Report of Foreign Private Issuer

 

Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

9 November 2016

 

 

 Form 6-K

 

The Royal Bank of Scotland Group plc

 

 

Gogarburn

PO Box 1000

Edinburgh EH12 1HQ

Scotland

United Kingdom

 

(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-             

 

This report on Form 6-K shall be deemed incorporated by reference into the company's Registration Statement on Form F-3 (File Nos. 333-184147 and 333-184147-01) and to be a part thereof from the date which it was filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 

 


 

 

The Royal Bank of Scotland Group plc

Q3 2016 Results

 

Contents

Page 

 

 

Forward-looking statements

2

Introduction

3

Presentation of information

3

Condensed consolidated income statement (unaudited) 

5

Condensed consolidated balance sheet (unaudited) 

6

Highlights

7

Segmental income statement reconciliations

13

Analysis of results

16

Segment performance

24

 

 

Statutory results

 

 

 

Selected statutory financial statements

34

Notes

38

Additional information

 

 

 

Other financial data

42

Signature page

44

 

 

 

1

 


 

 

Forward-looking statements

 

Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believe’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions.

 

In particular, this document includes forward-looking statements relating, but not limited to: The Royal Bank of Scotland Group plc and its subsidiaries (RBS) restructuring which includes the divestment of Williams & Glyn, litigation, government and regulatory investigations, the proposed restructuring of RBS’s CIB business, the implementation of the UK ring-fencing regime, cost-reduction targets and progress relating there to the implementation of a major development program to update RBS’s IT infrastructure and the continuation of its balance sheet reduction programme, the impact of the UK’s referendum on its membership of the European Union and impact thereof on the RBS’s markets, prospects, financial and capital position and strategy, as well as capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios and requirements, liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, AT1 and other funding plans, funding and credit risk profile; RBS’s future financial performance; the level and extent of future impairments and write-downs; including with respect to goodwill; future pension contributions and RBS’s exposure to political risks, operational risk, conduct risk and credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

 

Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in RBS’s 2015 Annual Report on Form 20-F and RBS’s 2016 Interim Form 6-K – and in this report under “highlights – Outlook”. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes (including where resolved by settlement); the economic, regulatory and political uncertainty arising from the majority vote to leave in the referendum on the UK’s membership in the European Union and the revived political uncertainty regarding Scottish independence; the divestment of Williams & Glyn; RBS’s ability to successfully implement the various initiatives that are comprised in its restructuring plan, particularly the proposed restructuring of its CIB business and the balance sheet reduction programme as well as the significant restructuring required to be undertaken by RBS in order to implement the UK ring fencing regime; the significant changes, complexity and costs relating to the implementation of its restructuring, the separation and divestment of Williams & Glyn and the UK ring-fencing regime; whether RBS will emerge from its restructuring and the UK ring-fencing regime as a viable, competitive, customer focused and profitable bank; RBS’s ability to achieve its capital and leverage requirements or targets which will depend on RBS’s success in reducing the size of its business and future profitability; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; the ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS’s strategic refocus on the UK the impact of global economic and financial market conditions (including low or negative interest rates) as well as increasing competition. In addition, there are other risks and uncertainties. These include operational risks that are inherent to RBS’s business and will increase as a result of RBS’s significant restructuring; the potential negative impact on RBS’s business of actual or perceived global economic and financial market conditions and other global risks; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates; the risk of failure to realise the benefit of RBS’s substantial investments in its information technology and systems, the risk of failing to preventing a failure of RBS’s IT systems or to protect itself and its customers against cyber threats, reputational risks; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; risks relating to increased pension liabilities and the impact of pension risk on RBS’s capital position; increased competitive pressures resulting from new incumbents and disruptive technologies; RBS’s ability to attract and retain qualified personnel; HM Treasury exercising influence over the operations of RBS; limitations on, or additional requirements imposed on, RBS’s activities as a result of HM Treasury’s investment in RBS; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS’s financial statements; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject; the recoverability of deferred tax assets; and the success of RBS in managing the risks involved in the foregoing.

 

The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

2

 


 

 

 

Introduction

 

Presentation of information

In this document, ‘RBSG plc’ or the ‘parent company’ refers to The Royal Bank of Scotland Group plc, and ‘RBS’ or the ‘Group’ refers to RBSG plc and its subsidiaries.

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 2015 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.

 

As described in Note 1 on page 38, RBS prepares its financial statements in accordance with IFRS as adopted by the European Union (EU). The EU has not adopted the complete text of IAS 39; it has relaxed some of the standard's hedging requirements. RBS has not taken advantage of this relaxation, therefore its financial statements are also prepared in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (‘GAAP’).

 

The unaudited condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity and related notes presented on pages 34 to 41 inclusive are presented on a statutory basis as described above.

 

 

Non GAAP financial measures

This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures which have not been prepared in accordance with EU IFRS. These measure exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures are used internally by management to measure performance and management believes provide helpful supplementary information for investors. These adjusted measures, derived from the reported results are non-IFRS financial measures and are not a substitute to IFRS reported measures.

 

These measures include:

 

‘Adjusted’ measures of financial performance, principally operating performance before own credit adjustments; gain or loss on redemption of own debt; strategic disposals; restructuring costs and litigation and conduct costs (A reconciliation of the non-GAAP and GAAP measures of segment results is included on pages 13 to 15);  

‘Return on tangible equity’, ‘adjusted return on tangible equity’ and related RWA equivalents incorporating the effect of capital deductions (RWAes) and total assets excluding derivatives (funded assets) which are internal metrics used to measure business performance;

Personal & Business Banking (PBB) franchise, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI; and Commercial & Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking, Private Banking and RBS International (RBSI). The combined presentation of the Group’s reportable segments provides investors with a summary of the Group’s business performance and is prepared on a non-IFRS basis. Segment results prepared on a statutory basis are included on pages 13 to 15; and

Cost savings progress and 2016 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, the impairment of other intangible assets, the operating costs of Williams & Glyn and the VAT recovery.

3

 


 

 

Introduction

 

Other operating Indicators

This document also includes a number of operational metrics which include certain capital, liquidity and credit measures and ratios which management believes may be helpful to investors in understanding the Group’s business and performance.

 

These measures are used internally by management to measure performance and for risk management purposes and may not yet be required to be disclosed by a government, governmental authority or self-regulatory organisation.  As a result, the basis of calculation of these measures may not be the same as that used by the Group’s peers. 

 

Recent developments

FCA’s review of the treatment of SME’s in the RBS Global Restructuring Group

On 8 November 2016, the Financial Conduct Authority (FCA) published an update on its review into the treatment of small and medium enterprise (SME) customers in RBS’s former Global Restructuring Group (GRG) between 2008 and 2013.

In response, RBS has announced steps that will impact SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. Those steps are (i) an automatic refund of certain complex fees and; (ii) a new complaints process, overseen by an Independent Third Party. ­ These steps have been developed with the involvement of the FCA which agrees that they are appropriate for RBS to take.

RBS estimates the costs associated with the new complaints review process and the automatic refund of complex fees to be approximately £400 million, which will be recognised as a provision in Q4 2016. This includes operational costs together with the cost of refunded complex fees and the additional estimated redress costs arising from the new complaints process.

The FCA has announced that its review will continue. RBS continues to cooperate fully with the review and it would not be appropriate to comment further until further announcement by the FCA.

Martinez v. Deutsche Bank AG and others

On 2 November 2016, a complaint was filed in the United States District Court for the Southern District of Illinois against RBS N.V. and certain other financial institutions (Deutsche Bank, HSBC, Barclays, Standard Chartered, Credit Suisse, Bank Saderat, and Commerzbank). The plaintiffs are a number of US military personnel (or their estates, survivors, or heirs) who were killed or injured in 21 attacks in Iraq between 2006 and 2011. The attacks were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the complaint, the defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells, in violation of the US Anti- Terrorism Act, by, among other things, agreeing to engage in "stripping" of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. As previously disclosed, RBS N.V. has made a motion to dismiss the complaint in another Anti-Terrorism Act case (Freeman v. HSBC Holdings PLC and others, pending in the United States District Court for the Eastern District of New York) which asserts substantially similar allegations on behalf of other US nationals injured in Iraq.

4

 


 

 

Condensed consolidated income statement for the period ended 30 September 2016 (unaudited) 

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

2016

2015*

  

2016

2016

2015*

  

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Interest receivable

8,432 

9,070 

  

2,776 

2,827 

2,963 

Interest payable

(1,932)

(2,465)

  

(609)

(650)

(776)

  

  

  

  

  

  

  

Net interest income

6,500 

6,605 

  

2,167 

2,177 

2,187 

  

  

  

  

  

  

  

Fees and commissions receivable

2,519 

2,838 

  

843 

810 

880 

Fees and commissions payable

(592)

(558)

  

(200)

(180)

(195)

Income from trading activities

384 

1,045 

  

401 

(55)

170 

(Loss)/gain on redemption of own debt

(127)

  

(130)

Other operating income

690 

509 

  

96 

378 

141 

  

  

  

  

  

  

  

Non-interest income

2,874 

3,834 

  

1,143 

823 

996 

  

  

  

  

  

  

  

Total income

9,374 

10,439 

  

3,310 

3,000 

3,183 

  

  

  

  

  

  

  

Staff costs

(3,982)

(4,449)

  

(1,287)

(1,372)

(1,562)

Premises and equipment

(1,006)

(1,380)

  

(354)

(328)

(635)

Other administrative expenses

(3,234)

(3,096)

  

(1,095)

(1,564)

(730)

Depreciation and amortisation

(529)

(994)

  

(175)

(176)

(282)

Write down of other intangible assets

(89)

(673)

  

(69)

(67)

  

  

  

  

  

  

  

Operating expenses

(8,840)

(10,592)

  

(2,911)

(3,509)

(3,276)

  

  

  

  

  

  

  

Profit/(loss) before impairment (losses)/releases

534 

(153)

  

399 

(509)

(93)

Impairment (losses)/releases

(553)

400 

  

(144)

(186)

79 

  

  

  

  

  

  

  

Operating (loss)/profit before tax

(19)

247 

  

255 

(695)

(14)

Tax (charge)/credit

(922)

(284)

  

(582)

(260)

  

  

  

  

  

  

  

Loss from continuing operations

(941)

(37)

  

(327)

(955)

(11)

Profit from discontinued operations, net of tax  

1,451 

  

1,093 

  

  

  

  

  

  

  

(Loss)/profit for the period

(941)

1,414 

  

(327)

(955)

1,082 

  

  

  

  

  

  

.

Attributable to:

  

  

  

  

  

  

Non-controlling interests

37 

389 

  

45 

Preference share and other dividends

343 

264 

  

135 

114 

97 

Dividend access share

1,193 

  

Ordinary shareholders

(2,514)

761 

  

(469)

(1,077)

940 

  

  

  

  

  

  

  

(Loss)/earnings per ordinary share (EPS) (1)

  

  

  

  

  

  

Basic EPS from continuing and discontinued operations

(21.5p)

6.6p

  

(3.9p)

(9.3p)

8.1p

Basic EPS from continuing operations

(21.5p)

(3.2p)

  

(3.9p)

(9.3p)

(1.0p)

 

* Restated - refer to page 38 for further details

 

Note:

(1)

There was no dilutive impact in any period.

 

Statutory results. For further information see pages 34 to 41.

5

 


 

 

Condensed consolidated balance sheet as at 30 September 2016 (unaudited)   

 

 

  

30 September

30 June

31 December

2016

2016

2015

  

£m 

£m 

£m 

  

  

  

  

Assets

  

  

  

Cash and balances at central banks

69,254 

65,307 

79,404 

Net loans and advances to banks

19,741 

21,763 

18,361 

Reverse repurchase agreements and stock borrowing

12,251 

14,458 

12,285 

Loans and advances to banks

31,992 

36,221 

30,646 

Net loans and advances to customers

326,736 

326,503 

306,334 

Reverse repurchase agreements and stock borrowing

33,704 

31,320 

27,558 

Loans and advances to customers

360,440 

357,823 

333,892 

Debt securities

79,784 

84,058 

82,097 

Equity shares

728 

749 

1,361 

Settlement balances

10,298 

13,405 

4,116 

Derivatives

283,049 

326,023 

262,514 

Intangible assets

6,506 

6,525 

6,537 

Property, plant and equipment

4,490 

4,589 

4,482 

Deferred tax

1,684 

2,217 

2,631 

Prepayments, accrued income and other assets

4,140 

4,311 

4,242 

Assets of disposal groups

13 

396 

3,486 

  

  

  

  

Total assets

852,378 

901,624 

815,408 

  

  

  

  

Liabilities

  

  

  

Bank deposits

32,172 

31,377 

28,030 

Repurchase agreements and stock lending

6,557 

11,611 

10,266 

Deposits by banks

38,729 

42,988 

38,296 

Customer deposits

358,844 

355,719 

343,186 

Repurchase agreements and stock lending

29,851 

29,270 

27,112 

Customer accounts

388,695 

384,989 

370,298 

Debt securities in issue

28,357 

27,148 

31,150 

Settlement balances

10,719 

11,262 

3,390 

Short positions

19,882 

21,793 

20,809 

Derivatives

275,364 

322,390 

254,705 

Provisions, accruals and other liabilities

15,954 

15,627 

15,115 

Retirement benefit liabilities

526 

511 

3,789 

Deferred tax

647 

824 

882 

Subordinated liabilities

19,162 

20,113 

19,847 

Liabilities of disposal groups

15 

252 

2,980 

  

  

  

  

Total liabilities

798,050 

847,897 

761,261 

  

  

  

  

Equity

  

  

  

Non-controlling interests

853 

820 

716 

Owners’ equity*

  

  

  

  Called up share capital

11,792 

11,756 

11,625 

  Reserves

41,683 

41,151 

41,806 

  

  

  

  

Total equity

54,328 

53,727 

54,147 

  

  

  

  

Total liabilities and equity

852,378 

901,624 

815,408 

  

  

  

  

*Owners’ equity attributable to:

  

  

  

Ordinary shareholders

46,328 

47,066 

47,480 

Other equity owners

7,147 

5,841 

5,951 

  

  

  

  

  

53,475 

52,907 

53,431 

 

Statutory results. For further information see pages 34 to 41.

6

 


 

 

Highlights

 

RBS reported an operating profit before tax of £255 million, and a loss attributable to ordinary shareholders of £469 million in Q3 2016 which included restructuring costs of £469 million, litigation and conduct costs of £425 million and a £300 million deferred tax asset impairment.

 

Across our Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and Corporate & Institutional Banking (CIB) franchises, RBS reported an adjusted operating profit before tax(1) of £1,331 million. RBS has generated over £1 billion of adjusted operating profit (1)  across PBB, CPB and CIB in each quarter this year. Return on equity was (4.8%) for Q3 2016(2).  Adjusted return on equity(3,4) across PBB, CPB and CIB was 14% for Q3 2016.

  

Common Equity Tier 1 ratio of 15.0% increased by 50 basis points in the quarter and remains ahead of our 13% target. Leverage ratio(5) increased by 40 basis points to 5.6% principally reflecting the £2 billion Additional Tier 1 (AT1) issuance.

 

Q3 2016 RBS performance summary

RBS reported a loss attributable to ordinary shareholders of £469 million in Q3 2016 compared with a profit of £940 million in Q3 2015 which included a £1,147 million gain on loss of control of Citizens. Q3 2016 included a £469 million restructuring cost, £425 million of litigation and conduct costs and a £300 million deferred tax asset impairment. The loss attributable to ordinary shareholders for the first nine months of the year was £2,514 million and operating loss before tax was £19 million.

 

 

Q3 2016 operating profit before tax of £255 million compared with an operating loss before tax of £14 million in Q3 2015.  Adjusted operating profit before tax (1)  of £1,333 million was £507 million, or 61%, higher than Q3 2015 reflecting increased income and reduced expenses.

 

 

Income across PBB and CPB was 2% higher than Q3 2015, adjusting for transfers(6),  and was stable for the year to date, as increased lending volumes more than offset reduced margins. CIB income ,which includes own credit adjustments, increased by 16% to £471 million. CIB adjusted income increased by 71% to £526 million, adjusting for transfers(6),  the highest quarterly income for the year, driven by Rates, which benefited from sustained customer activity and favourable market conditions following the EU referendum and central bank actions.

 

 

Net interest margin (NIM) of 2.17% for Q3 2016 was 7 basis points higher than Q3 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises. NIM fell 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure.  

 

 

PBB and CPB net loans and advances have increased by 13% on an annualised basis since the start of 2016, with strong growth across both residential mortgages and commercial lending.

 

 

Operating expenses of £2,911 million were £365 million, or 11%, lower than Q3 2015. Adjusted operating expenses have been reduced by £695(4,7)  million for the year to date. Cost:income ratio for the year to date was 94% compared to 101% in the prior year. Adjusted cost:income ratio(3,4)  for the year to date was 66% compared with 67% in the prior year. Across PBB, CPB and CIB cost:income ratio year to date was 70% compared with 80% in the prior year. Across PBB, CPB and CIB adjusted cost:income ratio of 60% year to date was stable compared with 2015.

 

 

Restructuring costs were £469 million in the quarter, a reduction of £378 million compared with Q3 2015. Williams & Glyn(8) restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform. 

 

 

Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.

RBS has reviewed the recoverability of its deferred tax asset and, in light of the weaker economic outlook and recently enacted restrictions on carrying forward losses; an impairment of £300 million has been recognised in Q3 2016.

Refer to page 9 for footnotes.

7

 


 

 

Highlights

 

PBB, CPB and CIB performance

Across our PBB, CPB and CIB franchises operating profit of £1,170 million was £787 million higher than in Q2 2016. Adjusted operating profit(1)   of £1,331 million, was £212 million higher than Q3 2015.

 

 

 

 

UK Personal and Business Banking (UK PBB) operating profit was £567 million compared with £549 million in Q3 2015 with 2% income growth and a 3% reduction in operating expenses partially offset by a modestly higher impairment charge. Adjusted operating profit(1)  of £591 million was £14 million higher than Q3 2015.

 

 

 

 

Ulster Bank RoI operating profit of £54 million was £49 million lower than Q3 2015 primarily reflecting a lower net impairment release and income gains in Q3 2015.  Adjusted operating profit(1)  of £68 million compared with £108 million in Q3 2015.

 

 

 

 

Commercial Banking operating profit of £355 million in Q3 2016 compared with £376 million in Q3 2015. Adjusted operating profit(1)  of £382 million was £7 million higher than Q3 2015 and was £122 million higher than Q2 2016, principally reflecting a single name impairment charge taken in respect of the oil and gas portfolio in Q2 2016 and a 1% increase in income, adjusting for transfers(9).   

 

 

 

 

Private Banking(10)  operating profit of £50 million was £12 million higher than Q3 2015 and was £9 million higher than Q2 2016. Adjusted operating profit(1)  of £53 million was £16 million higher than Q3 2015, benefiting from a £13 million VAT recovery. RBS International (RBSI) operating profit of £54 million was 8% higher than Q3 2015 driven by increased income, whilst adjusted operating profit(1)   was broadly stable at £53 million.

 

 

 

 

CIB total income, which includes own credit adjustments, increased by £65 million, or 16%, to £471 million compared with £406 million in Q3 2015. Adjusted income(3)  of £526 million was 71% higher than Q3 2015, adjusting for transfers(6),  principally driven by Rates. An operating profit of £90 million compared with an operating loss of £109 million in Q3 2015. Adjusted operating profit(1)  of £184 million compared with a loss of £30 million in Q3 2015.

 

Capital Resolution & Central items

Capital Resolution operating loss of £454 million in Q3 2016 compared with a loss of £798 million in Q3 2015 and a loss of £612 million in Q2 2016.  The Q3 2016 loss included a £190 million impairment loss on the shipping portfolio and a £160 million valuation adjustment gain. Adjusted operating loss(1)  of £118 million compared with an adjusted operating loss(1)  of £245 million in Q3 2015. RWAs reduced by £3.7 billion in the quarter to £38.6 billion

 

 

Central items not allocated represented a charge of £545 million in Q3 2016, an increase of £207 million compared with Q3 2015. Treasury funding costs were a charge of £177 million (compared with a charge of £117 million in Q3 2015) driven by a £150 million IFRS volatility charge(11).  Restructuring costs in the quarter included £289 million relating to Williams & Glyn (Q3 2015 - £190 million). Partially offsetting this a gain of £97 million was recognised arising from a partial recycling of the accumulated foreign exchange reserve triggered by a capital reduction in a foreign subsidiary.   Adjusted operating profit(1)  of £24 million compared with an adjusted operating loss(1)  of £163 million in Q3 2015.

 

Refer to the following page for footnotes.

 

8

 


 

 

Highlights

 

Progress on 2016 targets

Strategy goal

2016 target

Q3 2016 Progress

Strength and sustainability

Maintain Bank CET1 ratio of 13%

CET1 ratio of 15.0%

£2 billion AT1 issuance

£2.0 billion equivalent issued in Q3 2016

Capital Resolution RWAs around £30-35 billion

RWAs down £10.4 billion to £38.6 billion for the year to date

Customer experience

Narrow the gap to No.1 in Net Promoter Score (NPS) in every primary UK brand

Year on year Commercial Banking(12) has seen an improvement in NPS and is the highest it has ever been.

Simplifying the bank

Reduce operating expenses by £800 million

Operating expenses down £695 million(7) 

Supporting growth

Net 4% growth in PBB and CPB customer loans

Net customer loans in PBB and CPB are up 13% on an annualised basis for the year to date

Employee engagement

Raise employee engagement to within two points of the GFS norm

Down 3 points to within 6 points of GFS norm

 

 

Notes:

(1)

Operating profit before tax excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs and litigation and conduct costs.

(2)

Calculated using (loss)/profit for the period attributable to ordinary shareholders.

(3)

Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(4)

Excluding restructuring costs and litigation and conduct costs.

(5)

Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.

(6)

CIB's results include the following financials for businesses subsequently transferred to Commercial Banking: total income of £98 million for nine months ended 2015 (Q3 2015 - £20 million).

(7)

Cost saving target and progress for the nine months ended 2016 calculated using operating expenses excluding restructuring costs £1,099 million (2015 - £2,317 million), litigation and conduct costs £1,740 (2015 - £1,444), write down of other intangible assets of £48 million (2015 - nil), the operating costs of Williams and Glyn £296 million (2015 - £252 million) and the VAT recovery £227 million.

(8)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

(9)

The business transfers included: total income of £42 million (Q3 2015 - nil); operating expenses of £25 million (Q3 2015 - nil) and impairments of £7 million (Q3 2015 - nil).

(10)

Private Banking serves high net worth individuals through Coutts and Adam & Co.

(11)

IFRS volatility arises from the changes to fair value of hedges of loans which do not qualify for hedge accounting under IFRS.

(12)

£2m+ combination of NatWest & Royal Bank of Scotland in GB (954) Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain. 

     

9

 


 

 

Highlights

 

Building a stronger RBS

RBS is progressing with its plan to build a strong, simple, fair bank for customers and shareholders.

CET1 remains ahead of our 13% target at 15.0%, a 50 basis point increase compared with Q2 2016 driven by a £10.0 billion reduction in RWAs principally reflecting a £5.1 billion reduction in UK PBB, largely due to the unwind of mortgage risk parameter model uplifts taken in the first half, and £3.7 billion of disposals and run-off in Capital Resolution.

On 10 August 2016 RBS announced that it had successfully completed the pricing of US$2.65 billion 8.625% AT1 capital notes, with £4.0 billion equivalent now issued since August 2015.   

In addition, on 7 September 2016 we successfully issued US$2.65 billon seven year senior debt which is eligible to meet RBS’s ‘Minimum Requirement for Own Funds and Eligible Liabilities’, with £4.2 billion equivalent issued this year. 

Leverage ratio increased by 40 basis points to 5.6% largely driven by the AT1 issuance.

Risk elements in lending (REIL) of £12.6 billion were 3.8% of gross customer loans, down from 4.5% at 30 September 2015.

In June 2016, the triennial funding valuation of the Main Scheme of The Royal Bank of Scotland Group Pension Fund was agreed which showed that as at 31 December 2015 the value of liabilities exceeded the value of assets by £5.8 billion. In March 2016, to mitigate this anticipated deficit, RBS made a cash payment of £4.2 billion. The next triennial valuation is due to occur at the end of 2018 with agreement on any additional contributions by the end of March 2020. As at 30 September 2016, the Main Scheme had an unrecognised surplus reflected by a ratio of asset to liabilities of c.115% under IAS19 valuation principles. The surplus is unrecognised because the trustee’s power to enhance member benefits could consume that surplus meaning that RBS does not control its ability to realise an asset. The existence of the asset, albeit unrecognised, does limit RBS’s exposure to changes in actuarial assumptions and investment performance.

 

Building the number one bank for customer service, trust and advocacy in the UK

RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending of £7.9 billion was 12% higher than Q3 2015. Our market share of gross new mortgage lending in Q3 2016 was approximately 12% compared with a stock share of 8.7%. Commercial Banking net loans and advances have grown by an annualised 12% since the start of the year.

The Reward account continues to show positive momentum and now has over one million fee-paying customers compared with 202,000 at 31 December 2015.

We continue to make better use of our digital channels to make it simpler to serve our customers and for them to do business with us. We now have more than 4.3 million customers regularly using our mobile app, with over 20% of our customers now exclusively using digital banking for their day to day banking needs. We anticipate that this number will continue to grow as we make more of our products and services available digitally. Our new ‘Online Account Opening’ service allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour.

 

10

 


 

 

Highlights

 

Investment in subsidiaries and distributable reserves

As part of the Q3 2016 results we have reviewed the value of the investments in subsidiaries held in the parent company, RBSG plc, and in light of the deterioration in the economic outlook we have reduced the carrying value of the investments by £6.0 billion to £44.7 billion. This has the effect of reducing distributable reserves of RBSG plc by £6.0 billion to £7.2 billion. Whilst this level of distributable reserves does not impact upon our ability to pay coupons on existing securities, it is our intention to implement a capital reorganisation in 2017 in order to increase parent company distributable reserves, providing greater flexibility for future distributions and preference share redemptions. The capital reduction will be subject to shareholder approval (to be sought at the next Annual General Meeting) and court approval. The reorganisation in carrying value of the parent company’s investment in its subsidiaries does not impact upon the Group’s consolidated regulatory capital, including CET1, or tangible net asset value.   

 

Recent developments

Work has continued to explore means to achieve separation and divestment of the business previously described as Williams & Glyn. RBS has had positive discussions with a number of interested parties concerning a transaction related to substantially all of the business. These discussions are ongoing and may or may not lead to a viable transaction. However, none of the proposals under discussion can deliver full separation and divestment by 31 December 2017. RBS is therefore in discussion with HM Treasury, and expects further engagement with the European Commission, to agree a solution with regards to its State Aid obligations.


As we no longer intend to pursue divestment by way of an Initial Public Offering, on 21 October 2016 RBS redeemed the £600 million exchangeable bond issued to a consortium of investors, led by Centerbridge and Corsair, in 2013 in accordance with the terms of the bond.

 

11

 


 

 

Highlights

 

Outlook

The current low interest rate and low growth environment presents a range of uncertainties which could impact the performance of our core business. Whilst we remain committed to achieving our long term cost:income ratio and returns targets, set out in 2014, we now do not expect to achieve these by 2019 as previously indicated. We also recognise that the ongoing discussions around further tightening of regulatory capital rules could result in RWA inflation in the medium term.

We expect PBB and CPB income to be broadly stable in 2016 compared with 2015 as strong planned balance sheet growth, particularly in mortgages but also in core commercial lending, is balanced by headwinds from low interest rates and the uncertain macroeconomic environment. We now anticipate that CIB will report a modest increase in income in 2016 compared with 2015.

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £695 million reduction in the first nine months of the year. Core franchise profitability will be adversely impacted by the annual bank levy charge in Q4 2016, around £200 million, and expense inflation associated with weaker sterling. We retain our expectation that the adjusted cost:income ratio across our combined PBB, CPB and CIB businesses will improve in 2016 compared with 2015. We plan to provide further cost guidance for 2017 as part of the 2016 year end results.  

We do not anticipate a material change to the current impairment loss rate for 2016. The impairment charges taken during 2016 year to date largely relate to sector specific issues particularly in the shipping portfolio and oil and gas sector. We recognise the continuing risk of large single name/sector driven events across our portfolios given the uncertain macroeconomic environment. In the current environment there is an increased level of uncertainty; however it continues to be too early at this point to quantify the impact of potential credit losses that may result.

We now anticipate a restructuring charge of around £1.5 billion in 2016 compared with previous guidance of over £1.0 billion, as a result of additional Williams & Glyn charges in respect of the decision to discontinue the programme to create a cloned banking platform.

We now expect Capital Resolution disposal losses to total approximately £2.0 billion, up from the previous guidance of £1.5 billion. Total losses to date have been £997 million (of which 2015; £367 million and 2016 year to date; £630 million) including an impairment charge of £454 million in relation to the shipping portfolio during 2016 year to date. We anticipate that Capital Resolution RWAs will be in the range £30-£35 billion by the end of 2016. Excluding RBS’s stake in Saudi Hollandi Bank (£7.9 billion at Q3 2016), we would expect RWAs to be in the range £15-£20 billion by end 2017.

We continue to deal with a range of uncertainties in the external environment and also manage conduct-related investigations and litigation, including US RMBS. Substantial additional charges and costs may be recognised in the coming quarters which would have an impact on the Group’s level of capital

In view of the above, the timing of returning excess capital to shareholders through dividends or buybacks remains uncertain.

 

12

 


 

 

Segmental income statement reconciliations

  

PBB

  

CPB

  

  

  

  

Central

  

  

  

Ulster

  

Commercial

Private

RBS

  

  

Capital

Williams

 items &

Total

  

UK PBB

Bank RoI

  

Banking

Banking

International

  

CIB

Resolution

& Glyn

other  

RBS

Nine months ended 30 September 2016

£m

£m

  

£m

£m

£m

  

£m

£m

£m

£m

£m

  

  

  

  

  

  

  

  

  

  

  

  

  

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

Total income - statutory

3,951 

439 

  

2,548 

496 

278 

  

1,289 

(69)

620 

(178)

9,374 

Own credit adjustments

(3)

  

  

(82)

(142)

(67)

(294)

Loss on redemption of own debt

  

  

127 

127 

Strategic disposals

  

  

81 

(245)

(164)

Total income  - adjusted

3,951 

436 

  

2,548 

496 

278 

  

1,207 

(130)

620 

(363)

9,043 

Operating expenses - statutory

(2,784)

(443)

  

(1,458)

(390)

(110)

  

(1,110)

(915)

(353)

(1,277)

(8,840)

Restructuring costs  - direct

50 

32 

  

13 

  

16 

35 

57 

894 

1,099 

                                  - indirect

86 

  

49 

22 

  

50 

35 

(248)

Litigation and conduct costs

420 

95 

  

16 

(1)

  

62 

257 

889 

1,740 

Operating expenses - adjusted

(2,228)

(312)

  

(1,380)

(365)

(108)

  

(982)

(588)

(296)

258 

(6,001)

Impairment (losses)/releases

(67)

66 

  

(123)

(5)

(11)

  

(383)

(31)

(553)

Operating profit/(loss) - adjusted

1,656 

190 

  

1,045 

126 

159 

  

225 

(1,101)

293 

(104)

2,489 

  

  

  

  

  

  

  

  

  

  

  

  

  

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

Return on equity (1) 

17.0%

3.1%

  

8.5%

7.0%

15.4%

  

1.6%

nm

nm

nm

(8.5%)

Return on equity  - adjusted (1,2) 

26.4%

9.5%

  

9.4%

8.9%

15.6%

  

2.4%

nm

nm

nm

(0.6%)

Cost income ratio

70%

101%

  

57%

79%

40%

  

86%

nm

57%

nm

94%

Cost income ratio - adjusted (2) 

56%

72%

  

54%

74%

39%

  

81%

nm

48%

71%

66%

  

  

  

  

  

  

  

  

  

  

  

  

  

Nine months ended 30 September 2015*

  

  

  

  

  

  

  

  

  

  

  

  

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

Total income - statutory

3,946 

434 

  

2,457 

486 

272 

  

1,341 

801 

625 

77 

10,439 

Own credit adjustments

  

  

(186)

(180)

(58)

(424)

Strategic disposals

  

  

14 

121 

135 

Total income  - adjusted

3,946 

434 

  

2,457 

486 

272 

  

1,155 

635 

625 

140 

10,150 

Operating expenses - statutory

(2,606)

(322)

  

(1,291)

(439)

(120)

  

(1,938)

(2,955)

(252)

(669)

(10,592)

Restructuring costs - direct

19 

  

12 

  

44 

359 

1,876 

2,317 

                                 - indirect

73 

  

78 

  

418 

844 

(1,423)

Litigation and conduct costs

365 

(9)

  

59 

  

373 

607 

47 

1,444 

Operating expenses - adjusted

(2,161)

(310)

  

(1,217)

(359)

(115)

  

(1,103)

(1,145)

(252)

(169)

(6,831)

Impairment (losses)/releases

(20)

131 

  

(42)

(1)

  

369 

(47)

400 

Operating profit/(loss) - adjusted

1,765 

255 

  

1,198 

126 

157 

  

57 

(141)

378 

(76)

3,719 

  

  

  

  

  

  

  

  

  

  

  

  

  

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

Return on equity (1) 

20.8%

13.1%

  

12.3%

2.0%

18.2%

  

(10.1%)

nm

nm

nm

2.4%

Return on equity  - adjusted (1,2) 

28.3%

13.8%

  

13.2%

7.9%

18.8%

  

(0.5%)

nm

nm

nm

12.4%

Cost income ratio

66%

74%

  

53%

90%

44%

  

145%

nm

40%

nm

101%

Cost income ratio - adjusted (2) 

55%

71%

  

50%

74%

42%

  

95%

nm

40%

nm

67%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

 

*Restated - refer to page 38 for further details.

For the notes to this table refer to page 15.         

13

 


 

 

 

Segmental income statement reconciliations

  

PBB

  

CPB

  

  

  

  

Central

  

 

UK

Bank

 

Commercial

Private

RBS

 

 

Capital

Williams

Items &

  Total

 

 

PBB

RoI

 

Banking

Banking

International

CIB

 

Resolution

& Glyn

other

RBS

 

Quarter ended 30 September 2016

£m

£m

  

£m

£m

£m

  

£m

£m

£m

£m

£m

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

 

Total income - statutory

1,336 

146 

  

849 

165 

93 

  

471 

103 

209 

(62)

3,310 

 

Own credit adjustments

  

  

55 

42 

59 

156 

 

Gain on redemption of own debt

  

  

(3)

(3)

 

Strategic disposals

  

  

30 

31 

 

Total income - adjusted

1,336 

146 

  

849 

165 

93 

  

526 

175 

209 

(5)

3,494 

 

Operating expenses - statutory

(742)

(131)

  

(474)

(112)

(39)

  

(381)

(437)

(111)

(484)

(2,911)

 

Restructuring costs  - direct

(1)

  

12 

  

23 

12 

409 

469 

 

                                    - indirect

26 

  

  

27 

10 

(78)

 

Litigation and conduct costs

(1)

  

(1)

  

231 

181 

425 

 

Operating expenses - adjusted

(718)

(117)

  

(447)

(109)

(40)

  

(342)

(173)

(99)

28 

(2,017)

 

Impairment (losses)/releases

(27)

39 

  

(20)

(3)

  

(120)

(14)

(144)

 

Operating profit/(loss) - adjusted

591 

68 

  

382 

53 

53 

  

184 

(118)

96 

24 

1,333 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

 

Return on equity (1) 

27.1%

7.8%

  

9.5%

11.1%

15.4%

  

3.1%

nm

nm

nm

(4.8%)

 

Return on equity     - adjusted (1,2) 

28.3%

9.9%

  

10.4%

11.8%

15.1%

  

8.0%

nm

nm

nm

4.6%

 

Cost income ratio

56%

90%

  

56%

68%

42%

  

81%

nm

53%

nm

88%

 

Cost income ratio - adjusted (2) 

54%

80%

  

53%

66%

43%

  

65%

99%

47%

nm

58%

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Quarter ended 30 June 2016

  

  

  

  

  

  

  

  

  

  

  

  

 

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

 

Total income - statutory

1,340 

135 

  

846 

166 

95 

  

477 

(325)

206 

60 

3,000 

 

Own credit adjustments

  

  

(73)

(76)

(45)

(194)

 

Loss on redemption of own debt

  

  

130 

130 

 

Strategic disposals

  

  

45 

(246)

(201)

 

Total income - adjusted

1,340 

135 

  

846 

166 

95 

  

404 

(356)

206 

(101)

2,735 

 

Operating expenses - statutory

(1,292)

(202)

  

(546)

(125)

(35)

  

(368)

(220)

(124)

(597)

(3,509)

 

Restructuring costs  - direct

38 

18 

  

  

10 

25 

295 

392 

 

                                    - indirect

51 

  

41 

  

11 

16 

(125)

 

Litigation and conduct costs

421 

92 

  

  

38 

16 

707 

1,284 

 

Operating expenses - adjusted

(782)

(91)

  

(497)

(119)

(33)

  

(309)

(183)

(99)

280 

(1,833)

 

Impairment (loss)/releases

(24)

14 

  

(89)

(9)

  

(67)

(11)

(186)

 

Operating profit/(loss) - adjusted

534 

58 

  

260 

47 

53 

  

95 

(606)

96 

179 

716 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

 

Return on equity (1) 

(0.4%)

(8.2%)

  

4.9%

8.6%

15.0%

  

4.3%

nm

nm

nm

(11.0%)

 

Return on equity  - adjusted (1,2) 

24.2%

9.0%

  

6.6%

9.9%

15.7%

  

3.5%

nm

nm

nm

3.2%

 

Cost income ratio

96%

150%

  

65%

75%

37%

  

77%

nm

60%

nm

117%

 

Cost income ratio - adjusted (2) 

58%

67%

  

59%

72%

35%

  

76%

nm

48%

nm

67%

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

                                                                                                     

For the notes to this table refer to page 15.

14

 


 

 

 

Segmental income statement reconciliations

  

PBB

  

CPB

  

  

  

  

Central

  

 

  

  

Ulster

  

Commercial

Private

RBS

  

  

Capital

Williams

 items &

Total

  

UK PBB

Bank RoI

  

Banking

Banking

International

  

CIB

Resolution

& Glyn

other

RBS

Quarter ended 30 September 2015*

£m

£m

  

£m

£m

£m

  

£m

£m

£m

£m

£m

  

  

  

  

  

  

  

  

  

  

  

  

  

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

Total income - statutory

1,313 

164 

  

800 

160 

87 

  

406 

89 

211 

(47)

3,183 

Own credit adjustments

  

  

(78)

(38)

(20)

(136)

Total income  - adjusted

1,313 

164 

  

800 

160 

87 

  

328 

51 

211 

(67)

3,047 

Operating expenses - statutory

(762)

(115)

  

(408)

(118)

(38)

  

(515)

(937)

(91)

(292)

(3,276)

Restructuring costs - direct

  

(2)

  

190 

647 

847 

                                 - indirect

23 

  

(2)

  

148 

300 

(474)

Litigation and conduct costs

  

  

101 

22 

129 

Operating expenses - adjusted

(734)

(110)

  

(409)

(119)

(36)

  

(358)

(346)

(91)

(97)

(2,300)

Impairment (losses)/releases

(2)

54 

  

(16)

(4)

  

50 

(5)

79 

Operating profit/(loss) - adjusted

577 

108 

  

375 

37 

52 

  

(30)

(245)

115 

(163)

826 

  

  

  

  

  

  

  

  

  

  

  

  

  

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

Return on equity (1) 

27.2%

16.7%

  

12.3%

7.4%

18.0%

  

(6.4%)

nm

nm

nm

9.0%

Return on equity  - adjusted (1,2) 

28.7%

17.5%

  

12.3%

7.1%

18.8%

  

(2.7%)

nm

nm

nm

16.3%

Cost income ratio

58%

70%

  

51%

74%

44%

  

127%

nm

43%

nm

103%

Cost income ratio - adjusted (2) 

56%

67%

  

51%

74%

41%

  

109%

nm

43%

nm

75%

  

  

  

  

  

  

  

  

  

  

  

  

  

*Restated - refer to page 38 for further details.

  

  

  

  

  

  

  

  

  

  

  

  

 

                                       

 

Notes:

(1)

RBS’s CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 11% (Commercial Banking and Ulster Bank RoI), 12% (RBS International) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect capital deductions (RWAes). RBS Return on equity is calculated using profit for the period attributable to ordinary shareholders.

(2)

Excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs and litigation and conduct costs.

 

15

 


 

 

Analysis of results

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

2016

2015

  

2016

2016

2015

Net interest income

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Net interest income

  

  

  

  

  

  

RBS

6,500 

6,605 

  

2,167 

2,177 

2,187 

  

  

  

  

  

  

  

  - UK Personal & Business Banking

3,194 

3,122 

  

1,085 

1,090 

1,055 

  - Ulster Bank RoI

304 

280 

  

106 

93 

90 

  - Commercial Banking

1,601 

1,485 

  

534 

531 

504 

  - Private Banking

338 

328 

  

112 

113 

109 

  - RBS International

226 

225 

  

75 

76 

73 

  - Corporate & Institutional Banking

75 

59 

  

32 

24 

29 

  - Capital Resolution

195 

359 

  

27 

82 

78 

  - Williams & Glyn

488 

493 

  

164 

162 

167 

  - Central items & other

79 

254 

  

32 

82 

  

  

  

  

  

  

  

Average interest-earning assets (IEA)

  

  

  

  

  

  

RBS

398,833 

415,352 

  

397,345 

396,008 

413,670 

  

  

  

  

  

  

  

  - UK Personal & Business Banking

140,696 

129,359 

  

145,649 

140,591 

131,406 

  - Ulster Bank RoI

24,835 

23,244 

  

26,026 

24,288 

23,456 

  - Commercial Banking

119,496 

104,686 

  

123,817 

119,768 

105,905 

  - Private Banking

16,621 

15,770 

  

16,978 

16,622 

15,878 

  - RBS International

22,073 

20,432 

  

23,332 

21,798 

20,244 

  - Corporate & Institutional Banking

11,817 

18,696 

  

11,960 

11,923 

18,686 

  - Capital Resolution

27,407 

67,659 

  

22,352 

29,157 

51,786 

  - Williams & Glyn

24,044 

22,810 

  

24,597 

24,172 

23,020 

  - Central items & other

11,844 

12,696 

  

2,634 

7,689 

23,289 

  

  

  

  

  

  

  

Yields, spreads and margins of the banking business

  

  

  

  

  

  

  

  

  

  

  

  

  

Gross yield on interest-earning assets

  

  

  

  

  

  

  of the banking business (1) 

2.82%

2.92%

  

2.78%

2.87%

2.84%

Cost of interest-bearing liabilities of banking business

(1.01%)

(1.18%)

  

(0.94%)

(1.02%)

(1.11%)

  

  

  

  

  

  

  

Interest spread of banking business (2) 

1.81%

1.74%

  

1.84%

1.85%

1.73%

Benefit from interest-free funds

0.37%

0.39%

  

0.33%

0.36%

0.37%

  

  

  

  

  

  

  

Net interest margin (3) 

  

  

  

  

  

  

RBS

2.18%

2.13%

  

2.17%

2.21%

2.10%

  

  

  

  

  

  

  

  - UK Personal & Business Banking (4) 

3.03%

3.23%

  

2.96%

3.12%

3.19%

  - Ulster Bank RoI (4) 

1.64%

1.61%

  

1.62%

1.54%

1.52%

  - Commercial Banking (4) 

1.79%

1.90%

  

1.72%

1.78%

1.89%

  - Private Banking (4) 

2.72%

2.78%

  

2.62%

2.73%

2.72%

  - RBS International (4) 

1.37%

1.47%

  

1.28%

1.40%

1.43%

  - Corporate & Institutional Banking

0.85%

0.42%

  

1.06%

0.81%

0.62%

  - Capital Resolution

0.95%

0.71%

  

0.48%

1.13%

0.60%

  - Williams & Glyn

2.71%

2.89%

  

2.65%

2.70%

2.88%

 

Third party customer rates (5)

  

  

  

  

  

  

Third party customer asset rate

  

  

  

  

  

  

  - UK Personal & Business Banking

3.90%

4.18%

  

3.79%

3.96%

4.15%

  - Ulster Bank RoI (6)

2.19%

2.29%

  

2.17%

2.07%

2.26%

  - Commercial Banking

2.81%

2.96%

  

2.74%

2.82%

2.93%

  - Private Banking

2.95%

3.18%

  

2.86%

2.97%

3.12%

  - RBS International

3.08%

3.10%

  

2.95%

3.02%

3.11%

Third party customer funding rate

  

  

  

  

  

  

  - UK Personal & Business Banking

(0.50%)

(0.68%)

  

(0.44%)

(0.46%)

(0.65%)

  - Ulster Bank RoI (6)

(0.53%)

(0.92%)

  

(0.46%)

(0.53%)

(0.82%)

  - Commercial Banking

(0.35%)

(0.38%)

  

(0.32%)

(0.36%)

(0.36%)

  - Private Banking

(0.20%)

(0.26%)

  

(0.18%)

(0.20%)

(0.25%)

  - RBS International

(0.15%)

(0.33%)

  

(0.10%)

(0.13%)

(0.25%)

 

 

Refer to the following page for footnotes.

16

 


 

 

 

Analysis of results

 

Notes:                                                                                                                                           

(1)

Gross yield is the interest earned on average interest-earning assets as a percentage of average interest-earning assets.

(2)

Interest spread is the difference between the gross yield and interest paid on average interest-bearing liabilities as a percentage of average interest-bearing liabilities.

(3)

Net interest margin is net interest income as a percentage of average interest-earning assets.

(4)

PBB NIM was 2.82% (nine months ended 2015 - 2.98%; Q3 2016 - 2.76%; Q2 2016 - 2.89%; Q3 2015 - 2.93%). CPB NIM was 1.83% (nine months ended 2015 - 1.93%; Q3 2016 - 1.75%; Q2 2016 - 1.83%; Q3 2015 - 1.92%).

(5)

Net interest margin includes Treasury allocations and interest on intercompany borrowings, which are excluded from third party customer rates.

(6)

Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.

 

Key points

·

Net interest income of £2,167 million decreased by £20 million, or 1%, compared with Q3 2015 principally driven by a £51 million reduction in Capital Resolution in line with the planned shrinkage of the balance sheet.  Across our PBB and CPB franchises, net interest income increased by £81 million, or 4%, reflecting increased lending.

·

NIM was 2.17% for Q3 2016, 7 basis points higher than Q3 2015 as the benefit associated with reductions in the low yielding ‘non-core’ assets has been partially offset by modest asset margin pressure and mix impacts across PBB and CPB.  

·

NIM decreased by 4 basis points compared with Q2 2016 reflecting asset and liability margin pressure across PBB and CPB and a release of previously suspended credit card interest in Q2 2016.

·

NIM across the combined PBB and CPB franchises was 2.27% in Q3 2016 compared with 2.45% in Q3 2015 and 2.37% in Q2 2016.

·

UK PBB, NIM decreased by 23 basis points to 2.96% reflecting the change in mix of our asset base towards mortgage lending from unsecured lending, mortgage customers switching from standard variable rate (SVR) and lower returns on current account structural hedges. SVR mortgages represented 12% of the mortgage book compared with 15% a year earlier.  Compared with Q2 2016, UK PBB NIM reduced by 16 basis points reflecting a £22 million reduction in suspended interest releases, 6 basis points, and asset and liability margin pressure. 

·

Commercial Banking NIM decreased by 17 basis points to 1.72%, compared with Q3 2015, principally reflecting asset margin pressure.

·

Structural hedges of £122 billion as at 30 September 2016 generated a benefit of £0.9 billion through net interest income for the year to date. Around 72% of these hedges are part of a five year rolling hedge programme that will progressively roll-off over the coming years.

 

 

 

 

 

 

17

 


 

 

 

Analysis of results

 

The following table reconciles adjusted operating expenses (a non-GAAP financial measure) to operating expenses reported on a statutory basis.

 

  

Nine months ended

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

  

2016 

2015*

  

2016 

2016 

2015*

Operating expenses

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Staff costs

  

  

  

  

  

  

  - adjusted basis (1)

(3,457)

(3,824)

  

(1,128)

(1,127)

(1,281)

  - restructuring costs

(525)

(625)

  

(159)

(245)

(281)

  

  

  

  

  

  

  

Statutory basis

(3,982)

(4,449)

  

(1,287)

(1,372)

(1,562)

  

  

  

  

  

  

  

Premises and equipment

  

  

  

  

  

  

  - adjusted basis (1)

(951)

(1,061)

  

(321)

(315)

(352)

  - restructuring costs

(55)

(319)

  

(33)

(13)

(283)

  

  

  

  

  

  

  

Statutory basis

(1,006)

(1,380)

  

(354)

(328)

(635)

  

  

  

  

  

  

  

Other administrative expenses

  

  

  

  

  

  

  - adjusted basis (1)

(1,018)

(1,338)

  

(393)

(179)

(477)

  - litigation and conduct costs

(1,740)

(1,444)

  

(425)

(1,284)

(129)

  - restructuring costs

(476)

(314)

  

(277)

(101)

(124)

  

  

  

  

  

  

  

Statutory basis

(3,234)

(3,096)

  

(1,095)

(1,564)

(730)

  

  

  

  

  

  

  

Restructuring costs (2) 

  

  

  

  

  

  

  - adjusted basis

(1,099)

(2,317)

  

(469)

(392)

(847)

  - staff costs

525 

625 

  

159 

245 

281 

  - premises and equipment

55 

319 

  

33 

13 

283 

  - other administrative expenses

476 

314 

  

277 

101 

124 

  - depreciation and amortisation

386 

  

92 

  - write down of other intangible assets

41 

673 

  

31 

67 

  

  

  

  

  

  

  

Statutory basis

  

  

  

  

  

  

  

  

Litigation and conduct costs (2) 

  

  

  

  

  

  

  - adjusted basis

(1,740)

(1,444)

  

(425)

(1,284)

(129)

  - other administrative expenses

1,740 

1,444 

  

425 

1,284 

129 

  

  

  

  

  

  

  

Statutory basis

  

  

  

  

  

  

  

  

Depreciation and amortisation

  

  

  

  

  

  

  - adjusted basis (1)

(527)

(608)

  

(175)

(174)

(190)

  - restructuring costs

(2)

(386)

  

(2)

(92)

  

  

  

  

  

  

  

Statutory basis

(529)

(994)

  

(175)

(176)

(282)

  

  

  

  

  

  

  

Write down of other intangible assets

  

  

  

  

  

  

  - adjusted basis (1)

(48)

  

(38)

  - write down of other intangible assets

48 

  

38 

  

  

  

  

  

  

  

Statutory basis

  

  

  

  

  

  

  

  

Write-down of goodwill and other intangible assets

  

  

  

  

  

  

  - write-down of other intangible assets

(48)

  

(38)

  - restructuring costs

(41)

(673)

  

(31)

(67)

  

  

  

  

  

  

  

Statutory basis

(89)

(673)

  

(69)

(67)

  

  

  

  

  

  

  

Operating expenses - adjusted basis

(6,001)

(6,831)

  

(2,017)

(1,833)

(2,300)

  

  

  

  

  

  

  

Operating expenses - statutory basis

(8,840)

(10,592)

  

(2,911)

(3,509)

(3,276)

  

  

  

  

  

  

  

* Restated - Refer to page 38 for further details

  

  

  

  

  

  

 

Notes:

(1)

Adjusted basis is calculated as operating expenses before restructuring costs and litigation and conduct costs.

(2)

Items reallocated to other expense lines, not reconciling items.

 

 

18

 


 

 

Analysis of results

 

Key points

·

Operating expenses of £2,911 million were £365 million, or 11%, lower than Q3 2015 reflecting a £378 million reduction in restructuring costs and a £283 million reduction in adjusted operating expenses, partially offset by a £296 million increase in litigation and conduct expenses.

·

Adjusted operating expenses reduced by £283 million, or 12%, compared with Q3 2015 to £2,017 million. Against our cost reduction target of £800 million, adjusted expenses reduced by £695(1)  million for the year to date.

·

Staff costs of £1,287 million were down £275 million, or 18%, compared with Q3 2015, reflecting a 9,900 reduction in FTEs.

·

Restructuring costs of £469 million compared with £847 million in Q3 2015. Williams & Glyn restructuring costs of £301 million include £127 million of termination costs associated with the decision to discontinue the programme to create a cloned banking system. 

·

Litigation and conduct costs of £425 million include an additional charge in respect of the recent settlement with the National Credit Union Administration Board to resolve two outstanding lawsuits in the United States relating to residential mortgage backed securities.

 

Note:

(1)

Operating expenses excluding restructuring costs £1,099 million (2015 - £2,317 million), litigation and conduct costs £1,740 million (2015 - £1,444 million), write down of other intangible assets of £48 million (2015 – nil), the operating costs of Williams and Glyn £296 million (2015 - £252 million) and the VAT recovery £227 million.

19

 


 

 

Analysis of results

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

2016

2015

  

2016

2016

2015

Impairment losses/(releases)

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Loan impairment losses/(releases)

  

  

  

  

  

  

  - individually assessed

575 

(135)

  

217 

172 

(15)

  - collectively assessed

219 

(8)

  

176 

27 

(13)

  - latent

(191)

(380)

  

(202)

(10)

(64)

  

  

  

  

  

  

  

Customer loans

603 

(523)

  

191 

189 

(92)

Bank loans

(4)

  

(4)

  

  

  

  

  

  

  

Total loan impairment losses/(releases)

603 

(527)

  

191 

189 

(96)

Securities

(50)

127 

  

(47)

(3)

17 

  

  

  

  

  

  

  

Total impairment losses/(releases)

553 

(400)

  

144 

186 

(79)

 

  

30 September 

30 June 

31 December 

Credit metrics (1) 

2016 

2016 

2015 

  

  

  

  

Gross customer loans

£332,917m

£333,017m

£315,111m

Loan impairment provisions

£6,181m

£6,456m

£7,139m

Risk elements in lending (REIL)

£12,625m

£11,789m

£12,157m

Provisions as a % of REIL

49%

55%

59%

REIL as a % of gross customer loans

3.8%

3.5%

3.9%

 

Note:

(1)

Includes disposal groups and excludes reverse repos.

 

Key points 

·

A net impairment loss of £144 million was reported in Q3 2016 compared with a release of £79 million in Q3 2015 and a loss of £186 million in Q2 2016. 

·

Capital Resolution reported a net impairment loss of £120 million in Q3 2016 compared with a release of £50 million in Q3 2015. The loss for the quarter included a £190 million charge (year to date - £454 million) in respect of the shipping portfolio reflecting difficult conditions in some parts of the sector.

·

Commercial Banking reported an impairment loss of £20 million for Q3 2016 compared with £16 million in Q3 2015 and £89 million in Q2 2016. Q2 2016 included a single name charge taken in respect of the oil and gas portfolio.

·

Ulster Bank RoI reported a net impairment release of £39 million (€48 million) in Q3 2016 compared with £54 million (€75 million) in Q3 2015. The Q3 2016 impairment release included a write back associated with the sale of a portfolio of loans partially offset by additional provisions in respect of mortgages. On completion in Q4 2016, the portfolio sale is expected to reduce gross customer loans in Ulster Bank RoI by £1.5 billion(1)  (€1.8 billion) and reduce REIL as a percentage of gross customer loans by around 6 percentage points.

·

REIL increased by £836 million in the quarter to £12,625 million, principally relating to the shipping portfolio along with the implementation of a revised mortgage methodology in Ulster Bank RoI and foreign exchange movements. REIL represented 3.8% of gross customer loans compared with 3.5% at 30 June 2016 and 3.9% at 31 December 2015. Provision coverage was 49% compared with 55% at 30 June 2016 and 59% at 31 December 2015.

  

Note:

(1)

The value shown has been converted using a spot exchange rate as at September 2016 of €1.158:£1.

 

20

 


 

 

 

Analysis of results

 

  

  

  

  

  

  

  

  

  

  

  

  

Selected credit risk portfolios

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

30 September 2016

  

30 June 2016

  

31  December 2015

  

 CE (1) 

PE (1)

EAD (2)

  

 CE (1) 

PE (1)

EAD (2)

  

 CE (1) 

PE (1)

EAD (2)

Natural resources

£m

£m

£m

  

£m

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

  

  

  

  

  

Oil and gas

2,989 

6,000 

4,739 

  

3,298 

6,356 

5,039 

  

3,544 

6,798 

5,606 

Mining and metals

652 

1,782 

1,375 

  

816 

1,941 

1,608 

  

729 

1,823 

1,555 

Electricity

3,256 

8,466 

5,782 

  

3,374 

8,583 

5,940 

  

2,851 

7,683 

5,205 

Water and waste

5,875 

8,772 

7,381 

  

5,347 

8,665 

6,679 

  

4,657 

8,261 

5,873 

  

  

  

  

  

  

  

  

  

  

  

  

  

12,772 

25,020 

19,277 

  

12,835 

25,545 

19,266 

  

11,781 

24,565 

18,239 

  

  

  

  

  

  

  

  

  

  

  

  

Shipping

5,514 

6,043 

6,154 

  

6,765 

7,246 

7,496 

  

6,776 

7,301 

7,509 

 

Notes:

(1)

Current exposure (CE) and potential exposure (PE) are both net of impairment provisions and credit valuation adjustments and after the effect of risk transfer. For a full description of what is included and excluded from current and potential exposure refer to page 16 of Appendix 1 of the Interim Form 6-K.

(2)

Exposure at default (EAD) reflects an estimate of the extent to which a bank will be exposed under a specific facility on the default of a customer or counterparty.

Uncommitted undrawn facilities are excluded from current exposure but included within EAD; therefore EAD can exceed current exposure.

 

Key points

·

Oil and gas - Exposure to the sector remained stable and there was no material change in the credit quality of the portfolio during the quarter. Provisions increased by £10 million to £167 million. AQ10 potential exposure, net of provisions, was £178 million (30 June 2016 - £207 million). Exposures classified as risk of credit loss were minimal.

·

Mining and metals - The sector continued to be affected by a slowdown in demand and the oversupply of key metal commodities. RBS’s strategic focus in this sector is on investment grade customers and there was no material change in the credit quality during the quarter. Provisions also remained stable. AQ10 potential exposure, net of provisions was £56 million (30 June 2016 - £82 million). Exposures classified as risk of credit loss were minimal.

·

Shipping - The reduction in exposure was due to disposals and loan amortisation. Challenging market conditions continued to affect vessel values in the bulk and container sectors, where values remain severely depressed and close to historic lows, and also in the tanker sector, where values have reduced from recent highs. Portfolio credit quality deteriorated during the quarter as a result of the difficult market conditions. Impairment charges of £190 million partially offset by write offs of £58 million in Q3 2016 increased provisions by £126 million to £571 million (30 June 2016 - £445 million; 31 December 2015 - £181 million). AQ10 current exposure, net of provisions, was £1,031 million (30 June 2016 - £579 million). In addition £775 million of current exposure was classified as at risk of credit loss (30 June 2016 - £78 million).

 

21

 


 

 

Analysis of results

 

Capital and leverage ratios

  

  

  

  

  

  

  

 

End-point CRR basis (1) 

  

PRA transitional basis

  

30 September 

30 June 

31 December 

  

30 September 

30 June 

31 December 

  

2016 

2016 

2015 

  

2016 

2016 

2015 

Risk asset ratios

  

  

  

  

  

  

  

  

  

CET1

15.0 

14.5 

15.5 

  

15.0 

14.5 

15.5 

Tier 1

16.7 

15.4 

16.3 

  

19.1 

17.7 

19.1 

Total

20.6 

19.0 

19.6 

  

24.1 

23.0 

24.7 

  

  

  

  

  

  

  

  

Capital

£m

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

  

Tangible equity (2) 

39,822 

40,541 

40,943 

  

39,822 

40,541 

40,943 

  

  

  

  

  

  

  

  

Expected loss less impairment provisions

(862)

(831)

(1,035)

  

(862)

(831)

(1,035)

Prudential valuation adjustment

(734)

(603)

(381)

  

(734)

(603)

(381)

Deferred tax assets

(838)

(1,040)

(1,110)

  

(838)

(1,040)

(1,110)

Own credit adjustments

(435)

(587)

(104)

  

(435)

(587)

(104)

Pension fund assets

(209)

(209)

(161)

  

(209)

(209)

(161)

Cash flow hedging reserve

(1,565)

(1,603)

(458)

  

(1,565)

(1,603)

(458)

Other deductions

(9)

(14)

(86)

  

(9)

(14)

(64)

  

  

  

  

  

  

  

  

Total deductions

(4,652)

(4,887)

(3,335)

  

(4,652)

(4,887)

(3,313)

  

  

  

  

  

  

  

  

CET1 capital

35,170 

35,654 

37,608 

  

35,170 

35,654 

37,630 

AT1 capital

4,041 

1,997 

1,997 

  

9,662 

7,756 

8,716 

Tier 1 capital

39,211 

37,651 

39,605 

  

44,832 

43,410 

46,346 

Tier 2 capital

9,181 

9,028 

8,002 

  

11,773 

13,043 

13,619 

  

  

  

  

  

  

  

  

Total regulatory capital

48,392 

46,679 

47,607 

  

56,605 

56,453 

59,965 

  

  

  

  

  

  

  

  

Risk-weighted assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit risk

  

  

  

  

  

  

  

  - non-counterparty

166,600 

172,500 

166,400 

  

  

  

  

  - counterparty

25,100 

26,100 

23,400 

  

  

  

  

Market risk

17,800 

20,900 

21,200 

  

  

  

  

Operational risk

25,700 

25,700 

31,600 

  

  

  

  

  

  

  

  

  

  

  

  

Total RWAs

235,200 

245,200 

242,600 

  

  

  

  

  

  

  

  

  

  

  

  

Leverage (3) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Derivatives

283,000 

326,000 

262,500 

  

  

  

  

Loans and advances

346,500 

348,500 

327,000 

  

  

  

  

Reverse repos

46,000 

45,800 

39,900 

  

  

  

  

Other assets

176,900 

181,300 

186,000 

  

  

  

  

  

  

  

  

  

  

  

  

Total assets

852,400 

901,600 

815,400 

  

  

  

  

Derivatives

  

  

  

  

  

  

  

  - netting and variation margin

(281,700)

(328,400)

(258,600)

  

  

  

  

  - potential future exposures

64,100 

75,500 

75,600 

  

  

  

  

Securities financing transactions gross up

2,200 

3,200 

5,100 

  

  

  

  

Undrawn commitments

62,100 

63,200 

63,500 

  

  

  

  

Regulatory deductions and other

  

  

  

  

  

  

  

  adjustments

4,100 

5,600 

1,500 

  

  

  

  

  

  

  

  

  

  

  

  

Leverage exposure

703,200 

720,700 

702,500 

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1 capital

39,211 

37,651 

39,605 

  

  

  

  

  

  

  

  

  

  

  

  

Leverage ratio %

5.6 

5.2 

5.6 

  

  

  

  

  

  

  

  

  

  

  

  

Average leverage exposure (4)

717,056 

717,167 

  

  

  

  

  

  

  

  

  

  

  

  

  

Average Tier 1 capital (4)

38,919 

38,561 

  

  

  

  

  

  

  

  

  

  

  

  

  

Average leverage ratio % (4)

5.4 

5.4 

  

  

  

  

  

 

Notes:

(1)

CRR as implemented by the PRA in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases with the exception of unrealised gains on available-for-sale securities which have been included from 2015 under the PRA transitional basis.

(2)

Tangible equity is equity attributable to ordinary shareholders less intangible assets.

(3)

Based on end-point CRR Tier 1 capital and leverage exposure under the CRR Delegated Act.

(4)

Based on averages of the last four quarter end positions.

22

 


 

 

Analysis of results

 

Key points

·

CET1 ratio decreased by 50 basis points in the nine months to 30 September 2016 to 15.0% primarily reflecting management actions to normalise the ownership structure and improve the long-term resilience of RBS. These actions included the final Dividend Access Share payment of £1.2 billion and the accelerated payment of £4.2 billion relating to the deficit on the Main Scheme of The Royal Bank of Scotland Group Pension Fund, both in March 2016. Litigation and conduct charges contributed to a £2.0 billion reduction in CET1 capital.

·

Tier 1 capital benefitted from the successful issuance of £2 billion of AT1 capital notes in August 2016. Total end-point CRR compliant AT1 capital now stands at £4.0 billion.

·

RWAs decreased by £7.4 billion to £235.2 billion during the nine months to 30 September 2016.

 

Credit risk RWAs have remained relatively flat as lending growth in UK PBB and Commercial Banking and the adverse impact of foreign exchange movements following the EU referendum were offset by reductions due to disposals and run-off in Capital Resolution.

 

The impact of market volatility throughout 2016 and implementation of new risk metric models in CIB and Capital Resolution led to an increase of £1.7 billion in counterparty credit risk RWAs.

 

Market risk RWAs reduced by £3.4 billion driven by disposals of securitisations and lower US dollar position in Treasury.

 

Operational risk RWAs decreased by £5.9 billion as a result of the annual recalculation and the removal of the element relating to Citizens following regulatory approval.

·

There was a 50 basis points increase in the CET1 ratio in Q3 2016 driven primarily by a £10.0 billion reduction in RWAs. RWA reduction reflected disposals and run-off in Capital Resolution, the unwind of mortgage model recalibrations booked by UK PBB in H1 2016 and lower non-modelled market risk.

·

Leverage ratio increased by 40 basis points in the period to 5.6% driven by the issuance of AT1 instruments in August 2016.

·

RBS’s PRA minimum leverage ratio requirement of 3% has been supplemented with an additional GSII leverage ratio buffer of 0.13125%, equivalent to £923 million of CET1 capital at 30 September 2016.

       

 

23

 


 

 

Segment performance

  

Nine months ended 30 September 2016

 

  

PBB

  

CPB

  

  

  

  

 

Central

 

  

  

Ulster

  

Commercial

Private

RBS

  

  

Capital

Williams

 items &

Total

 

  

UK PBB

Bank RoI

  

Banking

Banking

International

  

CIB

Resolution

& Glyn (1)

other (2)

RBS

  

£m

£m

  

£m

£m

£m

  

£m

£m

£m

£m

£m

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

Net interest income

3,194 

304 

  

1,601 

338 

226 

  

75 

195 

488 

79 

6,500 

Other non-interest income

757 

132 

  

947 

158 

52 

  

1,132 

(325)

132 

(442)

2,543 

Total income - adjusted (3) 

3,951 

436 

  

2,548 

496 

278 

  

1,207 

(130)

620 

(363)

9,043 

Own credit adjustments

  

  

82 

142 

67 

294 

Loss on redemption of own debt

  

  

(127)

(127)

Strategic disposals

  

  

(81)

245 

164 

Total income

3,951 

439 

  

2,548 

496 

278 

  

1,289 

(69)

620 

(178)

9,374 

Direct expenses - staff costs

(529)

(150)

  

(392)

(115)

(33)

  

(192)

(79)

(190)

(1,777)

(3,457)

                           - other costs

(221)

(32)

  

(166)

(32)

(13)

  

(28)

(81)

(46)

(1,925)

(2,544)

Indirect expenses

(1,478)

(130)

  

(822)

(218)

(62)

  

(762)

(428)

(60)

3,960 

Operating expenses - adjusted (4)

(2,228)

(312)

  

(1,380)

(365)

(108)

  

(982)

(588)

(296)

258 

(6,001)

Restructuring costs  - direct

(50)

(32)

  

(13)

(1)

(1)

  

(16)

(35)

(57)

(894)

(1,099)

                                  - indirect

(86)

(4)

  

(49)

(22)

(2)

  

(50)

(35)

248 

Litigation and conduct costs

(420)

(95)

  

(16)

(2)

  

(62)

(257)

(889)

(1,740)

Operating expenses

(2,784)

(443)

  

(1,458)

(390)

(110)

  

(1,110)

(915)

(353)

(1,277)

(8,840)

Profit/(loss) before impairment (losses)/releases

1,167 

(4)

  

1,090 

106 

168 

  

179 

(984)

267 

(1,455)

534 

Impairment (losses)/releases

(67)

66 

  

(123)

(5)

(11)

  

(383)

(31)

(553)

Operating profit/(loss)

1,100 

62 

  

967 

101 

157 

  

179 

(1,367)

236 

(1,454)

(19)

Operating profit/(loss) - adjusted (3,4)

1,656 

190 

  

1,045 

126 

159 

  

225 

(1,101)

293 

(104)

2,489 

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

Return on equity (5)

17.0%

3.1%

  

8.5%

7.0%

15.4%

  

1.6%

nm

nm

nm

(8.5%)

Return on equity - adjusted (3,4,5)

26.4%

9.5%

  

9.4%

8.9%

15.6%

  

2.4%

nm

nm

nm

(0.6%)

Cost:income ratio

70%

101%

  

57%

79%

40%

  

86%

nm

57%

nm

94%

Cost:income ratio - adjusted (3,4)

56%

72%

  

54%

74%

39%

  

81%

nm

48%

71%

66%

Total assets (£bn)

155.4 

25.3 

  

152.6 

18.2 

26.9 

  

249.7 

176.7 

25.7 

21.9 

852.4 

Funded assets (£bn) (6)

155.4 

25.2 

  

152.6 

18.1 

26.9 

  

112.5 

34.9 

25.7 

18.0 

569.3 

Net loans and advances to customers (£bn) 

129.6 

19.5 

  

99.8 

11.8 

8.7 

  

19.9 

16.7 

20.6 

0.1 

326.7 

Risk elements in lending (£bn)

2.1 

4.8 

  

2.1 

0.1 

0.1 

  

-  

2.9 

0.4 

0.1 

12.6 

Impairment provisions (£bn)

(1.4)

(2.3)

  

(1.0)

-  

-  

  

-  

(1.2)

(0.2)

-  

(6.1)

Customer deposits (£bn)

143.7 

15.1 

  

98.1 

25.3 

25.5 

  

9.7 

16.8 

24.0 

0.6  

358.8 

Risk-weighted assets (RWAs) (£bn)

31.9 

21.4 

  

77.6 

8.2 

9.6 

  

36.6 

38.6 

9.7 

1.6  

235.2 

RWA equivalent (£bn) (5)

35.4 

22.8 

  

82.3 

8.2 

9.6 

  

37.2 

39.8 

10.2 

1.9  

247.4 

Employee numbers (FTEs - thousands)

18.7 

3.2 

  

5.8 

1.8 

0.8 

  

1.3 

0.7 

5.0 

45.2  

82.5 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

For the notes to this table refer to page 25. nm = not meaningful

  

  

  

  

  

  

  

  

  

  

  

 

                                                       

24

 


 

 

 

Segment performance

  

Quarter ended 30 September 2016

 

  

PBB

  

CPB

  

  

  

  

   Central

  

  

  

Ulster

  

Commercial

Private

RBS

  

  

Capital

Williams

 items &

Total

 

  

UK PBB

Bank RoI

  

Banking

Banking

International

  

CIB

Resolution

& Glyn (1)

 other (2)

RBS

 

  

£m

£m

  

£m

£m

£m

  

£m

£m

£m

£m

£m

 

Income statement

  

  

  

  

  

  

  

  

  

  

  

  

 

Net interest income

1,085 

106 

  

534 

112 

75 

  

32 

27 

164 

32 

2,167 

 

Other non-interest income

251 

40 

  

315 

53 

18 

  

494 

148 

45 

(37)

1,327 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Total income adjusted (3) 

1,336 

146 

  

849 

165 

93 

  

526 

175 

209 

(5)

3,494 

 

Own credit adjustments

  

  

(55)

(42)

(59)

(156)

 

Gain on redemption of own debt

  

  

 

Strategic disposals

  

  

(30)

(1)

(31)

 

Total income

1,336 

146 

  

849 

165 

93 

  

471 

103 

209 

(62)

3,310 

 

Direct expenses - staff costs

(168)

(53)

  

(127)

(38)

(11)

  

(61)

(17)

(65)

(588)

(1,128)

 

                           - other costs

(59)

(19)

  

(55)

(9)

(5)

  

(7)

(17)

(13)

(705)

(889)

 

Indirect expenses

(491)

(45)

  

(265)

(62)

(24)

  

(274)

(139)

(21)

1,321 

 

Operating expenses - adjusted (4)

(718)

(117)

  

(447)

(109)

(40)

  

(342)

(173)

(99)

28 

(2,017)

 

Restructuring costs  - direct

(8)

  

(12)

  

(6)

(23)

(12)

(409)

(469)

 

                                  - indirect

(26)

(3)

  

(9)

(3)

  

(27)

(10)

78 

 

Litigation and conduct costs

(3)

  

(6)

  

(6)

(231)

(181)

(425)

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Operating expenses

(742)

(131)

  

(474)

(112)

(39)

  

(381)

(437)

(111)

(484)

(2,911)

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Profit/(loss) before impairment (losses)/releases

594 

15 

  

375 

53 

54 

  

90 

(334)

98 

(546)

399 

 

Impairment (losses)/releases

(27)

39 

  

(20)

(3)

  

(120)

(14)

(144)

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Operating profit/(loss)

567 

54 

  

355 

50 

54 

  

90 

(454)

84 

(545)

255 

 

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Operating profit/(loss) - adjusted (3,4)

591 

68 

  

382 

53 

53 

  

184 

(118)

96 

24 

1,333 

 

Additional information

  

  

  

  

  

  

  

  

  

  

  

  

 

Return on equity (5)

27.1%

7.8%

  

9.5%

11.1%

15.4%

  

3.1%

nm

nm

nm

(4.8%)

 

Return on equity - adjusted (3,4,5)

28.3%

9.9%

  

10.4%

11.8%

15.1%

  

8.0%

nm

nm

nm

4.6%

 

Cost:income ratio

56%

90%

  

56%

68%

42%

  

81%

nm

53%

nm

88%

 

Cost:income ratio - adjusted (3,4)

54%

80%

  

53%

66%

43%

  

65%

99%

47%

nm

58%

 

Total assets (£bn)

155.4 

25.3 

  

152.6 

18.2 

26.9 

  

249.7 

176.7 

25.7 

21.9 

852.4 

 

Funded assets (£bn) (6) 

155.4 

25.2 

  

152.6 

18.1 

26.9 

  

112.5 

34.9 

25.7 

18.0 

569.3 

 

Net loans and advances to customers (£bn)

129.6 

19.5 

  

99.8 

11.8 

8.7 

  

19.9 

16.7 

20.6 

0.1 

326.7 

 

Risk elements in lending (£bn)

2.1 

4.8 

  

2.1 

0.1 

0.1 

  

2.9 

0.4 

0.1 

12.6 

 

Impairment provisions (£bn)

(1.4)

(2.3)

  

(1.0)

  

(1.2)

(0.2)

(6.1)

 

Customer deposits (£bn)

143.7 

15.1 

  

98.1 

25.3 

25.5 

  

9.7 

16.8 

24.0 

0.6 

358.8 

 

Risk-weighted assets (RWAs) (£bn)

31.9 

21.4 

  

77.6 

8.2 

9.6 

  

36.6 

38.6 

9.7 

1.6 

235.2 

 

RWA equivalent (£bn) (5) 

35.4 

22.8 

  

82.3 

8.2 

9.6 

  

37.2 

39.8 

10.2 

1.9 

247.4 

 

Employee numbers (FTEs - thousands)

18.7 

3.2 

 

5.8 

1.8 

0.8 

 

1.3 

0.7 

5.0 

45.2 

    82.5 

 

                                                   

Notes:

(1)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.  

(2)

Central items include unallocated transactions which principally comprise volatile items under IFRS.

(3)

Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.

(4)

Excluding restructuring costs and litigation and conduct costs.

(5)

RBS’s CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 11% (Commercial Banking and Ulster Bank RoI), 12% (RBS International) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect capital deductions (RWAes). RBS Return on equity is calculated using profit for the period attributable to ordinary shareholders.

(6)

Funded assets exclude derivative assets.

 

25

 


 

 

Segment performance

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

  

2016

2015

  

2016

2016

2015

Total income by segment

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

UK PBB

  

  

  

  

  

  

Personal advances

630 

570 

  

216 

210 

185 

Personal deposits

547 

566 

  

186 

195 

186 

Mortgages

1,733 

1,736 

  

596 

573 

591 

Cards

464 

481 

  

148 

174 

159 

Business banking

544 

546 

  

188 

181 

182 

Other

33 

47 

  

10 

Total

3,951 

3,946 

  

1,336 

1,340 

1,313 

  

  

  

  

  

  

  

Ulster Bank RoI

  

  

  

  

  

  

Corporate

142 

109 

  

43 

43 

38 

Retail

291 

246 

  

96 

95 

91 

Other

79 

  

(3)

35 

  

  

  

  

  

  

  

Total income

439 

434 

  

146 

135 

164 

  

  

  

  

  

  

  

Commercial Banking

  

  

  

  

  

  

Commercial lending

1,372 

1,223 

  

472 

464 

380 

Deposits

365 

352 

  

116 

124 

123 

Asset and invoice finance

537 

542 

  

181 

179 

184 

Other

274 

340 

  

80 

79 

113 

Total

2,548 

2,457 

  

849 

846 

800 

  

  

  

  

  

  

  

Private Banking

  

  

  

  

  

  

Investments

74 

65 

  

24 

22 

20 

Banking

422 

421 

  

141 

144 

140 

Total

496 

486 

  

165 

166 

160 

  

  

  

  

  

  

  

RBS International

278 

272 

  

93 

95 

87 

  

  

  

  

  

  

  

CIB

  

  

  

  

  

  

Rates

719 

557 

  

348 

258 

160 

Currencies

394 

295 

  

128 

122 

96 

Financing

183 

260 

  

78 

55 

32 

Other

(89)

(55)

  

(28)

(31)

20 

Total excluding own credit adjustments

1,207 

1,057 

  

526 

404 

308 

Own credit adjustments

82 

186 

  

(55)

73 

78 

Businesses transferred to Commercial Banking

98 

  

20 

Total

1,289 

1,341 

  

471 

477 

406 

  

  

  

  

  

  

  

Capital Resolution

  

  

  

  

  

  

APAC portfolio (1) 

(3)

68 

  

(5)

17 

Americas portfolio

11 

52 

  

EMEA portfolio (2) 

27 

62 

  

15 

Legacy loan portfolio

(8)

155 

  

31 

(25)

22 

Shipping

37 

66 

  

15 

21 

Markets

(177)

212 

  

212 

(360)

58 

Global Transaction Services

107 

277 

  

24 

35 

48 

Other

42 

(84)

  

11 

23 

(46)

Total excluding disposals and own credit

  

  

  

  

  

  

  adjustments

36 

808 

  

288 

(299)

140 

Disposal losses

(247)

(187)

  

(143)

(102)

(89)

Own credit adjustments

142 

180 

  

(42)

76 

38 

Total

(69)

801 

  

103 

(325)

89 

  

  

  

  

  

  

  

Williams & Glyn (3)

  

  

  

  

  

  

Retail

351 

355 

  

120 

116 

119 

Commercial

269 

270 

  

89 

90 

92 

Total

620 

625 

  

209 

206 

211 

  

  

  

  

  

  

  

Central items

(178)

77 

  

(62)

60 

(47)

Total RBS

9,374 

10,439 

  

3,310 

3,000 

3,183 

 

Notes:

(1)

Asia-Pacific portfolio.

(2)

European, the Middle East and African portfolio.

(3)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

26

 


 

 

Segment performance

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

  

2016

2015

  

2016

2016

2015

Impairment losses/(releases) by segment

£m

£m

  

£m

£m

£m

UK PBB

  

  

  

  

  

  

Personal advances

46 

56 

  

26 

14 

12 

Mortgages

17 

(1)

  

(1)

14 

(9)

Business banking

(7)

(55)

  

(8)

Cards

11 

11 

  

10 

(5)

Other

  

(7)

Total

67 

20 

  

27 

24 

  

  

  

  

  

  

  

Ulster Bank RoI

  

  

  

  

  

  

Mortgages

59 

(94)

  

60 

(2)

(36)

Commercial real estate

  

  

  

  

  

  

 - investment

(23)

  

(18)

(1)

 - development

(19)

  

(12)

(5)

(2)

Other lending

(83)

(40)

  

(69)

(7)

(15)

Total

(66)

(131)

  

(39)

(14)

(54)

  

  

  

  

  

  

  

Commercial Banking

  

  

  

  

  

  

Commercial real estate

(4)

10 

.

(6)

Asset and invoice finance

14 

  

10 

(2)

Private sector services (education, health etc)

  

Banks & financial institutions

  

Wholesale and retail trade repairs

  

10 

(4)

Hotels and restaurants

20 

  

21 

(1)

Manufacturing

  

Construction

  

Other (1)

74 

16 

  

(7)

74 

Total

123 

42 

  

20 

89 

16 

  

  

  

  

  

  

  

Private Banking

  

  

  

  

  

  

  

  

RBS International

11 

  

(1)

  

  

  

  

  

  

  

Corporate & Institutional Banking

(5)

  

  

  

  

  

  

  

  

Capital Resolution

383 

(369)

  

120 

67 

(50)

  

  

  

  

  

  

  

Williams & Glyn (2) 

  

  

  

  

  

  

Retail

21 

15 

  

11 

Commercial

10 

(20)

  

Total

31 

(5)

  

14 

11 

  

  

  

  

  

  

  

Central items

(1)

47 

  

(1)

(1)

Total RBS

553 

(400)

  

144 

186 

(79)

  

  

  

  

  

  

  

  

  

  

  

30 September

30 June

31 December

  

  

  

  

2016

2016

2015

Analysis of Capital Resolution RWAs by portfolio

  

  

£m

£m

£m

APAC portfolio (3)

  

  

  

0.1 

0.2 

0.5 

Americas portfolio

  

  

  

0.3 

0.3 

1.0 

EMEA portfolio (4) 

  

  

  

1.2 

1.1 

1.2 

Legacy loan portfolio

  

  

  

2.0 

2.2 

3.7 

Shipping

  

  

  

3.5 

4.0 

4.5 

Markets

  

  

  

17.1 

19.2 

20.7 

Global Transaction Services

  

  

  

1.8 

2.5 

3.6 

Saudi Hollandi Bank

  

  

  

7.9 

7.9 

6.9 

Other

  

  

  

1.9 

2.1 

2.9 

Total credit and market risk RWAs

  

  

  

35.8 

39.5 

45.0 

Operational risk

  

  

  

2.8 

2.8 

4.0 

Total RWAs

  

  

  

38.6 

42.3 

49.0 

 

Notes:

(1)

Includes a single name charge taken in respect of the oil and gas portfolio.

(2)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

(3)

Asia-Pacific portfolio.

(4)

European, the Middle East and Africa portfolio.

27

 


 

 

Segment Performance

  

30 September

30 June

31 December

  

2016

2016

2015

Loans and advances to customers (gross) by segment (1) 

£bn

£bn

£bn

UK PBB

  

  

  

Personal advances

6.0 

6.0 

6.0 

Mortgages

114.7 

111.4 

104.8 

Business banking

6.4 

6.2 

5.3 

Cards

3.9 

3.9 

4.1 

Other

-  

-  

1.4 

Total

 131.0 

127.5 

121.6 

  

  

  

  

Ulster Bank RoI

  

  

  

Mortgages

16.0 

15.6 

13.8 

Commercial real estate

  

  

  

 - investment

1.0 

1.0 

0.7 

 - development

0.4 

0.4 

0.2 

 - other lending

4.4 

4.4 

3.9 

Total

21.8 

21.4 

18.6 

  

  

  

  

Commercial Banking

  

  

  

Commercial real estate

17.5 

17.8 

16.7 

Asset and invoice finance

15.0 

14.8 

14.4 

Private sector services (education, health etc)

6.9 

6.8 

6.7 

Banks & financial institutions

8.9 

8.2 

7.1 

Wholesale and retail trade repairs

8.2 

8.2 

7.5 

Hotels and restaurants

3.6 

3.6 

3.3 

Manufacturing

6.4 

7.0 

5.3 

Construction

2.0 

2.1 

2.1 

Other

32.3 

31.7 

28.9 

Total

100.8 

100.2 

92.0 

  

  

  

  

Private Banking

  

  

  

Personal advances

2.3 

2.5 

2.7 

Mortgages

6.7 

6.8 

6.5 

Other

2.8 

2.5 

2.0 

Total

11.8 

11.8 

11.2 

  

  

  

  

RBS International

  

  

  

Corporate

6.1 

5.9 

4.5 

Mortgages

2.6 

2.6 

2.5 

Other

0.4 

Total

8.7 

8.5 

7.4 

  

  

  

  

Capital Resolution

17.9 

21.0 

25.9 

  

  

  

  

Williams & Glyn (2) 

  

  

  

Retail

12.2 

12.1 

11.6 

Commercial

8.6 

8.5 

8.7 

Total

20.8 

20.6 

20.3 

  

  

  

  

Central items

0.1 

0.5 

2.0 

  

  

  

  

Balance sheet

  

  

  

Corporate & Institutional Banking

  

  

  

Reverse repos

42.7 

43.1 

38.6 

Loans and advances to customer (gross)

19.9 

21.6 

16.1 

Loans and advances to banks (gross) (3)

5.9 

6.3 

5.7 

Securities

26.4 

30.1 

23.7 

Cash and eligible bills

6.4 

10.3 

14.3 

Other

11.2 

14.2 

4.9 

Total funded assets

112.5 

125.6 

103.3 

Notes:

(1)

Excludes reverse repurchase agreements and includes disposal groups.

(2)

Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK.

(3)

Excludes disposal groups.

28

 


 

 

Segment performance

 

UK Personal & Business Banking

Operating profit was £567 million compared with £549 million in Q3 2015 with 2% income growth and a 3% reduction in operating expenses partially offset by a modestly higher impairment charge.  Compared with Q2 2016, operating profit improved £543 million, principally due to reduced litigation and conduct costs. Adjusted operating profit improved by £57 million to £591 million principally due to a £42 million FSCS levy charge included in the prior quarter. Return on equity of 27% was in line with Q3 2015. Adjusted return on equity of 28% compared with 29% in Q3 2015.

UK PBB continued to deliver support for both personal and business customers with net loans and advances of £129.6 billion up £13.3 billion, or 11%, compared with Q3 2015, primarily due to mortgage growth. Gross new mortgage lending in the quarter of £7.9 billion was 12% higher with market share of new mortgages at approximately 12% supporting a growth in stock share to 8.7%.

The Reward proposition continues to show positive momentum and now has more than one million customer accounts with improved levels of customer engagement. In addition, we continue to make better use of digital channels, with over 4.3 million customers regularly using our mobile app.

Total income of £1,336 million was £23 million, or 2%, higher than Q3 2015. Net interest income increased by £30 million, or 3%, principally reflecting strong volume growth and savings re-pricing benefits partially offset by asset margin pressure.  Net interest margin declined by 23 basis points to 2.96% reflecting the change in mix of the asset base towards mortgage lending from unsecured lending, mortgage customers switching from standard variable rate (SVR) and lower returns on current account structural hedges. SVR mortgages represented 12% of the total mortgage book (Q3 2015 - 15%). Non-interest income reduced by £7 million, or 3%, primarily due to reduced credit card interchange fees, £13 million, and higher cash back payments on the Reward account. 

Operating expenses reduced by £20 million, or 3% compared with Q3 2015. Adjusted operating expenses reduced by £16 million, or 2%, compared with Q3 2015 with a £43 million, or 16%, reduction in direct costs, primarily due to an 18% reduction in FTEs driving lower staff costs, partially offset by increased technology investment in the business. Compared with Q2 2016 operating expenses reduced by £550 million, principally due to reduced litigation and conduct costs. Adjusted operating expenses reduced by £64 million compared with Q2 2016 principally reflecting a £42 million FSCS levy charge in Q2 2016 and a £12 million reduction in staff costs as FTEs reduced a further 1,300 in the quarter. 

The net impairment charge of £27 million, which continues to reflect benign credit conditions, increased by £25 million compared with Q3 2015 primarily due to reduced portfolio provision releases. Default levels remain low across all portfolios.

RWAs were £1.4 billion, or 4%, lower than Q3 2015 with lending growth more than offset by improved overall credit quality. The reduction of £5.1 billion in the quarter principally reflects the unwind of mortgage risk parameter model recalibrations taken in H1 2016 and improved credit quality.

 

 

29

 


 

 

 

Segment performance

 

Ulster Bank RoI

Operating profit of £54 million (€69 million) was £49 million (€74 million) lower than Q3 2015 primarily reflecting a lower net impairment release and income gains in Q3 2015. Operating profit of £54 million (€69 million) was £107 million (€138 million) higher than Q2 2016 primarily as a result of a reduction in litigation and conduct costs. Adjusted operating profit of £68 million (€81 million) was £10 million (€8 million) higher than Q2 2016 as a £25 million (€31 million) increase in net impairment releases was partially offset by £15 million (€19 million) accrual releases in Q2 2016.   

Ulster Bank RoI built upon its strong H1 2016 performance in mortgage lending, adding a further £0.3 billion (€0.3 billion) of gross new lending in the quarter, up 77% (51%) compared with Q3 2015. The low yielding tracker mortgage portfolio increased £1.0 billion to £9.6 billion but in euro terms declined by a further €0.3 billion to €11.1 billion.

Total income of £146 million (€171 million) was £18 million (€57 million) lower than Q3 2015 due to reduced income on free funds and income gains in Q3 2015, including a £12 million (€17 million) profit on the sale of a buy-to-let mortgage portfolio, as well as a £24 million (€33 million) gain realised on the closure of a foreign exchange exposure. Partially offsetting, income benefits from the weakening of sterling against the Euro.  

Operating expenses increased £16 million, or 14%, but reduced by €10 million in euro terms,  or 6%, to £131 million (€150 million) compared with Q3 2015. Adjusted operating expenses increased by £7 million, or 6%, but reduced by €15 million in euro terms, or 10%, compared with Q3 2015 to £117 million (€138 million). Compared with Q2 2016 adjusted operating expenses increased by £26 million (€22 million) primarily due to accrual releases of £15 million (€19 million) in Q2 2016.

The Q3 2016 impairment release of £39 million (€48 million) included a net impairment write back associated with the sale of a portfolio of loans, partially offset by additional provisions in respect of mortgages.

REILs were £4.8 billion (€5.6 billion) in Q3 2016, increasing £0.5 billion (€0.4 billion) on Q2 2016 primarily driven by a widening of the definition of non-performing loans which are considered to be impaired to include multiple forbearance arrangements and probationary mortgages. The amendment to the definition does not have a material impact on provisions. It is expected that the sale of a portfolio of loans will materially reduce Ulster Bank RoI REIL when complete in Q4 2016.

RWAs increased 9% to £21.4 billion compared with Q3 2015 due to the strengthening of the euro but decreased 7% to €24.7 billion in euro terms as credit metrics continue to benefit from the improving economic environment. RWAs on the tracker mortgage portfolio increased £0.6 billion, or 8%, compared with Q3 2015 to £8.3 billion but reduced by €1.1 billion, or 10%, in euro terms compared with Q3 2015 to €9.6 billion.

 

 

30

 


 

 

 

Segment performance

 

Commercial Banking

Operating profit of £355 million in Q3 2016 compared with £376 million in Q3 2015. Adjusted operating profit of £382 million was £7 million higher than Q3 2015 and was £122 million higher than Q2 2016, principally reflecting a single name impairment charge taken in respect of the oil and gas portfolio in Q2 2016. Return on equity of 9.5% compared with 12.3% in Q3 2015. Adjusted return on equity of 10.4% compared with 12.3% in Q3 2015.

Total income increased by £49 million or 6% to £849 million compared with Q3 2015 largely reflecting increased asset and liability volumes and £42 million of business transfers(1)  . Net interest margin fell by 17 basis points from Q3 2015 to 1.72% driven by asset margin pressure in a competitive market and low rate environment.

Operating expenses increased by £66 million compared with Q3 2015 as a result of higher restructuring costs and £25 million of business transfers(1), but reduced by £72 million compared to Q2 2016 reflecting cost efficiencies and a £25 million intangible asset write down in Q2 2016.

Net impairment losses of £20 million were £4 million higher than Q3 2015 and £69 million lower than Q2 2016 reflecting the non-repeat of a single name charge taken in respect of the oil and gas portfolio.

Net loans and advances increased by £10.7 billion from Q3 2015, principally reflecting increased borrowing across mid and large corporate customers and £4.2 billion of business transfers(1). Net loans and advances continued to grow in the quarter, up £0.6 billion, but at a slower rate than in H1 2016.

RWAs of £77.6 billion increased by £13.4 billion compared to Q3 2015, reflecting asset growth and £6.5 billion of business transfers(1)  partially offset by reduced RWA intensity. 

 

Private Banking

Operating profit of £50 million was £12 million higher than Q3 2015 and was £9 million higher than Q2 2016. Return on equity of 11.1% compared with 7.4% in Q3 2015. Adjusted return on equity of 11.8% compared with 7.1% in Q3 2015.

Total income of £165 million increased by £5 million, 3%, compared with Q3 2015 as the benefit of increased asset volumes has been partially offset by reduced net interest margin, down 10 basis points to 2.62% reflecting the lower interest rate environment.

Operating expenses were 5% lower than Q3 2015 at £112 million, principally reflecting management actions to reduce operational costs and a £13 million VAT recovery. Adjusted operating expenses were 8% lower than Q3 2015 at £109 million.

Net loans and advances increased 6% to £11.8 billion, due to increased mortgage lending, and customer deposits grew by 11% to £25.3 billion compared with Q3 2015. Assets under management(2)  increased by £3.1 billion to £16.6 billion reflecting market and underlying growth. In addition, investment cash balances were included in assets under management for the first time in Q3 2016, excluding this, growth was £1.7 billion.

 

Notes:

(1)

The business transfers included: total income of £42 million (Q2 2016 - £53 million; Q3 2015 - nil); operating expenses of £25 million (Q2 2016 - £22 million; Q3 2015 - nil); impairments of £7 million (Q2 2016 £7 million; Q3 2015 - nil) net loans and advances to customers of £4.2 billion (30 June 2016 - £5.2 billion; 30 September 2015 - nil); and RWAs of £6.5 billion (30 June 2016 - £8.5 billion; 30 September 2015 - nil).

(2)

AUM’s constitute assets under management, assets under custody and investment cash.

31

 


 

 

Segment performance

 

 

RBS International

Operating profit of £54 million was 8% higher than Q3 2015 driven by increased income. Return on equity of 15.4% compared with 18.0% in Q3 2015. Adjusted return on equity of 15.1% compared with 18.8% in Q3 2015.

Total income increased 7% compared with Q3 2015 to £93 million driven by increased asset volumes partially offset by lower asset margins.

Net loans and advances to customers increased by £1.7 billion to £8.7 billion compared with Q3 2015 principally reflecting balance draw-downs in the funds sector lending portfolio and foreign exchange movements.

Customer deposits increased by £3.2 billion to £25.5 billion reflecting the transfer in of the Luxembourg branch from Capital Resolution in Q2 2016 and foreign exchange movements.

 

Corporate & Institutional Banking (CIB)

An operating profit of £90 million compared with an operating loss of £109 million in Q3 2015, with the improvement principally reflecting an increase in total income. Adjusted operating profit of £184 million compared with an adjusted operating loss of £30 million in Q3 2015.

Total income, which includes own credit adjustments, increased by £65 million, or 16%, to £471 million compared with £406 million in Q3 2015. Adjusted income, excluding a £20 million movement associated with the transfer of portfolios to Commercial Banking(1),  increased by £218 million to £526 million. The increase was primarily driven by an increase in Rates, reflecting sustained customer activity and favourable market conditions following the EU referendum and central bank actions.

Operating expenses reduced by £134 million, or 26%, to £381 million compared with £515 million in Q3 2015 principally reflecting lower restructuring costs. Adjusted operating expenses fell by £16 million, or 4%, to £342 million as the business reshaping and FTE reductions were partially offset by the impact of investment spend that was previously capitalised.  

RWAs increased by £3.7 billion compared with Q3 2015 to £36.6 billion, adjusting for the impact of transfers to Commercial Banking(1),  principally due to model updates and the impact of market volatility throughout 2016.

 

Note:

(1)

CIB's results include the following financials for businesses subsequently transferred to Commercial Banking: total income of £98 million for nine months ended 2015 (Q3 2015 - £20 million) and RWAs of £5.9 billion as at 30 September 2015.

 

32

 


 

 

Segment performance

 

Capital Resolution

RWAs reduced by £3.7 billion in the quarter to £38.6 billion reflecting disposal activity, partially offset by an increase due to the weakening of sterling.

Total assets reduced £31.3 billion in Q3 2016 to £176.7 billion. Funded assets (which exclude derivatives) reduced by £9.8 billion in Q3 2016 to £34.9 billion with the most significant reductions across Markets and GTS. 

An operating loss of £454 million in Q3 2016 compared with an operating loss of £798 million in Q3 2015 and a loss of £612 million in Q2 2016. 

Total income of £103 million increased by £428 million compared with Q2 2016 primarily due to a £160 million partial reversal of the £220 million additional funding valuation adjustment made in Q2 2016 following the EU referendum.

Operating expenses increased from £220 million to £437 million in Q3 2016 due to a higher level of litigation and conduct costs. Adjusted operating expenses of £173 million were 50% lower than Q3 2015 principally reflecting a reduction in FTE and associated cost efficiencies. 

A net impairment loss of £120 million in the quarter, compared with £67 million in Q2 2016, and included a charge of £190 million in respect of the shipping portfolio. An impairment release of £50 million was reported in Q3 2015.

RWAs have fallen by £21.1 billion to £38.6 billion from Q3 2015, primarily due to run-off and loan portfolio disposals. Total assets reduced £58.2 billion to £176.7 billion for the same period. Funded assets (which exclude derivatives) have reduced by £31.1 billion to £34.9 billion for the same period.

 

Williams & Glyn

Operating profit reduced by £31 million to £84 million compared with Q3 2015, whilst adjusted operating profit reduced by £19 million to £96 million.  Operating profit increased £13 million compared with Q2 2016 reflecting lowering restructuring costs. Adjusted operating profit was in line with Q2 2016.

Total income was broadly stable compared with Q3 2015 at £209 million as the growth in the balance sheet has been more than offset by net interest margin reduction. Net interest margin of 2.65% was 23 basis points lower than Q3 2015 and was 5 basis points lower than Q2 2016. 

Operating expenses increased by £20 million, or 22%, to £111 million compared with Q3 2015. Adjusted operating expenses increased by £8 million, or 9%, to £99 million compared with Q3 2015, reflecting previous activity undertaken to create a standalone entity. Compared with Q2 2016, operating expenses decreased £13 million reflecting lowering restructuring costs, adjusted operating expenses were flat. 

A net impairment loss of £14 million was reported in Q3 2016 compared with a loss of £5 million in Q3 2015. 

Net loans and advances increased by £0.6 billion, or 3%, to £20.6 billion compared with Q3 2015.  Gross mortgage lending increased by £0.7 billion, or 7%, to £10.9 billion and commercial lending was £0.3 billion, or 3%, lower at £8.6 billion.

 

Central items & other

Central items not allocated represented a charge of £545 million in Q3 2016, an increase of £207 million compared with Q3 2015. Treasury funding costs were a charge of £177 million (compared with a charge of £117 million in Q3 2015) driven by a £150 million IFRS volatility charge. Restructuring costs in the quarter included £289 million relating to Williams & Glyn (Q3 2015 - £190 million). Partially offsetting this a gain of £97 million was recognised arising from a partial recycling of the accumulated foreign exchange reserve triggered by a capital reduction in a foreign subsidiary.  

 

33

 


 

 

Selected statutory financial statements

 

Condensed consolidated income statement for the period ended 30 September 2016 (unaudited) 

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

2016

2015*

  

2016

2016

2015*

  

£m

£m

  

£m

£m

£m

  

  

  

  

  

  

  

Interest receivable

8,432 

9,070 

  

2,776 

2,827 

2,963 

Interest payable

(1,932)

(2,465)

  

(609)

(650)

(776)

  

  

  

  

  

  

  

Net interest income

6,500 

6,605 

  

2,167 

2,177 

2,187 

  

  

  

  

  

  

  

Fees and commissions receivable

2,519 

2,838 

  

843 

810 

880 

Fees and commissions payable

(592)

(558)

  

(200)

(180)

(195)

Income from trading activities

384 

1,045 

  

401 

(55)

170 

(Loss)/gain on redemption of own debt

(127)

  

(130)

Other operating income

690 

509 

  

96 

378 

141 

  

  

  

  

  

  

  

Non-interest income

2,874 

3,834 

  

1,143 

823 

996 

  

  

  

  

  

  

  

Total income

9,374 

10,439 

  

3,310 

3,000 

3,183 

  

  

  

  

  

  

  

Staff costs

(3,982)

(4,449)

  

(1,287)

(1,372)

(1,562)

Premises and equipment

(1,006)

(1,380)

  

(354)

(328)

(635)

Other administrative expenses

(3,234)

(3,096)

  

(1,095)

(1,564)

(730)

Depreciation and amortisation

(529)

(994)

  

(175)

(176)

(282)

Write down of other intangible assets

(89)

(673)

  

(69)

(67)

  

  

  

  

  

  

  

Operating expenses

(8,840)

(10,592)

  

(2,911)

(3,509)

(3,276)

  

  

  

  

  

  

  

Profit/(loss) before impairment (losses)/releases

534 

(153)

  

399 

(509)

(93)

Impairment (losses)/releases

(553)

400 

  

(144)

(186)

79 

  

  

  

  

  

  

  

Operating (loss)/profit before tax

(19)

247 

  

255 

(695)

(14)

Tax (charge)/credit

(922)

(284)

  

(582)

(260)

  

  

  

  

  

  

  

Loss from continuing operations

(941)

(37)

  

(327)

(955)

(11)

Profit from discontinued operations, net of tax  

1,451 

  

1,093 

  

  

  

  

  

  

  

(Loss)/profit for the period

(941)

1,414 

  

(327)

(955)

1,082 

  

  

  

  

  

  

.

Attributable to:

  

  

  

  

  

  

Non-controlling interests

37 

389 

  

45 

Preference share and other dividends

343 

264 

  

135 

114 

97 

Dividend access share

1,193 

  

Ordinary shareholders

(2,514)

761 

  

(469)

(1,077)

940 

  

  

  

  

  

  

  

(Loss)/earnings per ordinary share (EPS) (1)

  

  

  

  

  

  

Basic EPS from continuing and discontinued operations

(21.5p)

6.6p

  

(3.9p)

(9.3p)

8.1p

Basic EPS from continuing operations

(21.5p)

(3.2p)

  

(3.9p)

(9.3p)

(1.0p)

 

*Restated - refer to page 38 for further details

 

Note:

(1)

There was no dilutive impact in any period.

 

34

 


 

 

Selected statutory financial statements

 

Condensed consolidated statement of comprehensive income for the period ended 30 September 2016 (unaudited) 

 

  

Nine months ended

  

Quarter ended

  

30 September

30 September

  

30 September

30 June

30 September

  

2016

2015*

  

2016

2016

2015*

  

£m

£m

  

£m

£m

£m

(Loss)/profit for the period

(941)

1,414 

  

(327)

(955)

1,082 

Items that do not qualify for reclassification

  

  

  

  

  

  

(Loss)/gain on remeasurement of retirement benefit schemes

(1,047)

20 

  

(52)

(466)

Tax

285 

(4)

  

12 

130 

(1)

  

(762)

16 

  

(40)

(336)

Items that do qualify for reclassification

  

  

  

  

  

  

Available-for-sale financial assets

(162)

(95)

  

(67)

(87)

(50)

Cash flow hedges

1,515 

(302)

  

(66)

635 

408 

Currency translation

1,276 

(1,177)

  

205 

489 

(604)

Tax

(297)

106 

  

63 

(122)

(38)

  

2,332 

(1,468)

  

135 

915 

(284)

Other comprehensive income/(loss) after tax

1,570 

(1,452)

  

95 

579 

(282)

  

  

  

  

  

  

  

Total comprehensive income/(loss) for the period

629 

(38)

  

(232)

(376)

800 

  

  

  

  

  

  

  

Total comprehensive income/(loss) is attributable to:

  

  

  

  

  

  

Non-controlling interests

157 

357 

  

32 

53 

58 

Preference shareholders

192 

223 

  

79 

57 

80 

Paid-in equity holders

151 

41 

  

56 

57 

17 

Dividend access share

1,193 

 - 

  

 - 

 - 

 - 

Ordinary shareholders

(1,064)

(659)

  

(399)

(543)

645 

  

629 

(38)

  

(232)

(376)

800 

*Restated - refer to page 38 for further details

35

 


 

 

Selected statutory financial statements

 

Condensed consolidated balance sheet as at 30 September 2016 (unaudited) 

 

  

30 September

30 June

31 December

2016

2016

2015

  

£m 

£m 

£m 

  

  

  

  

Assets

  

  

  

Cash and balances at central banks

69,254 

65,307 

79,404 

Net loans and advances to banks

19,741 

21,763 

18,361 

Reverse repurchase agreements and stock borrowing

12,251 

14,458 

12,285 

Loans and advances to banks

31,992 

36,221 

30,646 

Net loans and advances to customers

326,736 

326,503 

306,334 

Reverse repurchase agreements and stock borrowing

33,704 

31,320 

27,558 

Loans and advances to customers

360,440 

357,823 

333,892 

Debt securities

79,784 

84,058 

82,097 

Equity shares

728 

749 

1,361 

Settlement balances

10,298 

13,405 

4,116 

Derivatives

283,049 

326,023 

262,514 

Intangible assets

6,506 

6,525 

6,537 

Property, plant and equipment

4,490 

4,589 

4,482 

Deferred tax

1,684 

2,217 

2,631 

Prepayments, accrued income and other assets

4,140 

4,311 

4,242 

Assets of disposal groups

13 

396 

3,486 

  

  

  

  

Total assets

852,378 

901,624 

815,408 

  

  

  

  

Liabilities

  

  

  

Bank deposits

32,172 

31,377 

28,030 

Repurchase agreements and stock lending

6,557 

11,611 

10,266 

Deposits by banks

38,729 

42,988 

38,296 

Customer deposits

358,844 

355,719 

343,186 

Repurchase agreements and stock lending

29,851 

29,270 

27,112 

Customer accounts

388,695 

384,989 

370,298 

Debt securities in issue

28,357 

27,148 

31,150 

Settlement balances

10,719 

11,262 

3,390 

Short positions

19,882 

21,793 

20,809 

Derivatives

275,364 

322,390 

254,705 

Provisions, accruals and other liabilities

15,954 

15,627 

15,115 

Retirement benefit liabilities

526 

511 

3,789 

Deferred tax

647 

824 

882 

Subordinated liabilities

19,162 

20,113 

19,847 

Liabilities of disposal groups

15 

252 

2,980 

  

  

  

  

Total liabilities

798,050 

847,897 

761,261 

  

  

  

  

Equity

  

  

  

Non-controlling interests

853 

820 

716 

Owners’ equity*

  

  

  

  Called up share capital

11,792 

11,756 

11,625 

  Reserves

41,683 

41,151 

41,806 

  

  

  

  

Total equity

54,328 

53,727 

54,147 

  

  

  

  

Total liabilities and equity

852,378 

901,624 

815,408 

  

  

  

  

*Owners’ equity attributable to:

  

  

  

Ordinary shareholders

46,328 

47,066 

47,480 

Other equity owners

7,147 

5,841 

5,951 

  

  

  

  

  

53,475 

52,907 

53,431 

36

 


 

 

Selected statutory financial statements

 

Condensed consolidated statement of changes in equity for the period ended 30 September 2016 (unaudited) 

 

  

Share

  

  

  

  

  

  

  

capital and

  

  

  

Total

Non

  

  

statutory

Paid-in

Retained

Other

owners'

controlling

Total

  

reserves

equity  

earnings

reserves*

equity

 interests 

equity

  

£m

£m

£m

£m

£m

£m

£m

At 1 January 2016

41,485 

2,646 

(4,020)

13,320 

53,431 

716 

54,147 

(Loss)/profit attributable to ordinary

  

  

(978)

  

(978)

37 

(941)

  shareholders and other equity owners

  

  

  

  

  

  

  

Other comprehensive income

  

  

  

  

  

  

  

 - amount recognised in equity

  

  

(1,047)

3,748 

2,701 

120 

2,821 

 - amount transferred from equity to profit or loss

  

  

  

(1,198)

(1,198)

  

(1,198)

 - recycled to profit or loss on

  

  

  

  

  

  

  

  disposal of businesses (1) 

  

  

  

(41)

(41)

  

(41)

 - tax

  

  

285 

(297)

(12)

  

(12)

Dividend access share dividend

  

  

(1,193)

  

(1,193)

  

(1,193)

Preference share and other dividends paid

  

  

(343)

  

(343)

  

(343)

Shares and securities issued during the period (2) 

405 

2,046 

(10)

  

2,441 

  

2,441 

Redemption of preference shares (3) 

  

  

(1,160)

  

(1,160)

  

(1,160)

Redemption of paid-in equity (4) 

  

(110)

(21)

  

(131)

  

(131)

Share-based payments - gross

  

  

(13)

  

(13)

  

(13)

Movement in own shares held

(29)

  

  

  

(29)

  

(29)

Equity withdrawn

  

  

  

  

  

(20)

(20)

At 30 September 2016

41,861 

4,582 

(8,500)

15,532 

53,475 

853 

54,328 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

30 September

  

  

  

  

  

  

  

2016

Total equity is attributable to:

  

  

  

  

£m

Non-controlling interests

  

  

  

  

  

  

853 

Preference shareholders

  

  

  

  

  

  

2,565 

Paid-in equity holders

  

  

  

  

  

  

4,582 

Ordinary shareholders

  

  

  

  

  

  

46,328 

  

  

  

  

  

  

  

54,328 

*Other reserves consist of:

  

  

  

  

  

  

Merger reserve

  

  

  

  

  

  

10,881 

Available-for-sale reserve

  

  

  

  

  

  

188 

Cash flow hedging reserve

  

  

  

  

  

  

1,565 

Foreign exchange reserve

  

  

  

  

  

  

2,898 

  

  

  

  

  

  

  

15,532 

 

Notes:

(1)

No tax impact.

(2)

AT1 capital notes totalling £2.0 billion issued in August 2016.

(3)

In September 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billon. The nominal value of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners’ equity was reduced by £0.4 billion in respect of the movement in exchange rates since issue.

(4)

Paid-in equity reclassified to liabilities as a result of the call of RBS Capital Trust C in May 2016 (redeemed in July 2016).

 

37

 


 

 

Notes

 

1. Basis of preparation

The consolidated financial statements should be read in conjunction with RBS’s 2015 Annual Report on Form 20-F which was prepared in accordance with International Financial Reporting Standards (IFRS) 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).

 

Accounting policies

RBS’s principal accounting policies are set out on pages 270 to 279 of the 2015 Annual Report on Form 20-F. Amendments to IFRSs effective for 2016 have not had a material effect on RBS’s Q3 2016 results.

 

Pensions

In Q4 2015, RBS changed its accounting policy for the recognition of surpluses in its defined benefit pension schemes: in particular, the policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. Where RBS has a right to a refund, this is not deemed unconditional if pension fund trustees can unilaterally enhance benefits for plan members. The amended policy was applied retrospectively and prior periods restated. For further details, refer to pages 270 to 271 of RBS’s 2015 Annual Report on Form 20-F.

  

Critical accounting policies and key sources of estimation uncertainty

The judgements and assumptions that are considered to be the most important to the portrayal of RBS’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 judgements are described on pages 279 to 282 of RBS’s 2015 Annual Report on Form 20-F.

 

Going concern

Having reviewed RBS’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS will continue in operational existence for the foreseeable future. Accordingly, the results for the period ended 30 September 2016 have been prepared on a going concern basis.

 

2. Pensions

In June 2016, the triennial funding valuation of the Main Scheme of The Royal Bank of Scotland Group Pension Fund was agreed which showed that at 31 December 2015 the value of liabilities exceeded the value of assets. In March 2016, to mitigate this anticipated deficit, RBS made a cash payment of £4.2 billion. The next triennial valuation is due to occur at the end of 2018 with agreement on any additional contributions by the end of March 2020.

 

As at 30 September 2016, the Main Scheme had an unrecognised surplus under IAS19 valuation principles. The surplus is unrecognised because the trustee’s power to enhance member benefits could consume that surplus meaning that RBS does not control its ability to realise an asset.  The existence of the asset, albeit unrecognised, limits RBS’s exposure to changes in actuarial assumptions and investment performance.

38

 


 

 

Notes

 

3. Provisions for liabilities and charges

  

  

  

Regulatory and legal actions

  

  

  

  

Interest

  

  

  

  

  

  

Payment

rate

Other

Foreign

Litigation

  

  

  

protection

hedging

 customer 

exchange

and other

Property

  

  

insurance

products

 redress (1) 

investigations

regulatory

and other

Total

  

£m

£m

£m

£m

£m

£m

£m

  

  

  

  

  

  

  

  

At 1 January 2016

996 

149 

672 

306 

3,985 

1,258 

7,366 

Transfer from accruals and other liabilities

19 

19 

Transfer

21 

(35)

85 

(71)

Currency translation and other movements

10 

126 

28 

164 

Charge to income statement

11 

34 

79 

124 

Releases to income statement

(8)

(1)

(19)

(28)

Provisions utilised

(85)

(41)

(63)

(24)

(69)

(282)

At 31 March 2016

911 

108 

633 

281 

4,205 

1,225 

7,363 

Transfer from accruals and other liabilities

35 

14 

54 

Transfer

50 

(50)

Currency translation and other movements

23 

336 

20 

387 

Charge to income statement

400 

117 

779 

233 

1,529 

Releases to income statement

(5)

(12)

(95)

(112)

Provisions utilised

(114)

(30)

(50)

(141)

(146)

(481)

At 30 June 2016

1,247 

78 

688 

304 

5,172 

1,251 

8,740 

Transfer from accruals and other liabilities

17 

17 

Currency translation and other movements

94 

19 

118 

Charge to income statement

16 

469 

191 

676 

Releases to income statement

(12)

(48)

(8)

(68)

Provisions utilised

(102)

(10)

(69)

(105)

(176)

(462)

At 30 September 2016

1,145 

68 

623 

309 

5,599 

1,277 

9,021 

 

Note:

(1)

Closing provision predominantly relates to investment advice, packaged accounts (including costs) and tracker mortgages.

 

There are uncertainties as to the eventual cost of redress in relation to certain of the provisions contained in the table above. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different from the amount provided. RBS will continue to monitor the position closely and refresh the underlying assumptions.

 

4. Litigation, investigations and reviews

 

RBS's 2016 interim results on Form 6-K issued on 8 August 2016 included comprehensive disclosures about RBS's litigation, investigations and reviews in Note 15. Set out below are the material developments in these matters since the 2016 interim results were published. RBS generally does not disclose information about the establishment or existence of a provision for a particular matter where disclosure of the information can be expected to prejudice seriously RBS’s position in the matter.

 

Litigation

 

Other securitisation and securities related litigation in the US

On 27 September 2016, RBS Securities Inc. (RBSSI) settled the two mortgage-backed securities (MBS) litigations that the National Credit Union Administration Board has been litigating on behalf of US Central Federal Credit Union and Western Corporate Federal Credit Union.  The settlement amount of US$1.1 billion was substantially covered by provisions existing at 30 June 2016.  

 

39

 


 

 

Notes

 

4. Litigation, investigations and reviews (continued) 

 

RBS continues to litigate various other MBS-related civil claims identified in its 2016 interim results, including those of the Federal Housing Finance Agency, and to respond to investigations by the civil and criminal divisions of the U.S. Department of Justice and various other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (including several state attorneys general). MBS litigation and investigations may require provisions in future periods that in aggregate could be materially in excess of existing provisions.

 

London Interbank Offered Rate (LIBOR)

As previously disclosed, 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. On 16 August 2016, a class action complaint was filed in the United States District Court for the Southern District of New York against certain Group companies (including RBSG plc and The Royal Bank of Scotland N.V.) and a number of other financial institutions. The complaint alleges that the defendants conspired to manipulate the Australian Bank Bill Swap Reference Rate (BBSW) and asserts claims under the U.S. antitrust laws, the Commodity Exchange Act, RICO (Racketeer Influenced and Corrupt Organizations Act), and the common law. RBS anticipates making a motion to dismiss the complaint.

 

FX antitrust litigation

On 26 September 2016, a class action complaint was filed in the United States District Court for the Southern District of New York asserting claims on behalf of “indirect purchasers” of FX instruments.  The complaint defines “indirect purchasers” as persons who were indirectly affected by FX instruments that others entered into directly with defendant banks or on exchanges. It is alleged that certain RBS companies and other defendant banks caused damages to the “indirect purchasers” by conspiring to restrain trade in the FX spot market. The complaint seeks damages and other relief under federal, California, and New York antitrust laws. RBS anticipates making a motion to dismiss the complaint.

 

Investigations and reviews

 

Connecticut Department of Banking

As previously disclosed, in June 2016, RBSSI, a U.S. broker-dealer, reached an agreement in principle to resolve investigations by the office of the Attorney General of Connecticut on behalf of the Connecticut Department of Banking, concerning RBSSI’s underwriting and issuance of mortgage-backed securities and the potential consequences to RBSSI of The Royal Bank of Scotland plc’s (RBS plc’s) May 2015 FX-related guilty plea.  The agreement became final on 3 October 2016 through the publication by the Department of Banking of two agreed consent orders without RBSSI admitting or denying the Department of Banking’s allegations.  As required by the RMBS consent order, in addition to making certain undertakings, RBSSI has paid US$120 million to the State of Connecticut to resolve the investigation. The amount was covered by a provision that had previously been established. Pursuant to the FX consent order, RBSSI agreed, among other things, to certify to the Department of Banking its compliance with various obligations undertaken in connection with RBS plc's FX-related guilty plea and FX-related resolutions with the Commodity Futures Trading Commission and Board of Governors of the Federal Reserve System.

 

FCA review of RBS’s treatment of SMEs

The FCA published an update on 4 October 2016 confirming that it had received the final Skilled Person’s report and that there were a number of steps for the FCA to complete before being in a position to share its final findings. RBS has been given the opportunity to review that report.

40

 


 

 

Notes

 

4. Litigation, investigations and reviews (continued) 

 

UK retail banking

On 9 August 2016, the Competition & Markets Authority (CMA) published its final report on retail banking. The CMA concluded that there are a number of competition concerns in the provision of personal current accounts (PCAs), business current accounts and SME lending, particularly around low levels of customers searching and switching, resulting in banks not being put under enough competitive pressure, and new products and new banks not attracting customers quickly enough.

The final report set out remedies to address these concerns. These include remedies to make it easier for customers to compare products, ensure customers benefit from technological advantages around open banking, improve the current account switching service and provide PCA overdraft customers with greater control over their charges, along with additional measures targeted at SME customers.

 

The CMA has also been reviewing the undertakings given by certain banks following the Competition Commission’s 2002 investigation into SME banking (SME Undertakings). On 9 August 2016, the CMA announced its final decision, which is that the SME Undertakings should be revoked, with the exception of the prohibition on the ability of certain named banks, including RBS, to bundle (i.e. sell together) business current accounts and SME lending.

 

At this stage there remains uncertainty around the financial impact of the proposed remedies and it is not practicable to estimate the potential impact on RBS, which may be material.

 

FCA wholesale sector competition review

On 18 October 2016, the FCA published its final report following its market study into investment and corporate banking. It found that whilst many clients feel well served by primary capital market services there were some areas where improvements could be made to encourage competition, particularly for smaller clients. It set out a package of remedies, including prohibiting the use of restrictive contractual clauses and ending league table misrepresentation by asking league table providers to review their recognition criteria. The FCA is to undertake further consultation with regards to the prohibition on restrictive contractual clauses. Subject to this consultation, the FCA expects to publish the final rules regarding these restrictive contractual clauses in early 2017.

 

Enforcement proceedings and investigations in relation to Coutts & Co Ltd

As previously disclosed, the Swiss Financial Market Supervisory Authority (FINMA) is taking enforcement proceedings against Coutts & Co Ltd (Coutts), a member of RBS incorporated in Switzerland, with regard to certain client accounts held with Coutts relating to allegations in connection with the Malaysian sovereign wealth fund 1MDB. The proceedings are at an advanced stage. Coutts is also cooperating with investigations, one of which is at an advanced stage and may conclude in the near term, and enquiries from authorities in other jurisdictions in relation to the same subject matter. The outcomes of such proceedings, investigations and enquiries are uncertain but may include financial penalties and/or regulatory sanctions.

 

5. Post balance sheet events

Other than matters disclosed, there have been no further significant events between 30 September 2016 and the date of approval of this announcement.

41

 


 

 

Additional information

 

Other financial data

The following table shows RBS’s issued and fully paid share capital, owners’ equity and indebtedness on a consolidated basis in accordance with IFRS as at 30 September 2016.

 

As at 
30 September 

 2016 

 

£m 

 

 

Share capital - allotted, called up and fully paid: Ordinary shares of £1

11,792

Retained income and other reserves

41,683

 

 

Owners’ equity

53,475

 

 

RBS indebtedness

 

Subordinated liabilities

19,162

Debt securities in issue

28,357

 

 

Total indebtedness

47,519

 

 

Total capitalisation and indebtedness

100,994

 

Under IFRS, certain preference shares are classified as debt and are included in subordinated liabilities in the table above.

The information contained in the table above has not changed materially since 30 September 2016.

42

 


 

 

Additional information

 

Other financial data (continued) 

 

 

Year ended 31 December

 

Nine months 

 ended 

30 September 

2016 (1) 

2015

2014

2013

2012

2011 

 

 

 

 

 

 

 

Return on average total assets (2) 

(0.4%)

(0.2%)

(0.3%)

(0.7%)

(0.4%)

(0.1%)

Return on average ordinary shareholders’ equity (3) 

(7.3%)

(4.0%)

(6.5%)

(14.7%)

(8.9%)

(3.1%)

Average owners’ equity as a percentage of
average total assets

6.2%

6.0%

5.8% 

5.5%

5.2%

4.9%

Ratio of earnings to combined fixed charges

and preference share dividends (4,5) 

 

 

 

 

 

 

  - including interest on deposits

0.85

0.17

1.52 

(0.51)

0.13 

0.78 

  - excluding interest on deposits

0.66

(1.17)

2.61 

(5.12)

(3.73)

(0.86)

Ratio of earnings to fixed charges only (4,5) 

 

 

 

 

 

 

  - including interest on deposits

0.99

0.19

1.67 

(0.55)

0.13 

0.78 

  - excluding interest on deposits

0.97

(1.60)

3.58 

(6.95)

(4.80)

(0.86)

 

Notes:

(1)

Based on unaudited numbers.

(2)

Represents loss attributable to ordinary shareholders as a percentage of average total assets.

(3)

Represents loss attributable to equity owners expressed as a percentage of average ordinary shareholders' equity.

(4)

For this purpose, earnings consist of income before tax and non-controlling interests, plus fixed charges less the unremitted income of associated undertakings (share of profits less dividends received). Fixed charges consist of total interest expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the proportion of rental expense deemed representative of the interest factor (one third of total rental expenses).

(5)

The earnings for the nine months ended 30 September 2016 and years ended 31 December 2015, 2013, 2012, and 2011, were inadequate to cover total fixed charges and preference share dividends. The coverage deficiency for total fixed charges and preference share dividends for the nine months ended 30 September 2016 and for the years ended 31 December 2015, 2013, 2012 and 2011 was £362 million, £3,088 million, £9,247 million, £6,353 million and £1,860 million, respectively. The coverage deficiency for fixed charges for the nine month ended 30 September 2016 and years ended 31 December 2015, 2013, 2012 and 2011 was £19 million, £2,703 million, £8,849 million, £6,052 million and £1,860 million, respectively.

 

43

 


 

 

SIGNATURE

 

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 authorised.

 

 

 

 

The Royal Bank of Scotland Group plc

Registrant

 

 

 

 

 

 

 

 

/s/ Katie Murray

Katie Murray

Director of Finance

9 November 2016