 million Skills & Opportunities Fund to help people from disadvantaged communities learn new skills, get into the world of work or set up their own business was also launched.

 

 

Building a more capable and diverse workforce - RBS is raising professional standards by supporting staff to undertake the Chartered Banker foundation qualification. RBS is the first bank to achieve Investors in Young People Accreditation. In 2015 we will increase the number of apprentices from 50 to over 300. RBS has set a target of having 30% female leaders in every business by 2020.

 

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

 

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

 

Net Promoter Score (NPS)

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

 

 

 

 

Note:

(1)

Source: internal NPD Drivers study, June 15 based on 3 month roll with latest base size 2234.

12

 


 

 

Highlights

 

The table below lists all of the businesses for which we have an NPS for Q2 2015.  Year-on-year, NatWest Personal Banking, NatWest Business Banking, RBS Business Banking and Ulster Bank (Northern Ireland) Personal Banking have all seen statistically significant improvements in NPS. 

 

In recent years, the bank has launched a number of initiatives to make it simpler, fairer and easier to do business, and it continues to deliver on the commitments that it made to its customers in 2014.

 

 

 

Q2 2014

Q1 2015

Q2 2015

Year end 2015 target

Personal Banking

NatWest (England & Wales)(1)

4

5

8

9

RBS (Scotland)(1)

-10

-18

-10

-10

Ulster Bank (Northern Ireland)(2)

-34

-18

-11

-21

Ulster Bank (Republic of Ireland)(2)

-22

-16

-14

-15

Business Banking

NatWest (England & Wales)(3)

-15

-6

4

-7

RBS (Scotland)(3)

-30

-17

-17

-21

Commercial Banking(4)

9

12

10

15

 

Customer Trust

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

 

Trust in the RBS brand was impacted by the IT incident on 17 June 2015.

 

 

 

Q2 2014

Q1 2015

Q2 2015

Year end 2015 target

Customer Trust(5)

NatWest (England & Wales)(1)

49%

44%

48%

46%

RBS (Scotland)

0%

10%

-2%

11%

 

Notes:

Suitable measures for Private Banking and for Corporate & Institutional Banking are in development.  NPS for Ulster Bank Business Banking is measured at Q4.

(1)

Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest England & Wales (3,444) RBS Scotland (520). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?”

(2)

Source: Coyne Research 12 month rolling data. Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”.   

(3)

Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with an annual turnover up to £2 million. 12 month rolling data. Latest base sizes: NatWest England & Wales (1,240), RBS Scotland (419). Weighted by region and turnover to be representative of businesses in England & Wales/Scotland.

(4)

Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with annual turnover between £2 million and £1 billion.  Latest base size: RBSG Great Britain (965). Weighted by region and turnover to be representative of businesses in Great Britain.

(5)

Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (916), RBS Scotland (209).

 

13

 


 

 

Highlights

 

Recent developments

 

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.

 

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. The bank levy for 2015 is expected to be £280 million and is projected to fall progressively to £150 million by 2019. 

 

14

 


 

 

Highlights

 

Outlook

Following the sale of a further tranche of shares, RBS now plans to complete the exit from Citizens by the end of 2015, subject to market conditions.

 

The divestment, together with the strong progress being made in CIB and RCR, will enable RBS to meet its target of reducing RWAs to below £300 billion in 2015.

 

The restructuring of CIB is planned to accelerate during the second half of 2015.  This is expected to result in lower revenues, partially due to higher disposal losses, and elevated restructuring costs.

 

Targeted cost savings of £800 million in 2015 are expected to be delivered, notwithstanding the adverse impact of the increased UK bank levy.

 

RBS expects to meet its objective of lending growth in strategic segments, UK PBB and Commercial Banking, in line with or above nominal UK GDP growth.

 

Investments to make the bank simpler and fairer for customers are having a positive impact on NPS. The target to improve NPS in all customer franchises is stretching but achievable.

 

Whilst legacy issues continue to be addressed, material further and incremental costs and provisions related to historical conduct are expected. The timing and quantum of any future costs, provisions and settlements, however, remain uncertain.

15

 


 

 

Letter from the Chairman

 

These results demonstrate the strength of our underlying customer businesses with operating profit - excluding restructuring and conduct charges of £1.8 billion(1) for the quarter, up 11% on Q1. We have reported an attributable profit for the quarter, albeit a loss for the half year, which reflects the restructuring and conduct costs we are continuing to work through.  

 

We are seeing progress in our UK retail and commercial businesses. More customers are choosing us to help them buy their homes than ever before, while the commercial business grew its loan book by £1.4 billion since 30 June 2014. 

 

RBS is closely involved in the UK’s improving economic performance.  In partnership with Entrepreneurial Spark, RBS is opening business accelerator hubs in Birmingham, Brighton, Bristol and Leeds, with plans to open further hubs in major cities across the UK as we continue to support UK entrepreneurs and businesses providing free space, mentoring and financial support. The latest data from UK Export Finance shows that we are currently the biggest backer (by volume and value) of export contracts for 2015/16 and we are well on track to exceed our business for the previous financial year.

 

In the first six months of the year we have increased our UK focus by further reducing our stake in Citizens in the US and by agreeing to sell our International Private Bank. We have made excellent progress running down the parts of the business that no longer fit with our strategy.

 

We have also once again improved our core capital position, and have had six consecutive quarters of capital growth.  RBS is now a much better capitalised bank. 

 

The RBS of today is of course very different from the bank of 2009.  It has a greater focus on the quality of earnings and the control of risks.

 

There have naturally been ups and downs along the way, which have required the strategy to change, but the focus on making this a stronger, simpler and fairer organisation has been the right one.  The decisions to sell or run-off significant parts of the business while investing in our core customer franchises has meant we are better positioned to deal with the constraints of structural regulatory reform, notably ring-fencing.

 

Of course there are still some obstacles to overcome especially the resolution of outstanding conduct issues, including the investigations into our sale of residential mortgage-backed securities in the US between 2005-07, and the investigation by UK authorities into the bank’s approach to distressed businesses. 

 

Past experience at RBS and many other banks has demonstrated the readiness of regulators to impose substantial fines and costly redress schemes.  These conduct and litigation costs have greatly exceeded the expectations of banks and their investors. Judging the ultimate scale of conduct costs remains extremely challenging.

 

Looking forward, however, making customer service, trust and advocacy the focus of our strategy is starting to deliver results and by the end of this year I am confident that shareholders will see a clearer picture of the bank that RBS will become. 

 

This is an appropriate backdrop to the sale of shares by the UK government, which will be a significant moment for this bank.

 

Philip Hampton

Chairman

 

Note:

(1)

On a non-statutory basis excluding restructuring costs of £1.1 billion (Q1 15 - £0.5 billion) and conduct charges of £0.5 billion (Q1 15 – £0.9 billion)

 

16

 


 

 

Analysis of results

 

The following table reconciles the non-statutory basis results (a non-GAAP financial measure) to the statutory basis.

  

Half year ended

  

Quarter ended

  

30 June

30 June

  

30 June

31 March

30 June

  

2015 

2014 

  

2015 

2015 

2014 

Net interest income

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Net interest income

  

  

  

  

  

  

  - UK Personal & Business Banking

2,290 

2,276 

  

1,147 

1,143 

1,152 

  - Ulster Bank

265 

323 

  

132 

133 

169 

  - Commercial Banking

1,108 

999 

  

562 

546 

511 

  - Private Banking

254 

344 

  

126 

128 

174 

  - Corporate & Institutional Banking

376 

365 

  

174 

202 

186 

  - Central items

150 

203 

  

88 

62 

100 

  - RCR

(25)

(1)

  

(14)

(11)

  - Citizens

1,104 

987 

  

551 

553 

499 

  - non-statutory basis

5,522 

5,496 

  

2,766 

2,756 

2,798 

  - Citizens

(1,104)

(987)

  

(551)

(553)

(499)

  - RFS Holdings minority interest

(3)

  

  

  

Net interest income - statutory basis

4,418 

4,506 

  

2,215 

2,203 

2,299 

  

  

  

  

  

  

  

Average interest-earning assets

  

  

  

  

  

  

  - RBS

416,207 

439,250 

  

417,135 

415,579 

433,920 

  - UK Personal & Business Banking

128,468 

126,696 

  

128,569 

128,366 

126,964 

  - Ulster Bank

27,518 

28,089 

  

27,404 

27,633 

28,884 

  - Commercial Banking

77,985 

74,749 

  

78,880 

77,079 

74,971 

  - Private Banking

15,850 

18,663 

  

15,729 

15,973 

18,698 

  - Corporate & Institutional Banking

71,269 

83,778 

  

69,437 

73,114 

83,477 

  - Central items

77,681 

70,892 

  

82,358 

73,270 

66,393 

  - RCR

17,436 

36,383 

  

14,758 

20,144 

34,533 

  

  

  

  

  

  

  

Net interest margin

  

  

  

  

  

  

  - RBS

2.14%

2.07%

  

2.13%

2.15%

2.13%

  - UK Personal & Business Banking

3.59%

3.62%

  

3.58%

3.61%

3.64%

  - Ulster Bank

1.94%

2.32%

  

1.93%

1.95%

2.35%

  - Commercial Banking

2.87%

2.70%

  

2.86%

2.87%

2.73%

  - Private Banking

3.23%

3.72%

  

3.21%

3.25%

3.73%

  - Corporate & Institutional Banking

1.06%

0.88%

  

1.00%

1.12%

0.90%

  - Central items

0.39%

0.58%

  

0.43%

0.34%

0.60%

  - RCR

(0.29%)

(0.01%)

  

(0.38%)

(0.22%)

0.08%

  

  

  

  

  

  

  

17

 


 

 

 

Analysis of results

 

Key points

 

H1 2015 compared with H1 2014

·

Net interest income was stable, with asset growth in UK PBB and Commercial Banking. Segmental splits are affected by the transfer of a number of portfolios between businesses, including the transfer to Commercial Banking of the UK corporate coverage business from CIB and of the RBS International business from Private Banking.

 

 

·

Net interest margin (NIM) rose 7 basis points, with progressive repricing of deposits helping to offset continuing competitive pressures on asset margins.

 

Q2 2015 compared with Q1 2015

·

Asset growth was driven by rising mortgage volumes, supported by increased mortgage adviser capacity and increasingly competitive pricing.

 

 

·

Modest downward pressure on NIM reflected competitive conditions in domestic markets and a further slight decline in the standard variable rate mortgage book, partially offset by some further small adjustments to deposit pricing.

 

Q2 2015 compared with Q2 2014

·

Net interest income was down 4%, with good asset growth in UK mortgages and Commercial Banking partially offsetting declines in other portfolios.

 

 

·

NIM remained stable, with deposit repricing offsetting continuing pressure on asset margins.

 

18

 


 

 

 

Analysis of results

 

The following tables reconcile the non-statutory basis results (a non-GAAP financial measure) to the statutory basis.

  

Half year ended

  

Quarter ended

  

30 June

30 June

  

30 June

31 March

30 June

  

2015 

2014 

  

2015 

2015 

2014 

Non-interest income

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Fees and commissions receivable

  

  

  

  

  

  

  - non-statutory basis

2,347 

2,605 

  

1,169 

1,178 

1,314 

  - Citizens

(389)

(362)

  

(200)

(189)

(188)

  

  

  

  

  

  

  

Statutory basis

1,958 

2,243 

  

969 

989 

1,126 

  

  

  

  

  

  

  

Fees and commissions payable

  

  

  

  

  

  

  - non-statutory basis

(381)

(487)

  

(195)

(186)

(251)

  - Citizens

18 

12 

  

  

  

  

  

  

  

  

Statutory basis

(363)

(475)

  

(186)

(177)

(244)

  

  

  

  

  

  

  

Net fees and commissions - non-statutory basis

1,966 

2,118 

  

974 

992 

1,063 

  

  

  

  

  

  

  

Net fees and commissions - statutory basis

1,595 

1,768 

  

783 

812 

882 

  

  

  

  

  

  

  

Income from trading activities

  

  

  

  

  

  

  - non-statutory basis

734 

1,482 

  

464 

270 

626 

  - own credit adjustments

210 

11 

  

115 

95 

(84)

  - Citizens

(69)

(43)

  

(34)

(35)

(13)

  - RFS Holdings minority interest

  

(1)

  

  

  

  

  

  

  

Statutory basis

875 

1,450 

  

545 

330 

528 

  

  

  

  

  

  

  

Gain on redemption of own debt - statutory basis

20 

  

  

  

  

  

  

  

  

Other operating income

  

  

  

  

  

  

  - non-statutory basis

478 

882 

  

165 

313 

438 

  - own credit adjustments

78 

(62)

  

53 

25 

(106)

  - strategic disposals

(135)

191 

  

(135)

  - Citizens

(53)

(231)

  

(24)

(29)

(191)

  - RFS Holdings minority interest

25 

  

13 

  

  

  

  

  

  

  

Statutory basis

368 

805 

  

194 

174 

154 

  

  

  

  

  

  

  

Total non-interest income - non-statutory basis

3,178 

4,482 

  

1,603 

1,575 

2,127 

  

  

  

  

  

  

  

Total non-interest income - statutory basis

2,838 

4,043 

  

1,522 

1,316 

1,564 

 

Key points

 

H1 2015 compared with H1 2014

·

Non-interest income was down 30%, principally reflecting reduced trading income, in line with CIB’s  risk and resource reduction.

 

 

·

Losses of £69 million were recorded on the disposal of available-for-sale securities, compared with gains of £215 million in H1 2014.

 

Q2 2015 compared with Q1 2015

·

Non-interest income was up 16% due to charges in Q1 of £122 million relating to strategic disposals in respect of International Private Banking and £13 million mainly in relation to RBS Kazakhstan. On a non-statutory basis non-interest income was up 2%, reflecting seasonal movements offset by volatile items under IFRS.

 

19

 


 

 

Analysis of results

 

Key points (continued) 

 

Q2 2015 compared with Q2 2014

·

Non-interest income was 3% lower reflecting the reduction in CIB’s scale and with reductions in fees and commissions payable offset by gains in income from trading and other operating income. On a non-statutory basis non-interest income was 25% lower, principally reflecting the reduction in CIB’s scale.

 

 

·

A loss of £42 million on the disposal of available-for-sale securities compared with a gain of £13 million in Q2 2014.

 

20

 


 

 

 

Analysis of results

 

The following tables reconcile the non-statutory basis results (a non-GAAP financial measure) to the statutory basis.

 

Half year ended

  

Quarter ended

  

30 June

30 June

  

30 June

31 March

30 June

  

2015 

2014 

  

2015 

2015 

2014 

Operating expenses

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Staff costs

  

  

  

  

  

  

  - non-statutory basis

(3,075)

(3,340)

  

(1,517)

(1,558)

(1,693)

  - restructuring costs

(348)

(196)

  

(293)

(55)

(153)

  - Citizens

568 

539 

  

280 

288 

287 

  - RFS Holdings minority interest

  

  

  

  

  

  

  

  

Statutory basis

(2,855)

(2,997)

  

(1,530)

(1,325)

(1,558)

  

  

  

  

  

  

  

Premises and equipment

  

  

  

  

  

  

  - non-statutory basis

(859)

(1,079)

  

(372)

(487)

(485)

  - restructuring costs

(47)

(196)

  

(37)

(10)

(137)

  - Citizens

161 

149 

  

83 

78 

76 

  

  

  

  

  

  

  

Statutory basis

(745)

(1,126)

  

(326)

(419)

(546)

  

  

  

  

  

  

  

Other administrative expenses

  

  

  

  

  

  

  - non-statutory basis

(1,133)

(1,292)

  

(622)

(511)

(605)

  - litigation and conduct costs

(1,315)

(250)

  

(459)

(856)

(250)

  - restructuring costs

(208)

(119)

  

(100)

(108)

(94)

  - Citizens

290 

305 

  

154 

136 

171 

  - RFS Holdings minority interest

(1)

  

(2)

  

  

  

  

  

  

  

Statutory basis

(2,366)

(1,357)

  

(1,027)

(1,339)

(780)

  

  

  

  

  

  

  

Depreciation and amortisation

  

  

  

  

  

  

  - non-statutory basis

(418)

(551)

  

(186)

(232)

(282)

  - Citizens

88 

  

45 

  - restructuring costs

(294)

(3)

  

(14)

(280)

(1)

  - RFS Holdings minority interest

  

  

  

  

  

  

  

  

  

  

Statutory basis

(712)

(466)

  

(200)

(512)

(237)

  

  

  

  

  

  

  

Restructuring costs (1)

  

  

  

  

  

  

  - non-statutory basis

(1,503)

(514)

  

(1,050)

(453)

(385)

  - staff costs

348 

196 

  

293 

55 

153 

  - premises and equipment

47 

196 

  

37 

10 

137 

  - other administrative expenses

208 

119 

  

100 

108 

94 

  - write off of intangible assets

606 

  

606 

  - depreciation and amortisation

294 

  

14 

280 

  

  

  

  

  

  

  

Statutory basis

  

  

  

  

  

  

  

  

Litigation and conduct costs (1)

  

  

  

  

  

  

  - non-statutory basis

(1,315)

(250)

  

(459)

(856)

(250)

  - other administrative expenses

1,315 

250 

  

459 

856 

250 

  

  

  

  

  

  

  

Statutory basis

  

  

  

  

  

  

  

  

Write down of goodwill and other intangible assets

  

  

  

  

  

  

  - non-statutory basis

(82)

  

  - write down of goodwill and other intangible assets

(606)

(130)

  

(606)

(130)

  

  

  

  

  

  

  

Statutory basis

(606)

(212)

  

(606)

(130)

  

  

  

  

  

  

  

Operating expenses - non-statutory basis

(8,303)

(7,108)

  

(4,206)

(4,097)

(3,700)

  

  

  

  

  

  

  

Operating expenses - statutory basis

(7,284)

(6,158)

  

(3,689)

(3,595)

(3,251)

 

Note:

(1)

Items reallocated to other expense lines, not reconciling items.

21

 


 

 

 

Analysis of results

 

Key points

 

H1 2015 compared with H1 2014

·

Operating expenses rose as a result of higher restructuring and litigation and conduct costs partially offset by the benefits of the bank’s cost reduction programme. This included a 5% reduction in staff expenses, driven by a reduction in headcount, principally in higher cost businesses.

 

 

·

Operating expenses excluding litigation and conduct costs of £1,315 million (H1 2014 - £250 million) and restructuring costs of £1,503 million (H1 2014 - £514 million) were 17% lower.

 

Q2 2015 compared with Q1 2015

·

Operating expenses were 3% higher, with an increase in restructuring costs (up £597 million) partially offset by lower litigation and conduct costs (down £397 million).

 

 

·

Operating expenses excluding litigation and conduct costs of £459 million (Q1 2015 - £856 million) and restructuring costs of £1,050 million (Q1 2015 - £453 million) fell by 5%, including an 8% reduction within CIB.

 

Q2 2015 compared with Q2 2014

·

Operating expenses were 13% higher reflecting increased restructuring and litigation and conduct costs.

 

 

·

Operating expenses excluding litigation and conduct costs of £459 million (Q2 2014 - £250 million) and restructuring costs of £1,050 million (Q2 2014 - £385 million) fell by 17%, driven by a reduction in staff expenses.

 

Restructuring costs

·

Restructuring costs totalled £1,050 million for Q2 2015 and £1,503 million for H1 2015, principally relating to CIB (Q2 2015 - £734 million) and to Williams & Glyn separation (Q2 2015 - £126 million).  Restructuring costs included intangible software write-offs in CIB and Private Banking totalling £606 million, which have no impact on CET1 capital or tangible net asset value.

 

 

·

Total restructuring charges are still expected to total c.£5 billion over the five year period 2015-2019 including:

 

Williams & Glyn separation c.£1.1 billion of which £259 million was taken in H1 2015. The remainder is expected to be incurred over the period to Q4 2016;

 

Independent Commission on Banking (ICB) preparation c.£800 million. The bulk is expected to be incurred in 2016-2018; and

 

Restructuring of CIB and Go-forward Bank transformation just over c.£3 billion, of which £1,244 million was taken in H1 2015, with the majority relating to CIB. Most of the CIB restructuring is expected to be incurred in 2015.

 

Litigation and conduct costs

·

£459 million of additional litigation and conduct costs taken in Q2 2015 related principally to mortgage-backed securities litigation in the United States. An additional £69 million provision was taken in relation to interest rate hedging products redress.

 

22

 


 

 

 

Analysis of results

 

The following tables reconcile the non-statutory basis results (a non-GAAP financial measure) to the statutory basis.  

 

Half year ended

  

Quarter ended

  

30 June

30 June

  

30 June

31 March

30 June

  

2015 

2014 

  

2015 

2015 

2014 

Impairment (releases)/losses

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Loans

  

  

  

  

  

  

  - non-statutory basis

(342)

271 

  

(152)

(190)

(89)

  - Citizens

(89)

(102)

  

(51)

(38)

(29)

  

  

  

  

  

  

  

Statutory basis

(431)

169 

  

(203)

(228)

(118)

  

  

  

  

  

  

  

Securities

  

  

  

  

  

  

  - non-statutory basis

110 

(2)

  

11 

99 

(4)

  - Citizens

(2)

  

(2)

  

  

  

  

  

  

  

Statutory basis

110 

(4)

  

11 

99 

(6)

  

  

  

  

  

  

  

Impairment (releases)/losses - non-statutory basis

(232)

269 

  

(141)

(91)

(93)

Impairment (releases)/losses - statutory basis

(321)

165 

  

(192)

(129)

(124)

  

  

  

  

  

  

  

Loan impairment (releases)/losses

  

  

  

  

  

  

Individually assessed

  

  

  

  

  

  

  - non-statutory basis

(102)

113 

  

(96)

(6)

(42)

  - Citizens

(18)

(19)

  

(9)

(9)

(5)

  

  

  

  

  

  

  

Statutory basis

(120)

94 

  

(105)

(15)

(47)

  

  

  

  

  

  

  

Collectively assessed

  

  

  

  

  

  

  - non-statutory basis

90 

348 

  

21 

69 

221 

  - Citizens

(84)

(71)

  

(28)

(56)

(32)

  

  

  

  

  

  

  

Statutory basis

277 

  

(7)

13 

189 

  

  

  

  

  

  

  

Latent

  

  

  

  

  

  

  - non-statutory basis

(330)

(180)

  

(77)

(253)

(258)

  - Citizens

13 

(13)

  

(14)

27 

  

  

  

  

  

  

  

Statutory basis

(317)

(193)

  

(91)

(226)

(250)

  

  

  

  

  

  

  

Loan impairment (releases)/losses - non-statutory basis

(342)

281 

  

(152)

(190)

(79)

Loan impairment (releases)/losses - statutory basis

(431)

178 

  

(203)

(228)

(108)

  

  

  

  

  

  

  

Bank loans

(10)

  

(10)

  

  

  

  

  

  

  

Loan impairment (releases)/losses

  

  

  

  

  

  

RBS excluding RCR

13 

290 

  

43 

(30)

36 

RCR

(355)

(19)

  

(195)

(160)

(125)

  

  

  

  

  

  

  

  

(342)

271 

  

(152)

(190)

(89)

  

  

  

  

  

  

  

Customer loan impairment (releases)/losses

  

  

  

  

  

  

  as a % of gross loans and advances (1)

  

  

  

  

  

  

RBS non-statutory

(0.2%)

0.1%

  

(0.2%)

(0.2%)

(0.1%)

RBS

(0.3%)

0.1%

  

(0.2%)

(0.3%)

(0.1%)

RBS excluding RCR

0.0%

0.2%

  

(0.0%)

RCR

(6.5%)

(0.1%)

  

(7.1%)

(4.2%)

(1.7%)

 

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

23

 


 

 

 

Analysis of results

  

30 June 

31 March 

31 December 

  

2015 

2015 

2014 

  

  

  

  

Loan impairment provisions (1)

  

  

  

  - RBS

£11.3bn

£13.8bn

£18.0bn

  - RBS excluding RCR

£6.2bn

£6.6bn

£7.1bn

  - RCR

£5.1bn

£7.2bn

£10.9bn

Risk elements in lending (REIL) (1)

  

  

  

  - RBS

£18.7bn

£22.3bn

£28.2bn

  - RBS excluding RCR

£11.3bn

£12.1bn

£12.8bn

  - RCR

£7.4bn

£10.2bn

£15.4bn

Provisions as a % of REIL (1)

  

  

  

  - RBS

60%

62%

64%

  - RBS excluding RCR

54%

55%

55%

  - RCR

69%

70%

71%

REIL as a % of gross customer loans (1)

  

  

  

  - RBS

4.8%

5.4%

6.8%

  - RBS excluding RCR

3.0%

3.0%

3.3%

  - RCR

67%

68%

70%

 

Note:

(1)

Excludes reverse repurchase agreements and includes disposal groups.

 

Key points 

 

H1 2015 compared with H1 2014

·

Net impairment releases of £321 million were recorded in H1 2015, compared with net impairment losses of £165 million in H1 2014. Net loan impairment releases were recorded in all operating segments except Commercial Banking and CFG, where impairments nevertheless remained low at 0.1% and 0.3% respectively of gross loans and advances.

 

 

·

RCR saw loan impairment releases of £355 million, largely arising from disposals.

 

 

·

REIL totalled £18.7 billion at 30 June 2015, and represented 4.8% of gross customer loans, down £9.5 billion from 31 December 2014, when they represented 6.8% of gross customer loans.

 

 

·

The £114 million increase in securities impairments related to a small number of single name exposures, predominantly an exposure in the RBS N.V. liquidity portfolio.

 

Q2 2015 compared with Q1 2015

·

Net impairment releases of £192 million were up from net releases of £129 million in Q1 2015. Loan impairment releases were lower, reflecting reduced latent releases, but securities impairments recorded in Q1 2015 were not repeated on the same scale.

 

 

·

REIL were £3.6 billion lower, representing 4.8% of gross customer loans, with the bulk of the reduction in RCR.

 

 

·

Provision coverage of REIL was 60%, compared with 62% at 31 March 2015, reflecting the continuing reduction in the more heavily provisioned portfolios of RCR.

 

Q2 2015 compared with Q2 2014

·

Net impairment releases of £192 million were up from Q2 2014, during which higher latent releases were partially offset by greater collectively assessed impairment charges.

24

 


 

 

Analysis of results

 

Capital and leverage ratios

  

  

  

  

  

  

  

 

End-point CRR basis (1)

  

PRA transitional basis

  

30 June 

31 March 

31 December 

  

30 June 

31 March 

31 December 

  

2015 

2015 

2014 

  

2015 

2015 

2014 

Risk asset ratios

  

  

  

  

  

  

  

  

  

CET1

12.3 

11.5 

11.2 

  

12.3 

11.5 

11.1 

Tier 1

12.3 

11.5 

11.2 

  

14.3 

13.3 

13.2 

Total

14.8 

14.0 

13.7 

  

18.5 

17.0 

17.1 

  

  

  

  

  

  

  

  

Capital

£m

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

  

Tangible equity

43,919 

44,242 

44,368 

  

43,919 

44,242 

44,368 

Expected loss less impairment provisions

(1,319)

(1,512)

(1,491)

  

(1,319)

(1,512)

(1,491)

Prudential valuation adjustment

(366)

(393)

(384)

  

(366)

(393)

(384)

Deferred tax assets

(1,206)

(1,140)

(1,222)

  

(1,206)

(1,140)

(1,222)

Own credit adjustments

345 

609 

500 

  

345 

609 

500 

Pension fund assets

(250)

(245)

(238)

  

(250)

(245)

(238)

Other deductions

(1,070)

(1,436)

(1,614)

  

(1,047)

(1,414)

(1,884)

  

  

  

  

  

  

  

  

Total deductions

(3,866)

(4,117)

(4,449)

  

(3,843)

(4,095)

(4,719)

  

  

  

  

  

  

  

  

CET1 capital

40,053 

40,125 

39,919 

  

40,076 

40,147 

39,649 

AT1 capital

  

6,709 

6,206 

7,468 

Tier 1 capital

40,053 

40,125 

39,919 

  

46,785 

46,353 

47,117 

Tier 2 capital

8,181 

8,689 

8,717 

  

13,573 

12,970 

13,626 

  

  

  

  

  

  

  

  

Total regulatory capital

48,234 

48,814 

48,636 

  

60,358 

59,323 

60,743 

  

  

  

  

  

  

  

  

Risk-weighted assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit risk

  

  

  

  

  

  

  

  - non-counterparty

245,000 

263,000 

264,700 

  

245,000 

263,000 

264,700 

  - counterparty

27,500 

31,200 

30,400 

  

27,500 

31,200 

30,400 

Market risk

22,300 

22,800 

24,000 

  

22,300 

22,800 

24,000 

Operational risk

31,600 

31,600 

36,800 

  

31,600 

31,600 

36,800 

  

  

  

  

  

  

  

  

Total RWAs

326,400 

348,600 

355,900 

  

326,400 

348,600 

355,900 

  

  

  

  

  

  

  

  

Leverage (2)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Derivatives

282,300 

391,100 

354,000 

  

  

  

  

Loans and advances

402,800 

429,400 

419,600 

  

  

  

  

Reverse repos

67,800 

69,900 

64,700 

  

  

  

  

Other assets

211,800 

214,200 

212,500