rbs201211026k4.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 November 02, 2012
 
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 period ended 30 September 2012
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Interest receivable
4,529 
4,774 
5,371 
  
14,320 
16,176 
Interest payable
(1,658)
(1,803)
(2,294)
  
(5,479)
(6,571)
             
Net interest income
2,871 
2,971 
3,077 
  
8,841 
9,605 
             
Fees and commissions receivable
1,403 
1,450 
1,452 
  
4,340 
4,794 
Fees and commissions payable
(341)
(314)
(304)
  
(945)
(887)
Income from trading activities
334 
657 
957 
  
1,203 
2,939 
(Loss)/gain on redemption of own debt
(123)
- 
1 
  
454 
256 
Other operating income (excluding insurance
  net premium income)
(217)
394 
2,384 
  
(570)
3,917 
Insurance net premium income
932 
929 
1,036 
  
2,799 
3,275 
             
Non-interest income
1,988 
3,116 
5,526 
  
7,281 
14,294 
             
Total income
4,859 
6,087 
8,603 
  
16,122 
23,899 
             
Staff costs
(2,059)
(2,143)
(2,076)
  
(6,772)
(6,685)
Premises and equipment
(597)
(544)
(604)
  
(1,704)
(1,777)
Other administrative expenses
(1,259)
(1,156)
(962)
  
(3,431)
(3,635)
Depreciation and amortisation
(430)
(434)
(485)
  
(1,332)
(1,362)
             
Operating expenses
(4,345)
(4,277)
(4,127)
  
(13,239)
(13,459)
             
Profit before insurance net claims and
  impairment losses
514 
1,810 
4,476 
  
2,883 
10,440 
Insurance net claims
(596)
(576)
(734)
  
(1,821)
(2,439)
Impairment losses
(1,176)
(1,335)
(1,738)
  
(3,825)
(6,791)
             
Operating (loss)/profit before tax
(1,258)
(101)
2,004 
  
(2,763)
1,210 
Tax charge
(30)
(290)
(791)
  
(459)
(1,436)
             
(Loss)/profit from continuing operations
(1,288)
(391)
1,213 
  
(3,222)
(226)
Profit/(loss) from discontinued operations,
  net of tax
5 
(4)
6 
  
6 
37 
             
(Loss)/profit for the period
(1,283)
(395)
1,219 
  
(3,216)
(189)
Non-controlling interests
(3)
5 
7 
  
16 
(10)
Preference share dividends
(98)
(76)
- 
  
(174)
- 
             
(Loss)/profit attributable to ordinary and
  B shareholders
(1,384)
(466)
1,226 
  
(3,374)
(199)
             
Basic (loss)/profit per ordinary and B share
  from continuing operations (1)
(12.5p)
(4.2p)
11.3p 
  
(30.7p)
(1.9p)
             
Diluted (loss)/profit per ordinary and B share
  from continuing operations (1)
(12.5p)
(4.2p)
11.2p 
  
(30.7p)
(1.9p)
             
Basic and diluted loss per ordinary and B
  share from discontinued operations (1)
- 
- 
- 
  
- 
- 
 
Note:
(1)
Data for 2011 have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares.
 
In the income statement above, one-off and other items as shown on page 17 are included in the appropriate captions. A reconciliation between the income statement above and the managed view income statement on page 11 is given in Appendix 1 to this announcement.

 
Condensed consolidated statement of comprehensive income
for the period ended 30 September 2012
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
(Loss)/profit for the period
(1,283)
(395)
1,219 
  
(3,216)
(189)
             
Other comprehensive income
            
Available-for-sale financial assets
124 
66 
996 
  
715 
2,365 
Cash flow hedges
437 
662 
939 
  
1,132 
1,300 
Currency translation
(573)
58 
(22)
  
(1,069)
(323)
             
Other comprehensive income before tax
(12)
786 
1,913 
  
778 
3,342 
Tax charge
(91)
(237)
(480)
  
(347)
(972)
             
Other comprehensive (loss)/income
  after tax
(103)
549 
1,433 
  
431 
2,370 
             
Total comprehensive (loss)/income
  for the period
(1,386)
154 
2,652 
  
(2,785)
2,181 
             
Total comprehensive (loss)/income is
  attributable to:
            
Non-controlling interests
- 
(10)
(6)
  
(13)
(12)
Preference shareholders
(98)
(76)
- 
  
(174)
- 
Ordinary and B shareholders
(1,288)
240 
2,658 
  
(2,598)
2,193 
             
 
(1,386)
154 
2,652 
  
(2,785)
2,181 
 
Key points
 
·  
The movement in available-for-sale financial assets reflects net unrealised gains on high quality UK, US and German sovereign bonds.
   
·  
Cash flow hedging gains in both the quarter and year-to-date largely result from reductions in sterling swap rates.
   
·  
Currency translation losses during the quarter and the nine months ended 30 September 2012 are principally due to the strengthening of Sterling against both the US Dollar, 2.9%, and the Euro, 1.4%, in the quarter and 4.3% and 5.0% respectively in the year to date.

 
Condensed consolidated balance sheet
at 30 September 2012
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
Assets
      
Cash and balances at central banks
80,122 
78,647 
79,269 
Net loans and advances to banks
38,347 
39,436 
43,870 
Reverse repurchase agreements and stock borrowing
34,026 
37,705 
39,440 
Loans and advances to banks
72,373 
77,141 
83,310 
Net loans and advances to customers
423,155 
434,965 
454,112 
Reverse repurchase agreements and stock borrowing
63,909 
60,196 
61,494 
Loans and advances to customers
487,064 
495,161 
515,606 
Debt securities
177,722 
187,626 
209,080 
Equity shares
15,527 
13,091 
15,183 
Settlement balances
15,055 
15,312 
7,771 
Derivatives
468,171 
486,432 
529,618 
Intangible assets
14,798 
14,888 
14,858 
Property, plant and equipment
11,220 
11,337 
11,868 
Deferred tax
3,480 
3,502 
3,878 
Prepayments, accrued income and other assets
10,695 
10,983 
10,976 
Assets of disposal groups
20,667 
21,069 
25,450 
       
Total assets
1,376,894 
1,415,189 
1,506,867 
       
Liabilities
      
Bank deposits
58,127 
67,619 
69,113 
Repurchase agreements and stock lending
49,222 
39,125 
39,691 
Deposits by banks
107,349 
106,744 
108,804 
Customer deposits
412,712 
412,769 
414,143 
Repurchase agreements and stock lending
93,343 
88,950 
88,812 
Customer accounts
506,055 
501,719 
502,955 
Debt securities in issue
104,157 
119,855 
162,621 
Settlement balances
14,427 
15,126 
7,477 
Short positions
32,562 
38,376 
41,039 
Derivatives
462,300 
480,745 
523,983 
Accruals, deferred income and other liabilities
18,458 
18,820 
23,125 
Retirement benefit liabilities
1,779 
1,791 
2,239 
Deferred tax
1,686 
1,815 
1,945 
Insurance liabilities
6,249 
6,322 
6,312 
Subordinated liabilities
25,309 
25,596 
26,319 
Liabilities of disposal groups
22,670 
23,064 
23,995 
       
Total liabilities
1,303,001 
1,339,973 
1,430,814 
       
Equity
      
Non-controlling interests
1,194 
1,200 
1,234 
Owners' equity*
      
  Called up share capital
6,581 
6,528 
15,318 
  Reserves
66,118 
67,488 
59,501 
       
Total equity
73,893 
75,216 
76,053 
       
Total liabilities and equity
1,376,894 
1,415,189 
1,506,867 
       
* Owners' equity attributable to:
      
Ordinary and B shareholders
67,955 
69,272 
70,075 
Other equity owners
4,744 
4,744 
4,744 
       
 
72,699 
74,016 
74,819 

 
 
Commentary on condensed consolidated balance sheet
 
Key points
 
30 September 2012 compared with 31 December 2011
·  
Total assets of £1,376.9 billion at 30 September 2012 were down £130.0 billion, 9%, compared with 31 December 2011. This was principally driven by a decrease in loans and advances to banks and customers led by Non-Core disposals and run off, decreases in debt securities and the reduction in the mark-to-market value of derivatives.
   
