rbs201408016k2.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 1, 2014
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

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

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


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


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

 

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

 

 

Condensed consolidated income statement
for the period ended 30 June 2014


 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
 
2014
2013
 
2014
2014
2013
 
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
Interest receivable
7,621 
8,560 
 
3,821 
3,800 
4,281 
 
Interest payable
(2,128)
(3,123)
 
(1,023)
(1,105)
(1,514)
 
 
 
 
 
 
 
 
 
Net interest income
5,493 
5,437 
 
2,798 
2,695 
2,767 
 
 
 
 
 
 
 
 
 
Fees and commissions receivable
2,605 
2,708 
 
1,314 
1,291 
1,392 
 
Fees and commissions payable
(487)
(460)
 
(251)
(236)
(250)
 
Income from trading activities
1,493 
2,064 
 
541 
952 
949 
 
Gain on redemption of own debt
20 
191 
 
20 
242 
 
Other operating income
1,036 
1,332 
 
345 
691 
720 
 
 
 
 
 
 
 
 
 
Non-interest income
4,667 
5,835 
 
1,949 
2,718 
3,053 
 
 
 
 
 
 
 
 
 
Total income
10,160 
11,272 
 
4,747 
5,413 
5,820 
 
 
 
 
 
 
 
 
 
Staff costs
(3,536)
(3,727)
 
(1,845)
(1,691)
(1,840)
 
Premises and equipment
(1,275)
(1,104)
 
(622)
(653)
(548)
 
Other administrative expenses
(1,662)
(2,181)
 
(951)
(711)
(1,418)
 
Depreciation and amortisation
(554)
(736)
 
(282)
(272)
(349)
 
Write-down of goodwill and other intangible assets
(212)
 
(130)
(82)
 
 
 
 
 
 
 
 
 
Operating expenses
(7,239)
(7,748)
 
(3,830)
(3,409)
(4,155)
 
 
 
 
 
 
 
 
 
Profit before impairment losses
2,921 
3,524 
 
917 
2,004 
1,665 
 
Impairment (losses)/recoveries
(269)
(2,150)
 
93 
(362)
(1,117)
 
 
 
 
 
 
 
 
 
Operating profit before tax
2,652 
1,374 
 
1,010 
1,642 
548 
 
Tax charge
(733)
(678)
 
(371)
(362)
(328)
 
 
 
 
 
 
 
 
 
Profit from continuing operations
1,919 
696 
 
639 
1,280 
220 
 
Profit from discontinued operations, net of tax
35 
138 
 
26 
 
 
 
 
 
 
 
 
 
Profit for the period
1,954 
834 
 
665 
1,289 
229 
 
Non-controlling interests
(42)
(117)
 
(23)
(19)
14 
 
Preference share and other dividends
(487)
(182)
 
(412)
(75)
(101)
 
 
 
 
 
 
 
 
 
Profit attributable to ordinary and
 
 
 
 
 
 
 
  B shareholders
1,425 
535 
 
230 
1,195 
142 
 
 
 
 
 
 
 
 
 
Earnings/(loss) per ordinary and equivalent
 
 
 
 
 
 
 
 B share (EPS)
 
 
 
 
 
 
 
Basic EPS from continuing and discontinued operations
12.7p
 
2.0p
 
Basic EPS from continuing operations
12.5p
 
1.9p
 
Adjusted EPS from continuing operations
12.1p
(0.5p)
 
4.3p
7.8p
(1.8p)
 

Notes:
(1)
A reconciliation between the statutory income statement above and the non-statutory income statement on page 12 is given in Appendix 2 to this announcement.
(2)
Basic EPS for the half year and quarter ended 30 June 2013 have been restated to reflect the terms of the dividend access share (see Note 9 on page 88).
(3)
Diluted EPS in the half year ended 30 June 2014 and the quarter ended 30 June 2014 were 0.1p lower than basic EPS.



Condensed consolidated statement of comprehensive income
for the period ended 30 June 2014


 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Profit for the period
1,954 
834 
 
665 
1,289 
229 
 
 
 
 
 
 
 
Items that qualify for reclassification
 
 
 
 
 
 
Available-for-sale financial assets
529 
 (733)
 
265 
264 
 (1,009)
Cash flow hedges
248 
 (1,536)
 
 (47)
295 
 (1,502)
Currency translation
 (733)
1,310 
 
 (598)
 (135)
113 
Tax
 (160)
726 
 
 (72)
 (88)
678 
 
 
 
 
 
 
 
Other comprehensive (loss)/income after tax
 (116)
 (233)
 
 (452)
336 
 (1,720)
 
 
 
 
 
 
 
Total comprehensive income/(loss) for the period
1,838 
601 
 
213 
1,625 
 (1,491)
 
 
 
 
 
 
 
Total comprehensive income/(loss) is
 
 
 
 
 
 
  attributable to:
 
 
 
 
 
 
Non-controlling interests
30 
134 
 
24 
 (15)
Preference shareholders
140 
152 
 
75 
65 
81 
Paid-in equity holders
27 
30 
 
17 
10 
20 
Dividend access share
320 
 -
 
320 
 -
 -
Ordinary and B shareholders
1,321 
285 
 
 (205)
1,526 
 (1,577)
 
 
 
 
 
 
 
 
1,838 
601 
 
213 
1,625 
 (1,491)

Key points
·
The movement in available-for-sale financial assets during both the half year and quarter reflects unrealised gains predominately arising on Spanish and US bonds, partially offset by realised gains on high quality UK, Dutch and German sovereign bonds.
   
·
Cash flow hedging gains in H1 largely result from decreases in Sterling, Euro and US dollar swap rates in the main durations of the underlying portfolio.
   
·
Currency translation losses during the half year and quarter are principally due to the strengthening of Sterling against the US dollar and, in the quarter, the Euro.



Condensed consolidated balance sheet
at 30 June 2014


 
30 June
31 March
31 December
2014
2014
2013
 
£m
£m
£m
 
 
 
 
Assets
 
 
 
Cash and balances at central banks
68,670 
69,647 
82,659 
Net loans and advances to banks
28,904 
28,302 
27,555 
Reverse repurchase agreements and stock borrowing
28,163 
26,470 
26,516 
Loans and advances to banks
57,067 
54,772 
54,071 
Net loans and advances to customers
385,554 
390,780 
390,825 
Reverse repurchase agreements and stock borrowing
53,542 
51,743 
49,897 
Loans and advances to customers
439,096 
442,523 
440,722 
Debt securities
112,794 
120,737 
113,599 
Equity shares
7,834 
9,761 
8,811 
Settlement balances
19,682 
16,900 
5,591 
Derivatives
274,906 
277,294 
288,039 
Intangible assets
12,173 
12,428 
12,368 
Property, plant and equipment
7,115 
7,437 
7,909 
Deferred tax
3,107 
3,289 
3,478 
Prepayments, accrued income and other assets
7,418 
7,077 
7,614 
Assets of disposal groups
1,246 
1,905 
3,017 
 
 
 
 
Total assets
1,011,108 
1,023,770 
1,027,878 
 
 
 
 
Liabilities
 
 
 
Bank deposits
39,179 
35,371 
35,329 
Repurchase agreements and stock lending
31,722 
31,691 
28,650 
Deposits by banks
70,901 
67,062 
63,979 
Customer deposits
401,226 
401,276 
414,396 
Repurchase agreements and stock lending
51,540 
57,085 
56,484 
Customer accounts
452,766 
458,361 
470,880 
Debt securities in issue
59,087 
61,755 
67,819 
Settlement balances
15,128 
17,175 
5,313 
Short positions
39,019 
37,850 
28,022 
Derivatives
270,087 
274,506 
285,526 
Accruals, deferred income and other liabilities
14,876 
15,336 
16,017 
Retirement benefit liabilities
2,742 
2,829 
3,210 
Deferred tax
605 
583 
507 
Subordinated liabilities
24,809 
24,139 
24,012 
Liabilities of disposal groups
125 
3,238 
3,378 
 
 
 
 
Total liabilities
950,145 
962,834 
968,663 
 
 
 
 
Equity
 
 
 
Non-controlling interests
618 
612 
473 
Owners’ equity*
 
 
 
  Called up share capital
6,811 
6,752 
6,714 
  Reserves
53,534 
53,572 
52,028 
 
 
 
 
Total equity
60,963 
60,936 
59,215 
 
 
 
 
Total liabilities and equity
1,011,108 
1,023,770 
1,027,878 
 
 
 
 
* Owners’ equity attributable to:
 
 
 
Ordinary and B shareholders
55,053 
55,032 
53,450 
Other equity owners
5,292 
5,292 
5,292 
 
 
 
 
 
60,345 
60,324 
58,742 



Average balance sheet


 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
2014
2013
 
2014
2014
 
%
%
 
%
%
 
 
 
 
 
 
Average yields, spreads and margins of the
 
 
 
 
 
  banking business
 
 
 
 
 
Gross yield on interest-earning assets of banking business
3.03 
3.10 
 
3.05 
3.01 
Cost of interest-bearing liabilities of banking business
(1.18)
(1.46)
 
(1.16)
(1.21)
 
 
 
 
 
 
Interest spread of banking business
1.85 
1.64 
 
1.89 
1.80 
Benefit from interest-free funds
0.32 
0.33 
 
0.33 
0.32 
 
 
 
 
 
 
Net interest margin of banking business
2.17 
1.97 
 
2.22 
2.12 
 
 
 
 
 
 
Average interest rates
 
 
 
 
 
Base rate
0.50 
0.50 
 
0.50 
0.50 
 
 
 
 
 
 
London inter-bank three month offered rates
 
 
 
 
 
  - Sterling
0.53 
0.51 
 
0.53 
0.52 
  - Eurodollar
0.23 
0.28 
 
0.23 
0.23 
  - Euro
0.30 
0.21 
 
0.30 
0.30 



Average balance sheet


 
Half year ended
 
Half year ended
 
30 June 2014
 
30 June 2013
 
Average
 
 
 
Average
 
 
 
balance
Interest
Rate
 
balance
Interest
Rate
 
£m
£m
%
 
£m
£m
%
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Loans and advances to banks
69,097 
178 
0.52 
 
74,631 
222 
0.60 
Loans and advances to customers
382,326 
7,061 
3.72 
 
406,534 
7,640 
3.79 
Debt securities
55,845 
383 
1.38 
 
75,129 
700 
1.88 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
  - banking business (1,2)
507,268 
7,622 
3.03 
 
556,294 
8,562 
3.10 
  - trading business (3)
176,200 
 
 
 
232,773 
 
 
 
 
 
 
 
 
 
 
Non-interest earning assets
351,329 
 
 
 
521,217 
 
 
 
 
 
 
 
 
 
 
Total assets
1,034,797 
 
 
 
1,310,284 
 
 
 
 
 
 
 
 
 
 
Memo: Funded assets
745,611 
 
 
 
877,487 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits by banks
16,877 
92 
1.10 
 
26,244 
218 
1.68 
Customer accounts
302,157 
987 
0.66 
 
338,938 
1,577 
0.94 
Debt securities in issue
43,954 
586 
2.69 
 
61,136 
738 
2.43 
Subordinated liabilities
23,831 
432 
3.66 
 
24,939 
416 
3.36 
Internal funding of trading business
(20,254)
57 
(0.57)
 
(18,266)
178 
(1.97)
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
  - banking business (1,4,5)
366,565 
2,154 
1.18 
 
432,991 
3,127 
1.46 
  - trading business (3)
185,308 
 
 
 
236,675 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing liabilities
 
 
 
 
 
 
 
  - demand deposits
81,316 
 
 
 
76,820 
 
 
  - other liabilities
341,458 
 
 
 
493,938 
 
 
Owners’ equity (6)
60,150 
 
 
 
69,860 
 
 
 
 
 
 
 
 
 
 
Total liabilities and owners’ equity
1,034,797 
 
 
 
1,310,284 
 
 

Notes:
(1)
Interest receivable has been increased by £1 million (H1 2013 - £2 million) and interest payable has been increased by £29 million (H1 2013 - £40 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.
(3)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(4)
Interest payable has been decreased by £3 million (H1 2013 - £5 million) to exclude RFS Holdings minority interest. Related interest-bearing liabilities have also been adjusted.
(5)
Interest payable has been decreased by nil (H1 2013 - £31 million) in respect of non-recurring adjustments.
(6)
Including equity attributable to ordinary and B shareholders of £53,931 million (H1 2013 - £63,261 million).



Average balance sheet


 
Quarter ended
 
Quarter ended
 
30 June 2014
 
31 March 2014
 
Average
 
 
 
Average
 
 
 
balance
Interest
Rate
 
balance
Interest
Rate
 
£m
£m
%
 
£m
£m
%
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Loans and advances to banks
66,047 
89 
0.54 
 
72,181 
89 
0.50 
Loans and advances to customers
380,772 
3,544 
3.73 
 
383,898 
3,517 
3.72 
Debt securities
55,528 
189 
1.37 
 
56,165 
194 
1.40 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
  - banking business (1,2,3)
502,347 
3,822 
3.05 
 
512,244 
3,800 
3.01 
  - trading business (4)
175,066 
 
 
 
177,347 
 
 
 
 
 
 
 
 
 
 
Non-interest earning assets
358,106 
 
 
 
344,476 
 
 
 
 
 
 
 
 
 
 
Total assets
1,035,519 
 
 
 
1,034,067 
 
 
 
 
 
 
 
 
 
 
Memo: funded assets
747,798 
 
 
 
743,399 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits by banks
16,985 
41 
0.97 
 
16,768 
51 
1.23 
Customer accounts
298,170 
472 
0.63 
 
306,189 
515 
0.68 
Debt securities in issue
42,720 
284 
2.67 
 
45,202 
302 
2.71 
Subordinated liabilities
24,342 
220 
3.63 
 
23,314 
212 
3.69 
Internal funding of trading business
(22,224)
21 
(0.38)
 
(18,262)
36 
(0.80)
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
  - banking business (1,2)
359,993 
1,038 
1.16 
 
373,211 
1,116 
1.21 
  - trading business (4)
184,529 
 
 
 
186,096 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing liabilities
 
 
 
 
 
 
 
  - demand deposits
82,213 
 
 
 
80,409 
 
 
  - other liabilities
348,434 
 
 
 
334,403 
 
 
Owners’ equity (5)
60,350 
 
 
 
59,948 
 
 
 
 
 
 
 
 
 
 
Total liabilities and owners’ equity
1,035,519 
 
 
 
1,034,067 
 
 

Notes:
(1)
Interest receivable has been increased by nil (Q1 2014 - £1 million) and interest payable has been increased by £14 million (Q1 2014 - £15 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2)
Interest receivable has been increased by £1 million (Q1 2014 - £1 million decrease) and interest payable has been increased by £1 million (Q1 2014 - £4 million decrease) to exclude RFS Holdings minority interest. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(3)
Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.
(4)
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(5)
Including equity attributable to ordinary and B shareholders of £54,425 million (Q1 2014 - £53,436 million).



Condensed consolidated statement of changes in equity
for the period ended 30 June 2014


 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Called-up share capital
 
 
 
 
 
 
At beginning of period
6,714 
6,582 
 
6,752 
6,714 
6,619 
Ordinary shares issued
97 
50 
 
59 
38 
13 
 
 
 
 
 
 
 
At end of period
6,811 
6,632 
 
6,811 
6,752 
6,632 
 
 
 
 
 
 
 
Paid-in equity
 
 
 
 
 
 
At beginning and end of period
979 
979 
 
979 
979 
979 
 
 
 
 
 
 
 
Share premium account
 
 
 
 
 
 
At beginning of period
24,667 
24,361 
 
24,760 
24,667 
24,455 
Ordinary shares issued
218 
122 
 
125 
93 
28 
 
 
 
 
 
 
 
At end of period
24,885 
24,483 
 
24,885 
24,760 
24,483 
 
 
 
 
 
 
 
Merger reserve
 
 
 
 
 
 
At beginning and end of period
13,222 
13,222 
 
13,222 
13,222 
13,222 
 
 
 
 
 
 
 
Available-for-sale reserve
 
 
 
 
 
 
At beginning of period
(308)
(346)
 
(62)
(308)
(10)
Unrealised gains/(losses)
844 
14 
 
411 
433 
(568)
Realised gains
(366)
(605)
 
(148)
(218)
(441)
Tax
(68)
333 
 
(63)
(5)
305 
Recycled to profit or loss on disposal of businesses (1)
36 
(110)
 
36 
 
 
 
 
 
 
 
At end of period
138 
(714)
 
138 
(62)
(714)
 
 
 
 
 
 
 
Cash flow hedging reserve
 
 
 
 
 
 
At beginning of period
(84)
1,666 
 
141 
(84)
1,635 
Amount recognised in equity
968 
(859)
 
315 
653 
(1,118)
Amount transferred from equity to earnings
(720)
(677)
 
(362)
(358)
(384)
Tax
(70)
361 
 
(70)
358 
 
 
 
 
 
 
 
At end of period
94 
491 
 
94 
141 
491 
 
 
 
 
 
 
 
 
Foreign exchange reserve
 
 
 
 
 
 
At beginning of period
3,691 
3,908 
 
3,551 
3,691 
5,072 
Retranslation of net assets
(872)
1,430 
 
(702)
(170)
44 
Foreign currency gains on hedges of net assets
155 
(131)
 
123 
32 
70 
Tax
(11)
(3)
 
(9)
(2)
15 
Recycled to profit or loss on disposal of businesses
(3)
 
 
 
 
 
 
 
 
At end of period
2,963 
5,201 
 
2,963 
3,551 
5,201 
 
 
 
 
 
 
 
 
Capital redemption reserve
 
 
 
 
 
 
At beginning and end of period
9,131 
9,131 
 
9,131 
9,131 
9,131 
 
 
 
 
 
 
 
 
Contingent capital reserve
 
 
 
 
 
 
At beginning and end of period
(1,208)
 
(1,208)

For the notes to this table refer the following page.


Condensed consolidated statement of changes in equity
for the period ended 30 June 2014

 
 
 
 
 
 
 
 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
At beginning of period
867 
10,596 
 
1,986 
867 
10,949 
Profit attributable to ordinary and B
 
 
 
 
 
 
   shareholders and other equity owners
 
 
 
 
 
 
  - continuing operations
1,895 
607 
 
627 
1,268 
241 
  - discontinued operations
17 
110 
 
15 
Equity preference dividends paid
(140)
(152)
 
(75)
(65)
(81)
Dividend Access Share dividend
(320)
 
(320)
Paid-in equity dividends paid, net of tax
(27)
(30)
 
(17)
(10)
(20)
Loss on disposal of own shares held
(18)
 
(18)
Shares released for employee benefits
(41)
(1)
 
(5)
(36)
(1)
Share-based payments
 
 
 
 
 
 
  - gross
(4)
 
47 
(39)
33 
  - tax
(1)
(3)
 
(1)
 
 
 
 
 
 
 
At end of period
2,258 
11,105 
 
2,258 
1,986 
11,105 
 
 
 
 
 
 
 
Own shares held
 
 
 
 
 
 
At beginning of period
(137)
(213)
 
(136)
(137)
(211)
Disposal of own shares
73 
 
71 
Shares released for employee benefits
 
 
 
 
 
 
 
 
At end of period
(136)
(139)
 
(136)
(136)
(139)
 
 
 
 
 
 
 
Owners’ equity at end of period
60,345 
69,183 
 
60,345 
60,324 
69,183 
 
 
 
 
 
 
 
Non-controlling interests
 
 
 
 
 
 
At beginning of period
473 
1,770 
 
612 
473 
532 
Currency translation adjustments and other movements
(16)
14 
 
(19)
(1)
Profit/(loss) attributable to non-controlling interests
 
 
 
 
 
 
  - continuing operations
24 
89 
 
12 
12 
(21)
  - discontinued operations
18 
28 
 
11 
Movements in available-for-sale securities
 
 
 
 
 
 
  - unrealised (losses)/gains
(2)
 
(1)
(1)
  - realised losses
 
  - tax
(1)
 
  - recycled to profit or loss on disposal of discontinued
 
 
 
 
 
 
    operations (2)
(5)
 
Equity raised
115 
 
115 
Equity withdrawn and disposals
(1,429)
 
(42)
 
 
 
 
 
 
 
At end of period
618 
475 
 
618 
612 
475 
 
 
 
 
 
 
 
Total equity at end of period
60,963 
69,658 
 
60,963 
60,936 
69,658 

Notes:
(1)
Net of tax - £11 million (Q1 2014 - £11 million; Q2 2013 - £35 million).
(2)
Net of tax - £1 million in H1 2013.
 
For an explanation of the movements in the available-for-sale, cash flow hedging and foreign exchange reserves refer to page 70.


Condensed consolidated cash flow statement
for the period ended 30 June 2014


 
Half year ended
 
30 June
30 June
 
2014 
2013 
 
£m
£m
 
 
 
Operating activities
 
 
Operating profit before tax on continuing operations
2,652 
1,374 
Operating profit before tax on discontinued operations
40 
161 
Adjustments for non-cash items
(897)
(7,378)
 
 
 
Net cash inflow/(outflow) from trading activities
1,795 
(5,843)
Changes in operating assets and liabilities
(7,634)
431 
 
 
 
Net cash flows from operating activities before tax
(5,839)
(5,412)
Income taxes received/(paid)
41 
(260)
 
 
 
Net cash flows from operating activities
(5,798)
(5,672)
 
 
 
Net cash flows from investing activities
(641)
12,293 
 
 
 
Net cash flows from financing activities
921 
(1,408)
 
 
 
Effects of exchange rate changes on cash and cash equivalents
(2,391)
4,948 
 
 
 
Net (decrease)/increase in cash and cash equivalents
(7,909)
10,161 
Cash and cash equivalents at beginning of period
121,177 
132,841 
 
 
 
Cash and cash equivalents at end of period
113,268 
143,002 

 

 
Notes


1. Basis of preparation
The Group’s condensed consolidated financial statements have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and IAS 34 ‘Interim Financial Reporting’. They should be read in conjunction with the Group’s 2013 Annual Report and Accounts which were prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS).

From 13 March 2013, Direct Line Group (DLG) was classified as an associated undertaking and at 31 December 2013 the Group’s interest in DLG was transferred to disposal groups. The Group disposed of its remaining interest in DLG in February 2014.

The Group’s 2014 condensed consolidated financial statements have been prepared in compliance with the British Bankers’ Association Code for Financial Reporting Disclosure published in September 2010.

Going concern
The Group’s business activities and financial position, and the factors likely to affect its future development and performance are discussed on pages 12 to 131. Its objectives and policies in managing the financial risks to which it is exposed and its regulatory capital resources, liquidity and funding management are discussed in the Capital and risk management appendix. A summary of the risk factors which could materially affect the Group’s future results are described on pages 135 to 137.

Having reviewed the Group’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the results for the half year ended 30 June 2014 have been prepared on a going concern basis.

2. Accounting policies
There have been no significant changes to the Group’s principal accounting policies as set out on pages 377 to 389 of the 2013 Annual Report and Accounts apart from the adoption of new and revised IFRSs that are effective from 1 January 2014:

‘Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)’ adds application guidance to IAS 32 to address inconsistencies identified in the application of the standard’s criteria for offsetting financial assets and financial liabilities.

‘Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)’ applies to investment entities; such entities should account for their subsidiaries (other than those that provide services related to the entity’s investment activities) at fair value through profit or loss.

IFRIC 21 ‘Levies’ provides guidance on accounting for levies payable to public authorities if certain conditions are met on a particular date.

IAS 36 ‘Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)’ aligns IAS 36’s disclosure requirements about recoverable amounts with IASB’s original intentions.



Notes


2. Accounting policies (continued)
IAS 39 ‘Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)’ provides relief from discontinuing hedge accounting on novation of a derivative designated as a hedging instrument.

The implementation of these requirements has not had a material effect on the Group’s financial statements.

Critical accounting policies and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions that are considered to be the most important to the portrayal of the Group’s financial condition are those relating to pensions; goodwill; provisions for liabilities; deferred tax; loan impairment provisions and fair value of financial instruments. These critical accounting policies and judgments are described on pages 386 to 389 of the Group’s 2013 Annual Report and Accounts.

Recent developments in IFRS
In July 2014 the IASB published IFRS 9 ‘Financial Instruments’. IFRS 9 replaces the current financial instruments standard IAS 39, setting out new accounting requirements in a number of areas. First, there are revisions to the classification and measurement of financial instruments. There are new restrictions on the ability to account for financial assets at amortised cost and a prohibition on the bifurcation of embedded derivatives from financial assets. Accounting for financial liabilities is largely unchanged except for the treatment of changes in the fair value of liabilities designated as at fair value through profit or loss attributable to own credit risk; these are recognised in other comprehensive income. Secondly, there are amended requirements for hedge accounting designed to align the accounting more closely to the risk management framework and remove or simplify some of the rule-based requirements of IAS 39. The basic mechanics of hedge accounting: fair value, cash flow and net investment hedges are retained. Finally, there is a new approach to credit impairment provisions moving from IAS 39’s incurred loss model to an expected loss model. An expected loss model will result in the recognition of credit impairment losses earlier than an incurred loss model. IFRS 9 is effective for periods beginning on or after 1 January 2018.

IFRS 9 makes major and fundamental changes to accounting for financial instruments. The Group is continuing its assessment of its effect on the Group’s financial statements.

The IASB also published:
in January 2014 IFRS 14 ‘Regulatory Deferral Accounts’ which permits costs that can be deferred in the presentation of regulatory accounts to be deferred also in accordance with IFRS.
   
in May 2014 IFRS 15 ‘Revenue from Contracts with Customers’ effective from 1 January 2017 replacing IAS 11 ‘Construction Contracts’, IAS 18 ‘Revenue’ and several Interpretations. Contracts are bundled or unbundled into distinct performance obligations with revenue recognised as the obligations are met.
   
in May 2014 ‘Accounting for Acquisitions of interests in Joint Operations’, an amendment to IFRS 11 ‘Joint Arrangements’ to clarify that the donor of assets and liabilities to a joint operation should hold its continuing interest in them at the lower of cost and recoverable amount.
   
in May 2014 ‘Clarification of Acceptable Methods of Depreciation and Amortisation’ amending IAS 16 ‘Property, Plant and Equipment and IAS 38 ‘Intangible Assets’ to require any policy less prudent than straight line to be justified.

The Group is reviewing these requirements to determine their effect, if any, on its financial reporting.



Notes


3. Analysis of income, expenses and impairment losses
 
 
 
 
 
 
 
 
 
 
 
 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
 
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m 
£m
 
 
 
 
 
 
 
Loans and advances to customers
7,061 
7,640 
 
3,543 
3,518 
3,809 
Loans and advances to banks
178 
222 
 
89 
89 
114 
Debt securities
382 
698 
 
189 
193 
358 
 
 
 
 
 
 
 
Interest receivable
7,621 
8,560 
 
3,821 
3,800 
4,281 
 
 
 
 
 
 
 
Customer accounts
987 
1,577 
 
471 
516 
740 
Deposits by banks
95 
223 
 
41 
54 
107 
Debt securities in issue
557 
698 
 
270 
287 
345 
Subordinated liabilities
432 
447 
 
220 
212 
225 
Internal funding of trading businesses
57 
178 
 
21 
36 
97 
 
 
 
 
 
 
 
Interest payable
2,128 
3,123 
 
1,023 
1,105 
1,514 
 
 
 
 
 
 
 
Net interest income
5,493 
5,437 
 
2,798 
2,695 
2,767 
 
 
 
 
 
 
 
Fees and commissions receivable
 
 
 
 
 
 
  - payment services
647 
688 
 
325 
322 
355 
  - credit and debit card fees
500 
529 
 
245 
255 
275 
  - lending (credit facilities)
703 
698 
 
371 
332 
345 
  - brokerage
207 
252 
 
102 
105 
143 
  - investment management
206 
210 
 
100 
106 
97 
  - trade finance
138 
153 
 
71 
67 
75 
  - other
204 
178 
 
100 
104 
102 
 
 
 
 
 
 
 
 
2,605 
2,708 
 
1,314 
1,291 
1,392 
Fees and commissions payable
(487)
(460)
 
(251)
(236)
(250)
 
 
 
 
 
 
 
Net fees and commissions
2,118 
2,248 
 
1,063 
1,055 
1,142 
 
 
 
 
 
 
 
Foreign exchange
420 
450 
 
202 
218 
255 
Interest rate
672 
402 
 
424 
248 
203 
Credit
397 
880 
 
41 
356 
328 
Own credit adjustments
11 
175 
 
(84)
95 
76 
Other
(7)
157 
 
(42)
35 
87 
 
 
 
 
 
 
 
Income from trading activities
1,493 
2,064 
 
541 
952 
949 
 
 
 
 
 
 
 
Gain on redemption of own debt
20 
191 
 
20 
242 
 
 
 
 
 
 
 
Operating lease and other rental income
178 
256 
 
87 
91 
118 
Own credit adjustments
(62)
201 
 
(106)
44 
51 
Other changes in the fair value of financial assets
 
 
 
 
 
 
  and liabilities designated as at fair value through
 
 
 
 
 
 
  profit or loss and related derivatives
29 
29 
 
20 
17 
Changes in fair value of investment properties
(43)
(16)
 
(31)
(12)
(7)
Profit on sale of:
 
 
 
 
 
 
  - securities
343 
572 
 
132 
211 
419 
  - property, plant and equipment
40 
23 
 
16 
24 
  - subsidiaries, networks and associates
363 
18 
 
171 
192 
24 
Dividend income
30 
35 
 
17 
13 
21 
Share of results of associates
55 
204 
 
28 
27 
27 
Other income
103 
10 
 
22 
81 
45 
 
 
 
 
 
 
 
Other operating income
1,036 
1,332 
 
345 
691 
720 




Notes


3. Analysis of income, expenses and impairment losses (continued)

 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013 
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Total non-interest income
4,667 
5,835 
 
1,949 
2,718 
3,053 
 
 
 
 
 
 
 
Total income
10,160 
11,272 
 
4,747 
5,413 
5,820 
 
 
 
 
 
 
 
Staff costs
(3,536)
(3,727)
 
(1,845)
(1,691)
(1,840)
Premises and equipment
(1,275)
(1,104)
 
(622)
(653)
(548)
Other (1)
(1,662)
(2,181)
 
(951)
(711)
(1,418)
 
 
 
 
 
 
 
Administrative expenses
(6,473)
(7,012)
 
(3,418)
(3,055)
(3,806)
Depreciation and amortisation
(554)
(736)
 
(282)
(272)
(349)
Write down of goodwill
(130)
 
(130)
Write down of other intangible assets
(82)
 
(82)
 
 
 
 
 
 
 
Operating expenses
(7,239)
(7,748)
 
(3,830)
(3,409)
(4,155)
 
 
 
 
 
 
 
Loan impairment losses/(recoveries)
271 
2,161 
 
(89)
360 
1,125 
Securities
(2)
(11)
 
(4)
(8)
 
 
 
 
 
 
 
Impairment losses/(recoveries)
269 
2,150 
 
(93)
362 
1,117 

Note:
(1)
Includes Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs and regulatory and legal actions costs - see below for further details.

Payment Protection Insurance (PPI)
An additional charge of £150 million has been recognised for PPI in Q2 2014 (Q1 2014 - nil; Q2 2013 - £185 million) as a result of higher customer response rates and higher average redress costs. The cumulative charge in respect of PPI is £3.2 billion, of which £2.6 billion (82%) in redress and expenses had been utilised by 30 June 2014. Of the £3.2 billion cumulative charge, £2.9 billion relates to redress and £0.3 billion to administrative expenses.
 
 
 
 
 
 
 
 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m 
 
 
 
 
 
 
 
At beginning of period
926 
895 
 
708 
926 
705 
Charge to income statement
150 
185 
 
150 
185 
Utilisations
(490)
(376)
 
(272)
(218)
(186)
 
 
 
 
 
 
 
At end of period
586 
704 
 
586 
708 
704 

The remaining provision provides coverage for approximately seven months for redress and administrative expenses, based on the current average monthly utilisation.




Notes


3. Analysis of income, expenses and impairment losses (continued)
The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
     
Sensitivity
 
Actual to date 
Current 
 assumption 
Change in 
assumption 
Consequential 
change in 
provision 
Assumption
£m 
         
Past business review take up rate
47%
52%
+/-5
+/-56
Uphold rate (1)
89%
88%
+/-5
+/-17
Average redress
£1,741
£1,722
+/-5
+/-15

Note:
(1)
Uphold rate excludes claims where no PPI policy was held.

Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to the Group of administering the redress process. The Group expects the majority of the cash outflows associated with this provision to have occurred by the end of 2014. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different than the amount provided. The Group will continue to monitor the position closely and refresh its assumptions.

Interest Rate Hedging Products (IRHP) redress and related costs
Following an industry-wide review conducted in conjunction with the Financial Services Authority (now being dealt with by the Financial Conduct Authority (FCA)), the Group agreed to provide redress to customers in relation to certain interest rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. An additional charge of £100 million has been recognised in Q2 2014 (Q1 2014 and Q2 2013 - nil), principally reflecting the marginal increase in our redress experience compared to expectations. We have now agreed outcomes with the independent reviewer relating to over 95% of cases. A cumulative charge of £1.4 billion has been recognised, of which £1.1 billion relates to redress and £0.3 billion relates to administrative expenses.

 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m 
 
 
 
 
 
 
 
At beginning of period
1,077 
676 
 
878 
1,077 
702 
Charge to income statement
100 
50 
 
100 
Utilisations
(417)
(56)
 
(218)
(199)
(32)
 
 
 
 
 
 
 
At end of period
760 
670 
 
760 
878 
670 




Notes


3. Analysis of income, expenses and impairment losses (continued)
The Group is progressing with its review of sales of IRHP and providing basic redress to all customers who are entitled to it. Customers may also be entitled to be compensated for any consequential losses they may have suffered. The Group is not able to measure reliably any liability it may have and has accordingly not made any provision. Customers will receive redress monies without having to wait for the assessment of any additional consequential loss claims which are outside the allowance for such claims included in the 8% interest on redress due.

The Group continues to monitor the level of provision given the uncertainties over the number of transactions that will qualify for redress and the nature and cost of that redress.

Regulatory and legal actions
The Group is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. No additional charge has been booked in 2014 (Q2 2013 - £385 million). A charge of £1,910 million in Q4 2013 was primarily in respect of matters related to mortgage-backed securities and securities related litigation following recent third party litigation settlements and regulatory decisions.

4. Pensions
Pension costs for the half year ended 30 June 2014 amounted to £281 million (H1 2013 - £297 million; Q2 2014 - £138 million; Q1 2014 - £143 million and Q2 2013 - £149 million). Defined benefit schemes’ charges are based on the actuarially determined pension cost rates at 31 December 2013.

In May 2014, the triennial funding valuation of The Royal Bank of Scotland Group Pension Fund was agreed which showed that the value of the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this deficit, RBS will pay annual contributions of £650 million from 2014 to 2016 and £450 million (indexed in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.



Notes


5. Loan impairment provisions and REIL

Loan impairments
Operating profit is stated after charging loan impairment losses of £271 million (H1 2013 - £2,161 million). The balance sheet loan impairment provisions decreased in the half year ended 30 June 2014 from £25,216 million to £22,446 million and the movements thereon were:
 
Half year ended
 
30 June 2014
 
30 June 2013
 
RBS
 
 
 
RBS excl.
 
 
excl. RCR
RCR
Total
Non-Core
Non-Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
At beginning of period (1)
8,716 
16,500 
25,216 
 
10,062 
11,188 
21,250 
Currency translation and other adjustments
(118)
(395)
(513)
 
207 
341 
548 
Amounts written-off
(868)
(1,619)
(2,487)
 
(1,155)
(968)
(2,123)
Recoveries of amounts previously written-off
84 
14 
98 
 
90 
31 
121 
Charge to income statement
 
 
 
 
 
 
 
  - continuing operations
290 
(19)
271 
 
1,258 
903 
2,161 
Unwind of discount (recognised in interest income)
(63)
(76)
(139)
 
(104)
(100)
(204)
 
 
 
 
 
 
 
 
At end of period
8,041 
14,405 
22,446 
 
10,358 
11,395 
21,753 

 
Quarter ended
 
30 June 2014
 
31 March 2014
 
30 June 2013
 
RBS
 
 
 
RBS
 
 
 
RBS excl.
Non-
 
excl. RCR
RCR
Total
excl. RCR
RCR
Total
Non-Core
Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
At beginning of period (1)
8,516 
15,719 
24,235 
 
8,716 
16,500 
25,216 
 
10,266 
11,228 
21,494 
Currency translation and other
 
 
 
 
 
 
 
 
 
 
 
  adjustments
(75)
(333)
(408)
 
(43)
(62)
(105)
 
71 
75 
146 
Amounts written-off
(447)
(827)
(1,274)
 
(421)
(792)
(1,213)
 
(626)
(341)
(967)
Recoveries of amounts previously 
 
 
 
 
 
 
 
 
 
 
 
  written-off
43 
46 
 
41 
11 
52 
 
41 
15 
56 
Charge to income statement
 
 
 
 
 
 
 
 
 
 
 
  - continuing operations
36 
(125)
(89)
 
254 
106 
360 
 
659 
466 
1,125 
Unwind of discount
 
 
 
 
 
 
 
 
 
 
 
  (recognised in interest income)
(32)
(32)
(64)
(31)
(44)
(75)
 
(53)
(48)
(101)
 
 
 
 
 
 
 
 
 
 
 
 
At end of period
8,041 
14,405 
22,446 
 
8,516 
15,719 
24,235 
 
10,358 
11,395 
21,753 

Note:
(1)
As a result of the creation of RCR on 1 January 2014, £855 million of provisions were transferred from Non-Core to the original donating divisions and £16,500 million of provisions were transferred to RCR, £12,984 million from Non-Core and £3,516 million from other divisions.

Provisions at 30 June 2014 include £50 million in respect of loans and advances to banks (31 March 2014 - £62 million; 31 December 2013 - £63 million; 30 June 2013 - £83 million).



Notes


5. Loan impairment provisions and REIL (continued)

Risk elements in lending
Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected and those awaiting individual assessment. A latent provision is established for the latter.

REIL decreased by £5,311 million in the half year ended 30 June 2014 to £34,081 million and the movements thereon were:

 
Half year ended
 
30 June 2014
 
30 June 2013
 
RBS
 
 
 
RBS excl.
 
 
excl. RCR
RCR
Total
Non-Core
Non-Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
At beginning of period (1)
15,276 
24,116 
39,392 
 
19,766 
21,374 
41,140 
Currency translation and other adjustments
(167)
(658)
(825)
 
458 
642 
1,100 
Additions
2,273 
1,887 
4,160 
 
4,878 
1,978 
6,856 
Transfers (2)
(121)
52 
(69)
 
292 
(4)
288 
Transfer to performing book
(111)
(74)
(185)
 
(55)
(25)
(80)
Repayments and disposals
(2,629)
(3,276)
(5,905)
 
(2,858)
(2,140)
(4,998)
Amounts written-off
(868)
(1,619)
(2,487)
 
(1,155)
(968)
(2,123)
 
 
 
 
 
 
 
 
At end of period
13,653 
20,428 
34,081 
 
21,326 
20,857 
42,183 

 
Quarter ended
 
30 June 2014
 
31 March 2014
 
30 June 2013
 
RBS
 
 
 
RBS
 
 
 
RBS excl.
 
 
excl. RCR
RCR
Total
excl. RCR
RCR
Total
Non-Core
Non-Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
At beginning of period (1)
14,351 
23,002 
37,353 
 
15,276 
24,116 
39,392 
 
20,286 
20,756 
41,042 
Currency translation and
 
 
 
 
 
 
 
 
 
 
 
  other adjustments
(102)
(560)
(662)
 
(65)
(98)
(163)
 
82 
114 
196 
Additions
810 
564 
1,374 
 
1,463 
1,323 
2,786 
 
2,781 
1,039 
3,820 
Transfers (2)
(65)
36 
(29)
 
(56)
16 
(40)
 
203 
(35)
168 
Transfer to performing book
(8)
(71)
(79)
 
(103)
(3)
(106)
 
(14)
(6)
Repayments and disposals
(886)
(1,716)
(2,602)
 
(1,743)
(1,560)
(3,303)
 
(1,386)
(684)
(2,070)
Amounts written-off
(447)
(827)
(1,274)
 
(421)
(792)
(1,213)
 
(626)
(341)
(967)
 
 
 
 
 
 
 
 
 
 
 
 
At end of period
13,653 
20,428 
34,081 
 
14,351 
23,002 
37,353 
 
21,326 
20,857 
42,183 

Notes:
(1)
As a result of the creation of RCR on 1 January 2014, £1,328 million of REIL were transferred from Non-Core to the original donating divisions and £24,116 million of REIL were transferred to RCR, £17,686 million from Non-Core and £6,430 million from other divisions.
(2)
Represents transfers between REIL and potential problem loans.

Provision coverage of REIL was 66% at 30 June 2014 (31 March 2014 - 65%; 31 December 2013 - 64%; 30 June 2013 - 52%).

Refer to Appendix 1 for analyses of loan impairments and REIL by segment, sector and geographical region.



Notes


6. Tax
The actual tax charge differs from the expected tax charge computed by applying the standard UK corporation tax rate of 21.5% (2013 - 23.25%).

 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Profit before tax
2,652 
1,374 
 
1,010 
1,642 
548 
 
 
 
 
 
 
 
Expected tax charge
(570)
(319)
 
(217)
(353)
(127)
Losses in year where no deferred tax
 
 
 
 
 
 
  asset recognised
(22)
(116)
 
(9)
(13)
(44)
Foreign profits taxed at other rates
(87)
(120)
 
(30)
(57)
(32)
Unrecognised timing differences
13 
(12)
 
(15)
Non-deductible goodwill impairment
(28)
 
(28)
Items not allowed for tax
 
 
 
 
 
 
  - losses on disposals and write-downs
(5)
 
(5)
  - UK bank levy
(30)
(29)
 
(11)
(19)
(9)
  - regulatory and legal actions
(90)
 
(90)
  - employee share schemes
(5)
(14)
 
(2)
(3)
(7)
  - other disallowable items
(64)
(82)
 
(39)
(25)
(45)
Non-taxable items
 
 
 
 
 
 
  - gain on sale of Direct Line Insurance Group
41 
 
41 
  - other non-taxable items
13 
86 
 
(1)
14 
31 
Taxable foreign exchange movements
(2)
 
(4)
Losses brought forward and utilised
45 
27 
 
36 
22 
Reduction in carrying value of deferred tax asset
 
 
 
 
 
 
  in respect of losses in US
(76)
 
(76)
Adjustments in respect of prior periods
38 
(7)
 
26 
12 
(8)
 
 
 
 
 
 
 
Actual tax charge
(733)
(678)
 
(371)
(362)
(328)

At 30 June 2014, the Group has recognised a deferred tax asset of £3,107 million (31 March 2014 - £3,289 million; 31 December 2013 - £3,478 million) and a deferred tax liability of £605 million (31 March 2014 - £583 million; 31 December 2013 - £507 million). These include amounts recognised in respect of UK trading losses of £2,135 million (31 March 2014 - £2,240 million; 31 December 2013 - £2,411 million). Under UK tax legislation, these UK losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has considered the carrying value of this asset as at 30 June 2014 and concluded that it is recoverable based on future profit projections.



Notes


7. Profit/(loss) attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
RBS Sempra Commodities JV
(2)
 
RFS Holdings BV Consortium Members
38 
113 
 
21 
17 
Direct Line Group
19 
 
Other
(13)
 
(14)
 
 
 
 
 
 
 
Profit/(loss) attributable to non-controlling interests
42 
117 
 
23 
19 
(14)

8. Dividends
Dividends paid to preference shareholders and paid-in equity holders, and the dividend on the Dividend Access Share are as follows:

 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013
 
2014
2014
2013
 
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Preference shareholders
 
 
 
 
 
 
Non-cumulative preference shares of US$0.01
105 
116 
 
40 
65 
45 
Non-cumulative preference shares of €0.01
34 
35 
 
34 
35 
Non-cumulative preference shares of £1
 
 
 
 
 
 
 
 
Paid-in equity holders
 
 
 
 
 
 
Interest on securities classified as equity, net of tax
27 
30 
 
17 
10 
20 
 
 
 
 
 
 
 
Dividend Access Share dividend
320 
 
320 
 
 
 
 
 
 
 
 
487 
182 
 
412 
75 
101 

The Group has resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBS and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.

The Board has decided to continue partially neutralising the Common Equity Tier 1 impact of Group hybrid capital instruments. It is expected that £300 million of new equity will be issued during the course of 2014 to achieve this aim, of which £100 million was issued in May 2014 and a further £51 million in July 2014.

Following approval of the DAS Retirement Agreement by independent shareholders at a General Meeting in June 2014, provision has been made for the DAS retirement initial dividend of £320 million.



Notes


9. Earnings per ordinary and equivalent B share
At a General Meeting on 25 June 2014, the Company’s independent shareholders approved an agreement between RBS and Her Majesty's Treasury for the retirement of the Dividend Access Share (the DAS retirement agreement).

Prior to the DAS retirement agreement, the DAS was entitled to a dividend amounting to the greater of 7% of the aggregate issue price of B shares and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any dividends paid on the B shares and on ordinary shares issued on their conversion. When calculating earnings per share, IFRS requires profit or loss to be allocated to participating equity instruments as if all of the profit or loss for the period had been distributed. Consequently, earnings for all periods presented ending on or before 31 March 2014 are allocated solely to the dividend access share and earnings per ordinary and equivalent B share are nil for all periods. Adjusted earnings per ordinary and equivalent B share excludes the rights of the dividend access share for periods prior to 25 June 2014 and has been calculated on the basis tabulated on the following page.

After the DAS retirement agreement came into effect, once RBS has paid dividends on the DAS totalling £1.5 billion (subject to increases after 1 January 2016), the DAS will lose its preferential dividend rights and will become a single B share. The dividends are payable at the discretion of the directors. The first DAS dividend of £320 million payable within 45 business days of approval of the agreement, has been recognised as a liability at 30 June 2014. Unpaid DAS dividends will be subject to an increase of 5% per annum from 1 January 2016 and an increase of 10% per annum from 1 January 2021.

These changes to the DAS agreement have re-characterised the DAS such that it is no longer a participating share; it is only entitled to total dividends of £1.5 billion, subject to increases after 1 January 2016. Consequently earnings per share for periods ended after 25 June 2014 only reflect DAS dividends recognised before the end of a reporting period; this amounted to £320 million in respect of the half year and quarter ended 30 June 2014. Dividends can be paid on ordinary and B shares only once the total remaining amount of retirement dividend of £1,180 million, subject to increases as above, has been paid.



Notes


9. Earnings per ordinary and equivalent B share (continued)

 
Half year ended
 
Quarter ended
 
30 June
30 June
 
30 June
31 March
30 June
2014
2013*
 
2014
2014
2013*
 
 
 
 
 
 
 
Earnings
 
 
 
 
 
 
Profit from continuing operations attributable
 
 
 
 
 
 
  to ordinary and B shareholders (£m)
1,408 
425 
 
215 
1,193 
140 
Profit from discontinued operations attributable to
 
 
 
 
 
 
  ordinary and B shareholders (£m)
17 
110 
 
15 
 
 
 
 
 
 
 
Profit attributable to ordinary and B shareholders (£m)
1,425 
535 
 
230 
1,195 
142 
 
 
 
 
 
 
 
Ordinary shares outstanding during the period (millions)
6,208 
6,052 
 
6,235 
6,181 
6,073 
Equivalent B shares in issue during the period (millions)
5,100 
5,100 
 
5,100 
5,100 
5,100 
 
 
 
 
 
 
 
Weighted average number of ordinary
 
 
 
 
 
 
  shares and equivalent B shares outstanding
 
 
 
 
 
 
  during the period (millions)
11,308 
11,152 
 
11,335 
11,281 
11,173 
Effect of dilutive share options and convertible
 
 
 
 
 
 
  securities (millions)
97 
114 
 
89 
110 
114 
 
 
 
 
 
 
 
Diluted weighted average number of ordinary
 
 
 
 
 
 
  shares and equivalent B shares outstanding
 
 
 
 
 
 
  during the period (millions)
11,405 
11,266 
 
11,424 
11,391 
11,287 
Basic and diluted earnings/(loss) per ordinary and
 
 
 
 
 
 
   equivalent B share (EPS)
 
 
 
 
 
 
Basic EPS from continuing operations
12.5p
 
1.9p
Earnings allocated to DAS
3.8p
 
10.6p
1.2p
Own credit adjustments
0.4p
(2.6p)
 
1.3p
(0.9p)
(0.8p)
Gain on redemption of own debt
(0.2p)
(1.7p)
 
(0.2p)
(2.1p)
Write-down of goodwill
1.1p
 
1.1p
Strategic disposals
(1.7p)
 
(1.7p)
(0.1p)
 
 
 
 
 
 
 
Adjusted EPS from continuing operations
12.1p
(0.5p)
 
4.3p
7.8p
(1.8p)
Basic EPS from discontinued operations
0.2p
 
0.1p
Earnings allocated to DAS
1.0p
 
 
 
 
 
 
 
 
Adjusted EPS from discontinued operations
0.2p
1.0p
 
0.1p

* Basic EPS for the half year and quarter ended 30 June 2013 have been restated to reflect the terms of the DAS.

Notes:
(1)
Diluted EPS from continuing operations in the half year ended 30 June 2014 and the quarter ended 30 June 2014 were 0.1p lower than basic EPS.
(2)
Adjusted EPS has been restated to reflect the change in presentation of one-off and other items set out on page 10.




Notes


10. Segmental analysis
On 27 February 2014, RBS announced the reorganisation of the previously reported operating divisions into three franchises:

Personal & Business Banking (PBB), comprising two reportable segments, UK Personal & Business Banking, including Williams & Glyn, (UK PBB) and Ulster Bank.
   
Commercial & Private Banking (CPB), comprising two reportable segments, Commercial Banking and Private Banking.
   
Corporate & Institutional Banking (CIB); a single reportable segment.

RBS Capital Resolution (RCR) was established with effect from 1 January 2014 by the transfer of capital intensive and higher risk assets from existing divisions. Non-Core was dissolved on 31 December 2013. No business lines moved to RCR and so comparative data has not been restated.

RBS will continue to manage and report Citizens Financial Group (CFG) and RBS Capital Resolution (RCR) separately until disposal or wind-down. Residual unallocated costs will continue to be reported within central items.

As part of its internal reorganisation, RBS has also centralised all services and functions. The costs relating to Services and Functions previously reported as direct expenses in the divisions are now reallocated to businesses using appropriate drivers and reported as indirect expenses in the segmental income statements.

In addition, a number of previously reported reconciling items (Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, restructuring costs, amortisation of purchased intangible assets and bank levy) have now been allocated to the reportable segments.

Refer to ‘Presentation of information’ on pages 9 and 10 for further details. Comparatives have been restated accordingly.

Analysis of operating profit
The following tables provide a segmental analysis of operating profit/(loss) by main income statement captions. The segmental income statements on pages 24 to 68 reflect certain presentational reallocations as described in the notes below. These do not affect the overall operating profit.




Notes


10. Segmental analysis (continued)

Analysis of operating profit (continued)
 
 
 
 
 
 
 
 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Half year ended 30 June 2014
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Personal & Business Banking
2,276 
686 
2,962 
(1,820)
(148)
994 
Ulster Bank
323 
89 
412 
(300)
(57)
55 
 
 
 
 
 
 
 
Personal & Business Banking
2,599 
775 
3,374 
(2,120)
(205)
1,049 
 
 
 
 
 
 
 
Commercial Banking
999 
569 
1,568 
(902)
(31)
635 
Private Banking
344 
201 
545 
(400)
145 
 
 
 
 
 
 
 
Commercial & Private Banking
1,343 
770 
2,113 
(1,302)
(31)
780 
 
 
 
 
 
 
 
Corporate & Institutional Banking
365 
2,062 
2,427 
(2,158)
39 
308 
Central items
203 
146 
349 
(270)
12 
91 
Citizens Financial Group
987 
620 
1,607 
(1,082)
(104)
421 
RCR (1)
(1)
109 
108 
(176)
20 
(48)
 
 
 
 
 
 
 
Non-statutory basis
5,496 
4,482 
9,978 
(7,108)
(269)
2,601 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (2)
(51)
(51)
(51)
Gain on redemption of own debt
20 
20 
20 
Write down of goodwill
(130)
(130)
Strategic disposals
191 
191 
191 
RFS Holdings minority interest
(3)
25 
22 
(1)
21 
Statutory basis
5,493 
4,667 
10,160 
(7,239)
(269)
2,652 

Notes:
(1)
Reallocation of £12 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Comprises £11 million gain included in 'Income from trading activities' and £62 million loss included in 'Other operating income' on a statutory basis.




Notes


10. Segmental analysis (continued)

Analysis of operating profit (continued)

 
 
 
 
 
 
 
 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Half year ended 30 June 2013*
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Personal & Business Banking
2,200 
629 
2,829 
(1,885)
(256)
688 
Ulster Bank
302 
142 
444 
(322)
(503)
(381)
 
 
 
 
 
 
 
Personal & Business Banking
2,502 
771 
3,273 
(2,207)
(759)
307 
 
 
 
 
 
 
 
Commercial Banking
936 
613 
1,549 
(854)
(282)
413 
Private Banking
317 
214 
531 
(436)
(7)
88 
 
 
 
 
 
 
 
Commercial & Private Banking
1,253 
827 
2,080 
(1,290)
(289)
501 
 
 
 
 
 
 
 
Corporate & Institutional Banking (1)
313 
2,395 
2,708 
(2,682)
(223)
(197)
Central items
453 
219 
672 
(122)
553 
Citizens Financial Group
939 
570 
1,509 
(1,105)
(51)
353 
Non-Core (2)
(18)
384 
366 
(344)
(831)
(809)
 
 
 
 
 
 
 
Non-statutory basis
5,442 
5,166 
10,608 
(7,750)
(2,150)
708 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (3)
376 
376 
376 
Gain on redemption of own debt
191 
191 
191 
RFS Holdings minority interest
(5)
102 
97 
99 
 
 
 
 
 
 
 
Statutory basis
5,437 
5,835 
11,272 
(7,748)
(2,150)
1,374 

*Restated

Notes:
(1)
Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2)
Reallocation of £20 million between net interest income and non-interest income in respect of funding costs of rental assets, £19 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(3)
Comprises £175 million gain included in 'Income from trading activities' and £201 million gain included in 'Other operating income' on a statutory basis.


 

Notes


10. Segmental analysis (continued)

Analysis of operating profit (continued)

 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Quarter ended 30 June 2014
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Personal & Business Banking
1,152 
347 
1,499 
(955)
(60)
484 
Ulster Bank
169 
42 
211 
(155)
(10)
46 
 
 
 
 
 
 
 
Personal & Business Banking
1,321 
389 
1,710 
(1,110)
(70)
530 
 
 
 
 
 
 
 
Commercial Banking
511 
287 
798 
(493)
314 
Private Banking
174 
98 
272 
(201)
(1)
70 
 
 
 
 
 
 
 
Commercial & Private Banking
685 
385 
1,070 
(694)
384 
 
 
 
 
 
 
 
Corporate & Institutional Banking
186 
890 
1,076 
(1,146)
45 
(25)
Central items
100 
44 
144 
(71)
13 
86 
Citizens Financial Group
499 
391 
890 
(582)
(31)
277 
RCR (1)
28 
35 
(97)
128 
66 
 
 
 
 
 
 
 
Non-statutory basis
2,798 
2,127 
4,925 
(3,700)
93 
1,318 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (2)
(190)
(190)
(190)
Write down of goodwill
(130)
(130)
RFS Holdings minority interest
12 
12 
12 
 
 
 
 
 
 
 
Statutory basis
2,798 
1,949 
4,747 
(3,830)
93 
1,010 

Notes:
(1)
Reallocation of £9 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Comprises £84 million loss included in 'Income from trading activities' and £106 million loss included in 'Other operating income' on a statutory basis.




Notes


10. Segmental analysis (continued)

Analysis of operating profit (continued)

 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Quarter ended 31 March 2014*
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Personal & Business Banking
1,124 
339 
1,463 
(865)
(88)
510 
Ulster Bank
154 
47 
201 
(145)
(47)
 
 
 
 
 
 
 
Personal & Business Banking
1,278 
386 
1,664 
(1,010)
(135)
519 
 
 
 
 
 
 
 
Commercial Banking
488 
282 
770 
(409)
(40)
321 
Private Banking
170 
103 
273 
(199)
75 
 
 
 
 
 
 
 
Commercial & Private Banking
658 
385 
1,043 
(608)
(39)
396 
 
 
 
 
 
 
 
Corporate & Institutional Banking
179 
1,172 
1,351 
(1,012)
(6)
333 
Central items
103 
102 
205 
(199)
(1)
Citizens Financial Group
488 
229 
717 
(500)
(73)
144 
RCR (1)
(8)
81 
73 
(79)
(108)
(114)
 
 
 
 
 
 
 
Non-statutory basis
2,698 
2,355 
5,053 
(3,408)
(362)
1,283 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (2)
139 
139 
139 
Gain on redemption of own debt
20 
20 
20 
Strategic disposals
191 
191 
191 
RFS Holdings minority interest
(3)
13 
10 
(1)
 
 
 
 
 
 
 
Statutory basis
2,695 
2,718 
5,413 
(3,409)
(362)
1,642 

*Restated

Notes:
(1)
Reallocation of £3 million between net interest income and non-interest income in respect of funding costs of rental assets.
(2)
Comprises £95 million gain included in Income from trading activities and £44 million gain included in Other operating income on a statutory basis.

 

Notes


10. Segmental analysis (continued)

Analysis of operating profit (continued)

 
Net
Non-
 
 
Impairment
 
interest
interest
Total
Operating
(losses)/
Operating
income
income
income
expenses
recoveries
profit/(loss)
Quarter ended 30 June 2013*
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
UK Personal & Business Banking
1,118 
320 
1,438 
(1,044)
(126)
268 
Ulster Bank
152 
88 
240 
(187)
(263)
(210)
 
 
 
 
 
 
 
Personal & Business Banking
1,270 
408 
1,678 
(1,231)
(389)
58 
 
 
 
 
 
 
 
Commercial Banking
484 
325 
809 
(425)
(155)
229 
Private Banking
159 
110 
269 
(220)
(2)
47 
 
 
 
 
 
 
 
Commercial & Private Banking
643 
435 
1,078 
(645)
(157)
276 
 
 
 
 
 
 
 
Corporate & Institutional Banking (1)
141 
1,095 
1,236 
(1,487)
(144)
(395)
Central items
228 
207 
435 
(86)
352 
Citizens Financial Group
469 
278 
747 
(548)
(32)
167 
Non-Core (2)
19 
254 
273 
(159)
(398)
(284)
 
 
 
 
 
 
 
Non-statutory basis
2,770 
2,677 
5,447 
(4,156)
(1,117)
174 
Reconciling items:
 
 
 
 
 
 
Own credit adjustments (3)
127 
127 
127 
Gain on redemption of own debt
242 
242 
242 
Strategic disposals
RFS Holdings minority interest
(3)
(2)
(1)
 
 
 
 
 
 
 
Statutory basis
2,767 
3,053 
5,820 
(4,155)
(1,117)
548 

*Restated

Notes:
(1)
Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2)
Reallocation of £11 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(3)
Comprises £76 million gain included in 'Income from trading activities' and £51 million gain included in 'Other operating income' on a statutory basis.


 

Notes


10. Segmental analysis (continued)

Total revenue
 
 
 
 
 
 
 
 
Half year ended
 
30 June 2014
 
30 June 2013*
 
 
Inter
 
 
 
Inter
 
 
External
segment
Total
 
External
segment
Total
Total revenue
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
UK Personal & Business Banking
3,583 
3,590 
 
3,620 
3,627 
Ulster Bank
408 
40 
448 
 
549 
36 
585 
 
 
 
 
 
 
 
 
Personal & Business Banking
3,991 
47 
4,038 
 
4,169 
43 
4,212 
 
 
 
 
 
 
 
 
Commercial Banking
1,729 
13 
1,742 
 
1,778 
16 
1,794 
Private Banking
470 
258 
728 
 
503 
340 
843 
 
 
 
 
 
 
 
 
Commercial & Private Banking
2,199 
271 
2,470 
 
2,281 
356 
2,637 
 
 
 
 
 
 
 
 
Corporate & Institutional Banking
3,033 
2,028 
5,061 
 
3,461 
2,691 
6,152 
Central items
1,200 
2,051 
3,251 
 
1,550 
4,665 
6,215 
Citizens Financial Group
1,724 
1,729 
 
1,644 
50 
1,694 
RCR
443 
254 
697 
 
n/a
n/a
n/a
Non-Core
n/a
n/a
n/a
 
1,081 
223 
1,304 
 
 
 
 
 
 
 
 
Non-statutory basis
12,590 
4,656 
17,246 
 
14,186 
8,028 
22,214 
Reconciling items:
 
 
 
 
 
 
 
Own credit adjustments
(51)
(51)
 
376 
376 
Gain on redemption of own debt
20 
20 
 
191 
191 
Strategic disposals
191 
191 
 
RFS Holdings minority interest
25 
25 
 
102 
102 
Elimination of intra-group transactions
(4,656)
(4,656)
 
(8,028)
(8,028)
 
 
 
 
 
 
 
 
Statutory basis
12,775 
12,775 
 
14,855 
14,855 

*Restated



Notes


10. Segmental analysis (continued)

Total revenue (continued)
 
Quarter ended
 
30 June 2014
 
31 March 2014*
 
30 June 2013*
 
 
Inter
 
 
 
Inter
 
 
 
Inter
 
 
External
segment
Total
 
External
segment
Total
 
External
segment
Total
Total revenue
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
UK Personal & Business Banking
1,806 
1,809 
 
1,777 
1,781 
 
1,821 
(7)
1,814 
Ulster Bank
210 
20 
230 
 
198 
20 
218 
 
289 
27 
316 
 
 
 
 
 
 
 
 
 
 
 
 
Personal & Business Banking
2,016 
23 
2,039 
 
1,975 
24 
1,999 
 
2,110 
20 
2,130 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking
875 
(18)
857 
 
854 
31 
885 
 
909 
917 
Private Banking
234 
127 
361 
 
236 
131 
367 
 
255 
162 
417 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & Private Banking
1,109 
109 
1,218 
 
1,090 
162 
1,252 
 
1,164 
170 
1,334 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate & Institutional Banking
1,383 
1,128 
2,511 
 
1,650 
900 
2,550 
 
1,628 
1,470 
3,098 
Central items
552 
1,019 
1,571 
 
648 
1,032 
1,680 
 
873 
2,319 
3,192 
Citizens Financial Group
947 
949 
 
777 
780 
 
813 
25 
838 
RCR
193 
97 
290 
 
250 
157 
407 
 
n/a
n/a
n/a
Non-Core
n/a
n/a
n/a
 
n/a
n/a
n/a
 
620 
144 
764 
 
 
 
 
 
 
 
 
 
 
 
 
Non-statutory basis
6,200 
2,378 
8,578 
 
6,390 
2,278 
8,668 
 
7,208 
4,148 
11,356 
Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
Own credit adjustments
(190)
(190)
 
139 
139 
 
127 
127 
Gain on redemption of own debt
 
20 
20 
 
242 
242 
Strategic disposals
 
191 
191 
 
RFS Holdings minority interest
11 
11 
 
14 
14 
 
Elimination of intra-group transactions
(2,378)
(2,378)
 
(2,278)
(2,278)
 
(4,148)
(4,148)
 
 
 
 
 
 
 
 
 
 
 
 
Statutory basis
6,021 
6,021 
 
6,754 
6,754 
 
7,584 
7,584 

Total assets and liabilities
 
 
 
 
 
 
 
 
 
 
30 June 2014
 
31 March 2014*
 
31 December 2013*
Assets
Liabilities
 
Assets
Liabilities
 
Assets
Liabilities
Total assets
£m 
£m 
 
£m 
£m 
 
£m 
£m 
 
 
 
 
 
 
 
 
 
UK Personal & Business Banking
133,559 
147,650 
 
132,802 
146,264 
 
132,153 
146,255 
Ulster Bank
26,734 
24,718 
 
26,160 
26,055 
 
28,183 
27,047 
 
 
 
 
 
 
 
 
 
Personal & Business Banking
160,293 
172,368 
 
158,962 
172,319 
 
160,336 
173,302 
 
 
 
 
 
 
 
 
 
Commercial Banking
88,573 
90,272 
 
89,608 
90,158 
 
87,900 
93,201 
Private Banking
20,794 
36,379 
 
21,227 
37,173 
 
21,168 
37,564 
 
 
 
 
 
 
 
 
 
Commercial & Private Banking
109,367 
126,651 
 
110,835 
127,331 
 
109,068 
130,765 
 
 
 
 
 
 
 
 
 
Corporate & Institutional Banking
537,563 
493,282 
 
546,968 
503,189 
 
551,200 
512,691 
Central items
92,392 
81,308 
 
91,219 
82,839 
 
103,450 
84,279 
Citizens Financial Group
76,090 
63,661 
 
76,063 
63,547 
 
71,738 
61,289 
RCR
34,449 
12,731 
 
38,793 
13,475 
 
n/a
n/a
Non-Core
n/a
n/a
 
n/a
n/a
 
31,177 
6,100 
 
 
 
 
 
 
 
 
 
Non-statutory basis
1,010,154 
950,001 
 
1,022,840 
962,700 
 
1,026,969 
968,426 
Reconciling item:
 
 
 
 
 
 
 
 
RFS Holdings minority interest
954 
144 
 
930 
134 
 
909 
237 
 
 
 
 
 
 
 
 
 
Statutory basis
1,011,108 
950,145 
 
1,023,770 
962,834 
 
1,027,878 
968,663 
 
 
 
 
 
 
 
 
 
*Restated
 
 
 
 
 
 
 
 



Notes


11. Financial instruments

Classification
The following tables analyse the Group’s financial assets and liabilities in accordance with the categories of financial instruments in IAS 39 with assets and liabilities outside the scope of IAS 39 shown separately.

 
 
 
 
 
 
 
 
 
Non
 
Financial instruments
financial
 
 
 
 
 
 
 
Amortised
Finance
assets/
 
HFT (1)
DFV (2)
HD (3)
AFS (4)
LAR (5)
HTM(6)
 cost
leases
liabilities
Total 
30 June 2014
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
68,670 
 
 
 
68,670 
Loans and advances to banks
 
 
 
 
 
 
 
 
 
 
  - reverse repos
25,139 
 
3,024 
 
 
 
28,163 
  - other
9,907 
 
18,997 
 
 
 
28,904 
Loans and advances to customers
 
 
 
 
 
 
 
 
 
 
  - reverse repos
53,142 
 
400 
 
 
 
53,542 
  - other
18,171 
50 
 
360,790 
 
6,543 
 
385,554 
Debt securities
55,893 
121 
 
48,698 
3,526 
4,556 
 
 
 
112,794 
Equity shares
6,444 
338 
 
1,052 
 
 
 
7,834 
Settlement balances
 
19,682 
 
 
 
19,682 
Derivatives
270,807 
 
4,099 
 
 
 
 
 
 
274,906 
Intangible assets
 
 
 
 
 
 
 
 
12,173 
12,173 
Property, plant and equipment
 
 
 
 
 
 
 
 
7,115 
7,115 
Deferred tax
 
 
 
 
 
 
 
 
3,107 
3,107 
Prepayments, accrued income and
 
 
 
 
 
 
 
 
 
 
  other assets
 
 
 
7,418 
7,418 
Assets of disposal groups
 
 
 
 
 
 
 
 
1,246 
1,246 
 
 
 
 
 
 
 
 
 
 
 
 
439,503 
509 
4,099 
49,750 
475,089 
4,556 
 
6,543 
31,059 
1,011,108 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits by banks
 
 
 
 
 
 
 
 
 
 
  - repos
28,931 
 
 
 
 
2,791 
 
 
31,722 
  - other
22,168 
 
 
 
 
17,011 
 
 
39,179 
Customer accounts
 
 
 
 
 
 
 
 
 
 
  - repos
46,861 
 
 
 
 
4,679 
 
 
51,540 
  - other
9,287 
5,248 
 
 
 
 
386,691 
 
 
401,226 
Debt securities in issue
7,339 
12,967 
 
 
 
 
38,781 
 
 
59,087 
Settlement balances
 
 
 
 
15,128 
 
 
15,128 
Short positions
39,019 
 
 
 
 
 
 
 
39,019 
Derivatives
266,544 
 
3,543 
 
 
 
 
 
 
270,087 
Accruals, deferred income and
 
 
 
 
 
 
 
 
 
 
  other liabilities
 
 
 
 
1,744 
15 
13,117 
14,876 
Retirement benefit liabilities
 
 
 
 
 
 
 
 
2,742 
2,742 
Deferred tax
 
 
 
 
 
 
 
 
605 
605 
Subordinated liabilities
846 
 
 
 
 
23,963 
 
 
24,809 
Liabilities of disposal groups
 
 
 
 
 
 
 
 
125 
125 
 
 
 
 
 
 
 
 
 
 
 
 
420,149 
19,061 
3,543 
 
 
 
490,788 
15 
16,589 
950,145 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
60,963 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,011,108 

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



Notes


11. Financial instruments: Classification (continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non 
 
Financial instruments
financial 
 
 
 
 
 
 
Amortised
Finance 
assets/ 
 
HFT (1)
DFV (2)
HD (3)
AFS (4)
LAR (5)
 cost
leases 
liabilities 
Total 
31 December 2013
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
82,659 
 
 
 
82,659 
Loans and advances to banks
 
 
 
 
 
 
 
 
 
  - reverse repos
25,795 
 
721 
 
 
 
26,516 
  - other
9,952 
 
17,603 
 
 
 
27,555 
Loans and advances to customers
 
 
 
 
 
 
 
 
 
  - reverse repos
49,897 
 
-
 
 
 
49,897 
  - other
19,170 
49 
 
-
364,772 
 
6,834 
 
390,825 
Debt securities
56,582 
122 
 
53,107 
3,788 
 
 
 
113,599 
Equity shares
7,199 
400 
 
1,212 
 
 
 
 
8,811 
Settlement balances
 
5,591 
 
 
 
5,591 
Derivatives
283,508 
 
4,531 
 
 
 
 
 
288,039 
Intangible assets
 
 
 
 
 
 
 
12,368 
12,368 
Property, plant and equipment
 
 
 
 
 
 
 
7,909 
7,909 
Deferred tax
 
 
 
 
 
 
 
3,478 
3,478 
Prepayments, accrued income and
 
 
 
 
 
 
 
 
 
  other assets
 
 
 
7,614 
7,614 
Assets of disposal groups
 
 
 
 
 
 
 
3,017 
3,017 
 
 
 
 
 
 
 
 
 
 
 
452,103 
571 
4,531 
54,319 
475,134 
 
6,834 
34,386 
1,027,878 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Deposits by banks
 
 
 
 
 
 
 
 
 
  - repos
23,127 
 
 
 
5,523 
 
 
28,650 
  - other
19,764 
 
 
 
15,565 
 
 
35,329 
Customer accounts
 
 
 
 
 
 
 
 
 
  - repos
52,300 
 
 
 
4,184 
 
 
56,484 
  - other
10,236 
5,862 
 
 
 
398,298 
 
 
414,396 
Debt securities in issue
8,560 
15,848 
 
 
 
43,411 
 
 
67,819 
Settlement balances
 
 
 
5,313 
 
 
5,313 
Short positions
28,022 
 
 
 
 
 
 
28,022 
Derivatives
281,299 
 
4,227 
 
 
 
 
 
285,526 
Accruals, deferred income and
 
 
 
 
 
 
 
 
 
  other liabilities
 
 
 
1,764 
19 
14,234 
16,017 
Retirement benefit liabilities
 
 
 
 
 
 
 
3,210 
3,210 
Deferred tax
 
 
 
 
 
 
 
507 
507 
Subordinated liabilities
868 
 
 
 
23,144 
 
 
24,012 
Liabilities of disposal groups
 
 
 
 
 
 
 
3,378 
3,378 
 
 
 
 
 
 
 
 
 
 
 
423,308 
22,578 
4,227 
 
 
497,202 
19 
21,329 
968,663 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
59,215 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,027,878 
Notes:
(1)
Held-for-trading.
(2)
Designated as at fair value.
(3)
Hedging derivatives.
(4)
Available-for-sale.
(5)
Loans and receivables.
(6)
Held to maturity

Apart from the reclassification of £3.6 billion of Treasury debt securities from AFS to HTM in Q1 2014, there were no other reclassifications in the first half of 2014.




Notes


11. Financial instruments (continued)

Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The table below shows credit valuation adjustments (CVA) and other valuation reserves.  CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures.

 
30 June
31 December
2014 
2013 
 
£m
£m
 
 
 
Credit valuation adjustments
 
 
  - monoline insurers and credit derivative product companies (CDPC)
57 
99 
  - other counterparties
1,433 
1,667 
 
 
 
 
1,490 
1,766 
 
 
 
Other valuation reserves
 
 
  - bid-offer
405 
513 
  - funding valuation adjustment
522 
424 
  - product and deal specific
718 
745 
  - other
27 
 
 
 
 
1,672 
1,690 
 
 
 
Valuation reserves
3,162 
3,456 

The table below analyses CVA relating to other counterparties by rating and sector.
 
 
 
30 June
31 December
Ratings:
2014 
2013 
£m 
£m 
 
 
 
AAA
85 
104 
AA to AA+
25 
13 
A to AA-
111 
168 
BBB- to A-
336 
446 
Non-investment grade
876 
936 
 
 
 
 
1,433 
1,667 
 
 
 
Counterparty:
 
 
Banks
38 
89 
Other financial institutions
196 
199 
Corporate
1,013 
1,126 
Government
186 
253 
 
 
 
 
1,433 
1,667 

Key points
·
The decrease in CVA was primarily driven by tightening of credit spreads.
   
·
Other valuation reserves were broadly flat with balance sheet reduction impacts being offset by additional funding related reserves.




Notes


11. Financial instruments: Valuation reserves (continued)

Own credit
The cumulative own credit adjustment (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below.

Cumulative OCA (CR)/DR (1)
 
 
 
Subordinated 
 
 
 
Debt securities in issue (2)
liabilities 
 
 
 
HFT 
DFV 
Total 
DFV 
Total 
Derivatives 
Total (3)
£m 
£m 
£m 
£m 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
30 June 2014
(395)
(87)
(482)
237 
(245)
54 
(191)
31 December 2013
(467)
(33)
(500)
256 
(244)
96 
(148)
30 June 2013
(488)
244 
(244)
380 
136 
309 
445 
 
 
 
 
 
 
 
 
Carrying values of underlying liabilities
£bn 
£bn 
£bn 
£bn 
£bn 
 
 
 
 
 
 
 
 
 
 
30 June 2014
7.3 
13.0 
20.3 
0.8 
21.1 
 
 
31 December 2013
8.6 
15.8 
24.4 
0.9 
25.3 
 
 
30 June 2013
9.3 
20.7 
30.0 
0.9 
30.9 
 
 

Notes:
(1)
The OCA does not alter cash flows and is not used for performance management.
(2)
Includes wholesale and retail note issuances.
(3)
The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.

Key points
·
The cumulative OCA decreased during the first half of 2014 due to tightening of RBS credit spreads in the second quarter of 2014 partially offset by the impact of time decay (e.g. the reduction in the remaining time to maturity of the trades reduces the impact of changes in RBS credit spreads).
   
·
Senior issued debt OCA is determined by reference to secondary debt issuance spreads, the five year spread tightened to 72 basis points (31 December 2013 - 92 basis points; 30 June 2013 - 140 basis points).
   
·
RBS CDS spreads tightened to 85 basis points (31 December 2013 - 114 basis points; 30 June 2013 - 228 basis points).




Notes


11. Financial instruments (continued)

Financial instruments carried at fair value - valuation hierarchy
Commentary on the control environment, valuation techniques and related aspects pertaining to financial instruments measured at fair value are included in the Group’s 2013 Annual Report and Accounts. There have been no material changes to valuation or levelling approaches in the half year to 30 June 2014.

The tables below show financial instruments carried at fair value on the Group’s balance sheet by valuation hierarchy – level 1, level 2 and level 3 and valuation sensitivities for level 3 balances.

 
 
 
 
 
 
Level 3 sensitivity
 
Level 1 
Level 2 
Level 3 
Total 
 
Favourable 
Unfavourable 
30 June 2014
£bn 
£bn 
£bn 
£bn 
 
£m 
£m 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Loans and advances to banks
34.7 
0.3 
35.0 
 
20 
(10)
Loans and advances to customers
71.2 
0.2 
71.4 
 
20 
(30)
Debt securities
58.3 
44.6 
1.8 
104.7 
 
130 
(60)
Equity shares
6.1 
1.1 
0.6 
7.8 
 
100 
(80)
Derivatives
0.1 
271.8 
3.1 
275.0 
 
330 
(190)
 
 
 
 
 
 
 
 
 
64.5 
423.4 
6.0 
493.9 
 
600 
(370)
 
 
 
 
 
 
 
 
Proportion
13.1%
85.7%
1.2%
100.0%
 
 
 
 
 
 
 
 
 
 
 
Of which
 
 
 
 
 
 
 
RBS excluding RCR
64.4 
409.5 
4.4 
478.3 
 
 
 
RCR
0.1 
13.9 
1.6 
15.6 
 
 
 
 
 
 
 
 
 
 
 
 
64.5 
423.4 
6.0 
493.9 
 
 
 

31 December 2013
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Loans and advances to banks
35.5 
0.3 
35.8 
 
30 
(10)
Loans and advances to customers
68.9 
0.2 
69.1 
 
20 
(30)
Debt securities
58.0 
49.7 
2.1 
109.8 
 
160 
(100)
Equity shares
7.0 
1.1 
0.7 
8.8 
 
120 
(110)
Derivatives
0.1 
284.4 
3.5 
288.0 
 
390 
(250)
 
 
 
 
 
 
 
 
 
65.1 
439.6 
6.8 
511.5 
 
720 
(500)
 
 
 
 
 
 
 
 
Proportion
12.7%
86.0%
1.3%
100.0%
 
 
 
 
 
 
 
 
 
 
 
Of which
 
 
 
 
 
 
 
RBS excluding Non-Core
64.9 
436.2 
4.9 
506.0 
 
 
 
Non-Core
0.2 
3.4 
1.9 
5.5 
 
 
 
 
 
 
 
 
 
 
 
 
65.1 
439.6 
6.8 
511.5 
 
 
 




Notes


11. Financial instruments: Valuation hierarchy (continued)

 
 
 
 
 
 
Level 3 sensitivity
 
Level 1 
Level 2 
Level 3 
Total 
 
Favourable 
Unfavourable 
30 June 2014
£bn 
£bn 
£bn 
£bn 
 
£m 
£m 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits by banks
51.0 
0.1 
51.1 
 
10 
Customer accounts
61.2 
0.2 
61.4 
 
(10)
Debt securities in issue
19.0 
1.3 
20.3 
 
30 
(50)
Short positions
34.3 
4.7 
39.0 
 
Derivatives
0.1 
267.6 
2.5 
270.2 
 
130 
(120)
Subordinated liabilities
0.8 
0.8 
 
-
-
 
 
 
 
 
 
 
 
 
34.4 
404.3 
4.1 
442.8 
 
170 
(180)
 
 
 
 
 
 
 
 
Proportion
7.8%
91.3%
0.9%
100.0%
 
 
 
 
 
 
 
 
 
 
 
Of which
 
 
 
 
 
 
 
RBS excluding RCR
34.4 
393.5 
3.7 
431.6 
 
 
 
RCR
10.8 
0.4 
11.2 
 
 
 
 
 
 
 
 
 
 
 
 
34.4 
404.3 
4.1 
442.8 
 
 
 

31 December 2013
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits by banks
42.8 
0.1 
42.9 
 
10 
Customer accounts
68.2 
0.2 
68.4 
 
(10)
Debt securities in issue
23.1 
1.3 
24.4 
 
50 
(70)
Short positions
23.9 
4.1 
28.0 
 
Derivatives
0.1 
282.4 
3.0 
285.5 
 
130 
(120)
Subordinated liabilities
0.9 
0.9 
 
-
-
 
 
 
 
 
 
 
 
 
24.0 
421.5 
4.6 
450.1 
 
190 
(200)
 
 
 
 
 
 
 
 
Proportion
5.3%
93.7%
1.0%
100.0%
 
 
 
 
 
 
 
 
 
 
 
Of which
 
 
 
 
 
 
 
RBS excluding Non-Core
24.0 
420.1 
4.5 
448.6 
 
 
 
Non-Core
1.4 
0.1 
1.5 
 
 
 
 
 
 
 
 
 
 
 
 
24.0 
421.5 
4.6 
450.1 
 
 
 
 
 
 
 
 
 
 
 




Notes


11. Financial instruments (continued)

Valuation techniques
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that have a material impact on the valuation of Level 3 financial instruments. The table excludes unobservable inputs where the impact on valuation is less significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note holder. Whilst we indicate where we consider that there are significant relationships between the inputs, these inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.

 
Level 3 (£bn)
 
 
Range
Financial instruments
Assets
Liabilities
Valuation technique
Unobservable inputs
Low
High
Loans
0.3
0.1
Discounted cash flow (DCF)
Credit spreads (2)
285bps
1211bps
 
   
 
 
 
 
Deposits
0.2
0.2
Option pricing
Volatility (3)
27%
30%
 
   
 
 
 
 
     
DCF
Credit spreads (2)
0bps
25bps
       
Recovery rates (4)
0%
71%
     
Price based
Price (5)
80%
100%
             
Debt securities
   
 
 
 
 
RMBS
0.2
 
Price based
Price (5)
0%
99%
 
   
 
 
 
 
 
   
DCF
Probability of default (6)
3%
12%
 
     
Yield (5)
10%
40%
 
     
Conditional prepayment rates (CPR) (7)
0%
10%
 
   
 
 
 
 
CDO and CLO
0.8
 
Price based
Price (5)
0%
100%
 
   
 
 
 
 
 
   
DCF
Yield (5)
0%
40%
 
     
Probability of default (6)
2%
10%
Other ABS
0.4
 
Price based
Price (5)
0%
100%
 
   
 
 
 
 
Other debt securities
0.4
 
DCF
Credit spreads (2)
100bps
109bps
 
   
Price based
Price (5)
0%
100%
 
   
 
 
 
 
Equity securities
0.6
 
Price based
Price (5)
0%
100%
 
   
 
 
 
 
 
   
EBITDA multiple
EBITDA multiple (8)
12x
40x
 
   
DCF
Yield (5)
10%
30%
 
   
 
 
 
 
 
   
 
Recovery rates (4)
0%
100%
 
   
 
 
 
 
Derivatives
   
 
 
 
 
Foreign exchange
1.0
0.6
Option pricing model
Correlation (9)
(41%)
100%
 
     
Volatility (3)
6%
23%
 
   
 
 
 
 
Interest rate
1.3
0.5
Option pricing model
Correlation (9)
(40%)
100%
 
   
 
 
 
 
 
   
DCF
CPR (7)
2%
20%
 
   
 
 
 
 
Equities and commodities
0.1
0.6
Option pricing model
Volatility (3)
27%
30%
 
   
 
 
 
 
Credit
0.7
0.8
Price based
Price (5)
0%
100%
 
   
 
 
 
 
 
   
DCF based on defaults
Recovery rates (4)
0%
100%
 
   
  and recoveries
Credit spreads (2)
25bps
410bps



Notes


11. Financial instruments: Valuation techniques (continued)

Notes:
(1)
Level 3 structured issued debt securities of £1.3 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component.
(2)
Credit spreads and discount margins: Credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(3)
Volatility: A measure of the tendency of a price to change with time.
(4)
Recovery rate: Reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(5)
Price and yield: There may be a range of price based information used for evaluating the value of an instrument. This may be a direct comparison of one instrument or portfolio with another or movements in a more liquid instrument may be used to indicate the movement in the value of less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected payouts. Similarly to price, an instrument’s yield may be compared to other instruments either directly or indirectly. Prices move inversely to yields.
(6)
Probability of default: This is a measure of the expected rate of losses in an underlying portfolio of mortgages or other receivables. The higher the probability of default the lower the value of the underlying portfolio. The cumulative losses tend to move conversely to prepayment rates and in line with constant default rates. The higher the rate, the higher the expected number of defaults and therefore the expected losses. An increase in the default rate is likely to reduce the value of an asset.
(7)
Conditional prepayment rate: The measure of the rate at which underlying mortgages or loans are prepaid. An increase in prepayment rates in a portfolio may increase or decrease its value depending upon the credit quality and payment terms of the underlying loans. For example an increase in prepayment rate of a portfolio of high credit quality underlying assets may reduce the value and size of the portfolio whereas for lower credit quality underlyings it may increase the value.
(8)
EBITDA (earnings before interest, tax, depreciation and amortisation) multiple: This is a commonly used valuation technique for equity holdings. The EBITDA of a company is used as a proxy for the future cash flows and when multiplied by an appropriate factor gives an estimate for the value of the company.
(9)
Correlation: Measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(10)
Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
(11)
Improvements in price discovery resulted in transfers of £0.2 billion and £0.1 billion of asset and liabilities respectively from level 3 to level 2. Transfers from level 2 to level 3 mainly comprised debt securities in issue of £0.2 billion, derivative assets and liabilities of £0.1 billion each and debt securities of £0.1 billion due to increased unobservability of inputs used in the valuation of these instruments. There were no significant transfers between level 1 and level 2.




Notes


11. Financial instruments: Movement in level 3 portfolios
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts recorded in
 
 
 
 
 
 
 
 
 
 
 
 
 
the income statement
 
At 
Amount recorded in
 
 
 
Purchases 
Settlements
Sales 
Foreign 
At
 
in respect of balances
1 January 
Income 
SOCI 
Level 3 transfers
and
 exchange 
30 June
held at period end
2014 
statement (1) 
 (2) 
In 
Out 
issuances (3)
and other 
2014 
Unrealised 
Realised 
 
£m 
£m 
£m 
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
 
£m 
£m 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FVTPL (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and advances
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  - banks
310 
(12)
 
(5)
293 
 
16 
  - customers
172 
(1)
 
13 
(3)
48 
(14)
(10)
(3)
202 
 
(13)
Debt securities
906 
77 
 
77 
(52)
238 
(41)
(225)
(5)
975 
 
55 
10 
Equity shares
286 
83 
 
(38)
40 
(31)
(46)
(3)
291 
 
(22)
Derivatives
3,493 
(282)
 
99 
(55)
100 
(212)
(65)
(14)
3,064 
 
(297)
(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FVTPL assets
5,167 
(135)
 
189 
(148)
426 
(298)
(351)
(25)
4,825 
 
(261)
18 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of which ABS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  - FVTPL (4)
591 
84 
 
24 
(29)
181 
(17)
(222)
(3)
609 
 
59 
  - AFS
1,108 
(9)
 
(195)
(111)
805 
 
(3)
11 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale (AFS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
1,194 
(9)
 
(297)
(53)
848 
 
(3)
11 
Equity shares
400 
26 
 
(61)
(24)
(61)
(7)
282 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS assets
1,594 
12 
17 
 
(61)
(321)
(114)
(6)
1,130 
 
12 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,761 
(123)
17 
 
192 
(209)
432 
(619)
(465)
(31)
5,955 
 
(260)
30 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
253 
13 
 
10 
(2)
275 
 
13 
Debt securities in issue
1,354 
(60)
 
236 
(34)
36 
(230)
(5)
(1)
1,296 
 
(7)
Short positions
17 
(1)
 
(11)
(4)
 
(4)
Derivatives
3,007 
(124)
 
79 
(84)
53 
(334)
(69)
(11)
2,520 
 
(98)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,631 
(172)
 
325 
(129)
96 
(566)
(78)
(11)
4,099 
 
(96)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains/(losses)
 
49 
14 
 
 
 
 
 
 
 
 
 
(164)
30 

Notes:
(1)
Net losses on HFT instruments of £94 million (31 December 2013 - £143 million) were recorded in income from trading activities. Net gains on other instruments of £143 million (31 December 2013 - £11 million) were recorded in other operating income, interest income as appropriate.
(2)
Consolidated statement of comprehensive income.
(3)
Includes £36 million of debt securities in issue and £7 million derivative liabilities relating to issuances.
(4)
Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.




Notes


11. Financial instruments (continued)

Fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
 
30 June 2014
 
31 December 2013
 
Carrying 
 
 
Carrying 
 
 
value 
Fair value 
 
value 
Fair value 
 
£bn 
£bn 
 
£bn 
£bn 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
Loans and advances to banks
20.5 
20.5 
 
16.8 
16.8 
Loans and advances to customers
367.7 
357.9 
 
371.6 
360.0 
Debt securities
8.1 
7.8 
 
3.8 
3.2 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
Deposits by banks
19.3 
19.3 
 
20.3 
20.3 
Customer accounts
140.8 
141.0 
 
133.8 
134.0 
Debt securities in issue
38.8 
40.4 
 
43.4 
44.7 
Subordinated liabilities
24.0 
24.4 
 
23.1 
22.5 

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates. Furthermore, there is a wide range of potential valuation techniques. Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.

For the following short-term financial instruments fair value approximates to carrying value: cash and balances at central banks, items in the course of collection from and transmission to other banks, settlement balances, customer demand deposits and notes in circulation. These are excluded from the table above.



Notes


12. Provisions for liabilities and charges

 
 
 
Other
 
Other
 
 
 
 
 
 
 
 customer
 
regulatory
 
 
 
 
 
PPI
IRHP
 redress
LIBOR
provisions
Litigation
Property
Other
Total
 
£m
£m
£m
£m
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
At 1 January 2014
926 
1,077 
337 
416 
150 
2,018 
379 
186 
5,489 
Currency translation and other
 
 
 
 
 
 
 
 
 
  movement
(2)
(15)
(17)
Charge to income statement
 
 
 
 
 
 
 
 
 
  - continuing operations
23 
34 
81 
140 
Releases to income statement
 
 
 
 
 
 
 
 
 
  - continuing operations
(5)
(4)
(5)
(14)
Provisions utilised
(218)
(199)
(26)
(414)
(13)
(59)
(32)
(961)
 
 
 
 
 
 
 
 
 
 
At 31 March 2014
708 
878 
329 
150 
2,020 
317 
235 
4,637 
Currency translation and other
 
 
 
 
 
 
 
 
 
  movement
(2)
(46)
(2)
(50)
Charge to income statement
 
 
 
 
 
 
 
 
 
  - continuing operations
150 
100 
28 
34 
149 
93 
554 
Releases to income statement
 
 
 
 
 
 
 
 
 
  - continuing operations
(3)
(31)
(10)
(44)
Provisions utilised
(272)
(218)
(53)
(5)
(67)
(70)
(39)
(724)
 
 
 
 
 
 
 
 
 
 
At 30 June 2014
586 
760 
301 
143 
1,910 
384 
289 
4,373 

13. Contingent liabilities and commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 June 2014
 
31 March 2014
 
31 December 2013
 
RBS
 
 
 
RBS
 
 
 
RBS excl.
 
 
 
excl. RCR
RCR
Total
 
excl. RCR
RCR
Total
 
Non-Core
Non-Core
Total
 
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
 
 
 
 
 
 
 
 
 
 
 
Guarantees and assets pledged
 
 
 
 
 
 
 
 
 
 
 
  as collateral security
19,542 
220 
19,762 
 
19,634 
270 
19,904 
 
19,563 
616 
20,179 
Other
6,145 
187 
6,332 
 
6,039 
236 
6,275 
 
5,893 
98 
5,991 
 
 
 
 
 
 
 
 
 
 
 
 
 
25,687 
407 
26,094 
 
25,673 
506 
26,179 
 
25,456 
714 
26,170 
 
 
 
 
 
 
 
 
 
 
 
 
Commitments
 
 
 
 
 
 
 
 
 
 
 
Undrawn formal standby
 
 
 
 
 
 
 
 
 
 
 
  facilities, credit lines and other
 
 
 
 
 
 
 
 
 
 
 
  commitments to lend
208,299 
2,076 
210,375 
 
208,550 
2,482 
211,032 
 
210,766 
2,280 
213,046 
Other
2,616 
36 
2,652 
 
2,590 
13 
2,603 
 
2,793 
2,793 
 
 
 
 
 
 
 
 
 
 
 
 
 
210,915 
2,112 
213,027 
 
211,140 
2,495 
213,635 
 
213,559 
2,280 
215,839 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities and
 
 
 
 
 
 
 
 
 
 
 
  commitments
236,602 
2,519 
239,121 
 
236,813 
3,001 
239,814 
 
239,015 
2,994 
242,009 

Additional contingent liabilities arise in the normal course of the Group’s business. It is not anticipated that any material loss will arise from these transactions.



Notes


14. Litigation, investigations and reviews
Arising out of their normal business operations, the Company and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action in the United Kingdom, the European Union, the United States and other jurisdictions.

The Group recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of the legal proceedings, investigations and regulatory and governmental matters in which the Group is involved is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory and governmental matters as at 30 June 2014 (see Note 12). The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that the Group has recognised.

In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can be reasonably estimated for any claim. The Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.

There are also situations where the Group may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, even for those matters for which the Group believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities.

Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened) that are material individually or in aggregate.

Litigation

Shareholder litigation
RBS and certain of its subsidiaries, together with certain current and former officers and directors were named as defendants in a purported class action filed in the United States District Court for the Southern District of New York involving holders of American Depositary Receipts (the ADR claims).

A consolidated amended complaint asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the Securities Act was filed in November 2011 on behalf of all persons who purchased or otherwise acquired the Group's American Depositary Receipts (ADRs) from issuance through 20 January 2009. In September 2012, the Court dismissed the ADR claims with prejudice. On 5 August 2013, the Court denied the plaintiffs’ motions for reconsideration and for leave to re-plead their case. The plaintiffs appealed the dismissal of this case to the Second Circuit Court of Appeals and that appeal was heard on 19 June 2014. A decision in respect of the appeal is awaited.




Notes


14. Litigation, investigations and reviews (continued)
Additionally, between March and July 2013, claims were issued in the High Court of Justice of England and Wales by sets of current and former shareholders, against the Group (and in one of those claims, also against certain former individual officers and directors) alleging that untrue and misleading statements and/or improper omissions were made in connection with the rights issue announced by the Group on 22 April 2008 in breach of the Financial Services and Markets Act 2000. On 30 July 2013 these and other similar threatened claims were consolidated by the Court via a Group Litigation Order. The Group’s defence to the claims was filed on 13 December 2013. Since then, further High Court claims have been issued against the Group under the Group Litigation Order. There are likely to be further case management conferences which, in due course, will lead to a trial date being set.

Other securitisation and securities related litigation in the United States
Group companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United States that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and purported class action suits. Together, the pending individual and class action cases involve the issuance of more than US$64 billion of mortgage-backed securities (MBS) issued primarily from 2005 to 2007. Although the allegations vary by claim, in general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued. Group companies remain as defendants in more than 40 lawsuits and arbitrations brought by purchasers of MBS, including the purported class actions identified below.

Among these MBS lawsuits are two cases filed on 2 September 2011 by the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The primary FHFA lawsuit remains pending in the United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of MBS for which Group entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. Of these approximately US$10 billion were outstanding at 30 June 2014 with cumulative losses of approximately US$1.03 billion (being the loss of principal value suffered by security holders). On 30 September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended complaint in this case. Discovery is ongoing.

The other remaining FHFA lawsuit that involves the Group (in which the primary defendant is Nomura) names RBS Securities Inc. as a defendant by virtue of the fact that it was an underwriter of some of the securities at issue. This case is part of a coordinated proceeding in the United States District Court for the Southern District of New York in which discovery is underway. Three other FHFA lawsuits (against JP Morgan, Morgan Stanley and Countrywide) in which RBS Securities Inc. was an underwriter defendant were settled without any contribution from RBS Securities Inc. On 19 June 2014, another FHFA lawsuit in which RBS Securities Inc. was an underwriter defendant (against Ally Financial Group) was settled by RBS Securities Inc. for US$99.5 million. This amount is fully provided for.

Other MBS lawsuits against Group companies include three cases filed by the National Credit Union Administration Board (on behalf of US Central Federal Credit Union, Western Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Members United Corporate Federal Credit Union) and six cases filed by the Federal Home Loan Banks of Boston, Chicago, Indianapolis, Seattle and San Francisco.




Notes


14. Litigation, investigations and reviews (continued)
The purported MBS class actions in which Group companies are defendants include New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. and In re IndyMac Mortgage-Backed Securities Litigation, the latter of which has been settled in principle subject to documentation and court approval.  A third MBS class action, New Jersey Carpenters Vacation Fund et al. v. The Royal Bank of Scotland plc et al., has been settled in principle for US$275 million subject to court approval. There is a provision that fully covers this settlement amount. The case relates to more than US$15 billion of the issued MBS that are the subject of MBS claims pending against Group companies. The outcome in this case should not be seen as indicative of how other MBS lawsuits may be resolved.

RBS Securities Inc. was also a defendant in Luther v. Countrywide Financial Corp. et al. and related class action cases. On 5 December 2013, the court granted final approval of a US$500 million settlement of plaintiffs’ claims to be paid by Countrywide without contribution from RBS Securities Inc. Several members of the settlement class are appealing the court-approved settlement to the United States Court of Appeals for the Ninth Circuit.

Certain other institutional investors have threatened to bring claims against the Group in connection with various mortgage-related offerings. The Group cannot predict whether any of these individual investors will pursue these threatened claims (or their outcome), but expects that several may. If such claims are asserted and were successful, the amounts involved may be material.

In many of these actions, the Group has or will have contractual claims to indemnification from the issuers of the securities (where a Group company is underwriter) and/or the underlying mortgage originator (where a Group company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a number of factors, including the ongoing creditworthiness of the indemnifying party.

London Interbank Offered Rate (LIBOR)
Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.




Notes


14. Litigation, investigations and reviews (continued)
Most of the USD LIBOR-related actions in which Group companies are defendants, including all purported class actions relating to USD LIBOR, have been transferred to a coordinated proceeding in the United States District Court for the Southern District of New York. In the coordinated proceeding, consolidated class action complaints were filed on behalf of (1) exchange-based purchaser plaintiffs, (2) over-the-counter purchaser plaintiffs, and (3) corporate debt purchaser plaintiffs. In orders dated 29 March 2013 and 23 June 2014, the Court dismissed plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt Organizations Act), but declined to dismiss (a) certain Commodities Exchange Act claims on behalf of persons who transacted in Eurodollar futures contracts and options on futures contracts on the Chicago Mercantile Exchange (on the theory that defendants' alleged persistent suppression of USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser plaintiffs who transacted directly with a defendant. Discovery is stayed. Over 35 other USD LIBOR-related actions involving RBS have been stayed pending further order from the Court. On 30 June 2014, the U.S. Supreme Court announced that it would consider an appeal by plaintiffs whose claims have been dismissed in their entirety to decide whether those plaintiffs have the procedural right to appeal the dismissals to the U.S. Court of Appeals for the Second Circuit on an interlocutory basis instead of waiting until there is a final judgment in the coordinated proceeding.

Certain members of the Group have also been named as defendants in class actions relating to (i) JPY LIBOR and Euroyen TIBOR (the "Yen action") and (ii) Euribor (the "Euribor action"), both of which are pending in the United States District Court for the Southern District of New York. On 28 March 2014, the Court in the Yen action dismissed the plaintiffs’ antitrust claims, but refused to dismiss their claims under the Commodity Exchange Act for price manipulation.

Details of LIBOR investigations and their outcomes affecting the Group are set out under ‘Investigations and reviews’ on page 114.

Credit default swap antitrust litigation
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action pending in the United States District Court for the Southern District of New York. The plaintiffs generally allege that defendants violated the U.S. antitrust laws by restraining competition in the market for credit default swaps through various means and thereby causing inflated bid-ask spreads for credit default swaps.

FX antitrust litigation
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action on behalf of U.S.-based plaintiffs and two similar complaints on behalf of non-U.S. plaintiffs in Norway and South Korea. The three cases are all pending in the United States District Court for the Southern District of New York. The plaintiffs generally allege that the defendants violated the U.S. antitrust laws, state statutes, and the common law by conspiring to manipulate the foreign exchange market by manipulating benchmark foreign exchange rates. On 30 May 2014, the defendants filed motions to dismiss the complaints in these actions.




Notes


14. Litigation, investigations and reviews (continued)

Madoff
In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS N.V.) in New York bankruptcy court. In the operative complaint, filed in August 2012, the trustee seeks to recover US$75.8 million in redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that RBS N.V. allegedly received from its swap counterparties at a time when RBS N.V. allegedly ‘knew or should have known of Madoff’s possible fraud’. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff’s estate. A further claim, for US$21.8 million, was filed in October 2011. These matters remain at the motion to dismiss stage of litigation.

Thornburg adversary proceeding
RBS Securities Inc. and certain other Group companies, as well as several other financial institutions, are defendants in an adversary proceeding filed in the U.S. bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made under certain restructuring agreements as, among other things, avoidable fraudulent and preferential conveyances and transfers.

Complex Systems
RBS N.V. is a defendant in an action being heard in the United States District Court for the Southern District of New York filed by Complex Systems, Inc (CSI). The plaintiff alleges that RBS N.V. has since late 2007 been using the plaintiff's back-office trade finance processing software without a valid licence, in violation of the US Copyright Act.

After granting summary judgment to CSI on the issue of liability, the Court on 9 May 2014 issued an injunction that requires RBS N.V. to cease using the disputed software. RBS N.V. has appealed the injunction and the underlying liability determination to the U.S. Court of Appeals for the Second Circuit. On 26 June 2014, that court denied RBS N.V.'s request that the injunction be stayed pending the outcome of the appeal. RBS N.V. is currently in discussions with CSI to resolve the dispute.

CPDO Litigation
CPDO claims have been served on RBS N.V. in England, the Netherlands and Australia relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO). In November 2012, the Federal Court of Australia issued a judgment against RBS N.V. and others in one such case. It held that RBS N.V. and others committed certain wrongful acts in connection with the rating and sale of the CPDO. In March 2013, RBS N.V. was ordered to pay A$19.7 million. RBS N.V. appealed this decision and the appeal court found against RBS N.V. in May 2014. RBS N.V. has made the required payment of A$19.7 million. The judgment may potentially have significance to the other claims served and to any future similar claims.



Notes


14. Litigation, investigations and reviews (continued)

Investigations and reviews
The Group’s businesses and financial condition can be affected by the fiscal or other policies and actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the United Kingdom, the European Union, the United States and elsewhere, on an ongoing and regular basis regarding operational, systems and control evaluations and issues including those related to compliance with applicable regulatory, anti-bribery, anti-money laundering and sanctions regimes. It is possible that any matters discussed or identified may result in investigatory or other action being taken by governmental and regulatory authorities, increased costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the Group’s business activities or fines. Any of the events or circumstances mentioned below could have a material adverse effect on the Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.

The Group is co-operating fully with the investigations and reviews described below.

LIBOR, other trading rates and foreign exchange trading
On 6 February 2013, the Group announced settlements with the Financial Services Authority in the United Kingdom, the United States Commodity Futures Trading Commission and the United States Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of the London Interbank Offered Rate (LIBOR). RBS agreed to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the investigations. As part of the agreement with the DOJ, RBS plc entered into a Deferred Prosecution Agreement in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. In addition, on 12 April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen LIBOR and on 6 January 2014, the US District Court for the District of Connecticut entered a final judgment in relation to the conviction of RBS Securities Japan Limited pursuant to the plea agreement. On 12 April 2013, RBS Securities Japan Limited received a business improvement order from Japan’s Financial Services Agency requiring RBS to take remedial steps to address certain matters, including inappropriate conduct in relation to Yen LIBOR. Since such date, RBS Securities Japan Limited has been taking steps to address the issues raised in compliance with that order. In June 2013, RBS was listed amongst the 20 banks found by the Monetary Authority of Singapore (MAS) to have deficiencies in the governance, risk management, internal controls and surveillance systems relating to benchmark submissions following a finding by the MAS that certain traders made inappropriate attempts to influence benchmarks in the period 2007 - 2011. RBS was ordered at that time to set aside additional statutory reserves with MAS of SGD1-1.2 billion and to comply with certain directives set by MAS with oversight by an independent reviewer, including instituting proper benchmark rate governance, providing training and ensuring robust surveillance systems and proper management of conflicts of interest. RBS complied with all directives to the satisfaction of MAS and the statutory reserves amount has been repaid by MAS.



Notes


14. Litigation, investigations and reviews (continued)
In February 2014, the Group paid settlement penalties of approximately EUR 260 million and EUR 131 million to resolve investigations by the European Commission into Yen LIBOR competition infringements and EURIBOR competition infringements respectively.

In July 2014, RBS entered into an Enforceable Undertaking (EU) with the Australian Securities and Investments Commission (ASIC) in relation to potential misconduct involving the Australian Bank Bill Swap Rate. RBS undertakes in the EU to (a) comply with its existing undertakings arising out of the February 2013 settlement with the United States Commodity Futures Trading Commission as they relate to Australian Benchmark Interest Rates, (b) implement remedial measures with respect to its trading in Australian reference bank bills and (c) appoint an independent compliance expert to review and report on RBS’s implementation of such remedial measures. The remediation measures include ensuring appropriate records retention, training, communications surveillance and trading reviews are in place. As part of the EU, RBS also agreed to make a voluntary contribution of A$1.6 million to fund independent financial literacy projects in Australia.

The Group is co-operating with investigations and new and ongoing requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating to a number of trading rates, including LIBOR and other interest rate settings, ISDAFIX and non-deliverable forwards. The Group is also under investigation by competition authorities in a number of jurisdictions stemming from the actions of certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading.

In addition, various governmental and regulatory authorities have commenced investigations into foreign exchange trading and sales activities apparently involving multiple financial institutions. The Group has received enquiries from certain of these authorities including the FCA. The Group is reviewing communications and procedures relating to certain currency exchange benchmark rates as well as foreign exchange trading and sales activity. It is not possible to estimate reliably what effect the outcome of these investigations, any regulatory findings and any related developments may have on the Group, including the timing and amount of fines or settlements, which may be material.

On 21 July 2014, the Serious Fraud Office announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions.

Technology incident in June 2012
On 19 June 2012, the Group was affected by a technology incident, as a result of which the processing of certain customer accounts and payments were subject to considerable delay. The cause of the incident has been investigated by independent external counsel with the assistance of third party advisors. The Group agreed to reimburse customers for any loss suffered as a result of the incident and the Group made a provision of £175 million in 2012.

The incident, the Group's handling of the incident, and the systems and controls surrounding the processes affected, are the subject of regulatory investigations in the UK and in the Republic of Ireland.



Notes


14. Litigation, investigations and reviews (continued)
On 9 April 2013, the UK Financial Conduct Authority (FCA) announced that it had commenced an enforcement investigation into the incident. This is a joint investigation conducted by the FCA together with the UK Prudential Regulation Authority (PRA). The FCA and PRA will reach their conclusions in due course and will decide whether or not to initiate enforcement action following that investigation. While the outcomes of the FCA and PRA investigations will be separate, the regulators have indicated that they will endeavour to co-ordinate the timescales of their respective investigations. Separately the Central Bank of Ireland has initiated an investigation.

Interest rate hedging products
In June 2012, following an industry wide review, the FSA announced that the Group and other UK banks had agreed to a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses who were classified as retail clients or private customers under FSA rules. On 31 January 2013, the FSA issued a report outlining the principles to which it wished the Group and other UK banks to adhere in conducting the review and redress exercise. This exercise is being scrutinised by an independent reviewer, who is reviewing and approving any redress, and the FCA is overseeing this.

As part of the redress exercise, the Group undertook to provide fair and reasonable redress to non-sophisticated customers classified as retail clients or private customers, who were mis-sold interest rate hedging products. In relation to non-sophisticated customers classified as retail clients or private customers who were sold interest rate products other than interest rate caps on or after 1 December 2001 up to 29 June 2012, the Group was required to (i) make redress to customers sold structured collars; and (ii) write to customers sold other interest rate hedging products offering a review of their sale and, if it is appropriate in the individual circumstances, propose fair and reasonable redress on a case by case basis. Furthermore, non-sophisticated customers classified as retail clients or private customers who purchased interest rate caps during the period on or after 1 December 2001 to 29 June 2012 are entitled to approach the Group and request a review. The Group has reached agreement with the independent reviewer in relation to redress outcomes for almost all in scope customers. The Group and the independent reviewer are now focused on completing the few remaining review outcomes, as well as assessing ancillary issues such as consequential loss claims.

In addition to the redress exercise that is being overseen by the FCA, the Group is also dealing with a large number of active litigation claims by customers who are also being considered under the FCA redress programme as well as customers who are outside of scope for the review due to their sophistication. The Group is encouraging those customers that are eligible to seek redress under the FCA scheme. To the extent that claims are brought, the Group believes it has strong grounds for defending these claims.

The Group is voluntarily undertaking a similar exercise and past business review in relation to the sale of interest rate hedging products to retail designated small and medium sized businesses in the Republic of Ireland and to relevant customers of RBS International. Current expectations are that these will be completed by 31 December 2014.

The Group has made provisions in relation to all of the above totalling £1.4 billion to date for this matter, including £100 million in the six months ended 30 June 2014, of which £0.6 billion had been utilised at 30 June 2014.



Notes


14. Litigation, investigations and reviews (continued)

FSA mystery shopping review
On 13 February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice offered by banks and building societies to retail clients. As a result of that review the FSA announced that firms involved were cooperative and agreed to take immediate action. The Group was one of the firms involved.

The action required included a review of the training provided to advisers, considering whether changes are necessary to advice processes and controls for new business, and undertaking a past business review to identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this right for customers).

Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required the Group to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the Financial Planning channel of the Personal and Business Banking division of the Group, which includes The Royal Bank of Scotland plc and National Westminster Bank Plc, during the period from March 2012 until December 2012. This review is being conducted under section 166 of the Financial Services and Markets Act, under which a skilled person has been appointed to monitor such exercise. Alongside this review, the Personal and Business Banking business of the Group is also carrying out self-initiated reviews of certain parts of its advice back book and discussions are taking place with the FCA in relation to a remediation exercise for a specific customer segment who may have been mis-sold a structured product.

Card Protection Plan Limited
On 22 August 2013, the FCA announced that Card Protection Plan Limited (“CPP”) and 13 banks and credit card issuers, including the Group, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers. The compensation scheme has now been approved by the requisite number of customers and by the High Court of England and Wales. CPP has written to affected policyholders to ask those who believe they have been mis-sold to submit their claims. Claims that have been submitted to date are currently being processed and payments are now being made. Save for exceptional cases, all claims must be submitted before 31 August 2014. The Group has made appropriate levels of provision based on its estimate of ultimate exposure.

Tomlinson Report
On 25 November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK government’s Department for Business Innovation and Skills, was published (Tomlinson Report). The Tomlinson Report was critical of the Group’s Global Restructuring Group’s treatment of SMEs. The Tomlinson Report was passed to the PRA and FCA. On 29 November 2013, the FCA announced that an independent skilled person would be appointed under Section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. On 17 January 2014, Promontory Financial Group and Mazars were appointed as the skilled person. The Group is fully cooperating with the FCA in its investigation.



Notes


14. Litigation, investigations and reviews (continued)
Separately, in November 2013 the Bank instructed the law firm Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: the Group’s Global Restructuring Group was alleged to be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses and through that putting businesses into insolvency. Clifford Chance published its report on 17 April 2014 and concluded that there was no evidence to support the principal allegation.

A separate independent review of the principal allegation, led by Mason Hayes & Curran, Solicitors, has been commenced in the Republic of Ireland. The Group’s current expectation is that this review will be completed by 30 September 2014.

Multilateral interchange fees
In 2007, the EC issued a decision that, while interchange is not illegal per se, MasterCard’s multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the EEA were in breach of competition law. MasterCard was required to withdraw (i.e. set to zero) the relevant cross-border MIF by 21 June 2008. MasterCard appealed against the decision to the General Court in March 2008, with the Group intervening in the appeal proceedings. The General Court heard MasterCard’s appeal in July 2011 and issued its judgment in May 2012, upholding the EC’s original decision. MasterCard has appealed further to the Court of Justice and the Group has intervened in these appeal proceedings. The appeal hearing took place on 4 July 2013 and the Advocate General’s (AG) opinion (which is a non binding opinion and provided to the Court in advance of its final decision) was published on 30 January 2014. The AG opinion proposes that the Court should dismiss MasterCard’s appeal. The Court’s decision is currently expected on 11 September 2014. MasterCard negotiated interim cross border MIF levels to apply for the duration of the General Court proceedings. These MIF levels remain in place during the appeal before the Court of Justice.

On 9 April 2013, the EC announced it was opening a new investigation into interbank fees payable in respect of payments made in the EEA by MasterCard cardholders from non-EEA countries.

In March 2008, the EC opened a formal inquiry into Visa’s MIF arrangements for cross border payment card transactions with Visa branded debit and consumer credit cards in the EEA. In April 2009 the EC announced that it had issued Visa with a formal Statement of Objections. In April 2010 Visa announced it had reached an agreement with the EC as regards immediate cross border debit card MIF rates only and in December 2010 the commitments were finalised for a four year period commencing December 2010 under Article 9 of Regulation 1/2003. In July 2012 Visa made a request to re-open the settlement in order to modify the fee. The EC rejected the request and in October 2012 Visa filed an appeal to the General Court seeking to have that decision annulled. That appeal is ongoing. The EC is continuing its investigations into Visa’s cross border MIF arrangements for deferred debit and credit transactions. On 31 July 2012 the EC announced that it had issued Visa with a supplementary Statement of Objections regarding consumer credit cards in the EEA. On 14 May 2013, the EC announced it had reached an agreement with Visa regarding immediate cross border credit card MIF rates. This agreement has now been market tested and was made legally binding on 26 February 2014. The agreement is to last for four years.




Notes


14. Litigation, investigations and reviews (continued)
In addition, the EC has proposed a draft regulation on interchange fees for card payments. The draft regulation is subject to a consultation process, prior to being finalised and enacted. It is currently expected that the regulation will be enacted during early 2015 at the earliest. The draft regulation proposes the capping of both cross-border and domestic MIF rates for debit and credit consumer cards. The draft regulation also sets out other proposals for reform including to the Honour All Cards Rule so merchants will be required to accept all cards with the same level of MIF but not cards with different MIF levels.

In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange fees applicable in respect of Visa and MasterCard consumer and commercial credit and debit card transactions. The OFT has not made a finding of an infringement of competition law and has not issued a Statement of Objections to any party in connection with those investigations. In February 2013 the OFT confirmed that while reserving its right to do so, it did not expect to issue Statements of Objections in respect of these investigations (if at all) prior to the handing down of the judgment of the Court of Justice in the matter of MasterCard's appeal against the EC’s 2007 infringement decision.

The outcomes of these ongoing investigations, proceedings and proposed regulation are not yet known, but they may have a material adverse effect on the structure and operation of four party card payment schemes in general and, therefore, on the Group’s business in this sector.

Payment Protection Insurance
The FSA conducted a broad industry thematic review of Payment Protection Insurance (PPI) sales practices and in September 2008, the FSA announced an escalation of its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies had been made to banks and to the Financial Ombudsman Service (FOS) and many of these were being upheld by the FOS against the banks.

The FSA published a final policy statement in August 2010 imposing significant changes with respect to the handling of complaints about the mis-selling of PPI. In October 2010, the British Bankers’ Association (BBA) filed an application for judicial review of the FSA’s policy statement and of related guidance issued by the FOS. In April 2011 the High Court issued judgment in favour of the FSA and the FOS and in May 2011 the BBA announced that it would not appeal that judgment. The Group then reached agreement with the FSA on a process for implementation of its policy statement and for the future handling of PPI complaints. Implementation of the agreed processes has been under way since 2011. The Group has made provisions totalling £3.2 billion to date for this matter, including £150 million in the six months ended 30 June 2014, of which £2.6 billion has been utilised at 30 June 2014.

Retail banking – EC
Since initiating an inquiry into retail banking in the European Union (EU) in 2005, the European Commission (EC) continues to keep retail banking under review. In late 2010 the EC launched an initiative pressing for greater transparency of bank fees and is currently proposing to legislate for increased harmonisation of terminology across Member States. The Group cannot predict the outcome of these actions at this stage.




Notes


14. Litigation, investigations and reviews (continued)

UK personal current accounts/retail banking
In July 2008, the OFT published a market study report into Personal Current Accounts (PCAs) raising concerns as regards the way the market was functioning. In October 2009 the OFT summarised initiatives agreed with industry to address these concerns. In December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the PCA market in the UK, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes were required for the market to work in the best interests of bank customers. In March 2010, the OFT announced that it had secured agreement from the banks on four industry-wide initiatives designed to address its concerns, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on information sharing with customers, best practice for PCA customers in financial difficulties and incurring charges, and PCA providers to publish their policies on dealing with PCA customers in financial difficulties. The OFT also announced that it would conduct six-monthly reviews and would also review the market again fully in 2012 and undertake a brief analysis on barriers to entry.

The first six-monthly review was completed in September 2010. The OFT noted progress in switching, transparency and unarranged overdrafts for the period March to September 2010 and highlighted further changes it wanted to see in the market. In March 2011, the OFT published the next update report in relation to PCAs. This noted further progress in improving consumer control over the use of unarranged overdrafts. In particular, the Lending Standards Board had led on producing standards and guidance to be included in a revised Lending Code. The OFT stated it would continue to monitor the market and would consider the need for, and appropriate timing of, further update reports in light of other developments, in particular the work of the UK Government’s Independent Commission on Banking (ICB).

Additionally, in May 2010, the OFT announced its review of barriers to entry. The review concerned retail banking and banking for small and medium sized enterprises (SMEs) (up to £25 million turnover). The OFT published its report in November 2010. It advised that it expected its review to be relevant to the ICB, the FSA, HM Treasury and the Department for Business, Innovation and Skills and to the devolved governments in the UK. The OFT did not indicate whether it would undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch networks and brands.

On 13 July 2012, the OFT launched its planned full review of the PCA market. The review was intended to consider whether the initiatives agreed by the OFT with banks to date had been successful and whether the market should be referred to the Competition Commission (CC) for a fuller market investigation.

The OFT’s PCA report was published on 25 January 2013. The OFT acknowledged some specific improvements in the market since its last review but concluded that further changes are required to tackle ongoing concerns, including a lack of switching, the ability of consumers to compare products and the complexity of overdraft charges. However, the OFT recognised at the time it published the report that a number of major developments were expected over the coming months including divestment of branches, improvements in account switching and assistance to customers to compare products and services. Therefore the OFT decided not to refer the market to the CC but said that it expected to return to the question of a referral to the CC in 2015, or before. The OFT also announced that it would be carrying out behavioural economic research on the way consumers make decisions and engage with retail banking service, and would study the operation of payment systems as well as the SME banking market.



Notes


14. Litigation, investigations and reviews (continued)
On 11 March 2014, the successor body to the OFT and CC, the Competition & Markets Authority (CMA), announced that in addition to its pending SME review (see below), it would be undertaking an update of the OFT’s 2013 PCA review. On 18 July 2014 the CMA published its preliminary findings in respect of both the PCA and SME market studies. The CMA provisionally decided to make a market investigation reference (MIR) for both the PCA and SME market studies. The provisional decision on both PCAs and SMEs is now subject to a consultation period which runs until 17 September 2014. Following this period of consultation the CMA will make its final decision on a MIR in late autumn 2014. Should the CMA decide to proceed with a MIR this would result in a wide-ranging 18-24 month Phase 2 inquiry. At this stage it is not possible to estimate potential impacts on the Group.

SME banking market study
The OFT announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland on 19 June 2013. Following a consultation on the scope of the market study, the OFT published an update paper on 27 September 2013 setting out its proposed scope. On 11 March 2014, the OFT set out some competition concerns on SME banking and also announced that its successor body, the CMA, would continue the review. As discussed above, the CMA has provisionally decided to make a MIR for the SME market study in addition to the PCA study. As regards SMEs, the CMA is consulting on both the provisional decision and its provisional conclusion that it would be more appropriate to make a MIR than accept a set of undertakings in lieu put forward by RBS, Barclays, HSBC and Lloyds. The CMA is also consulting on whether a review is required of the previous undertakings given following the CC’s investigation into SME banking in 2002 and has asked for comments on whether these undertakings need to be varied. At this stage it is not possible to estimate potential impacts on the Group.

FCA Wholesale Sector Competition Review
On 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas which may merit further investigation through an in-depth market study.

The initial review is an exploratory exercise and will focus primarily on competition in wholesale securities and investment markets, and related activities such as corporate banking. It will commence with a three month consultation exercise, including a call for inputs from stakeholders. Following this consultation period, the FCA intends to publish a feedback statement later in 2014 and any market study is expected to be launched in early 2015.

Credit default swaps (CDS) investigation
The Group is a party to the EC’s antitrust investigation into the CDS information market. The Group has received and responded to a Statement of Objections from the EC and continues to co-operate fully with the EC's ongoing investigation. In general terms, the EC has raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges from entering the CDS market. At this stage, the Group cannot estimate reliably what effect the outcome of the investigation may have on the Group, which may be material.



Notes


14. Litigation, investigations and reviews (continued)

Securitisation and collateralised debt obligation business
In the United States, the Group is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and self-regulatory organisations, including among others various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force relating to, among other things, issuance, underwriting and trading in mortgage-backed securities, collateralised debt obligations (CDOs), and synthetic products. In connection with these inquiries, Group companies have received requests for information and subpoenas seeking information about, among other things, the structuring of CDOs, financing to loan originators, purchase of whole loans, sponsorship and underwriting of securitisations, due diligence, representations and warranties, communications with ratings agencies, disclosure to investors, document deficiencies, trading activities and repurchase requests.

On 7 November 2013, the Group announced that it had settled with the US Securities and Exchange Commission (‘the SEC’) over its investigation of RBS Securities Inc. relating to due diligence conducted in connection with a 2007 offering of residential mortgage-backed securities and corresponding disclosures. Pursuant to the settlement, RBS Securities Inc., without admitting or denying the SEC's allegations, consented to the entry of a final judgment ordering certain relief, including an injunction and the payment of approximately US$153 million in disgorgement, penalties, and interest. The settlement was subsequently approved by the United States District Court for the District of Connecticut. The Group co-operated fully with the SEC throughout the investigation.

In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due diligence on mortgages. The Group completed its production of documents requested by the New York State Attorney General in 2008, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011, the New York State Attorney General requested additional information about the Group's mortgage securitisation business and, following the formation of the RMBS Working Group, has focused on the same or similar issues as the other state and federal RMBS Working Group investigations described above. The investigation is ongoing and the Group continues to respond to requests for information.

US mortgages - loan repurchase matters
The Group’s Markets business in North America has been a purchaser of non-agency US residential mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-backed securities (RMBS). Markets did not originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government sponsored enterprises (GSEs) (e.g. the Federal National Mortgage Association and the Federal Home Loan Mortgage Association).




Notes


14. Litigation, investigations and reviews (continued)
In issuing RMBS, Markets generally assigned certain representations and warranties regarding the characteristics of the underlying loans made by the originator of the residential mortgages; however, in some circumstances, Markets made such representations and warranties itself. Where Markets has given those or other representations and warranties (whether relating to underlying loans or otherwise), Markets may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. In certain instances where it is required to repurchase loans or related securities, Markets may be able to assert claims against third parties who provided representations or warranties to Markets when selling loans to it, although the ability to recover against such parties is uncertain. Between the start of 2009 and 30 June 2014, Markets received approximately US$741 million in repurchase demands in respect of loans made primarily from 2005 to 2008 and related securities sold where obligations in respect of contractual representations or warranties were undertaken by Markets. However, repurchase demands presented to Markets are subject to challenge and rebuttal by Markets.

Citizens Financial Group, Inc (Citizens) has not been an issuer or underwriter of non-agency RMBS. However, Citizens is an originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, Citizens makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of the representations and warranties concerning the underlying loans. Between the start of 2009 and 30 June 2014, Citizens received US$243 million in repurchase demands in respect of loans originated primarily since 2003. However, repurchase demands presented to Citizens are subject to challenge and rebuttal by Citizens.

Although there has in recent times been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner or at all (including as a result of interventions by certain states and local governments), to date, Citizens has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.

The Group cannot currently estimate what the ultimate exposure may be with respect to repurchase demands. Furthermore, the Group is unable to estimate the extent to which the matters described above will impact it, and future developments may have an adverse impact on the Group’s net assets, operating results or cash flows in any particular period.

Citizens consent orders
The activities of Citizens' two US bank subsidiaries - Citizens Bank, N.A. and Citizens Bank of Pennsylvania - are subject to extensive US laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries’ practices with respect to overdraft protection and other consumer products have not met applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to bring their practices in conformity with applicable laws and regulations. In April 2013, the bank subsidiaries consented to the issuance of orders by their respective primary federal banking regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators’ findings that they had engaged in deceptive marketing and implementation of the bank's overdraft protection programme, checking rewards programmes, and stop-payment process for pre-authorised recurring electronic fund transfers.



Notes


14. Litigation, investigations and reviews (continued)
In connection with the Consent Orders, the bank subsidiaries paid a total of US$10 million in civil monetary penalties. The Consent Orders also require the bank subsidiaries to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately US$8 million), to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders.

In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with the Consent Order. Restitution plans have been prepared and submitted for approval, and Citizens Bank, N.A. has submitted for approval and is in the process of implementing its action plan for compliance with the Consent Order, as well as updated policies, procedures and programmes related to its compliance risk management systems. In addition to the above, the bank subsidiaries could face further formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to issues arising from other consumer products.

Governance and risk management consent order
On 27 July 2011, the Group agreed with the Board of Governors of the Federal Reserve System, the New York State Banking Department, the Connecticut Department of Banking, and the Illinois Department of Financial and Professional Regulation to enter into a consent Cease and Desist Order (the Order) to address deficiencies related to governance, risk management and compliance systems and controls in RBS plc and RBS N.V. branches. In the Order, the Group agreed to create the following written plans or programmes:

a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of the Group’s U.S. operations on an enterprise-wide and business line basis,
an enterprise-wide risk management programme for the Group’s U.S. operations,
a plan to oversee compliance by the Group’s U.S. operations with all applicable U.S. laws, rules, regulations, and supervisory guidance,
a Bank Secrecy Act/anti-money laundering compliance programme for the RBS plc and RBS N.V. branches in the U.S. (the U.S. Branches) on a consolidated basis,
a plan to improve the U.S. Branches’ compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve,
a customer due diligence programme designed to reasonably ensure the identification and timely, accurate, and complete reporting by the U.S. Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations, and
a plan designed to enhance the U.S. Branches’ compliance with OFAC requirements.




Notes


14. Litigation, investigations and reviews (continued)
The Order (which is publicly available) identified specific items to be addressed, considered, and included in each proposed plan or programme. The Group also agreed in the Order to adopt and implement the plans and programmes after approval by the regulators, to fully comply with the plans and programmes thereafter, and to submit to the regulators periodic written progress reports regarding compliance with the Order. The Group has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with the Group's efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for the Group's U.S. operations. The Group continues to test the effectiveness of the remediation efforts undertaken by the Group to ensure they are sustainable and meet regulators' expectations. Furthermore, the Group continues to work closely with the regulators in its efforts to fulfil its obligations under the Order, which will remain in effect until terminated by the regulators.

The Group may be subject to formal and informal supervisory actions and may be required by its US banking supervisors to take further actions and implement additional remedial measures with respect to these and additional matters. The Group's activities in the United States may be subject to significant limitations and/or conditions.

US dollar processing consent order
The Group’s operations include businesses outside the United States that are responsible for processing US dollar payments. On 11 December 2013 the Group and The Royal Bank of Scotland plc announced that they had reached a settlement with the Board of Governors of the Federal Reserve System (Fed), the New York State Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to The Royal Bank of Scotland plc's historical compliance with US economic sanction regulations outside the US. In settlement with the above authorities, The Royal Bank of Scotland plc agreed to pay US$100 million in total, including US$50 million to the Fed, of which US$33 million was deemed to satisfy the OFAC penalty, and US$50 million to DFS.

As part of the settlement, the Group and The Royal Bank of Scotland plc entered into a consent Cease and Desist Order with the Fed (the Order) indicating, among other things, that: (a) the Group and The Royal Bank of Scotland plc lacked adequate risk management and legal review policies and procedures to ensure that activities conducted outside the United States comply with applicable OFAC regulations; (b) from at least 2005 to 2008, certain business lines within The Royal Bank of Scotland plc developed and implemented policies and procedures for processing U.S. dollar-denominated funds transfers through unaffiliated U.S. financial institutions involving parties subject to OFAC Regulations that omitted relevant information from payment messages necessary for the U.S. financial institutions to determine whether these transactions were carried out in a manner consistent with U.S. law; and (c) the Group continues to implement improvements in its oversight and compliance programme for activities involving offices outside the United States that impact the ability of U.S. financial institutions to comply with applicable OFAC sanctions. In the Order (which is publicly available), the Group agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by the Group's global business lines outside of the United States, and to adopt, implement, and comply with the programme. The programme has now been submitted to the Federal Reserve Bank of Boston (Reserve Bank) for approval.



Notes


14. Litigation, investigations and reviews (continued)
Sixty days after the programme submitted to the Federal Reserve Bank of Boston (Reserve Bank) is approved, the Group is to complete a global OFAC risk assessment and submit it to the Reserve Bank and the FCA. The Group also agreed in the Order to hire an independent consultant (subject to approval by the Reserve Bank and the FCA) to conduct an annual OFAC compliance review involving a review of compliance policies and their implementation and an appropriate risk-focused sampling of U.S. dollar payments. The Order further requires the Group to submit quarterly written progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the Order. It was also announced that the US Department of Justice and the New York County District Attorney’s Office had concluded their parallel criminal investigations and do not intend to take any action against The Royal Bank of Scotland plc.

US/Swiss tax programme
In August 2013, the DOJ announced a programme for Swiss banks (the Programme), to settle the long-running dispute between the US tax authorities and Switzerland regarding the role of Swiss banks in concealing the assets of US tax payers in offshore accounts. The Programme provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, concerning their status in connection with the DOJ’s investigations. 

Coutts & Co Ltd, a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme based on the possibility that some of its clients may not have declared their assets in compliance with US tax laws. The Programme required a detailed review of all US related accounts. The results of Coutts & Co Ltd’s review were presented to the DOJ in June 2014. The DOJ has extended, until 31 July 2014, the deadline for Programme participants to complete the collection of evidence of the tax status of their US related account holders. The DOJ has also extended, until 15 September 2014, the deadline to collect evidence of those US related account holders also participating in an offshore voluntary disclosure programme.

Review of suitability of advice provided by Coutts & Co
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result of this review, Coutts & Co, a member of the Group incorporated in England and Wales, decided to undertake a past business review into the suitability of investment advice provided to its clients. This review is ongoing. Coutts & Co is in the process of contacting clients and redress will be offered in appropriate cases. A provision has been taken to cover any potential liability arising from this review.



Notes


15. Other developments

Completion of sale of remaining interest in Direct Line Insurance Group (DLG)
RBS completed the sale of its remaining interest of 423.2 million ordinary shares in DLG on 27 February 2014 at a price of £2.63 pence per share, raising gross proceeds of £1,113 million and realising a gain of £191 million.

RBS has now sold all its ordinary shares in DLG except for 4.2 million shares held to satisfy long term incentive plan awards granted by RBS to DLG management. The sale marks the completion of RBS's EC-mandated disposal of its interest in DLG.

Dividend Access Share and revised State Aid terms
RBS announced on 9 April 2014 that it had entered into an agreement ('DAS Retirement Agreement') with Her Majesty's Treasury ('HMT') to provide for the future retirement of the Dividend Access Share ('DAS') subject to approval by the Company’s independent shareholders, which was received at a General Meeting of the Company on 25 June 2014. The DAS Retirement Agreement sets out the process for removal of the DAS - a key element of the Government's 2009 capital injection into RBS and the associated European Commission (“EC”) approval of the state aid package for the bank. Among other benefits, the retirement of the DAS will in future allow the Board to state more clearly a dividend policy to existing and potential investors.

The DAS was an important factor in the EC's assessment of the state aid RBS received and was part of the basis for its approval of that support in 2009. It was therefore necessary for the proposal for the eventual retirement of the DAS to be notified to the EC by HMT and this was done by HMT.

The EC concluded that the new arrangements for the eventual retirement of the DAS did not constitute new state aid and approved the changes to RBS's restructuring plan in its State Aid Amendment Decision of 9 April 2014. In addition, this decision included two further key commitments made by HMT to the EC as follows:
The deadline for RBS’s divestment of the Williams & Glyn business (by Initial Public Offering (IPO), whole business sale or tendering procedure for its entire interest) has been extended. In the expected event of divestment by IPO, RBS must carry out this IPO before 31 December 2016 and complete the disposal of its entire interest in the Williams & Glyn business by 31 December 2017.
   
Citizens Financial Group, Inc. (‘Citizens’) will be disposed of by 31 December 2016, with an automatic 12 month extension if market metrics indicate that an IPO or subsequent tranches of disposal cannot be completed in an orderly fashion or at a fair value. On 1 November 2013, RBS announced that it would accelerate the divestment of Citizens with a partial IPO and that it planned to fully divest the business by the end of 2016. The obligation under the State Aid Amendment Decision to dispose of Citizens is therefore in line with RBS’s planned and publicly stated divestment timetable and already reflected in its capital and strategic planning.

RBS has entered into a Revised State Aid Commitment Deed under which it undertakes to do all acts and things necessary to ensure that HMT is able to comply with the revised state aid commitments made by HMT to the EC.




Notes


15. Other developments (continued)

Board changes
On 27 February 2014, RBS announced that Philip Scott, a non-executive director, will step down from the Board by 31 October 2014.

Morten Friis was appointed as a non-executive director with effect from 10 April 2014.

Anthony Di Iorio, a non-executive director, stepped down from the Board on 26 March 2014.

Ewen Stevenson was appointed as an executive director and RBS Chief Financial Officer with effect from 19 May 2014.

Cap on variable remuneration
The fourth EU Capital Requirements Directive (CRD IV), implemented for banks in the UK by the Prudential Regulation Authority, imposes a 1:1 cap on the ratio of variable remuneration to fixed remuneration; however, with shareholder approval it is possible to award variable remuneration up to 200% of fixed remuneration (a 2:1 ratio).

On 25 April 2014, the Board announced it was not seeking approval from shareholders at the 2014 Annual General Meeting for the 2:1 ratio. Instead, the Company has taken steps to work within the constraints of the 1:1 ratio (of variable to fixed remuneration) for employees subject to the Prudential Regulation Authority’s Remuneration Code to deliver a remuneration structure that is aligned with shareholders’ interests and compliant with the requirements of CRD IV.

EU financial transaction tax
On 30 April 2014, the European Court rejected a challenge from the UK Government of the initial proposal for the EU financial transaction tax on procedural grounds. A further challenge on substantive grounds may follow, depending on the nature of any subsequent Directive enacted in the future. RBS continues to monitor developments.

Citizens Financial Group (CFG)
On 13 May 2014, CFG filed an S-1 registration statement with the Securities and Exchange Commission in the United States to undertake an initial public offering. The intention to fully divest CFG was announced in November 2013.

The filing of an S-1 Registration Statement is a regulatory requirement in the United States as part of the IPO process. This draft submission will initiate a 12-14 week process where the SEC can provide their comments. A formal prospectus will then be published which will include a price range and offering size range.

The submission of this statement is in line with the stated plan to launch an IPO of CFG by Q4 2014 - and complete RBS’s selldown of CFG in 2016 - as part of the RBS Capital Plan.



Notes


15. Other developments (continued)

Rating agencies

Moody’s Investors Service
On 13 March 2014, Moody’s Investors Service (‘Moody’s’) lowered its credit ratings of RBS Group plc and certain subsidiaries by one notch. The long term ratings of RBS Group plc were lowered to ‘Baa2’ from ‘Baa1’ whilst the long term ratings of RBS plc and National Westminster Bank Plc were lowered to ‘Baa1’ from ‘A3’. Short term ratings were affirmed as unchanged. Post the review, a negative ratings outlook was assigned.

The ratings of Ulster Bank Ltd and Ulster Bank Ireland Ltd were also impacted by the rating action on the RBS Group. The long term and short term ratings of these entities were lowered by one notch to ‘Baa3’ (long term)/’P-3’ (short term) from ‘Baa2’/’P-2’. A negative outlook was assigned to ratings, in line with the ratings outlook on the RBS Group.

Moody’s rating actions were prompted by its concerns over the execution risks relating to the effective roll-out of the Group’s strategic plans, its concerns over the impact of restructuring costs on profitability and its concern that the Group’s capitalisation is vulnerable to short-term shocks. Despite these short to medium term concerns, Moody’s expects RBS Group’s capitalisation to improve in the medium to long term as the recovery plan is progressed. The agency also considers that, if executed according to plan, the intended restructuring will ultimately be positive for creditors as it will deliver a more efficient UK-focused bank with lower risk operations.

The long-term ratings of subsidiaries, Citizens Bank NA and Citizens Bank of Pennsylvania were not impacted by the rating action on the RBS Group and the long-term ratings of these entities were affirmed as unchanged by Moody’s. Ratings are on a negative outlook.

Fitch Ratings
On 24 March 2014 Fitch Ratings (‘Fitch’) affirmed as unchanged the long term ratings of RBS Group plc and subsidiaries, RBS plc and National Westminster Bank Plc, retaining the rating outlooks of these entities at negative.

On 25 March 2014 Fitch affirmed the ratings of Ulster Bank Ltd. At the same time, the long-term rating of Ulster Bank Ireland Ltd was revised down one notch to ‘BBB+’ from ‘A-‘ and the short-term rating was revised to ‘F2’ from ‘F1’. The outlooks on the ratings of both Ulster Bank Ltd and Ulster Bank Ireland Ltd remain negative.

The decision to downgrade the rating of Ulster Bank Ireland Ltd was based on the view that this entity’s role within RBS Group may become less important over the next three to five years. Fitch also believe that the potential for disposal of Ulster Bank Ireland Ltd is higher than that of Ulster Bank Ltd, a Northern Irish business. These opinions caused Fitch to reduce the amount of support uplift in the ratings of Ulster Bank Ireland Ltd by one notch.




Notes


15. Other developments (continued)

Rating agencies (continued)

Standard & Poor’s
During the quarter, Standard & Poor’s affirmed as unchanged its ratings on the Group and notable subsidiaries. Negative rating outlooks were maintained.

Current RBS Group plc and subsidiary ratings are shown in the table below:

 
Moody’s
 
S&P
 
Fitch
 
Long term 
Short term
 
Long term
Short term
 
Long term
Short term
                 
RBS Group plc
Baa2
P-2
 
BBB+
A-2
 
A
F1
                 
The Royal Bank of Scotland plc
Baa1
P-2
 
A-
A-2
 
A
F1
                 
National Westminster Bank Plc
Baa1
P-2
 
A-
A-2
 
A
F1
                 
RBS N.V.
Baa1
P-2
 
A-
A-2
 
A
F1
                 
Citizens Bank, NA/
Citizens Bank of Pennsylvania
A3
P-2
 
A-
A-2
 
BBB+
F2
                 
Ulster Bank Ireland Ltd
Baa3
P-3
 
BBB+
A-2
 
BBB+
F2
Ulster Bank Ltd
Baa3
P-3
 
BBB+
A-2
 
A-
F1

16. Related party transactions

UK Government
The UK Government and bodies controlled or jointly controlled by the UK Government and bodies over which it has significant influence are related parties of the Group. The Group enters into transactions with many of these bodies on an arm’s length basis.

Bank of England facilities
In the ordinary course of business, the Group may from time to time access market-wide facilities provided by the Bank of England.

The Group’s other transactions with the UK Government include the payment of taxes, principally UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy and FSCS levies).

Other related parties
(a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.

(b) The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.

Full details of the Group’s related party transactions for the year ended 31 December 2013 are included in the 2013 Annual Report and Accounts.



Notes


17. Date of approval
This announcement was approved by the Board of directors on 31 July 2014.

18. Post balance sheet events
There have been no significant events between 30 June 2014 and the date of approval of this announcement which would require a change to or additional disclosure in the announcement.



Independent review report to The Royal Bank of Scotland Group plc


We have been engaged by The Royal Bank of Scotland Group plc (“the Company”) to review the condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprise the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement, related Notes 1 to 18, the financial information in the segment results on pages 24 to 68, and the Capital and risk management disclosures set out in Appendix 1 except for those indicated as not reviewed (together “the condensed consolidated financial statements”). We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority.

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union.

Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the half-yearly financial report based on our review.

Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.



Independent review report to The Royal Bank of Scotland Group plc (continued)


Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2014 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.



Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
31 July 2014



Disposal of Direct Line Group


In November 2009, the Group entered into a state aid commitment deed with the Commissioners of Her Majesty’s Treasury requiring the Group to: (1) divest its interest in Direct Line Group (DLG) to a level below that at which it would be considered to exercise control by 31 December 2013 and (2) dispose of its entire interest by 31 December 2014.  Pursuant to its obligations, the Group sold 34.7% of DLG in an initial public offering (IPO) in October 2012 and subsequently sold 16.8% in March 2013, 20.0% in September 2013, and 28.5% in February 2014 through institutional placings.

The Group ceased to consolidate DLG after the second share sale in March 2013 when its shareholding fell to 48.5% thereafter treating it as an associate until the final share sale in February 2014.  The Group has been in discussions with the Conduct Committee of the UK Financial Reporting Council (the Conduct Committee) about when DLG should have been deconsolidated.  Based on full consideration of the facts and circumstances, the Group’s assessment is that it no longer controlled DLG after the second share sale in March 2013. The Conduct Committee considers that the Group retained control owing to its dominant voting interest, notwithstanding the reduction of its shareholding to below 50%, the relationship agreement and the state aid commitment deed; therefore, in accordance with the provisions in IFRS 10 Consolidated Financial Statements regarding de facto control, DLG should have been consolidated by the Group in its interim accounts for the six months ended 30 June 2013.

At the request of the Conduct Committee, the effect on the Group’s financial statements for 30 June 2013 and 31 December 2013 of consolidating DLG up until September 2013 is set out below:

 
Half year ended
 
Year ended
 
30 June 2013
 
31 December 2013
 
As published
DLG consolidated to September 2013
 
As published
DLG consolidated to September 2013
 
£m
£m
 
£m
£m
           
Income statement
         
Other operating income
1,332 
1,286 
 
1,398 
1,331 
Operating profit/(loss) before tax
1,374 
1,328 
 
(8,243)
(8,310)
Discontinued operations
138 
161 
 
148 
346 
Profit/(loss) for the period
834 
811 
 
(8,477)
(8,346)
Total comprehensive income/(loss)
601 
649 
 
(10,189)
(10,051)
           
 
30 June 2013
 
31 December 2013
 
As published
DLG consolidated to September 2013
 
As published
DLG consolidated to September 2013
 
£m
£m
 
£m
£m
           
Balance sheet
         
Prepayments, accrued income and other assets:
9,063 
7,565 
 
7,614 
7,614 
  Interests in associates
2,500 
1,002 
 
902 
902 
Assets of disposal groups
1,313 
13,621 
 
3,017 
3,071 
Total assets
1,216,229 
1,227,039 
 
1,027,878 
1,027,932 
Liabilities of disposal groups
306 
9,477 
 
3,378 
3,378 
Non-controlling interests
475 
2,121 
 
473 
473 
Owners’ equity
69,183 
69,176 
 
58,742 
58,796 

The Conduct Committee is not pursuing the matter further given the amounts involved and the subsequent loss of control.



Risk factors


Set out below is a summary of the principal risks which could adversely affect the Group; it should be read in conjunction with the Risk and Balance Sheet management section on pages 174 to 364 of the 2013 Annual Report and Accounts (2013 R&A). This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included in the 2013 R&A on pages 523 to 536.

The Group is implementing a new strategic plan and direction which will result in a significant downsizing of the Group, including simplifying the Group by replacing the previous divisional structure with three customer franchises. The Group is also taking steps to strengthen its capital position and has established medium term goals.
   
The Group’s ability to implement its new strategic plan and achieve its capital goals depends on the success of its efforts to refocus on its core strengths and the timely divestment of Citizens Financial Group (CFG). Since 2009, the Group has undertaken an extensive restructuring, including the disposal of non-core assets and businesses, such as the full divestment of Direct Line Group in March 2014, as part of the State Aid restructuring plan approved by the EC and supplemented by the agreements with HM Treasury and the EC on 9 April 2014. The Group created RBS Capital Resolution in the fourth quarter of 2013 to manage the run-down of problem assets with the clear aspiration of removing such assets from the balance sheet by the end of 2016.
   
The level of structural change required to implement the Group’s strategic and capital goals together with other regulatory requirements such as ring fencing are likely to be disruptive and increase operational and people risks for the Group. There is no assurance that the Group will be able to successfully implement its new strategy on which its capital plan depends or achieve its goals within the time frames contemplated or at all.
   
Operational and reputational risks are inherent in the Group’s businesses, and heightened as a result of the implementation of the new strategic plan.
   
The Scottish government is holding a referendum on 18 September 2014 on the question of Scottish independence from the UK. Although the outcome of the referendum is uncertain, subject to any mitigating factors, uncertainties resulting from an affirmative vote in favour of independence would be likely to significantly impact the Group's credit ratings and could also impact the fiscal, monetary, legal and regulatory landscape to which the Group is subject.  Were Scotland to become independent, it may also affect Scotland’s status in the EU. The occurrence of any of the impacts above could significantly impact the Group’s costs and would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
   
Despite the improved outlook for the global and UK economy over the near to medium-term, actual or perceived difficult global economic conditions, potential volatility in the UK housing market and restrictions on mortgage lending as well as increased competition, particularly in the UK, create challenging economic and market conditions and a difficult operating environment for the Group’s businesses. These factors, together with additional uncertainty relating to the recovery of the Eurozone economy where the Group has significant exposure and the risk of a return of volatile financial markets, in part due to the monetary policies and measures carried out by central banks, have adversely affected and will continue to adversely affect the Group’s businesses, earnings, financial condition and prospects.



Risk factors


The Group is subject to substantial regulation and oversight, and any further significant regulatory developments such as those which have occurred over the past several years could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition. Certain regulatory measures introduced in the UK and in Europe relating to ring-fencing of certain bank activities could result in additional costs and increased operational risks which may impact the viability of certain business models and require significant restructuring with the possible transfer of a large number of customers between legal entities.
   
·
The Group’s ability to implement its strategy and its future success depends on its ability to attract and retain qualified personnel. The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees, and it may suffer if it does not maintain good employee relations. The Group’s changing strategy has led to the departure of many talented staff. Following the implementation of CRD IV and the Government’s views on variable compensation, there is now a restriction on the Group’s ability to pay individual bonuses greater than salary, which may put the Group at a competitive disadvantage. An inability to attract and retain qualified personnel could have an adverse impact on the implementation of the Group’s strategy and regulatory commitments.
   
The Group is subject to a number of regulatory initiatives which may adversely affect its business, including the UK Government’s adoption of the Financial Services (Banking Reform) Act 2013, the US Federal Reserve’s new rules for applying US capital, liquidity and enhanced prudential standards to certain of the Group’s US operations and ongoing reforms in the European Union with respect to capital requirements, stability and resolution of financial institutions, including CRD IV and the Resolution and Recovery Directive.
   
·
The Group’s ability to meet its obligations including its funding commitments depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a reasonable cost, could adversely affect the Group’s financial condition and results of operations. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government’s credit ratings. The Group’s credit ratings would be likely to be negatively impacted by political events, such as an affirmative vote in favour of Scottish independence.
   
The Group’s business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements, including those arising out of Basel III implementation (globally or by European, UK or US authorities) as well as structural changes that may result from the implementation of ring-fencing under the Financial Services (Banking Reform) Act 2013 or changes of the US Federal Reserve with respect to the Group’s US operations. The Group’s ability to reach its target capital ratios in the medium term will turn on a number of factors including a significant downsizing of the Group in part through the sale of CFG.
   
The Group is, and may be, subject to litigation and regulatory and governmental investigations that may impact its business, reputation, results of operations and financial condition. Although the Group settled a number of legal proceedings and regulatory investigations during 2013 and 2014, the Group is expected to continue to have material exposure to legacy litigation and regulatory proceedings in the medium term. The Group also expects greater regulatory and governmental scrutiny for the foreseeable future particularly as it relates to compliance with historical, new and existing laws and regulations such as anti-money laundering and anti-terrorism laws.




Risk factors


The Group is highly dependent on its information technology systems, which are currently subject to significant investment and rationalisation as part of the Group’s new strategic plan and associated transformation programme. The Group has been and expects to continue to be subject to cyber attacks which expose the Group to loss of customer data or other sensitive information and which, combined with other failures of the Group’s information technology systems, may hinder its ability to service its clients which could result in long-term damage to the Group’s businesses and brands.
   
The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures, including recapitalisation of the Group or any of its UK bank subsidiaries, through bail-in which has been introduced by the Financial Services (Banking Reform) Act 2013 and will come into force on a date stipulated by HM Treasury. Various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group’s businesses.
   
As a result of the UK Government’s majority shareholding in the Group it is able to exercise a significant degree of influence over the Group including on dividend policy, the election of directors or appointment of senior management, remuneration policy and/or limiting the Group’s operations. The offer or sale by the UK Government of all or a portion of its shareholding in the Company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the Group from the Official List.
   
The actual or perceived failure or worsening credit of the Group’s counterparties or borrowers, including sovereigns in the Eurozone, and depressed asset valuations resulting from poor market conditions have led the Group to realise and recognise significant impairment charges and write-downs which have adversely affected the Group and could continue to adversely affect the Group if, due to a deterioration in economic and financial market conditions or continuing weak economic growth, it were to recognise or realise further write-downs or impairment charges.
   
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.
   
Recent developments in regulatory or tax legislation and any further significant developments could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.
   
The Group is required to make planned contributions to its pension schemes and to compensation schemes in respect of certain financial institutions (such as the UK Financial Services Compensation Scheme). Additional or increased contributions may have an adverse impact on the Group’s results of operations, cash flow and financial condition.



Statement of directors’ responsibilities


We, the directors listed below, confirm that to the best of our knowledge:

·
the condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting';
   
·
the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
   
·
the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).


By order of the Board




Philip Hampton
Ross McEwan
Ewen Stevenson
Chairman
Chief Executive
Chief Financial Officer

31 July 2014



Board of directors

Chairman
Executive directors
Non-executive directors
Philip Hampton
Ross McEwan
Ewen Stevenson
 
 
Sandy Crombie
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Brendan Nelson
Baroness Noakes
Philip Scott



Additional information


Share information
 
30 June 
2014 
31 March 
2014 
31 December 
2013 
       
Ordinary share price
328.4p 
311.0p 
338.1p 
       
Number of ordinary shares in issue
6,300m 
6,241m 
6,203m 
       
Number of equivalent B shares in issue
5,100m 
5,100m 
5,100m 


Statutory results
Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 (‘the Act’). The statutory accounts for the year ended 31 December 2013 have been filed with the Registrar of Companies. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.

Financial calendar
   
2014 third quarter interim management statement
31 October 2014



 
 
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: 1 August 2014
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary