rbs201108056k5.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

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

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

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


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


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

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

 
 
Risk and balance sheet management
 
Except as otherwise indicated by an asterisk (*), the information in the Risk and balance sheet management section on pages 118 to 171 has been reviewed by the Group's external auditor.
 
Key terms and acronyms used in this section are defined in the glossary of terms.
 
Balance sheet management
 
Capital
The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements as capital adequacy and risk management are closely aligned. The Group's risk asset ratios calculated in accordance with Financial Services Authority (FSA) definitions are set out below.
 
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
Risk-weighted assets (RWAs)*
£bn 
£bn 
£bn 
       
Credit risk
366.1 
367.9 
385.9 
Counterparty risk
66.1 
62.8 
68.1 
Market risk
58.6 
69.5 
80.0 
Operational risk
37.9 
37.9 
37.1 
       
 
528.7 
538.1 
571.1 
Benefit of Asset Protection Scheme
(95.2)
(98.4)
(105.6)
       
 
433.5 
439.7 
465.5 
 
Risk asset ratio*
% 
% 
% 
       
Core Tier 1
11.1 
11.2 
10.7 
Tier 1
13.5 
13.5 
12.9 
Total
14.4 
14.5 
14.0 
 
Key points*
·
Credit and counterparty risk RWAs increased by £1.5 billion in Q2 2011 principally driven by a change in risk parameters and business movements.
   
·
Market risk RWAs decreased by £10.9 billion in Q2 2011 reflecting de-risking of the Non-Core portfolio and a reduction in trading VaR in both GBM and Non-Core.
   
·
The APS benefit decreased by £3.2 billion, reflecting asset reductions, partially offset by adverse changes in risk parameters principally related to Ireland.
   
·
The Core Tier 1 ratio remained strong at 11.1%.
 
 
 
 
* not reviewed


 
Risk and balance sheet management (continued)
Balance sheet management: Capital(continued)
 
The Group's capital resources in accordance with FSA definitions were as follows:
 
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
Composition of regulatory capital
£m 
£m 
£m 
       
Tier 1
      
Ordinary and B shareholders' equity
70,000 
69,332 
70,388 
Non-controlling interests
1,498 
1,710 
1,719 
Adjustments for:
      
  - goodwill and other intangible assets - continuing businesses
(14,592)
(14,409)
(14,448)
  - unrealised losses on available-for-sale (AFS) debt securities
1,103 
2,125 
2,061 
  - reserves arising on revaluation of property and unrealised gains on
    AFS equities
(76)
(62)
(25)
  - reallocation of preference shares and innovative securities
(548)
(548)
(548)
  - other regulatory adjustments*
(1,014)
(379)
(1,097)
Less excess of expected losses over provisions net of tax
(2,156)
(2,385)
(1,900)
Less securitisation positions
(2,404)
(2,410)
(2,321)
Less APS first loss
(3,810)
(3,936)
(4,225)
       
Core Tier 1 capital
48,001 
49,038 
49,604 
Preference shares
5,372 
5,380 
5,410 
Innovative Tier 1 securities
4,564 
4,561 
4,662 
Tax on the excess of expected losses over provisions
777 
860 
758 
Less material holdings
(327)
(291)
(310)
       
Total Tier 1 capital
58,387 
59,548 
60,124 
       
Tier 2
      
Reserves arising on revaluation of property and unrealised gains on AFS
  equities
76 
62 
25 
Collective impairment provisions
715 
750 
778 
Perpetual subordinated debt
1,858 
1,845 
1,852 
Term subordinated debt
15,697 
16,334 
16,745 
Non-controlling and other interests in Tier 2 capital
11 
11 
11 
Less excess of expected losses over provisions
(2,933)
(3,245)
(2,658)
Less securitisation positions
(2,404)
(2,410)
(2,321)
Less material holdings
(327)
(291)
(310)
Less APS first loss
(3,810)
(3,936)
(4,225)
       
Total Tier 2 capital
8,883 
9,120 
9,897 
       
Supervisory deductions
      
Unconsolidated investments
      
  - RBS Insurance
(4,176)
(3,988)
(3,962)
  - other investments
(354)
(330)
(318)
Other deductions
(419)
(422)
(452)
       
Deductions from total capital
(4,949)
(4,740)
(4,732)
       
Total regulatory capital
62,321 
63,928 
65,289 
       
* Includes reduction for own liabilities carried at fair value
(1,112)
(863)
(1,182)
 


 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital(continued)
 
Movement in Core Tier 1 capital
£m 
   
At 1 January 2011
49,604 
Attributable loss net of movement in fair value of own debt
(209)
Foreign currency reserves
(384)
Increase in capital deductions including APS first loss
(285)
Other movements
312 
   
At 31 March 2011
49,038 
Attributable loss net of movement in fair value of own debt
(1,146)
Foreign currency reserves
80 
Decrease in non-controlling interests
(212)
Decrease in capital deductions including APS first loss
361 
Other movements
(120)
   
At 30 June 2011
48,001 
 


 
Risk and balance sheet management (continued)
 
 
Balance sheet management: Capital: 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 
APS 
relief 
Net 
RWAs 
30 June 2011
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
UK Retail
42.2 
- 
- 
7.3 
49.5 
(10.7)
38.8 
UK Corporate
71.2 
- 
- 
6.7 
77.9 
(19.3)
58.6 
Wealth
10.9 
- 
0.1 
1.9 
12.9 
- 
12.9 
Global Transaction Services
13.9 
- 
- 
4.9 
18.8 
- 
18.8 
Ulster Bank
33.9 
0.5 
0.1 
1.8 
36.3 
(7.6)
28.7 
US Retail & Commercial
49.6 
0.8 
- 
4.4 
54.8 
- 
54.8 
               
Retail & Commercial
221.7 
1.3 
0.2 
27.0 
250.2 
(37.6)
212.6 
Global Banking & Markets
51.2 
31.4 
40.9 
15.5 
139.0 
(10.3)
128.7 
Other
10.7 
0.4 
- 
0.7 
11.8 
- 
11.8 
               
Core
283.6 
33.1 
41.1 
43.2 
401.0 
(47.9)
353.1 
Non-Core
79.7 
33.0 
17.5 
(5.5)
124.7 
(47.3)
77.4 
               
Group before RFS MI
363.3 
66.1 
58.6 
37.7 
525.7 
(95.2)
430.5 
RFS MI
2.8 
- 
- 
0.2 
3.0 
- 
3.0 
               
Group
366.1 
66.1 
58.6 
37.9 
528.7 
(95.2)
433.5 
               
31 March 2011
              
               
UK Retail
43.0 
- 
- 
7.3 
50.3 
(11.4)
38.9 
UK Corporate
72.6 
- 
- 
6.7 
79.3 
(21.5)
57.8 
Wealth
10.6 
- 
0.1 
1.9 
12.6 
- 
12.6 
Global Transaction Services
13.3 
- 
- 
4.9 
18.2 
- 
18.2 
Ulster Bank
29.4 
0.4 
0.1 
1.8 
31.7 
(7.4)
24.3 
US Retail & Commercial
48.4 
0.8 
- 
4.4 
53.6 
- 
53.6 
               
Retail & Commercial
217.3 
1.2 
0.2 
27.0 
245.7 
(40.3)
205.4 
Global Banking & Markets
51.0 
32.0 
48.0 
15.5 
146.5 
(11.1)
135.4 
Other
13.3 
0.5 
- 
0.7 
14.5 
- 
14.5 
               
Core
281.6 
33.7 
48.2 
43.2 
406.7 
(51.4)
355.3 
Non-Core
83.6 
29.1 
21.3 
(5.5)
128.5 
(47.0)
81.5 
               
Group before RFS MI
365.2 
62.8 
69.5 
37.7 
535.2 
(98.4)
436.8 
RFS MI
2.7 
- 
- 
0.2 
2.9 
- 
2.9 
               
Group
367.9 
62.8 
69.5 
37.9 
538.1 
(98.4)
439.7 
 
31 December 2010
              
               
UK Retail
41.7 
- 
- 
7.1 
48.8 
(12.4)
36.4 
UK Corporate
74.8 
- 
- 
6.6 
81.4 
(22.9)
58.5 
Wealth
10.4 
- 
0.1 
2.0 
12.5 
- 
12.5 
Global Transaction Services
13.7 
- 
- 
4.6 
18.3 
- 
18.3 
Ulster Bank
29.2 
0.5 
0.1 
1.8 
31.6 
(7.9)
23.7 
US Retail & Commercial
52.0 
0.9 
- 
4.1 
57.0 
- 
57.0 
               
Retail & Commercial
221.8 
1.4 
0.2 
26.2 
249.6 
(43.2)
206.4 
Global Banking & Markets
53.5 
34.5 
44.7 
14.2 
146.9 
(11.5)
135.4 
Other
16.4 
0.4 
0.2 
1.0 
18.0 
- 
18.0 
               
Core
291.7 
36.3 
45.1 
41.4 
414.5 
(54.7)
359.8 
Non-Core
91.3 
31.8 
34.9 
(4.3)
153.7 
(50.9)
102.8 
               
Group before RFS MI
383.0 
68.1 
80.0 
37.1 
568.2 
(105.6)
462.6 
RFS MI
2.9 
- 
- 
- 
2.9 
- 
2.9 
               
Group
385.9 
68.1 
80.0 
37.1 
571.1 
 (105.6)
465.5 
 
* not reviewed
 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital(continued)
 
Basel 2.5 and Basel III impacts*
The Basel Committee on Banking Supervision completed its review of and finalised the Basel III capital requirements for credit valuation adjustments (CVAs) with respect to counterparty risk in June 2011.  The review resulted in minor modifications to the text published in December 2010.  Indicative impacts of the major Basel 2.5 and Basel III proposals on the Group's RWAs and Core Tier 1 ratio were disclosed in our 2010 Annual Report and Accounts and these remain unchanged.  The Group continues to make progress on the mitigation actions and develop further opportunities to optimise the outcome. 
 
On 20 July 2011, the European Commission published a preliminary version of the Capital Requirements Directive (CRD) IV to implement the Basel III agreement within the EU.  The Group is assessing the impact of CRD IV on RWAs, capital and liquidity.
 
 
 
Funding and liquidity risk
The Group's balance sheet composition is a function of the broad array of product offerings and diverse markets served by its Core divisions. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise liquidity transformation in normal business environments while ensuring adequate coverage of all cash requirements under extreme stress conditions.
 
Diversification of the Group's funding base is central to its liquidity management strategy. The Group's businesses have developed large customer franchises based on strong relationship management and high quality service. These customer franchises are strongest in the UK, US and Ireland but extend into Europe and Asia. Customer deposits provide large pools of stable funding to support the majority of the Group's lending. It is a strategic objective to improve the Group's loan to deposit ratio to 100%, or better, by 2013.
 
The Group also accesses professional markets funding by way of public and private debt issuances on an unsecured and secured basis. These debt issuance programmes are spread across multiple currencies and maturities to appeal to a broad range of investor types and preferences around the world. This market based funding supplements the Group's structural liquidity needs and in some cases achieves certain capital objectives.
 
 
 
 
 
 
 
* not reviewed


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk: funding sources (continued)
 
Funding sources
The table below shows the Group's primary funding sources, excluding repurchase agreements.
 
 
30 June 2011
  
31 March 2011
  
31 December 2010
 
£m 
% 
  
£m 
% 
  
£m 
% 
                 
Deposits by banks
                
  - central banks
8,156 
1.1 
  
10,679 
1.5 
  
11,612 
1.6 
  - cash collateral
25,524 
3.5 
  
23,594 
3.2 
  
28,074 
3.8 
  - other
37,893 
5.1 
  
29,556 
4.0 
  
26,365 
3.6 
                 
 
71,573 
9.7 
  
63,829 
8.7 
  
66,051 
9.0 
                 
Debt securities in issue
                
  - commercial paper
22,369 
3.0 
  
24,216 
3.3 
  
26,235 
3.5 
  - certificates of deposits
35,305 
4.8 
  
35,967 
4.9 
  
37,855 
5.1 
  - medium-term notes (MTNs)
132,371 
17.9 
  
130,230 
17.7 
  
131,026 
17.7 
  - covered bonds
6,972 
0.9 
  
6,850 
0.9 
  
4,100 
0.6 
  - securitisations
16,780 
2.3 
  
18,705 
2.6 
  
19,156 
2.6 
                 
 
213,797 
28.9 
  
215,968 
29.4 
  
218,372 
29.5 
Subordinated liabilities
26,311 
3.5 
  
26,515 
3.6 
  
27,053 
3.6 
                 
Debt securities in issue and subordinated
  liabilities
240,108 
32.4 
  
242,483 
33.0 
  
245,425 
33.1 
                 
Wholesale funding
311,681 
42.1 
  
306,312 
41.7 
  
311,476 
42.1 
                 
Customer deposits
                
  - cash collateral
11,166 
1.5 
  
8,673 
1.2 
  
10,433 
1.4 
  - other
417,537 
56.4 
  
419,801 
57.1 
  
418,166 
56.5 
                 
Total customer deposits
428,703 
57.9 
  
428,474 
58.3 
  
428,599 
57.9 
                 
Total funding
740,384 
100.0 
  
734,786 
100.0 
  
740,075 
100.0 
 
 
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
 
£bn 
£bn 
£bn 
       
Short-term wholesale funding
173.5 
166.3 
157.5 
Of which - bank deposits
67.0 
60.3 
62.5 
                  - other
106.5 
106.0 
95.0 
       
Short-term wholesale funding excluding derivative collateral
148.0 
142.7 
129.4 
Of which - bank deposits
41.5 
36.7 
34.4 
                 - other
106.5 
106.0 
95.0 
 


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk: funding sources (continued)
 
Key points
·
Customer deposits remained stable in absolute terms at £428.7 billion and as a proportion of total funding at 58%.
   
·
The proportion of funding from customer deposits, excluding cash collateral, remained broadly stable at 56.4% at 30 June 2011 compared with 31 December 2010 and reduced slightly from 57.1% at 31 March 2011 reflecting a net £5.4 billion increase in wholesale funding in Q2 2011.
   
·
Short-term wholesale funding excluding derivative collateral and bank deposits increased from £95.0 billion at 31 December 2010 to £106.0 billion at 31 March 2011 and increased marginally to £106.5 billion at 30 June 2011. The £11.0 billion increase in the first quarter of 2011 was primarily due to the inclusion of MTNs issued under the Credit Guarantee Scheme (CGS) maturing through to Q2 2012.
   
·
Short-term wholesale funding excluding derivative collateral increased from £129.4 billion at 31 December 2010 to £142.7 billion at 31 March 2011 and £148.0 billion at 30 June 2011, due primarily to the inclusion of CGS MTNs as discussed above.
 
The table below shows the Group's debt securities in issue and subordinated liabilities by remaining maturity.
 
Debt securities in issue
      
 
CP and CDs 
MTNs 
Covered 
bonds 
Securitisations 
Total 
Subordinated 
liabilities 
Total 
  
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
% 
                 
30 June 2011
                
Less than 1 year
56,868 
49,174 
- 
43 
106,085 
399 
106,484 
44.3 
1-3 years
788 
33,366 
1,114 
18 
35,286 
1,962 
37,248 
15.6 
3-5 years
13 
19,028 
3,154 
33 
22,228 
8,316 
30,544 
12.7 
More than 5 years
5 
30,803 
2,704 
16,686 
50,198 
15,634 
65,832 
27.4 
                 
 
57,674 
132,371 
6,972 
16,780 
213,797 
26,311 
240,108 
100.0 
                 
31 March 2011
                
Less than 1 year
59,533 
45,530 
- 
105 
105,168 
826 
105,994 
43.7 
1-3 years
634 
34,046 
1,105 
16 
35,801 
2,247 
38,048 
15.7 
3-5 years
11 
22,242 
1,326 
34 
23,613 
7,217 
30,830 
12.7 
More than 5 years
5 
28,412 
4,419 
18,550 
51,386 
16,225 
67,611 
27.9 
                 
 
60,183 
130,230 
6,850 
18,705 
215,968 
26,515 
242,483 
100.0 
                 
31 December 2010
                
Less than 1 year
63,371 
30,589 
- 
88 
94,048 
964 
95,012 
38.7 
1-3 years
702 
47,357 
1,078 
12 
49,149 
754 
49,903 
20.3 
3-5 years
12 
21,466 
1,294 
34 
22,806 
8,476 
31,282 
12.8 
More than 5 years
5 
31,614 
1,728 
19,022 
52,369 
16,859 
69,228 
28.2 
                 
 
64,090 
131,026 
4,100 
19,156 
218,372 
27,053 
245,425 
100.0 
 


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk: funding sources (continued)
 
Long-term debt issuances
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 (predominately term repos) which are not reflected in the following tables.
 
   
Half year 
ended 
30 June 
2011 
  
Half year 
ended 
30 June 
2010 
 
Quarter ended
Quarter ended
 
30 June 
2011 
31 March 
2011 
30 June 
2010 
31 March 
2010 
 
£m 
£m 
£m 
£m 
£m 
£m 
             
Public
            
  - unsecured
1,808 
3,277 
5,085 
1,882 
3,976 
5,858 
  - secured
2,211 
2,652 
4,863 
1,030 
- 
1,030 
Private
            
  - unsecured
3,997 
4,251 
8,248 
2,370 
4,158 
6,528 
             
Gross issuance
8,016 
10,180 
18,196 
5,282 
8,134 
13,416 
 
The table below shows the original maturity of public long-term debt securities issued in the half years ended 30 June 2011 and 2010.
 
 
2-3 years 
3-4 years 
5-10 years 
> 10 years 
Total 
Half year ended 30 June 2011
£m 
£m 
£m 
£m 
£m 
           
MTNs
904 
1,407 
1,839 
935 
5,085 
Covered bonds
- 
- 
2,652 
- 
2,652 
Securitisations
- 
- 
- 
2,211 
2,211 
           
 
904 
1,407 
4,491 
3,146 
9,948 
           
% of total
9% 
14% 
45% 
32% 
100% 
           
Half year ended 30 June 2010
          
           
MTNs
- 
260 
3,828 
1,770 
5,858 
Covered bonds
- 
1,030 
- 
- 
1,030 
           
 
- 
1,290 
3,828 
1,770 
6,888 
           
% of total
- 
19% 
55% 
26% 
100% 
 


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk: funding sources (continued)
 
The table below shows the currency breakdown of public and private long-term debt securities issued in the half years ended 30 June 2011 and 2010.
 
 
GBP 
EUR 
USD 
AUD 
Other 
Total 
Half year ended 30 June 2011
£m 
£m 
£m 
£m 
£m 
£m 
             
Public
            
  - MTNs
- 
1,808 
2,181 
1,096 
- 
5,085 
  - covered bonds
- 
2,652 
- 
- 
- 
2,652 
  - securitisations
258 
1,293 
660 
- 
- 
2,211 
Private
1,203 
2,535 
2,344 
118 
2,048 
8,248 
             
 
1,461 
8,288 
5,185 
1,214 
2,048 
18,196 
             
% of total
8% 
46% 
28% 
7% 
11% 
100% 
             
Half year ended 30 June 2010
            
             
Public
            
  - MTNs
1,260 
2,923 
1,427 
- 
248 
5,858 
  - covered bonds
- 
1,030 
- 
- 
- 
1,030 
Private
448 
4,552 
846 
68 
614 
6,528 
             
 
1,708 
8,505 
2,273 
68 
862 
13,416 
             
% of total
13% 
63% 
17% 
1% 
6% 
100% 
 
Key points
·
Gross term issuances in Q2 2011 were £8.0 billion, including £2.2 billion of securitisations with original maturity of greater than 10 years.
   
·
The Group has continued to diversify its funding mix with 46% of issuance denominated in euros, 28% in US dollars and 26% in other currencies.
   
·
The Group had  completed £18 billion of its £23 billion 2011 issuance target by 30 June 2011.


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk (continued)
 
Liquidity portfolio
The table below shows the composition of the Group's liquidity portfolio.
 
 
30 June 
2011 
31 March 
2011 
31 December 
2010 
Liquidity portfolio
£m 
£m 
£m 
       
Cash and balances at central banks
59,010 
58,936 
53,661 
Treasury bills
8,600 
9,859 
14,529 
Central and local government bonds (1)
      
  - AAA rated governments and US agencies (2)
47,999 
40,199 
41,435 
  - AA- to AA+ rated governments
1,399 
1,408 
3,744 
  - governments rated below AA
836 
1,052 
1,029 
  - local government
4,881 
4,771 
5,672 
 
55,115 
47,430 
51,880 
Unencumbered collateral (3)
      
  - AAA rated
18,335 
21,328 
17,836 
  - below AAA rated and other high quality assets
13,493 
13,637 
16,693 
 
31,828 
34,965 
34,529 
       
Total liquidity portfolio
154,553 
151,190 
154,599 
 
Notes:
(1)
Includes FSA eligible government bonds of £34.5 billion at 30 June 2011 (31 March 2011 - £30.1 billion; 31 December 2010 - £34.7 billion).
(2)
Includes AAA rated US government guaranteed and US government sponsored agencies.
(3)
Includes secured assets eligible for discounting at central banks, comprising loans and advances and debt securities.
 
Key points
·
The Group's liquidity portfolio was £154.6 billion, an increase of £3.4 billion from 31 March 2011 and flat compared with the position at 31 December 2010. The Group increased its liquidity balances during the quarter given unsettled market conditions.
   
·
The strategic target of £150 billion is unchanged.
   
·
The liquidity portfolio is actively managed and as such its composition varies over time. Actions in H1 2011 to alter the maturity and currency mix resulted in a higher portfolio of cash and central bank balances compared with 31 December 2010.


 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk (continued)
 
Net stable funding*
The table below shows the Group's net stable funding ratio (NSFR) estimated by applying the Basel III guidance issued in December 2010. This measure seeks to show the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding and equity. The Group's NSFR will continue to be refined over time in line with regulatory developments.
 
30 June 2011
  
31 March 2011
  
31 December 2010
    
   
ASF (1)
    
ASF (1)
    
ASF (1)
  
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
  
% 
                     
Equity
76 
76 
  
76 
76 
  
76 
76 
  
100 
Wholesale funding > 1 year
138 
138 
  
138 
138 
  
154 
154 
  
100 
Wholesale funding < 1 year
174 
- 
  
168 
- 
  
157 
- 
  
- 
Derivatives
388 
- 
  
361 
- 
  
424 
- 
  
- 
Repurchase agreements
124 
- 
  
130 
- 
  
115 
- 
  
- 
Deposits
                    
  - Retail and SME - more stable
168 
151 
  
171 
154 
  
172 
155 
  
90 
  - Retail and SME - less stable
25 
20 
  
26 
21 
  
51 
41 
  
80 
  - Other
236 
118 
  
231 
116 
  
206 
103 
  
50 
Other (2)
117 
- 
  
112 
- 
  
98 
- 
  
- 
                     
Total liabilities and equity
1,446 
503 
  
1,413 
505 
  
1,453 
529 
    
                     
Cash
64 
- 
  
60 
- 
  
57 
- 
  
- 
Inter bank lending
53 
- 
  
59 
- 
  
58 
- 
  
- 
Debt securities > 1 year
                    
  - central and local governments AAA
    to AA-
87 
4 
  
83 
4 
  
89 
4 
  
5 
  - other eligible bonds
85 
17 
  
79 
16 
  
75 
15 
  
20 
  - other bonds
19 
19 
  
16 
16 
  
10 
10 
  
100 
Debt securities < 1 year
53 
- 
  
53 
- 
  
43 
- 
  
- 
Derivatives
395 
- 
  
361 
- 
  
427 
- 
  
- 
Reverse repurchase agreements
98 
- 
  
106 
- 
  
95 
- 
  
- 
Customer loans and advances > 1 year
                    
  - residential mortgages
145 
94 
  
143 
93 
  
145 
94 
  
65 
  - other
182 
182 
  
200 
200 
  
211 
211 
  
100 
Customer loans and advances < 1 year
                    
  - retail loans
20 
17 
  
19 
16 
  
22 
19 
  
85 
  - other
143 
72 
  
132 
66 
  
125 
63 
  
50 
Other (3)
102 
102 
  
102 
102 
  
96 
96 
  
100 
                     
Total assets
1,446 
507 
  
1,413 
513 
  
1,453 
512 
    
                     
Undrawn commitments
250 
13 
  
255 
13 
  
267 
13 
  
5 
                     
Total assets and undrawn commitments
1,696 
520 
  
1,668 
526 
  
1,720 
525 
    
                     
Net stable funding ratio
  
97%
    
96% 
    
101% 
    
 
Notes:
(1)
Available stable funding.
(2)
Deferred tax, insurance liabilities and other liabilities.
(3)
Prepayments, accrued income, deferred tax and other assets.
 
Key point*
·
The Group's net stable funding ratio declined in Q1 2010 due to the roll down of CGS MTNs into wholesale funding maturing in less than one year. The ratio stabilised in Q2 2011 and we anticipate that the ratio will continue to improve in H2 2011.
 
* not reviewed
 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk (continued)
 
Loan deposit ratio and funding gap
The table below shows quarterly trends in the loan to deposit ratio and customer funding gap. 
 
 
Loan to
deposit ratio (1)
  
Customer 
 funding gap (1)
 
Group 
Core 
  
Group 
 
% 
% 
  
£bn 
         
30 June 2011
114 
96 
  
61 
31 March 2011
115 
96 
  
66 
31 December 2010
117 
96 
  
74 
30 September 2010
126 
101 
  
107 
30 June 2010
128 
102 
  
118 
31 March 2010
131 
102 
  
131 
 
Note:
(1)
Excludes repurchase agreements and bancassurance deposits at 31 March 2010, and loans are net of provisions.
 
Key points
·
The Group's loan to deposit ratio improved by 300 basis points to 114% in the six months to 30 June 2011, including a 100 basis points improvement in the second quarter of 2011. The customer funding gap narrowed by £13 billion in the six months to 30 June 2011, including a £5 billion reduction in Q2 2011, primarily due to a reduction in Non-Core customer loans.
   
·
The loan to deposit ratio for the Group's Core business has remained stable at 96% since December 2010.
 
Sensitivity of net interest income*
The Group seeks to mitigate the effect of prospective interest rate movements which could reduce future net interest income through its management of market risk in the Group's businesses, whilst balancing the cost of such hedging activities on the current net revenue stream. Hedging activities also consider the impact on market value sensitivity under stress.
 
The table below shows the sensitivity of net interest income over the next twelve months to an immediate up and down 100 basis points change to all interest rates. In addition the table includes the impact of a gradual 400 basis point steepening and a gradual 300 basis point flattening of the yield curve at tenors greater than a year.
 
30 June 
2011 
£m 
   
+ 100bp shift in yield curves
319 
- 100bp shift in yield curves
(141)
Bear steepener
417 
Bull flattener
(309)
 
Key points*
·
The Group's interest rate exposure remains slightly asset sensitive driven in part by changes to underlying business assumptions as rates rise.
·
The reported sensitivity will vary over time due to a number of factors such as changing market conditions and strategic changes to the balance sheet mix and should not therefore be considered predictive of future performance.
* not reviewed
 
Risk and balance sheet management (continued)
 
Balance sheet management: Funding and liquidity risk (continued)
 
Structural foreign currency exposures
The Group does not maintain material non-trading open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding.
 
The table below shows the Group's structural foreign currency exposures.
 
 
Net assets 
 of overseas 
 operations 
RFS MI 
Net 
investments 
in foreign 
 operations 
Net 
 investment 
 hedges 
Structural 
 foreign 
 currency 
 exposures 
pre-economic 
hedges 
Economic 
 hedges (1) 
Residual 
structural 
foreign 
currency 
exposures 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
30 June 2011
              
US dollar
17,082 
2 
17,080 
(1,827)
15,253 
(3,920)
11,333 
Euro
9,313 
50 
9,263 
(733)
8,530 
(2,416)
6,114 
Other non-sterling
5,603 
262 
5,341 
(4,340)
1,001 
- 
1,001 
               
 
31,998 
314 
31,684 
(6,900)
24,784 
(6,336)
18,448 
               
31 December 2010
              
US dollar
17,137 
2 
17,135 
(1,820)
15,315 
(4,058)
11,257 
Euro
8,443 
33 
8,410 
(578)
7,832 
(2,305)
5,527 
Other non-sterling
5,320 
244 
5,076 
(4,135)
941 
- 
941 
               
 
30,900 
279 
30,621 
(6,533)
24,088 
(6,363)
17,725 
 
Note:
(1)
The economic hedges represent US dollar and euro preference shares in issue that are treated as equity under IFRS, and do not qualify as hedges for accounting purposes.
 
Key point
·
Changes in foreign currency exchange rates will affect equity in proportion to the structural foreign currency exposure. A 5% strengthening in foreign currencies against sterling would result in a gain of £1,300 million (31 December 2010 - £1,200 million) recognised in equity, while a 5% weakening in foreign currencies would result in a loss of £1,200 million (31 December 2010 - £1,150 million) recognised in equity.
 
 

 
Signatures


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







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