rbs201211026k5.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:

 
 



 
Risk and balance sheet management
 
Balance sheet management
 
Capital
The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements. Capital adequacy and risk management are closely aligned. The Group's risk-weighted assets and risk asset ratios, calculated in accordance with Financial Services Authority (FSA) definitions, are set out below.
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
Risk-weighted assets (RWAs) by risk
£bn 
£bn 
£bn 
       
Credit risk
334.5 
334.8 
344.3 
Counterparty risk
53.3 
53.0 
61.9 
Market risk
47.4 
54.0 
64.0 
Operational risk
45.8 
45.8 
37.9 
       
 
481.0 
487.6 
508.1 
Asset Protection Scheme (APS) relief
(48.1)
(52.9)
(69.1)
       
 
432.9 
434.7 
439.0 
 
 
Risk asset ratios
% 
% 
% 
       
Core Tier 1
11.1 
11.1 
10.6 
Core Tier 1 excluding capital relief provided by APS
10.4 
10.3 
9.7 
Tier 1
13.4 
13.4 
13.0 
Total
14.6 
14.6 
13.8 
 
Key points
 
·
The Core Tier 1 ratio remained stable at 11.1%. Excluding the capital relief provided by APS, the Core Tier 1 ratio improved by 70 basis points year-to-date, of which 10 basis points were in Q3 2012, reflecting reductions in RWAs and capital deductions. Gross RWAs decreased by £27.1 billion year-to-date, of which £6.6 billion was in Q3 2012.
   
·
Non-Core RWAs decreased by £21.1 billion year-to-date (Q3 2012 - down £10.5 billion) mainly as a result of lower market risk through active reduction in derivatives, including the impact of restructuring a large derivative exposure to a highly leveraged counterparty in the first half of 2012. Credit and counterparty RWAs fell, driven by sales and run-off partly offset by the impact of regulatory uplifts.
   
·
In Markets, RWAs fell driven by lower market risk.
   
·
Retail & Commercial credit risk RWAs remained stable at c.£250 billion despite the impact of regulatory wholesale credit model changes, particularly in International Banking and UK Corporate.
   
·
The decrease in capital deductions principally related to securitisations, reflecting the continuation of Non-Core's de-risking strategy.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital (continued) The Group's regulatory capital resources in accordance with FSA definitions were as follows:
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
Shareholders' equity (excluding non-controlling interests)
      
 Shareholders' equity per balance sheet
72,699 
74,016 
74,819 
 Preference shares - equity
(4,313)
(4,313)
(4,313)
 Other equity instruments
(431)
(431)
(431)
 
67,955 
69,272 
70,075 
       
Non-controlling interests
      
 Non-controlling interests per balance sheet
1,194 
1,200 
1,234 
 Non-controlling preference shares
(548)
(548)
(548)
 Other adjustments to non-controlling interests for regulatory purposes
(259)
(259)
(259)
 
387 
393 
427 
       
Regulatory adjustments and deductions
      
 Own credit
651 
(402)
(2,634)
 Unrealised losses on AFS debt securities
375 
520 
1,065 
 Unrealised gains on AFS equity shares
(84)
(70)
(108)
 Cash flow hedging reserve
(1,746)
(1,399)
(879)
 Other adjustments for regulatory purposes
895 
637 
571 
 Goodwill and other intangible assets
(14,798)
(14,888)
(14,858)
 50% excess of expected losses over impairment provisions (net of tax)
(2,429)
(2,329)
(2,536)
 50% of securitisation positions
(1,180)
(1,461)
(2,019)
 50% of APS first loss
(1,926)
(2,118)
(2,763)
 
(20,242)
(21,510)
(24,161)
       
Core Tier 1 capital
48,100 
48,155 
46,341 
       
Other Tier 1 capital
      
 Preference shares - equity
4,313 
4,313 
4,313 
 Preference shares - debt
1,055 
1,082 
1,094 
 Innovative/hybrid Tier 1 securities
4,065 
4,466 
4,667 
 
9,433 
9,861 
10,074 
       
Tier 1 deductions
      
 50% of material holdings
(242)
(313)
(340)
 Tax on excess of expected losses over impairment provisions
788 
756 
915 
 
546 
443 
575 
       
Total Tier 1 capital
58,079 
58,459 
56,990 
       
Qualifying Tier 2 capital
      
 Undated subordinated debt
2,245 
1,958 
1,838 
 Dated subordinated debt - net of amortisation
12,641 
13,346 
14,527 
 Unrealised gains on AFS equity shares
84 
70 
108 
 Collectively assessed impairment provisions
500 
552 
635 
 Non-controlling Tier 2 capital
11 
11 
11 
 
15,481 
15,937 
17,119 
       
Tier 2 deductions
      
 50% of securitisation positions
(1,180)
(1,461)
(2,019)
 50% excess of expected losses over impairment provisions
(3,217)
(3,085)
(3,451)
 50% of material holdings
(242)
(313)
(340)
 50% of APS first loss
(1,926)
(2,118)
(2,763)
 
(6,565)
(6,977)
(8,573)
       
Total Tier 2 capital
8,916 
8,960 
8,546 

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital (continued)
 
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
Supervisory deductions
      
 Unconsolidated Investments
      
   - Direct Line Group
(3,537)
(3,642)
(4,354)
   - Other investments
(144)
(141)
(239)
 Other deductions
(217)
(197)
(235)
       
 
(3,898)
(3,980)
(4,828)
       
Total regulatory capital
63,097 
63,439 
60,708 
 
 
Movement in Core Tier 1 capital
£m 
   
At 1 January 2012
46,341 
Attributable profit net of movements in fair value of own debt
242 
Share capital and reserve movements in respect of employee share schemes
659 
Foreign currency reserves
(461)
Decrease in non-controlling interests
(34)
Decrease in capital deductions including APS first loss
1,410 
Increase in goodwill and intangibles
(30)
Other movements
28 
   
At 30 June 2012
48,155 
Attributable loss net of movements in fair value of own debt
(330)
Ordinary shares issued
123 
Share capital and reserve movements in respect of employee share schemes
46 
Foreign currency reserves
(567)
Decrease in non-controlling interests
(6)
Decrease in capital deductions including APS first loss
373 
Decrease in goodwill and intangibles
90 
Other movements
216 
   
At 30 September 2012
48,100 

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital (continued)
 
Risk-weighted assets by division
Risk-weighted assets by risk category and division are set out below.
 
 
 
Credit 
risk 
Counterparty 
risk 
Market 
risk 
Operational 
risk 
Gross 
RWAs 
30 September 2012
£bn 
£bn 
£bn 
£bn 
£bn 
           
UK Retail
39.9 
- 
- 
7.8 
47.7 
UK Corporate
73.5 
- 
- 
8.6 
82.1 
Wealth
10.3 
- 
0.1 
1.9 
12.3 
International Banking
44.5 
- 
- 
5.2 
49.7 
Ulster Bank
32.4 
0.9 
0.1 
1.7 
35.1 
US Retail & Commercial
50.9 
0.9 
- 
4.9 
56.7 
           
Retail & Commercial
251.5 
1.8 
0.2 
30.1 
283.6 
Markets
15.4 
35.3 
41.6 
15.7 
108.0 
Other
12.1 
0.4 
- 
1.4 
13.9 
           
Core
279.0 
37.5 
41.8 
47.2 
405.5 
Non-Core
52.4 
15.8 
5.6 
(1.6)
72.2 
           
Group before RFS Holdings MI
331.4 
53.3 
47.4 
45.6 
477.7 
RFS Holdings MI
3.1 
- 
- 
0.2 
3.3 
           
Group
334.5 
53.3 
47.4 
45.8 
481.0 
APS relief
(42.2)
(5.9)
- 
- 
(48.1)
           
Net RWAs
292.3 
47.4 
47.4 
45.8 
432.9 
 
 
30 June 2012
          
           
UK Retail
39.6 
- 
- 
7.8 
47.4 
UK Corporate
70.8 
- 
- 
8.6 
79.4 
Wealth
10.3 
- 
0.1 
1.9 
12.3 
International Banking
41.2 
- 
- 
4.8 
46.0 
Ulster Bank
34.7 
0.9 
0.1 
1.7 
37.4 
US Retail & Commercial
52.5 
1.1 
- 
4.9 
58.5 
           
Retail & Commercial
249.1 
2.0 
0.2 
29.7 
281.0 
Markets
15.7 
33.4 
43.1 
15.7 
107.9 
Other
10.5 
0.2 
0.2 
1.8 
12.7 
           
Core
275.3 
35.6 
43.5 
47.2 
401.6 
Non-Core
56.4 
17.4 
10.5 
(1.6)
82.7 
           
Group before RFS Holdings MI
331.7 
53.0 
54.0 
45.6 
484.3 
RFS Holdings MI
3.1 
- 
- 
0.2 
3.3 
           
Group
334.8 
53.0 
54.0 
45.8 
487.6 
APS relief
(46.2)
(6.7)
- 
- 
(52.9)
           
Net RWAs
288.6 
46.3 
54.0 
45.8 
434.7 

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital: Risk-weighted assets by division(continued)
 
 
 
Credit 
risk 
Counterparty 
risk 
Market 
risk 
Operational 
risk 
Gross 
RWAs 
31 December 2011
£bn 
£bn 
£bn 
£bn 
£bn 
           
UK Retail
41.1 
- 
- 
7.3 
48.4 
UK Corporate
71.2 
- 
- 
8.1 
79.3 
Wealth
10.9 
- 
0.1 
1.9 
12.9 
International Banking
38.9 
- 
- 
4.3 
43.2 
Ulster Bank
33.6 
0.6 
0.3 
1.8 
36.3 
US Retail & Commercial
53.6 
1.0 
- 
4.7 
59.3 
           
Retail & Commercial
249.3 
1.6 
0.4 
28.1 
279.4 
Markets
16.7 
39.9 
50.6 
13.1 
120.3 
Other
9.8 
0.2 
- 
2.0 
12.0 
           
Core
275.8 
41.7 
51.0 
43.2 
411.7 
Non-Core
65.6 
20.2 
13.0 
(5.5)
93.3 
           
Group before RFS Holdings MI
341.4 
61.9 
64.0 
37.7 
505.0 
RFS Holdings MI
2.9 
- 
- 
0.2 
3.1 
           
Group
344.3 
61.9 
64.0 
37.9 
508.1 
APS relief
(59.6)
(9.5)
- 
- 
(69.1)
           
Net RWAs
284.7 
52.4 
64.0 
37.9 
439.0 

 
 
Risk and balance sheet management (continued)
 
Balance sheet management (continued)
 
Liquidity and funding risk
Liquidity risk is the risk that the Group is unable to meet its obligations, including financing maturities as they fall due. Liquidity risk is heavily influenced by the maturity profile and mix of the Group's funding base, as well as the quality and liquidity value of its liquidity portfolio.
 
Overview
The Group continues to improve the structure and composition of its balance sheet against a backdrop of improved wholesale funding market conditions and a tempering of UK regulatory requirements relating to liquidity risk.
 
 
·
Short-term wholesale funding (STWF) excluding derivative collateral continued to be actively reduced and stood at £49 billion at 30 September 2012, which was well covered by a strong Group liquidity buffer of £147 billion. STWF accounted for 5% of the funded balance sheet and 31% of wholesale funding, compared with 7% and 34%, respectively at 30 June 2012.
   
·
The Group's liquidity buffer was lowered by £9 billion during the quarter to £147 billion reflecting the shrinking overall balance sheet and reduced STWF.
   
·
The Group's customer funding gap has decreased significantly, from £37 billion at the end of 2011 to £19 billion at 30 June 2012 and £8 billion at 30 September 2012. Customer deposits now account for 70% of the Group's primary funding sources.
   
·
Progress against the Group's strategic plan has resulted in a balance sheet structure which is broadly matched. At 30 September 2012, the Group's loan:deposit ratio improved to 102% with a Core ratio of 91%.
   
·
The combined impacts of the ongoing deleveraging process being driven by Non-Core and Markets have allowed the Group to further reduce its wholesale funding base. During the third quarter, the Group completed a cash tender offer to repurchase £4.4 billion of senior unsecured debt securities issued by RBS plc. The repurchase was across dollar, sterling and euro securities of varying maturities and interest rates.
   
·
The Group took advantage of the improved wholesale market conditions in the quarter and issued US$2 billion of public fixed rate notes to help pre-fund future financing needs of the holding company.
   
·
The Group has drawn £750 million under the Bank of England's Funding for Lending Scheme (FLS) and held a comparable amount of related treasury bills at 30 September 2012.
   
·
The 'A' senior unsecured credit rating was affirmed with a stable outlook for the Group by Fitch in July 2012 and for RBS plc by S&P in October 2012.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Funding sources
The table below shows the Group's primary funding sources including deposits in disposal groups and excluding repurchase agreements.
 
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
 
£m 
£m 
£m 
       
Deposits by banks
      
 derivative cash collateral
28,695 
32,001 
31,807 
 other deposits
29,433 
35,619 
37,307 
       
 
58,128 
67,620 
69,114 
       
Debt securities in issue
      
 conduit asset-backed commercial paper (ABCP)
2,909 
4,246 
11,164 
 other commercial paper (CP)
2,829 
1,985 
5,310 
 certificates of deposits (CDs)
6,696 
10,397 
16,367 
 medium-term notes (MTNs)
70,417 
81,229 
105,709 
 covered bonds
9,903 
9,987 
9,107 
 securitisations
11,403 
12,011 
14,964 
       
 
104,157 
119,855 
162,621 
Subordinated liabilities
25,309 
25,596 
26,319 
       
Notes issued
129,466 
145,451 
188,940 
       
Wholesale funding
187,594 
213,071 
258,054 
       
Customer deposits
      
 cash collateral
9,642 
10,269 
9,242 
 other deposits
425,238 
425,031 
427,511 
       
Total customer deposits
434,880 
435,300 
436,753 
       
Total funding
622,474 
648,371 
694,807 
       
Disposal group deposits included above
      
 banks
1 
1 
1 
 customers
22,168 
22,531 
22,610 
       
 
22,169 
22,532 
22,611 
 
The table below shows the Group's wholesale funding source metrics.
 
 
 
Short-term wholesale
funding (1)
  
Total wholesale
funding
  
Net inter-bank
funding (2)
 
Excluding 
 derivative 
collateral 
Including 
 derivative 
 collateral 
  
Excluding 
 derivative 
collateral 
Including 
 derivative 
 collateral 
  
Deposits 
Loans 
Net 
 Inter-bank 
 funding 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
£bn 
                   
30 September 2012
48.5 
77.2 
  
158.9 
187.6 
  
29.4 
(20.2)
9.2 
30 June 2012
62.3 
94.3 
  
181.1 
213.1 
  
35.6 
(22.3)
13.3 
31 March 2012
79.7 
109.1 
  
204.9 
234.3 
  
36.4 
(19.7)
16.7 
31 December 2011
102.4 
134.2 
  
226.2 
258.1 
  
37.3 
(24.3)
13.0 
30 September 2011
141.6 
174.1 
  
267.0 
299.4 
  
46.2 
(33.0)
13.2 
 
Notes:
 
(1)
Short-term balances denote those with a residual maturity of less than one year and includes longer-term issuances.
(2)
Excludes derivative collateral.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Notes issued
The table below shows the Group's debt securities in issue and subordinated liabilities by remaining maturity.
 
 
Debt securities in issue
      
 
Conduit 
ABCP 
Other 
CP and 
CDs 
MTNs 
Covered 
bonds 
Securit- 
isations 
Total 
Subordinated 
liabilities 
Total 
notes 
issued 
Total 
notes 
issued 
30 September 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
% 
                   
Less than 1 year
2,909 
9,079 
13,466 
1,009 
15 
26,478 
1,632 
28,110 
22 
1-3 years
- 
441 
22,477 
2,865 
1,243 
27,026 
5,693 
32,719 
25 
3-5 years
- 
1 
13,221 
2,323 
- 
15,545 
2,272 
17,817 
14 
More than 5 years
- 
4 
21,253 
3,706 
10,145 
35,108 
15,712 
50,820 
39 
                   
 
2,909 
9,525 
70,417 
9,903 
11,403 
104,157 
25,309 
129,466 
100 
                   
30 June 2012
                  
                   
Less than 1 year
4,246 
12,083 
16,845 
1,020 
69 
34,263 
1,631 
35,894 
25 
1-3 years
- 
293 
24,452 
1,681 
1,263 
27,689 
5,401 
33,090 
23 
3-5 years
- 
1 
16,620 
3,619 
- 
20,240 
2,667 
22,907 
15 
More than 5 years
- 
5 
23,312 
3,667 
10,679 
37,663 
15,897 
53,560 
37 
                   
 
4,246 
12,382 
81,229 
9,987 
12,011 
119,855 
25,596 
145,451 
100 
                   
31 December 2011
                  
                   
Less than 1 year
11,164 
21,396 
36,302 
- 
27 
68,889 
624 
69,513 
37 
1-3 years
- 
278 
26,595 
2,760 
479 
30,112 
3,338 
33,450 
18 
3-5 years
- 
2 
16,627 
3,673 
- 
20,302 
7,232 
27,534 
14 
More than 5 years
- 
1 
26,185 
2,674 
14,458 
43,318 
15,125 
58,443 
31 
                   
 
11,164 
21,677 
105,709 
9,107 
14,964 
162,621 
26,319 
188,940 
100 
 
Key point
 
·
Debt securities in issue decreased by £15.7 billion in Q3 2012 mainly due to the active reduction of CP and conduit ABCP, the maturity of unsecured MTNs and the impact of the execution of the liability management exercise.
 
Deposit and repo funding
The table below shows the composition of the Group's deposits excluding repos and repo funding including disposal groups.
 
 
30 September 2012
  
30 June 2012
  
31 December 2011
 
Deposits 
Repos 
  
Deposits 
Repos 
  
Deposits 
Repos 
 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                 
Financial institutions
                
  - central and other banks
58,128 
49,222 
  
67,620 
39,125 
  
69,114 
39,691 
  - other financial institutions
69,697 
92,321 
  
65,563 
87,789 
  
66,009 
86,032 
Personal and corporate deposits
365,183 
1,022 
  
369,737 
1,161 
  
370,744 
2,780 
                 
 
493,008 
142,565 
  
502,920 
128,075 
  
505,867 
128,503 
 
Key points
 
·
The central and other banks balances include €10 billion of funding accessed through the European Central Bank's long-term re-financing operation facility in the first half of 2012.
   
·
Approximately 40% of the customer deposits above are insured through the UK Financial Services Compensation Scheme, US Federal Deposit Insurance Corporation and similar schemes.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Customer loan:deposit ratio and funding gap
The table below shows the Group's divisional customer loan:deposit ratio (LDR) and customer funding gap.
 
 
Loans (1)
Deposits (2)
LDR (3)
Funding 
 surplus/ 
(gap) (3)
30 September 2012
£m 
£m 
% 
£m 
         
UK Retail
110,267 
105,984 
104 
(4,283)
UK Corporate
105,952 
126,780 
84 
20,828 
Wealth
16,919 
38,692 
44 
21,773 
International Banking (4)
42,154 
41,668 
101 
(486)
Ulster Bank
28,615 
20,278 
141 
(8,337)
US Retail & Commercial
50,116 
59,817 
84 
9,701 
Conduits (International Banking) (4)
4,588 
- 
nm 
(4,588)
         
Retail & Commercial
358,611 
393,219 
91 
34,608 
Markets
29,324 
34,348 
85 
5,024 
Direct Line Group and other
3,274 
3,388 
97 
114 
         
Core
391,209 
430,955 
91 
39,746 
Non-Core
51,355 
3,925 
nm 
(47,430)
         
Group
442,564 
434,880 
102 
(7,684)
 
 
30 June 2012
        
         
UK Retail
110,318 
106,571 
104 
(3,747)
UK Corporate
107,775 
127,446 
85 
19,671 
Wealth
16,888 
38,462 
44 
21,574 
International Banking (4)
43,190 
42,238 
102 
(952)
Ulster Bank
29,701 
20,593 
144 
(9,108)
US Retail & Commercial
51,634 
59,229 
87 
7,595 
Conduits (International Banking) (4)
6,295 
- 
nm 
(6,295)
         
Retail & Commercial
365,801 
394,539 
93 
28,738 
Markets
30,191 
34,257 
88 
4,066 
Direct Line Group and other
1,320 
2,999 
44 
1,679 
         
Core
397,312 
431,795 
92 
34,483 
Non-Core
57,398 
3,505 
nm 
(53,893)
         
Group
454,710 
435,300 
104 
(19,410)
 
nm = not meaningful
 
For the notes to this table refer to the following page.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Customer loan to deposit ratio and funding gap (continued)
 
 
Loans (1)
Deposits (2)
LDR (3)
Funding 
 surplus/ 
(gap) (3)
31 December 2011
£m 
£m 
% 
£m 
         
UK Retail
107,983 
101,878 
106 
(6,105)
UK Corporate
108,668 
126,309 
86 
17,641 
Wealth
16,834 
38,164 
44 
21,330 
International Banking (4)
46,417 
45,051 
103 
(1,336)
Ulster Bank
31,303 
21,814 
143 
(9,489)
US Retail & Commercial
50,842 
59,984 
85 
9,142 
Conduits (International Banking) (4)
10,504 
- 
nm 
(10,504)
         
Retail & Commercial
372,551 
393,200 
95 
20,649 
Markets
31,254 
36,776 
85 
5,522 
Direct Line Group and other
1,196 
2,496 
48 
1,300 
         
Core
405,001 
432,472 
94 
27,471 
Non-Core
68,516 
4,281 
nm 
(64,235)
         
Group
473,517 
436,753 
108 
(36,764)
 
nm = not meaningful
 
Notes:
 
(1)
Loans and advances to customers excluding reverse repurchase agreements and stock borrowing and including disposal groups.
(2)
Excluding repurchase agreements and stock lending but including disposal groups.
(3)
Based on loans and advances to customers net of provisions and customer deposits as shown.
(4)
All conduits relate to International Banking and have been extracted and shown separately.
 
Key point
 
·
The Group loan:deposit ratio has improved 600 basis points during the first nine months of 2012 to 102%, of which 200 basis points was in Q3 2012, as the Group continued to make progress on the strategic goal of a broadly matched balance sheet structure.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Long-term debt issuance
The table below shows debt securities issued by the Group with an original maturity of one year or more. The Group also executes other long-term funding arrangements (predominantly term repurchase agreements) which are not reflected in the following tables.
 
     
Nine months 
ended 
30 September 
2012 
Year ended 
31 December 
2011 
Quarter ended
30 September 
2012 
30 June 
2012 
31 March 
2012 
 
£m 
£m 
£m 
  
£m 
£m 
             
Public
            
  - unsecured
1,237 
- 
- 
  
1,237 
5,085 
  - secured
- 
- 
1,784 
  
1,784 
9,807 
Private
            
  - unsecured
1,631 
909 
1,676 
  
4,216 
12,414 
  - secured
- 
- 
- 
  
- 
500 
             
Gross issuance
2,868 
909 
3,460 
  
7,237 
27,806 
Buy backs (1)
(2,213)
(1,730)
(1,129)
  
(5,072)
(6,892)
             
Net issuance
655 
(821)
2,331 
  
2,165 
20,914 
 
Note:
 
(1)
Excludes liability management exercises.
 
 
Key point
 
·
During Q3 2012, the Group issued US$2 billion public fixed rate notes to help pre-fund future financing needs of the holding company.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Liquidity portfolio
The table below shows the composition of the Group's liquidity portfolio (at estimated liquidity value). All assets within the liquidity portfolio are unencumbered.
 
 
 
30 September 2012
  
30 June 2012
  
31 December 2011
 
Quarterly 
average 
Period 
 end 
  
Quarterly 
average 
Period 
end 
  
Quarterly 
average 
Period 
 end 
 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                 
Cash and balances at central banks
72,734 
72,563 
  
87,114 
71,890 
  
89,377 
69,932 
Central and local government bonds
                
 AAA rated governments and US agencies
21,612 
19,776 
  
20,163 
26,315 
  
30,421 
29,632 
 AA- to AA+ rated governments (1)
9,727 
7,393 
  
10,739 
14,449 
  
5,056 
14,102 
 governments rated below AA
549 
647 
  
609 
519 
  
1,011 
955 
 local government
1,523 
988 
  
2,546 
1,872 
  
4,517 
4,302 
 
33,411 
28,804 
  
34,057 
43,155 
  
41,005 
48,991 
Treasury bills
54 
750 
  
- 
- 
  
444 
- 
                 
 
106,199 
102,117 
  
121,171 
115,045 
  
130,826 
118,923 
                 
Other assets (2)
                
 AAA rated
10,365 
8,827 
  
22,505 
10,712 
  
25,083 
25,202 
 below AAA rated and other high quality assets
33,738 
35,667 
  
13,789 
30,244 
  
11,400 
11,205 
                 
 
44,103 
44,494 
  
36,294 
40,956 
  
36,483 
36,407 
                 
Total liquidity portfolio
150,302 
146,611 
  
157,465 
156,001 
  
167,309 
155,330 
 
Notes:
 
(1)
Includes US government guaranteed and US government sponsored agencies.
(2)
Includes assets eligible for discounting at central banks.
 
Key points
 
·
The liquidity portfolio decreased by £9.4 billion to £146.6 billion in the quarter and exceeded the short-term wholesale funding by 3 times (30 June 2012 - 2.5 times).
   
·
The proportion of the portfolio held in central and local government bonds decreased to circa 20% from circa 30% at 30 June 2012, following FSA consultation. Loans prepositioned with the central bank can also now be included within the liquidity buffer.
   
·
FLS related treasury bills of £750 million are included within the liquidity buffer.

 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Net stable funding ratio
The table below shows the composition of the Group's net stable funding ratio (NSFR), estimated by applying the Basel III guidance issued in December 2010. The Group's NSFR will also continue to be refined over time in line with regulatory developments and related interpretations. It may also be calculated on a basis that may differ from other financial institutions.
 
 
 
30 September 2012
  
30 June 2012
  
31 December 2011
    
   
ASF (1)
    
ASF (1)
    
ASF (1)
  
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
  
% 
                     
Equity
74 
74 
  
75 
75 
  
76 
76 
  
100 
Wholesale funding > 1 year
111 
111 
  
119 
119 
  
124 
124 
  
100 
Wholesale funding < 1 year
77 
- 
  
94 
- 
  
134 
- 
  
- 
Derivatives
462 
- 
  
481 
- 
  
524 
- 
  
- 
Repurchase agreements
143 
- 
  
128 
- 
  
129 
- 
  
- 
Deposits
                    
  - retail and SME - more stable
232 
209 
  
235 
212 
  
227 
204 
  
90 
  - retail and SME - less stable
32 
26 
  
29 
23 
  
31 
25 
  
80 
  - other
170 
85 
  
171 
86 
  
179 
89 
  
50 
Other (2)
76 
- 
  
83 
- 
  
83 
- 
  
- 
                     
Total liabilities and equity
1,377 
505 
  
1,415 
515 
  
1,507 
518 
    
                     
Cash
80 
- 
  
79 
- 
  
79 
- 
  
- 
Inter-bank lending
38 
- 
  
39 
- 
  
44 
- 
  
- 
Debt securities > 1 year
                    
  - governments AAA to AA-
71 
4 
  
70 
4 
  
77 
4 
  
5 
  - other eligible bonds
58 
12 
  
60 
12 
  
73 
15 
  
20 
  - other bonds
19 
19 
  
20 
20 
  
14 
14 
  
100 
Debt securities < 1 year
30 
- 
  
38 
- 
  
45 
- 
  
- 
Derivatives
468 
- 
  
486 
- 
  
530 
- 
  
- 
Reverse repurchase agreements
98 
- 
  
98 
- 
  
101 
- 
  
- 
Customer loans and advances > 1 year
                    
  - residential mortgages
148 
96 
  
146 
95 
  
145 
94 
  
65 
  - other
144 
144 
  
151 
151 
  
173 
173 
  
100 
Customer loans and advances < 1 year
                    
  - retail loans
18 
15 
  
18 
15 
  
19 
16 
  
85 
  - other
132 
66 
  
140 
70 
  
137 
69 
  
50 
Other (3)
73 
73 
  
70 
70 
  
70 
70 
  
100 
                     
Total assets
1,377 
429 
  
1,415 
437 
  
1,507 
455 
    
Undrawn commitments
221 
11 
  
228 
11 
  
240 
12 
  
5 
                     
Total assets and undrawn commitments
1,598 
440 
  
1,643 
448 
  
1,747 
467 
    
                     
Net stable funding ratio
115% 
      
115% 
    
111% 
    
 
Notes:
 
(1)
Available stable funding.
(2)
Deferred tax, insurance liabilities and other liabilities.
(3)
Prepayments, accrued income, deferred tax, settlement balances and other assets.
 
Key points
 
·
The NSFR remained unchanged at 115% at 30 September 2012 compared with the half year position, but improved by 400 basis points from the 2011 year end position.
   
·
In Q3 2012, reduced loan balances of £10 billion were largely offset by an £8 billion reduction in long-term funding.
 

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk
Credit risk is the risk of financial loss due to the failure of a customer to meet its obligation to settle outstanding amounts. The quantum and nature of credit risk assumed across the Group's different businesses vary considerably, while the overall credit risk outcome usually exhibits a high degree of correlation with the macroeconomic environment.
 
Financial assets
The table below analyses the Group's financial asset exposures, both gross and net of offset arrangements.
 
 
 
Gross 
exposure 
IFRS 
offset (1)
Balance 
sheet value 
Other 
offset (2)
Exposure 
post offset 
30 September 2012
£m 
£m 
£m 
£m 
£m 
           
Cash balances at central banks
80,122 
- 
80,122 
- 
80,122 
Reverse repos
159,885 
(61,950)
97,935 
(18,537)
79,398 
Lending
461,502 
- 
461,502 
(39,186)
422,316 
Debt securities
177,722 
- 
177,722 
- 
177,722 
Equity shares
15,527 
- 
15,527 
- 
15,527 
Derivatives
862,618 
(394,447)
468,171 
(434,406)
33,765 
Settlement balances
21,760 
(6,705)
15,055 
(2,539)
12,516 
Other financial assets
891 
- 
891 
- 
891 
           
Total excluding disposal groups
1,780,027 
(463,102)
1,316,925 
(494,668)
822,257 
           
Total including disposal groups
1,799,970 
(463,102)
1,336,868 
(494,668)
842,200 
Short positions
(32,562)
- 
(32,562)
- 
(32,562)
           
Net of short positions
1,767,408 
(463,102)
1,304,306 
(494,668)
809,638 
 
 
30 June 2012
          
           
Cash balances at central banks
78,647 
- 
78,647 
- 
78,647 
Reverse repos
144,465 
(46,564)
97,901 
(13,212)
84,689 
Lending
474,401 
- 
474,401 
(41,151)
433,250 
Debt securities
187,626 
- 
187,626 
- 
187,626 
Equity shares
13,091 
- 
13,091 
- 
13,091 
Derivatives
910,996 
(424,564)
486,432 
(445,980)
40,452 
Settlement balances
21,644 
(6,332)
15,312 
(3,090)
12,222 
Other financial assets
1,490 
- 
1,490 
- 
1,490 
           
Total excluding disposal groups
1,832,360 
(477,460)
1,354,900 
(503,433)
851,467 
           
Total including disposal groups
1,852,702 
(477,460)
1,375,242 
(503,433)
871,809 
Short positions
(38,376)
- 
(38,376)
- 
(38,376)
           
Net of short positions
1,814,326 
(477,460)
1,336,866 
(503,433)
833,433 
 
For the notes to this table refer to the following page.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets (continued)
 
 
 
Gross 
exposure 
IFRS 
offset (1)
Balance 
sheet value 
Other 
offset (2)
Exposure 
post offset 
31 December 2011
£m 
£m 
£m 
£m 
£m 
           
Cash balances at central banks
79,269 
- 
79,269 
- 
79,269 
Reverse repos
138,539 
(37,605)
100,934 
(15,246)
85,688 
Lending
497,982 
- 
497,982 
(41,129)
456,853 
Debt securities
209,080 
- 
209,080 
- 
209,080 
Equity shares
15,183 
- 
15,183 
- 
15,183 
Derivatives
1,074,109 
(544,491)
529,618 
(478,848)
50,770 
Settlement balances
9,130 
(1,359)
7,771 
(2,221)
5,550 
Other financial assets
1,309 
- 
1,309 
- 
1,309 
           
Total excluding disposal groups
2,024,601 
(583,455)
1,441,146 
(537,444)
903,702 
           
Total including disposal groups
2,045,134 
(583,455)
1,461,679 
(537,444)
924,235 
Short positions
(41,039)
- 
(41,039)
- 
(41,039)
           
Net of short positions
2,004,095 
(583,455)
1,420,640 
(537,444)
883,196 
 
Notes:
 
(1)
Relates to offset arrangements that comply with IFRS criteria and to transactions cleared through and novated to central clearing houses, primarily London Clearing House.
(2)
This reflects the amounts by which the Group's credit risk is reduced through arrangements such as master netting agreements and current account pooling. In addition, the Group holds collateral in respect of individual loans and advances. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group also obtains collateral in the form of securities relating to reverse repo and derivative transactions.
 
Key points
 
·
Financial asset exposures post offset arrangements, excluding disposal groups, decreased by £81 billion compared with 31 December 2011 (Q3 2012 - £29 billion) to £822 billion, reflecting the Group's focus on reducing its funded balance sheet, primarily in Non-Core and Markets.
·
Reductions in lending (year-to-date - £35 billion; Q3 2012 - £11 billion), debt securities (year-to-date - £31 billion; Q3 2012 - £10 billion), derivatives (year-to-date - £17 billion; Q3 2012 - £7 billion) and reverse repos (year-to-date - £6 billion; Q3 2012 - £5 billion) were partially offset by higher seasonal settlement balances (year-to-date - £7 billion).
·
Central and local government exposures decreased by £23 billion (Q3 2012 - £8 billion) principally in debt securities. This was driven by Markets continuing to de-risk and reduce its balance sheet, management of the Group Treasury liquidity portfolio as well as overall risk reductions in respect of eurozone exposures.
·
Exposures to financial institutions were £25 billion lower (Q3 2012 - £11 billion), across securities, loans and derivatives, also reflecting Markets balance sheet management.
·
Within lending:
 
○
UK Retail increased its lending to homeowners, principally in the first half of the year, including to first-time buyers, whilst unsecured lending balances fell.
 
○
UK Corporate reduced its Core commercial real estate lending by £2.4 billion (Q3 2012 - £0.6 billion), contributing to the decrease in Core property and construction exposure. The Core decrease was primarily offset by the transfer of £2 billion of social housing loans from Non-Core to Core in Q3 2012.
 
○
Non-Core continued to make significant progress on its balance sheet strategy and lending declined across the majority of sectors, principally property and construction, where commercial real estate lending decreased by £6.2 billion (Q3 2012 - £2.3 billion), reflecting repayments and sales.
 
 

 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets (continued)
 
Sector concentration
The table below analyses balance sheet financial assets by sector.
 
 
 
Reverse 
repos 
Lending
  
Securities
Derivatives 
Other 
Balance 
sheet value 
Other 
offset 
Exposure 
post offset 
Core 
Non-Core 
Total 
  
Debt 
Equity 
30 September 2012
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                         
Government (1)
417 
8,716 
1,452 
10,168 
  
107,686 
- 
6,188 
1,728 
126,187 
(5,946)
120,241 
Finance
- banks
34,026 
38,017 
447 
38,464 
  
11,304 
1,899 
356,371 
80,122 
522,186 
(367,864)
154,322 
 
- other
63,119 
41,031 
3,087 
44,118 
  
53,120 
2,640 
84,862 
13,896 
261,755 
(110,090)
151,665 
Personal
- mortgages
- 
140,332 
3,270 
143,602 
  
- 
- 
- 
- 
143,602 
(1)
143,601 
 
- unsecured
- 
30,265 
1,119 
31,384 
  
- 
- 
- 
53 
31,437 
(17)
31,420 
Property and construction
- 
45,283 
32,455 
77,738 
  
954 
614 
4,694 
- 
84,000 
(2,762)
81,238 
Manufacturing
318 
21,108 
2,580 
23,688 
  
919 
1,693 
2,230 
59 
28,907 
(2,965)
25,942 
Finance leases (2)
- 
8,808 
4,645 
13,453 
  
40 
2 
44 
2 
13,541 
- 
13,541 
Retail, wholesale and repairs
- 
20,346 
1,752 
22,098 
  
442 
1,654 
989 
- 
25,183 
(1,545)
23,638 
Transport and storage
- 
14,536 
3,970 
18,506 
  
495 
271 
3,822 
- 
23,094 
(516)
22,578 
Health, education and leisure
29 
12,917 
1,002 
13,919 
  
284 
479 
756 
- 
15,467 
(960)
14,507 
Hotels and restaurants
- 
6,541 
987 
7,528 
  
208 
46 
501 
4 
8,287 
(229)
8,058 
Utilities
- 
5,143 
1,563 
6,706 
  
1,353 
668 
3,128 
16 
11,871 
(1,020)
10,851 
Other
26 
26,767 
3,681 
30,448 
  
1,846 
5,698 
4,586 
188 
42,792 
(753)
42,039 
                         
Total gross of provisions
97,935 
419,810 
62,010 
481,820 
  
178,651 
15,664 
468,171 
96,068 
1,338,309 
(494,668)
843,641 
Provisions
- 
(9,203)
(11,115)
(20,318)
  
(929)
(137)
- 
- 
(21,384)
n/a 
(21,384)
                         
Total excluding disposal groups
97,935 
410,607 
50,895 
461,502 
  
177,722 
15,527 
468,171 
96,068 
1,316,925 
(494,668)
822,257 
Disposal groups
- 
18,509 
983 
19,492 
  
31 
5 
366 
49 
19,943 
- 
19,943 
                         
Total including disposal groups
97,935 
429,116 
51,878 
480,994 
  
177,753 
15,532 
468,537 
96,117 
1,336,868 
(494,668)
842,200 
 
For the notes to this table refer to the following page.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets (continued)
 
Sector concentration (continued)
 
 
 
Reverse 
repos 
Lending
  
Securities
Derivatives 
Other 
Balance 
sheet value 
Other 
offset 
Exposure 
post offset 
Core 
Non-Core 
Total 
  
Debt 
Equity 
31 December 2011
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                         
Government (1)
2,247 
8,359 
1,383 
9,742 
  
126,604 
- 
5,541 
641 
144,775 
(1,098)
143,677 
Finance
- banks
39,345 
43,374 
619 
43,993 
  
16,940 
2,219 
400,261 
79,269 
582,027 
(407,457)
174,570 
 
- other
58,478 
46,452 
3,229 
49,681 
  
60,453 
2,490 
97,825 
7,437 
276,364 
(119,717)
156,647 
Personal
- mortgages
- 
138,509 
5,102 
143,611 
  
- 
- 
- 
- 
143,611 
- 
143,611 
 
- unsecured
- 
31,067 
1,556 
32,623 
  
- 
- 
- 
52 
32,675 
(7)
32,668 
Property and construction
- 
45,485 
40,736 
86,221 
  
623 
228 
5,545 
1 
92,618 
(2,413)
90,205 
Manufacturing
254 
23,201 
4,931 
28,132 
  
664 
1,938 
3,786 
306 
35,080 
(2,214)
32,866 
Finance leases (2)
- 
8,440 
6,059 
14,499 
  
145 
2 
75 
- 
14,721 
(16)
14,705 
Retail, wholesale and repairs
- 
21,314 
2,339 
23,653 
  
645 
2,652 
1,134 
18 
28,102 
(1,671)
26,431 
Transport and storage
436 
16,454 
5,477 
21,931 
  
539 
74 
3,759 
- 
26,739 
(241)
26,498 
Health, education and leisure
- 
13,273 
1,419 
14,692 
  
310 
21 
885 
- 
15,908 
(973)
14,935 
Hotels and restaurants
- 
7,143 
1,161 
8,304 
  
116 
5 
671 
- 
9,096 
(184)
8,912 
Utilities
- 
6,543 
1,849 
8,392 
  
1,530 
554 
3,708 
30 
14,214 
(450)
13,764 
Other
174 
28,374 
4,017 
32,391 
  
2,899 
5,141 
6,428 
595 
47,628 
(1,003)
46,625 
                         
Total gross of provisions
100,934 
437,988 
79,877 
517,865 
  
211,468 
15,324 
529,618 
88,349 
1,463,558 
(537,444)
926,114 
Provisions
- 
(8,414)
(11,469)
(19,883)
  
(2,388)
(141)
- 
- 
(22,412)
n/a 
(22,412)
                         
Total excluding disposal groups
100,934 
429,574 
68,408 
497,982 
  
209,080 
15,183 
529,618 
88,349 
1,441,146 
(537,444)
903,702 
Disposal groups
- 
18,677 
815 
19,492 
  
- 
5 
439 
597 
20,533 
- 
20,533 
                         
Total including disposal groups
100,934 
448,251 
69,223 
517,474 
  
209,080 
15,188 
530,057 
88,946 
1,461,679 
(537,444)
924,235 
 
 
Notes:
 
(1)
Comprises central and local government.
(2)
Includes instalment credit.

 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets (continued)
 
Debt securities
The table below analyses debt securities by issuer and IFRS measurement classifications.
 
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
Of which 
ABS 
UK 
US 
Other 
30 September 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                 
Held-for-trading (HFT)
5,506 
19,039 
34,905 
2,460 
23,468 
2,169 
87,547 
21,363 
Designated as at fair value
1 
- 
127 
85 
709 
8 
930 
580 
Available-for-sale
11,453 
19,787 
16,858 
8,508 
24,963 
2,995 
84,564 
32,086 
Loans and receivables
10 
- 
- 
251 
3,980 
440 
4,681 
3,988 
                 
Long positions
16,970 
38,826 
51,890 
11,304 
53,120 
5,612 
177,722 
58,017 
                 
Of which US agencies
- 
6,187 
- 
- 
24,183 
- 
30,370 
28,820 
                 
Short positions
(HFT)
(830)
(11,233)
(15,156)
(1,590)
(1,591)
(1,032)
(31,432)
(86)
                 
Available-for-sale
                
Gross unrealised gains
1,232 
1,259 
1,084 
101 
719 
122 
4,517 
763 
Gross unrealised losses
- 
(1)
(38)
(702)
(1,295)
(16)
(2,052)
(1,989)
                 
31 December 2011
                
                 
Held-for-trading
9,004 
19,636 
36,928 
3,400 
23,160 
2,948 
95,076 
20,816 
Designated as at fair value
1 
- 
127 
53 
457 
9 
647 
558 
Available-for-sale
13,436 
20,848 
25,552 
13,175 
31,752 
2,535 
107,298 
40,735 
Loans and receivables
10 
- 
1 
312 
5,259 
477 
6,059 
5,200 
                 
Long positions
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
67,309 
                 
Of which US agencies
- 
4,896 
- 
- 
25,924 
- 
30,820 
28,558 
                 
Short positions
(HFT)
(3,098)
(10,661)
(19,136)
(2,556)
(2,854)
(754)
(39,059)
(352)
                 
Available-for-sale
                
Gross unrealised gains
1,428 
1,311 
1,180 
52 
913 
94 
4,978 
1,001 
Gross unrealised losses
- 
- 
(171)
(838)
(2,386)
(13)
(3,408)
(3,158)

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets: Debt securities (continued)
The table below analyses available-for-sale debt securities and related reserves, gross of tax.
 
 
 
30 September 2012
  
31 December 2011
 
UK 
US 
Other (1)
Total 
  
UK 
US 
Other (1)
Total 
 
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Central and local
  government
11,453 
19,787 
16,858 
48,098 
  
13,436 
20,848 
25,552 
59,836 
Banks
1,001 
417 
7,090 
8,508 
  
1,391 
376 
11,408 
13,175 
Other financial
  institutions
2,709 
11,906 
10,348 
24,963 
  
3,100 
17,453 
11,199 
31,752 
Corporate
1,207 
735 
1,053 
2,995 
  
1,105 
131 
1,299 
2,535 
                   
Total
16,370 
32,845 
35,349 
84,564 
  
19,032 
38,808 
49,458 
107,298 
                   
Of which ABS
3,533 
15,823 
12,730 
32,086 
  
3,659 
20,256 
16,820 
40,735 
                   
AFS reserves (gross)
886 
810 
(1,443)
253 
  
845 
486 
(1,815)
(484)
 
Note:
 
(1)
Includes eurozone countries as detailed in the Country risk section of this report.
 
Key points
 
·
Debt securities decreased by £31.4 billion or 15% during the nine months ended 30 September 2012, £22.7 billion in available-for-sale (AFS) across the Group and £7.5 billion of held-for-trading (HFT) positions within Markets reflecting a combination of de-risking strategies and active balance sheet management.
   
·
HFT: The £7.5 billion decrease comprised £6.1 billion of central and local government, £0.9 billion of banks and £0.8 billion of corporate, partially offset by an increase of £0.3 billion of other financial institutions. A decrease in UK government bonds of £3.5 billion reflected maturities and disposals in line with Markets balance sheet management strategy. A reduction in other government bonds principally French, Italian, Swiss and Japanese, was partially offset by moves to those issued by Denmark, Germany and the Netherlands.
   
·
AFS: decreased by £22.7 billion, comprising £11.7 billion of central and local government, £6.8 billion of other financial institutions and £4.7 billion of banks, partially offset by an increase of £0.5 billion of corporate bonds. UK Government bonds fell by £2.0 billion primarily due to disposals. Disposals from the Group Treasury liquidity portfolio resulted in lower government bonds, primarily German and French (£5.6 billion). Japanese government bonds fell by £2.0 billion reflecting reduced collateral requirements following a change in clearing status from direct (self-clearing) to agency in H1 2012. Bank bonds decreased by £4.7 billion of which £2.0 billion related to sales of Spanish covered bonds by Group Treasury and lower positions in Australian and German securities reflected the close out of positions and maturities, respectively.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Financial assets: Debt securities (continued)
The table below analyses debt securities by issuer and external ratings. Ratings are based on the lowest of Standard and Poor's, Moody's and Fitch.
 
 
 
Central and local government
Banks 
Other 
financial 
institutions 
Corporate 
Total 
 
Total 
% 
Of which 
ABS 
UK 
US 
Other 
30 September 2012
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                   
AAA
16,970 
43 
21,006 
2,493 
11,824 
171 
52,507 
30 
10,884 
AA to AA+
- 
38,760 
8,671 
1,330 
28,394 
658 
77,813 
44 
32,843 
A to AA-
- 
22 
16,069 
2,975 
3,266 
1,957 
24,289 
14 
3,136 
BBB- to A-
- 
- 
5,398 
3,833 
4,600 
1,450 
15,281 
8 
7,389 
Non-investment grade
- 
- 
742 
350 
3,301 
762 
5,155 
3 
2,858 
Unrated
- 
1 
4 
323 
1,735 
614 
2,677 
1 
907 
                   
 
16,970 
38,826 
51,890 
11,304 
53,120 
5,612 
177,722 
100 
58,017 
                   
31 December 2011
                  
                   
AAA
22,451 
45 
32,522 
5,155 
15,908 
452 
76,533 
37 
17,156 
AA to AA+
- 
40,435 
2,000 
2,497 
30,403 
639 
75,974 
36 
33,615 
A to AA-
- 
1 
24,966 
6,387 
4,979 
1,746 
38,079 
18 
6,331 
BBB- to A-
- 
- 
2,194 
2,287 
2,916 
1,446 
8,843 
4 
4,480 
Non-investment grade
- 
- 
924 
575 
5,042 
1,275 
7,816 
4 
4,492 
Unrated
- 
3 
2 
39 
1,380 
411 
1,835 
1 
1,235 
                   
 
22,451 
40,484 
62,608 
16,940 
60,628 
5,969 
209,080 
100 
67,309 
 
Key points
 
·
AAA rated debt securities decreased as France and Austria were downgraded to AA+ in the first half of the year and also reflected the Group's reduced holdings of UK government bonds. Additionally, certain Spanish covered bonds and the Dutch bond portfolio were downgraded during H1 2012.
   
·
The decrease in A to AA- debt securities related to further downgrades of Italy and Spain to BBB+ and BBB- respectively in H1 2012, along with a downgrade of selected bank ratings.
   
·
Non-investment grade and unrated debt securities accounted for 4% of the portfolio.


 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk (continued)
 
Problem debt management
The following tables analyse loans and advances to banks and customers (excluding reverse repos) and the related debt management measures and ratios by division.
 
Refer to pages 136 to 141 of the Group's 2011 Annual Report and Accounts for policies, methodologies and approaches to problem debt management.
 
 
       
Credit metrics
Year-to-date
  
 
Gross loans to
REIL 
Provisions 
REIL as a % 
of gross 
loans to 
customers 
Provisions 
as a % 
of REIL 
  
Impairment 
charge 
Amounts 
written-off 
  
Banks 
Customers 
  
30 September 2012
£m 
£m 
£m 
£m 
% 
% 
£m 
£m 
  
                   
UK Retail
862 
105,370 
4,074 
2,342 
3.9 
57 
436 
472 
  
UK Corporate
900 
96,603 
4,579 
1,921 
4.7 
42 
604 
389 
  
Wealth
1,810 
17,016 
243 
99 
1.4 
41 
30 
11 
  
International Banking
5,250 
47,378 
699 
644 
1.5 
92 
74 
220 
  
Ulster Bank
1,011 
32,179 
7,036 
3,564 
21.9 
51 
1,046 
44 
  
US Retail & Commercial
371 
50,701 
1,057 
327 
2.1 
31 
64 
298 
  
                   
Retail & Commercial
10,204 
349,247 
17,688 
8,897 
5.1 
50 
2,254 
1,434 
  
Markets
22,542 
29,523 
393 
306 
1.3 
78 
12 
23 
  
Direct Line Group and other
5,271 
3,023 
- 
- 
- 
- 
- 
- 
  
                   
Core
38,017 
381,793 
18,081 
9,203 
4.7 
51 
2,266 
1,457 
  
Non-Core
447 
61,563 
22,019 
11,115 
35.8 
50 
1,647 
1,388 
  
                   
Group
38,464 
443,356 
40,100 
20,318 
9.0 
51 
3,913 
2,845 
  
                   
Total including disposal groups
38,547 
463,544 
41,502 
21,097 
9.0 
51 
3,913 
2,845 
  
 
 
30 June 2012
                
                 
UK Retail
854 
105,559 
4,115 
2,376 
3.9 
58 
295 
299 
UK Corporate
884 
98,108 
3,938 
1,845 
4.0 
47 
357 
218 
Wealth
1,747 
16,985 
229 
99 
1.3 
43 
22 
3 
International Banking
5,219 
50,138 
682 
694 
1.4 
102 
62 
210 
Ulster Bank
2,286 
33,008 
6,234 
3,307 
18.9 
53 
717 
28 
US Retail & Commercial
232 
52,239 
1,022 
340 
2.0 
33 
43 
192 
                 
Retail & Commercial
11,222 
356,037 
16,220 
8,661 
4.6 
53 
1,496 
950 
Markets
23,614 
30,398 
345 
283 
1.1 
82 
19 
41 
Direct Line Group and other
4,316 
1,055 
- 
- 
- 
- 
- 
- 
                 
Core
39,152 
387,490 
16,565 
8,944 
4.3 
54 
1,515 
991 
Non-Core
403 
67,653 
23,088 
11,353 
34.1 
49 
1,215 
934 
                 
Group
39,555 
455,143 
39,653 
20,297 
8.7 
51 
2,730 
1,925 
                 
Total including disposal groups
39,643 
475,624 
41,106 
21,078 
8.6 
51 
2,730 
1,925 

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Problem debt management (continued)
 
 
       
Credit metrics
Year-to-date
  
 
Gross loans to
REIL 
Provisions 
REIL as a % 
of gross 
loans to 
customers 
Provisions 
as a % 
of REIL 
  
Impairment 
charge 
Amounts 
written-off 
  
Banks 
Customers 
  
31 December 2011
£m 
£m 
£m 
£m 
% 
% 
£m 
£m 
  
                   
UK Retail
628 
103,377 
4,087 
2,344 
4.0 
57 
788 
823 
  
UK Corporate
806 
98,563 
3,988 
1,623 
4.0 
41 
790 
658 
  
Wealth
2,422 
16,913 
211 
81 
1.2 
38 
25 
11 
  
International Banking
3,411 
57,728 
1,632 
851 
2.8 
52 
168 
125 
  
Ulster Bank
2,079 
34,052 
5,523 
2,749 
16.2 
50 
1,384 
124 
  
US Retail & Commercial
208 
51,562 
1,007 
455 
2.0 
45 
248 
373 
  
                   
Retail & Commercial
9,554 
362,195 
16,448 
8,103 
4.5 
49 
3,403 
2,114 
  
Markets
29,991 
31,490 
414 
311 
1.3 
75 
- 
23 
  
Direct Line Group and other
3,829 
929 
- 
- 
- 
- 
- 
- 
  
                   
Core
43,374 
394,614 
16,862 
8,414 
4.3 
50 
3,403 
2,137 
  
Non-Core
619 
79,258 
23,983 
11,469 
30.3 
48 
3,838 
2,390 
  
                   
Group
43,993 
473,872 
40,845 
19,883 
8.6 
49 
7,241 
4,527 
  
                   
Total including disposal groups
44,080 
494,068 
42,394 
20,674 
8.6 
49 
7,241 
4,527 
  
 
Key points
 
·
Total REIL including disposal groups decreased by £0.9 billion to £41.5 billion compared with 31 December 2011 as improvements in International Banking and Non-Core were partially offset by a number of corporate defaults in UK Corporate and the ongoing elevated levels of default in Ulster Bank. In Q3 2012, UK Corporate defaults resulted in a £0.6 billion increase in REIL. REIL represented 9.0% of gross loans to customers (30 June 2012 and 31 December 2011 - 8.6%).
   
·
Provision coverage increased to 51% at 30 September 2012 and 30 June 2012 from 49% at 31 December 2011 and Core coverage increased slightly to 51%, but decreased in Q3 2012 reflecting low provision cases in Ulster Bank.
   
·
Annualised impairment charge for the nine months to 30 September 2012 represented 1.13% of loans and advances to customers, compared with 1.47% for the year ended 31 December 2011, primarily reflecting a reduction in Non-Core impairments, particularly relating to exposures originating in Ulster Bank.
   
·
The challenging economic backdrop continued to be reflected in Ulster Bank credit metrics with Core REIL increasing by £1.5 billion since 31 December 2011 (Q3 2012 - £0.8 billion), primarily within the mortgage and commercial real estate portfolio, to £7.0 billion and is now 21.9% of gross loans to customers. Impairments continue to outpace write-offs.
   
·
Non-Core REIL decreased by £2.0 billion or 8% (Q3 2012 - £1.1 billion or 5%) reflecting a mixture of repayments and write-offs within UK Corporate, Markets and International Banking corporate portfolios.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Problem debt management (continued)
 
Key points (continued)
 
·
Exposure to commercial real estate lending has decreased by £8.8 billion or 12% during 2012 (Q3 2012 - £3.3 billion or 5%) in line with the Group's reduction strategy, while the REIL as a percentage of gross loans to customers has increased by 200 basis points from 31 December 2011 to 32.6%. Commercial real estate lending metrics were as follows:
 
 
 
Total
  
Non-Core (1)
 
30 September 
2012 
30 June 
2012 
31 December 
2011 
  
30 September 
2012 
30 June 
2012 
31 December 
2011 
               
Lending (gross)
£66.0bn 
£69.3bn 
£74.8bn 
  
£28.0bn 
£30.4bn 
£34.3bn 
Of which REIL
£21.5bn 
£21.7bn 
£22.9bn 
  
£17.1bn 
£18.1bn 
£18.8bn 
Provisions
£9.5bn 
£9.4bn 
£9.5bn 
  
£8.1bn 
£8.0bn 
£8.2bn 
REIL as a % of gross loans to
  customers
32.6% 
31.3% 
30.6% 
  
61.2% 
59.5% 
54.8% 
Provisions as a % of REIL
44% 
43% 
42% 
  
47% 
44% 
44% 
 
Note:
 
(1)
Excludes property related lending to customers in other sectors managed by Real Estate Finance.
 
Ulster Bank is a significant contributor to Non-Core commercial real estate lending. For further information refer to the section on Ulster Bank Group (Core and Non-Core).
 
Risk elements in lending (REIL)
REIL are stated without giving effect to any security held that could reduce the eventual loss should it occur or to any provisions marked. The table below details the movement in REIL excluding disposal groups.
 
 
Impaired loans
  
Other loans (1)
  
REIL
 
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
  
Core 
Non- 
Core 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
At 1 January 2012
15,306 
23,441 
38,747 
  
1,556 
542 
2,098 
  
16,862 
23,983 
40,845 
Currency translation and
  other adjustments
(193)
(681)
(874)
  
9 
(10)
(1)
  
(184)
(691)
(875)
Additions
5,296 
4,015 
9,311 
  
2,617 
390 
3,007 
  
7,913 
4,405 
12,318 
Transfers
232 
118 
350 
  
(289)
(67)
(356)
  
(57)
51 
(6)
Disposals and restructurings
(656)
(786)
(1,442)
  
(131)
(7)
(138)
  
(787)
(793)
(1,580)
Repayments
(2,351)
(3,070)
(5,421)
  
(1,858)
(478)
(2,336)
  
(4,209)
(3,548)
(7,757)
Amounts written-off
(1,457)
(1,388)
(2,845)
  
- 
- 
- 
  
(1,457)
(1,388)
(2,845)
                       
At 30 September 2012
16,177 
21,649 
37,826 
  
1,904 
370 
2,274 
  
18,081 
22,019 
40,100 
 
Note:
 
(1)
Accruing loans past due 90 days or more where an impairment event has taken place but no impairment provision has been recognised. This category is used for fully collateralised non-revolving credit facilities.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Problem debt management (continued)
 
Impairment provisions
The table below analyses impairment provisions in respect of loans and advances to banks and customers.
 
 
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 
                       
Individually assessed
2,910 
9,953 
12,863 
  
2,797 
10,071 
12,868 
  
2,674 
9,960 
12,634 
Collectively assessed
4,893 
648 
5,541 
  
4,785 
676 
5,461 
  
4,279 
861 
5,140 
Latent loss
1,284 
513 
1,797 
  
1,244 
605 
1,849 
  
1,339 
647 
1,986 
                       
Loans and advances to customers
9,087 
11,114 
20,201 
  
8,826 
11,352 
20,178 
  
8,292 
11,468 
19,760 
Loans and advances to banks
116 
1 
117 
  
118 
1 
119 
  
122 
1 
123 
                       
Total provisions
9,203 
11,115 
20,318 
  
8,944 
11,353 
20,297 
  
8,414 
11,469 
19,883 
                       
Provisions as a % of REIL
51% 
50% 
51% 
  
54% 
49% 
51% 
  
50% 
48% 
49% 
Customer provisions as a % of
  customer
loans (1)
2.5% 
18.0% 
4.5% 
  
2.4% 
16.7% 
4.4% 
  
2.2% 
14.4% 
4.2% 
 
Note:
 
(1)
Includes disposal groups and excludes reverse repos.
 
Key points
 
·
Within Core, individually assessed provisions increased by £236 million in the year-to-date (Q3 2012 - £113 million), driven by UK Corporate and Ulster Bank corporate portfolios where individual impairment charges continue to outpace the level of write-offs. This has been partially offset by lower individual provisions within International Banking mainly as a result of a material write-off on a single counterparty in H1 2012.
   
·
The increase in the year-to-date Core collectively assessed provisions reflects further impairment charges taken within Ulster Bank's mortgage portfolio, due to elevated levels of non-performing assets and increasing mortgage loss rate.

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk (continued)
 
Ulster Bank Group (Core and Non-Core)
 
Overview
At 30 September 2012, Ulster Bank Group accounted for 10.1% (30 June 2012 and 31 December 2011 - 10.1%) of the Group's total gross loans to customers and 8.4% (30 June 2012 - 8.5%; 31 December 2011 - 8.6%) of the Group's Core gross loans to customers. The impairment charge for the first nine months of 2012 was £1,659 million (Q3 2012 - £493 million), mainly driven by the residential mortgage and commercial real estate portfolios. Increased unemployment, austerity measures and economic uncertainty have in general affected both residential and commercial mortgage affordability and reduced real estate lease rentals, which, together with limited liquidity, have depressed asset values and reduced consumer spending with a consequent downward impact on mortgage, property and SME lending. The impairment charge for the first nine months of 2011 was significantly higher at £3,148 million (Q3 2011 - £608 million), reflecting substantial deterioration in development land values during the first half of 2011.
 
Core
The impairment charge for the first nine months of 2012 was £1,046 million (Q3 2012 - £329 million), with the mortgage sector accounting for £511 million, 49% (Q3 2012 - £155 million, 47%). The impairment charge for the corresponding period in 2011 was £1,057 million (Q3 2011 - £327 million), with the mortgage sector accounting for £437 million, 41% (Q3 2011 - £126 million, 39%).
 
Non-Core
The impairment charge for the first nine months of 2012 was £613 million (Q3 2012 - £164 million). The commercial real estate sector accounted for £552 million, 90% (Q3 2012 - £154 million, 94%), within which the development segment accounted for £355 million, 64% (Q3 2012 - £93 million, 60%).
 
The impairment charge for the corresponding period in 2011 was £2,091 million (Q3 2011 - £281 million). The commercial real estate sector accounted for £1,933 million, 92% (Q3 2011 - £236 million, 84%), within which the development segment accounted for £1,475 million, 76% (Q3 2011 - £162 million, 69%).

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
 
       
Credit metrics
    
 
Gross 
loans 
REIL 
Provisions 
REIL as a 
% of gross 
loans to 
customers 
Provisions 
as a % of 
REIL 
Provisions 
as a % of 
gross loans 
  
Year-to-date
Impairment 
charge 
Amounts 
written-off 
Sector analysis
£m 
£m 
£m 
% 
% 
% 
  
£m 
£m 
                   
30 September 2012
                  
Core
                  
Mortgages
18,861 
2,887 
1,377 
15.3 
48 
7.3 
  
511 
9 
Commercial real estate
                  
  - investment
3,627 
1,493 
543 
41.2 
36 
15.0 
  
169 
- 
  - development
739 
345 
173 
46.7 
50 
23.4 
  
38 
2 
Other corporate
7,624 
2,109 
1,282 
27.7 
61 
16.8 
  
292 
8 
Other lending
1,328 
202 
189 
15.2 
94 
14.2 
  
36 
25 
                   
 
32,179 
7,036 
3,564 
21.9 
51 
11.1 
  
1,046 
44 
                   
Non-Core
                  
Commercial real estate
                  
  - investment
3,490 
2,804 
1,374 
80.3 
49 
39.4 
  
197 
3 
  - development 
7,581 
7,168 
4,416 
94.6 
62 
58.3 
  
355 
73 
Other corporate
1,591 
1,214 
696 
76.3 
57 
43.7 
  
61 
7 
                   
 
12,662 
11,186 
6,486 
88.3 
58 
51.2 
  
613 
83 
                   
Ulster Bank Group
                  
Mortgages
18,861 
2,887 
1,377 
15.3 
48 
7.3 
  
511 
9 
Commercial real estate
                  
  - investment
7,117 
4,297 
1,917 
60.4 
45 
26.9 
  
366 
3 
  - development
8,320 
7,513 
4,589 
90.3 
61 
55.2 
  
393 
75 
Other corporate
9,215 
3,323 
1,978 
36.1 
60 
21.5 
  
353 
15 
Other lending
1,328 
202 
189 
15.2 
94 
14.2 
  
36 
25 
                   
 
44,841 
18,222 
10,050 
40.6 
55 
22.4 
  
1,659 
127 

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
 
       
Credit metrics
    
 
Gross 
loans 
REIL 
Provisions 
REIL as a 
% of gross 
loans to 
customers 
Provisions 
as a % of 
REIL 
Provisions 
as a % of 
gross loans 
  
Year-to-date
Impairment 
charge 
Amounts 
written-off 
Sector analysis
£m 
£m 
£m 
% 
% 
% 
  
£m 
£m 
                   
30 June 2012
                  
Core
                  
Mortgages
19,172 
2,561 
1,242 
13.4 
48 
6.5 
  
356 
11 
Commercial real estate
                  
  - investment
3,715 
1,117 
481 
30.1 
43 
12.9 
  
91 
- 
  - development
762 
335 
164 
44.0 
49 
21.5 
  
24 
- 
Other corporate
7,908 
2,010 
1,226 
25.4 
61 
15.5 
  
217 
2 
Other lending
1,451 
211 
194 
14.5 
92 
13.4 
  
29 
15 
                   
 
33,008 
6,234 
3,307 
18.9 
53 
10.0 
  
717 
28 
                   
Non-Core
                  
Commercial real estate
                  
  - investment
3,698 
2,929 
1,430 
79.2 
49 
38.7 
  
136 
3 
  - development 
7,683 
7,212 
4,374 
93.9 
61 
56.9 
  
262 
37 
Other corporate
1,619 
1,136 
656 
70.2 
58 
40.5 
  
51 
7 
                   
 
13,000 
11,277 
6,460 
86.7 
57 
49.7 
  
449 
47 
                   
Ulster Bank Group
                  
Mortgages
19,172 
2,561 
1,242 
13.4 
48 
6.5 
  
356 
11 
Commercial real estate
                  
  - investment
7,413 
4,046 
1,911 
54.6 
47 
25.8 
  
227 
3 
  - development
8,445 
7,547 
4,538 
89.4 
60 
53.7 
  
286 
37 
Other corporate
9,527 
3,146 
1,882 
33.0 
60 
19.8 
  
268 
9 
Other lending
1,451 
211 
194 
14.5 
92 
13.4 
  
29 
15 
                   
 
46,008 
17,511 
9,767 
38.1 
56 
21.2 
  
1,166 
75 
                       

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
 
       
Credit metrics
    
 
Gross 
loans 
REIL 
Provisions 
REIL as a 
% of gross 
loans to 
customers 
Provisions 
as a % of 
REIL 
Provisions 
as a % of 
gross loans 
  
Full year
Impairment 
charge 
Amounts 
written-off 
Sector analysis
£m 
£m 
£m 
% 
% 
% 
  
£m 
£m 
                   
31 December 2011
                  
Core
                  
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
  
570 
11 
Commercial real estate
                  
  - investment
3,882 
1,014 
413 
26.1 
41 
10.6 
  
225 
- 
  - development
881 
290 
145 
32.9 
50 
16.5 
  
99 
16 
Other corporate
7,736 
1,834 
1,062 
23.7 
58 
13.7 
  
434 
72 
Other lending
1,533 
201 
184 
13.1 
92 
12.0 
  
56 
25 
                   
 
34,052 
5,523 
2,749 
16.2 
50 
8.1 
  
1,384 
124 
                   
Non-Core
                  
Commercial real estate
                  
  - investment
3,860 
2,916 
1,364 
75.5 
47 
35.3 
  
609 
1 
  - development
8,490 
7,536 
4,295 
88.8 
57 
50.6 
  
1,551 
32 
Other corporate
1,630 
1,159 
642 
71.1 
55 
39.4 
  
173 
16 
                   
 
13,980 
11,611 
6,301 
83.1 
54 
45.1 
  
2,333 
49 
                   
Ulster Bank Group
                  
Mortgages
20,020 
2,184 
945 
10.9 
43 
4.7 
  
570 
11 
Commercial real estate
                  
  - investment
7,742 
3,930 
1,777 
50.8 
45 
23.0 
  
834 
1 
  - development
9,371 
7,826 
4,440 
83.5 
57 
47.4 
  
1,650 
48 
Other corporate
9,366 
2,993 
1,704 
32.0 
57 
18.2 
  
607 
88 
Other lending
1,533 
201 
184 
13.1 
92 
12.0 
  
56 
25 
                   
 
48,032 
17,134 
9,050 
35.7 
53 
18.8 
  
3,717 
173 

 
 
Risk and balance sheet management (continued)
 
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Key points
 
·
Core REIL increased by £1,513 million or 27% to £7,036 million year-to-date at 30 September 2012 (Q3 2012 - £802 million or 13%) of which mortgages accounted for £703 million (Q3 2012 - £326 million) as a result of an increase in arrears.
   
·
Core mortgage REIL as a percentage of gross mortgages was 15.3% at 30 September 2012 compared with 13.4% at 30 June 2012 and 10.9% at 31 December 2011, the trend reflecting continuing deterioration of macroeconomic factors. The number of properties repossessed in the first nine months of 2012 was 102 (Q3 2012 - 17), compared with 134 in the same period in 2011 (Q3 2011 - 36).
   
·
Year-to-date, commercial real estate accounted for £534 million or 35% of the increase in total Core REIL (Q3 2012 - £386 million, 48%). The movement in the quarter was driven by a small number of restructuring arrangements for higher value real estate customers.
   
·
The provision coverage ratio for total Core corporate portfolio increased during H1 2012 (from 51.6% at 31 December 2011 to 54.0%), reflecting additional impairment charges on the defaulted book due to further deterioration in collateral values. It then decreased to 50.6% in Q3 2012, mainly driven by three material newly defaulted customers with lower provision requirements (accounting for £294 million or 60% of the Q3 2012 increase in Core corporate REIL).
   
·
At 30 September 2012 £2.1 billion (30 June 2012 - £1.9 billion; 31 December 2011 - £1.8 billion) of the mortgage book was on a forbearance arrangement.
   
·
Non-Core REIL decreased by £425 million or 4% year-to-date to £11,186 million at 30 September 2012, reflecting lower defaults as well as recoveries and write-offs. At 30 September 2012, 61% (30 June 2012 - 64%; 31 December 2011 - 68%) of REIL was in Non-Core, of which the commercial real estate development portfolio accounted for 64%, broadly unchanged from the positions at 30 June 2012 and 31 December 2011.

 
 
Risk and balance sheet management (continued)
Risk management: Credit risk: Ulster Bank Group (Core and Non-Core) (continued)
 
Commercial real estate
The commercial real estate lending portfolio for Ulster Bank (Core and Non-Core) totalled £15.4 billion at 30 September 2012, of which £11.1 billion or 72% was in Non-Core. The geographic split of the total Ulster Bank Group commercial real estate portfolio remained similar to 31 December 2011, with 62.2% in the Republic of Ireland, 26.4% in Northern Ireland, 11.3% in the UK (excluding Northern Ireland) and 0.1% in Western Europe.
 
 
Investment
  
Development
    
 
Commercial 
Residential 
  
Commercial 
Residential 
  
Total 
Exposure by geography
£m 
£m 
  
£m 
£m 
  
£m 
               
30 September 2012
              
Ireland (ROI and NI)
4,717 
1,015 
  
2,272 
5,666 
  
13,670 
UK (excluding NI)
1,280 
91 
  
81 
287 
  
1,739 
RoW
13 
1 
  
5 
9 
  
28 
               
 
6,010 
1,107 
  
2,358 
5,962 
  
15,437 
               
30 June 2012
              
               
Ireland (ROI and NI)
4,939 
1,077 
  
2,315 
5,719 
  
14,050 
UK (excluding NI)
1,287 
96 
  
91 
304 
  
1,778 
RoW
14 
- 
  
5 
11 
  
30 
               
 
6,240 
1,173 
  
2,411 
6,034 
  
15,858 
               
31 December 2011
              
               
Ireland (ROI and NI)
5,097 
1,132 
  
2,591 
6,317 
  
15,137 
UK (excluding NI)
1,371 
111 
  
95 
336 
  
1,913 
RoW
27 
4 
  
- 
32 
  
63 
               
 
6,495 
1,247 
  
2,686 
6,685 
  
17,113 
 
Key points
 
·
Commercial real estate remains the primary sector contributing to the Ulster Bank Group defaulted loan book. A further modest reduction in exposure to the sector was seen during the quarter, partly reflecting foreign exchange rate movements and continuing the Group's strategy to reduce concentration risk.
   
·
The outlook for the property sector remains challenging. While there may be some signs of stabilisation in main urban centres, the outlook continues to be negative for secondary locations on the island of Ireland.
   
·
A small number of additional larger exposures defaulted and were subject to restructuring during the third quarter. In particular, three customers with low provision coverage accounted for £294 million (60%) of the increase in Core corporate REIL in the third quarter.
   
·
During the third quarter, Ulster Bank experienced further migration of commercial real estate exposures to its problem management framework, where various measures may be agreed to assist customers whose loans are performing but who are experiencing temporary financial difficulties. During the first nine months of 2012, performing loans of £55 million (each having exposures greater than £10 million) benefited from such measures.
   
·
During the first nine months of 2012, impaired loans of £628 million with provisions of £181 million (for exposures greater than £10 million) were restructured and remained in the non-performing book at 30 September 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