·  
Loans and advances to banks decreased by £10.9 billion, 13%, to £72.4 billion. Excluding reverse repurchase agreements and stock borrowing ('reverse repos'), down £5.4 billion, 14%, to £34.0 billion, bank placings declined £5.5 billion, 13%, to £38.4 billion.
   
·  
Loans and advances to customers declined £28.5 billion, 6%, to £487.1 billion. Within this, reverse repurchase agreements were up £2.4 billion, 4%, to £63.9 billion. Customer lending decreased by £30.9 billion, 7%, to £423.2 billion, or £30.5 billion to £443.4 billion before impairments. This reflected planned reductions in Non-Core of £15.9 billion, along with declines in International Banking, £8.7 billion, UK Corporate, £2.0 billion, Markets, £1.1 billion and Ulster Bank, £0.5 billion, together with the effect of exchange rate and other movements, £5.6 billion. These were partially offset by growth in UK Retail, £2.0 billion, US Retail & Commercial, £1.2 billion and Wealth, £0.1 billion.
   
·  
Debt securities were down £31.4 billion, 15%, to £177.7 billion, driven mainly by reductions within Markets and Group Treasury in holdings of UK and Eurozone government securities and financial institution bonds.
   
·  
Settlement balance assets and liabilities increased £7.3 billion to £15.1 billion and £6.9 billion to £14.4 billion respectively as a result of increased customer activity from seasonal year-end lows.
   
·  
Derivative assets were down £61.4 billion, 12%, to £468.2 billion, and liabilities, down £61.7 billion, 12%, to £462.3 billion due to reductions across all major contract categories, with the effect of currency movements (Sterling strengthened against both the US dollar and the Euro) and contract tear-ups being significant contributors. Within interest rate contracts, the impact of lower Sterling and Euro yields, reflecting global fears of low economic growth, partially offset the foreign exchange movements. Credit derivatives also decreased due to risk reduction in Non-Core and Markets as well as tightening of credit spreads.
   
·  
The reduction in assets and liabilities of disposal groups, down £4.8 billion, 19%, to £20.7 billion, and £1.3 billion, 6%, to £22.7 billion respectively, primarily reflects the disposal of RBS Aviation Capital in the second quarter.
   
·  
Deposits by banks decreased £1.5 billion, 1%, to £107.3 billion, with a decrease in inter-bank deposits, down £11.0 billion, 16%, to £58.1 billion. This was partly offset by an increase in repurchase agreements and stock lending ('repos'), up £9.5 billion, 24%, to £49.2 billion, improving the Group's mix of secured and unsecured funding.
   
·  
Customer accounts increased £3.1 billion, 1%, to £506.1 billion. Within this, repos increased £4.5 billion, 5%, to £93.4 billion. Excluding repos, customer deposits were down £1.4 billion at £412.7 billion, reflecting decreases in International Banking, £2.2 billion, Markets, £1.4 billion, Ulster Bank, £0.8 billion and Non-Core, £0.3 billion, together with exchange and other movements, £4.5 billion. This was partially offset by increases in UK Retail, £4.4 billion, US Retail & Commercial, £2.3 billion, UK Corporate, £0.6 billion and Wealth, £0.5 billion.

 
 
Commentary on condensed consolidated balance sheet
Key points (continued)
 
30 September 2012 compared with 31 December 2011 (continued)
·  
 
Debt securities in issue decreased £58.5 billion, 36%, to £104.2 billion reflecting the maturity of the remaining notes issued under the UK Government's Credit Guarantee Scheme, £21.3 billion, the repurchase of bonds and medium term notes as a result of the liability management exercise completed in September 2012, £4.4 billion, and the continuing reduction of commercial paper and medium term notes in issue in line with the Group's strategy.
   
·  
Short positions were down £8.5 billion, 21%, to £32.6 billion mirroring £7.5 billion decreases in held-for-trading debt securities.
   
·  
Subordinated liabilities decreased by £1.0 billion, 4%, to £25.3 billion, primarily reflecting the net decrease in dated loan capital as a result of the liability management exercise completed in March 2012, with redemptions of £3.4 billion offset by the issuance of £2.8 billion new loan capital, together with exchange rate movements and other adjustments of £0.4 billion.
   
·  
Owner's equity decreased by £2.1 billion, 3%, to £72.7 billion, driven by the £3.4 billion attributable loss for the period together with movements in foreign exchange reserves, £1.0 billion. Partially offsetting these reductions were an increase in available-for-sale reserves, £0.7 billion and cash flow hedging reserves, £0.9 billion and share capital and reserve movements in respect of employee share schemes, £0.7 billion.

 
Average balance sheet
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
  
30 September 
2012 
30 September 
2011 
 
% 
% 
  
% 
% 
           
Average yields, spreads and margins of the
  banking business
          
Gross yield on interest-earning assets of banking business
3.07 
3.13 
  
3.12 
3.27 
Cost of interest-bearing liabilities of banking business
(1.44)
(1.47)
  
(1.50)
(1.62)
           
Interest spread of banking business
1.63 
1.66 
  
1.62 
1.65 
Benefit from interest-free funds
0.31 
0.29 
  
0.31 
0.29 
           
Net interest margin of banking business
1.94 
1.95 
  
1.93 
1.94 
           
           
Average interest rates
          
The Group's base rate
0.50 
0.50 
  
0.50 
0.50 
           
London inter-bank three month offered rates
          
  - Sterling
0.72 
0.99 
  
0.92 
0.83 
  - Eurodollar
0.42 
0.47 
  
0.47 
0.29 
  - Euro
0.36 
0.61 
  
0.65 
1.30 

 
Average balance sheet (continued)
 
 
 
Quarter ended
  
Quarter ended
 
30 September 2012
  
30 June 2012
 
Average 
      
Average 
    
 
balance 
Interest 
Rate 
  
balance 
Interest 
Rate 
 
£m 
£m 
% 
  
£m 
£m 
% 
               
Assets
              
Loans and advances to banks
69,561 
110 
0.63 
  
78,151 
134 
0.69 
Loans and advances to
  customers
425,403 
3,968 
3.71 
  
435,372 
4,117 
3.80 
Debt securities
92,327 
453 
1.95 
  
99,472 
524 
2.12 
               
Interest-earning assets -
  banking business (1)
587,291 
4,531 
3.07 
  
612,995 
4,775 
3.13 
               
Trading business (4)
237,032 
      
241,431 
    
Non-interest earning assets
571,434 
      
603,888 
    
               
Total assets
1,395,757 
      
1,458,314 
    
               
Memo: Funded assets
911,903 
      
955,789 
    
               
Liabilities
              
Deposits by banks
36,928 
127 
1.37 
  
41,543 
154 
1.49 
Customer accounts
330,477 
860 
1.04 
  
337,189 
870 
1.04 
Debt securities in issue
80,476 
447 
2.21 
  
96,977 
541 
2.24 
Subordinated liabilities
21,916 
188 
3.41 
  
22,064 
190 
3.46 
Internal funding of trading
  business
(10,166)
43 
(1.68)
  
(7,336)
41 
(2.25)
               
Interest-bearing liabilities -
  banking business (1,2,3)
459,631 
1,665 
1.44 
  
490,437 
1,796 
1.47 
               
Trading business (4)
245,299 
      
252,639 
    
Non-interest-bearing liabilities
              
  - demand deposits
74,142 
      
75,806 
    
  - other liabilities
542,971 
      
565,310 
    
Owners' equity
73,714 
      
74,122 
    
               
Total liabilities and
  owners' equity
1,395,757 
      
1,458,314 
    
 
Notes:
 
(1)
Interest receivable has been increased by £2 million (Q2 2012 - £1 million) and interest payable has been increased by £38 million (Q2 2012 - £30 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.
(2)
Interest payable has been decreased by £2 million (Q2 2012 - £2 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(3)
Interest payable has been decreased by £29 million (Q2 2012 - £35 million) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

 
Average balance sheet (continued)
 
 
 
Nine months ended
  
Nine months ended
 
30 September 2012
  
30 September 2011
 
Average 
      
Average 
    
 
balance 
Interest 
Rate 
  
balance 
Interest 
Rate 
 
£m 
£m 
% 
  
£m 
£m 
% 
               
Assets
              
Loans and advances to banks
78,214 
392 
0.67 
  
67,916 
490 
0.96 
Loans and advances to
  customers
434,697 
12,337 
3.79 
  
471,551 
13,644 
3.87 
Debt securities
100,877 
1,602 
2.12 
  
121,949 
2,056 
2.25 
               
Interest-earning assets -
  banking business (1,2,3)
613,788 
14,331 
3.12 
  
661,416 
16,190 
3.27 
               
Trading business (4)
243,159 
      
281,601 
    
Non-interest earning assets
602,754 
      
573,261 
    
               
Total assets
1,459,701 
      
1,516,278 
    
               
Memo: Funded assets
959,817 
      
1,081,562 
    
               
Liabilities
              
Deposits by banks
40,938 
461 
1.50 
  
65,323 
749 
1.53 
Customer accounts
333,848 
2,647 
1.06 
  
334,890 
2,609 
1.04 
Debt securities in issue
100,043 
1,737 
2.32 
  
169,622 
2,687 
2.12 
Subordinated liabilities
22,169 
524 
3.16 
  
23,795 
452 
2.54 
Internal funding of trading
  business
(7,986)
109 
(1.82)
  
(50,581)
85 
(0.22)
               
Interest-bearing liabilities -
  banking business (1,2,3)
489,012 
5,478 
1.50 
  
543,049 
6,582 
1.62 
               
Trading business (4)
253,299 
      
310,184 
    
Non-interest-bearing liabilities
              
  - demand deposits
74,106 
      
65,011 
    
  - other liabilities
569,406 
      
523,038 
    
Owners' equity
73,878 
      
74,996 
    
               
Total liabilities and
  owners' equity
1,459,701 
      
1,516,278 
    
 
Notes:
 
(1)
Interest receivable has been increased by nil (nine months ended 30 September 2011 - £5 million) and interest payable has been decreased by £12 million (nine months ended 30 September 2011 - £1 million) to exclude the RFS Holdings minority interest. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest receivable has been increased by £11 million (nine months ended 30 September 2011 - £7 million) and interest payable has been increased by £120 million (nine months ended 30 September 2011 - £110 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.
(3)
Interest receivable has been increased by nil (nine months ended 30 September 2011 - £2 million) and interest payable has been decreased by £109 million (nine months ended 30 September 2011 - £98 million) in respect of non-recurring adjustments.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

 
Condensed consolidated statement of changes in equity for the period ended 30 September 2012
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Called-up share capital
            
At beginning of period
6,528 
15,397 
15,317 
  
15,318 
15,125 
Ordinary shares issued
53 
64 
1 
  
196 
193 
Share capital sub-division and consolidation
- 
(8,933)
- 
  
(8,933)
- 
             
At end of period
6,581 
6,528 
15,318 
  
6,581 
15,318 
             
Paid-in equity
            
At beginning and end of period
431 
431 
431 
  
431 
431 
             
Share premium account
            
At beginning of period
24,198 
24,027 
23,923 
  
24,001 
23,922 
Ordinary shares issued
70 
171 
- 
  
267 
1 
             
At end of period
24,268 
24,198 
23,923 
  
24,268 
23,923 
             
Merger reserve
            
At beginning of period
13,222 
13,222 
13,222 
  
13,222 
13,272 
Transfer to retained earnings
- 
- 
- 
  
- 
(50)
             
At end of period
13,222 
13,222 
13,222 
  
13,222 
13,222 
             
Available-for-sale reserve (1)
            
At beginning of period
(450)
(439)
(1,026)
  
(957)
(2,037)
Net unrealised gains
651 
428 
1,005 
  
1,803 
1,948 
Realised (gains)/losses
(528)
(370)
(12)
  
(1,110)
417 
Tax
36 
(69)
(259)
  
(27)
(620)
             
At end of period
(291)
(450)
(292)
  
(291)
(292)
             
Cash flow hedging reserve
            
At beginning of period
1,399 
921 
113 
  
879 
(140)
Amount recognised in equity
713 
928 
1,203 
  
1,931 
2,028 
Amount transferred from equity to earnings
(276)
(266)
(264)
  
(799)
(728)
Tax
(90)
(184)
(254)
  
(265)
(362)
             
At end of period
1,746 
1,399 
798 
  
1,746 
798 
 
Note:
 
(1)
Analysis provided on page 86.

 
Condensed consolidated statement of changes in equity for the period ended 30 September 2012 (continued)
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Foreign exchange reserve
            
At beginning of period
4,314 
4,227 
4,834 
  
4,775 
5,138 
Retranslation of net assets
(637)
82 
(31)
  
(1,203)
(271)
Foreign currency gains/(losses) on hedges
  of net assets
68 
(8)
10 
  
156 
(30)
Tax
2 
16 
34 
  
22 
10 
Recycled to profit or loss on disposal of
  business (nil tax)
- 
(3)
- 
  
(3)
- 
             
At end of period
3,747 
4,314 
4,847 
  
3,747 
4,847 
             
Capital redemption reserve
            
At beginning of period
9,131 
198 
198 
  
198 
198 
Share capital sub-division and consolidation
- 
8,933 
- 
  
8,933 
- 
             
At end of period
9,131 
9,131 
198 
  
9,131 
198 
             
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
16,657 
17,405 
19,726 
  
18,929 
21,239 
(Loss)/profit attributable to ordinary and B
  shareholders and other equity owners
            
  - continuing operations
(1,287)
(387)
1,225 
  
(3,198)
(204)
  - discontinued operations
1 
(3)
1 
  
(2)
5 
Transfer from merger reserve
- 
- 
- 
  
- 
50 
Equity preference dividends paid
(98)
(76)
- 
  
(174)
- 
Actuarial losses recognised in retirement
  benefit schemes
            
  - tax
(39)
- 
- 
  
(77)
- 
Loss on disposal of own shares held
- 
(196)
- 
  
(196)
- 
Shares released for employee benefits
(1)
(116)
(2)
  
(130)
(209)
Share-based payments
            
  - gross
44 
47 
35 
  
136 
102 
  - tax
2 
(17)
(8)
  
(9)
(6)
             
At end of period
15,279 
16,657 
20,977 
  
15,279 
20,977 

 
Condensed consolidated statement of changes in equity for the period ended 30 September 2012 (continued)
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Own shares held
            
At beginning of period
(206)
(765)
(786)
  
(769)
(808)
(Purchase)/disposal of own shares
(2)
451 
13 
  
447 
19 
Shares released for employee benefits
1 
108 
2 
  
115 
18 
             
At end of period
(207)
(206)
(771)
  
(207)
(771)
             
Owners' equity at end of period
72,699 
74,016 
77,443 
  
72,699 
77,443 
             
Non-controlling interests
            
At beginning of period
1,200 
1,215 
1,498 
  
1,234 
1,719 
Currency translation adjustments and other
  movements
(4)
(13)
(1)
  
(19)
(22)
(Loss)/profit attributable to non-controlling
  interests
            
  - continuing operations
(1)
(4)
(12)
  
(24)
(22)
  - discontinued operations
4 
(1)
5 
  
8 
32 
Dividends paid
(6)
(6)
- 
  
(12)
(39)
Movements in available-for-sale securities
            
  - unrealised gains
3 
5 
- 
  
4 
- 
  - realised (gains)/losses
(2)
3 
3 
  
18 
- 
  - tax
- 
- 
(1)
  
- 
- 
Equity raised
- 
1 
- 
  
1 
- 
Equity withdrawn and disposals
- 
- 
(59)
  
(16)
(235)
             
At end of period
1,194 
1,200 
1,433 
  
1,194 
1,433 
             
Total equity at end of period
73,893 
75,216 
78,876 
  
73,893 
78,876 
             
Total comprehensive (loss)/income
  recognised in the statement of
  changes in equity is attributable to:
            
Non-controlling interests
- 
(10)
(6)
  
(13)
(12)
Preference shareholders
(98)
(76)
- 
  
(174)
- 
Ordinary and B shareholders
(1,288)
240 
2,658 
  
(2,598)
2,193 
             
 
(1,386)
154 
2,652 
  
(2,785)
2,181 

 
 
Notes
 
1. Basis of preparation
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 Management Statement for the period ended 30 September 2012 has been prepared on a going concern basis.
 
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 IFRS Interpretations Committee 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 314 to 323 of the 2011 Annual Report and Accounts.
 
Critical accounting policies and key sources of estimation uncertainty. The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements.
The judgements and assumptions that are considered to be the most important to the portrayal of Group's financial condition are those relating to loan impairment provisions; pensions; financial instrument fair values; general insurance claims and deferred tax. These critical accounting policies and judgments are described on pages 323 to 325 of the Group's 2011 Annual Report and Accounts.
 
Recent developments in IFRS
In May 2012, the IASB issued Annual Improvements 2009-2011 Cycle which clarified:
 
 
·  
the requirements for comparative information in IAS 1 Presentation of Financial Statements and IAS 34 Interim Financial Reporting ;
   
·  
the classification of servicing equipment in IAS 16 Property, Plant and Equipment ;
   
·  
the accounting for the tax effect of distributions to holders of equity instruments in IAS 32 Financial Instruments: Presentation ; and
   
·  
the requirements in IAS 34 Interim Financial Reporting on segment information for total assets and liabilities.
 
None of the amendments are effective before 1 January 2013. Earlier application is permitted.
 
On 31 October 2012, the IASB issued Inv estment Entities (amendments to IFRS 10, IFRS 12 and IAS 27). The amendments apply to 'investment entities': entities whose business is to invest funds solely for returns from capital appreciation, investment income or both and which evaluate the performance of their investments on a fair value basis. The amendments provide an exception to IFRS 10 Consolidated Financial Statements by requiring investment entities to measure their subsidiaries (other than those that provide services related to the entity's investment activities) at fair value through profit or loss, rather than consolidate them. The amendments are effective from 1 January 2014 with early adoption permitted.
 
The Group is reviewing these amendments and Annual Improvements 2009-2011 Cycle to determine their effect, if any, on the Group's financial reporting.

 
Notes (continued)
 
3. Analysis of income, expenses and impairment losses
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Loans and advances to customers
3,968 
4,117 
4,505 
  
12,337 
13,633 
Loans and advances to banks
110 
134 
154 
  
392 
490 
Debt securities
451 
523 
712 
  
1,591 
2,053 
             
Interest receivable
4,529 
4,774 
5,371 
  
14,320 
16,176 
             
Customer accounts
858 
870 
919 
  
2,642 
2,603 
Deposits by banks
131 
156 
248 
  
478 
756 
Debt securities in issue
410 
511 
897 
  
1,619 
2,577 
Subordinated liabilities
216 
225 
175 
  
631 
550 
Internal funding of trading businesses
43 
41 
55 
  
109 
85 
             
Interest payable
1,658 
1,803 
2,294 
  
5,479 
6,571 
             
Net interest income
2,871 
2,971 
3,077 
  
8,841 
9,605 
             
Fees and commissions receivable
1,403 
1,450 
1,452 
  
4,340 
4,794 
Fees and commissions payable
            
  - banking
(209)
(201)
(204)
  
(589)
(623)
  - insurance related
(132)
(113)
(100)
  
(356)
(264)
             
Net fees and commissions
1,062 
1,136 
1,148 
  
3,395 
3,907 
             
Foreign exchange
133 
210 
441 
  
568 
1,019 
Interest rate
378 
428 
33 
  
1,478 
684 
Credit
232 
177 
(369)
  
619 
115 
Own credit adjustments
(435)
(271)
735 
  
(1,715)
565 
Other
26 
113 
117 
  
253 
556 
             
Income from trading activities
334 
657 
957 
  
1,203 
2,939 
             
(Loss)/gain on redemption of own debt
(123)
- 
1 
  
454 
256 
             
Operating lease and other rental income
163 
261 
327 
  
725 
999 
Own credit adjustments
(1,020)
(247)
1,887 
  
(2,714)
1,821 
Changes in the fair value of:
            
  - securities and other financial assets and
    liabilities
72 
(26)
(148)
  
127 
144 
  - investment properties
(21)
(88)
(22)
  
(77)
(74)
Profit on sale of securities
512 
259 
274 
  
994 
703 
(Loss)/profit on sale of:
            
  - property, plant and equipment
(1)
18 
5 
  
22 
27 
  - subsidiaries and associates
(27)
155 
(39)
  
116 
(13)
Life business losses
(2)
(4)
(8)
  
(8)
(13)
Dividend income
12
 
17 
14 
  
45 
47 
Share of profits less losses of associated
  entities
7 
5 
5 
  
8 
20 
Other income
88 
44 
89 
  
192 
256 
             
Other operating (loss)/income
(217)
394 
2,384 
  
(570)
3,917 
 
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
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Non-interest income (excluding
  insurance net premium income)
1,056 
2,187 
4,490 
  
4,482 
11,019 
Insurance net premium income
932 
929 
1,036 
  
2,799 
3,275 
             
Total non-interest income
1,988 
3,116 
5,526 
  
7,281 
14,294 
             
Total income
4,859 
6,087 
8,603 
  
16,122 
23,899 
             
Staff costs
2,059 
2,143 
2,076 
  
6,772 
6,685 
Premises and equipment
597 
544 
604 
  
1,704 
1,777 
Other
1,259 
1,156 
962 
  
3,431 
3,635 
             
Administrative expenses
3,915 
3,843 
3,642 
  
11,907 
12,097 
Depreciation and amortisation
430 
434 
485 
  
1,332 
1,362 
             
Operating expenses
4,345 
4,277 
4,127 
  
13,239 
13,459 
             
Loan impairment losses
1,183 
1,435 
1,452 
  
3,913 
5,587 
Securities impairment (recoveries)/losses
            
  - sovereign debt impairment and related
    interest rate hedge adjustments
- 
- 
202 
  
- 
1,044 
  - other
(7)
(100)
84 
  
(88)
160 
             
Impairment losses
1,176 
1,335 
1,738 
  
3,825 
6,791 
 
Refer to Appendix 1 for a reconciliation between the managed and statutory bases for key line items.
 
Payment Protection Insurance (PPI)
To reflect current experience of PPI complaints received, the Group strengthened its provision for PPI by £125 million in Q1 2012, £135 million in Q2 2012 and a further £400 million in Q3 2012, bringing the cumulative charge taken to £1.7 billion, of which £1.0 billion in redress had been paid by 30 September 2012. The eventual cost is dependent upon complaint volumes, uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The Group will continue to monitor the position closely and refresh its assumptions as more information becomes available.
 
 
 
Quarter ended
Nine months 
ended 
30 September 
2012 
Year ended 
31 December 
2011 
30 September 
2012 
30 June 
2012 
 
£m 
£m 
£m 
£m 
         
At beginning of period
588 
689 
745 
- 
Transfers from accruals and other liabilities
- 
- 
- 
215 
Charge to income statement
400 
135 
660 
850 
Utilisations
(304)
(236)
(721)
(320)
         
At end of period
684 
588 
684 
745 

 
 
Notes (continued)
 
4. Loan impairment provisions
Operating loss is stated after charging loan impairment losses of £1,183 million (Q2 2012 - £1,435 million; Q3 2011 - £1,452 million). The balance sheet loan impairment provision increased in the quarter ended 30 September 2012 from £20,297 million to £20,318 million and the movements thereon were:
 
 
 
Quarter ended
 
30 September 2012
  
30 June 2012
  
30 September 2011
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
At beginning of period
8,944 
11,353 
20,297 
  
8,797 
11,414 
20,211 
  
8,752 
12,007 
20,759 
Currency translation and other adjustments
(5)
(186)
(191)
  
9 
(236)
(227)
  
(90)
(285)
(375)
Amounts written-off
(466)
(454)
(920)
  
(586)
(494)
(1,080)
  
(593)
(497)
(1,090)
Recoveries of amounts previously written-off
34 
31 
65 
  
65 
20 
85 
  
39 
55 
94 
Charge to income statement
751 
432 
1,183 
  
719 
716 
1,435 
  
817 
635 
1,452 
Unwind of discount (recognised in interest income)
(55)
(61)
(116)
  
(60)
(67)
(127)
  
(52)
(65)
(117)
                       
At end of period
9,203 
11,115 
20,318 
  
8,944 
11,353 
20,297 
  
8,873 
11,850 
20,723 
 
 
 
Nine months ended
 
30 September 2012
  
30 September 2011
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
RFS 
MI 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                 
At beginning of period
8,414 
11,469 
19,883 
  
7,866 
10,316 
- 
18,182 
Intra-group transfers
- 
- 
- 
  
177 
(177)
- 
- 
Currency translation and other adjustments
(4)
(502)
(506)
  
(1)
(45)
- 
(46)
Disposals
- 
- 
- 
  
- 
- 
11 
11 
Amounts written-off
(1,457)
(1,388)
(2,845)
  
(1,611)
(1,409)
- 
(3,020)
Recoveries of amounts previously written-off
161 
84 
245 
  
119 
261 
- 
380 
Charge to income statement
                
  - continuing
2,266 
1,647 
3,913 
  
2,479 
3,108 
- 
5,587 
  - discontinued
- 
- 
- 
  
- 
- 
(11)
(11)
Unwind of discount (recognised in interest income)
(177)
(195)
(372)
  
(156)
(204)
- 
(360)
                 
At end of period
9,203 
11,115 
20,318 
  
8,873 
11,850 
- 
20,723 
 
Provisions at 30 September 2012 include £117 million in respect of loans and advances to banks (30 June 2012 - £119 million; 30 September 2011 - £126 million).

 
Notes (continued)
 
5. Tax
The actual tax charge differs from the expected tax credit computed by applying the standard UK corporation tax rate of 24.5% (2011 - 26.5%).
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
(Loss)/profit before tax
(1,258)
(101)
2,004 
  
(2,763)
1,210 
             
Expected tax credit/(charge)
308 
25 
(531)
  
677 
(321)
Sovereign debt impairment where no
  deferred tax asset recognised
- 
- 
(36)
  
- 
(219)
Derecognition of deferred tax asset in
  respect of losses in Australia
- 
(21)
- 
  
(182)
- 
Other losses in period where no deferred
  tax asset recognised
(129)
(80)
(67)
  
(382)
(335)
Foreign profits taxed at other rates
(95)
(109)
(71)
  
(306)
(371)
UK tax rate change - deferred tax impact
(89)
(16)
(50)
  
(135)
(137)
Unrecognised timing differences
3 
14 
(10)
  
17 
(20)
Items not allowed for tax
            
  - losses on strategic disposals and
     write-downs
(8)
- 
(4)
  
(12)
(14)
  - UK bank levy
(16)
(19)
- 
  
(53)
- 
  - employee share schemes
(15)
(14)
(4)
  
(44)
(12)
  - other disallowable items
(37)
(29)
(46)
  
(117)
(148)
Non-taxable items
            
  - gain on sale of RBS Aviation Capital
- 
27 
- 
  
27 
- 
  - gain on sale of Global Merchant Services
- 
- 
- 
  
- 
12 
  - other non-taxable items
18 
2 
16 
  
44 
37 
Taxable foreign exchange movements
1 
(3)
2 
  
(1)
2 
Losses brought forward and utilised
1 
(4)
2 
  
12 
31 
Adjustments in respect of prior periods
28 
(63)
8 
  
(4)
59 
             
Actual tax charge
(30)
(290)
(791)
  
(459)
(1,436)

 
 
Notes (continued)
 
5. Tax (continued)
The high tax charge for the nine months ended 30 September 2012 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 derecognition of deferred tax assets in respect of losses in Australia, following the strategic changes to the Markets and International Banking businesses announced in January 2012.
 
The combined effect of losses in Ireland and the Netherlands in the nine months ended 30 September 2012 for which no deferred tax asset has been recognised and the derecognition of the deferred tax asset in respect of losses in Australia account for £645 million (57%) 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 September 2012 of £3,480 million (30 June 2012 - £3,502 million; 31 December 2011 - £3,878 million) and a deferred tax liability at 30 September 2012 of £1,686 million (30 June 2012 - £1,815 million; 31 December 2011 - £1,945 million). These balances include amounts recognised in respect of UK trading losses of £3,178 million (30 June 2012 - £3,029 million; 31 December 2011 - £2,933 million). Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has considered the carrying value of this asset as at 30 September 2012 and concluded that it is recoverable based on future profit projections.
 
6. Profit/(loss) attributable to non-controlling interests
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
RBS Sempra Commodities JV
(2)
4 
(8)
  
2 
(13)
RFS Holdings BV Consortium Members
4 
(16)
3 
  
(31)
27 
Other
1 
7 
(2)
  
13 
(4)
             
Profit/(loss) attributable to non-controlling
  interests
3 
(5)
(7)
  
(16)
10 

 
 
Notes (continued)
 
7. Dividends
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011.
 
On 4 May 2012, RBS determined that it was in a position to recommence payments on RBS Group instruments. The Core Tier 1 capital impact of discretionary amounts payable in 2012 on RBSG instruments on which payments have previously been stopped is c.£330 million. In the context of recent macro-prudential policy discussions, the Board of RBS decided to neutralise any impact on Core Tier 1 capital through equity issuance. Approximately 65% of this is ascribed to equity funding of employee incentive awards through the sale of surplus shares held by the Group's Employee Benefit Trust, which was completed in June 2012. The remaining 35% was raised through the issue of new ordinary shares which was completed in September 2012.
 
Discretionary dividends on certain non-cumulative dollar preference shares and discretionary distributions on certain RBSG innovative securities payable after 4 May 2012 have been paid. Future coupons and dividends on RBSG hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
 
Dividends paid to preference shareholders are as follows:
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Preference shareholders
            
Non-cumulative preference shares of US$0.01
67 
43 
- 
  
110 
- 
Non-cumulative preference shares of €0.01
27 
33 
- 
  
60 
- 
Non-cumulative preference shares of £1
4 
- 
- 
  
4 
- 
             
 
98 
76 
- 
  
174 
- 
 
8. Share consolidation
Following approval at the Group's Annual General Meeting on 30 May 2012, the sub-division and consolidation of the Group's ordinary shares on a one-for-ten basis took effect on 6 June 2012. There was a corresponding change in the Group's share price to reflect this.

 
Notes (continued)
 
9. Earnings per ordinary and B share
Earnings per ordinary and B share have been calculated based on the following:
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
             
Earnings
            
(Loss)/profit from continuing operations
  attributable to ordinary and B shareholders (£m)
(1,385)
(463)
1,225 
  
(3,372)
(204)
             
Profit/(loss) from discontinued operations
  attributable to ordinary and B shareholders (£m)
1 
(3)
1 
  
(2)
5 
             
Ordinary shares in issue during the period
  (millions)
5,975 
5,854 
5,754 
  
5,867 
5,711 
Effect of convertible B shares in issue during
  the period (millions)
5,100 
5,100 
5,100 
  
5,100 
5,100 
             
Weighted average number of ordinary
  shares and effect of convertible B
  shares in issue during the period 
  (millions)
11,075 
10,954 
10,854 
  
10,967 
10,811 
Effect of dilutive share options and
  convertible securities (millions)
- 
- 
89 
  
- 
89 
             
Diluted weighted average number of ordinary
  shares and effect of convertible B shares in
  issue during the period (millions)
11,075 
10,954 
10,943 
  
10,967 
10,900 
             
Basic (loss)/earnings per ordinary and B
  share from continuing operations
(12.5p)
(4.2p)
11.3p 
  
(30.7p)
(1.9p)
Own credit adjustments
10.1p 
4.1p 
(18.4p)
  
31.5p 
(16.8p)
Asset Protection Scheme
- 
- 
0.4p 
  
0.3p 
4.7p 
Payment Protection Insurance costs
2.8p 
0.9p 
- 
  
4.6p 
5.8p 
Sovereign debt impairment
- 
- 
0.3p 
  
- 
8.1p 
Amortisation of purchased intangible assets
0.3p 
0.3p 
0.5p 
  
1.0p 
1.1p 
Integration and restructuring costs
1.8p 
1.7p 
1.6p 
  
6.7p 
4.2p 
Loss/(gain) on redemption of own debt
0.8p 
- 
- 
  
(3.2p)
(2.3p)
Strategic disposals
0.2p 
(1.4p)
0.3p 
  
(1.1p)
- 
Bonus tax
- 
- 
- 
  
- 
0.2p 
Interest rate hedge adjustments on impaired
  available-for-sale Sovereign debt
- 
- 
1.6p 
  
- 
1.6p 
             
Adjusted earnings/(loss) per ordinary and
  B share from continuing operations
3.5p 
1.4p 
(2.4p)
  
9.1p 
4.7p 
Loss/(earnings) from Non-Core divisions
  attributable to ordinary shareholders
2.6p 
3.0p 
(0.3p)
  
7.4p 
6.6p 
             
Core adjusted earnings/(loss) per
  ordinary and B share from continuing
  operations
6.1p 
4.4p 
(2.7p)
  
16.5p 
11.3p 
             
Memo: Core adjusted earnings per
  ordinary and B share from continuing
  operations assuming normalised tax
  rate of 24.5% (2011 - 26.5%)
10.3p 
9.7p 
6.7p 
  
31.5p 
33.4p 
             
Diluted (loss)/earnings per ordinary and B
  share from continuing operations
(12.5p)
(4.2p)
11.2p 
  
(30.7p)
(1.9p)
 
Data for 2011 have been adjusted for the sub-division and one-for-ten consolidation of ordinary shares, which took effect in June 2012.

 
Notes (continued)
 
10. Discontinued operations and assets and liabilities of disposal groups
 
(a) Profit/(loss) from discontinued operations, net of tax
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
 
£m 
£m 
£m 
  
£m 
£m 
             
Discontinued operations
            
Total income
7 
8 
10 
  
23 
27 
Operating expenses
(1)
(1)
(3)
  
(3)
(4)
Impairment losses
- 
- 
- 
  
- 
11 
             
Profit before tax
6 
7 
7 
  
20 
34 
Tax
(3)
(2)
(3)
  
(8)
(10)
             
Profit after tax
3 
5 
4 
  
12 
24 
Businesses acquired exclusively
  with a view to disposal
            
Profit/(loss) after tax
2 
(9)
2 
  
(6)
13 
             
Profit/(loss) from discontinued operations,
  net of tax
5 
(4)
6 
  
6 
37 
 
Discontinued operations reflect the results of RFS Holdings attributable to the State of the Netherlands and Santander following the legal separation of ABN AMRO Bank N.V. on 1 April 2010.
 
(b) Assets and liabilities of disposal groups
 
30 September 2012
30 June 
2012 
£m 
31 December 
2011 
£m 
 
UK branch 
based 
businesses 
Other 
Total 
 
£m 
£m 
£m 
           
Assets of disposal groups
          
Cash and balances at central banks
33 
16 
49 
140 
127 
Loans and advances to banks
- 
83 
83 
88 
87 
Loans and advances to customers
18,509 
900 
19,409 
19,700 
19,405 
Debt securities and equity shares
- 
36 
36 
36 
5 
Derivatives
363 
3 
366 
376 
439 
Intangible assets
- 
- 
- 
- 
15 
Settlement balances
- 
- 
- 
2 
14 
Property, plant and equipment
115 
1 
116 
115 
4,749 
Other assets
11 
433 
444 
445 
456 
           
Discontinued operations and other disposal groups
19,031 
1,472 
20,503 
20,902 
25,297 
Assets acquired exclusively with a view to disposal
- 
164 
164 
167 
153 
           
 
19,031 
1,636 
20,667 
21,069 
25,450 
           
Liabilities of disposal groups
          
Deposits by banks
1 
- 
1 
1 
1 
Customer accounts
21,385 
783 
22,168 
22,531 
22,610 
Derivatives
39 
3 
42 
61 
126 
Settlement balances
- 
- 
- 
- 
8 
Other liabilities
6 
443 
449 
461 
1,233 
           
Discontinued operations and other disposal groups
21,431 
1,229 
22,660 
23,054 
23,978 
Liabilities acquired exclusively with a view to disposal
- 
10 
10 
10 
17 
           
 
21,431 
1,239 
22,670 
23,064 
23,995 

 
Notes (continued)
 
10. Discontinued operations and assets and liabilities of disposal groups (continued)
The assets and liabilities of disposal groups at 30 September 2012 primarily comprise the RBS England and Wales and NatWest Scotland branch-based businesses ("UK branch-based businesses").
 
UK branch-based businesses
Gross loans, risk elements in lending (REIL) and impairment provisions at 30 September 2012 relating to the Group's UK branch-based businesses are set out below.
 
 
 
Gross 
loans 
REIL 
Impairment 
 provisions 
 
£m 
£m 
£m 
       
Residential mortgages
5,886 
191 
40 
Personal lending
1,848 
307 
254 
Property
5,420 
443 
144 
Construction
524 
129 
55 
Service industries and business activities
4,752 
287 
163 
Other
844 
45 
39 
Latent
- 
- 
70 
       
Total
19,274 
1,402 
765 

 
 
Notes (continued)
 
11. Financial instruments
 
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.
 
Credit valuation adjustments (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. Certain credit derivative product company (CDPC) exposures were restructured during the first half of the year and the CVA methodology applied to these exposures was updated to reflect the revised risk mitigation strategy that is now in place. There were no other changes to valuation methodologies.
 
The following table shows credit valuation adjustments and other reserves.
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
CVA
      
  - Monoline insurers
408 
481 
1,198 
  - Credit derivative product companies
455 
479 
1,034 
  - Other counterparties
2,269 
2,334 
2,254 
       
 
3,132 
3,294 
4,486 
Bid-offer, liquidity, funding, valuation and other reserves
2,048 
2,207 
2,704 
       
Valuation reserves
5,180 
5,501 
7,190 
 
Key points
 
30 September compared with 31 December 2011
 
·
Gross exposure to monolines reduced by £1.1 billion from £1.9 billion at 31 December 2011 to £0.8 billion at 30 September 2012, principally in H1 2012. This was primarily due to the restructuring of certain exposures, an increase in underlying asset prices and the appreciation of sterling against the US dollar. The CVA decreased on a total basis reflecting the lower exposure, and also on a relative basis (from 63% to 49%) due to the impact of restructurings and tighter credit spreads.
   
·
Gross exposure to CDPCs decreased by £1.1 billion from £1.9 billon at 31 December 2011 to £0.8 billion, of which £0.4 billion was in Q3 2012. This was primarily driven by tighter credit spreads and a decrease in the relative value of senior tranches compared with the underlying reference portfolios and the impact of restructuring certain exposures in the first half of the year. The CVA decreased on an absolute basis in line with the decrease in exposure but increased on a relative basis (30 September 2012 - 60%; 30 June 2012 - 42%; 31 December 2011 - 55%).
   
·
Other counterparty CVA was stable over the period with the impact of tighter credit spreads offset by other factors including counterparty rating downgrades and increased weighted average life assumptions applied in H1 2012.
   
·
Within other reserves, bid-offer reserves decreased, primarily reflecting restructuring in the second half of H1 2012, due to risk reduction and the impact of Greek government debt restructuring.

 
 
Notes (continued)
 
11. Financial instruments (continued)
 
Own credit
The following table shows the cumulative own credit adjustment (OCA) recorded on securities held-for-trading (HFT), classified as fair value through profit or loss (DFV) and derivative liabilities. There have been some refinements to methodologies during the nine months ended 30 September 2012, but they did not have a material overall impact on cumulative OCA.
 
 
Cumulative OCA (1)
 
Debt securities in issue (2)
Subordinated 
liabilities 
DFV 
£m 
Total 
£m 
Derivatives 
£m 
Total (3)
£m 
HFT 
£m 
DFV 
£m 
Total 
£m 
               
30 September 2012
(690)
126 
(564)
450 
(114)
375 
261 
30 June 2012
(323)
1,040 
717 
572 
1,289 
452 
1,741 
31 December 2011
882 
2,647 
3,529 
679 
4,208 
602 
4,810 
               
Carrying values of underlying liabilities
£bn 
£bn 
£bn 
£bn 
£bn 
    
               
30 September 2012
11.3 
27.7 
39.0 
1.0 
40.0 
    
30 June 2012
10.8 
30.3 
41.1 
0.9 
42.0 
    
31 December 2011
11.5 
35.7 
47.2 
0.9 
48.1 
    
 
Notes:
 
(1)
The OCA does not alter cash flows and is not used for performance management. It is disregarded for regulatory capital reporting purposes and will reverse over time as the liabilities mature.
(2)
Consists of wholesale and retail note issuances.
(3)
The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserves are stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.
 
Key points
 
·  
The OCA decreased significantly year-to-date, including a significant decrease in Q3 2012 as credit spreads tightened, reflecting improved investor perception of RBS.
   
·  
Senior issued debt adjustments are determined with reference to secondary debt issuance spreads. At 30 September 2012, the five year level tightened to c.100 basis points from c.450 basis points at 31 December 2011 and c.250 basis points at half year 2012, primarily due to increased demand from investors following quantitative easing measures from the European Central Bank and US Federal Reserve and the announcement of the Group's liability management exercise.
   
·  
Significant tightening of credit spreads, buy-backs exceeding issuances and the impact of buying back certain securities at lower spreads than at issuance, resulted in an overall decrease in OCA and a negative amount related to HFT debt securities in issue.
   
·  
Derivative liability OCA decreased as credit default swap spreads tightened.

 
 
Notes (continued)
 
12. Available-for-sale reserve
 
 
 
Quarter ended
  
Nine months ended
 
30 September 
2012 
30 June 
2012 
30 September 
2011 
  
30 September 
2012 
30 September 
2011 
Available-for-sale reserve
£m 
£m 
£m 
  
£m 
£m 
             
At beginning of period
(450)
(439)
(1,026)
  
(957)
(2,037)
Unrealised losses on Greek sovereign debt
- 
- 
(202)
  
- 
(346)
Impairment of Greek sovereign debt
- 
- 
202 
  
- 
1,044 
Other unrealised net gains
651 
428 
1,207 
  
1,803 
2,294 
Realised net gains
(528)
(370)
(214)
  
(1,110)
(627)
Tax
36 
(69)
(259)
  
(27)
(620)
             
At end of period
(291)
(450)
(292)
  
(291)
(292)
 
The Q3 2012 movement in available-for-sale reserve primarily reflects unrealised net gains on securities of £651 million, largely as yields tightened on German, US and UK sovereign bonds and realised net gains of £528 million on the sale of high quality bonds.
 
In Q2 2011, as a result of the deterioration in Greece's fiscal position and the announcement of proposals to restructure Greek government debt, the Group concluded that the Greek sovereign debt was impaired. Accordingly, £733 million of unrealised losses recognised in available-for-sale reserves together with £109 million related interest rate hedge adjustments were recycled to the income statement. Further losses of £202 million and £224 million were recorded in Q3 2011 and Q4 2011 respectively.
 
13. Contingent liabilities and commitments
 
 
30 September 2012
  
30 June 2012
  
31 December 2011
 
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
19,352 
722 
20,074 
  
21,706 
802 
22,508 
  
23,702 
1,330 
25,032 
Other contingent liabilities
11,373 
181 
11,554 
  
11,234 
232 
11,466 
  
10,667 
245 
10,912 
                       
 
30,725 
903 
31,628 
  
32,940 
1,034 
33,974 
  
34,369 
1,575 
35,944 
                       
Commitments
                      
Undrawn formal standby
  facilities, credit lines and
  other commitments to lend
213,484 
7,147 
220,631 
  
221,091 
6,941 
228,032 
  
227,419 
12,544 
239,963 
Other commitments
1,664 
16 
1,680 
  
1,303 
70 
1,373 
  
301 
2,611 
2,912 
                       
 
215,148 
7,163 
222,311 
  
222,394 
7,011 
229,405 
  
227,720 
15,155 
242,875 
                       
Total contingent liabilities
  and commitments
245,873 
8,066 
253,939 
  
255,334 
8,045 
263,379 
  
262,089 
16,730 
278,819 
 
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)
 
14. Litigation, investigations and reviews
Except for the developments noted below, there have been no material changes to the litigation, investigations and reviews as disclosed in the Interim Results for the six months ended 30 June 2012.
 
Litigation
 
Shareholder litigation
RBS and certain of its subsidiaries, together with certain current and former individual officers and directors were named as defendants in purported class actions filed in the United States District Court for the Southern District of New York involving holders of RBS preferred shares (the Preferred Shares litigation) and holders of American Depositary Receipts (the ADR claims).
 
On 4 September 2012, the Court dismissed the Preferred Shares litigation with prejudice. The plaintiffs have filed a notice of appeal.
 
On 27 September 2012, the Court dismissed the ADR claims. The plaintiffs have filed an application seeking to re-state their case.
 
Investigations and reviews
 
LIBOR
The Group continues to co-operate fully with investigations by various governmental and regulatory authorities into its submissions, communications and procedures relating to the setting of LIBOR and other trading rates. The relevant authorities include, amongst others, the US Commodity Futures Trading Commission, the US Department of Justice (Fraud Division) and the FSA, together with various other authorities in Europe and Asia. The Group has dismissed a number of employees for misconduct as a result of its investigations into these matters.
 
The Group is also under investigation by competition authorities in a number of jurisdictions including the European Commission, US Department of Justice (Antitrust Division) and Canadian Competition Bureau, stemming from the actions of certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading. The Group is also co-operating fully with these investigations.
 
The Group expects to enter into negotiations to settle some of these investigations in the near term and believes the probable outcome is that it will incur financial penalties. It is not possible to estimate reliably what effect the outcome of these investigations, any regulatory findings and any related developments may have on the Group, including the timing and amount of fines or settlements, which may be material.
 

 
Notes (continued)
 
14. Litigation, investigations and reviews (continued)
 
Private motor insurance
In December 2011, the OFT launched a market study into private motor insurance, with a focus on the provision of third party vehicle repairs and credit hire replacement vehicles to claimants. The OFT
issued its report on 31 May 2012 and has advised that it believes there are features of the market that potentially restrict, distort or prevent competition in the market and that would merit a referral to the Competition Commission (CC). The OFT's particular focus is on credit hire replacement vehicles and third party vehicle repairs.
On 28 September 2012 the OFT referred the private motor insurance market to the CC for a market investigation. The CC has until 27 September 2014 to publish its findings. At this stage, it is not possible to estimate the effect the market investigation may have on the Group and its independently listed subsidiary, Direct Line Insurance Group plc.
 
Independent Commission on Banking
The UK Government published a White Paper on Banking Reform in September 2012, outlining proposed structural reforms in the UK banking industry. The measures proposed were drawn in large part from the recommendations of the Independent Commission on Banking (ICB), which was appointed by the UK Government in June 2010. The ICB published its final report to the Cabinet Committee on Banking Reform on 12 September 2011, which set out the ICB's views on possible reforms to improve stability and competition in UK banking. The final report made a number of recommendations, including in relation to (i) promotion of competition, (ii) increased loss absorbency (including bail-in i.e. the ability to write-down debt or convert it into an issuer's ordinary shares in certain circumstances) and (iii) the implementation of a ring-fence of retail banking operations.
 
The measures in relation to the promotion of competition are already largely in train, including the development of an industry mechanism to make it easier for customers to switch their personal current accounts to a different provider, which is due to be completed by September 2013.
 
Bail-in mechanisms continue to be discussed by the European Union (EU), and the Group continues to participate in the debate around such mechanisms, which could affect the rights of creditors, including holders of senior and subordinated bonds and shareholders, in the event of the implementation of a recovery or resolution scheme or an insolvency, and could thereby materially affect the price of such securities. The UK Government's White Paper discussed a number of details relating to the ring-fencing of retail operations, including possible governance arrangements, the range of activities that might be prohibited for the ring-fenced entity and possible restrictions on transactions between the ring-fenced and non-ring-fenced entities within a single group.
 
The UK Government published in October 2012 a draft Bill intended to enable the implementation of these reforms. This draft Bill is subject to pre-legislative scrutiny by the UK Parliamentary Commission on Standards in Banking, which may recommend changes to the Bill. The UK Government is expected to introduce the Bill, which will provide primary enabling legislation early in 2013, with a view to completing the legislative framework by May 2015, requiring compliance as soon as practicable thereafter and setting a final deadline for full implementation of 2019.

 
Notes (continued)
 
14. Litigation, investigations and reviews (continued)
The impact of any final legislation on the Group is impossible to estimate with any precision at this stage. The introduction of 'bail in' mechanisms may affect the Group's cost of borrowing, its ability to access professional markets' funding and its funding and liquidity metrics. It is also likely that ring-fencing certain of the Group's operations would require significant restructuring, with the possible transfer of large numbers of customers between legal entities. It is possible that such ring-fencing, by itself, or taken together with the impact of other proposals contained in this legislation and other EU legislation that will apply to the Group could have a material adverse effect on the Group's structure, results of operations, financial conditions and prospects.
 
It is also possible that the UK's implementation of a ring-fence may conflict with any EU legislation to implement the recommendations of the High-level Expert Group on Reforming the Structure of the EU Banking Sector, whose report, published in October 2012, proposed, inter alia, ring-fencing the trading and market-making activities of major European banks. This could affect the Group's position relative to some competitors.
 
Securitisation and collateralised debt obligation business
With respect to the Nevada State Attorney General's investigation relating to securitisations of mortgages, on 23 October 2012, an Assurance of Discontinuance between RBS Financial Products Inc. and the State of Nevada was filed in Nevada state court which resolves the investigation as to RBS. The Assurance of Discontinuance requires RBS Financial Products Inc. to make payments totalling US$42.5 million.
 
Other investigations
With respect to the SEC's formal investigation relating to the Group's US sub-prime securities and residential mortgage exposures, SEC staff communicated in September 2012 that it had completed its investigation and that it did not, as of the date of that communication and based upon the information then in its possession, intend to recommend any enforcement action against RBS.
 
15. Other developments
 
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 The Royal Bank of Scotland N.V. (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.
 
It is expected that the Proposed Transfers will be implemented on a phased basis over a period ending 31 December 2013. The transfer of substantially all of the UK business was completed during Q4 2011 and substantially all of the Netherlands and EMEA businesses were transferred in September 2012.

 
 
Notes (continued)
 
15. Other developments (continued)
 
Rating agencies
On 17 July 2012, Fitch Ratings ("Fitch") affirmed its ratings on the Group and certain subsidiaries. Fitch's ratings Outlooks were also affirmed as unchanged at this time except for the Outlook on Ulster Bank Ireland Ltd which was changed to Negative from Stable. This Negative Outlook is aligned with the Outlook on the sovereign (Republic of Ireland). On 10 October 2012, Fitch re-affirmed the ratings of RBS Group plc, RBS plc, Citizens Financial Group, RBS NV, National Westminster Bank, and Royal Bank of Scotland International Limited. The Outlooks on all these entities were re-affirmed as stable. The rating affirmations on RBS Group plc and RBS plc were taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review.
 
On 25 October 2012, Standard & Poor's ("S&P") confirmed as unchanged its ratings and long term rating Outlooks on the Group and certain subsidiaries. Outlooks on Ulster Bank Ltd and Ulster Bank Ireland Ltd ratings remain Negative and match S&P's Negative Outlook on the Republic of Ireland sovereign. Outlooks on the Group and remaining rated subsidiaries are Stable.
 
No material rating actions have been undertaken on the Group or its subsidiaries by Moody's Investors Service during the quarter.
 
Current Group and subsidiary ratings are shown in the table below.
 
 
 
Moody's
  
S&P
  
Fitch
 
Long-term 
Short-term 
  
Long-term 
Short-term 
  
Long-term 
Short-term 
                 
RBS Group plc
Baa1 
P-2 
  
A- 
A-2 
  
A 
F1 
                 
RBS plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
NatWest Plc
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS N.V.
A3 
P-2 
  
A 
A-1 
  
A 
F1 
                 
RBS Citizens, N.A/Citizens
  Bank of Pennsylvania
A3 
P-2 
  
A 
A-1 
  
A- 
F1 
                 
Ulster Bank Ltd/Ulster Bank
  Ireland Ltd
Baa2 
P-2 
  
BBB+ 
A-2 
  
A- 
F1 
 
U K Insurance Limited has an insurance financial strength rating of 'A2' from Moody's and an insurer financial strength rating of 'A' from S&P. Both agencies have assigned a stable Outlook to the company.
 
16. Date of approval
This announcement was approved by the Board of directors on 1 November 2012.
 

Notes (continued)
 
17. Post balance sheet events
Save as detailed below, there have been no significant events between 30 September 2012 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.
 
UK branch-based businesses
On 12 October 2012, RBS announced that it had received notification of Santander's decision to pull out of its agreed purchase of certain of the Group's UK branch-based businesses. RBS has re-commenced its effort to divest the business and fulfil its obligations to the European Commission.
 
Direct Line Group IPO
RBS completed the successful initial public offering of Direct Line Group in October 2012, representing another important milestone in RBS's restructuring plan. RBS Group sold 520.8 million ordinary shares in Direct Line Group, representing 34.7% of the total share capital, generating gross proceeds of £911 million.
 
Asset Protection Scheme
The Group exited from the UK Government's APS on 18 October 2012.
 
 

 
 
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: 02 November 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary