rbs201108056k4.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For August 5, 2011
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(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- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 

 
Condensed consolidated income statement
for the half year ended 30 June 2011
 
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Interest receivable
5,404 
5,401 
5,888 
  
10,805 
11,580 
Interest payable
(2,177)
(2,100)
(2,212)
  
(4,277)
(4,362)
             
Net interest income
3,227 
3,301 
3,676 
  
6,528 
7,218 
             
Fees and commissions receivable
1,700 
1,642 
2,053 
  
3,342 
4,104 
Fees and commissions payable
(323)
(260)
(579)
  
(583)
(1,151)
Income from trading activities
1,147 
835 
2,110 
  
1,982 
3,876 
Gain on redemption of own debt
255 
- 
553 
  
255 
553 
Other operating income (excluding insurance
  premium income)
1,142 
391 
346 
  
1,533 
793 
Insurance net premium income
1,090 
1,149 
1,278 
  
2,239 
2,567 
             
Non-interest income
5,011 
3,757 
5,761 
  
8,768 
10,742 
             
Total income
8,238 
7,058 
9,437 
  
15,296 
17,960 
             
Staff costs
(2,210)
(2,399)
(2,365)
  
(4,609)
(5,054)
Premises and equipment
(602)
(571)
(547)
  
(1,173)
(1,082)
Other administrative expenses
(1,752)
(921)
(1,022)
  
(2,673)
(2,033)
Depreciation and amortisation
(453)
(424)
(519)
  
(877)
(1,001)
             
Operating expenses
(5,017)
(4,315)
(4,453)
  
(9,332)
(9,170)
             
Profit before other operating charges and
  impairment losses
3,221 
2,743 
4,984 
  
5,964 
8,790 
Insurance net claims
(793)
(912)
(1,323)
  
(1,705)
(2,459)
Impairment losses
(3,106)
(1,947)
(2,487)
  
(5,053)
(5,162)
             
Operating (loss)/profit before tax
(678)
(116)
1,174 
  
(794)
1,169 
Tax charge
(222)
(423)
(825)
  
(645)
(932)
             
(Loss)/profit from continuing operations
(900)
(539)
349 
  
(1,439)
237 
Profit/(loss) from discontinued operations, net of tax
21 
10 
(1,019)
  
31 
(706)
             
Loss for the period
(879)
(529)
(670)
  
(1,408)
(469)
Non-controlling interests
(18)
1 
946 
  
(17)
602 
Preference share and other dividends
- 
- 
(19)
  
- 
(124)
             
(Loss)/profit attributable to ordinary and B
  shareholders
(897)
(528)
257 
  
(1,425)
9 
             
Basic (loss)/gain per ordinary and B share from
  continuing operations
(0.8p)
(0.5p)
0.8p 
  
(1.3p)
0.6p 
             
Diluted (loss)/gain per ordinary and B share from
  continuing operations
(0.8p)
(0.5p)
0.8p 
  
(1.3p)
0.6p 
             
Basic (loss)/gain per ordinary and B share from
  discontinued operations
- 
- 
- 
  
- 
- 
             
Diluted (loss)/gain per ordinary and B share from
  discontinued operations
- 
- 
- 
  
- 
- 
 
In the income statement above, one-off and other items as shown on page 16 are included in the appropriate caption. A reconciliation between the income statement above and the managed view income statement on page 10 is given in Appendix 1 to this announcement.


Condensed consolidated statement of comprehensive income
for the half year ended 30 June 2011
 
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Loss for the period
(879)
(529)
(670) 
  
(1,408)
(469)
             
Other comprehensive income/(loss)
            
Available-for-sale financial assets (1)
1,406 
(37)
93 
  
1,369 
508 
Cash flow hedges
588 
(227)
1,449 
  
361 
1,254 
Currency translation
59 
(360)
(91)
  
(301)
694 
             
Other comprehensive income/(loss) before tax
2,053 
(624)
1,451 
  
1,429 
2,456 
Tax (charge)/credit
(524)
32 
(331)
  
(492)
(446)
             
Other comprehensive income/(loss) after tax
1,529 
(592)
1,120 
  
937 
2,010 
             
Total comprehensive income/(loss) for the period
650 
(1,121)
450 
  
(471)
1,541 
             
Total comprehensive income/(loss) recognised in the statement of changes in equity is attributable as follows:
            
Non-controlling interests
3 
(9)
(457)
  
(6)
(132)
Preference shareholders
- 
- 
- 
  
- 
105 
Paid-in equity holders
- 
- 
19 
  
- 
19 
Ordinary and B shareholders
647 
(1,112)
888 
  
(465)
1,549 
             
 
650 
(1,121)
450 
  
(471)
1,541 
 
Note:
(1)
Analysis provided on page 104.
 
Key points
·
The Q2 2011 movement in available-for-sale financial assets reflects the movement of £733 million losses on Greek government bonds and a £109 million related interest rate hedge adjustment to profit or loss from available-for-sale reserves. Offsetting this partially were realised gains from routine portfolio management in Group Treasury of £153 million, Non-Core of £31 million and UK Corporate of £16 million. In addition, unrealised gains on securities increased by £781 million in the quarter, primarily in relation to high quality sovereign bonds.
   
·
Gains related to cash flow hedges of £588 million in Q2 2011 result principally from declines in swap rates during the quarter as expectations of an increase in interest rates have been deferred.
 


Condensed consolidated balance sheet
at 30 June 2011
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
 
£m 
£m 
£m 
       
Assets
      
Cash and balances at central banks
64,351 
59,591 
57,014 
Net loans and advances to banks
53,133 
59,304 
57,911 
Reverse repurchase agreements and stock borrowing
41,973 
45,148 
42,607 
Loans and advances to banks
95,106 
104,452 
100,518 
Net loans and advances to customers
489,572 
494,148 
502,748 
Reverse repurchase agreements and stock borrowing
56,162 
60,511 
52,512 
Loans and advances to customers
545,734 
554,659 
555,260 
Debt securities
243,645 
231,384 
217,480 
Equity shares
24,951 
22,212 
22,198 
Settlement balances
24,566 
23,006 
11,605 
Derivatives
394,872 
361,048 
427,077 
Intangible assets
14,592 
14,409 
14,448 
Property, plant and equipment
17,357 
15,846 
16,543 
Deferred tax
6,245 
6,299 
6,373 
Prepayments, accrued income and other assets
11,143 
11,355 
12,576 
Assets of disposal groups
3,407 
8,992 
12,484 
       
Total assets
1,445,969 
1,413,253 
1,453,576 
       
Liabilities
      
Bank deposits
71,573 
63,829 
66,051 
Repurchase agreements and stock lending
35,381 
39,615 
32,739 
Deposits by banks
106,954 
103,444 
98,790 
Customer deposits
428,703 
428,474 
428,599 
Repurchase agreements and stock lending
88,822 
90,432 
82,094 
Customer accounts
517,525 
518,906 
510,693 
Debt securities in issue
213,797 
215,968 
218,372 
Settlement balances
22,905 
21,394 
10,991 
Short positions
56,106 
50,065 
43,118 
Derivatives
387,809 
360,625 
423,967 
Accruals, deferred income and other liabilities
24,065 
23,069 
23,089 
Retirement benefit liabilities
2,239 
2,257 
2,288 
Deferred tax
2,092 
2,094 
2,142 
Insurance liabilities
6,687 
6,754 
6,794 
Subordinated liabilities
26,311 
26,515 
27,053 
Liabilities of disposal groups
3,237 
6,376 
9,428 
       
Total liabilities
1,369,727 
1,337,467 
1,376,725 
       
Equity
      
Non-controlling interests
1,498 
1,710 
1,719 
Owners' equity*
      
  Called up share capital
15,317 
15,156 
15,125 
  Reserves
59,427 
58,920 
60,007 
       
Total equity
76,242 
75,786 
76,851 
       
Total liabilities and equity
1,445,969 
1,413,253 
1,453,576 
       
* Owners' equity attributable to:
      
Ordinary and B shareholders
70,000 
69,332 
70,388 
Other equity owners
4,744 
4,744 
4,744 
       
 
74,744 
74,076 
75,132 
 

 
Commentary on condensed consolidated balance sheet
 
Total assets of £1,446.0 billion at 30 June 2011 were down £7.6 billion, 1%, compared with 31 December 2010. This is principally driven by the reduction in the mark-to-market value of derivatives in GBM and the continuing planned disposal of Non-Core assets. The decrease is offset in part by higher levels of debt securities held by GBM and Group Treasury, coupled with a rise in settlement balances as a result of increased customer activity from seasonal year-end lows.
 
Loans and advances to banks decreased by £5.4 billion, 5%, to £95.1 billion. Within this, reverse repurchase agreements and stock borrowing ('reverse repos') were down £0.6 billion, 1%, to £42.0 billion and bank placings declined £4.8 billion, 8%, to £53.1 billion.
 
Loans and advances to customers declined £9.5 billion, 2%, to £545.7 billion. Within this, reverse repurchase agreements were up £3.7 billion, 7%, to £56.1 billion. Customer lending decreased by £13.2 billion to £489.6 billion, or £10.6 billion to £510.2 billion before impairments. This reflected planned reductions in Non-Core of £13.9 billion, along with declines in GBM, £4.2 billion, UK Corporate, £0.9 billion and Ulster Bank, £0.8 billion. These reductions were partially offset by growth in Global Transaction Services, £4.7 billion, UK Retail, £2.0 billion, US Retail & Commercial, £1.0 billion and Wealth, £0.6 billion, together with the effect of exchange rate and other movements. 
 
Debt securities were up £26.2 billion, 12%, to £243.6 billion, driven mainly by increased holdings of government and financial institution bonds within GBM and Group Treasury.
 
Settlement balances rose £13.0 billion, to £24.6 billion as a result of increased customer activity from seasonal year-end lows.
 
Movements in the value of derivative assets down, £32.2 billion, 8%, to £394.9 billion, and liabilities, down £36.2 billion, 9% to £387.8 billion, primarily reflect decreases in interest rate contracts, together with the combined effect of currency movements, with Sterling strengthening against the US dollar but weakening against the Euro. 
 
The reduction in assets and liabilities of disposal groups primarily reflects the continuing disposal of parts of the RBS Sempra Commodities JV business and the sale of certain Non-Core project finance assets.
 
Deposits by banks increased £8.2 billion, 8%, to £107.0 billion, with higher repurchase agreements and stock lending ('repos'), up £2.7 billion, 8%, to £35.4 billion combined with an increase in inter-bank deposits, up £5.5 billion, 8%, to £71.6 billion.
 
Customer accounts increased £6.8 billion, 1%, to £517.5 billion. Within this, repos increased £6.7 billion, 8%, to £88.8 billion.  Excluding repos, customer deposits were up £0.1 billion at £428.7 billion, reflecting growth in Global Transaction Services, £3.6 billion, Wealth, £0.9 billion and Ulster Bank, £0.4 billion, together with exchange and other movements £0.9 billion. This was offset by decreases in GBM, £3.4 billion, Non-Core, £1.8 billion and UK Corporate, £0.5 billion.
 
Settlement balances rose £11.9 billion to £22.9 billion and short positions were up £13.0 billion, 30%, to £56.1 billion due to increased customer activity from seasonal year-end lows.
 
 
 
Commentary on condensed consolidated balance sheet (continued)
 
Subordinated liabilities decreased by £0.7 billion, 3% to £26.3 billion, primarily reflecting the redemption of £0.2 billion US dollar and £0.4 billion Euro denominated dated loan capital.
 
Owner's equity decreased by £0.4 billion, 1%, to £74.7 billion, driven by the £1.4 billion attributable loss for the period together with movements in foreign exchange reserves, £0.3 billion, partially offset by increases in available-for-sale reserves, £1.0 billion and cash flow hedging reserves, £0.3 billion.
 


 
Average balance sheet
 
 
 
 
 
Quarter ended
  
 
Half year ended
 
30 June 
2011 
31 March 
2011 
  
30 June 
2011 
30 June 
2010 
Average yields, spreads and margins of the banking business
% 
% 
  
% 
% 
           
Gross yield on interest-earning assets of banking business
3.28 
3.33 
  
3.30 
3.26 
Cost of interest-bearing liabilities of banking business
(1.60)
(1.57)
  
(1.59)
(1.45)
           
Interest spread of banking business
1.68 
1.76 
  
1.71 
1.81 
Benefit from interest-free funds
0.29 
0.27 
  
0.29 
0.18 
           
Net interest margin of banking business
1.97 
2.03 
  
2.00 
1.99 
           
           
Average interest rates
          
The Group's base rate
0.50 
0.50 
  
0.50 
0.50 
           
London inter-bank three month offered rates
          
  - Sterling
0.82 
0.79 
  
0.81 
0.66 
  - Eurodollar
0.26 
0.31 
  
0.29 
0.35 
  - Euro
1.36 
1.04 
  
1.20 
0.62 
 


 
Average balance sheet (continued)
 
 
Quarter ended
Quarter ended
 
30 June 2011
31 March 2011
 
Average 
    
Average 
    
 
balance 
Interest 
Rate 
balance 
Interest 
Rate 
 
£m 
£m 
% 
£m 
£m 
% 
             
Assets
            
Loans and advances to
  banks
67,191 
164 
0.98 
64,021 
172 
1.09 
Loans and advances to
  customers
470,593 
4,545 
3.87 
474,177 
4,593 
3.93 
Debt securities
123,888 
705 
2.28 
120,380 
638 
2.15 
             
Interest-earning assets -
  banking business
661,672 
5,414 
3.28 
658,578 
5,403 
3.33 
             
Trading business
284,378 
    
279,164 
    
Non-interest earning assets
557,649 
    
507,209 
    
             
Total assets
1,503,699 
    
1,444,951 
    
             
Memo: Funded assets
1,089,400 
    
1,066,690 
    
             
Liabilities
            
Deposits by banks
65,119 
245 
1.51 
66,671 
259 
1.58 
Customer accounts
336,317 
857 
1.02 
329,825 
831 
1.02 
Debt securities in issue
171,709 
897 
2.10 
175,585 
846 
1.95 
Subordinated liabilities
21,522 
148 
2.76 
25,078 
170 
2.75 
Internal funding of trading
  business
(51,609)
22 
(0.17)
(52,013)
8 
(0.06)
             
Interest-bearing liabilities -
  banking business
543,058 
2,169 
1.60 
545,146 
2,114 
1.57 
             
Trading business
314,099 
    
301,753 
    
Non-interest-bearing liabilities
            
  - demand deposits
64,811 
    
63,701 
    
  - other liabilities
507,383 
    
459,981 
    
Owners' equity
74,348 
    
74,370 
    
             
Total liabilities and
  owners' equity
1,503,699
    
1,444,951 
    
 
Notes:
(1)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(2)
Interest receivable has been increased by £6 million (Q1 2011 - decreased by £1 million) to exclude the RFS Holdings minority interest. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(3)
Interest receivable has been increased by £2 million (Q1 2011 - £3 million) and interest payable has been increased by £34 million (Q1 2011 - £29 million) to record 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.
(4)
Interest receivable has been increased by £2 million (Q1 2011 - nil) and interest payable has been decreased by £42 million (Q1 2011 - £15 million) in respect of non-recurring adjustments.


 
Average balance sheet (continued)
 
 
Half year ended
Half year ended
 
30 June 2011
30 June 2010
 
Average 
    
Average 
    
 
balance 
Interest 
Rate 
balance 
Interest 
Rate 
 
£m 
£m 
% 
£m 
£m 
% 
             
Assets
            
Loans and advances to banks
65,606 
336 
1.03 
47,172 
272 
1.16 
Loans and advances to
  customers
472,385 
9,138 
3.90 
523,682 
9,365 
3.61 
Debt securities
122,134 
1,343 
2.22 
140,227 
1,861 
2.68 
             
Interest-earning assets -
  banking business
660,125 
10,817 
3.30 
711,081 
11,498 
3.26 
             
Trading business
281,771 
    
278,527 
    
Non-interest earning assets
532,429 
    
733,323 
    
             
Total assets
1,474,325 
    
1,722,931 
    
             
Memo: Funded assets
1,078,045 
    
1,242,452 
    
             
Liabilities
            
Deposits by banks
65,895 
504 
1.54 
90,189 
715 
1.60 
Customer accounts
333,071 
1,688 
1.02 
346,077 
1,834 
1.07 
Debt securities in issue
173,647 
1,743 
2.02 
202,673 
1,690 
1.68 
Subordinated liabilities
23,300 
318 
2.75 
31,134 
370 
2.40 
Internal funding of trading
  business
(51,811)
30 
(0.12)
(47,609)
 (125)
0.53 
             
Interest-bearing liabilities -
  banking business
544,102 
4,283 
1.59 
622,464 
4,484 
1.45 
             
Trading business
307,926 
    
301,816 
    
Non-interest-bearing liabilities
            
  - demand deposits
64,256 
    
46,937 
    
  - other liabilities
483,682 
    
674,006 
    
Owners' equity
74,359 
    
77,708 
    
             
Total liabilities and
  owners' equity
1,474,325 
    
1,722,931 
    
 
Notes:
(1)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(2)
Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance long-term assets and liabilities, attributable to policyholders, in view of their distinct nature. As a result, net interest income has been increased by nil (H1 2010 - £3 million).
(3)
Interest receivable has been increased by £5 million (H1 2010 - nil) to exclude the RFS Holdings minority interest. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(4)
Interest receivable has been increased by £5 million for H1 2011 (H1 2010 - £5 million) and interest payable has been increased by £63 million (H1 2010 - £12 million) to record 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.
(5)
Interest receivable has been increased by £2 million (H1 2010 - £90 million decrease) and interest payable has been decreased by £57 million (H1 2010 - £110 million increase) in respect of non-recurring adjustments.
 


Condensed consolidated statement of changes in equity
for the half year ended 30 June 2011
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Called-up share capital
            
At beginning of period
15,156 
15,125 
15,031 
  
15,125 
14,630 
Ordinary shares issued
161 
31 
- 
  
192 
401 
Preference shares redeemed
- 
- 
(2)
  
- 
(2)
             
At end of period
15,317 
15,156 
15,029 
  
15,317 
15,029 
             
Paid-in equity
            
At beginning of period
431 
431 
565 
  
431 
565 
Securities redeemed during the period
- 
- 
(132)
  
- 
(132)
Transfer to retained earnings
- 
- 
(2)
  
- 
(2)
             
At end of period
431 
431 
431 
  
431 
431 
             
Share premium account
            
At beginning of period
23,922 
23,922 
23,740 
  
23,922 
23,523 
Ordinary shares issued
1 
- 
- 
  
1 
217 
Redemption of preference shares classified as debt
- 
- 
118 
  
- 
118 
             
At end of period
23,923 
23,922 
23,858 
  
23,923 
23,858 
             
Merger reserve
            
At beginning of period
13,272 
13,272 
13,272 
  
13,272 
25,522 
Transfer to retained earnings
(50)
- 
- 
  
(50)
(12,250)
             
At end of period
13,222 
13,272 
13,272 
  
13,222 
13,272 
             
Available-for-sale reserve
            
At beginning of period
(2,063)
(2,037)
(1,527)
  
(2,037)
(1,755)
Unrealised gains
781 
162 
119 
  
943 
647 
Realised losses/(gains) (1)
626 
(197)
20 
  
429 
(127)
Tax
(370)
9 
(55)
  
(361)
(208)
Recycled to profit or loss on disposal of businesses(2)
- 
- 
(16)
  
- 
(16)
             
At end of period
(1,026)
(2,063)
(1,459)
  
(1,026)
(1,459)
             
Cash flow hedging reserve
            
At beginning of period
(314)
(140)
(272)
  
(140)
(252)
Amount recognised in equity
811 
14 
(47)
  
825 
(58)
Amount transferred from equity to earnings
(223)
(241)
7 
  
(464)
17 
Tax
(161)
53 
19 
  
(108)
- 
Recycled to profit or loss on disposal of businesses (3)
- 
- 
58 
  
- 
58 
             
At end of period
113 
(314)
(235)
  
113 
(235)
 
For the notes to this table refer to page 72.


Condensed consolidated statement of changes in equity
for the half year ended 30 June 2011 (continued)
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
  2010 
  
30 June 
2011 
30 June 
  2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Foreign exchange reserve
            
At beginning of period
4,754 
5,138 
5,229 
  
5,138 
4,528 
Retranslation of net assets
189 
(429)
666 
  
(240)
1,775 
Foreign currency (losses)/gains on hedges of
  net assets
(116)
76 
(189)
  
(40)
(609)
Tax
7 
(31)
60 
  
(24)
72 
Recycled to profit or loss on disposal of businesses
- 
- 
(11)
  
- 
(11)
             
At end of period
4,834 
4,754 
5,755 
  
4,834 
5,755 
             
Capital redemption reserve
            
At beginning of period
198 
198 
170 
  
198 
170 
Preference shares redeemed
- 
- 
2 
  
- 
2 
             
At end of period
198 
198 
172 
  
198 
172 
             
Contingent capital reserve
            
At beginning and end of period
(1,208)
(1,208)
(1,208)
  
(1,208)
(1,208)
             
Retained earnings
            
At beginning of period
20,713 
21,239 
24,164 
  
21,239 
12,134 
(Loss)/profit attributable to ordinary and B
  shareholders and other equity owners
            
  - continuing operations
(899)
(530)
302 
  
(1,429)
163 
  - discontinued operations
2 
2 
(26)
  
4 
(30)
Equity preference dividends paid
- 
- 
- 
  
- 
(105)
Paid-in equity dividends paid, net of tax
- 
- 
(19)
  
- 
(19)
Transfer from paid-in equity
            
  - gross
- 
- 
2 
  
- 
2 
  - tax
- 
- 
(1)
  
- 
(1)
Equity owners gain on withdrawal of minority
  interest
            
  - gross
- 
- 
40 
  
- 
40 
  - tax
- 
- 
(11)
  
- 
(11)
Redemption of equity preference shares
- 
- 
(2,968)
  
- 
(2,968)
Gain on redemption of equity preference shares
- 
- 
609 
  
- 
609 
Redemption of preference shares classified as debt
- 
- 
(118)
  
- 
(118)
Transfer from merger reserve
50 
- 
- 
  
50 
12,250 
Shares issued under employee share schemes
(166)
(41)
(2)
  
(207)
(9)
Share-based payments
            
  - gross
29 
38 
26 
  
67 
61 
  - tax
(3)
5 
5 
  
2 
5 
             
At end of period
19,726 
20,713 
22,003 
  
19,726 
22,003 


Condensed consolidated statement of changes in equity
for the half year ended 30 June 2011 (continued)
 
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Own shares held
            
At beginning of period
(785)
(808)
(488)
  
(808)
(121)
Shares (purchased)/disposed
(6)
12 
(330)
  
6 
(704)
Shares issued under employee share schemes
5 
11 
2 
  
16 
9 
             
At end of period
(786)
(785)
(816)
  
(786)
(816)
             
Owners' equity at end of period
74,744 
74,076 
76,802 
  
74,744 
76,802 
             
Non-controlling interests
            
At beginning of period
1,710 
1,719 
10,364 
  
1,719 
16,895 
Currency translation adjustments and other
  movements
(14)
(7)
(557)
  
(21)
(461)
Profit/(loss) attributable to non-controlling interests
            
  - continuing operations
(1)
(9)
47 
  
(10)
74 
  - discontinued operations
19 
8 
(993)
  
27 
(676)
Dividends paid
(39)
- 
(1,497)
  
(39)
(4,171)
Movements in available-for-sale securities
            
  - unrealised (losses)/gains
(1)
1 
(3)
  
- 
22 
  - realised gains
- 
(3)
(12)
  
(3)
(3)
  - tax
- 
1 
4 
  
1 
1 
  - recycled to profit or loss on disposal of
   discontinued operations (4)
- 
- 
(7)
  
- 
(7)
Movements in cash flow hedging reserves
            
  - amounts recognised in equity
- 
- 
30 
  
- 
(165)
  - amounts transferred from equity to earnings
- 
- 
(1)
  
- 
- 
  - tax
- 
- 
(1)
  
- 
47 
  - recycled to profit or loss on disposal of
    discontinued operations (5)
- 
- 
1,036 
  
- 
1,036 
Equity raised
- 
- 
(10)
  
- 
501 
Equity withdrawn and disposals
(176)
- 
(5,868)
  
(176)
(10,561)
Transfer to retained earnings
- 
- 
(40)
  
- 
(40)
             
At end of period
1,498 
1,710 
2,492 
  
1,498 
2,492 
             
Total equity at end of period
76,242 
75,786 
79,294 
  
76,242 
79,294 
             
Total comprehensive income/(loss) recognised in the statement of changes in equity is attributable as follows:
            
Non-controlling interests
3 
(9)
(457)
  
(6)
(132)
Preference shareholders
- 
- 
- 
  
- 
105 
Paid-in equity holders
- 
- 
19 
  
- 
19 
Ordinary and B shareholders
647 
(1,112)
888 
  
(465)
1,549 
             
 
650 
(1,121)
450 
  
(471)
1,541 
 
Notes:
(1)
Includes an impairment loss of £733 million in respect of the Group's holding of Greek government bonds, together with £109 million of related interest rate hedge adjustments, in the quarter ended 30 June 2011 and half year ended 30 June 2011.
(2)
Net of tax (quarter ended 30 June 2010 - £6 million credit; half year ended 30 June 2010 - £6 million credit).
(3)
Net of tax (quarter ended 30 June 2010 - £20 million charge; half year ended 30 June 2010 - £20 million charge).
(4)
Net of tax (quarter ended 30 June 2010 - £2 million credit; half year ended 30 June 2010 - £2 million credit).
(5)
Net of tax (quarter ended 30 June 2010 - £346 million charge; half year ended 30 June 2010 - £346 million charge).
 


Condensed consolidated cash flow statement
for the half year ended 30 June 2011
 
 
First half 
2011 
First half 
2010 
 
£m 
£m 
     
Operating activities
    
Operating (loss)/profit before tax
(794)
1,169 
Operating profit/(loss) before tax on discontinued operations
38 
(618)
Adjustments for non-cash items
1,503 
2,571 
     
Net cash inflow from trading activities
747 
3,122 
Changes in operating assets and liabilities
7,595 
(13,954)
     
Net cash flows from operating activities before tax
8,342 
(10,832)
Income taxes (paid)/received
(90)
411 
     
Net cash flows from operating activities
8,252 
(10,421)
     
Net cash flows from investing activities
(4,362)
822 
     
Net cash flows from financing activities
(1,212)
(12,795)
     
Effects of exchange rate changes on cash and cash equivalents
482 
(355)
     
Net increase/(decrease) in cash and cash equivalents
3,160 
(22,749)
Cash and cash equivalents at beginning of period
152,530 
144,186 
     
Cash and cash equivalents at end of period
155,690 
121,437 
 


 
Notes 
 
1. Basis of preparation
The Group's business activities and financial position, and the factors likely to affect its future development and performance are discussed on pages 5 to 117. Its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the risk and balance sheet management sections on pages 118 to 171. A summary of the risk factors which could materially affect the Group's future results are described on pages 174 to 177. The Group's regulatory capital resources are set on page 119. Pages 122 to 130 describe the Group's funding and liquidity management. The condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting'.
 
Having reviewed the Group's forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the interim financial statements for the six months ended 30 June 2011 have been prepared on a going concern basis.
 
In line with the Group's policy of providing users of its financial reports with relevant and transparent disclosures, it has adopted the British Bankers' Association Code for Financial Reporting Disclosure published in September 2010. The code sets out five disclosure principles together with supporting guidance: the overarching principle being a commitment to provide high quality, meaningful and decision-useful disclosures. 
 
2. Accounting policies
The annual accounts are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB as adopted by the European Union (EU) (together IFRS). There have been no significant changes to the Group's principal accounting policies as set out on pages 275 to 283 of the 2010 Annual Report and Accounts.
 
Recent developments in IFRS
In May 2011, the IASB issued six new or revised standards:
 
IFRS 10 Consolidated Financial Statements which replaces SIC-12 Consolidation - Special Purpose Entities and the consolidation elements of the existing IAS 27 Consolidated and Separate Financial Statements.  The new standard adopts a single definition of control: a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.
 
IAS 27 Separate Financial Statements which comprises those parts of the existing IAS 27 that dealt with separate financial statements.
 
IFRS 11 Joint Arrangements which supersedes IAS 31 Interests in Joint Ventures. IFRS 11 distinguishes between joint operations and joint ventures. Joint operations are accounted for by the investor recognising its assets and liabilities including its share of any assets held and liabilities incurred jointly and its share of revenues and costs. Joint ventures are accounted for in the investor's consolidated accounts using the equity method.
 

 
Notes (continued)
 
2. Accounting policies (continued)
 
Recent developments in IFRS (continued)
IAS 28 Investments in Associates and Joint Ventures covers joint ventures as well as associates; both must be accounted for using the equity method.  The mechanics of the equity method are unchanged.
 
IFRS 12 Disclosure of Interests in Other Entities covers disclosures for entities reporting under IFRS 10 and IFRS 11 replacing those in IAS 28 and IAS 27.  Entities are required to disclose information that helps financial statement readers evaluate the nature, risks and financial effects associated with an entity's interests in subsidiaries, in associates and joint arrangements and in unconsolidated structured entities.
 
IFRS 13 Fair Value Measurement which sets out a single IFRS framework for defining and measuring fair value and requiring disclosures about fair value measurements.
 
These standards are effective for annual periods beginning on or after 1 January 2013.  Earlier application is permitted.  The Group is reviewing the standards to determine their effect on the Group's financial reporting.
 
In June 2011, the IASB issued amendments to two standards:
 
Amendments to IAS 1 Presentation of Items of Other Comprehensive Income that require items that will never be recognised in profit or loss to be presented separately in other comprehensive income from those that are subject to subsequent reclassification.
 
Amendments IAS 19 Employee Benefits - these require the immediate recognition of all actuarial gains and losses eliminating the 'corridor approach'; interest cost to be calculated on the net pension liability or asset at the appropriate corporate bond rate; and all past service costs to be recognised immediately when a scheme is curtailed or amended.
 
These amendments are effective for annual periods beginning on or after 1 January 2013.  Earlier application is permitted.  The Group is reviewing the amendments to determine their effect on the Group's financial reporting.


 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
  2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Loans and advances to customers
4,535 
4,593 
4,754 
  
9,128 
9,451 
Loans and advances to banks
164 
172 
131 
  
336 
271 
Debt securities
705 
636 
1,003 
  
1,341 
1,858 
             
Interest receivable
5,404 
5,401 
5,888 
  
10,805 
11,580 
             
Customer accounts
853 
831 
966 
  
1,684 
1,834 
Deposits by banks
249 
259 
418 
  
508 
715 
Debt securities in issue
863 
817 
824 
  
1,680 
1,678 
Subordinated liabilities
190 
185 
60 
  
375 
260 
Internal funding of trading businesses
22 
8 
 (56)
  
30 
(125)
             
Interest payable
2,177 
2,100 
2,212 
  
4,277 
4,362 
             
Net interest income
3,227 
3,301 
3,676 
  
6,528 
7,218 
             
Fees and commissions receivable
1,700 
1,642 
2,053 
  
3,342 
4,104 
Fees and commissions payable
            
  - banking
(238)
(181)
(541)
  
(419)
(1,007)
  - insurance related
(85)
(79)
(38)
  
(164)
(144)
             
Net fees and commissions
1,377 
1,382 
1,474 
  
2,759 
2,953 
             
Foreign exchange
375 
203 
383 
  
578 
832 
Interest rate
2 
649 
207 
  
651 
1,161 
Credit
562 
(248)
1,231 
  
314 
1,208 
Other
208 
231 
289 
  
439 
675 
             
Income from trading activities
1,147 
835 
2,110 
  
1,982 
3,876 
             
Gain on redemption of own debt
255 
- 
553 
  
255 
553 
             
Operating lease and other rental income
350 
322 
344 
  
672 
687 
Changes in fair value of own debt
228 
(294)
515 
  
(66)
305 
Changes in the fair value of securities and other
  financial assets and liabilities
224 
68 
(165)
  
292 
(151)
Changes in the fair value of investment properties
(27)
(25)
(105)
  
(52)
(108)
Profit on sale of securities
193 
236 
6 
  
429 
154 
Profit on sale of property, plant and equipment
11 
11 
3 
  
22 
12 
Profit/(loss) on sale of subsidiaries and
  associates
55 
(29)
(428)
  
26 
(358)
Life business (losses)/profits
(3)
(2)
(23)
  
(5)
12 
Dividend income
18 
15 
21 
  
33 
41 
Share of profits less losses of associated entities
8 
7 
26 
  
15 
48 
Other income
85 
82 
152 
  
167 
151 
             
Other operating income
1,142 
391 
346 
  
1,533 
793 
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.

 
 
Notes (continued)
3. Analysis of income, expenses and impairment losses (continued)
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
  2010 
  
30 June 
2011 
30 June 
  2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Non-interest income (excluding insurance net
  premium income)
3,921 
2,608 
4,483 
  
6,529 
8,175 
Insurance net premium income
1,090 
1,149 
1,278 
  
2,239 
2,567 
             
Total non-interest income
5,011 
3,757 
5,761 
  
8,768 
10,742 
             
Total income
8,238 
7,058 
9,437 
  
15,296 
17,960 
             
Staff costs
            
  - wages, salaries and other staff costs
1,923 
2,059 
2,079 
  
3,982 
4,373 
  - bonus tax
11 
11 
15 
  
22 
69 
  - social security costs
168 
192 
158 
  
360 
352 
  - pension costs
108 
137 
113 
  
245 
260 
             
Total staff costs
2,210 
2,399 
2,365 
  
4,609 
5,054 
Premises and equipment
602 
571 
547 
  
1,173 
1,082 
Other
1,752 
921 
1,022 
  
2,673 
2,033 
             
Administrative expenses
4,564 
3,891 
3,934 
  
8,455 
8,169 
Depreciation and amortisation
453 
424 
519 
  
877 
1,001 
             
Operating expenses
5,017 
4,315 
4,453 
  
9,332 
9,170 
             
General insurance
793 
912 
1,348 
  
1,705 
2,455 
Bancassurance
- 
- 
(25)
  
- 
4 
             
Insurance net claims
793 
912 
1,323 
  
1,705 
2,459 
             
Loan impairment losses
2,237 
1,898 
2,479 
  
4,135 
5,081 
Securities impairment losses
            
  - sovereign debt impairment and related interest
    rate hedge adjustments
842 
- 
- 
  
842 
- 
  - other
27 
49 
8 
  
76 
81 
             
Impairment losses
3,106 
1,947 
2,487 
  
5,053 
5,162 
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.


 
Notes (continued)
 
4. Loan impairment provisions  
Operating (loss)/profit is stated after charging loan impairment losses of £2,237 million (Q1 2011 - £1,898 million; Q2 2010 - £2,479 million). The balance sheet loan impairment provisions increased in the quarter ended 30 June 2011 from £19,258 million to £20,759 million and the movements thereon were:
 
 
Quarter ended
 
30 June 2011
  
31 March 2011
  
30 June 2010
 
Core 
Non-Core 
RFS MI 
Total 
  
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                         
At beginning of period
8,416 
10,842 
- 
19,258 
  
7,866 
10,316 
18,182 
  
7,397 
9,430 
16,827 
Transfers to disposal groups
- 
9 
- 
9 
  
- 
(9)
(9)
  
- 
(38)
(38)
Intra-group transfers
- 
- 
- 
- 
  
177 
(177)
- 
  
- 
- 
- 
Currency translation and other adjustments
33 
145 
- 
178 
  
56 
95 
151 
  
(309)
(66)
(375)
Disposals
- 
- 
11 
11 
  
- 
- 
- 
  
- 
(17)
(17)
Amounts written-off
(504)
(474)
- 
(978)
  
(514)
(438)
(952)
  
(562)
(2,122)
(2,684)
Recoveries of amounts
  previously written-off
41 
126 
- 
167 
  
39 
80 
119 
  
59 
21 
80 
Charge to income statement
                        
  - continued
810 
1,427 
- 
2,237 
  
852 
1,046 
1,898 
  
1,096 
1,383 
2,479 
  - discontinued
- 
- 
(11)
(11)
  
- 
- 
- 
  
- 
- 
- 
Unwind of discount
(44)
(68)
- 
(112)
  
(60)
(71)
(131)
  
(48)
(58)
(106)
                         
At end of period
8,752 
12,007 
- 
20,759 
  
8,416 
10,842 
19,258 
  
7,633 
8,533 
16,166 
 
 
 
Half year ended
 
30 June 2011
  
30 June 2010
 
Core 
Non-Core 
RFS MI 
Total 
  
Core 
Non-Core 
RFS MI 
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
At beginning of period
7,866 
10,316 
- 
18,182 
  
6,921 
8,252 
2,110 
17,283 
Transfers to disposal groups
- 
- 
- 
- 
  
- 
(67)
- 
(67)
Intra-group transfers
177 
(177)
- 
- 
  
- 
- 
- 
- 
Currency translation and other  
  adjustments
89 
240 
- 
329 
  
(279)
119 
- 
(160)
Disposals
- 
- 
11 
11 
  
- 
(17)
(2,152)
(2,169)
Amounts written-off
(1,018)
(912)
- 
(1,930)
  
(1,063)
(2,718)
- 
(3,781)
Recoveries of amounts previously
  written-off
80 
206 
- 
286 
  
104 
46 
- 
150 
Charge to income statement
                  
  - continuing
1,662 
2,473 
- 
4,135 
  
2,046 
3,035 
- 
5,081 
  - discontinued
- 
- 
(11)
(11)
  
- 
- 
42 
42 
Unwind of discount
(104)
(139)
- 
(243)
  
(96)
(117)
- 
(213)
                   
At end of period
8,752 
12,007 
- 
20,759 
  
7,633 
8,533 
- 
16,166 
 
Provisions at 30 June 2011 include £132 million (31 March 2011 - £130 million; 30 June 2010 - £139 million) in respect of loans and advances to banks.
 
The table above excludes impairments relating to securities.


 
Notes (continued)
 
5. Strategic disposals
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Gain/(loss) on sale and provision for loss on disposal
  of investments in:
            
  - RBS Asset Management's investment strategies
    business
- 
- 
- 
  
- 
80 
  - Global Merchant Services
- 
47 
- 
  
47 
- 
  - Non-Core project finance assets
(4)
- 
- 
  
(4)
- 
  - Life assurance business
- 
- 
(235)
  
- 
(235)
  - Other
54 
(70)
(176)
  
(16)
(203)
             
 
50 
(23)
(411)
  
27 
(358)
 
6. Pensions
The Group and the Trustees of The Royal Bank of Scotland Group Pension Fund (which is the main defined benefit scheme of the Group) have recently agreed the funding valuation of the Main Scheme as at 31 March 2010 which shows that the value of liabilities exceeded the value of assets by £3.5 billion as at 31 March 2010, a ratio of assets to liabilities of 84%.
 
In order to eliminate this deficit, the Group will pay additional contributions each year over the period 2011 to 2018. These contributions will start at £375 million per annum in 2011, increase to £400 million per annum in 2013 and from 2016 onwards be further increased in line with price inflation.  These contributions are in addition to the regular contributions of around £300 million for future accrual of benefits. 
 
7. Bank Levy
The Finance (No. 3) Act 2011 introduced an annual bank levy in the UK.  The levy will be collected through the existing quarterly Corporation Tax collection mechanism starting with payment dates on or after 19 July 2011.
 
The levy is based on the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period. The first chargeable period for RBS is the year ending 31 December 2011. In determining the chargeable equity and liabilities the following amounts are excluded: adjusted Tier 1 capital; certain "protected deposits" (for example those protected under the Financial Services Compensation Scheme); liabilities that arise from certain insurance business within banking groups; liabilities in respect of currency notes in circulation; Financial Services Compensation Scheme liabilities; liabilities representing segregated client money; and deferred tax liabilities, current tax liabilities, liabilities in respect of the levy, revaluation of property liabilities, liabilities representing the revaluation of business premises and defined benefit retirement liabilities. It is also permitted in specified circumstances to reduce certain liabilities: by netting them against certain assets; offsetting assets on the relevant balance sheets that would qualify as high quality liquid assets (in accordance with the FSA definition); and repo liabilities secured against sovereign and supranational debt.
 

 
 
Notes (continued)
 
7. Bank Levy (continued)
The levy will be set at a rate of 0.075 per cent from 2011. Three different rates apply during 2011, these average to 0.075 per cent. Certain liabilities are subject to only a half rate, namely any deposits not otherwise excluded, (except for those from financial institutions and financial traders) and liabilities with a maturity greater than one year at the balance sheet date. The levy is not charged on the first £20 billion of chargeable liabilities.
 
If the levy had been applied to the balance sheet at 30 June 2011, the cost of the levy to RBS would be a full year charge of approximately £330 million. Under IFRS, no liability for the bank levy arises until the measurement date, 31 December 2011. Accordingly, no accrual was made for the estimated cost of the levy at 30 June 2011.
 
8. Tax
The charge for tax differs from the tax credit/(charge) computed by applying the standard UK corporation tax rate of 26.5% (2010 - 28%) as follows:
 
 
Quarter ended
  
 
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
(Loss)/profit before tax
(678)
(116)
1,174 
  
(794)
1,169 
             
Tax credit/(charge) based on the standard UK
  corporation tax rate of 26.5% (2010 - 28%)
179 
31 
(329)
  
210 
(327)
Sovereign debt impairment and related interest
  rate hedge adjustments where no deferred tax
  asset recognised
(219)
- 
- 
  
(219)
- 
Losses in period where no deferred tax asset
  recognised
(66)
(166)
(280)
  
(232)
(355)
Foreign profits taxed at other rates
(100)
(200)
(210)
  
(300)
(338)
UK tax rate change - deferred tax impact
- 
(87)
- 
  
(87)
- 
Unrecognised timing differences
(15)
5 
52 
  
(10)
- 
Items not allowed for tax
            
  - losses on strategic disposals and write downs
(7)
(3)
(134)
  
(10)
(145)
  - other disallowable items
(70)
(40)
(59)
  
(110)
(84)
Non-taxable items
            
  - gain on sale of Global Merchant Services
- 
12 
- 
  
12 
- 
  - gain on redemption of own debt
- 
- 
12 
  
- 
12 
  - other non taxable items
9 
12 
62 
  
21 
64 
Taxable foreign exchange movements
(2)
2 
7 
  
- 
7 
Losses brought forward and utilised
13 
16 
3 
  
29 
11 
Adjustments in respect of prior periods
56 
(5)
51 
  
51 
223 
             
Actual tax charge
(222)
(423)
(825)
  
(645)
(932)
 
The high charge in the first six months of 2011 reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland and the Netherlands) and the effect of the reduction of 1% in the rate of UK Corporation Tax enacted in March 2011 on the net deferred tax balance.


 
Notes (continued)
 
8. Tax (continued)
 
The combined effect of losses in Ireland and the Netherlands (including the sovereign debt impairment and related interest rate hedge adjustments) in the half year ended 30 June 2011 for which no deferred tax asset has been recognised and the 1% change in the standard rate of UK corporation tax accounts for £691 million (81%) of the difference between the actual tax charge and the tax credit derived from applying the standard UK Corporation Tax rate to the results for the period.
 
The Group has recognised a deferred tax asset at 30 June 2011 of £6,245 million (31 March 2011 -£6,299 million; 31 December 2010 - £6,373 million), of which £3,880 million (31 March 2011 - £3,770 million; 31 December 2010 - £3,849 million) relates to carried forward trading losses in the UK. 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 2011 and concluded that it is recoverable based on future profit projections.
 
9. Profit/(loss) attributable to non-controlling interests
 
 
Quarter ended
  
 
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
  2010 
  
30 June 
2011 
30 June 
  2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Trust preferred securities
- 
- 
- 
  
- 
10 
RBS Sempra Commodities JV
4 
(9)
20 
  
(5)
20 
ABN AMRO
            
  - RFS Holdings minority interest
14 
10 
(976)
  
24 
(644)
  - other
- 
- 
1 
  
- 
1 
RBS Life Holdings
- 
- 
7 
  
- 
11 
Other
- 
(2)
2 
  
(2)
- 
             
Profit/(loss) attributable to non-controlling interests
18 
(1)
(946)
  
17 
(602)
 
10. Dividends
The Group has undertaken that, unless otherwise agreed with the European Commission, neither the company nor any of its direct or indirect subsidiaries (other than companies in the RBS Holdings N.V. group, which are subject to different restrictions) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from 30 April 2010 and for a period of two years thereafter ("the Deferral period"), or exercise any call rights in relation to these capital instruments between 24 November 2009 and the end of the deferral period, unless there is a legal obligation to do so. Hybrid capital instruments issued after 24 November 2009 will generally not be subject to the restriction on dividend or coupon payments or call options.


 
Notes (continued)
 
11. Earnings per ordinary and B share
Earnings per ordinary and B share have been calculated based on the following:
 
 
Quarter ended
  
 
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Earnings
            
(Loss)/profit from continuing operations attributable
  to ordinary and B shareholders
(899)
(530)
283 
  
(1,429)
39 
Gain on redemption of preference shares and
  paid-in equity
- 
- 
610 
  
- 
610 
             
Adjusted (loss)/profit from continuing operations
  attributable to ordinary and B shareholders
(899)
(530)
893 
  
(1,429)
649 
             
Profit/(loss) from discontinued operations
  attributable to ordinary and B shareholders
2 
2 
(26)
  
4 
(30)
             
Ordinary shares in issue during the period (millions)
56,973 
56,798 
56,413 
  
56,886 
56,326 
B shares in issue during the period (millions)
51,000 
51,000 
51,000 
  
51,000 
51,000 
             
Weighted average number of ordinary and B
  shares in issue during the period (millions)
107,973 
107,798 
107,413 
  
107,886 
107,326 
Effect of dilutive share options and convertible
  securities
- 
- 
521 
  
- 
536 
             
Diluted weighted average number of ordinary and
  B shares in issue during the period (1)
107,973 
107,798 
107,934 
  
107,886 
107,862 
             
Basic (loss)/earnings per ordinary and B share from continuing operations
(0.8p)
(0.5p)
0.8p 
  
(1.3p)
0.6p 
Fair value of own debt
(0.2p)
0.3p 
(0.5p)
  
0.1p 
(0.3p)
Asset Protection Scheme credit default swap - fair
  value changes
0.1p 
0.3p 
(0.3p)
  
0.4p 
- 
Payment Protection Insurance costs
0.6p 
- 
- 
  
0.6p 
- 
Sovereign debt impairment and related interest rate
  hedge adjustments
0.8p 
- 
- 
  
0.8p 
- 
Amortisation of purchased intangible assets
- 
- 
0.1p 
  
- 
0.1p 
Integration and restructuring costs
- 
0.2p 
0.2p 
  
0.2p 
0.3p 
Gain on redemption of own debt
(0.2p)
- 
(1.0p)
  
(0.2p)
(1.0p)
Strategic disposals
- 
- 
0.4p 
  
- 
0.3p 
Bonus tax
- 
- 
- 
  
- 
0.1p 
             
Adjusted earnings/(loss) per ordinary and B
  share from continuing operations
0.3p 
0.3p 
(0.3p)
  
0.6p 
0.1p 
Loss/(profit) from Non-Core attributable to ordinary
  and B shareholders
0.4p 
0.3p 
(0.1p)
  
0.7p 
0.8p 
             
Core adjusted earnings/(loss) per ordinary and B share from continuing operations
0.7p 
0.6p 
(0.4p)
  
1.3p 
0.9p 
Core impairment losses
0.3p 
0.3p 
(0.1p)
  
0.6p 
0.5p 
             
Pre-impairment Core adjusted earnings/(loss) per ordinary and B share
1.0p 
0.9p 
(0.5p)
  
1.9p 
1.4p 
             
Memo: Core adjusted earnings per ordinary and B share from continuing operations assuming normalised tax rate of 26.5% (2010 - 28.0%)
1.1p 
1.4p 
1.0p 
  
2.5p 
2.6p 
             
Diluted (loss)/earnings per ordinary and B share from continuing operations
(0.8p)
(0.5p)
0.8p 
  
(1.3p)
0.6p 
 
Note:
(1)
Following reconsideration of the terms of the B Share agreement with HM Treasury, it is no longer treated as dilutive. The comparative amount for the half year ended 30 June 2010 has been restated.


 
Notes (continued)
 
12. Segmental analysis
There have been no significant changes in the Group's divisions as set out on page 377 of the 2010 Report and Accounts. Operating profit/(loss) before tax, total revenue and total assets by division are shown in the tables below.
 
Analysis of divisional operating profit/(loss)
The following tables provide an analysis of the divisional profit/(loss) for the quarters ended 30 June 2011, 31 March 2011 and 30 June 2010 and the half years ended 30 June 2011 and 30 June 2010 by main income statement captions. The divisional income statements on pages 23 to 61 reflect certain presentational reallocations as described in the notes below. These do not affect the overall operating profit/(loss).
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 30 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,086 
333 
1,419 
(688)
- 
(208)
523 
UK Corporate
641 
325 
966 
(403)
- 
(218)
345 
Wealth
182 
115 
297 
(220)
- 
(3)
74 
Global Transaction Services
263 
297 
560 
(342)
- 
(54)
164 
Ulster Bank
171 
51 
222 
(142)
- 
(269)
(189)
US Retail & Commercial
469 
246 
715 
(522)
- 
(66)
127 
Global Banking & Markets (1)
164 
1,386 
1,550 
(1,067)
- 
(37)
446 
RBS Insurance (2)
89 
957 
1,046 
(203)
(704)
- 
139 
Central items
(65)
79 
14 
30 
1 
2 
47 
               
Core
3,000 
3,789 
6,789 
(3,557)
(703)
(853)
1,676 
Non-Core (3)
233 
745 
978 
(335)
(90)
(1,411)
(858)
               
 
3,233 
4,534 
7,767 
(3,892)
(793)
(2,264)
818 
Fair value of own debt (4)
- 
339 
339 
- 
- 
- 
339 
Asset Protection Scheme credit
  default swap - fair value changes (5)
- 
(168)
(168)
- 
- 
- 
(168)
Payment Protection Insurance costs
- 
- 
- 
(850)
- 
 - 
(850)
Sovereign debt impairment and related interest rate hedge adjustments
- 
- 
- 
- 
- 
(842)
(842)
Amortisation of purchased intangible assets
- 
- 
- 
(56)
- 
- 
(56)
Integration and restructuring costs
- 
1 
1 
(209)
- 
- 
(208)
Gain on redemption of own debt
- 
255 
255 
- 
- 
- 
255 
Strategic disposals
- 
50 
50 
- 
- 
- 
50 
Bonus tax
- 
- 
- 
(11)
- 
- 
(11)
RFS Holdings minority interest
(6)
- 
(6)
1 
- 
- 
(5)
               
Total statutory
3,227 
5,011 
8,238 
(5,017)
(793)
(3,106)
(678)
 
Notes:
(1)
Reallocation of £14 million between net interest income and non-interest income in respect of funding costs of rental assets, £11 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £3 million.
(2)
Total income includes £69 million investment income, £54 million in net interest income and £15 million in non-interest income. Reallocation of £35 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £52 million between net interest income and non-interest income in respect of funding costs of rental assets, £51 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(4)
Comprises £111 million gain included in 'Income from trading activities' and £228 million gain included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.


 
Notes (continued)
 
12. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 31 March 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
1,076 
304 
1,380 
(678)
- 
(194)
508 
UK Corporate
689 
332 
1,021 
(423)
- 
(105)
493 
Wealth
167 
114 
281 
(196)
- 
(5)
80 
Global Transaction Services
260 
282 
542 
(335)
- 
(20)
187 
Ulster Bank
169 
51 
220 
(136)
- 
(461)
(377)
US Retail & Commercial
451 
243 
694 
(504)
- 
(110)
80 
Global Banking & Markets (1)
180 
2,200 
2,380 
(1,306)
- 
24 
1,098 
RBS Insurance (2)
88 
982 
1,070 
(219)
(784)
- 
67 
Central items
(28)
(13)
(41)
(1)
- 
(1)
(43)
               
Core
3,052 
4,495 
7,547 
(3,798)
(784)
(872)
2,093 
Non-Core (3)
250 
236 
486 
(323)
(128)
(1,075)
(1,040)
               
 
3,302 
4,731 
8,033 
(4,121)
(912)
(1,947)
1,053 
Fair value of own debt (4)
- 
(480)
(480)
- 
- 
- 
(480)
Asset Protection Scheme credit
  default swap - fair value changes (5)
- 
(469)
(469)
- 
- 
- 
(469)
Amortisation of purchased
  intangible assets
- 
- 
- 
(44)
- 
- 
(44)
Integration and restructuring costs
(2)
(4)
(6)
(139)
- 
- 
(145)
Strategic disposals
- 
(23)
(23)
- 
- 
- 
(23)
Bonus tax
- 
- 
- 
(11)
- 
- 
(11)
RFS Holdings minority interest
1 
2 
3 
- 
- 
- 
3 
               
Total statutory
3,301 
3,757 
7,058 
(4,315)
(912)
(1,947)
(116)
 
Notes:
(1)
Reallocation of £13 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £3 million.
(2)
Total income includes £64 million of investment income, £53 million in net interest income and £11 million in non-interest income. Reallocation of £35 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £53 million between net interest income and non-interest income in respect of funding costs of rental assets, £51 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £2 million.
(4)
Comprises £186 million loss included in 'Income from trading activities' and £294 million loss included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.
 


 
Notes (continued)
 
12. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Quarter ended 30 June 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail (1)
1,001 
297 
1,298 
(747)
25 
(300)
276 
UK Corporate
647 
340 
987 
(399)
- 
(198)
390 
Wealth
150 
116 
266 
(178)
- 
(7)
81 
Global Transaction Services
237 
411 
648 
(366)
- 
(3)
279 
Ulster Bank
194 
53 
247 
(143)
- 
(281)
(177)
US Retail & Commercial
502 
275 
777 
(504)
- 
(144)
129 
Global Banking & Markets (2)
320 
1,627 
1,947 
(1,033)
- 
(164)
750 
RBS Insurance (3)
95 
1,048 
1,143 
(220)
(1,126)
- 
(203)
Central items
66 
(72)
(6)
62 
(7)
- 
49 
               
Core
3,212 
4,095 
7,307 
(3,528)
(1,108)
(1,097)
1,574 
Non-Core (4)
472 
384 
856 
(575)
(215)
(1,390)
(1,324)
               
 
3,684 
4,479 
8,163 
(4,103)
(1,323)
(2,487)
250 
Fair value of own debt (5)
- 
619 
619 
- 
- 
- 
619 
Asset Protection Scheme credit
  default swap - fair value changes (6)
- 
500 
500 
- 
- 
- 
500 
Amortisation of purchased
  intangible assets
- 
- 
- 
(85)
- 
- 
(85)
Integration and restructuring costs
- 
- 
- 
(254)
- 
- 
(254)
Gain on redemption of own debt
- 
553 
553 
- 
- 
- 
553 
Strategic disposals
- 
(411)
(411)
- 
- 
- 
(411)
Bonus tax
- 
- 
- 
(15)
- 
- 
(15)
RFS Holdings minority interest
(8)
21 
13 
4 
- 
- 
17 
               
Total statutory
3,676 
5,761 
9,437 
(4,453)
(1,323)
(2,487)
1,174 
 
Notes:
(1)
Reallocation of netting of bancassurance claims of £25 million from non-interest income.
(2)
Reallocation of £15 million between net interest income and non-interest income in respect of funding costs of rental assets, £9 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £6 million.
(3)
Total income includes £74 million of investment income, £55 million in net interest income and £19 million in non-interest income. Reallocation of £40 million between non-interest income and net interest income in respect of instalment income.
(4)
Includes reallocation between net interest income and non-interest income in respect of funding costs of rental assets, £78 million, less interest on financial assets and liabilities designated as fair value through profit or loss, £16 million.
(5)
Comprises £104 million gain included in 'income from trading activities' and £515 million gain included in 'Other operating income' on a statutory basis.
(6)
Included in 'Income from trading activities' on a statutory basis.
 
 
 
Notes (continued)
12. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Half year ended 30 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail
2,162 
637 
2,799 
(1,366)
- 
(402)
1,031 
UK Corporate
1,330 
657 
1,987 
(826)
- 
(323)
838 
Wealth
349 
229 
578 
(416)
- 
(8)
154 
Global Transaction Services
523 
579 
1,102 
(677)
- 
(74)
351 
Ulster Bank
340 
102 
442 
(278)
- 
(730)
(566)
US Retail & Commercial
920 
489 
1,409 
(1,026)
- 
(176)
207 
Global Banking & Markets (1)
344 
3,586 
3,930 
(2,373)
- 
(13)
1,544 
RBS Insurance (2)
177 
1,939 
2,116 
(422)
(1,488)
- 
206 
Central items
(93)
66 
(27)
29 
1 
1 
4 
               
Core
6,052 
8,284 
14,336 
(7,355)
(1,487)
(1,725)
3,769 
Non-Core (3)
483 
981 
1,464 
(658)
(218)
(2,486)
(1,898)
               
 
6,535 
9,265 
15,800 
(8,013)
(1,705)
(4,211)
1,871 
Fair value of own debt (4)
- 
(141)
(141)
- 
- 
- 
(141)
Asset Protection Scheme credit default swap - fair value changes (5)    
- 
(637)
(637)
- 
- 
- 
(637)
Payment Protection Insurance costs
- 
- 
- 
(850)
- 
- 
(850)
Sovereign debt impairment and related interest rate hedge adjustments
- 
- 
- 
- 
- 
(842)
(842)
Amortisation of purchased
  intangible assets
- 
- 
- 
(100)
- 
- 
(100)
Integration and restructuring costs
(2)
(3)
(5)
(348)
- 
- 
(353)
Gain on redemption of own debt
- 
255 
255 
- 
- 
- 
255 
Strategic disposals
- 
27 
27 
- 
- 
- 
27 
Bonus tax
- 
- 
- 
(22)
- 
- 
(22)
RFS Holdings minority interest
(5)
2 
(3)
1 
- 
- 
(2)
               
Total statutory
6,528 
8,768 
15,296 
(9,332)
(1,705)
(5,053)
(794)
 
Notes:
(1)
Reallocation of £27 million between net interest income and non-interest income in respect of funding costs of rental assets, £21 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £6 million.
(2)
Total income includes £133 million investment income, £107 million in net interest income and £26 million in non-interest income. Reallocation of £70 million between non-interest income and net interest income in respect of instalment income.
(3)
Reallocation of £105 million between net interest income and non-interest income in respect of funding costs of rental assets, £102 million and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £3 million.
(4)
Comprises £75 million loss included in 'Income from trading activities' and £66 million loss included in 'Other operating income' on a statutory basis.
(5)
Included in 'Income from trading activities' on a statutory basis.
 


 
Notes (continued)
 
12. Segmental analysis (continued)
 
Analysis of divisional operating profit/(loss) (continued)
 
 
Net 
interest 
 income 
Non- 
interest 
 income 
 
Total 
 income 
 
Operating 
 expenses 
 Insurance 
net claims 
 
Impairment 
 losses 
 
Operating 
 profit/(loss)
Half year ended 30 June 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
UK Retail (1)
1,934 
643 
2,577 
(1,470)
(4)
(687)
416 
UK Corporate
1,257 
669 
1,926 
(834)
- 
(384)
708 
Wealth
293 
228 
521 
(367)
- 
(11)
143 
Global Transaction Services
454 
801 
1,255 
(740)
- 
(3)
512 
Ulster Bank
382 
106 
488 
(303)
- 
(499)
(314)
US Retail & Commercial
970 
527 
1,497 
(1,041)
- 
(287)
169 
Global Banking & Markets (2)
693 
4,078 
4,771 
(2,327)
- 
(196)
2,248 
RBS Insurance (3)
191 
2,089 
2,280 
(441)
(2,092)
- 
(253)
Central items
73 
125 
198 
204 
(15)
(1)
386 
               
Core
6,247 
9,266 
15,513 
(7,319)
(2,111)
(2,068)
4,015 
Non-Core (4)
971 
802 
1,773 
(1,214)
(348)
(3,094)
(2,883)
               
 
7,218 
10,068 
17,286 
(8,533)
(2,459)
(5,162)
1,132 
Fair value of own debt (5)
- 
450 
450 
- 
- 
- 
450 
Amortisation of purchased
  intangible assets
- 
- 
- 
(150)
- 
- 
(150)
Integration and restructuring costs
- 
- 
- 
(422)
- 
- 
(422)
Gain on redemption of own debt
- 
553 
553 
- 
- 
- 
553 
Strategic disposals
- 
(358)
(358)
- 
- 
- 
(358)
Bonus tax
- 
- 
- 
(69)
- 
- 
(69)
RFS Holdings minority interest
- 
29 
29 
4 
- 
- 
33 
               
Total statutory
7,218 
10,742 
17,960 
(9,170)
(2,459)
(5,162)
1,169 
 
Notes:
(1)
Reallocation of netting of bancassurance claims of £4 million from non-interest income.
(2)
Reallocation of £21 million between net interest income and non-interest income in respect of funding costs of rental assets, £18 million and to record interest on financial assets and liabilities designated as at fair value profit or loss, £3 million.
(3)
Total income includes £125 million of investment income, £109 million in net interest income and £16 million in non-interest income. Reallocation of £82 million between non-interest income and net interest income in respect of instalment income.
(4)
Reallocation of £131 million between net interest income and non-interest income in respect of funding costs of rental assets, £147 million and to record interest in financial assets and liabilities designated as fair value through profit or loss, £16 million.
(5)
Comprises £145 million gain included in 'Income from trading activities' and £305 million gain included in 'Other operating income' on a statutory basis.
 


 
Notes (continued)
 
12. Segmental analysis (continued)
 
Total revenue by division
 
 
Quarter ended
 
30 June 2011
  
31 March 2011
  
30 June 2010
 
External 
Inter 
 segment 
Total 
  
External 
Inter 
 segment 
Total 
  
External 
Inter 
segment 
Total 
 
Total revenue
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
UK Retail
1,744 
88 
1,832 
  
1,696 
116 
1,812 
  
1,700 
93 
1,793 
UK Corporate
1,112 
17 
1,129 
  
1,153 
19 
1,172 
  
1,100 
23 
1,123 
Wealth
253 
185 
438 
  
248 
168 
416 
  
238 
150 
388 
Global Transaction Services
410 
28 
438 
  
382 
12 
394 
  
748 
- 
748 
Ulster Bank
309 
2 
311 
  
327 
- 
327 
  
407 
40 
447 
US Retail & Commercial
826 
51 
877 
  
822 
54 
876 
  
984 
76 
1,060 
Global Banking & Markets
2,097 
1,967 
4,064 
  
2,813 
1,792 
4,605 
  
2,220 
1,385 
3,605 
RBS Insurance
1,187 
2 
1,189 
  
1,199 
2 
1,201 
  
1,273 
2 
1,275 
Central items
762 
3,062 
3,824 
  
693 
2,970 
3,663 
  
753 
2,131 
2,884 
                       
Core
8,700 
5,402 
14,102 
  
9,333 
5,133 
14,466 
  
9,423 
3,900 
13,323 
Non-Core
1,632 
116 
1,748 
  
1,122 
55 
1,177 
  
1,582 
178 
1,760 
                       
 
10,332 
5,518 
15,850 
  
10,455 
5,188
15,643 
  
11,005 
4,078 
15,083 
Reconciling items
                      
Fair value of own debt
339 
- 
339 
  
(480)
- 
(480)
  
619 
- 
619 
Asset Protection Scheme
  credit default swap -
  fair value changes
(168)
- 
(168)
  
(469)
- 
(469)
  
500 
- 
500 
Integration and restructuring costs
1 
- 
1 
  
(6)
- 
(6)
  
- 
- 
- 
 
Gain on redemption of
  own debt
255 
- 
255 
  
- 
- 
- 
  
553 
- 
553 
Strategic disposals
50 
- 
50 
  
(23)
- 
(23)
  
(411)
- 
(411)
RFS Holdings minority
  interest
(6)
- 
(6)
  
3 
- 
3 
  
25 
- 
25 
 
Elimination of intra-group
  transactions
- 
(5,518)
(5,518)
  
- 
(5,188)
(5,188)
  
- 
(4,078)
(4,078)
                       
 
10,803 
- 
10,803 
  
9,480 
- 
9,480 
  
12,291 
- 
12,291 
 


 
Notes (continued)
 
12. Segmental analysis (continued)
 
Total revenue by division (continued)
 
 
Half year ended
30 June 2011
  
Half year ended
30 June 2010
 
External 
Inter 
 segment 
Total 
  
External 
Inter 
 segment 
Total 
 
Total revenue
£m 
£m 
£m 
  
£m 
£m 
£m 
               
UK Retail
3,440 
204 
3,644 
  
3,391 
183 
3,574 
UK Corporate
2,265 
36 
2,301 
  
2,151 
47 
2,198 
Wealth
501 
353 
854 
  
467 
296 
763 
Global Transaction Services
792 
40 
832 
  
1,454 
1 
1,455 
Ulster Bank
636 
2 
638 
  
753 
70 
823 
US Retail & Commercial
1,648 
105 
1,753 
  
1,932 
148 
2,080 
Global Banking & Markets
4,910 
3,759 
8,669 
  
5,489 
2,517 
8,006 
RBS Insurance
2,386 
4 
2,390 
  
2,533 
5 
2,538 
Central items
1,455 
6,032 
7,487 
  
1,233 
5,106 
6,339 
               
Core
18,033 
10,535 
28,568 
  
19,403 
8,373 
27,776 
Non-Core
2,754 
171 
2,925 
  
3,517 
71 
3,588 
               
 
20,787 
10,706 
31,493 
  
22,920 
8,444 
31,364 
Reconciling items
              
Fair value of own debt
(141)
- 
(141)
  
450 
- 
450 
Asset Protection Scheme credit
  default swap - fair value changes
(637)
- 
(637)
  
- 
- 
- 
Integration and restructuring costs
(5)
- 
(5)
  
- 
- 
- 
 
Gain on redemption of own debt
255 
- 
255 
  
553 
- 
553 
 
Strategic disposals
27 
- 
27 
  
(358)
- 
(358)
RFS Holdings minority interest
(3)
- 
(3)
  
29 
- 
29 
Elimination of intra-group transactions
- 
(10,706)
(10,706)
  
- 
(8,444)
(8,444)
               
 
20,283 
- 
20,283 
  
23,594 
- 
23,594 
 
Total assets by division
 
30 June 
2011 
31 March 
2011 
31 December 
 2010 
Total assets
£m 
£m 
£m 
       
UK Retail
113,578 
113,303 
111,793 
UK Corporate
113,565 
115,029 
114,550 
Wealth
22,038 
21,500 
21,073 
Global Transaction Services
30,206 
27,091 
25,221 
Ulster Bank
38,690 
39,431 
40,081 
US Retail & Commercial
70,872 
70,559 
71,173 
Global Banking & Markets
787,655 
767,993 
802,578 
RBS Insurance
12,901 
12,673 
12,555 
Central items
120,734 
107,518 
99,728 
       
Core
1,310,239 
1,275,097 
1,298,752 
Non-Core
134,692 
137,135 
153,882 
       
 
1,444,931 
1,412,232 
1,452,634 
RFS Holdings minority interest
1,038 
1,021 
942 
       
 
1,445,969 
1,413,253 
1,453,576 


 
Notes (continued)
 
13. Discontinued operations and assets and liabilities of disposal groups
 
Profit/(loss) from discontinued operations, net of tax
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
  2010 
  
30 June 
2011 
30 June 
  2010 
 
£m 
£m 
£m 
  
£m 
£m 
             
Discontinued operations
            
Total income
9 
8 
- 
  
17 
1,435 
Operating expenses
- 
(1)
- 
  
(1)
(820)
Insurance net claims
- 
- 
- 
  
- 
(163)
Impairment recoveries/(losses)
11 
- 
- 
  
11 
(39)
             
Profit before tax
20 
7 
- 
  
27 
413 
Gain on disposal before recycling of reserves
- 
- 
57 
  
- 
57 
Recycled reserves
- 
- 
(1,076)
  
- 
(1,076)
             
Operating profit/(loss) before tax
20 
7 
(1,019)
  
27 
(606)
Tax on profit/(loss)
(4)
(3)
- 
  
(7)
(88)
             
Profit/(loss) after tax
16 
4 
(1,019)
  
20 
(694)
             
Businesses acquired exclusively with a view
  to disposal
            
Profit/(loss) after tax
5 
6  
- 
  
11 
(12)
             
Profit/(loss) from discontinued operations, net of tax
21 
10 
(1,019)
  
31 
(706)
 
Discontinued operations reflect the results of the State of the Netherlands and Santander in RFS Holdings following the legal separation of ABN AMRO Bank N.V. on 1 April 2010.
 


 
Notes (continued)
 
13. Discontinued operations and assets and liabilities of disposal groups (continued)
 
 
30 June 2011
31 March 
2011 
£m 
31 December 
2010 
£m 
 
Sempra 
Other 
Total 
 
£m 
£m 
£m 
           
Assets of disposal groups
          
Cash and balances at central banks
- 
155 
155 
126 
184 
Loans and advances to banks
316 
28 
344 
612 
651 
Loans and advances to customers
82 
1,405 
1,487 
3,579 
5,013 
Debt securities and equity shares
13 
3 
16 
32 
20 
Derivatives
505 
20 
525 
2,917 
5,148 
Settlement balances
157 
- 
157 
157 
555 
Property, plant and equipment
2 
15 
17 
766 
18 
Other assets
50 
423 
473 
585 
704 
           
Discontinued operations and other disposal groups
1,125 
2,049 
3,174 
8,774 
12,293 
Assets acquired exclusively with a view to disposal
- 
233 
233 
218 
191 
           
 
1,125 
2,282 
3,407 
8,992 
12,484 
           
Liabilities of disposal groups
          
Deposits by banks
6 
80 
86 
485 
266 
Customer accounts
57 
1,831 
1,888 
1,976 
2,267 
Derivatives
480 
18 
498 
2,963 
5,042 
Settlement balances
505 
- 
505 
452 
907 
Other liabilities
145 
94 
239 
481 
925 
           
Discontinued operations and other disposal groups
1,193 
2,023 
3,216 
6,357 
9,407 
Liabilities acquired exclusively with a view  to disposal
- 
21 
21 
19 
21 
           
 
1,193 
2,044 
3,237 
6,376 
9,428 
 
The Group substantially completed the disposal of the RBS Sempra Commodities JV in 2010. Certain contracts of the RBS Sempra Commodities JV were sold in risk transfer transactions prior to being novated to the purchaser. They comprise substantially all of its residual assets at 30 June 2011, 31 March 2011 and 31 December 2010 with the other assets and liabilities of disposal groups including project finance assets to be sold to The Bank of Tokyo-Mitsubishi UFJ, Ltd and Non-Core interests in Latin America and the Middle East.
 


 
Notes (continued)
14. Financial instruments
 
Classification
The following tables analyse the Group's 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.
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
financial 
instruments 
(amortised 
cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
30 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at central banks
- 
- 
- 
64,351 
      
64,351 
Loans and advances to banks
                
  - reverse repos
36,120 
- 
- 
5,853 
      
41,973 
  - other
21,733 
- 
- 
31,400 
      
53,133 
Loans and advances to
  customers
                
  - reverse repos
43,641 
- 
- 
12,521 
      
56,162 
  - other
19,971 
1,038 
- 
458,553 
  
10,010 
  
489,572 
Debt securities
118,169 
213 
118,668 
6,595 
      
243,645 
Equity shares
21,873 
1,049 
2,029 
- 
      
24,951 
Settlement balances
- 
- 
- 
24,566 
      
24,566 
Derivatives (5)
394,872 
            
394,872 
Intangible assets
            
14,592 
14,592 
Property, plant and equipment
            
17,357 
17,357 
Deferred tax
            
6,245 
6,245 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,160 
    
9,983 
11,143 
Assets of disposal groups
            
3,407 
3,407 
                 
 
656,379 
2,300 
120,697 
604,999 
  
10,010 
51,584 
1,445,969 
                 
Liabilities
                
Deposits by banks
                
  - repos
19,898 
- 
    
15,483 
    
35,381 
  - other
28,177 
- 
    
43,396 
    
71,573 
Customer accounts
                
  - repos
57,716 
- 
    
31,106 
    
88,822 
  - other
16,043 
5,566 
    
407,094 
    
428,703 
Debt securities in issue
10,474 
42,395 
    
160,928 
    
213,797 
Settlement balances
- 
- 
    
22,905 
    
22,905 
Short positions
56,106 
- 
          
56,106 
Derivatives (5)
387,809 
            
387,809 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,541 
467 
22,057 
24,065 
Retirement benefit liabilities
        
- 
  
2,239 
2,239 
Deferred tax
        
- 
  
2,092 
2,092 
Insurance liabilities
        
- 
  
6,687 
6,687 
Subordinated liabilities
- 
1,092 
    
25,219 
    
26,311 
Liabilities of disposal groups
            
3,237 
3,237 
                 
 
576,223 
49,053 
    
707,672 
467 
36,312 
1,369,727 
                 
Equity
              
76,242 
                 
               
1,445,969 
 
For the notes to this table refer to page 94.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Classification (continued)
 
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
 financial 
instruments 
(amortised 
 cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
31 March 2011
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at central banks
- 
- 
- 
59,591 
      
59,591 
Loans and advances to banks
                
  - reverse repos
39,838 
- 
- 
5,310 
      
45,148 
  - other
26,377 
6 
- 
32,921 
      
59,304 
Loans and advances to
  customers
                
  - reverse repos
49,007 
- 
- 
11,504 
      
60,511 
  - other
17,540 
1,053 
- 
465,673 
  
9,882 
  
494,148 
Debt securities
113,139 
332 
111,128 
6,785 
      
231,384 
Equity shares
19,134 
1,051 
2,027 
- 
      
22,212 
Settlement balances
- 
- 
- 
23,006 
      
23,006 
Derivatives (5)
361,048 
            
361,048 
Intangible assets
            
14,409 
14,409 
Property, plant and equipment
            
15,846 
15,846 
Deferred tax
            
6,299 
6,299 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,381 
    
9,974 
11,355 
Assets of disposal groups
            
8,992 
8,992 
                 
 
626,083 
2,442 
113,155 
606,171 
  
9,882 
55,520 
1,413,253 
                 
Liabilities
                
Deposits by banks
                
  - repos
24,204 
- 
    
15,411 
    
39,615 
  - other
25,234 
- 
    
38,595 
    
63,829 
Customer accounts
                
  - repos
59,246 
- 
    
31,186 
    
90,432 
  - other
13,704 
4,933 
    
409,837 
    
428,474 
Debt securities in issue
9,383 
43,681 
    
162,904 
    
215,968 
Settlement balances
- 
- 
    
21,394 
    
21,394 
Short positions
50,065 
- 
          
50,065 
Derivatives (5)
360,625 
            
360,625 
Accruals, deferred income
  and other liabilities
- 
- 
    
1,560 
476 
21,033 
23,069 
Retirement benefit liabilities
        
- 
  
2,257 
2,257 
Deferred tax
        
- 
  
2,094 
2,094 
Insurance liabilities
        
- 
  
6,754 
6,754 
Subordinated liabilities
- 
1,064 
    
25,451 
  
- 
26,515 
Liabilities of disposal groups
            
6,376 
6,376 
                 
 
542,461 
49,678 
    
706,338 
476 
38,514 
1,337,467 
                 
Equity
              
75,786 
                 
               
1,413,253 
 
For the notes to this table refer to page 94.
 


 
Notes (continued)
 
14. Financial instruments (continued)
 
Classification (continued)
 
HFT (1)
DFV (2)
AFS (3)
LAR (4)
Other 
 financial 
 instruments 
(amortised 
 cost)
Finance 
leases 
Non 
financial 
assets/ 
liabilities 
Total 
31 December 2010
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Assets
                
Cash and balances at
  central banks
- 
- 
- 
57,014 
      
57,014 
Loans and advances to banks
                
  - reverse repos
38,215 
- 
- 
4,392 
      
42,607 
  - other
26,082 
- 
- 
31,829 
      
57,911 
Loans and advances to
  customers
                
  - reverse repos
41,110 
- 
- 
11,402 
      
52,512 
  - other
19,903 
1,100 
- 
471,308 
  
10,437 
  
502,748 
Debt securities
98,869 
402 
111,130 
7,079 
      
217,480 
Equity shares
19,186 
1,013 
1,999 
- 
      
22,198 
Settlement balances
- 
- 
- 
11,605 
      
11,605 
Derivatives (5)
427,077 
            
427,077 
Intangible assets
            
14,448 
14,448 
Property, plant and equipment
            
16,543 
16,543 
Deferred tax
            
6,373 
6,373 
Prepayments, accrued
  income and other assets
- 
- 
- 
1,306 
    
11,270 
12,576 
Assets of disposal groups
            
12,484 
12,484 
                 
 
670,442 
2,515 
113,129 
595,935 
  
10,437 
61,118 
1,453,576 
                 
Liabilities
                
Deposits by banks
                
  - repos
20,585 
- 
    
12,154 
    
32,739 
  - other
28,216 
- 
    
37,835 
    
66,051 
Customer accounts
                
  - repos
53,031 
- 
    
29,063 
    
82,094 
  - other
14,357 
4,824 
    
409,418 
    
428,599 
Debt securities in issue
7,730 
43,488 
    
167,154 
    
218,372 
Settlement balances
- 
- 
    
10,991 
    
10,991 
Short positions
43,118 
- 
          
43,118 
Derivatives (5)
423,967 
            
423,967 
Accruals, deferred income and
  other liabilities
- 
- 
    
1,793 
458 
20,838 
23,089 
Retirement benefit liabilities
        
- 
  
2,288 
2,288 
Deferred tax
        
- 
  
2,142 
2,142 
Insurance liabilities
        
- 
  
6,794 
6,794 
Subordinated liabilities
- 
1,129 
    
25,924 
    
27,053 
Liabilities of disposal groups
            
9,428 
9,428 
                 
 
591,004 
49,441 
    
694,332 
458 
41,490 
1,376,725 
                 
Equity
              
76,851 
                 
               
1,453,576 
 
Notes:
(1)
Held-for-trading.
(2)
Designated as at fair value.
(3)
Available-for-sale.
(4)
Loans and receivables.
(5)
Held-for-trading derivatives include hedging derivatives.
 
Notes (continued)
 
14. Financial instruments (continued)
 
Reclassifications
There were no reclassifications in 2011 or 2010.
 
Financial instruments carried at fair value
Refer to Note 12 Financial instruments - valuation of the Group's 2010 Annual Report and Accounts for valuation techniques. Certain aspects relating to the valuation of financial instruments carried at fair value are discussed below.
 
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 the valuation reserves and adjustments.
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
 
£m 
£m 
£m 
       
Credit valuation adjustments (CVA)
      
  Monoline insurers
2,321 
2,178 
2,443 
  Credit derivative product companies (CDPCs)
532 
445 
490 
  Other counterparties
1,719 
1,629 
1,714 
       
 
4,572 
4,252 
4,647 
Bid-offer, liquidity  and other reserves
2,572 
2,931 
2,797 
       
 
7,144 
7,183 
7,444 
 
CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.
 
Key points
 
30 June 2011 compared with 31 March 2011
·
The increase in monoline CVA primarily reflected higher exposure, due to lower prices of underlying reference instruments, and wider credit spreads.
   
·
CDPC CVA increased due to higher exposure resulting from wider credit spreads of the underlying reference loans and bonds. This was partially offset by a decrease in the relative value of senior tranches compared with the underlying reference portfolios.
   
·
The CVA held against exposures to other counterparties increased over the period due to several factors including changes in credit spreads and counterparty exposures due to market moves, together with the impact of counterparty rating downgrades.
   
·
The decrease in bid-offer, liquidity and other reserves primarily reflects Non-Core de-risking.
 


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation reserves (continued)
 
Key points (continued)
 
30 June 2011 compared with 31 December 2010
·
Monoline CVA decreased primarily driven by a reduction in exposure due to higher prices of underlying reference instruments and sterling strengthening against the US dollar.
   
·
CDPC CVA was higher primarily due to an increase in the estimated cost of hedging expected underlying portfolio default losses in excess of the capital available in each vehicle.
   
·
The CVA held against exposures to other counterparties was stable over the period with the impact of several factors offsetting including changes in credit spreads and counterparty exposures due to market moves, together with the impact of realised defaults and counterparty rating downgrades.
   
·
The decrease in bid-offer, liquidity and other reserves primarily reflects Non-Core de-risking.
 
 
Own credit
 
Debt 
securities 
in issue 
£m 
Subordinated 
liabilities 
£m 
Total 
£m 
Derivatives 
£m 
Total 
£m 
Cumulative own credit adjustment
           
30 June 2011
1,933 
377
2,310
434
2,744
31 March 2011
1,566 
372 
1,938 
447 
2,385 
31 December 2010
2,091 
325 
2,416 
534 
2,950 
           
           
Carrying values of underlying liabilities
£bn 
£bn 
£bn 
    
           
30 June 2011
52.9 
1.1 
54.0 
    
31 March 2011
53.1 
1.1 
54.2 
    
31 December 2010
51.2 
1.1 
52.3 
    


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy
 
 
30 June 2011
     
Level 3 sensitivity (6)
 
Total 
Level 1 
Level 2 
Level 3 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Loans and advances to banks
              
  - reverse repos
36.1 
- 
36.1 
- 
  
- 
- 
  - collateral
20.7 
- 
20.7 
- 
  
- 
- 
  - other
1.1 
- 
0.5 
0.6 
  
70 
(60)
               
 
57.9 
- 
57.3 
0.6 
  
70 
(60)
               
Loans and advances to customers
              
  - reverse repos
43.5 
- 
43.5 
- 
  
- 
- 
  - collateral
15.8 
- 
15.8 
- 
  
- 
- 
  - other
5.3 
- 
4.8 
0.5 
  
30 
(30)
               
 
64.6 
- 
64.1 
0.5 
  
30 
(30)
               
Debt securities
              
  - government
139.8 
125.0 
14.8 
- 
  
- 
- 
  - MBS (1)
56.2 
- 
55.6 
0.6 
  
30 
(20)
  - CDOs (2)
3.4 
- 
0.9 
2.5 
  
170 
(30)
  - CLOs (3)
5.0 
- 
3.6 
1.4 
  
110 
(30)
  - other ABS (4)
4.3 
- 
3.2 
1.1 
  
90 
(30)
  - corporate
8.0 
- 
7.6 
0.4 
  
40 
(40)
  - financial institutions
20.0 
3.1 
16.3 
0.6 
  
30 
(50)
  - other
0.3 
- 
0.3 
- 
  
- 
- 
               
 
237.0 
128.1 
102.3 
6.6 
  
470 
(200)
               
Equity shares
25.0 
21.7 
2.1 
1.2 
  
210 
(240)
               
Derivatives
              
  - foreign exchange
72.7 
- 
71.9 
0.8 
  
30 
 (30)
  - interest rate
284.1 
0.3 
282.7 
1.1 
  
60 
(60)
  - equities and commodities
5.7 
- 
5.5 
0.2 
  
- 
- 
  - credit
32.4 
- 
29.9 
2.5 
  
510 
(130)
               
 
394.9 
0.3 
390.0 
4.6 
  
600 
(220)
               
Total
779.4 
150.1 
615.8 
13.5 
  
1,380 
(750)
               
Proportion
100% 
19.3% 
79.0% 
1.7% 
      
               
Of which
              
Core
742.7 
148.7 
587.8 
6.2 
      
Non-Core
36.7 
1.4 
28.0 
7.3 
      
               
Total
779.4 
150.1 
615.8 
13.5 
      
 
For the notes to this table refer to page 101.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
31 March 2011
  
31 December 2010
 
Total 
Level 1 
Level 2 
Level 3 
  
Total 
Level 1 
Level 2 
Level 3 
Assets
£bn 
£bn 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
                   
Loans and advances to banks
                  
  - reverse repos
39.8 
- 
39.8 
- 
  
38.2 
- 
38.2 
- 
  - collateral
25.3 
- 
25.3 
- 
  
25.1 
- 
25.1 
- 
  - other
1.1 
- 
0.4 
0.7 
  
1.0 
- 
0.6 
0.4 
                   
 
66.2 
- 
65.5 
0.7 
  
64.3 
- 
63.9 
0.4 
                   
Loans and advances to customers
                  
  - reverse repos
49.0 
- 
49.0 
- 
  
41.1 
- 
41.1 
- 
  - collateral
12.8 
- 
12.8 
- 
  
14.4 
- 
14.4 
- 
  - other
5.8 
- 
5.3 
0.5 
  
6.6 
- 
6.2 
0.4 
                   
 
67.6 
- 
67.1 
0.5 
  
62.1 
- 
61.7 
0.4 
                   
Debt securities
                  
  - government
135.0 
117.2 
17.8 
- 
  
123.9 
110.2 
13.7 
- 
  - MBS (1)
53.3 
- 
52.9 
0.4 
  
50.2 
- 
49.5 
0.7 
  - CDOs (2)
3.3 
- 
0.9 
2.4 
  
3.4 
- 
1.0 
2.4 
  - CLOs (3)
5.5 
- 
3.4 
2.1 
  
5.7 
- 
3.6 
2.1 
  - other ABS (4)
4.8 
- 
3.6 
1.2 
  
5.4 
- 
4.0 
1.4 
  - corporate
6.8 
- 
6.7 
0.1 
  
6.2 
- 
5.9 
0.3 
  - financial institutions
15.4 
0.1 
14.3 
1.0 
  
15.4 
0.1 
14.0 
1.3 
  - other
0.5 
- 
0.5 
- 
  
0.2 
- 
0.2 
- 
                   
 
224.6 
117.3 
100.1 
7.2 
  
210.4 
110.3 
91.9 
8.2 
                   
Equity shares
22.2 
18.6 
2.6 
1.0 
  
22.2 
18.4 
2.8 
1.0 
                   
Derivatives
                  
  - foreign exchange
73.6 
- 
73.5 
0.1 
  
83.3 
- 
83.2 
0.1 
  - interest rate
259.0 
0.2 
257.4 
1.4 
  
311.7 
1.7 
308.3 
1.7 
  - equities and commodities
5.7 
- 
5.2 
0.5 
  
5.2 
0.1 
4.9 
0.2 
  - credit - APS (5)
0.1 
- 
- 
0.1 
  
0.6 
- 
- 
0.6 
  - credit - other
22.6 
- 
20.0 
2.6 
  
26.3 
- 
23.2 
3.1 
                   
 
361.0 
0.2 
356.1 
4.7 
  
427.1 
1.8 
419.6 
5.7 
                   
Total
741.6 
136.1 
591.4 
14.1 
  
786.1 
130.5 
639.9 
15.7 
                   
Proportion
100% 
18.4% 
79.7% 
1.9% 
  
100% 
16.6% 
81.4% 
2.0% 
                   
Of which
                  
Core
714.0 
134.9 
572.6 
6.5 
  
754.2 
129.4 
617.6 
7.2 
Non-Core
27.6 
1.2 
18.8 
7.6 
  
31.9 
1.1 
22.3 
8.5 
                   
Total
741.6 
136.1 
591.4 
14.1 
  
786.1 
130.5 
639.9 
15.7 
 
For the notes to this table refer to page 101.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
The following table details AFS assets included within total assets on page 97.
 
 
30 June 2011
     
Level 3 Sensitivity (6)
 
Total 
Level 1 
Level 2 
Level 3 
  
Favourable 
Unfavourable 
Assets
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Debt securities
              
  - government
65.5 
59.5 
6.0 
- 
  
- 
- 
  - MBS (1)
33.7 
- 
33.4 
0.3 
  
20 
 (10)
  - CDOs (2)
2.0 
- 
0.5 
1.5 
  
90 
 (10)
  - CLOs (3)
4.2 
- 
3.4 
0.8 
  
50 
 (10)
  - other ABS (4)
3.4 
- 
2.4 
1.0 
  
50 
 (30)
  - corporate
1.9 
- 
1.9 
- 
  
- 
- 
  - financial institutions
8.0 
0.2 
7.8 
- 
  
- 
- 
               
 
118.7 
59.7 
55.4 
3.6 
  
210 
 (60)
Equity shares
2.0 
0.3 
1.3 
0.4 
  
70 
 (80)
               
Total
120.7 
60.0 
56.7 
4.0 
  
280 
(140)
               
Of which
              
Core
111.3 
59.5 
50.8 
1.0 
      
Non-Core
9.4 
0.5 
5.9 
3.0 
      
               
Total
120.7 
60.0 
56.7 
4.0 
      
 
 
 
31 March 2011
  
31 December 2010
 
Total 
Level 1 
Level 2 
Level 3 
  
Total 
Level 1 
Level 2 
Level 3 
Assets
£bn 
£bn 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
                   
Debt securities
                  
  - government
58.4 
51.3 
7.1 
- 
  
59.4 
53.0 
6.4 
- 
  - MBS (1)
33.0 
- 
32.8 
0.2 
  
31.5 
- 
31.1 
0.4 
  - CDOs (2)
1.9 
- 
0.5 
1.4 
  
2.0 
- 
0.6 
1.4 
  - CLOs (3)
4.4 
- 
3.2 
1.2 
  
5.0 
- 
3.5 
1.5 
  - other ABS (4)
3.6 
- 
2.5 
1.1 
  
4.0 
- 
2.9 
1.1 
  - corporate
1.8 
- 
1.8 
- 
  
1.4 
- 
1.4 
- 
  - financial institutions
8.0 
0.1 
7.9 
- 
  
7.8 
0.1 
7.7 
- 
                   
 
111.1 
51.4 
55.8 
3.9 
  
111.1 
53.1 
53.6 
4.4 
Equity shares
2.0 
0.3 
1.4 
0.3 
  
2.0 
0.3 
1.4 
0.3 
                   
Total
113.1 
51.7 
57.2 
4.2 
  
113.1 
53.4 
55.0 
4.7 
                   
Of which
                  
Core
103.7 
51.4 
51.4 
0.9 
  
103.0 
52.8 
49.2 
1.0 
Non-Core
9.4 
0.3 
5.8 
3.3 
  
10.1 
0.6 
5.8 
3.7 
                   
Total
113.1 
51.7 
57.2 
4.2 
  
113.1 
53.4 
55.0 
4.7 
 
For the notes to this table refer to page 101.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
30 June 2011
     
Level 3 Sensitivity (6)
 
Total 
Level 1 
Level 2 
Level 3 
  
Favourable 
Unfavourable 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£m 
£m 
               
Deposits by banks
              
  - repos
19.9 
- 
19.9 
- 
  
- 
- 
  - collateral
25.5 
- 
25.5 
- 
  
- 
- 
  - other
2.7 
- 
2.7 
- 
  
- 
- 
               
 
48.1 
- 
48.1 
- 
  
- 
- 
               
Customer accounts
              
  - repos
57.7 
- 
57.7 
- 
  
- 
- 
  - collateral
11.1 
- 
11.1 
- 
  
- 
- 
  - other
10.5 
- 
10.4 
0.1 
  
50 
(50)
               
 
79.3 
- 
79.2 
0.1 
  
50 
(50)
               
Debt securities in issue
52.9 
- 
50.6 
2.3 
  
110 
(90)
               
Short positions
56.1 
44.2 
11.1 
0.8 
  
20 
(60)
               
Derivatives
              
  - foreign exchange
78.0 
- 
77.6 
0.4 
  
20 
(20)
  - interest rate
269.7 
0.2 
269.2 
0.3 
  
20 
(30)
  - equities and commodities
9.2 
- 
8.6 
0.6 
  
10 
(10)
  - credit - APS (5)
0.1 
- 
- 
0.1 
  
500 
(220)
  - credit - other
30.8 
- 
29.7 
1.1 
  
40 
(100)
               
 
387.8 
0.2 
385.1 
2.5 
  
590 
(380)
               
Subordinated liabilities
1.1 
- 
1.1 
- 
  
- 
- 
               
Total
625.3 
44.4 
575.2 
5.7 
  
770 
(580)
               
Proportion
100% 
7.1% 
92.0% 
0.9% 
      
               
Of which
              
Core
606.8 
44.4 
558.6 
3.8 
      
Non-Core
18.5 
- 
16.6 
1.9 
      
               
Total
625.3 
44.4 
575.2 
5.7 
      
 
For the notes to this table refer to page 101.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
 
31 March 2011
  
31 December 2010
 
Total 
Level 1 
Level 2 
Level 3 
  
Total 
Level 1 
Level 2 
Level 3 
Liabilities
£bn 
£bn 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
                   
Deposits by banks
                  
  - repos
24.2 
- 
24.2 
- 
  
20.6 
- 
20.6 
- 
  - collateral
23.6 
- 
23.6 
- 
  
26.6 
- 
26.6 
- 
  - other
1.6 
- 
1.6 
- 
  
1.6 
- 
1.6 
- 
                   
 
49.4 
- 
49.4 
- 
  
48.8 
- 
48.8 
- 
                   
Customer accounts
                  
  - repos
59.2 
- 
59.2 
- 
  
53.0 
- 
53.0 
- 
  - collateral
8.5 
- 
8.5 
- 
  
10.4 
- 
10.4 
- 
  - other
10.1 
- 
10.0 
0.1 
  
8.8 
- 
8.7 
0.1 
                   
 
77.8 
- 
77.7 
0.1 
  
72.2 
- 
72.1 
0.1 
                   
Debt securities in issue
53.1 
- 
50.5 
2.6 
  
51.2 
- 
49.0 
2.2 
                   
Short positions
50.1 
40.4 
8.8 
0.9 
  
43.1 
35.0 
7.3 
0.8 
                   
Derivatives
                  
  - foreign exchange
79.0 
- 
78.7 
0.3 
  
89.4 
0.1 
89.3 
- 
  - interest rate
250.5 
0.1 
249.9 
0.5 
  
299.2 
0.2 
298.0 
1.0 
  - equities and commodities
9.4 
- 
8.7 
0.7 
  
10.1 
0.1 
9.6 
0.4 
  - credit
21.7 
- 
21.4 
0.3 
  
25.3 
- 
25.0 
0.3 
                   
 
360.6 
0.1 
358.7 
1.8 
  
424.0 
0.4 
421.9 
1.7 
                   
Subordinated liabilities
1.1 
- 
1.1 
- 
  
1.1 
- 
1.1 
- 
                   
Total
592.1 
40.5 
546.2 
5.4 
  
640.4 
35.4 
600.2 
4.8 
                   
Proportion
100% 
6.9% 
92.2% 
0.9% 
  
100% 
5.5% 
93.7% 
0.8% 
                   
Of which
                  
Core
581.1 
40.5 
536.2 
4.4 
  
626.1 
35.4 
586.9 
3.8 
Non-Core
11.0 
- 
10.0 
1.0 
  
14.3 
- 
13.3 
1.0 
                   
Total
592.1 
40.5 
546.2 
5.4 
  
640.4 
35.4 
600.2 
4.8 
 
Notes:
(1)
Mortgage-backed securities.
(2)
Collateralised debt obligations.
(3)
Collateralised loan obligations.
(4)
Asset-backed securities.
(5)
Asset Protection Scheme.
(6)
Sensitivity represents the reasonably possible favourable and unfavourable effect respectively on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs to the Group's valuation techniques or models. The level 3 sensitivities are calculated at a sub-portfolio level and hence these aggregated figures do not reflect the correlation between some of the sensitivities.


 
Notes (continued)
 
14. Financial instruments (continued)
 
Valuation hierarchy (continued)
 
30 June 2011 compared with 31 March 2011
·
Total assets carried at fair value increased by £37.8 billion to £779.4 billion. This principally reflected interest rate and credit derivatives (£34.9 billion) due to changes in market parameters and the effect of Non-Core hedging trades respectively and increases in government and US agency debt securities in GBM (£9.4 billion).
   
·
Total liabilities carried at fair value increased by £33.2 billion to £625.3 billion mainly in interest rate and credit derivatives (£28.3 billion) reflecting market parameter changes as well as increases in GBM's sovereign short positions (£6.0 billion).
   
·
Level 3 assets decreased by £0.6 billion largely due to bond disposals. The APS derivative was a liability at 30 June 2011 compared with an asset of £81 million at 31 March 2011.
   
·
Level 3 liabilities increased by £0.3 billion primarily in Non-Core's credit derivatives.
 
30 June 2011 compared with 31 December 2010
·
Total assets carried at fair value decreased by £6.7 billion in the period to £779.4 billion, with a decrease in derivatives of £32.2 billion mainly reflecting changes in market parameters and netting arrangements. This was partly offset by an increase in debt securities of £26.6 billion primarily reflecting GBM's HFT sovereign bond holdings.
   
·
Total liabilities carried at fair value decreased by £15.1 billion to £625.3 billion, with a decrease in derivatives of £36.2 billion partly offset by increases in short positions (£13.0 billion) in GBM and, financial institution repos and other customer balances (£7.1 billion).
   
·
Level 3 assets decreased by £2.2 billion mainly reflecting bond disposals and transfers to level 2 based on improved observability. The APS derivative asset of £550 million at 31 December 2010 decreased to a liability of £87 million at 30 June 2011.
   
·
Level 3 liabilities have increased by £0.9 billion, primarily derivatives.
   
·
There were no significant transfers between level 1 and 2.
   
·
Favourable and unfavourable effects of reasonably possible alternative assumptions on level 3 instruments at 30 June 2011 were £2,150 million (31 December 2010 - £2,600 million) and £1,330 million (31 December 2010 - £2,180 million) respectively. These total sensitivities are an aggregation of portfolio level sensitivities and hence do not reflect the correlation between some of the sensitivities.
   
·
Net losses of £1.4 billion on level 3 derivative assets held at 30 June 2011 included:
·    the decrease in APS credit derivative (£0.6 billion);
·    Non-Core: relating to monolines, CDPCs and other exotic products in Structured Credit Products and other areas (£0.5 billion); and
·    GBM: various small amounts across businesses (£0.3 billion).
 


 
Notes (continued)
 
14. Financial instruments (continued)
 
Movement in level 3 portfolios
 
 
1 January 
 2011 
Gains or 
 losses (1)
Transfers 
in/(out) of 
level 3 
Purchases 
 and issues 
Sales and 
settlements 
FX (2)
30 June 
 2011 
Gains/(losses)
relating to 
instruments 
held at  
30 June 
2011 
 
£m
£m
£m
£m
£m
£m
£m
£m
                 
Assets
                
Fair value through profit or loss:
                
Loans and advances
843 
75 
182 
67 
(78)
(15)
1,074 
83 
Debt securities
3,784 
121 
(466)
957 
(1,339)
(21)
3,036 
(15)
Equity shares
716 
(6)
83 
39 
(50)
2 
784 
(10)
Derivatives
5,737 
(1,356)
96 
541 
(418)
(4)
4,596 
(1,422)
                 
 
11,080 
(1,166)
(105)
1,604 
(1,885)
(38)
9,490 
(1,364)
                 
AFS:
                
Debt securities
4,379 
143 
(624)
97 
(368)
6 
3,633 
(92)
Equity shares
279 
31 
112 
7 
(14)
(7)
408 
4 
                 
 
4,658 
174 
(512)
104 
(382)
(1)
4,041 
(88)
                 
Total
15,738 
(992)
(617)
1,708 
(2,267)
(39)
13,531 
(1,452)
                 
Liabilities
                
Deposits
84 
17 
(8)
- 
- 
1 
94 
17 
Debt securities in issue
2,203 
29 
(255)
578 
(345)
42 
2,252 
36 
Short positions
776 
(201)
67 
195 
(55)
- 
782 
(200)
Derivatives
1,740 
(176)
208 
1,131 
(382)
10 
2,531 
(118)
Other
1 
- 
- 
- 
- 
- 
1 
- 
                 
Total
4,804 
(331)
12 
1,904 
(782)
53 
5,660 
(265)
 
Notes:
(1)
Net gains/(losses) recognised in the income statement and statement of comprehensive income during the period were (£921) million and £260 million respectively. 
(2)
Foreign exchange movements.
 


 
Notes (continued)
 
15. Available-for-sale financial assets
The Q2 2011 movement in available-for-sale financial assets reflects the movement of £733 million losses on Greek government bonds and a £109 million related interest rate hedge adjustment to profit or loss from available-for-sale reserves. Offsetting this partially were realised gains from routine portfolio management in Group Treasury of £153 million, Non-Core of £31 million and UK Corporate of £16 million. In addition, unrealised gains on securities increased by £781 million in the quarter, primarily in relation to high quality sovereign bonds.
 
 
Quarter ended
  
Half year ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
  
30 June 
2011 
30 June 
2010 
Available-for-sale reserve
£m 
£m 
£m 
  
£m 
£m 
             
At beginning of period
(2,063)
(2,037)
(1,527)
  
(2,037)
(1,755)
Unrealised gains
781 
162 
119 
  
943 
647 
Realised losses/(gains)
626 
(197)
20 
  
429 
(127)
Tax
(370)
9 
(55)
  
(361)
(208)
Recycled to profit or loss on disposal of businesses (1)
- 
- 
(16)
  
- 
(16)
             
At end of period
(1,026)
(2,063)
(1,459)
  
(1,026)
(1,459)
 
Note:
(1)
Net of tax - £6 million credit.
 
As a result of the deterioration in Greece's fiscal position and the announcement of the proposals to restructure Greek government debt, an impairment loss of £733 million has been recorded in respect of Greek government bonds, along with £109 million related interest rate hedge adjustments. Ireland, Italy, Portugal and Spain are facing less acute fiscal difficulties and the Group's sovereign exposures to these countries were not considered impaired at 30 June 2011.
 
16. Contingent liabilities and commitments
 
 
30 June 2011
  
31 March 2011
  
31 December 2010
 
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
  
Core 
Non-Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Contingent liabilities
                      
Guarantees and assets pledged as collateral security
27,090 
1,703 
28,793 
  
26,849 
3,156 
30,005 
  
28,859 
2,242 
31,101 
Other contingent liabilities
11,883 
296 
12,179 
  
11,407 
469 
11,876 
  
11,833 
421 
12,254 
                       
 
38,973 
1,999 
40,972 
  
38,256 
3,625 
41,881 
  
40,692 
2,663 
43,355 
                       
Commitments
                      
Undrawn formal standby
  facilities, credit lines and
  other commitments to lend
233,795 
16,493 
250,288 
  
236,096 
18,460 
254,556 
  
245,425 
21,397 
266,822 
Other commitments
1,141 
2,315 
3,456 
  
953 
2,494 
3,447 
  
1,560 
2,594 
4,154 
                       
 
234,936 
18,808 
253,744 
  
237,049 
20,954 
258,003 
  
246,985 
23,991 
270,976 
                       
Total contingent liabilities and commitments
273,909 
20,807 
294,716 
  
275,305 
24,579 
299,884 
  
287,677 
26,654 
314,331 
 
Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions.


 
Notes (continued)
 
17. Litigation and Investigations
 
Litigation
As a participant in the financial services industry, the Group operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, the Group and its members are involved in various disputes and legal proceedings in the United Kingdom, the United States and other jurisdictions, including litigation. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, particularly in the earlier stages of a case.
 
Other than as set out in this note (excluding the sub-heading "Summary of other disputes, legal proceedings and litigation"), neither RBS nor any member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which RBS is aware) during the 12 months prior to the date of this document which may have, or have had in the recent past, significant effects on the financial position or profitability of RBS and/or the Group taken as a whole.
 
Shareholder litigation
RBS and certain of its subsidiaries, together with certain current and former individual officers and directors have been named as defendants in class actions filed in the United States District Court for the Southern District of New York. There are parallel proceedings involving holders of RBS preferred shares (the "Preferred Shares litigation") and holders of American Depository Receipts (the "ADR claims").
 
In the Preferred Shares litigation, the consolidated amended complaint alleges certain false and misleading statements and omissions in public filings and other communications during the period 1 March 2007 to 19 January 2009, and variously asserts claims under Sections 11, 12 and 15 of the US Securities Act of 1933. The putative class is composed of all persons who purchased or otherwise acquired the Group Series Q, R, S, T and/or U non-cumulative dollar preference shares issued pursuant or traceable to the 8 April 2005 US Securities and Exchange Commission (SEC) registration statement and were damaged thereby. Plaintiffs seek unquantified damages on behalf of the putative class. The defendants have moved to dismiss the complaint.  Briefing on this motion is expected to be completed by September 2011.
 
With respect to the ADR claims, a complaint was filed in January 2011 and a further complaint was filed in February 2011asserting claims under Sections 10 and 20 of the Securities Exchange Act of 1934 on behalf of all persons who purchased or otherwise acquired the Group US American Depositary Receipts ("ADRs") between 1 March 2007 and 19 January 2009. There is a motion pending to consolidate these cases, as well as various motions for appointment of lead plaintiff and counsel.
 
The Group has also received notification of similar prospective claims in the United Kingdom and elsewhere but no court proceedings have been commenced in relation to these claims.
 
The Group considers that it has substantial and credible legal and factual defences to the remaining and prospective claims and will defend them vigorously. The Group cannot predict the outcome of these claims at this stage and is unable reliably to estimate the liability, if any, that might arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Notes (continued)
17. Litigation and Investigations
 
Other securitisation and securities related litigation in the United States
Group 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 purported class action suits and actions by individual purchasers of securities. The cases involve the issuance of mortgage backed securities and/or collateralised debt obligations for more than $35 billion of securities issued by over one hundred securitisation trusts.  Although the allegations vary by claim, in general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings of such securities contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued. 
 
In many of these actions, the Group has contractual rights to indemnification from the issuers of the securities (where a Group company is underwriter) and/or the underlying mortgage originator (where a Group company is issuer), but certain of those indemnity rights may prove effectively unenforceable where the issuers or originators are defunct or otherwise unable to perform. 
 
Certain other institutional investors have threatened to assert claims against the Group in connection with various mortgage-related offerings. The Group cannot predict with any certainty whether any of these individual investors will pursue these threatened claims.
 
With respect to all of the mortgage-backed securities related claims, the Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. The Group cannot predict the outcome of these claims at this stage and is unable reliably to estimate the liability, if any, that may arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
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 claim against RBS NV for $270 million. This is a clawback action similar to claims filed against six other institutions in December. RBS NV (or its subsidiaries) invested in Madoff funds through feeder funds. The Trustee alleges that RBS NV received $71 million in redemptions from the feeder funds and $200 million from its swap counterparties while RBS NV '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. The Group considers that it has substantial and credible legal and factual defences to the claim and intends to defend it vigorously. The Group cannot predict the outcome of the claim at this stage and is unable reliably to estimate the liability, if any, that may arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Unarranged overdraft charges
In the US, Citizens Financial Group, in common with other US banks, has been named as a defendant in a class action asserting that Citizens charges excessive overdraft fees. The plaintiffs claim that overdraft fees resulting from point of sale and automated teller machine (ATM) transactions violate the duty of good faith implied in Citizens' customer account agreement and constitute an unfair trade practice. The Group considers that it has substantial and credible legal and factual defences to these claims and will defend them vigorously. The Group cannot predict the outcome of these claims at this stage and is unable reliably to estimate the liability, if any, that might arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
London Interbank Offered Rate (LIBOR)
Certain members of the Group have been named as defendants in a number of class action claims filed in the US with respect to the setting of US dollar LIBOR. The complaints are substantially similar and allege, through various means, that certain members of the Group and other panel banks individually and collectively violated US commodities and antitrust laws and state common law by manipulating US dollar LIBOR and prices of US dollar LIBOR-based derivatives in various markets. The Group considers that it has substantial and credible legal and factual defences to these and prospective claims. The Group cannot predict the outcome of these claims at this stage and is unable reliably to estimate the liability, if any, that might arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Summary of other disputes, legal proceedings and litigation
Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of any of these other claims and proceedings will have a significant effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Investigations
The Group's businesses and financial condition can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis regarding operational, systems and control evaluations and issues including those related to compliance with applicable 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 the regulators, increased costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the Group's business activities or fines. Any of these events or circumstances could have a significant effect on the Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
 
Political and regulatory scrutiny of the operation of retail banking and consumer credit industries in the United Kingdom and elsewhere continues. The nature and impact of future changes in policies and regulatory action are not predictable and are beyond the Group's control but could have a significant effect on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Retail banking
In the European Union, regulatory actions included an inquiry into retail banking initiated on 13 June 2005 in all of the then 25 member states by the European Commission's Directorate General for Competition. The inquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission ("EC") announced that barriers to competition in certain areas of retail banking, payment cards and payment systems in the European Union had been identified. The EC indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition laws where appropriate. In addition, in late 2010, the EC launched an initiative pressing for increased transparency of bank fees. The Group cannot predict the outcome of these actions at this stage and  is unable reliably to estimate the effect, if any, that these may have on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Multilateral interchange fees
In 2007, the EC issued a decision that while interchange is not illegal per se, MasterCard's current multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIF (i.e. set these fees to zero) by 21 June 2008.
 
MasterCard appealed against the decision to the European Court of First Instance (subsequently re-named the General Court) on 1 March 2008, and the Group has intervened in the appeal proceedings. In addition, in summer 2008, MasterCard announced various changes to its scheme arrangements. The EC was concerned that these changes might be used as a means of circumventing the requirements of the infringement decision. In April 2009, MasterCard agreed an interim settlement on the level of cross-border MIF with the EC pending the outcome of the appeal process and, as a result, the EC has advised it will no longer investigate the non-compliance issue (although MasterCard is continuing with its appeal). The appeal was heard on 8 July 2011 by the General Court and judgment is awaited.
 
Visa's cross-border MIFs were exempted in 2002 by the EC for a period of five years up to 31 December 2007 subject to certain conditions. On 26 March 2008, the EC opened a formal inquiry into Visa's current MIF arrangements for cross border payment card transactions with Visa branded debit and consumer credit cards in the European Union and on 6 April 2009 the EC announced that it had issued Visa with a formal Statement of Objections. At the same time Visa announced changes to its interchange levels and introduced some changes to enhance transparency. There is no deadline for the closure of the inquiry. However, on 26 April 2010 Visa announced it had reached an agreement with the EC as regards immediate cross border debit card MIF rates only and in December 2010 the commitments were finalised for a four year period commencing December 2010 under Article 9 of Regulation 1/2003. The EC is continuing its investigations into Visa's cross border MIF arrangements for deferred debit and credit transactions.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Multilateral interchange fees (continued)
In the UK, the Office of Fair Trading ("OFT") has carried out investigations into Visa and MasterCard domestic credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeal Tribunal (the CAT) in June 2006. The OFT's investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards. In January 2010 the OFT advised that it did not anticipate issuing a Statement of Objections prior to the European General Court's judgment, although it has reserved the right to do so if it considers it appropriate.
 
The outcome of these investigations is not known, but they may have a significant effect on the consumer credit industry in general and, therefore, on the Group's business in this sector. Accordingly, the Group is unable reliably to estimate the effect, if any, which these investigations may have on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Payment Protection Insurance
Having conducted a market study relating to Payment Protection Insurance (PPI), on 7 February 2007 the OFT referred the PPI market to the Competition Commission (CC) for an in-depth inquiry. The CC published its final report on 29 January 2009 and announced its intention to order a range of remedies, including a prohibition on actively selling PPI at point of sale of the credit product (and for 7 days thereafter), a ban on single premium policies and other measures to increase transparency (in order to improve customers' ability to search and improve price competition). Barclays Bank PLC subsequently appealed certain CC findings to the CAT. On 16 October 2009, the CAT handed down a judgment remitting the matter back to the CC for review. Following further review, on 14 October 2010, the CC published its final decision on remedies following the remittal which confirmed the point of sale prohibition. On 24 March 2011, the CC made a final order with a commencement date of 6 April 2011. The key measures will come into force in October 2011 and April 2012.
 
The Financial Services Authority (FSA) conducted a broad industry thematic review of PPI sales practices and in September 2008, the FSA announced that it intended to escalate its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies have been made to banks and to the Financial Ombudsman Service (FOS) and many of these are being upheld by the FOS against the banks.
 
Following unsuccessful negotiations with the industry, the FSA issued consultation papers on PPI complaint handling and redress in September 2009 and again in March 2010. The FSA published its  final policy statement on 10 August 2010 and instructed firms to implement the measures contained in it by 1 December 2010. The new rules impose significant changes with respect to the handling of mis-selling PPI complaints. On 8 October 2010, the British Bankers' Association (BBA) filed an application for judicial review of the FSA's policy statement and of related guidance issued by the FOS. The application was heard in January 2011. On 20 April 2011 the High Court issued judgment in favour of the FSA and the FOS.  The BBA announced on 9 May 2011 that it would not appeal that judgment. The Group supports this position. The Group has recorded an additional provision of £850 million in the second quarter of 2011, supplementing its existing provision of approximately £100 million.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Payment Protection Insurance (continued)
The Group has now reached agreement with the FSA on a process for implementation of the FSA's policy statement and for the future handling of PPI complaints to ensure that redress is offered to any customers identified as having suffered detriment.
 
Personal current accounts
On 16 July 2008, the OFT published the results of its market study into Personal Current Accounts ("PCAs") in the United Kingdom. The OFT found evidence of competition and several positive features in the personal current account market but believed that the market as a whole was not working well for consumers and that the ability of the market to function well had become distorted.
 
On 7 October 2009, the OFT published a follow-up report summarising the initiatives agreed between the OFT and personal current account providers to address the OFT's concerns about transparency and switching, following its market study. Personal current account providers will take a number of steps to improve transparency, including providing customers with an annual summary of the cost of their account and making charges prominent on monthly statements. To improve the switching process, a number of steps are being introduced following work with Bacs (formerly Bankers' Automated Clearing Services), the payment processor, including measures to reduce the impact on consumers of any problems with transferring direct debits.
 
On 22 December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the personal current account market in the United Kingdom, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes are required for the market to work in the best interests of bank customers. The OFT stated that it would discuss these issues intensively with banks, consumer groups and other organisations, with the aim of reporting on progress by the end of March 2010. On 16 March 2010, the OFT announced that it had secured agreement from the banks on four industry-wide initiatives, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on information sharing with customers, best practice for PCA customers in financial difficulties and incurring charges, and PCA providers to publish their policies on dealing with PCA customers in financial difficulties. The OFT also announced its plan to conduct six-monthly ongoing reviews, fully to review the market again in 2012 and to undertake a brief analysis on barriers to entry.
 
The first six-monthly ongoing review was completed in September 2010. The OFT noted progress in the areas of switching, transparency and unarranged overdrafts for the period March to September 2010, as well as highlighting further changes the OFT expects to see in the market. On 29 March 2011, the OFT published its update report in relation to personal current accounts. This noted further progress in improving consumer control over the use of unarranged overdrafts. In particular, the Lending Standards Board has led on producing standards and guidance to be included in a revised Lending Code published on 31 March 2011. The OFT will continue to monitor the market and will consider the need for, and appropriate timing of, further update reports in light of other developments, in particular the work of the Independent Commission on Banking. The OFT intends to conduct a more comprehensive review of the market in 2012.
 
 
 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Personal current accounts (continued)
On 26 May 2010, the OFT announced its review of barriers to entry. The review concerns retail banking for individuals and small and medium size enterprises (up to £25 million turnover) and will look at products which require a banking licence to sell mortgages, loan products and, where appropriate, other products such as insurance or credit cards wherecross-selling may facilitate entry or expansion. The OFT published its report in November 2010. It advised that it expected its review to be relevant to the Independent Commission on Banking, the FSA, HM Treasury and the Department for Business, Innovation and Skills and to the devolved governments in the United Kingdom. The OFT has not indicated whether it will undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch networks and brands. At this stage, it is not possible to estimate the effect of the OFT's report and recommendations regarding barriers to entry upon the Group.
 
Equity underwriting
On 6 August 2010, the OFT launched a market study into equity underwriting and related services. The OFT looked at the way that the market works and in particular: (i) how underwriting services are purchased; (ii) how underwriting services are provided; and (iii) how the regulatory environment affects the provision of underwriting services. On 27 January 2011 the OFT published its market study report.  The OFT decided not to refer the market to the CC (this decision was confirmed on 17 May 2011 following a public consultation) but identified certain concerns around the level of equity underwriting fees. The OFT therefore identified a number of options which would enable companies and institutional shareholders to address these concerns and allow them to drive greater competition in the market.  It is not possible to estimate with any certainty what effect this development and any related developments may have on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
Independent Commission on Banking
On 16 June 2010, HM Treasury published the terms of reference for the Government's Independent Commission on Banking ("ICB"). The ICB is considering the structure of the United Kingdom banking sector and is looking at structural and non-structural measures to reform the banking system and to promote competition. It is mandated to formulate policy recommendations with a view to: (i) reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function; (ii) mitigating moral hazard in the banking system; (iii) reducing the likelihood and impact of a bank's failure; and (iv) promoting competition in retail and investment banking with a view to ensuring that the needs of banks' customers are served efficiently and considering the extent to which large banks can gain competitive advantage from being perceived as "too big to fail". The ICB reports to the Cabinet Committee on Banking Reform and will issue a final report on 12 September 2011. The interim report published on 11 April 2011 (the "Interim Report") set out the ICB's provisional views on possible reforms and sought responses to those views.  Reform options for stability include additional capital and the ring-fencing of retail banking operations (on a basis yet to be defined). Reform options for competition include structural measures to improve competition, improved means of switching and transparency and a primary duty for the Financial Conduct Authority to promote effective competition.  The Interim Report also supported the introduction of rules as to contingent capital, bail-in debt and depositor preferences.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Independent Commission on Banking (continued)
The Group has responded to the Interim Report and set out its views on the reform options outlined in that Report. The Group will continue to participate in the debate and to consult with the ICB during the coming weeks and with the UK Government thereafter. Prior to the publication of a final report by the ICB it is not possible to estimate the effect of the ICB's report and recommendations upon the Group but they could have a negative impact on its consolidated net assets, operating results or cash flows in any particular period.
 
US dollar clearing activities
In May 2010, following a criminal investigation by the United States Department of Justice ("DoJ") into its dollar clearing activities, Office of Foreign Assets Control compliance procedures and other Bank Secrecy Act compliance matters, RBS NV formally entered into a Deferred Prosecution Agreement (DPA) with the DoJ resolving the investigation. The investigation was in relation to activities before the Consortium Members acquired ABN AMRO Holding N.V. (now known as RBS Holdings N.V.). The agreement was signed by RBS NV and is binding on that entity and its subsidiaries. Pursuant to the DPA, RBS NV paid a penalty of US$500 million and agreed that it will comply with the terms of the DPA and continue to co-operate fully with any further investigations. Payment of the penalty was made from a provision established in April 2007 when an agreement in principle to settle was first announced. At the joint request of the DoJ and RBS NV, in order to allow RBS NV sufficient time to fulfil its obligations, the U.S. District Court, on 6 April 2011, extended the duration of the DPA until 31 December 2011. Upon satisfaction of the conditions of the DPA within that period the matter will be fully resolved. Failure to comply with the terms of the DPA during this period could result in the DoJ recommencing its investigations, the outcome of which would be uncertain and could result in public censure and fines or have an adverse effect on RBS Holdings N.V.'s operations, any of which could have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.
 
Securitisation and collateralised debt obligation business
In September and October 2010, the SEC requested voluntary production of information concerning residential mortgage-backed securities underwritten by subsidiaries of RBS during the period from September 2006 to July 2007 inclusive. In November 2010, the SEC commenced formal proceedings and requested testimony from the Group employees. The investigation is in its preliminary stages and it is difficult to predict any potential exposure that may result.
 
Also in October 2010, the SEC commenced an inquiry into document deficiencies and repurchase requests with respect to certain securitisations, and in January 2011, this was converted to a formal investigation. Among other matters, the investigation seeks information related to document deficiencies and remedial measures taken with respect to such deficiencies. The investigation also seeks information related to early payment defaults and loan repurchase requests. The Group is fully co-operating with this investigation.
 
In June 2009, in connection with an investigation into the role of investment banks in the origination and securitisation of sub-prime loans in Massachusetts, the Massachusetts Attorney General issued subpoenas to various banks, including an RBS subsidiary, seeking information related to residential mortgage lending practices and sales and securitisation of residential mortgage loans. This investigation is ongoing and the Group is co-operating.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Securitisation and collateralised debt obligation business (continued)
Previously, in 2008, 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 as part of the due diligence process from the independent due diligence firms. The Group completed its production of documents requested by the New York State Attorney General in 2009, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011, at the New York State Attorney General's request, representatives of the Group attended an informal meeting to provide additional information about the Group's mortgage securitisation business.  The investigation is ongoing and the Group is cooperating.  It is difficult to predict the potential exposure from this investigation. 
 
In September 2010, RBS subsidiaries received a request from the Nevada State Attorney General requesting information related to securitisations of mortgages issued by three specific originators. The investigation by the Nevada State Attorney General is in the early stages and therefore it is difficult to predict the potential exposure from any such investigation. RBS and its subsidiaries are co-operating with these various investigations and requests. At this stage it is not possible to estimate the effect of the matters discussed in this section headed "Securitisation and collateralised debt obligation business" upon the Group, if any.
 
US mortgages
The Group's Global Banking & Markets N.A. ("GBM N.A."), 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"). GBM N.A. 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, GBM N.A. 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, GBM N.A. made such representations and warranties itself. Where GBM N.A. has given those or other representations and warranties (whether relating to underlying loans or otherwise), GBM N.A. 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, GBM N.A. may be able to assert claims against third parties who provided representations or warranties to GBM N.A. when selling loans to it; although the ability to make recoveries against such parties and outcome of such claims would be uncertain. During the two and a half year period ended 30 June 2011, GBM N.A. has received approximately US$48 million in repurchase demands in respect of loans made and related securities sold where obligations in respect of contractual representations or warranties were undertaken by GBM N.A. However, repurchase demands presented to GBM N.A. are subject to challenge and, to date, GBM N.A. has rebutted a significant percentage of these claims.
 


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
US mortgages (continued)
Citizens Financial Group (CFG) has not been an issuer or underwriter of non-agency RMBS. However, CFG 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, CFG 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. During the two and a half year period ended 30 June 2011, CFG has received approximately US$28.7 million in repurchase demands in respect of loans originated. However, repurchase demands presented to CFG are subject to challenge and, to date, CFG has rebutted a significant percentage of these claims.
 
Although there has 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) over the last year (including as a result of interventions by certain states and local governments), to date, CFG has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.
 
The Group cannot estimate what the future level of repurchase demands or ultimate exposure of GBM N.A. or CFG may be, and cannot give any assurance that the historical experience will continue in the future. Furthermore, the Group is unable to estimate the extent to which the matters described above will impact it and future developments may have an adverse impact on the Group's consolidated net assets, operating results or cash flows in any particular period.
 
LIBOR
The Group has received requests from various regulators, including the US Commodity Futures Trading Commission, the US Department of Justice and the European Commission, seeking documents and communications related to the process and procedures for setting LIBOR and other interest rates, together with related trading information. The Group is co-operating with these investigations and is keeping relevant regulators informed. It is not possible to estimate with any certainty what effect these investigations and any related developments may have on the Group.
 
Other investigations
The Federal Reserve and state banking supervisors have been reviewing the Group's US operations and RBS and its subsidiaries have been required to make improvements with respect to various matters, including enterprise-wide governance, Bank Secrecy Act and anti-money laundering compliance, risk management and asset quality. The Group is in the process of implementing measures for matters identified to date. The Group may become 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. Any limitations or conditions placed on the Group's activities in the United States, as well as the terms of any supervisory action applicable to RBS and its subsidiaries, could have a material adverse effect on the Group's consolidated net assets, operating results or cash flows in any particular period.


 
Notes (continued)
 
17. Litigation and investigations (continued)
 
Other investigations (continued)
On 27 July 2011, the Group consented to the issuance of a Cease and Desist Order ("the Order") setting forth measures required to address deficiencies related to governance, risk management and compliance systems and controls identified by the Federal Reserve and state banking supervisors during examinations of the RBS plc and RBS N.V. branches in the United States in 2010. The Order requires the Group to strengthen its US corporate governance structure, to develop an enterprise-wide risk management programme, and to develop and enhance its programmes to ensure compliance with US law, particularly the US Bank Secrecy Act and anti-money laundering laws, rules and regulations. The Group has established a strategic and remedial programme of change to address the identified concerns and is committed to working closely with the US bank regulators to implement the remedial measures required by the Order.
 
The Group's operations include businesses outside the United States that are responsible for processing US dollar payments. The Group is conducting a review of its policies, procedures and practices in respect of such payments and has initiated discussions with UK and US authorities to discuss its historical compliance with applicable laws and regulations, including US economic sanctions regulations. Although the Group cannot currently determine when the review of its operations will be completed or what the outcome of its discussions with UK and US authorities will be, the investigation costs, remediation required or liability incurred could have a material adverse impact on the Group's business, results of operations or value of the Securities.
 
In April 2009, the FSA notified the Group that it was commencing a supervisory review of the acquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of the Group. RBS and its subsidiaries co-operated fully with this review and investigation. On 2 December 2010, the FSA confirmed that it had completed its investigation and had concluded that no enforcement action, either against the Group or against individuals, was warranted. The Group is engaging constructively with the FSA with regard to the publication of a report by the FSA relating to the supervisory review, subject to any necessary commercial constraints.
 
In July 2010, the FSA notified the Group that it was commencing an investigation into the sale by Coutts & Co of the ALICO (American Life Insurance Company) Premier Access Bond Enhanced Variable Rate Fund to customers between 2001 and 2008 as well as its subsequent review of those sales. On 11 January 2011 the FSA amended the date range on which their investigation is focused and the investigation start date is now December 2003. RBS and its subsidiaries are co-operating fully with this investigation. 
 
In the United States, RBS and certain subsidiaries have received requests for information from various governmental agencies, self-regulatory organisations, and state governmental agencies including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. In particular, during March 2008, the Group was advised by the SEC that it had commenced a non-public, formal investigation relating to the Group's United States sub-prime securities exposures and United States residential mortgage exposures. RBS and its subsidiaries are co-operating with these various requests for information and investigations. In December 2010, the SEC contacted the Group and indicated that it would also examine valuations of various RBS N.V. structured products, including Collateralised Debt Obligations (CDOs).
 
Notes (continued)
 
18. Other developments
 
Proposed transfers of a substantial part of the business activities of RBS N.V. to The Royal Bank of Scotland plc (RBS plc) 
On 19 April 2011, the Group announced its intention to transfer a substantial part of the business activities of RBS N.V. to RBS plc (the "Proposed Transfers"), subject, amongst other matters, to regulatory and other approvals, further tax and other analysis in respect of the assets and liabilities to be transferred and employee consultation procedures.
 
The Proposed Transfers will streamline the manner in which the GBM and GTS businesses of the Group interact with clients with simplified access to the GBM and GTS product suites. 
 
It is expected that the Proposed Transfers will be implemented on a phased basis over a period ending 31 December 2013. A large part of the Proposed Transfers (including the transfers of certain securities issued by RBS N.V.) is expected to have taken place by the end of 2012.
 
Rating agencies
RBS and RBS plc's long-term and short-term ratings have remained unchanged in the quarter. On 9 March 2011, Standard & Poor's affirmed the A+ counterparty rating of RBS plc and upgraded its standalone credit profile to a- from bbb+. The agency highlighted that they expect RBS plc's standalone credit profile to move toward the A+ counterparty rating by 2012 if continued progress is made, following the strategic plan. The counterparty rating contains 2 notches of uplift to account for the systemic importance of the Group. On 29 June 2011, Fitch affirmed the AA- Issuer Default Rating of RBS plc and RBS and also upgraded the individual rating to C from C/D.  Fitch noted the significant progress RBS made in implementing its strategic plan and improving its funding and liquidity profile.  Further to this, on 20 July 2011 Fitch changed its individual rating methodology for financial institutions, moving from an 'A to E' scale to a viability rating on a more familiar scale (aaa, aa+ etc).  It was announced that RBS plc had an assigned viability rating of bbb. On 24 May 2011 Moody's placed the long term rating of RBS and several of its primary operating subsidiaries on review for possible downgrade following Moody's reassessment of extraordinary levels of systemic support in its ratings of UK financial institutions. This review is due to conclude following the publication of the final Independent Commission on Banking report in September.
 
Gender equality in insurance contracts
On 1 March 2011, the European Court of Justice (ECJ) upheld a ruling that insurers are no longer allowed to use gender as a rating factor across the insurance industry. This will have a significant impact on the insurance industry in calculating premiums and determining benefits. The Group is currently working through the findings, and any consequences arising will be rectified by December 2012 in line with the ruling from the ECJ. At this stage, while it is not possible reliably to estimate the impact which the ECJ's ruling may have on the Group's financial position or profitability, it is not expected to be material.


 
Notes (continued)
 
19. Related party transactions
Related party transactions in the half year ended 30 June 2011 were similar in nature to those for the year ended 31 December 2010.
 
Full details of the Group's related party transactions for the year ended 31 December 2010 are included in the Group's 2010 Annual Report and Accounts.
 
20. Date of approval
This announcement was approved by the Board of directors on 4 August 2011.
 
21. Post balance sheet events
There have been no significant events between 30 June 2011 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.

 

 
 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 5 August 2011
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary