rbs201208036k8.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For August 03, 2012
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

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

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


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


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

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

 
 
 

 
 
 
 
 
Appendix 1
 
Income statement reconciliations
 
 
 
 

 
 
Appendix 1 Income statement reconciliations
 
 
 
 
Half year ended
 
30 June 2012
  
30 June 2011
 
Managed 
Reallocation 
of one-off 
 items 
Statutory 
  
Managed 
Reallocation 
of one-off 
 items 
Statutory 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Interest receivable
9,791 
- 
9,791 
  
10,812 
(7)
10,805 
Interest payable
(3,811)
(10)
(3,821)
  
(4,277)
- 
(4,277)
               
Net interest income
5,980 
(10)
5,970 
  
6,535 
(7)
6,528 
               
Fees and commissions receivable
2,937 
- 
2,937 
  
3,342 
- 
3,342 
Fees and commissions payable
(604)
- 
(604)
  
(583)
- 
(583)
Income from trading activities
2,195 
(1,326)
869 
  
2,789 
(807)
1,982 
Gain on redemption of own debt
- 
577 
577 
  
- 
255 
255 
Other operating income (excluding insurance premium income)
1,194 
(1,547)
(353)
  
1,573 
(40)
1,533 
Insurance net premium income
1,867 
- 
1,867 
  
2,239 
- 
2,239 
    ”           
Non-interest income
7,589 
(2,296)
5,293 
  
9,360 
(592)
8,768 
               
Total income
13,569 
(2,306)
11,263 
  
15,895 
(599)
15,296 
               
Staff costs
(4,257)
(456)
(4,713)
  
(4,419)
(190)
(4,609)
Premises and equipment
(1,073)
(34)
(1,107)
  
(1,119)
(54)
(1,173)
Other administrative expenses
(1,755)
(417)
(2,172)
  
(1,699)
(974)
(2,673)
Depreciation and amortisation
(776)
(126)
(902)
  
(776)
(101)
(877)
               
Operating expenses
(7,861)
(1,033)
(8,894)
  
(8,013)
(1,319)
(9,332)
               
Profit before other operating charges
5,708 
(3,339)
2,369 
  
7,882 
(1,918)
5,964 
Insurance net claims
(1,225)
- 
(1,225)
  
(1,705)
- 
(1,705)
               
Operating profit before impairment losses
4,483 
(3,339)
1,144 
  
6,177 
(1,918)
4,259 
Impairment losses
(2,649)
- 
(2,649)
  
(4,211)
(842)
(5,053)
               
Operating profit/(loss)
1,834 
(3,339)
(1,505)
  
1,966 
(2,760)
(794)
 
 
Appendix 1 Income statement reconciliations (continued)
 
 
 
Half year ended
 
30 June 2012
  
30 June 2011
 
Managed 
Reallocation 
of one-off 
 items 
Statutory 
  
Managed 
Reallocation 
of one-off 
 items 
Statutory 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Operating profit/(loss)
1,834 
(3,339)
(1,505)
  
1,966 
(2,760)
(794)
Own credit adjustments (1)
(2,974)
2,974 
- 
  
(236)
236 
- 
Asset Protection Scheme (2)
(45)
45 
- 
  
(637)
637 
- 
Payment Protection Insurance costs
(260)
260 
- 
  
(850)
850 
- 
Sovereign debt impairment
- 
- 
- 
  
(733)
733 
- 
Interest rate hedge adjustments on impaired available-for-sale sovereign debt
- 
- 
- 
  
(109)
109 
- 
Amortisation of purchased intangible assets
(99)
99 
- 
  
(100)
100 
- 
Integration and restructuring costs
(673)
673 
- 
  
(353)
353 
- 
Gain on redemption of own debt
577 
(577)
- 
  
255 
(255)
- 
Strategic disposals
152 
(152)
- 
  
27 
(27)
- 
Bonus tax
- 
- 
- 
  
(22)
22 
- 
RFS Holdings minority interest
(17)
17 
- 
  
(2)
2 
- 
               
Loss before tax
(1,505)
- 
(1,505)
  
(794)
- 
(794)
Tax charge
(429)
- 
(429)
  
(645)
- 
(645)
               
Loss from continuing operations
(1,934)
- 
(1,934)
  
(1,439)
- 
(1,439)
Profit from discontinued operations, net of tax
1 
- 
1 
  
31 
- 
31 
               
Loss for the period
(1,933)
- 
(1,933)
  
(1,408)
- 
(1,408)
Non-controlling interests
19 
- 
19 
  
(17)
- 
(17)
Preference share and other dividends
(76)
- 
(76)
  
- 
- 
- 
               
Loss attributable to ordinary and B shareholders
(1,990)
- 
(1,990)
  
(1,425)
- 
(1,425)
 
Notes:
 
(1)
Reallocation of £1,280 million loss (H1 2011 - £170 million loss) to income from trading activities and £1,694 million loss (H1 2011 - £66 million loss) to other operating income.
(2)
Reallocation to income from trading activities.
 
Appendix 1 Income statement reconciliations (continued)
 
 
 
Quarter ended
 
30 June 2012
  
31 March 2012
  
30 June 2011
 
Managed 
Reallocation 
of one-off 
items 
Statutory 
  
Managed 
Reallocation 
of one-off 
items 
Statutory 
  
Managed 
Reallocation 
of one-off 
items 
Statutory 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Interest receivable
4,774 
- 
4,774 
  
5,017 
- 
5,017 
  
5,410 
(6)
5,404 
Interest payable
(1,801)
(2)
(1,803)
  
(2,010)
(8)
(2,018)
  
(2,177)
- 
(2,177)
                       
Net interest income
2,973 
(2)
2,971 
  
3,007 
(8)
2,999 
  
3,233 
(6)
3,227 
                       
Fees and commissions receivable
1,450 
- 
1,450 
  
1,487 
- 
1,487 
  
1,700 
- 
1,700 
Fees and commissions payable
(314)
- 
(314)
  
(290)
- 
(290)
  
(323)
- 
(323)
Income from trading activities
931 
(274)
657 
  
1,264 
(1,052)
212 
  
1,219 
(72)
1,147 
Gain on redemption of own debt
- 
- 
- 
  
- 
577 
577 
  
- 
255 
255 
Other operating income (excluding insurance net premium income)
469 
(75)
394 
  
725 
(1,472)
(747)
  
863 
279 
1,142 
Insurance net premium income
929 
- 
929 
  
938 
- 
938 
  
1,090 
- 
1,090 
                       
Non-interest income
3,465 
(349)
3,116 
  
4,124 
(1,947)
2,177 
  
4,549 
462 
5,011 
                       
Total income
6,438 
(351)
6,087 
  
7,131 
(1,955)
5,176 
  
7,782 
456 
8,238 
                       
Staff costs
(2,036)
(107)
(2,143)
  
(2,221)
(349)
(2,570)
  
(2,099)
(111)
(2,210)
Premises and equipment
(523)
(21)
(544)
  
(550)
(13)
(563)
  
(563)
(39)
(602)
Other administrative expenses
(936)
(220)
(1,156)
  
(819)
(197)
(1,016)
  
(834)
(918)
(1,752)
Depreciation and amortisation
(382)
(52)
(434)
  
(394)
(74)
(468)
  
(396)
(57)
(453)
                       
Operating expenses
(3,877)
(400)
(4,277)
  
(3,984)
(633)
(4,617)
  
(3,892)
(1,125)
(5,017)
                       
Profit before other operating charges
2,561 
(751)
1,810 
  
3,147 
(2,588)
559 
  
3,890 
(669)
3,221 
Insurance net claims
(576)
- 
(576)
  
(649)
- 
(649)
  
(793)
- 
(793)
                       
Operating profit/(loss) before impairment losses
1,985 
(751)
1,234 
  
2,498 
(2,588)
(90)
  
3,097 
(669)
2,428 
Impairment losses
(1,335)
- 
(1,335)
  
(1,314)
- 
(1,314)
  
(2,264)
(842)
(3,106)
                       
Operating profit/(loss)
650 
(751)
(101)
  
1,184 
(2,588)
(1,404)
  
833 
(1,511)
(678)
 
 
Appendix 1 Income statement reconciliations (continued)
 
 
 
Quarter ended
 
30 June 2012
  
31 March 2012
  
30 June 2011
 
Managed 
Reallocation 
of one-off 
items 
Statutory 
  
Managed 
Reallocation 
of one-off 
items 
Statutory 
  
Managed 
Reallocation 
of one-off 
items 
Statutory 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
  
£m 
£m 
£m 
                       
Operating profit/(loss)
650 
(751)
(101)
  
1,184 
(2,588)
(1,404)
  
833 
(1,511)
(678)
Own credit adjustments (1)
(518)
518 
- 
  
(2,456)
2,456 
- 
  
324 
(324)
- 
Asset Protection Scheme (2)
(2)
2 
- 
  
(43)
43 
- 
  
(168)
168 
- 
Payment Protection Insurance costs
(135)
135 
- 
  
(125)
125 
- 
  
(850)
850 
- 
Sovereign debt impairment
- 
- 
- 
  
- 
- 
- 
  
(733)
733 
- 
Interest rate hedge adjustments on impaired available-for-sale
  sovereign debt
- 
- 
- 
  
- 
- 
- 
  
(109)
109 
- 
Amortisation of purchased intangible assets
(51)
51 
- 
  
(48)
48 
- 
  
(56)
56 
- 
Integration and restructuring costs
(213)
213 
- 
  
(460)
460 
- 
  
(208)
208 
- 
Gain on redemption of own debt
- 
- 
- 
  
577 
(577)
- 
  
255 
(255)
- 
Strategic disposals
160 
(160)
- 
  
(8)
8 
- 
  
50 
(50)
- 
Bonus tax
- 
- 
- 
  
- 
- 
- 
  
(11)
11 
- 
RFS Holdings minority interest
8 
(8)
- 
  
(25)
25 
- 
  
(5)
5 
- 
                       
Loss before tax
(101)
- 
(101)
  
(1,404)
- 
(1,404)
  
(678)
- 
(678)
Tax charge
(290)
- 
(290)
  
(139)
- 
(139)
  
(222)
- 
(222)
                       
Loss from continuing operations
(391)
- 
(391)
  
(1,543)
- 
(1,543)
  
(900)
- 
(900)
(Loss)/profit from discontinued operations, net of tax
(4)
- 
(4)
  
5 
- 
5 
  
21 
- 
21 
                       
Loss for the period
(395)
- 
(395)
  
(1,538)
- 
(1,538)
  
(879)
- 
(879)
Non-controlling interests
5 
- 
5 
  
14 
- 
14 
  
(18)
- 
(18)
Preference share and other dividends
(76)
- 
(76)
  
- 
- 
- 
  
- 
- 
- 
                       
Loss attributable to ordinary and B shareholders
(466)
- 
(466)
  
(1,524)
- 
(1,524)
  
(897)
- 
(897)
 
Notes:
 
(1)
Reallocation of £271 million loss (Q1 2012 - £1,009 million loss; Q2 2011 - £96 million gain) to income from trading activities and £247 million loss (Q1 2012 - £1,447 million loss; Q2 2011 - £228 million gain) to other operating income.
(2)
Reallocation to income from trading activities.
 
 
 
 
 
 
Appendix 2
 
Businesses outlined for
Disposal
 
 
 
 

 
 
Appendix 2 Businesses outlined for disposal
 
 
To comply with EC State Aid requirements the Group agreed to make a series of divestments by the end of 2013: the disposal of Direct Line Group, Global Merchant Services and its interest in RBS Sempra Commodities JV. The Group also agreed to dispose of its RBS England and Wales and NatWest Scotland branch-based businesses, along with certain SME and corporate activities across the UK ('UK branch-based businesses'). The disposals of Global Merchant Services and RBS Sempra Commodities JV businesses have now effectively been completed.
 
The Group continues to work with Santander on the sale of the UK branch-based businesses. The complexity of the transaction and the focus on causing minimum disruption to customers is likely to lead to an extension of the process well into 2013.
 
Preparations for the planned IPO of Direct Line Group in the latter part of 2012 remain on track. The company is prepared for separation and, from 1 July, is operating on a substantially standalone basis with its own corporate functions and HR platform. Residual IT services will be provided by the Group under a Transitional Services Agreement. Direct Line Group returned £800 million to the Group during H1 2012 as part of the optimisation of its capital structure.
 
The table below shows total income and operating profit of Direct Line Group and the UK branch-based businesses.
 
 
Total income
  
Operating profit
before impairments
  
Operating profit
 
H1 2012 
FY 2011 
  
H1 2012 
FY 2011 
  
H1 2012 
FY 2011 
 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                 
Direct Line Group (1)
1,900 
4,286 
  
219 
407 
  
219 
407 
UK branch-based businesses (2)
458 
959 
  
253 
518 
  
186 
319 
                 
Total
2,358 
5,245 
  
472 
925 
  
405 
726 
 
The table below shows the estimated risk-weighted assets, total assets and capital of the businesses identified for disposal.
 
 
 
RWAs
  
Total assets
  
Capital
 
30 June 
2012 
31 December 
2011 
  
30 June 
2012 
31 December 
2011 
  
30 June 
2012 
31 December 
2011 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
                 
Direct Line Group (1)
n/m 
n/m 
  
13.4 
13.9 
  
3.6 
4.4 
UK branch-based businesses (2)
10.3 
11.1 
  
19.2 
19.3 
  
1.0 
1.1 
                 
Total
10.3 
11.1 
  
32.6 
33.2 
  
4.6 
5.5 
 
Notes:
 
(1)
Total income includes investment income of £163 million (FY 2011 - £302 million). Total assets and estimated capital include approximately £0.9 billion of goodwill, of which £0.7 billion is attributed to Direct Line Group by RBS Group.
(2)
Estimated notional equity based on 10% of RWAs.




 
Appendix 2 Businesses outlined for disposal (continued)
 
Further information on the UK branch-based businesses by division is shown in the tables below:
 
 
 
Division
  
Total
 
UK 
Retail 
UK 
Corporate 
  
H1 2012 
FY 2011 
 
£m 
£m 
  
£m 
£m 
           
Income statement
          
Net interest income
157 
179 
  
336 
689 
Non-interest income
45 
77 
  
122 
270 
           
Total income
202 
256 
  
458 
959 
           
Direct expenses
          
  - staff
(35)
(40)
  
(75)
(158)
  - other
(47)
(28)
  
(75)
(166)
Indirect expenses
(30)
(25)
  
(55)
(117)
           
 
(112)
(93)
  
(205)
(441)
           
Operating profit before impairment losses
90 
163 
  
253 
518 
Impairment losses
(30)
(37)
  
(67)
(199)
           
Operating profit
60 
126 
  
186 
319 
           
Analysis of income by product
          
Loans and advances
57 
147 
  
204 
436 
Deposits
41 
73 
  
114 
245 
Mortgages
67 
- 
  
67 
134 
Other
37 
36 
  
73 
144 
           
Total income
202 
256 
  
458 
959 
           
Net interest margin
4.60% 
3.19% 
  
3.72% 
3.57% 
Employee numbers (full time equivalents rounded to the
  nearest hundred)
2,700 
1,600 
  
4,300 
4,400 
 
 
 
Division
  
Total
 
UK 
Retail 
UK 
Corporate 
Markets 
  
30 June 
2012 
31 December 
2011 
 
£bn 
£bn 
£bn 
  
£bn 
£bn 
             
Capital and balance sheet
            
Total third party assets (excluding mark-to-
  market derivatives)
7.3 
11.5 
- 
  
18.8 
18.9 
Loans and advances to customers (gross)
7.5 
11.9 
- 
  
19.4 
19.5 
Customer deposits
8.6 
13.1 
- 
  
21.7 
21.8 
Derivative assets
- 
- 
0.4 
  
0.4 
0.4 
Derivative liabilities
- 
- 
0.1 
  
0.1 
0.1 
Risk elements in lending
0.5 
0.9 
- 
  
1.4 
1.5 
Loan:deposit ratio
82% 
88% 
- 
  
86% 
86% 
Risk-weighted assets
3.6 
6.7 
- 
  
10.3 
11.1 
 
 
Appendix 2 Businesses outlined for disposal (continued)
 
 
Direct Line Group
The following table analyses the results of Direct Line Group between 'ongoing' and 'run-off' businesses. The income statement for each period includes the results of Direct Line Versicherung AG (DLVAG) which was acquired by Direct Line Group on 2 April 2012.
 
 
 
Half year ended
30 June 2012
  
Half year ended
30 June 2011
 
Ongoing 
Run-off 
Total 
  
Ongoing 
Run-off 
Total 
 
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Income statement
              
Earned premiums
2,019 
13 
2,032 
  
2,057 
64 
2,121 
Reinsurers' share
(161)
(4)
(165)
  
(114)
- 
(114)
               
Net premium income
1,858 
9 
1,867 
  
1,943 
64 
2,007 
Fees and commissions
(156)
(66)
(222)
  
(140)
(16)
(156)
Instalment income
62 
- 
62 
  
70 
- 
70 
Other income
30 
- 
30 
  
61 
1 
62 
               
Total income
1,794 
(57)
1,737 
  
1,934 
49 
1,983 
Net claims
(1,254)
29 
(1,225)
  
(1,449)
(39)
(1,488)
               
Underwriting profit/(loss)
540 
(28)
512 
  
485 
10 
495 
               
Staff expenses
(159)
(1)
(160)
  
(142)
(4)
(146)
Other expenses
(171)
(1)
(172)
  
(164)
(2)
(166)
               
Total direct expenses
(330)
(2)
(332)
  
(306)
(6)
(312)
Indirect expenses
(124)
- 
(124)
  
(108)
(2)
(110)
               
Total expenses
(454)
(2)
(456)
  
(414)
(8)
(422)
               
Technical result
86 
(30)
56 
  
71 
2 
73 
Investment income
134 
29 
163 
  
124 
9 
133 
               
Operating profit/(loss)
220 
(1)
219 
  
195 
11 
206 
               
Performance ratios
              
               
Loss ratio
68% 
  
66% 
  
75% 
  
74% 
Commission ratio
8% 
  
12% 
  
7% 
  
8% 
Expense ratio
24% 
  
24% 
  
21% 
  
21% 
Combined operating ratio
100% 
  
102% 
  
103% 
  
103% 
 
Operating profit is reported before exceptional items of £109 million (H1 2011 - £8 million) primarily comprising separation and restructuring costs.
 
 
 
 
 
 
Appendix 3
 
Credit risk assets
 
 
 
 
Appendix 3 Credit risk assets
 
 
Credit risk assets
Credit risk assets analysed in this appendix are presented to supplement the balance sheet related credit risk analyses on pages 152 to 175. Credit risk assets consist of:
 
 
●
Lending - cash and balances at central banks and loans and advances to banks and customers (including overdraft facilities, instalment credit and finance leases);
   
●
Rate risk management, which includes foreign exchange transactions, interest rate swaps, credit default swaps and options. Exposures are mitigated by (i) offsetting in-the-money and out-of-the-money transactions where such transactions are governed by legally enforcing netting agreements; and (ii) the receipt of financial collateral (primarily cash and bonds) using industry standard collateral agreements; and
   
●
Contingent obligations, primarily letters of credit and guarantees.
 
Credit risk assets exclude issuer risk (primarily debt securities) and reverse repurchase arrangements. They take account of legal netting arrangements that provide a right of legal set-off but do not meet the offset criteria under IFRS.
 
 
Divisional analysis of credit risk assets
30 June 
2012 
£m 
31 December 
2011 
£m 
     
UK Retail
113,408 
111,070 
UK Corporate
103,528 
105,078 
Wealth
19,677 
20,079 
International Banking
72,644 
72,737 
Ulster Bank
36,605 
37,781 
US Retail & Commercial
56,176 
56,546 
     
Retail & Commercial
402,038 
403,291 
Markets
97,206 
114,327 
Other
67,065 
64,517 
     
Core
566,309 
582,135 
Non-Core
79,732 
92,709 
     
 
646,041 
674,844 
 
Key points
 
●
Total Core exposure decreased by 3% during the period, driven by reduced placement activity with central banks and a reduction in lending and derivatives exposure within the non-bank financial institutions sector.
   
●
Exposure in Retail & Commercial divisions remained broadly stable, with UK Retail being the only division experiencing growth, driven by an increase in exposure to UK mortgages in line with the Group's strategy.
   
●
Non-Core exposure declined by 14% during the period, in line with the Group's target, as a result of continued disposals and run-off of assets, significant restructurings and unwinding of trades. The decline was observed across all regions, with significant reductions in the commercial real estate, mortgages and financial guarantors sectors.
 
 
Appendix 3 Credit risk assets (continued)
 
 
Credit risk assets (continued)
 
Asset quality
Internal reporting and oversight of risk assets is principally differentiated by credit grades. Customers are assigned credit grades based on various credit grading models that reflect the key drivers of default for each customer type. All credit grades across the Group map to both a Group level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures, used for internal management reporting across portfolios. Accordingly, measures of risk exposure may be readily aggregated and reported at increasing levels of granularity depending on stakeholder or business need.
 
The table below shows credit risk assets by asset quality (AQ) band:
 
 
   
30 June 2012
  
31 December 2011
Asset quality band
Core 
£m 
Non-Core 
£m 
Total 
£m 
Total 
% 
  
Core 
£m 
Non-Core 
£m 
Total 
£m 
Total 
% 
                     
AQ1
0% - 0.034%
182,074 
10,331 
192,405 
29.8 
  
195,826 
13,732 
209,558 
31.1 
AQ2
0.034% - 0.048%
19,331 
2,456 
21,787 
3.4 
  
18,366 
2,915 
21,281 
3.2 
AQ3
0.048% - 0.095%
26,794 
3,519 
30,313 
4.7 
  
27,082 
2,883 
29,965 
4.4 
AQ4
0.095% - 0.381%
66,630 
8,703 
75,333 
11.7 
  
65,491 
9,636 
75,127 
11.1 
AQ5
0.381% - 1.076%
93,450 
8,721 
102,171 
15.8 
  
92,503 
10,873 
103,376 
15.3 
AQ6
1.076% - 2.153%
66,151 
6,247 
72,398 
11.2 
  
67,260 
6,636 
73,896 
11.0 
AQ7
2.153% - 6.089%
35,504 
6,638 
42,142 
6.5 
  
36,567 
8,133 
44,700 
6.6 
AQ8
6.089% - 17.222%
13,404 
2,151 
15,555 
2.4 
  
11,921 
3,320 
15,241 
2.3 
AQ9
17.222% - 100%
10,909 
3,434 
14,343 
2.2 
  
12,710 
5,024 
17,734 
2.6 
AQ10
100%
19,630 
24,332 
43,962 
6.8 
  
20,029 
25,020 
45,049 
6.7 
Other (1)
  
32,432 
3,200 
35,632 
5.5 
  
34,380 
4,537 
38,917 
5.7 
                     
   
566,309 
79,732 
646,041 
100 
  
582,135 
92,709 
674,844 
100 
 
Note:
 
(1)
'Other' largely comprises assets covered by the standardised approach, for which a probability of default equivalent to those assigned to assets covered by the internal ratings based approach is not available.
 
 
Appendix 3 Credit risk assets (continued)
 
 
Asset quality (continued)
 
 
30 June 2012
  
31 December 2011
AQ10 credit risk assets by division
AQ10 
£m 
% of 
 divisional 
 credit risk 
 assets 
% 
  
AQ10 
£m 
% of 
 divisional 
 credit risk 
 assets 
% 
           
UK Retail
5,074 
4.5 
  
5,097 
4.6 
UK Corporate
5,607 
5.4 
  
5,484 
5.2 
Wealth
- 
- 
  
12 
0.1 
International Banking
926 
1.3 
  
1,736 
2.4 
Ulster Bank
6,834 
18.7 
  
6,305 
16.7 
US Retail & Commercial
647 
1.2 
  
646 
1.1 
           
Retail & Commercial
19,088 
4.7 
  
19,280 
4.8 
Markets
542 
0.6 
  
749 
0.7 
           
Core
19,630 
3.5 
  
20,029 
3.4 
Non-Core
24,332 
30.5 
  
25,020 
27.0 
           
 
43,962 
6.8 
  
45,049 
6.7 
 
Key points
 
●
Trends in the asset quality of the Group's credit risk exposures in the first half of 2012 reflected changes in the composition of the Core portfolio (for details, see the commentary on pages 5 and 6 of this appendix) and the run-off of Non-Core assets. Overall, the asset quality of the Group's corporate exposure was broadly maintained despite the difficult external conditions in the UK and ongoing uncertainty in the eurozone.
   
●
The decrease in the Group's Core exposures within the AQ1 band reflects the decrease in the Group's exposure to sovereigns.
   
●
Defaulted assets (AQ10) in Non-Core continued to increase as a percentage of the overall Non-Core portfolio due to the run-off and disposals of performing assets, in line with expectations. Weakness in the commercial real estate market continue to be the main driver of defaulted assets within Non-Core, with approximately 80% of the defaulted assets in Non-Core occurring in that sector.
   
●
Given continued weaknesses in the Irish economy, the stock of defaulted assets in the Ulster Bank portfolio continued to grow, driven by exposures in the personal and property sectors. Refer to the Risk management section on Ulster Bank Group (Core and Non-Core) for more details.
   
●
Defaulted credit risk assets within International Banking decreased significantly as successful restructurings led to a significant amount of exposure returning to the performing book.
 
 
Appendix 3 Credit risk assets (continued)
 
 
Credit risk assets by sector and geographical region
 
 
30 June 2012
UK 
£m 
Western 
 Europe 
(excl. UK)
£m 
North 
America 
£m 
Asia 
Pacific 
£m 
Latin 
America 
£m 
Other (1)
£m 
Total 
£m 
Core 
£m 
Non- 
Core 
£m 
                   
Personal
128,980 
19,367 
32,412 
1,589 
44 
1,133 
183,525 
178,762 
4,763 
Banks
3,984 
37,644 
5,511 
9,913 
1,560 
2,761 
61,373 
60,902 
471 
Other financial institutions
17,511 
12,736 
10,477 
3,827 
5,874 
814 
51,239 
42,743 
8,496 
Sovereign (2)
30,168 
32,343 
18,351 
670 
68 
1,292 
82,892 
81,830 
1,062 
Property
57,556 
25,226 
8,724 
1,185 
3,253 
1,451 
97,395 
57,846 
39,549 
Natural resources
6,720 
6,581 
7,544 
4,703 
913 
1,882 
28,343 
24,392 
3,951 
Manufacturing
9,855 
6,264 
6,911 
2,067 
826 
1,430 
27,353 
25,575 
1,778 
Transport (3)
13,066 
7,131 
4,751 
5,369 
2,477 
5,079 
37,873 
27,720 
10,153 
Retail and leisure
19,065 
5,612 
4,971 
1,186 
750 
602 
32,186 
28,132 
4,054 
Telecommunications, media
  and technology
5,122 
3,832 
3,377 
1,940 
73 
713 
15,057 
11,653 
3,404 
Business services
17,503 
3,396 
6,245 
881 
600 
180 
28,805 
26,754 
2,051 
                   
 
309,530 
160,132 
109,274 
33,330 
16,438 
17,337 
646,041 
566,309 
79,732 
 
 
31 December 2011
                  
                   
Personal
126,945 
20,254 
33,087 
1,604 
158 
1,114 
183,162 
176,201 
6,961 
Banks
4,720 
39,213 
3,952 
11,132 
1,738 
3,276 
64,031 
63,470 
561 
Other financial institutions
16,549 
15,960 
13,319 
3,103 
5,837 
1,159 
55,927 
45,548 
10,379 
Sovereign (2)
21,053 
31,374 
31,391 
3,399 
78 
1,581 
88,876 
87,617 
1,259 
Property
60,099 
27,281 
8,052 
1,370 
3,471 
1,480 
101,753 
58,323 
43,430 
Natural resources
6,552 
7,215 
8,116 
3,805 
1,078 
2,508 
29,274 
25,146 
4,128 
Manufacturing
9,583 
7,391 
7,098 
2,126 
1,011 
1,381 
28,590 
26,525 
2,065 
Transport (3)
13,789 
7,703 
4,951 
5,433 
2,500 
5,363 
39,739 
27,529 
12,210 
Retail and leisure
22,775 
6,101 
5,762 
1,488 
1,041 
675 
37,842 
32,766 
5,076 
Telecommunications, media
  and technology
5,295 
4,941 
3,202 
1,944 
139 
609 
16,130 
12,180 
3,950 
Business services
17,851 
3,719 
6,205 
910 
629 
206 
29,520 
26,830 
2,690 
                   
 
305,211 
171,152 
125,135 
36,314 
17,680 
19,352 
674,844 
582,135 
92,709 
 
Notes:
 
(1)
Comprises Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank.
(2)
Includes central bank exposures.
(3)
Excludes net investment in operating leases in shipping and aviation portfolios as they are accounted for as property, plant and equipment. However, operating leases are included in the monitoring and management of these portfolios.
(4)
Enhancements to Wealth credit systems in Q2 2012 resulted in refinements to sector classifications at 30 June 2012. The most significant impact has been a re-allocation of £2.6 billion from the retail and leisure sector across a number of other sectors. Prior period data have not been revised.
 
 
Appendix 3 Credit risk assets (continued)
 
 
Credit risk assets by sector and geographical region (continued)
 
Key points
 
●
Conditions in financial markets and the Group's focus on risk appetite and sector concentration had a direct impact on the composition of its portfolio during 2011 and this has continued in the first half of 2012. The following key trends were observed:
 
○
A 7% decrease in exposures to sovereigns, driven by a reduction in the Group's placing of deposits with central banks;
 
○
A 4% reduction in exposures to the property sector, driven by tightened controls in Core and a £4 billion reduction in Non-Core;
 
○
A 6% reduction in exposure to other banks, driven by economy-wide subdued borrowing activity;
 
○
An 8% reduction in exposure to financial institutions, driven by a reduction in lending and derivatives across a range of entities, including finance companies, financial services companies, funds, monoline insurers and CDPCs; and
 
○
A slight increase in exposure to the personal sector, driven by an increase in UK mortgages.
   
●
The Group's sovereign portfolio comprises exposures to central governments, central banks and sub-sovereigns such as local authorities, primarily in the Group's key markets in the UK, Western Europe and the US. Exposure predominantly comprises cash balances placed with central banks such as the Bank of England, the Federal Reserve and the Eurosystem (including the European Central Bank and central banks in the eurozone); consequently, the asset quality of this portfolio is high. Exposure to sovereigns fluctuates according to the Group's liquidity requirements and cash positions, which determine the level of cash placed with central banks. Information on the Group's exposure to governments, including eurozone peripheral sovereigns, can be found in the Risk management section on Country risk.
   
●
The banking sector is one of the largest in the Group's portfolio. The sector is well diversified geographically and exposures are largely collateralised and tightly controlled through the combination of a single name concentration framework and a suite of credit policies specifically tailored to the sector and country limits. Exposures to the banking sector decreased by £2.7 billion during the period, primarily due to reduced interbank lending and derivative activity.
   
●
The Group's exposure to the property sector totalled £97.4 billion at 30 June 2012 (a 4% decline since 31 December 2011), the majority of which relates to commercial real estate (refer to the Risk management section on Commercial real estate for further details). The remainder comprises lending to construction companies, housing associations and building material groups, which remained stable during the period.
   
●
Core personal lending continued to rise, driven by an increase in UK mortgages. This expansion is in line with strategy and has had no detrimental impact on credit quality (for more commentary refer to the Risk management section on Residential mortgages).
   
●
Exposure to the retail and leisure sector fell 15% from 31 December 2011, driven by a decline in the Core portfolio as many customers in this sector chose to de-lever balance sheets. The market outlook for this sector remains challenging, but certain sub-sectors have proven resilient to macroeconomic volatilities (e.g. food and beverages) as have large retailers with well established brands and multiple channel offerings. Whilst the sector continues to show wide variation in performance depending on sub-sector and end markets, credit metrics overall remained broadly stable during the period.
 
 
Appendix 3 Credit risk assets (continued)
 
 
Credit risk assets by sector and geographical region (continued)
 
Key points (continued)
 
●
Exposure to the transport sector includes asset-backed exposure to ocean-going vessels. The downturn observed in the shipping sector since 2008 continued into H1 2012, with oversupply of vessels, lower asset prices and lower charter rates. Credit quality in this portfolio continued to deteriorate and, despite no material defaults in this portfolio, the number of clients moved onto the Watchlist increased. The other component of this sector, land transport and logistics, performed satisfactorily in H1 2012.
 
 
 

 
 
 
Signatures


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







 
 
Date: 03 August 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary