Edgar Filing: ROYAL BANK OF SCOTLAND GROUP PLC

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

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

the Securities Exchange Act of 1934

15 December 2010

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(File Nos. 333-162219 and 333-162219-01) and to be a part thereof from the date which it was filed, to the extent not superseded by documents or reports subsequently filed or furnished.

Contents


	Page

Forward-looking statements	4

Presentation of information	5

Comment	6

Condensed consolidated income statement	7

Highlights	8

Condensed consolidated balance sheet	14

Commentary on condensed consolidated balance sheet	15

Results summary	17

Divisional performance	24
UK Retail	27
UK Corporate	31
Wealth	34
Global Transaction Services	36
Ulster Bank	38
US Retail & Commercial	41
Global Banking & Markets	46
RBS Insurance	49
Central items	52
Non-Core	53

Condensed consolidated income statement	60

Condensed consolidated statement of comprehensive income	61

Condensed consolidated balance sheet	62

Condensed consolidated statement of changes in equity	63

Notes	66

Contents (continued)

	Page

Risk and capital management	88

Presentation of information	88

Capital	88

Credit risk	92

Funding and liquidity risk	108

Market risk	114

Other risk exposures	118

Additional Information	133

Selected financial data	133

Appendix 1 The Asset Protection Scheme

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’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions.

In particular, this document includes forward-looking statements relating, but not limited to: the Group’s restructuring plans, capitalisation, portfolios, net interest margin, capital ratios, liquidity, risk weighted assets, return on equity (ROE), cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; the Group’s future financial performance; the level and extent of future impairments and write-downs; the protection provided by the Asset Protection Scheme (APS); and the Group’s potential exposures 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 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 of the market risk disclosures are dependent on choices about 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 cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the global economy and instability in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the financial stability of other financial institutions, and the Group’s counterparties and borrowers; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain Non-Core assets and assets and businesses required as part of the EC State Aid restructuring plan; organisational restructuring; the ability to access sufficient funding to meet liquidity needs; cancellation, change or withdrawal of, or failure to renew, governmental support schemes; the extent of future write-downs and impairment charges caused by depressed asset valuations; the inability to hedge certain risks economically; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgage-backed securities in the United States; the value and effectiveness of any credit protection purchased by the Group; unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices and equity prices; changes in the credit ratings of the Group; ineffective management of capital or changes to capital adequacy or liquidity requirements; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; HM Treasury exercising influence over the operations of the Group; the ability of the Group to attract or retain senior management or other key employees; regulatory change in the United Kingdom, the United States and other countries in which the Group operates or a change in United Kingdom Government policy; changes to regulatory requirements relating to capital and liquidity; changes to the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; impairments of goodwill; pension fund shortfalls; litigation and regulatory investigations; general operational risks; insurance claims; reputational risk; general geopolitical and economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the ability to achieve revenue benefits and cost savings from the integration of certain of RBS Holdings N.V.’s (formerly ABN AMRO Holding N.V.) businesses and assets; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; the participation of the Group in the APS and the effect of the APS on the Group’s financial and capital position; the ability to access the contingent capital arrangements with HM Treasury; the conversion of the B Shares in accordance with their terms; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; and the success of the Group in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as of the date of this announcement, and the Group does not undertake 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.

Presentation of information

Statutory results

RFS Holdings is the entity that acquired ABN AMRO and is jointly owned by the Consortium Members. It is controlled by RBS and is therefore fully consolidated in its financial statements. The interests of Fortis, and its successor the State of the Netherlands, and Santander in RFS Holdings are included in minority interests. Following the legal separation of ABN AMRO Bank NV on 1 April 2010, RBS no longer consolidates the interests in ABN AMRO of its consortium partners in its results.

Non-GAAP financial information

IFRS requires the Group to consolidate those entities that it controls, including RFS Holdings as described above. However, discussion of the Group’s performance focuses on performance measures that exclude the RFS Holdings minority interest as the Group believes that such measures allow a more meaningful analysis of the Group’s financial condition and the results of its operations. These measures are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Reconciliations of these non-GAAP measures are presented throughout this document. These non-GAAP financial measures are not a substitute for GAAP measures, for which management has responsibility.

RBS has divided its operations into “Core” and “Non-Core” for internal reporting purposes. Certain measures disclosed in this document for Core operations and used by RBS management are non-GAAP financial measures as they represent a combination of all reportable segments with the exception of Non-Core. In addition, RBS has further divided parts of the Core business into “Retail & Commercial” consisting of UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank and US Retail & Commercial divisions. This is a non-GAAP financial measure.

Recent Developments

World Online International N.V.

In November 2009 the Supreme Court in the Netherlands gave a declaratory judgment against World Online International N.V., Goldmans Sachs International and ABN AMRO Bank N.V. (now known as The Royal Bank of Scotland N.V.) in relation to claims arising out of the World Online initial public offering of 2000. It held that these Defendants had committed certain wrongful acts in connection with the initial public offering. The judgment does not establish liability or the amount of any loss. The defendant banks have agreed to pay some damages to certain investors. RBS Group does not believe that such settlements or any final liability or loss will have a significant effect on RBS Group’s financial position or profitability.

Other investigations

In April 2009 the FSA notified RBS Group that it was commencing a supervisory review of the acquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of the RBS Group. RBS Group and its subsidiaries cooperated fully with this review and investigation. On 2 December 2010, the FSA confirmed that it had completed its investigation and had concluded that no enforcement action, either against RBS Group or against individuals, was warranted.

Comment

Stephen Hester, Group Chief Executive, commented:

“Our third quarter results demonstrate that we continue to make good progress in our recovery. We are delivering what we set out to achieve.

The Core Bank is becoming stronger. As we focus on serving customers better, profitability is also improving and rebalancing towards a more sustainable mix of business contributions. At the same time, the legacy risks and losses in Non-Core are being worked out effectively and our ambitious restructuring efforts continue apace.

The accounting treatment of some balance sheet items is volatile and can sometimes obscure our underlying story. Nevertheless, I believe that our results today show clear and measured progress toward our three strategic goals:

Serving our customers better must be the foundation of everything we do. It is our mission. Across our businesses change is occurring to improve customer service, not least through the customer charters that now drive our UK retail and corporate banking operations. Already we have customer satisfaction and market positions that compare well with our competitors. Our aspirations are higher still and we are investing to achieve them.

We are making the bank safer, stronger, and more resilient. We have delivered good progress on all our targets: reducing costs; strengthening our capital base; reducing our dependency on short-term wholesale funding; improving our liquidity; and, reducing our leverage. This activity should also ensure that RBS is well positioned to meet the very substantial uplifts required by international regulatory change in bank resilience in the areas of capital and liquidity, within the timetable given.

The profitable Core of RBS is the ultimate source of value creation for all of our shareholders; we need to produce profits above the cost of capital we use across business cycles. At present, as these Core profits build, they are partially offset by planned Non-Core losses. We target continued improvement in this balance in 2011 and in the sustainable level of Core profitability. We have much still to do on the revenue lines. There is substantial management action in train targeting long-term improvements.

While economic challenges, especially interest rate-driven, and regulatory costs will impact the level of improvements targeted and their speed, RBS remains focused on achieving balanced progress across all our key objectives.”

Condensed consolidated income statement

for the period ended 30 September 2010

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September* 2009			30 September 2010			30 September* 2009
		£m			£m			£m			£m			£m

Interest receivable		5,584			5,888			5,693			17,164			20,334
Interest payable		(2,173	)		(2,212	)		(2,573	)		(6,535	)		(10,365	)

Net interest income		3,411			3,676			3,120			10,629			9,969

Fees and commissions receivable		2,037			2,053			1,919			6,141			6,385
Fees and commissions payable		(611	)		(579	)		(545	)		(1,762	)		(1,896	)
Income from trading activities		277			2,110			1,088			4,153			3,052
Gain on redemption of own debt		-			553			-			553			3,790
Other operating income (excluding insurance premium income)		(317	)		346			(77	)		476			569
Insurance net premium income		1,289			1,278			1,301			3,856			3,958

Non-interest income		2,675			5,761			3,686			13,417			15,858

Total income		6,086			9,437			6,806			24,046			25,827

Staff costs		(2,423	)		(2,365	)		(2,363	)		(7,477	)		(7,499	)
Premises and equipment		(611	)		(547	)		(631	)		(1,693	)		(1,909	)
Other administrative expenses		(914	)		(1,022	)		(1,062	)		(2,947	)		(3,265	)
Depreciation and amortisation		(603	)		(519	)		(534	)		(1,604	)		(1,566	)
Write-down of goodwill and other intangible assets		-			-			-			-			(311	)

Operating expenses		(4,551	)		(4,453	)		(4,590	)		(13,721	)		(14,550	)

Profit before other operating charges and impairment losses		1,535			4,984			2,216			10,325			11,277
Insurance net claims		(1,142	)		(1,323	)		(1,145	)		(3,601	)		(3,036	)
Impairment losses		(1,953	)		(2,487	)		(3,279	)		(7,115	)		(10,800	)

Operating (loss)/profit before tax		(1,560	)		1,174			(2,208	)		(391	)		(2,559	)
Tax credit/(charge)		295			(825	)		617			(637	)		1,073

(Loss)/profit from continuing operations		(1,265	)		349			(1,591	)		(1,028	)		(1,486	)

Loss on distribution of ABN AMRO Bank NV to the State of the Netherlands and Santander		-			(1,019	)		-			(1,019	)		-
Other profits from discontinued operations, net of tax		18			-			-			331			30

Profit/(loss) from discontinued operations, net of tax		18			(1,019	)		-			(688	)		30

Loss for the period		(1,247	)		(670	)		(1,591	)		(1,716	)		(1,456	)
Minority interests		101			946			36			703			(595	)
Preference share and other dividends		-			(19	)		(245	)		(124	)		(791	)

(Loss)/profit attributable to ordinary and B shareholders		(1,146	)		257			(1,800	)		(1,137	)		(2,842	)

* restated for the reclassification of the results attributable to other Consortium Members as discontinued operations.

Highlights

Third quarter 2010 results summary

Group operating loss in Q3 2010 was £1,560 million down from a profit of £1,174 million in the second quarter but improved from a loss of £2,208 million in Q3 2009.

The net loss attributable to shareholders was £1,146 million, compared with a profit of £257 million in Q2 2010 and a loss of £1,800 million in Q3 2009.

Operating performance

Improved Core operating results were led by a good performance from our Retail & Commercial businesses. The Retail & Commercial net interest margin continued its recovery from the trough levels reached in 2008 and 2009, rising 12 basis points to 3.23%. Impairments were 12% lower, with improved credit performance in UK Retail and UK Corporate, leaving operating profits up 12% at £1,100 million.

GBM revenues were 20% lower at £1,554 million for the quarter, given lower customer trading volumes and volatility. Expenses were 3% lower and a small net recovery was recorded on previously booked impairments. Operating profit fell by 21% to £589 million. Year-to-date revenue was £6,325 million.

RBS Insurance’s performance improved in the third quarter, due to lower additions to bodily injury reserves, though the business still recorded an operating loss of £33 million. Tighter underwriting criteria are now in effect, but the motor segment remained in loss. The home insurance segment continues to deliver strong results.

Highlights (continued)

Third quarter 2010 results summary (continued)

Operating performance (continued)

Non-Core income benefited from higher trading income while impairment losses decreased by 16% to £1,171 million. Total Non-Core operating loss was 24% lower at £1,006 million.

Overall Group impairments fell to £1,953 million, 21% lower than in Q2 2010 and down 40% from Q3 2009. The reduction in credit costs was broadly spread, with improvements in most Retail & Commercial franchises, in GBM and in Non-Core. Impairment losses in Ulster Bank, however, remained severe, reflecting the continuing deterioration in credit metrics across the Irish economy.

Efficiency

Group expenses were up 2% during the third quarter at £4,551 million and down 1% from the third quarter of 2009. Core expenses were flat during the quarter and 4% lower than in the prior year. Non-Core expenses were 2% lower than in Q2 2010 reflecting a number of business disposals. Costs within Business Services, which provides technology, property and operational services to the Group’s customer-facing divisions, rose 2% compared with Q2 2010 but were 4% lower than in the third quarter of 2009. Further plans to consolidate a number of Business Services operations centres were announced in September.

The Group cost:income ratio, excluding fair value of own debt and net of claims, was 60.5%, compared with 60.0% in the second quarter and 65.2% in Q3 2009. The Core cost:income ratio, excluding fair value of own debt, in Q3 2010 was 58.3%.

Balance sheet management

The Group’s funded balance sheet increased by £22 billion during the third quarter, driven by a 5% increase in GBM, which returned towards more normal asset levels after a sharp reduction during Q2 2010. This was partially offset by continued good progress of the Non-Core run-off programme, with third party assets, excluding derivatives, down £20 billion. This was largely driven by the division’s disposal programme (£11 billion), including the disposal of Sempra JV assets (£3 billion) and a number of other assets, principally from the markets business. Portfolio run-off totalled £9 billion. There was some asset growth in UK Retail and Wealth, but loan demand remained muted in other Retail & Commercial divisions.

Gross risk-weighted assets (excluding the relief provided by the Asset Protection Scheme) were broadly flat at £595 billion, as Non-Core asset run-off was largely offset by run-off of capital relief trades in GBM.

Highlights (continued)

Third quarter 2010 results summary (continued)

Balance sheet management (continued)

Wholesale funding market conditions improved significantly during the quarter and RBS has taken advantage of opportunities to improve its funding profile, in line with the Group’s strategic plan. Public and private unguaranteed debt issuance during Q3 2010 totalled £18 billion, higher than the first half of 2010, featuring RBS’s second covered bond and its first residential mortgage-backed securities public issuance since 2007.

The run-off of the Non-Core portfolio continues to contribute to the reduction in the Group’s overall wholesale funding, and more of this requirement is being funded longer term. The proportion of debt instruments with more than one year to maturity increased to 62% at 30 September 2010, compared with 50% at 31 December 2009.

The liquidity portfolio increased by £14 billion to £151 billion during the quarter which reflects asset disposals in Non-Core and the impact of term debt issuance.

Capital

The Group’s Core Tier 1 ratio at 30 September 2010 was 10.2%, compared with 10.5% at 30 June 2010. The decline reflects the attributable loss together with reduced RWA relief from the APS as covered assets run-off.

Basel III capital implementation and impacts

The new framework under Basel III is being phased in over the next few years. Given our current strong capital base and improving operating earnings performance, we expect to be well positioned to meet the Basel requirements. For further details see the Capital section on pages 90 and 91.

Bank levy

Certain details of the UK bank levy announced in the June 2010 Budget are yet to be clarified. However, on the basis of the proposals announced in the initial consultation paper, the cost of the levy to RBS is currently estimated to be approximately £225-£250 million in 2011, rising to approximately £350-£400 million in 2012. The levy penalises non-insured liabilities, including deposits from our corporate customers, as well as other wholesale funding.

Highlights (continued)

Third quarter 2010 results summary (continued)

Customer franchises

A key element of the Group’s strategic progress involves strengthening and improving its Core businesses through a dedicated focus on serving customers well. RBS customer franchises have come through the turmoil of the last three years with resilience, demonstrating the solidity of their foundations. The third quarter has seen further early progress across the Group in restoring and developing these franchises.

UK Retail launched the Retail Customer Charter in June and is now working towards delivery of the commitments made. Progress against these commitments will be formally reviewed at the end of 2010 and reported as part of the year end results. Tangible steps so far to meet the commitment and improve customers’ experience include process improvements in approximately 1,200 branches and 500 new cash deposit machines installed in branches around the UK.

·	UK Corporate is currently opening more than 2,000 start-up accounts per week and recently launched a Start-Up Hotline to give advice to budding entrepreneurs. Over the past 12 months the division has helped more than 100,000 new businesses enter the market with two years free banking.

Global Transaction Services delivered a number of initiatives designed to increase UK companies’ ability and confidence to do business overseas. One such initiative saw Global Transaction Services partner with UK Trade & Investment to support UK businesses in taking advantage of business opportunities in Asia.

Ulster Bank has increased customer numbers by 3% over the past year, representing a net increase of 50,000. The September 2010 launch of the "Helpful Banking" programme resulted in a number of new initiatives, including Saturday branch openings in most towns and cities. By opening on Saturdays, and extending weekday opening hours in the Republic of Ireland, Ulster Bank is giving customers an extra 30,000 hours each year to visit its branches.

·	US Retail & Commercial added more than 52,500 new customer accounts and 12,500 small business accounts in the year to 30 September 2010 with the new brand platform of “Good Banking is Good Citizenship” garnering positive response, from both new and existing customers.

·	GBM, despite difficult conditions and reduced client activity, has retained its number one position for sterling derivative products in Q3 2010 and has been recognised for service quality as most innovative in asset & liability management and inflation products.

·	RBS Insurance's home business has continued to make good progress and the division established itself as the largest home insurance provider within the UK at the end of H1 2010, with Privilege and Churchill brands combined growing in-force policies by over 17% in the last year.

Highlights (continued)

Third quarter 2010 results summary (continued)

UK Lending

The Group grew net UK mortgage balances by £2.6 billion in Q3 2010, up 6% from Q2 2010. While gross lending remained strong at £5.3 billion in Q3 2010 (up 8% from the previous quarter), net lending volumes have been affected by an increase in redemptions during 2010. This reflects the roll-off of a large number of customers from fixed-term mortgage deals, as well as greater competition in the market. However, the Group’s market share for gross mortgage lending remained high, at 14%, for the third quarter.

Acceptance rates remain high at approximately 90% and we continue to offer a wide range of mortgage products up to 90% Loan to Value. In particular, the Group continues to support the first time buyer market, helping more than 8,000 customers to move into their first home during Q3 2010.

With net lending of £5.8 billion in the seven months March-September 2010, RBS remains on course to achieve its £8 billion mortgage lending target for the March 2010 to February 2011 period.

During Q3 2010, the Group extended £13.9 billion of gross new facilities to UK businesses. This was 9% higher than the previous quarter and a 34% rise from Q3 2009. However, many businesses are continuing to reduce existing borrowings. Net repayments by businesses totalled £3.7 billion in the quarter though this includes loans in RBS’s Non-Core Division targeted for run-off. Additionally, businesses have access to £43 billion of undrawn facilities extended by RBS and available for when credit demand increases.

Gross new facilities of £7.6 billion were extended to SMEs during Q3 2010, up 8% from the previous quarter and 15% higher year-on-year. However, the volume of new credit applications is weak, down 8% in Q3 2010 from the previous quarter and 12% lower than the comparable period last year. The Group continues to approve approximately 85% of credit applications. The average price of new loans to SMEs during the third quarter was 3.44%, an increase from 3.18% in Q3 2009 largely driven by the rising cost of term funding, but considerably lower than the average of 7.01% during the third quarter of 2008.

In the mid and large corporate segments, £6.3 billion of gross new facilities were extended during Q3 2010, up 11% on the previous quarter and 67% higher than during the third quarter of 2009. The higher lending volumes during Q3 2010 were primarily due to a number of significant one-off transactions and larger corporates bringing forward refinancings. The latter reflects both current loan market conditions, with margins having tightened and terms lengthened, and longer-term concerns over loan market liquidity and funding costs.

Gross new facilities extended to businesses in the seven months March-September 2010 totalled £30.9 billion, of which £17.5 billion was to SMEs. At this stage, the Group is on plan to achieve its £50 billion gross business lending target for the March 2010 to February 2011 period.

Highlights (continued)

Third quarter 2010 results summary (continued)

Disposals

During the third quarter, the Group completed four disposals from its Non-Core division, resulting in a reduction of close to £10 billion in risk-weighted assets. Three more Non-Core business disposals were signed during the quarter, including the sale of the Indian retail and commercial banking operations to HSBC.

Significant progress has also been made on the Group’s European Commission-mandated disposal programme, with three of our four mandated disposal businesses largely agreed. In early August, agreement was reached on the sale of the Group’s RBS England and Wales and NatWest Scotland branches to Santander UK plc. The sale remains subject to regulatory and other approvals and is expected to complete by the end of 2011. In the same month, the sale of the Global Merchant Services business to a consortium of Advent International and Bain Capital was agreed. RBS will hold a 19.99% minority stake in the resulting entity and the transaction is expected to close in Q4 2010.

Following the sale of RBS Sempra Commodities’ Metals, Oil and European Energy business lines to J.P. Morgan in February, sale agreements have now been reached for substantially all of the remaining assets of the joint venture. The sale of Sempra Energy Solutions to Noble Americas Gas & Power Corp was announced in September, while the sale of Sempra North American Power and Gas to J.P. Morgan was announced on 7 October. Both these transactions are expected to close in Q4 2010.

Taken together, these EU mandated transactions will reduce the Group’s gross risk-weighted assets by approximately £18 billion. The progress made will allow management to intensify focus on the Core business and further the execution of the Group’s strategic plan.

Outlook

Fourth quarter trends in RBS Retail & Commercial banking businesses seem likely to be broadly consistent with those of the third quarter in terms of both profitability and key balance sheet items. The pace of net interest margin expansion is likely to moderate into 2011 pending the start of interest rate normalisation. GBM revenues, as is typical for the industry, are hard to forecast. It is anticipated, however, the fourth quarter market environment will remain challenging.

In Non-Core we expect to continue to make good progress on risk reduction in the fourth quarter. Given our healthy asset sales pipeline, we expect to come in below our year-end third party asset target. This could bring with it an increase in disposal losses.

Lastly, accounting (non-cash) volatility in fair value of own debt and APS costs is likely to continue.

Overall RBS expects to continue to operate broadly in line with its strategic plan metrics for 2010 as a whole.

Condensed consolidated balance sheet

at 30 September 2010

	30 September 2010		30 June 2010		31 December 2009
		£m		£m		£m

Assets
Cash and balances at central banks		61,416		29,591		52,261
Net loans and advances to banks		60,334		54,489		56,656
Reverse repurchase agreements and stock borrowing		48,407		47,663		35,097
Loans and advances to banks		108,741		102,152		91,753
Net loans and advances to customers		528,049		539,375		687,353
Reverse repurchase agreements and stock borrowing		44,503		39,396		41,040
Loans and advances to customers		572,552		578,771		728,393
Debt securities		226,410		236,260		267,254
Equity shares		21,755		17,326		19,528
Settlement balances		22,874		20,718		12,033
Derivatives		548,805		522,871		441,454
Intangible assets		14,369		14,482		17,847
Property, plant and equipment		17,398		17,608		19,397
Deferred taxation		5,909		5,839		7,039
Prepayments, accrued income and other assets		11,908		14,095		20,985
Assets of disposal groups		17,450		22,340		18,542

Total assets		1,629,587		1,582,053		1,696,486

Liabilities
Bank deposits		80,304		96,710		104,138
Repurchase agreements and stock lending		41,465		44,165		38,006
Deposits by banks		121,769		140,875		142,144
Customer deposits		420,639		420,890		545,849
Repurchase agreements and stock lending		87,287		70,655		68,353
Customer accounts		507,926		491,545		614,202
Debt securities in issue		235,083		217,317		267,568
Settlement balances		20,628		19,730		10,413
Short positions		44,004		42,994		40,463
Derivatives		543,397		508,966		424,141
Accruals, deferred income and other liabilities		23,667		24,867		30,327
Retirement benefit liabilities		2,637		2,611		2,963
Deferred taxation		2,270		2,195		2,811
Insurance liabilities		6,782		6,521		10,281
Subordinated liabilities		27,890		27,523		37,652
Liabilities of disposal groups		16,154		17,615		18,890

Total liabilities		1,552,207		1,502,759		1,601,855

Equity
Minority interests		1,780		2,492		16,895
Owners’ equity*
Called up share capital		15,030		15,029		14,630
Reserves		60,570		61,773		63,106

Total equity		77,380		79,294		94,631

Total liabilities and equity		1,629,587		1,582,053		1,696,486

* Owners’ equity attributable to:
Ordinary and B shareholders		70,856		72,058		69,890
Other equity owners		4,744		4,744		7,846

		75,600		76,802		77,736

Commentary on condensed consolidated balance sheet

Total assets of £1,629.6 billion at 30 September 2010 were up £47.5 billion, 3%, compared with 30 June 2010.

Cash and balances at central banks were up £31.8 billion, 108% to £61.4 billion.

Loans and advances to banks increased by £6.6 billion, 6%, to £108.7 billion. Reverse repurchase agreements and stock borrowing (‘reverse repos’) were up £0.7 billion, 2% to £48.4 billion and bank placings rose £5.8 billion, 11%, to £60.3 billion as a result of increased placings on the inter-bank markets.

Loans and advances to customers decreased £6.2 billion, 1%, to £572.6 billion. Within this reverse repos were up £5.1 billion, 13% to £44.5 billion. Excluding reverse repos, customer lending decreased by £11.3 billion, 2%, to £528.0 billion or by £9.8 billion before impairment provisions. This reflected reductions, in constant currency terms, in Non-Core of £6.8 billion, together with declines in UK Corporate £1.7 billion, Global Transaction Services, £1.2 billion, Global Banking & Markets, £1.2 billion and US Retail & Commercial, £1.1 billion together with the effect of exchange rate movements, £0.2 billion. These were offset by growth in UK Retail, £1.9 billion, and Wealth, £0.6 billion.

Equity shares increased £4.4 billion, 26%, to £21.8 billion driven by increased holdings within Global Banking & Markets.

Settlement balances rose £2.2 billion, 10%, to £22.9 billion as a result of customer activity principally within Global Banking & Markets.

Movements in the value of derivative assets, up £25.9 billion, 5%, to £548.8 billion, and liabilities, up £34.4 billion, 7%, to £543.4 billion, primarily reflect changes in interest rates, currency movements, with Sterling strengthening against the US dollar offset in part by weakening against the Euro, and growth in trading volumes.

Assets of disposal groups reduced by £4.9 billion, 22%, to £17.5 billion resulting primarily from the completion of disposals of RBS Sempra’s Oil, Metals and European Gas & Power business, the Eurosales Finance businesses in France and Germany and certain of the Group’s Asian and Latin American businesses.

Deposits by banks declined £19.1 billion, 14%, to £121.8 billion, reflecting reduced inter-bank deposits, down £16.4 billion, 17%, to £80.3 billion and decreased repurchase agreements and stock lending (‘repos’), down £2.7 billion, 6%, to £41.5 billion.

Customer accounts rose £16.4 billion, 3%, to £507.9 billion. Within this, repos increased £16.6 billion, 24%, to £87.3 billion. Excluding repos, customer deposits were down £0.3 billion, to £420.6 billion, with reductions, in constant currency terms, in Global Banking & Markets, £4.8 billion, Wealth, £1.4 billion and Ulster Bank, £0.2 billion, together with the effect of exchange rate movements of £1.5 billion. This was partially offset by growth in UK Corporate, £2.6 billion, Global Transaction Services, £2.3 billion, UK Retail, £1.4 billion and US Retail & Commercial, £1.1 billion.

Commentary on condensed consolidated balance sheet (continued)

Debt securities in issue were up £17.8 billion, 8%, to £235.1 billion, principally as a result of the Group’s capital raising programme in the third quarter, coupled with movements in Global Banking & Markets.

Liabilities of disposal groups declined £1.5 billion, 8%, to £16.2 billion primarily reflecting the completion of several disposals in the quarter.

Owners' equity reduced by £1.2 billion, 2%, to £75.6 billion. The attributable loss for the period, £1.1 billion, and exchange rate movements, £0.7 billion, were offset in part by an increase in cash flow hedging reserves, £0.4 billion, and reduced losses in available-for-sale reserves £0.2 billion.

Results summary

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
Non-interest income		£m			£m			£m			£m			£m

Net fees and commissions		1,426			1,474			1,374			4,379			4,489
Income from trading activities
- fair value of own debt		(330	)		104			(246	)		(185	)		(114	)
- Asset Protection Scheme credit default swap – fair value changes		(825	)		500			-			(825	)		-
- other		1,432			1,506			1,334			5,163			3,166
Gain on redemption of own debt		-			553			-			553			3,790
Other operating income
- fair value of own debt		(528	)		515			(237	)		(223	)		(298	)
- strategic disposals		27			(411	)		(155	)		(331	)		(298	)
- other		184			242			315			1,030			1,165

Non-interest income (excluding insurance net premium income)*		1,386			4,483			2,385			9,561			11,900
Insurance net premium income		1,289			1,278			1,301			3,856			3,958

Total non-interest income		2,675			5,761			3,686			13,417			15,858


* includes fair value of own debt impact:
(Loss)/income from trading activities		(330	)		104			(246	)		(185	)		(114	)
Other operating income		(528	)		515			(237	)		(223	)		(298	)

Fair value of own debt		(858	)		619			(483	)		(408	)		(412	)

Key points

Q3 2010 compared with Q2 2010

·	Income from trading activities, excluding movements in the fair value of own debt and the Asset Protection Scheme (APS) credit default swap, declined by £74 million, with economic uncertainty and the seasonally quieter summer period leading to weaker capital market conditions, reduced volatility and lower client activity. Non-Core income from trading activities was £227 million, compared with £25 million in the second quarter, reflecting credit market write-backs.

·	The Group’s credit spreads narrowed during the quarter, resulting in a loss of £858 million on the fair value of own debt, compared with a gain of £619 million in the second quarter.

·	The APS is structured as a credit derivative, and movements in the fair value of the contract led to a charge of £825 million in the third quarter compared with a credit of £500 million in the second quarter. This largely reflected tightening credit spreads across the portfolio of covered assets, leading to a fall in the fair value of the protection provided by the contract. The minimum fee on the APS policy throughout its life remains £2.5 billion, with the cumulative fees paid for coverage through to the end of 2010 at £1.4 billion.

·	Other operating income, excluding movements in the fair value of own debt and strategic disposals, totalled £184 million compared with £242 million in the second quarter.

Results summary (continued)

Q3 2010 compared with Q3 2009

·	GBM trading income was 51% lower than in the third quarter of 2009, which saw greater activity and volatility in capital markets. Non-Core trading income of £227 million compared with a loss of £565 million in the prior year period when losses were incurred on banking book hedges and CDPCs.

·	Other operating income, excluding movements in the fair value of own debt and strategic disposals, totalled £184 million compared with £315 million in the third quarter of 2009.

·	The charge of £858 million on the fair value of own debt compares with a charge of £483 million in the third quarter of 2009, resulting from a sharp improvement in the Group’s credit spreads during the quarter.

Results summary (continued)

	Quarter ended							Nine months ended
	30 September 2010		30 June 2010			30 September 2009		30 September 2010		30 September 2009
Operating expenses		£m		£m			£m		£m		£m

Staff costs		2,423		2,365			2,363		7,477		7,499
Premises and equipment		611		547			631		1,693		1,909
Other		914		1,022			1,062		2,947		3,265

Administrative expenses		3,948		3,934			4,056		12,177		12,673
Depreciation and amortisation		603		519			534		1,604		1,566
Write-down of goodwill and other intangible assets		-		-			-		-		311

Operating expenses		4,551		4,453			4,590		13,721		14,550



General insurance		1,092		1,348			1,054		3,547		2,919
Bancassurance		50		(25	)		91		54		117

Insurance net claims		1,142		1,323			1,145		3,601		3,036

Key points

Q3 2010 compared with Q2 2010

·	Total expenses increased to 2% to £4,551 million. Excluding a £74 million credit in Q2 2010 relating to changes to the US defined benefit pension plan, expenses were flat due to good cost control and the benefits of the Group’s efficiency programmes. Staff costs were similarly well controlled.

·	Insurance claims fell by 14% to £1,142 million, with a reduction during the quarter in prior year-related bodily injury reserving.

Q3 2010 compared with Q3 2009

·	Total expenses were down 1% compared with a year ago due to the benefits of the Group’s efficiency programmes, particularly in relation to property and purchasing.

Results summary (continued)

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
Impairment losses		£m			£m			£m			£m			£m

Division
UK Retail		251			300			404			938			1,228
UK Corporate		158			198			187			542			737
Wealth		1			7			1			12			23
Global Transaction Services		3			3			22			6			35
Ulster Bank		286			281			144			785			301
US Retail & Commercial		125			144			180			412			549

Retail & Commercial		824			933			938			2,695			2,873
Global Banking & Markets		(40	)		164			272			156			510
RBS Insurance		-			-			2			-			8
Central items		(2	)		-			1			(1	)		(1	)

Core		782			1,097			1,213			2,850			3,390
Non-Core		1,171			1,390			2,066			4,265			7,410

Group impairment losses		1,953			2,487			3,279			7,115			10,800

Asset category
Loan impairment losses		1,908			2,479			3,262			6,989			10,058
Securities impairment losses		45			8			17			126			742

Group impairment losses		1,953			2,487			3,279			7,115			10,800

Loan impairment charge as % of gross loans and advances (excluding reverse repurchase agreements)		1.4	%		1.8	%		2.2	%		1.7	%		2.2	%

Key points

Q3 2010 compared with Q2 2010

·	Within Core, Retail & Commercial impairments were down 12%, £109 million, compared with the second quarter of 2010 with improvements in both personal and mortgage loans. The exception remains Ulster Bank where impairments remain elevated reflecting a very weak economy and property market. In GBM there was an absence of individual impairments and several minor recoveries.

·	Non-Core impairments of £1,171 million were down £219 million compared with the second quarter.

Q3 2010 compared with Q3 2009

·	Impairments were lower across most divisions compared with the elevated levels experienced in the prior year, reflecting our risk reduction actions and slightly better economic conditions. Impairment losses in Ulster Bank, however, worsened, reflecting the continuing deterioration in credit metrics across the Irish economy.

·	Impairments in the quarter versus a year ago were down 36% in Core and 43% in Non-Core.

Results summary (continued)

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
Credit and other market (gains)/losses (1)		£m			£m			£m			£m			£m

Monoline exposures		(191	)		139			106			(52	)		1,653
CDPCs (2)		15			56			276			103			846
Asset backed products		(160	)		(97	)		(147	)		(202	)		390
Other credit exotics		2			(47	)		46			(56	)		588
Equities		15			6			12			28			34
Banking book hedges		123			(147	)		426			12			1,465
Other		54			183			55			377			97

Net credit and other market (gains)/losses		(142	)		93			774			210			5,073

Notes:

(1)	Included in ‘Income from trading activities’, all in Non-Core in Q3 2010.
(2)	Credit derivative product companies.

Key points

Q3 2010 compared with Q2 2010

●	Net gains of £142 million compared with losses of £93 million in Q2 2010, primarily reflect general tightening of credit spreads across a range of asset classes in Q3 2010, compared with widening of spreads in the second quarter, together with a rally in asset prices. These factors more than offset losses on banking book hedges.

●	Gains on monoline exposures reflect tightening credit spreads and net reductions in exposures, following restructuring; these were partially offset by foreign currency movements. In Q2 2010, credit spread movements more than offset reductions in exposures from restructuring.

●	Gains on asset-backed products in both quarters resulted from disposals and asset price improvements.

●	The losses on the banking book hedges in Q3 2010 compared with gains in Q2 2010 reflect tightening credit spreads.

Q3 2010 compared with Q3 2009

●

Gains of £142 million compared with losses of £774 million in Q3 2009 when substantial losses on CDPCs and banking book hedges were incurred due to widening credit spreads.

●

Monoline-related gains in Q3 2010 reflect tighter credit spreads compared with widening credit spreads in Q3 2009.

●

In Q3 2009 widening credit spreads resulted in higher CDPC credit valuation adjustment, but it remained broadly flat in Q3 2010 primarily reflecting exchange movements and tighter credit spreads.

●

Asset-backed product gains in both quarters reflected disposals and price improvements.

●

Lower losses on banking book hedges in Q3 2010 compared with Q3 2009 reflect lower credit spread movement on a smaller book.

Results summary (continued)

Capital resources and ratios

30 September

2010

30 June

2010

31 December

2009

Core Tier 1 capital

£48bn

£50bn

£60bn

Tier 1 capital

£59bn

£61bn

£76bn

Total capital

£65bn

£66bn

£87bn

Risk-weighted assets – gross

£595bn

£600bn

£669bn

Benefit of Asset Protection Scheme

(£117bn)

(£123bn)

(£128bn)

Risk-weighted assets

£478bn

£477bn

£541bn

Core Tier 1 ratio*

10.2

10.5

11.0

Tier 1 ratio

12.4

12.8

14.1

Total capital ratio

13.5

13.9

16.1

* Benefit of APS in Core Tier 1 ratio is 1.2% at 30 September 2010, 1.3% at 30 June 2010 and 1.6% at 31 December 2009.

Key points

·	The attributable loss and reduced risk-weighted asset (RWA) relief on the Asset Protection Scheme led to a decline of 30 basis points to 10.2% in the Core Tier 1 ratio and 40 basis points to 12.4% in the Tier 1 ratio. The Total Capital ratio declined by 40 basis points to 13.5%.

·	Gross RWAs were broadly flat at £595 billion, reflecting successful Non-Core de-leveraging counterbalanced by the roll-off of capital relief trades within GBM.

·	RWAs eligible for the Asset Protection Scheme relief declined by £6 billion to £117 billion, reflecting disposals and repayments as well as changes in risk parameters.

Results summary (continued)

Balance sheet	30 September 2010	30 June 2010	31 December 2009

Total assets	£1,630bn	£1,582bn	£1,696bn
Funded balance sheet	£1,081bn	£1,059bn	£1,255bn
Loans and advances to customers (1)	£528bn	£539bn	£687bn
Customer deposits (2)	£421bn	£421bn	£546bn

Notes:

(1)	Excluding reverse repurchase agreements and stock borrowing.
(2)	Excluding repurchase agreements and stock lending.

Key points

·	The funded balance sheet increased by £22 billion during the third quarter. This reflects growth in the GBM balance sheet of £21 billion compared with the seasonally low position at the end of the second quarter and growth in our liquidity portfolio, partially offset by further deleveraging in Non-Core, which reduced its balance sheet by £20 billion to £154 billion.

·	Loans and advances in Retail & Commercial were down 1% during the quarter at £336 billion, with growth in UK Retail more than offset by small reductions elsewhere as loan demand remained subdued.

·	Retail & Commercial deposits rose by 1% during the third quarter and by 7% year-on-year. GBM deposits fell by £4.7 billion during the quarter, with excess short term balances continuing to decline.

Further discussion of the Group’s funding and liquidity position is included on pages 108 to 113.

Divisional performance

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Operating profit/(loss) by division
UK Retail		398			276			64			814			101
UK Corporate		422			390			379			1,130			785
Wealth		74			81			119			217			331
Global Transaction Services		309			279			253			821			749
Ulster Bank		(176	)		(177	)		(85	)		(490	)		(93	)
US Retail & Commercial		73			129			(43	)		242			(94	)

Retail & Commercial		1,100			978			687			2,734			1,779
Global Banking & Markets		589			750			641			2,837			4,993
RBS Insurance		(33	)		(203	)		11			(286	)		228
Central items		76			49			283			462			554

Core		1,732			1,574			1,622			5,747			7,554
Non-Core		(1,006	)		(1,324	)		(2,664	)		(3,889	)		(12,021	)

		726			250			(1,042	)		1,858			(4,467	)

Reconciling items
Fair value of own debt	(858	)	619		(483	)	(408	)	(412	)
RFS Holdings minority interest	(181	)	17		(131	)	(148	)	(186	)
Amortisation of purchased intangible assets	(123	)	(85	)	(73	)	(273	)	(213	)
Integration and restructuring costs	(311	)	(254	)	(324	)	(733	)	(1,058	)
Write-down of goodwill	-		-		-		-		(311	)
Gain on redemption of own debt	-		553		-		553		3,790
Strategic disposals	27		(411	)	(155	)	(331	)	298
Bonus tax	(15	)	(15	)	-		(84	)	-
Asset Protection Scheme credit default swap – fair value changes	(825	)	500		-		(825	)	-

Group operating (loss)/profit	(1,560	)	1,174		(2,208	)	(391	)	(2,559	)

Divisional performance (continued)

	Quarter ended							Nine months ended
	30 September 2010			30 June 2010		30 September 2009		30 September 2010			30 September 2009
		£m			£m		£m		£m			£m

Impairment losses by division
UK Retail		251			300		404		938			1,228
UK Corporate		158			198		187		542			737
Wealth		1			7		1		12			23
Global Transaction Services		3			3		22		6			35
Ulster Bank		286			281		144		785			301
US Retail & Commercial		125			144		180		412			549

Retail & Commercial		824			933		938		2,695			2,873
Global Banking & Markets		(40	)		164		272		156			510
RBS Insurance		-			-		2		-			8
Central items		(2	)		-		1		(1	)		(1	)

Core		782			1,097		1,213		2,850			3,390
Non-Core		1,171			1,390		2,066		4,265			7,410

Group impairment losses		1,953			2,487		3,279		7,115			10,800

	Quarter ended						Nine months ended
	30 September 2010		30 June 2010		30 September 2009		30 September 2010		30 September 2009
	%		%		%		%		%

Net interest margin by division
UK Retail		4.02		3.88		3.47		3.85		3.54
UK Corporate		2.58		2.50		2.38		2.49		2.14
Wealth		3.44		3.36		4.34		3.39		4.54
Global Transaction Services		6.72		6.47		9.63		6.96		9.03
Ulster Bank		1.90		1.92		1.74		1.86		1.88
US Retail & Commercial		2.92		2.78		2.37		2.79		2.34

Retail & Commercial		3.23		3.11		2.91		3.10		2.84
Global Banking & Markets		1.14		1.01		1.08		1.08		1.52
Non-Core		1.05		1.22		0.55		1.18		0.54

Divisional performance (continued)

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Risk-weighted assets by division
UK Retail		49.3			49.1			-			51.3			(4	%)
UK Corporate		84.7			87.6			(3	%)		90.2			(6	%)
Wealth		12.1			12.0			1	%		11.2			8	%
Global Transaction Services		18.6			19.4			(4	%)		19.1			(3	%)
Ulster Bank		32.6			30.5			7	%		29.9			9	%
US Retail & Commercial		64.1			65.5			(2	%)		59.7			7	%

Retail & Commercial		261.4			264.1			(1	%)		261.4			-
Global Banking & Markets		143.7			141.3			2	%		123.7			16	%
Other		19.9			16.9			18	%		9.4			112	%

Core		425.0			422.3			1	%		394.5			8	%
Non-Core		166.9			175.0			(5	%)		171.3			(3	%)

		591.9			597.3			(1	%)		565.8			5	%
Benefit of Asset Protection Scheme		(116.9	)		(123.4	)		(5	%)		(127.6	)		(8	%)
		475.0			473.9			-			438.2			8	%
RFS Holdings minority interest		3.0			3.1			(3	%)		102.8			(97	%)

Total		478.0			477.0			-			541.0			12	%

Employee numbers in continuing operations (full time equivalents rounded to the nearest hundred)	30 September 2010		30 June 2010		31 December 2009

UK Retail		24,400		24,000		25,500
UK Corporate		13,000		12,600		12,300
Wealth		5,100		5,000		4,600
Global Transaction Services		3,700		3,600		3,500
Ulster Bank		4,500		4,300		4,500
US Retail & Commercial		15,700		15,700		15,500

Retail & Commercial		66,400		65,200		65,900
Global Banking & Markets		19,500		19,200		17,900
RBS Insurance		14,400		14,500		13,900
Group Centre		4,600		4,700		4,200

Core		104,900		103,600		101,900
Non-Core		10,000		11,300		15,100

		114,900		114,900		117,000
Business Services		41,300		41,800		43,100
Integration		300		300		500
RFS Holdings minority interest		-		-		300

Group total		156,500		157,000		160,900

UK Retail

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		1,056			1,001			848			2,990			2,513

Net fees and commissions		279			280			322			832			1,021
Other non-interest income		97			14			141			182			248

Non-interest income		376			294			463			1,014			1,269

Total income		1,432			1,295			1,311			4,004			3,782

Direct expenses
- staff		(197	)		(203	)		(206	)		(598	)		(634	)
- other		(134	)		(140	)		(129	)		(406	)		(407	)
Indirect expenses		(402	)		(401	)		(417	)		(1,194	)		(1,295	)

		(733	)		(744	)		(752	)		(2,198	)		(2,336	)

Insurance net claims		(50	)		25			(91	)		(54	)		(117	)
Impairment losses		(251	)		(300	)		(404	)		(938	)		(1,228	)

Operating profit		398			276			64			814			101


Analysis of income by product
Personal advances		248			236			303			718			919
Personal deposits		277			277			319			831			1,070
Mortgages		527			478			319			1,427			799
Bancassurance and insurance net claims		110			33			160			231			307
Cards		243			239			225			711			641
Other		27			32			(15	)		86			46

Total income		1,432			1,295			1,311			4,004			3,782


Analysis of impairments by sector
Mortgages		55			44			26			147			89
Personal		150			168			247			551			741
Cards		46			88			131			240			398

Total impairment losses		251			300			404			938			1,228


Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Mortgages		0.2	%		0.2	%		0.1	%		0.2	%		0.1	%
Personal		4.8	%		5.3	%		6.8	%		5.9	%		6.8	%
Cards		3.0	%		5.9	%		8.6	%		5.2	%		8.7	%

		0.9	%		1.1	%		1.6	%		1.2	%		1.6	%

UK Retail (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Return on equity (1)		23.2	%		16.1	%		3.8	%		15.8	%		2.0	%
Net interest margin		4.02	%		3.88	%		3.47	%		3.85	%		3.54	%
Cost:income ratio		51	%		57	%		57	%		55	%		62	%
Adjusted cost:income ratio (2)		53	%		56	%		62	%		56	%		64	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Loans and advances to customers (gross)
- mortgages		89.1			86.9			3	%		83.2			7	%
- personal		12.4			12.8			(3	%)		13.6			(9	%)
- cards		6.1			6.0			2	%		6.2			(2	%)
Customer deposits (excluding bancassurance)		91.4			90.0			2	%		87.2			5	%
Assets under management (excluding deposits)		5.4			5.4			-			5.3			2	%
Risk elements in lending		5.0			4.8			4	%		4.6			9	%
Loan:deposit ratio (excluding repos)		115	%		114	%		100	bp		115	%		-
Risk-weighted assets		49.3			49.1			-			51.3			(4	%)

Notes:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).
(2)	Adjusted cost:income ratio is based on total income after netting insurance claims, and operating expenses.

Key points

Q3 2010 compared with Q2 2010

·	UK Retail delivered a strong operating performance in Q3 2010, with income up, costs down and impairments continuing to improve. Operating profit was up 44% from the previous quarter at £398 million.

·	The NatWest and RBS Customer Charters aim to deliver those elements that customers have said are most important to them, and has been well received by both customers and staff. The division is reaping continuing benefits from investment in process improvements and automation resulting in gains in both service quality and cost efficiency.

UK Retail (continued)

Key points (continued)

Q3 2010 compared with Q2 2010 (continued)

·	UK Retail continues to achieve growth in secured lending, while building customer deposits.

	o	Mortgage balances increased 3% on Q2 2010, with strong retention rates among existing customers and gross new lending up 4% on Q2 2010. Market share of new mortgage lending remained at 12% in the quarter, still well above the Group’s 7% share of stock. While the Group offers a broad range of products across a variety of Loan-to-value (LTV) bandings, the average LTV of new business decreased from 69% in Q2 2010 to 64% in Q3 2010.
	o	Unsecured lending fell 2% in the quarter, in line with current risk appetite and the Group’s continued focus on lower risk secured lending.
	o	Deposits grew by £1.4 billion or 2% in Q3 2010 despite a still challenging market place

The loan to deposit ratio at 30 September 2010 was 115%, broadly in line with the prior quarter.


·	Net interest income increased by 5%, with net interest margin continuing to recover from the low levels recorded in 2009 to 4.02% in the quarter. Asset margins continued to widen, mainly reflecting the increasing proportion of customers on standard variable rate mortgages. Liability margins, however, fell further compared with Q2 2010, with strong competition in fixed term bonds and bonus savings accounts, compounded by a continuing reduction in yield on current account hedges.

·	Non-interest income increased by 28%, with an improvement across the majority of products despite the still-challenging economic climate.

·	Expenses declined by 1% in the quarter, with continuing benefit of process re-engineering and technology investment. Headcount in Q3 2010 increased 2% partly as a result of extensions to opening hours, in line with the Customer Charters. The adjusted cost:income ratio improved by 300 basis points to 53%.

·	Impairment losses declined by 16% in Q3 2010. Impairments are expected to continue gradually improving, subject to economic conditions remaining stable.

	o	Mortgage impairment losses were £55 million on a total book of £89 billion. The quarter-on-quarter increase of £11 million broadly relates to more conservative assumptions on recoveries.
	o	The unsecured portfolio charge fell 23% to £196 million, on a book of £19 billion, with lower default volumes and improved collections performance.


·	Risk-weighted assets increased marginally in the quarter with growth in mortgage loans and a retiring credit cards securitisation largely offset by lower unsecured lending balances and improving portfolio credit metrics.

UK Retail (continued)

Key points (continued)

Q3 2010 compared with Q3 2009

·	Operating profit increased by £334 million, with income up 9%, costs down 3% and impairments 38% lower than in Q3 2009. Return on equity in the first nine months of 2010 was 15.8%, compared with 2.0% in the same period of 2009.

·	Net interest income was 25% higher than Q3 2009, with strong mortgage and deposit balance growth and recovering asset margins across all products, which together more than offset the decline in liability margins.

·	Non-interest income decreased 19% on prior year, principally reflecting the change to the structure of overdraft charges, which took effect from Q4 2009.

·	Deposit balances were up 7% on Q3 2009. Savings balances grew by 9%, outperforming the market total deposit growth of 2.4%, which remains intensely competitive. Personal current account balances were up 2% in the same period.

·	Mortgage balances at 30 September 2010 were up 11%. UK Retail considers mortgages to be a core customer product requirement and continues to support lending for both new and existing customers.

·	Costs were 3% lower than in Q3 2009, driven by process re-engineering efficiencies within the branch network and operational centres. The adjusted cost:income ratio improved from 62% to 53%.

·	Impairment losses dropped by 38% on Q3 2009 primarily reflecting lower arrears volumes on the unsecured portfolio.

UK Corporate

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		662			647			607			1,919			1,666

Net fees and commissions		244			233			223			701			636
Other non-interest income		80			107			106			292			332

Non-interest income		324			340			329			993			968

Total income		986			987			936			2,912			2,634

Direct expenses
- staff		(186	)		(189	)		(174	)		(580	)		(541	)
- other		(81	)		(82	)		(71	)		(266	)		(191	)
Indirect expenses		(139	)		(128	)		(125	)		(394	)		(380	)

		(406	)		(399	)		(370	)		(1,240	)		(1,112	)

Impairment losses		(158	)		(198	)		(187	)		(542	)		(737	)

Operating profit		422			390			379			1,130			785


Analysis of income by business
Corporate and commercial lending		651			660			546			1,941			1,542
Asset and invoice finance		163			154			129			451			361
Corporate deposits		183			185			241			544			795
Other		(11	)		(12	)		20			(24	)		(64	)

Total income		986			987			936			2,912			2,634


Analysis of impairments by sector
Banks and financial institutions		15			(9	)		4			8			9
Hotels and restaurants		6			12			7			34			58
Housebuilding and construction		62			8			58			84			119
Manufacturing		2			2			2			10			23
Other		19			83			31			139			138
Private sector education, health, social work, recreational and community services		1			-			(4	)		9			36
Property		34			61			69			161			229
Wholesale and retail trade, repairs		14			28			16			60			53
Asset and invoice finance		5			13			4			37			72

Total impairment losses		158			198			187			542			737

UK Corporate (continued)

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Banks and financial institutions		1.0	%		(0.6	%)		0.3	%		0.2	%		0.2	%
Hotels and restaurants		0.3	%		0.7	%		0.4	%		0.7	%		1.1	%
Housebuilding and construction		5.5	%		0.7	%		5.0	%		2.5	%		3.4	%
Manufacturing		0.2	%		0.1	%		0.1	%		0.3	%		0.5	%
Other		0.2	%		1.0	%		0.4	%		0.6	%		0.6	%
Private sector education, health, social work, recreational and community services		-			-			(0.2	%)		0.1	%		0.7	%
Property		0.5	%		0.8	%		0.8	%		0.7	%		0.9	%
Wholesale and retail trade, repairs		0.5	%		1.1	%		0.6	%		0.8	%		0.7	%
Asset and invoice finance		0.2	%		0.6	%		0.2	%		0.5	%		1.1	%

		0.6	%		0.7	%		0.7	%		0.6	%		0.9	%

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Return on equity (1)		16.0	%		14.3	%		13.5	%		14.3	%		9.3	%
Net interest margin		2.58	%		2.50	%		2.38	%		2.49	%		2.14	%
Cost:income ratio		41	%		40	%		40	%		43	%		42	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Total third party assets		116.6			118.4			(2	%)		114.9			1	%
Loans and advances to customers (gross)
- banks and financial institutions		6.0			6.5			(8	%)		6.3			(5	%)
- hotels and restaurants		6.9			7.0			(1	%)		6.7			3	%
- housebuilding and construction		4.5			4.6			(2	%)		4.3			5	%
- manufacturing		5.3			5.5			(4	%)		5.9			(10	%)
- other		31.9			32.6			(2	%)		29.9			7	%
- private sector education, health, social work, recreational and community services		9.0			9.1			(1	%)		6.5			38	%
- property		30.0			30.3			(1	%)		33.0			(9	%)
- wholesale and retail trade, repairs		10.2			10.4			(2	%)		10.2			-
- asset and invoice finance		9.7			9.2			5	%		8.8			10	%
Customer deposits		98.1			95.4			3	%		87.8			12	%
Risk elements in lending		3.3			2.9			14	%		2.3			43	%
Loan:deposit ratio (excluding repos)		114	%		119	%		(500	bp)		126	%		(1,200	bp)
Risk-weighted assets		84.7			87.6			(3	%)		90.2			(6	%)

Note:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).

UK Corporate (continued)

Key points

Q3 2010 compared with Q2 2010

·	Operating profit increased by 8% to £422 million, driven by improved credit performance.

·	Net interest income rose by 2%. Deposit balances grew by £2.7 billion with new product launches and other deposit-gathering initiatives continuing to deliver in an intensely competitive market. Loans and advances to customers were marginally down from the previous quarter, with above-target levels of gross new lending offset by customer deleveraging. Net interest margin increased by 8 basis points, driven by a recovery in asset margins from the depressed levels recorded in 2008 and 2009, whilst deposit margins remain under pressure.

·	Non-interest income declined 5%, with reduced sales of financial market products.

·	Total costs rose 2%, driven by investment in strategic initiatives.

·	Impairments were £40 million lower; reflecting an improved flow into collectively assessed balances.

·	Risk-weighted assets decreased by 3% reflecting lower nominal assets and improved risk metrics.

Q3 2010 compared with Q3 2009

·	Operating profit was up £43 million or 11%, reflecting good income growth and lower impairments partially offset by higher costs.

·	Net interest income increased by 9%, reflecting good growth in deposit volumes, together with a recovery in asset margins. Deposit balances grew by £11.4 billion compared with 30 September 2009 and the loan:deposit ratio improved to 114%, compared with 130% a year earlier. Net interest margin improved by 20 basis points, reflecting the progressive repricing of the loan portfolio and a better funding cost environment than in Q3 2009.

·	Non-interest income was 2% (£5 million) lower, the result of reduced sales of financial market products and services.

·	Total expenses increased by 10%, driven primarily by investment in strategic initiatives.

·	Impairments were £29 million lower compared with Q3 2009, which included a charge for potential losses in the portfolio not yet specifically identified and lower specific provisions.

·	Whilst loans and advances stayed broadly in line, risk-weighted assets decreased by £6.3 billion, or 7% primarily reflecting improvements in risk metrics.

Wealth

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		156			150			168			449			502

Net fees and commissions		90			97			92			282			272
Other non-interest income		18			19			19			54			61

Non-interest income		108			116			111			336			333

Total income		264			266			279			785			835

Direct expenses
- staff		(95	)		(92	)		(82	)		(286	)		(250	)
- other		(39	)		(39	)		(41	)		(113	)		(119	)
Indirect expenses		(55	)		(47	)		(36	)		(157	)		(112	)

		(189	)		(178	)		(159	)		(556	)		(481	)

Impairment losses		(1	)		(7	)		(1	)		(12	)		(23	)

Operating profit		74			81			119			217			331


Analysis of income
Private banking		217			216			232			637			693
Investments		47			50			47			148			142

Total income		264			266			279			785			835

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Net interest margin		3.44	%		3.36	%		4.34	%		3.39	%		4.54	%
Cost:income ratio		72	%		67	%		57	%		71	%		58	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Loans and advances to customers (gross)
- mortgages		7.5			6.9			9	%		6.5			15	%
- personal		6.5			6.4			2	%		4.9			33	%
- other		1.5			1.6			(6	%)		2.3			(35	%)
Customer deposits		34.8			36.2			(4	%)		35.7			(3	%)
Assets under management (excluding deposits)		31.1			30.2			3	%		30.7			1	%
Risk elements in lending		0.2			0.2			-			0.2			-
Loan:deposit ratio (excluding repos)		44	%		41	%		300	bp		38	%		600	bp
Risk-weighted assets		12.1			12.0			1	%		11.2			8	%

Wealth (continued)

Key points

Q3 2010 compared with Q2 2010

·	Operating profit fell 9% to £74 million in the third quarter, with weaker investment fee income and higher business investment costs only partially mitigated by a fall in impairment losses.

·	Total income fell 1% in the quarter. Lower average assets under management and reduced levels of trading fees led to a 7% fall in non-interest income. This was offset by a 4% increase in net interest income.

·	Loans and advances continued to grow strongly, increasing 4% in the quarter, primarily driven by mortgage lending which rose by £0.6 billion. Credit metrics remain satisfactory and were comparable with previous quarters.

·	Net interest margin improved 8 basis points reflecting strong lending performance. However the competitive nature of pricing within the deposit market continues, leading to a 4% reduction in balances.

·	Assets under management grew 3% in positive market conditions, reversing the falls seen in Q2 2010. The international businesses continue to feel the impact of client losses following the departures of a number of senior private bankers earlier in the year.

·	Total expenses increased 6% primarily driven by investment in strategic initiatives, combined with continued front office staff investment and temporary resource to support the implementation of the new banking platform.

Q3 2010 compared with Q3 2009

·	Operating profit fell 38% with lower income and an increase in expenses.

·	Income declined by 5% primarily due to lower net interest income which fell £12 million, 7%.

·	Lending continued to be made available to meet client demand, with balances increasing 16% over Q3 2009. Mortgage balances in particular saw strong growth, increasing 23%.

·	Client deposits decreased 4% through the impact of client losses in the International businesses. Pricing competition to retain and attract balances put pressure on net interest margin which narrowed by 90 basis points.

·	Assets under management fell 2% (5% at constant exchange rates) due to client attrition in the International businesses.

·	Total expenses rose 19%, in part reflecting additional headcount in expanding the UK and International franchises.

Global Transaction Services

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		257			237			234			711			679
Non-interest income		411			411			388			1,212			1,171

Total income		668			648			622			1,923			1,850

Direct expenses
- staff		(100	)		(102	)		(87	)		(306	)		(269	)
- other		(38	)		(37	)		(37	)		(108	)		(110	)
Indirect expenses		(218	)		(227	)		(223	)		(682	)		(687	)

		(356	)		(366	)		(347	)		(1,096	)		(1,066	)

Impairment losses		(3	)		(3	)		(22	)		(6	)		(35	)

Operating profit		309			279			253			821			749


Analysis of income by product
Domestic cash management		216			201			202			611			608
International cash management		200			193			183			578			531
Trade finance		81			76			71			228			223
Merchant acquiring		123			133			127			371			377
Commercial cards		48			45			39			135			111

Total income		668			648			622			1,923			1,850

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Net interest margin		6.72	%		6.47	%		9.63	%		6.96	%		9.03	%
Cost:income ratio		53	%		56	%		56	%		57	%		58	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Total third party assets		24.2			25.7			(6	%)		18.4			32	%
Loans and advances		14.4			15.6			(8	%)		12.7			13	%
Customer deposits		65.4			62.7			4	%		61.8			6	%
Risk elements in lending		0.2			0.2			-			0.2			-
Loan:deposit ratio (excluding repos)		22	%		25	%	(300bps)				21	%	100bps
Risk-weighted assets		18.6			19.4			(4	%)		19.1			(3	%)

Global Transaction Services (continued)

Key points

Q3 2010 compared with Q2 2010

·	Operating profit increased 11%, driven by increased deposit volumes and lower expenses.

·	Income increased 3%, or 4% at constant foreign exchange rates, reflecting increased earnings on the division’s deposit surplus and improving commercial card transaction volumes, partially offset by seasonality impacts in Merchant Acquiring.

·	Expenses fell by 3%, or 1% on a constant foreign exchange basis, mainly reflecting lower operations costs in indirect expenses.

·	Customer deposits increased by 4% to £65.4 billion, driven by growth in both non-interest-bearing balances in the Domestic business and interest-bearing balances in the International cash management business. The loan to deposit ratio improved by 300 basis points to 22% from 25% in the previous quarter.

·	The sale of the Global Merchant Services business is on track for completion during the fourth quarter. In Q3 2010, Global Merchant Services reported income of £128 million and expenses of £76 million, generating an operating profit of £52 million.

Q3 2010 compared with Q3 2009

·	Operating profit increased 22%, or 18% at constant foreign exchange rates, with income up 7% and expenses up 3%.

·	Income rose to £668 million, reflecting higher domestic and international average deposit balances, increased foreign exchange transaction fees and improving commercial card transaction volumes.

·	Expenses rose 3%, largely reflecting continued investment in front office and support infrastructure.

·	Third party assets increased by £3 billion as yen clearing activities were brought in-house.

·	Customer deposit balances increased by 12% with growth in the international and UK domestic cash management businesses. Net interest margin declined by 291 basis points largely driven by the impact of new yen clearing activities and associated low interest cash balances, as well as deposit and trade finance margin compression. The loan to deposit ratio improved by 300 basis points and the funding surplus increased by £6.9 billion.

Ulster Bank

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		192			194			176			574			586

Net fees and commissions		38			43			45			116			130
Other non-interest income		14			10			10			42			33

Non-interest income		52			53			55			158			163

Total income		244			247			231			732			749

Direct expenses
- staff		(54	)		(60	)		(79	)		(180	)		(249	)
- other		(18	)		(20	)		(22	)		(57	)		(73	)
Indirect expenses		(62	)		(63	)		(71	)		(200	)		(219	)

		(134	)		(143	)		(172	)		(437	)		(541	)

Impairment losses		(286	)		(281	)		(144	)		(785	)		(301	)

Operating loss		(176	)		(177	)		(85	)		(490	)		(93	)


Analysis of income by business
Corporate		120			134			134			399			434
Retail		124			105			104			341			298
Other		-			8			(7	)		(8	)		17

Total income		244			247			231			732			749


Analysis of impairments by sector
Mortgages		69			33			30			135			54
Corporate
- property		107			117			(2	)		306			73
- other corporate		100			118			89			309			120
Other lending		10			13			27			35			54

Total impairment losses		286			281			144			785			301


Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Mortgages		1.3	%		0.9	%		0.7	%		0.8	%		0.4	%
Corporate
- property		8.1	%		4.9	%		(0.1	%)		7.7	%		1.0	%
- other corporate		4.3	%		4.8	%		3.0	%		4.4	%		1.3	%
Other lending		2.4	%		2.7	%		5.4	%		2.7	%		3.6	%

		3.0	%		3.1	%		1.4	%		2.8	%		1.0	%

Ulster Bank (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Return on equity (1)		(20.9	%)		(21.7	%)		(11.3	%)		(19.4	%)		(4.1	%)
Net interest margin		1.90	%		1.92	%		1.74	%		1.86	%		1.88	%
Cost:income ratio		55	%		58	%		74	%		60	%		72	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Loans and advances to customers (gross)
- mortgages		21.4			14.9			44	%		16.2			32	%
- corporate
- property		5.3			9.5			(44	%)		10.1			(48	%)
- other corporate		9.4			9.9			(5	%)		11.0			(15	%)
- other lending		1.7			1.9			(11	%)		2.4			(29	%)
Customer deposits		23.4			22.7			3	%		21.9			7	%
Risk elements in lending
- mortgages		1.4			0.7			100	%		0.6			133	%
- corporate
- property		0.6			1.3			(54	%)		0.7			(14	%)
- other corporate		1.0			1.3			(23	%)		0.8			25	%
- other lending		0.2			0.2			-			0.2			-
Loan:deposit ratio (excluding repos)		156	%		154	%		200	bp		177	%		(2,100	bp)
Risk-weighted assets		32.6			30.5			7	%		29.9			9	%

Note:

(1)	Return on equity is based on divisional operating profit/(loss) after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).

Key points

Q3 2010 compared with Q2 2010

·	Operating loss for the quarter of £176 million was in line with the previous quarter. Operating profit before impairment losses increased by 4% in constant currency terms reflecting improved performance in the quarter on both income and expenses.

·	As part of its strategic plan update, the bank has taken the decision to cease early stage development property lending. Accordingly on 1 July 2010 the division transferred a portfolio of development property assets to the Non-Core division. In addition, reflecting its continued commitment to the retail mortgage sector, a portfolio of retail mortgage assets to be managed as part of the core business was transferred back.

·	Net interest income rose 2% in the quarter on a constant currency basis, with higher asset and liability balances but reduced net interest margin, reflecting an increased level of liquid assets held.

·	Total expenses decreased by 1% on a constant currency basis, driven by the continuing impact on direct costs (down 5% at constant exchange rates) of savings initiated through its restructuring programme and ongoing operational efficiencies.

Ulster Bank (continued)

Key points (continued)

Q3 2010 compared with Q2 2010 (continued)

·	Customer deposit balances remained broadly flat in constant currency terms during the period.

·	Impairment losses remain severe, reflecting the continuing deterioration in credit metrics across the Irish economy. Asset default levels and loss rates in both the retail and corporate portfolios continue to remain elevated which is expected to continue into Q4 before beginning to stabilise.

·	In September, Ulster Bank launched its Helpful Banking programme which outlines a set of commitments to personal and business customers and clearly articulates how the bank intends to deliver on what matters most to them. Private Banking in the Republic of Ireland was also launched in September, delivering an island-wide proposition to meet the day-to-day banking needs of high net worth customers.

Q3 2010 compared with Q3 2009

·	Operating loss increased significantly compared with Q3 2009 as a result of higher impairment losses, partially mitigated by strong management action to improve income generation and to reduce costs.

·	Net interest income increased by 15% in constant currency terms, with improved asset pricing more than offsetting a decrease in liability margins.

·	Loans to customers decreased by 3% over the period on a constant currency basis, while deposit balances increased by 16%, reflecting the business’s focus on growing the customer deposit base.

·	Non-interest income declined by 4% in constant currency terms, largely reflecting changes to the structure of overdraft charges which took effect from Q4 2009.

·	The focus on the management of the cost base across the business coupled with the impact of the Group-wide restructuring programme has resulted in a reduction in total expenses of 18% from the prior year on a constant currency basis.

·	Impairment losses increased sharply reflecting the deterioration in the economic environment in the Republic of Ireland.

US Retail & Commercial (£ Sterling)

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income		480			502			410			1,450			1,352

Net fees and commissions		180			203			159			560			566
Other non-interest income		91			72			65			238			162

Non-interest income		271			275			224			798			728

Total income		751			777			634			2,248			2,080

Direct expenses
- staff		(214	)		(151	)		(174	)		(580	)		(576	)
- other		(148	)		(163	)		(132	)		(445	)		(463	)
Indirect expenses		(191	)		(190	)		(191	)		(569	)		(586	)

		(553	)		(504	)		(497	)		(1,594	)		(1,625	)

Impairment losses		(125	)		(144	)		(180	)		(412	)		(549	)

Operating profit/(loss)		73			129			(43	)		242			(94	)


Average exchange rate – US$/£		1.551			1.492			1.640			1.534			1.543

Analysis of income by product
Mortgages and home equity		142			124			112			381			384
Personal lending and cards		127			122			116			363			336
Retail deposits		223			248			200			697			633
Commercial lending		145			152			127			439			408
Commercial deposits		78			86			97			245			290
Other		36			45			(18	)		123			29

Total income		751			777			634			2,248			2,080

Analysis of impairments by sector
Residential mortgages		14			22			29			55			64
Home equity		56			38			82			100			154
Corporate and commercial		23			76			65			148			234
Other consumer		28			7			4			91			97
Securities impairment losses		4			1			-			18			-

Total impairment losses		125			144			180			412			549

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Residential mortgages		0.9	%		1.3	%		1.7	%		1.2	%		1.2	%
Home equity		1.5	%		0.9	%		2.1	%		0.9	%		1.3	%
Corporate and commercial		0.5	%		1.5	%		1.3	%		1.0	%		1.5	%
Other consumer		1.6	%		0.3	%		0.2	%		1.8	%		1.6	%

		1.0	%		1.1	%		1.4	%		1.1	%		1.4	%

US Retail & Commercial (£ Sterling) (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
Performance ratios
Return on equity (1)		3.7	%		6.4	%		(2.2	%)		4.1	%		(1.6	%)
Net interest margin		2.92	%		2.78	%		2.37	%		2.79	%		2.34	%
Cost:income ratio		74	%		65	%		78	%		71	%		78	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Total third party assets		72.4			78.2			(7	%)		75.4			(4	%)
Loans and advances to customers (gross)
- residential mortgages		6.2			6.6			(6	%)		6.5			(5	%)
- home equity		15.3			16.3			(6	%)		15.4			(1	%)
- corporate and commercial		19.8			20.7			(4	%)		19.5			2	%
- other consumer		6.8			8.0			(15	%)		7.5			(9	%)
Customer deposits (excluding repos)		60.5			62.3			(3	%)		60.1			1	%
Risk elements in lending
- retail		0.4			0.4			-			0.4			-
- commercial		0.4			0.5			(20	%)		0.2			100	%
Loan:deposit ratio (excluding repos)		78	%		81	%		(300	bp)		80	%		(200	bp)
Risk-weighted assets		64.1			65.5			(2	%)		59.7			7	%

Spot exchange rate – US$/£		1.570			1.498						1.622

Note:

(1)	Return on equity is based on divisional operating profit/(loss) after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).

Key points

·	Sterling strengthened relative to the US dollar during the third quarter, with the average exchange rate increasing by 4% compared with Q2 2010.

·	Performance is described in full in the US dollar-based financial statements set out on pages 43 and 44.

US Retail & Commercial (US Dollar)

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		$m			$m			$m			$m			$m

Income statement
Net interest income		745			748			680			2,223			2,087

Net fees and commissions		280			303			266			859			874
Other non-interest income		139			110			104			365			248

Non-interest income		419			413			370			1,224			1,122

Total income		1,164			1,161			1,050			3,447			3,209

Direct expenses
- staff		(332	)		(223	)		(289	)		(890	)		(889	)
- other		(230	)		(246	)		(219	)		(683	)		(714	)
Indirect expenses		(296	)		(283	)		(313	)		(872	)		(902	)

		(858	)		(752	)		(821	)		(2,445	)		(2,505	)

Impairment losses		(193	)		(214	)		(296	)		(631	)		(847	)

Operating profit/(loss)		113			195			(67	)		371			(143	)


Analysis of income by product
Mortgages and home equity		220			185			186			585			593
Personal lending and cards		196			182			190			556			518
Retail deposits		345			372			329			1,068			976
Commercial lending		225			226			210			673			629
Commercial deposits		122			128			160			376			448
Other		56			68			(25	)		189			45

Total income		1,164			1,161			1,050			3,447			3,209

Analysis of impairments by sector
Residential mortgages		22			33			47			85			99
Home equity		88			56			131			154			238
Corporate and commercial		35			113			107			225			360
Other consumer		42			10			11			139			150
Securities impairment losses		6			2			-			28			-

Total impairment losses		193			214			296			631			847

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Residential mortgages		0.9	%		1.3	%		1.7	%		1.2	%		1.2	%
Home equity		1.5	%		0.9	%		2.0	%		0.9	%		1.2	%
Corporate and commercial		0.5	%		1.5	%		1.3	%		1.0	%		1.5	%
Other consumer		1.6	%		0.3	%		0.3	%		1.7	%		1.6	%

		1.0	%		1.1	%		1.5	%		1.1	%		1.4	%

US Retail & Commercial (US Dollar) (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
Performance ratios
Return on equity (1)		3.6	%		6.5	%		(2.2	%)		4.0	%		(1.5	%)
Net interest margin		2.92	%		2.78	%		2.37	%		2.79	%		2.34	%
Cost:income ratio		74	%		65	%		78	%		71	%		78	%

	30 September 2010			30 June 2010						31 December 2009
	$bn			$bn			Change			$bn			Change

Capital and balance sheet
Total third party assets		113.7			117.2			(3	%)		122.3			(7	%)
Loans and advances to customers (gross)
- residential mortgages		9.7			9.9			(2	%)		10.6			(8	%)
- home equity		24.0			24.4			(2	%)		25.0			(4	%)
- corporate and commercial		31.1			30.9			1	%		31.6			(2	%)
- other consumer		10.7			12.0			(11	%)		12.1			(12	%)
Customer deposits (excluding repos)		95.1			93.3			2	%		97.4			(2	%)
Risk elements in lending
- retail		0.7			0.6			17	%		0.6			17	%
- commercial		0.6			0.7			(14	%)		0.4			50	%
Loan:deposit ratio (excluding repos)		78	%		81	%		(300	bp)		80	%		(200	bp)
Risk-weighted assets		100.7			98.1			3	%		96.9			4	%

Note:

(1)	Return on equity is based on divisional operating profit/(loss) after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).

Key points

Q3 2010 compared with Q2 2010

·	US Retail & Commercial delivered a profit for the third consecutive quarter, posting an operating profit of £73 million ($113 million). Excluding a £74 million ($113 million) credit related to changes to the defined benefit pension plan in Q2 2010, operating profit was up 38% from the previous quarter. Economic conditions in core regions remain subdued, with lingering high unemployment, a soft housing market and reduced consumer activity.

·	Net interest income was in line with the previous quarter. Loans and advances declined 2% principally due to the sale of a student loan portfolio (£0.7 billion, ($1.1 billion)) and reduced housing related loans. Customer deposits, however, increased 2% overall, with demand deposit account balances up 9%.

·	Net interest margin increased by 14 basis points to 2.92%, with a continued trend of balance migration from lower margin term and time accounts to higher margin checking accounts, as well as a positive impact from a balance sheet restructuring carried out during the quarter.

·	The loan to deposit ratio continued to trend lower, dropping by 300 basis points to 78% during the quarter.

US Retail & Commercial (US Dollar) (continued)

Key points (continued)

Q3 2010 compared with Q2 2010 (continued)

·	Non-interest income was up 1% reflecting strong mortgage income (up £23 million ($35 million) on the second quarter), offset by lower deposit fees as a result of Regulation E legislative changes introduced in the quarter. The current annual impact of Regulation E is estimated at between £80-100 million ($125-150 million). Mitigating action to implement changes to account and transaction fee schedules is currently under review. In addition, gains of £213 million ($330 million) were recognised on the sale of available-for-sale securities as part of a balance sheet restructuring exercise which were largely offset by losses crystallised on the termination of swaps hedging fixed-rate funding.

·	Regulation E prohibits financial institutions from charging consumers fees for paying automated teller machine (ATM) and one-off debit card transactions which would result in overdraft, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

·	Total expenses were 1% lower, excluding the pension credit booked in Q2 2010.

·	Impairment losses fell 10%, reflecting a gradual improvement in the underlying credit environment. Loan impairments decreased as a proportion of loans and advances, falling 10 basis points from the second quarter and continuing a downward trend from their peak in Q3 2009.

·	Following significant loan reserve building in 2009, provisions for loan losses held steady at £0.8 billion ($1.2 billion), reflecting a cautious near-term view of the credit environment.

Q3 2010 compared with Q3 2009

·	Operating profit increased to £73 million ($113 million) from an operating loss of £43 million ($67 million).

·	Net interest income rose 10%, with net interest margin increasing by 55 basis points to 2.92%, offsetting a reduction in loan and deposit balances. The margin improvement was primarily due to changes in deposit mix and new deposit pricing strategies, as well as a positive impact from a balance sheet restructuring carried out during the quarter.

·	Customer deposits were down 4%, reflecting the impact of a changed pricing strategy on low margin term and time products, but strong growth was achieved in checking balances. Over 52,500 consumer checking accounts were added over the year, and more than 12,500 small business checking accounts were added. Consumer checking balances grew by 8% and small business balances by 11%.

·	Non-interest income was up 13%, driven by higher mortgage and debit card income and higher gains on the sale of securities.

·	Total expenses rose 5% reflecting impairment of mortgage servicing rights (£15 million ($23 million)), changes in the phasing of staff compensation and higher medical costs.

Global Banking & Markets

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income from banking activities		317			329			486			1,027			2,008
Funding costs of rental assets		(8	)		(9	)		(12	)		(26	)		(39	)
Net interest income		309			320			474			1,001			1,969

Net fees and commissions receivable		354			262			299			902			897
Income from trading activities		619			1,517			1,276			4,147			6,418
Other operating income		272			(152	)		(16	)		275			(189	)

Non-interest income		1,245			1,627			1,591			5,324			7,126

Total income		1,554			1,947			2,065			6,325			9,095

Direct expenses
- staff		(621	)		(631	)		(716	)		(2,139	)		(2,268	)
- other		(166	)		(200	)		(184	)		(550	)		(587	)
Indirect expenses		(218	)		(202	)		(252	)		(643	)		(737	)

		(1,005	)		(1,033	)		(1,152	)		(3,332	)		(3,592	)

Impairment losses		40			(164	)		(272	)		(156	)		(510	)

Operating profit		589			750			641			2,837			4,993


Analysis of income by product
Rates – money markets		38			4			287			130			1,606
Rates – flow		402			471			694			1,572			2,527
Currencies & commodities		218			179			147			692			1,102
Equities		198			238			282			750			1,017
Credit and mortgage markets		349			474			475			1,782			2,023
Portfolio management and origination		349			581			180			1,399			820

Total income		1,554			1,947			2,065			6,325			9,095


Analysis of impairments by sector
Manufacturing and infrastructure		(34	)		(12	)		33			(53	)		72
Property and construction		-			56			-			64			50
Banks and financial institutions		(3	)		110			237			123			280
Other		(3	)		10			2			22			108

Total impairment losses		(40	)		164			272			156			510


Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements)		(0.2	%)		0.7	%		0.6	%		0.2	%		0.5	%

Global Banking & Markets (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Return on equity (1)		11.3	%		13.8	%		14.2	%		18.0	%		36.9	%
Net interest margin		1.14	%		1.01	%		1.08	%		1.08	%		1.52	%
Cost:income ratio		65	%		53	%		56	%		53	%		39	%
Compensation ratio (2)		40	%		32	%		35	%		34	%		25	%

	30 September 2010			30 June 2010						31 December 2009
	£bn			£bn			Change			£bn			Change

Capital and balance sheet
Loans and advances to customers		87.9			88.8			(1	%)		90.9			(3	%)
Loans and advances to banks		44.8			40.1			12	%		36.9			21	%
Reverse repos		92.3			85.6			8	%		73.3			26	%
Securities		118.8			109.8			8	%		106.0			12	%
Cash and eligible bills		42.0			41.2			2	%		74.0			(43	%)
Other		34.9			34.5			1	%		31.1			12	%

Total third party assets (excluding derivatives mark-to-market)		420.7			400.0			5	%		412.2			2	%
Net derivative assets (after netting)		41.1			52.1			(21	%)		68.0			(40	%)
Customer deposits (excluding repos)		40.9			45.6			(10	%)		46.9			(13	%)
Risk elements in lending		1.6			1.8			(11	%)		1.8			(11	%)
Loan:deposit ratio (excluding repos)		215	%		195	%		2,000	bp		194	%		2,100	bp
Risk-weighted assets		143.7			141.3			2	%		123.7			16	%

Notes:

(1)	Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 10% of divisional risk-weighted assets, adjusted for capital deductions).
(2)	Compensation ratio is based on staff costs as a percentage of total income, excluding the fair value of own debt.

Key points

Q3 2010 compared with Q2 2010

·	Operating profit fell 21% to £589 million, with reduced revenue partially offset by a net recovery on impairments and a small reduction in costs.

·	Revenue fell 20%. Adjusting for the impact of the tightening in the Group’s credit spreads on derivative liabilities the decline was 13%. Trading volumes were weak as investors remained risk averse amidst uncertainty in the global economy. Volatility also subsided as concerns about European sovereign debt default decreased during the quarter. In spite of this environment, GBM continued to focus on serving its customers, remaining a top three bookrunner for IG Corporates in EMEA DCM.

Global Banking & Markets (continued)

Key points (continued)

Q3 2010 compared with Q2 2010 (continued)

·	Rates flow and Credit and mortgage markets products suffered from subdued client flow, but Currencies revenues recovered somewhat. Portfolio revenue fell back after a spike in market derivative values in Q2 2010.

·	Total costs fell by 3% compared with Q2 2010. The cost:income ratio for the nine months to September 2010 was 53%, below the 55% strategic plan target. The year-to-date compensation ratio of 34%, excluding fair value of own debt, remains within the expected range of 32-35%.

·	Impairments for the quarter were negligible, with no significant single name defaults, low levels of underlying impairment and several modest recoveries, resulting in a credit of £40 million.

·	Third party assets increased by £21 billion during Q3 2010, to £421 billion, within the normal range of £400 billion to £450 billion, reflecting increased customer demand for securities and a pick up in repo trading activity towards the end of the period.

·	Risk-weighted assets increased by 2% over the period reflecting effective management of underlying risk which mitigated the impact of changes in the regulatory treatment of some assets.

·	Adjusting for the fair value of own debt, return on equity for the quarter was 11.3% and 18.0% for the nine months to September 2010, ahead of the strategic plan target of 15% despite tough market conditions during Q2 and Q3 2010.

Q3 2010 compared with Q3 2009

·	Operating profit declined by 8%, reflecting lower revenue that was partially offset by lower costs and impairments.

·	Excluding the movement in fair value of own debt, revenue fell 25%. Rates, money markets and flow revenue fell, reflecting reduced volatility and client activity. However, revenue from currencies improved, driven by a significantly better performance in emerging markets.

·	Credit and mortgage market revenue declined as mortgage trading income fell from the buoyant trading conditions experienced in Q3 2009. Reduced revenue in Equities reflected lower ECM volumes in the EMEA region. Portfolio management revenue improved as a result of lower costs of balance sheet management and lower losses on market derivative values.

·	Third party assets over the period declined by £38 billion, an 8% year-on-year reduction. This was a result of active balance sheet management.

RBS Insurance

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Earned premiums		1,111			1,118			1,145			3,359			3,370
Reinsurers' share		(36	)		(38	)		(43	)		(108	)		(128	)

Net premium income		1,075			1,080			1,102			3,251			3,242
Fees and commissions		(96	)		(91	)		(95	)		(276	)		(282	)
Other income		112			116			112			320			324

Total income		1,091			1,105			1,119			3,295			3,284

Direct expenses
- staff		(68	)		(66	)		(67	)		(197	)		(206	)
- other		(41	)		(48	)		(47	)		(136	)		(168	)
Indirect expenses		(66	)		(62	)		(64	)		(193	)		(195	)

		(175	)		(176	)		(178	)		(526	)		(569	)

Net claims		(949	)		(1,132	)		(928	)		(3,055	)		(2,479	)

Impairment losses		-			-			(2	)		-			(8	)

Operating (loss)/profit		(33	)		(203	)		11			(286	)		228

Analysis of income by product
Personal lines motor excluding broker
- Own brands		481			472			482			1,430			1,385
- Partnerships		73			71			82			220			245
Personal lines home excluding broker
- Own brands		123			121			115			365			336
- Partnerships		97			97			98			298			293
Personal lines other excluding broker
- Own brands		48			47			49			147			143
- Partnerships		45			53			54			154			170
Other
- Commercial and international		165			158			152			487			473
- Other (including personal lines broker)		59			86			87			194			239

Total income		1,091			1,105			1,119			3,295			3,284

RBS Insurance (continued)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

In-force policies (thousands)
Personal lines motor excluding broker
- Own brands		4,276			4,424			4,798			4,276			4,798
- Partnerships		698			755			874			698			874
Personal lines home excluding broker
- Own brands		1,765			1,772			1,671			1,765			1,671
- Partnerships		1,859			1,875			1,947			1,859			1,947
Personal lines other excluding broker
- Own brands		2,069			2,194			2,250			2,069			2,250
- Partnerships		7,201			7,186			7,518			7,201			7,518
Other
- Commercial and international		1,373			1,322			1,213			1,373			1,213
- Other (including personal lines broker)		911			1,046			1,053			911			1,053

Total in-force policies (1)		20,152			20,574			21,324			20,152			21,324

Gross written premium (£m)		1,128			1,092			1,186			3,310			3,456

Performance ratios
Return on equity (2)		(3.5	%)		(21.8	%)		1.2	%		(10.2	%)		8.5	%
Cost:income ratio (3)		16	%		16	%		16	%		16	%		17	%
Loss ratio (4)		88.6	%		106.3	%		84.0	%		94.7	%		75.9	%
Combined operating ratio (5)		110.2	%		128.7	%		104.7	%		116.9	%		98.4	%

Balance sheet
General insurance reserves – total (£m)		7,552			7,326			6,839			7,552			6,839

Notes:

(1)	Total in-force policies include travel and creditor policies sold through RBS Group. These comprise travel policies included in bank accounts e.g. Royalties Gold Account, and creditor policies sold with bank products including mortgage, loan & card repayment payment protection.
(2)	Return on equity is based on divisional operating profit/(loss) after tax, divided by divisional notional equity (based on regulatory capital).
(3)	Cost:income ratio is based on total income, including investment income and total expenses.
(4)	Loss ratio is based on net claims divided by net premium income for the UK businesses.
(5)	Combined operating ratio is the expenses (including fees & commissions) divided by gross written premium income, added to the loss ratio, for the UK businesses.

Key points

Q3 2010 compared with Q2 2010

●	Performance improved on Q2 2010 due to lower additions to bodily injury reserves in the quarter. Tighter underwriting criteria are now in effect and pricing and claims management initiatives for bodily injury have started to deliver; further improvements still need to be fully embedded to restore the business to sustainable profitability.

●	RBS Insurance recently announced plans to rationalise its operational sites. This together with further actions to drive down expenses will deliver a more robust and cost-competitive platform for the business.

●	As planned, total in-force policies have declined. A reduction in motor policies following significant re-pricing as well as the Group’s exit from less profitable partnership and broker business, has been partly offset by growth in Commercial and International policies.

RBS Insurance (continued)

Key points (continued)

Q3 2010 compared with Q2 2010 (continued)

●	Total income declined slightly to £1,091 million. Although motor pricing has increased, premium income has fallen as a result of exiting the higher risk, higher premium motor business.

●	Net claims were 16% lower than Q2 2010, during which additional reserves totalling £320 million were established in respect of bodily injury. For Q3 2010 an additional £100 million has been added to bodily injury claims reserves, largely relating to periodic payment orders following an industry-wide review during the quarter. In response to this claims experience, motor pricing has been further increased from the second quarter and significant progress continues to be made in removing higher risk business from the overall motor book by targeted rating actions.

●	Expenses were flat in the quarter, with higher staff expenses offset by lower marketing costs and levies. In advance of the main phase of planned role reductions, additional headcount has been required to deliver the business transformation programme.

Q3 2010 compared with Q3 2009

·	Total in-force policies declined by 5%, reflecting the change in mix of the policy book, with motor own-brand policies down 11% but own-brand home policies up 6%. The partnership and broker segment declined by 11%, in line with business strategy.

·	Total income declined by 3% as a result of a reduction in in-force policies, including the removal of higher risk, higher premium motor business, partially offset by increased pricing.

●	Our market leading home business has continued to make solid progress with an increase in year to date total income of 5%.

·	Net claims were 2% higher, principally driven by the deterioration in the observed severity of bodily injury claims.

·	Expenses were down 2%, driven by lower levies and marketing costs.

·	The combined operating ratio, including indirect costs, was 110.2% compared with 104.7% in Q3 2009, owing to the impact of increased reserving for bodily injury claims partially mitigated by expense ratio improvement. Excluding increased bodily injury reserving relating to prior years, the combined operating ratio was 100.2%.

Central items

	Quarter ended						Nine months ended
	30 September 2010		30 June 2010		30 September 2009		30 September 2010		30 September 2009
		£m		£m		£m		£m		£m


Central items not allocated		76		49		283		462		554

Operating (loss)/profit		76		49		283		462		554

Key points

·	Funding and operating costs have been allocated to operating divisions, based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one division.

·	Residual unallocated items relate to volatile corporate items that do not naturally reside within a division.

Q3 2010 compared with Q2 2010

Central items not allocated, which are primarily volatile Group Treasury items, amounted to a net credit of £76 million, an increase of £27 million on Q2 2010. In Q3 2010 RBS N.V. realised a gain of £216 million on the sale of AFS securities. This was largely offset by negative movements relating to IFRS volatility.

Q3 2010 compared with Q3 2009

·	Central items not allocated during the quarter declined by £207 million relative to Q3 2009. This movement is attributable to unallocated volatile Group Treasury items.

Non-Core

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income statement
Net interest income from banking activities		433			550			282			1,551			929
Funding costs of rental assets		(79	)		(78	)		(56	)		(226	)		(192	)

Net interest income		354			472			226			1,325			737

Net fees and commissions		40			150			121			285			350
Income from trading activities		227			25			(565	)		130			(4,322	)
Insurance net premium income		180			173			173			521			613
Other operating income		87			53			99			434			213

Non-interest income		534			401			(172	)		1,370			(3,146	)

Total income		888			873			54			2,695			(2,409	)

Direct expenses
- staff		(172	)		(202	)		(150	)		(626	)		(604	)
- other		(277	)		(269	)		(244	)		(828	)		(747	)
Indirect expenses		(130	)		(121	)		(132	)		(373	)		(411	)

		(579	)		(592	)		(526	)		(1,827	)		(1,762	)

Insurance net claims		(144	)		(215	)		(126	)		(492	)		(440	)
Impairment losses		(1,171	)		(1,390	)		(2,066	)		(4,265	)		(7,410	)

Operating loss		(1,006	)		(1,324	)		(2,664	)		(3,889	)		(12,021	)

Analysis of income by business
Banking & portfolio		131			239			(271	)		641			(1,375	)
International businesses & portfolios		330			606			537			1,568			1,769
Markets		427			28			(212	)		486			(2,803	)

Total income		888			873			54			2,695			(2,409	)

Key metrics

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009

Performance ratios
Net interest margin		1.05	%		1.22	%		0.55	%		1.18	%		0.54	%
Cost:income ratio		65	%		68	%		974	%		68	%		(73	%)
Adjusted cost:income ratio		78	%		90	%		(731	%)		83	%		(62	%)

Non-Core (continued)

	30 September 2010		30 June 2010					31 December 2009
	£bn		£bn		Change			£bn		Change

Capital and balance sheet (1)
Total third party assets (including derivatives) (2)		175.2		193.3		(9	%)		220.9		(21	%)
Loans and advances to customers (gross)		119.5		126.4		(5	%)		149.5		(20	%)
Customer deposits		7.3		7.4		(1	%)		12.6		(42	%)
Risk elements in lending		23.9		22.0		9	%		22.9		4	%
Risk-weighted assets (3)		166.9		175.0		(5	%)		171.3		(3	%)

Notes:

(1)	Includes disposal groups.
(2)	Derivatives were £21.0 billion at 30 September 2010 (30 June 2010 – £19.4 billion; 31 December – £19.9 billion).
(3)	Includes Sempra: 30 September 2010 Third party assets (TPAs) £8.3 billion, RWAs £5.9 billion; (30 June 2010 TPAs £12.7 billion, RWAs £9.7 billion; 31 December 2009 TPAs £14.2 billion, RWAs £10.2 billion).

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Income/(loss) from trading activities
Monoline exposures		191			(139	)		(37	)		52			(1,708	)
Credit derivative product companies		(15	)		(55	)		(277	)		(101	)		(846	)
Asset backed products (1)		160			97			148			202			(393	)
Other credit exotics		(2	)		47			(38	)		56			(574	)
Equities		(15	)		(6	)		(13	)		(28	)		(38	)
Banking book hedges		(123	)		147			(386	)		(12	)		(1,382	)
Other (2)		23			(58	)		24			(48	)		561

		219			33			(579	)		121			(4,380	)

Impairment losses
Banking & portfolio		204			256			1,347			1,157			3,320
International businesses & portfolios		980			1,124			1,234			3,055			3,592
Markets		(13	)		10			(515	)		53			498

Total impairment		1,171			1,390			2,066			4,265			7,410

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) (3)
Banking & portfolio		1.3	%		1.8	%		6.0	%		2.4	%		4.8	%
International businesses & portfolios		6.9	%		7.4	%		6.9	%		7.2	%		6.7	%
Markets		(0.5	%)		3.6	%		(126.8	%)		8.8	%		5.7	%

		3.9	%		4.4	%		5.4	%		4.7	%		5.7	%

Non-Core (continued)

	30 September 2010		30 June 2010		31 December 2009
	£bn		£bn		£bn

Gross customer loans and advances
Banking & portfolio		64.4		67.8		82.0
International businesses & portfolios		54.8		58.2		65.6
Markets		0.3		0.4		1.9

		119.5		126.4		149.5

Risk-weighted assets
Banking & portfolio		54.0		55.1		58.2
International businesses & portfolios		40.6		40.4		43.8
Markets		72.3		79.5		69.3

		166.9		175.0		171.3

Notes:

(1)	Asset-backed products include super senior asset-backed structures and other asset-backed products.
(2)	Includes profits in Sempra of £78 million (30 June 2010 – £125 million; 31 December 2009 – £161 million).
(3)	Includes disposal groups.

Non-Core (continued)

Third party assets (excluding derivatives)

Quarter ended 30 September 2010

	30 June 2010		Run-off			Disposals/ restructuring			Drawings/ roll overs			Impairments			FX			30 September 2010
	£bn		£bn			£bn			£bn			£bn			£bn			£bn

Commercial real estate		44.1		2.9			(0.3	)		(0.2	)		(1.2	)		1.2			46.5
Corporate		70.4		(2.8	)		(2.4	)		0.6			0.1			0.2			66.1
SME		4.7		(0.8	)		-			-			-			-			3.9
Retail		16.8		(6.2	)		-			-			(0.1	)		(0.2	)		10.3
Other		3.0		(0.2	)		(0.3	)		0.1			-			-			2.6
Markets		22.3		(1.4	)		(4.4	)		0.4			-			(0.4	)		16.5

Total (excluding derivatives) (1)		161.3		(8.5	)		(7.4	)		0.9			(1.2	)		0.8			145.9
Markets – Sempra		12.7		(0.5	)		(3.3	)		-			-			(0.6	)		8.3

Total (2)		174.0		(9.0	)		(10.7	)		0.9			(1.2	)		0.2			154.2

Quarter ended 30 June 2010

	31 March 2010		Run-off			Disposals/ restructuring			Drawings/ roll overs		Impairments			FX			30 June 2010
	£bn		£bn			£bn			£bn		£bn			£bn			£bn

Commercial real estate		49.5		(5.3	)		(0.3	)		2.8		(1.1	)		(1.5	)		44.1
Corporate		78.8		(2.6	)		(4.5	)		0.6		0.1			(2.0	)		70.4
SME		4.0		0.9			-			-		(0.1	)		(0.1	)		4.7
Retail		19.8		(0.5	)		(1.7	)		-		(0.2	)		(0.6	)		16.8
Other		3.3		(0.2	)		(0.1	)		-		-			-			3.0
Markets		24.1		(0.6	)		(1.4	)		0.6		(0.1	)		(0.3	)		22.3

Total (excluding derivatives)		179.5		(8.3	)		(8.0	)		4.0		(1.4	)		(4.5	)		161.3
Markets – Sempra		14.0		(1.4	)		-			-		-			0.1			12.7

Total		193.5		(9.7	)		(8.0	)		4.0		(1.4	)		(4.4	)		174.0

Nine months ended 30 September 2010

	31 December 2009		Run-off			Disposals/ restructuring			Drawings/ roll overs		Impairments			FX			30 September 2010
	£bn		£bn			£bn			£bn		£bn			£bn			£bn

Commercial real estate		51.3		(3.9	)		(0.6	)		2.8		(3.4	)		0.3			46.5
Corporate		82.6		(10.0	)		(8.1	)		1.6		(0.2	)		0.2			66.1
SME		3.9		0.1			-			-		(0.1	)		-			3.9
Retail		19.9		(7.1	)		(1.9	)		0.1		(0.5	)		(0.2	)		10.3
Other		4.7		(2.0	)		(0.4	)		0.3		-			-			2.6
Markets		24.4		(3.2	)		(6.1	)		1.0		(0.1	)		0.5			16.5

Total (excluding derivatives) (1)		186.8		(26.1	)		(17.1	)		5.8		(4.3	)		0.8			145.9
Markets – Sempra		14.2		(3.1	)		(3.3	)		-		-			0.5			8.3

Total (2)		201.0		(29.2	)		(20.4	)		5.8		(4.3	)		1.3			154.2

Note:

(1)	Intra-group transfers during Q3 resulted in a net £2.2 billion reduction in TPAs. As a result of this transfer there was an increase of Commercial real estate assets totalling £5.4 billion, offset by reductions across other sectors, principally Retail.
(2)	In addition, £9.4 billion of disposals have been signed as of 30 September 2010 but are pending closing (30 June 2010 – £1.9 billion; 31 December 2009 - £3.0 billion).

Non-Core (continued)

	Quarter ended								Nine months ended
	30 September 2010			30 June 2010			30 September 2009		30 September 2010			30 September 2009
		£m			£m			£m		£m			£m

Loan impairment losses by donating division and sector

UK Retail
Mortgages		1			-			1		4			4
Personal		4			-			11		6			42

Total UK Retail		5			-			12		10			46

UK Corporate
Manufacturing and infrastructure		5			21			14		21			46
Property and construction		130			150			162		334			488
Transport		26			(3	)		5		23			8
Banks and financials		(8	)		2			1		18			102
Lombard		25			29			27		79			82
Invoice finance		(3	)		-			2		(3	)		2
Other		(2	)		64			33		119			609

Total UK Corporate		173			263			244		591			1,337

Ulster Bank
Mortgages		(1	)		23			7		42			26
Commercial investment and development		201			147			20		458			47
Residential investment and development		394			384			406		1,129			749
Other		82			137			148		270			184
Other EMEA		13			13			27		46			86

Total Ulster Bank		689			704			608		1,945			1,092

US Retail & Commercial
Auto and consumer		(2	)		32			49		45			109
Cards		2			4			33		20			104
SBO/home equity		57			67			69		226			367
Residential mortgages		3			(10	)		20		5			41
Commercial real estate		49			42			85		154			173
Commercial and other		7			6			39		15			75

Total US Retail & Commercial		116			141			295		465			869

Global Banking & Markets
Manufacturing and infrastructure		(53	)		(281	)		309		(305	)		1,320
Property and construction		147			501			141		1,120			730
Transport		8			-			5		9			173
Telecoms, media and technology		32			11			23		32			543
Banks and financials		5			11			270		177			523
Other		52			24			84		177			529

Total Global Banking & Markets		191			266			832		1,210			3,818

Other
Wealth		7			16			50		51			213
Global Transaction Services		(10	)		-			25		(7	)		35
Central items		-			-			-		-			-

Total Other		(3	)		16			75		44			248

Total impairment losses		1,171			1,390			2,066		4,265			7,410

Non-Core (continued)

	30 September 2010			30 June 2010			31 December 2009
	£bn			£bn			£bn

Gross loans and advances to customers (excluding reverse repurchase agreements) by donating division and sector

UK Retail
Mortgages		1.7			1.8			1.9
Personal		0.5			0.5			0.7

Total UK Retail		2.2			2.3			2.6

UK Corporate
Manufacturing and infrastructure		0.3			0.4			0.3
Property and construction		12.1			12.9			14.1
Lombard		1.9			2.4			2.9
Invoice finance		-			-			0.4
Other		14.2			14.7			17.2

Total UK Corporate		28.5			30.4			34.9

Ulster Bank
Mortgages		-			5.6			6.0
Commercial investment and development		6.7			4.1			3.0
Residential investment and development		6.0			3.8			5.6
Other		2.0			1.3			1.1
Other EMEA		0.8			0.9			1.0

Total Ulster Bank		15.5			15.7			16.7

US Retail & Commercial
Auto and consumer		2.7			3.0			3.2
Cards		0.1			0.2			0.5
SBO/home equity		3.3			3.6			3.7
Residential mortgages		0.8			0.9			0.8
Commercial real estate		1.7			1.9			1.9
Commercial and other		0.6			0.7			0.9

Total US Retail & Commercial		9.2			10.3			11.0

Global Banking & Markets
Manufacturing and infrastructure		10.6			13.4			17.5
Property and construction		22.9			21.6			25.7
Transport		5.6			5.3			5.8
Telecoms, media and technology		1.1			2.0			3.2
Banks and financials		13.8			15.7			16.0
Other		10.5			9.4			13.5

Total Global Banking & Markets		64.5			67.4			81.7

Other
Wealth		0.7			0.9			2.6
Global Transaction Services		0.5			0.6			0.8
RBS Insurance		0.2			0.2			0.2
Central items		(2.1	)		(2.1	)		(3.2	)

Total Other		(0.7	)		(0.4	)		0.4

Gross loans and advances to customers (excluding reverse repurchase agreements)		119.2			125.7			147.3

Non-Core (continued)

Key points

Q3 2010 compared with Q2 2010

·	Good progress was made in Non-Core’s asset reduction programme, with third party assets (excluding derivatives) declining by £20 billion to £154 billion. This was due to the division’s disposal programme (£11 billion), including the disposal of £4 billion of assets in the markets business, and portfolio run-off (£9 billion).

·	RWAs decreased £8 billion from £175 billion to £167 billion. The largest drivers of the change were the partial disposal of Sempra JV business and other sales across the Non-Core division offset by intra-group transfers, and regulatory model changes.

·	Non-Core operating loss was £1,006 million in the third quarter, compared with £1,324 million in Q2 2010, primarily due to improved results from trading activities and lower impairments.

·	Income from trading activities totalled £227 million, compared with £25 million in the second quarter. This reflects disposal gains on super senior assets as well as valuation gains in relation to monolines as spreads tightened. These were offset by losses incurred across CDS portfolios also due to tightening spreads. Sempra Commodities reported revenues £43 million lower than the second quarter following the disposal of its metals, oil and European energy business lines to J.P. Morgan in July.

·	Net interest income fell by £118 million, principally reflecting a reduction of 5% in the loan book. Other operating income totalled £87 million in Q3 2010 compared with £53 million in Q2 2010. Rental income of £166 million fell by £15 million compared to the second quarter due to run-off. Disposal losses in Q3 2010 totalled £304 million, balanced by some revaluations of equity positions totalling £146 million.

·	Expenses declined by 2%, reflecting a number of business disposals.

·	Impairment losses continued to trend down to £1,171 million. Underlying impairments continued to slow, and the division experienced a number of write-backs in its leveraged lending business, though at a lower level than Q2 2010.

Q3 2010 compared with Q3 2009

·	Over the 12 months to 30 September 2010, third party assets (excluding derivatives) decreased by £48 billion, 24%, as a result of the division’s disposal strategy, managed portfolio run-off and impairments.

·	Operating losses decreased substantially from the £2,664 million loss recorded in Q3 2009, with significant improvements in both trading income and impairments.

·	Impairments were £895 million lower than in Q3 2009. This reflected the steadily improving environment over the period. However, charges as a result of the continued decline in the UK and Irish commercial property sectors remain high.

Condensed consolidated income statement

for the period ended 30 September 2010

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September* 2009			30 September 2010			30 September* 2009
		£m			£m			£m			£m			£m

Interest receivable		5,584			5,888			5,693			17,164			20,334
Interest payable		(2,173	)		(2,212	)		(2,573	)		(6,535	)		(10,365	)

Net interest income		3,411			3,676			3,120			10,629			9,969

Fees and commissions receivable		2,037			2,053			1,919			6,141			6,385
Fees and commissions payable		(611	)		(579	)		(545	)		(1,762	)		(1,896	)
Income from trading activities		277			2,110			1,088			4,153			3,052
Gain on redemption of own debt		-			553			-			553			3,790
Other operating income (excluding insurance premium income)		(317	)		346			(77	)		476			569
Insurance net premium income		1,289			1,278			1,301			3,856			3,958

Non-interest income		2,675			5,761			3,686			13,417			15,858

Total income		6,086			9,437			6,806			24,046			25,827

Staff costs		(2,423	)		(2,365	)		(2,363	)		(7,477	)		(7,499	)
Premises and equipment		(611	)		(547	)		(631	)		(1,693	)		(1,909	)
Other administrative expenses		(914	)		(1,022	)		(1,062	)		(2,947	)		(3,265	)
Depreciation and amortisation		(603	)		(519	)		(534	)		(1,604	)		(1,566	)
Write-down of goodwill and other intangible assets		-			-			-			-			(311	)

Operating expenses		(4,551	)		(4,453	)		(4,590	)		(13,721	)		(14,550	)

Profit before other operating charges and impairment losses		1,535			4,984			2,216			10,325			11,277
Insurance net claims		(1,142	)		(1,323	)		(1,145	)		(3,601	)		(3,036	)
Impairment losses		(1,953	)		(2,487	)		(3,279	)		(7,115	)		(10,800	)

Operating (loss)/profit before tax		(1,560	)		1,174			(2,208	)		(391	)		(2,559	)
Tax credit/(charge)		295			(825	)		617			(637	)		1,073

(Loss)/profit from continuing operations		(1,265	)		349			(1,591	)		(1,028	)		(1,486	)

Loss on distribution of ABN AMRO Bank NV to the State of the Netherlands and Santander		-			(1,019	)		-			(1,019	)		-
Other profits from discontinued operations, net of tax		18			-			-			331			30

Profit/(loss) from discontinued operations, net of tax		18			(1,019	)		-			(688	)		30

Loss for the period		(1,247	)		(670	)		(1,591	)		(1,716	)		(1,456	)
Minority interests		101			946			36			703			(595	)
Preference share and other dividends		-			(19	)		(245	)		(124	)		(791	)

(Loss)/profit attributable to ordinary and B shareholders		(1,146	)		257			(1,800	)		(1,137	)		(2,842	)

Basic (loss)/earnings per ordinary and B share from continuing operations		(1.1p	)		0.8	p		(3.2p	)		(0.5p	)		(5.2p	)

Basic loss per ordinary and B share from discontinued operations		-			-			-			-			(0.1p	)

* restated for the reclassification of the results attributable to other Consortium Members as discontinued operations.

Condensed consolidated statement of comprehensive income

for the period ended 30 September 2010

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Loss for the period		(1,247	)		(670	)		(1,591	)		(1,716	)		(1,456	)

Other comprehensive income
Available-for-sale financial assets		235			93			3,079			743			1,419
Cash flow hedges		553			1,449			(90	)		1,807			274
Currency translation		(647	)		(91	)		1,777			47			(2,504	)
Tax on other comprehensive income		(256	)		(331	)		(857	)		(702	)		(379	)

Other comprehensive (loss)/income for the period, net of tax		(115	)		1,120			3,909			1,895			(1,190	)

Total comprehensive (loss)/income for the period		(1,362	)		450			2,318			179			(2,646	)

Attributable to
Minority interests		(117	)		(457	)		1,075			(249	)		(743	)
Preference shareholders		-			-			242			105			752
Paid-in equity holders		-			19			3			19			39
Ordinary and B shareholders		(1,245	)		888			998			304			(2,694	)

		(1,362	)		450			2,318			179			(2,646	)

Condensed consolidated balance sheet

at 30 September 2010

	30 September 2010		30 June 2010		31 December 2009
		£m		£m		£m

Assets
Cash and balances at central banks		61,416		29,591		52,261
Net loans and advances to banks		60,334		54,489		56,656
Reverse repurchase agreements and stock borrowing		48,407		47,663		35,097
Loans and advances to banks		108,741		102,152		91,753
Net loans and advances to customers		528,049		539,375		687,353
Reverse repurchase agreements and stock borrowing		44,503		39,396		41,040
Loans and advances to customers		572,552		578,771		728,393
Debt securities		226,410		236,260		267,254
Equity shares		21,755		17,326		19,528
Settlement balances		22,874		20,718		12,033
Derivatives		548,805		522,871		441,454
Intangible assets		14,369		14,482		17,847
Property, plant and equipment		17,398		17,608		19,397
Deferred taxation		5,909		5,839		7,039
Prepayments, accrued income and other assets		11,908		14,095		20,985
Assets of disposal groups		17,450		22,340		18,542

Total assets		1,629,587		1,582,053		1,696,486

Liabilities
Bank deposits		80,304		96,710		104,138
Repurchase agreements and stock lending		41,465		44,165		38,006
Deposits by banks		121,769		140,875		142,144
Customer deposits		420,639		420,890		545,849
Repurchase agreements and stock lending		87,287		70,655		68,353
Customer accounts		507,926		491,545		614,202
Debt securities in issue		235,083		217,317		267,568
Settlement balances		20,628		19,730		10,413
Short positions		44,004		42,994		40,463
Derivatives		543,397		508,966		424,141
Accruals, deferred income and other liabilities		23,667		24,867		30,327
Retirement benefit liabilities		2,637		2,611		2,963
Deferred taxation		2,270		2,195		2,811
Insurance liabilities		6,782		6,521		10,281
Subordinated liabilities		27,890		27,523		37,652
Liabilities of disposal groups		16,154		17,615		18,890

Total liabilities		1,552,207		1,502,759		1,601,855

Equity
Minority interests		1,780		2,492		16,895
Owners’ equity*
Called up share capital		15,030		15,029		14,630
Reserves		60,570		61,773		63,106

Total equity		77,380		79,294		94,631

Total liabilities and equity		1,629,587		1,582,053		1,696,486

* Owners’ equity attributable to:
Ordinary and B shareholders		70,856		72,058		69,890
Other equity owners		4,744		4,744		7,846

		75,600		76,802		77,736

Condensed consolidated statement of changes in equity

for the period ended 30 September 2010

	Nine months ended 30 September 2010			Six months ended 30 June 2010			Year ended 31 December 2009
		£m			£m			£m

Called-up share capital
At beginning of period		14,630			14,630			9,898
Ordinary shares issued in respect of placing and open offers		-			-			4,227
B shares issued		-			-			510
Other shares issued during the period		402			401			-
Preference shares redeemed during the period		(2	)		(2	)		(5	)

At end of period		15,030			15,029			14,630

Paid-in equity
At beginning of period		565			565			1,073
Securities redeemed during the period		(132	)		(132	)		(308	)
Transfer to retained earnings		(2	)		(2	)		(200	)

At end of period		431			431			565

Share premium account
At beginning of period		23,523			23,523			27,471
Ordinary shares issued in respect of placing and open offer, net of £95 million expenses		-			-			1,047
Other shares issued during the period		217			217			-
Preference shares redeemed during the period		-			-			(4,995	)
Redemption of preference shares classified as debt		118			118			-

At end of period		23,858			23,858			23,523

Merger reserve
At beginning of period		25,522			25,522			10,881
Issue of B shares, net of £399 million expenses		-			-			24,591
Transfer to retained earnings		(12,250	)		(12,250	)		(9,950	)

At end of period		13,272			13,272			25,522

Available-for-sale reserves
At beginning of period		(1,755	)		(1,755	)		(3,561	)
Unrealised gains in the period		1,327			647			1,202
Realised (gains)/losses in the period		(535	)		(127	)		981
Taxation		(263	)		(208	)		(377	)
Recycled to profit or loss on disposal of businesses, net of £6 million tax		(16	)		(16	)		-

At end of period		(1,242	)		(1,459	)		(1,755	)

Cash flow hedging reserve
At beginning of period		(252	)		(252	)		(876	)
Amount recognised in equity during the period		329			(58	)		380
Amount transferred from equity to earnings in the period		138			17			513
Taxation		(154	)		-			(269	)
Recycled to profit or loss on disposal of businesses, net of £20 million tax		58			58			-

At end of period		119			(235	)		(252	)

Condensed consolidated statement of changes in equity

for the period ended 30 September 2010 (continued)

	Nine months ended 30 September 2010			Six months ended 30 June 2010			Year ended 31 December 2009
		£m			£m			£m

Foreign exchange reserve
At beginning of period		4,528			4,528			6,385
Retranslation of net assets		997			1,775			(2,322	)
Foreign currency (losses)/gains on hedges of net assets		(452	)		(609	)		456
Taxation		29			72			9
Recycled to profit or loss on disposal of businesses		(17	)		(11	)		-

At end of period		5,085			5,755			4,528

Capital redemption reserve
At beginning of period		170			170			170
Preference shares redeemed during the period		2			2			-

At end of period		172			172			170

Contingent capital reserve
At beginning of period		(1,208	)		(1,208	)		-
Contingent capital agreement – consideration payable		-			-			(1,208	)

At end of period		(1,208	)		(1,208	)		(1,208	)

Retained earnings
At beginning of period		12,134			12,134			7,542
(Loss)/profit attributable to ordinary shareholders and other equity owners
- continuing operations		(985	)		163			(2,600	)
- discontinued operations		(28	)		(30	)		(72	)
Equity preference dividends paid		(105	)		(105	)		(878	)
Paid-in equity dividends paid, net of tax		(19	)		(19	)		(57	)
Transfer from paid-in equity
- gross		2			2			200
- taxation		(1	)		(1	)		-
Equity owners gain on withdrawal of minority interest
- gross		40			40			629
- taxation		(11	)		(11	)		(176	)
Redemption of equity preference shares		(2,968	)		(2,968	)		-
Gain on redemption of equity preference shares		609			609			-
Redemption of preference shares classified as debt		(118	)		(118	)		-
Transfer from merger reserve		12,250			12,250			9,950
Actuarial losses recognised in retirement benefit schemes
- gross		-			-			(3,756	)
- taxation		-			-			1,043
Net cost of shares bought and used to satisfy share-based payments		(11	)		(9	)		(16	)
Share-based payments
- gross		103			61			325
- taxation		12			5			-

At end of period		20,904			22,003			12,134

Own shares held
At beginning of period		(121	)		(121	)		(104	)
Shares purchased during the period		(711	)		(704	)		(33	)
Shares issued under employee share schemes		11			9			16

At end of period		(821	)		(816	)		(121	)

Owners’ equity at end of period		75,600			76,802			77,736

Condensed consolidated statement of changes in equity

for the period ended 30 September 2010 (continued)

	Nine months ended 30 September 2010			Six months ended 30 June 2010			Year ended 31 December 2009
		£m			£m			£m

Minority interests
At beginning of period		16,895			16,895			21,619
Currency translation adjustments and other movements		(481	)		(461	)		(1,434	)
(Loss)/profit attributable to minority interests
- continuing operations		(43	)		74			382
- discontinued operations		(660	)		(676	)		(33	)
Dividends paid		(4,217	)		(4,171	)		(313	)
Movements in available-for-sale securities
- unrealised (losses)/gains in the period		(54	)		22			299
- realised losses/(gains) in the period		36			(3	)		(466	)
- taxation		5			1			(36	)
- recycled to profit or loss on disposal of discontinued operations, net of £2 million tax		(7	)		(7	)		-
Movements in cash flow hedging reserves
- amount recognised in equity during the period		(99	)		(165	)		(209	)
- taxation		33			47			59
- recycled to profit or loss on disposal of discontinued operations, net of £340 million tax		1,021			1,036			-
Actuarial gains recognised in retirement benefit schemes
- gross		-			-			91
- taxation		-			-			1
Equity raised		501			501			9
Equity withdrawn and disposals		(11,110	)		(10,561	)		(2,445	)
Transfer to retained earnings		(40	)		(40	)		(629	)

At end of period		1,780			2,492			16,895

Total equity at end of period		77,380			79,294			94,631

Total comprehensive income/(loss) recognised in the statement of changes in equity is attributable as follows:
Minority interests		(249	)		(132	)		(1,346	)
Preference shareholders		105			105			878
Paid-in equity holders		19			19			57
Ordinary and B shareholders		304			1,549			(5,747	)

		179			1,541			(6,158	)

Notes

1. Basis of preparation

Having reviewed the Group’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. Accordingly, the financial statements for the nine months ended 30 September 2010 has been prepared on a going concern basis.

Whilst the financial information included herein has been prepared in accordance with the recognition and measurement criteria of International Accounting Standard 34, it does not contain itself sufficient information to comply with all of its disclosure requirements.

Notes (continued)

2. Analysis of income, expenses and impairment losses

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Loans and advances to customers		4,683			4,754			4,619			14,134			16,568
Loans and advances to banks		153			131			194			424			675
Debt securities		748			1,003			880			2,606			3,091

Interest receivable		5,584			5,888			5,693			17,164			20,334

Customer accounts		961			966			1,055			2,795			3,789
Deposits by banks		330			418			617			1,045			2,388
Debt securities in issue		733			824			787			2,411			3,773
Subordinated liabilities		175			60			262			435			994
Internal funding of trading businesses		(26	)		(56	)		(148	)		(151	)		(579	)

Interest payable		2,173			2,212			2,573			6,535			10,365

Net interest income		3,411			3,676			3,120			10,629			9,969

Fees and commissions receivable		2,037			2,053			1,919			6,141			6,385
Fees and commissions payable
- banking		(493	)		(541	)		(450	)		(1,500	)		(1,614	)
- insurance related		(118	)		(38	)		(95	)		(262	)		(282	)

Net fees and commissions		1,426			1,474			1,374			4,379			4,489

Foreign exchange		442			383			135			1,274			1,857
Interest rate		41			707			987			1,202			4,252
Credit		(425	)		731			(483	)		783			(4,299	)
Other		219			289			449			894			1,242

Income from trading activities		277			2,110			1,088			4,153			3,052

Gain on redemption of own debt		-			553			-			553			3,790

Operating lease and other rental income		338			344			320			1,025			982
Changes in the fair value of own debt		(528	)		515			(238	)		(223	)		(298	)
Changes in the fair value of securities and other financial assets and liabilities		54			(165	)		5			(97	)		(12	)
Changes in the fair value of investment properties		(4	)		(105	)		(6	)		(112	)		(153	)
Profit on sale of securities		352			6			34			506			80
Profit on sale of property, plant and equipment		9			3			2			21			27
Loss on sale of subsidiaries and associates		(260	)		(428	)		(163	)		(618	)		56
Life business profits/(losses)		49			(23	)		108			61			132
Dividend income		17			21			17			58			60
Share of profits less losses of associated entities		8			26			(2	)		56			(49	)
Other income		(352	)		152			(154	)		(201	)		(256	)

Other operating income		(317	)		346			(77	)		476			569

Non-interest income (excluding insurance net premium income)		1,386			4,483			2,385			9,561			11,900

Insurance net premium income		1,289			1,278			1,301			3,856			3,958

Total non-interest income		2,675			5,761			3,686			13,417			15,858

Total income		6,086			9,437			6,806			24,046			25,827

Notes (continued)

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

	Quarter ended							Nine months ended
	30 September 2010		30 June 2010			30 September 2009		30 September 2010		30 September 2009
		£m		£m			£m		£m		£m

Staff costs
- wages, salaries and other staff costs		2,100		2,079			1,952		6,473		6,308
- bonus tax		15		15			-		84		-
- social security costs		153		158			162		505		517
- pension costs		155		113			249		415		674
Premises and equipment		611		547			631		1,693		1,909
Other		914		1,022			1,062		2,947		3,265

Administrative expenses		3,948		3,934			4,056		12,177		12,673
Write-down of goodwill and other intangible assets		-		-			-		-		(311	)
Depreciation and amortisation		603		519			534		1,604		1,566

Operating expenses		4,551		4,453			4,590		13,721		14,550

General insurance		1,092		1,348			1,054		3,547		2,919
Bancassurance		50		(25	)		91		54		117

Insurance net claims		1,142		1,323			1,145		3,601		3,036


Loan impairment losses		1,908		2,479			3,262		6,989		10,058
Securities impairment losses		45		8			17		126		742

Impairment losses		1,953		2,487			3,279		7,115		10,800

Notes (continued)

3. Loan impairment provisions

Operating profit/(loss) is stated after charging loan impairment losses of £1,908 million (half year ended 30 June 2010 – £5,081 million; year ended 31 December 2009 – £13,090 million). The balance sheet loan impairment provisions increased in the quarter ended 30 September 2010 from £16,166 million to £17,670 million and the movements thereon were:

	Quarter ended									Half year ended			Year ended
	30 September 2010									30 June 2010			31 December 2009
	Core			Non-Core			Total			30 June 2010			31 December 2009
		£m			£m			£m			£m			£m

At beginning of period		7,633			8,533			16,166			15,173			9,451
Transfers to disposal groups		-			-			-			(67	)		(321	)
Intra-group transfers		(351	)		351			-			-			-
Currency translation and other adjustments		116			175			291			(160	)		(428	)
Disposals		-			-			-			(17	)		(65	)
Amounts written-off		(416	)		(329	)		(745	)		(3,781	)		(6,478	)
Recoveries of amounts previously written-off		80			85			165			150			325
Charge to income statement		779			1,129			1,908			5,081			13,090
Unwind of discount		(50	)		(65	)		(115	)		(213	)		(401	)

At end of period		7,791			9,879			17,670			16,166			15,173

Provisions at 30 September 2010 include £127 million (30 June 2010 – £139 million; 31 December 2009 – £157 million) in respect of loans and advances to banks. The table above excludes impairment charges relating to securities.

4. Strategic disposals

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Gain/(loss) on sale of investments in:
- RBS Asset Management’s investment strategies business		-			-			-			80			-
- Asian branches and businesses		-			(10	)		-			(10	)		-
- Latin American businesses		3			-			-			3			-
- RBS Sempra Commodities – oils, metals and European gas & power business		11			-			-			11			-
- Factoring businesses in France and Germany		8			-			-			8			-
- Bank of China (1)		-			-			(5	)		-			236
- Linea Directa		-			-			-			-			212
Provision for loss on disposal of:
- Latin American business		1			(142	)		-			(163	)		-
- Asian branches and businesses		5			3			(150	)		13			(150	)
- Life assurance business		-			(235	)		-			(235	)		-
- Other		(1	)		(27	)		-			(38	)		-

		27			(411	)		(155	)		(331	)		298

Note:

(1)	Including £359 million attributable to minority interests.

Notes (continued)

5. Profit attributable to minority interests

	Quarter ended									Nine months ended
	30 September 2010			30 June 2010			30 September 2009			30 September 2010			30 September 2009
		£m			£m			£m			£m			£m

Trust preferred securities		-			-			2			10			47
Investment in Bank of China		-			-			-			-			359
Sempra		26			19			35			46			179
RBS N.V.		(133	)		(974	)		(81	)		(776	)		(2	)
Other		6			9			8			17			12

(Loss)/profit attributable to minority interests		(101	)		(946	)		(36	)		(703	)		595

6. Profit attributable to preference shareholders and paid-in equity holders

	Quarter ended						Nine months ended
	30 September 2010		30 June 2010		30 September 2009		30 September 2010		30 September 2009
		£m		£m		£m		£m		£m

Preference shareholders
Non-cumulative preference shares of US$0.01		-		-		100		105		279
Non-cumulative preference shares of €0.01		-		-		81		-		138
Non-cumulative preference shares of £1
- issued to UK Financial Investments Limited (1)		-		-		-		-		274
- other		-		-		61		-		61

Paid-in equity holders
Interest on securities classified as equity, net of tax		-		19		3		19		39

		-		19		245		124		791

Note:

(1)	Includes £50 million redemption premium on repayment of preference shares.

Notes (continued)

7. Segmental analysis

Analysis of divisional operating profit/(loss)

The following tables provide an analysis of the divisional profit/(loss) for the quarters ended 30 September 2010, 30 June 2010 and for the nine month period ended 30 September 2010, by main income statement captions. Operating profit/(loss) differs from that used previously in that it excludes the fair value of own debt. Comparative data have been restated accordingly

	Net interest income			Non- interest income			Total income			Operating expenses			Insurance net claims			Impairment losses			Operating profit/(loss)
Quarter ended 30 September 2010		£m			£m			£m			£m			£m			£m			£m

UK Retail		1,056			376			1,432			(733	)		(50	)		(251	)		398
UK Corporate		662			324			986			(406	)		-			(158	)		422
Wealth		156			108			264			(189	)		-			(1	)		74
Global Transaction Services		257			411			668			(356	)		-			(3	)		309
Ulster Bank		192			52			244			(134	)		-			(286	)		(176	)
US Retail & Commercial		480			271			751			(553	)		-			(125	)		73
Global Banking & Markets		309			1,245			1,554			(1,005	)		-			40			589
RBS Insurance		92			999			1,091			(175	)		(949	)		-			(33	)
Central items		(154	)		193			39			34			1			2			76

Core		3,050			3,979			7,029			(3,517	)		(998	)		(782	)		1,732
Non-Core		354			534			888			(579	)		(144	)		(1,171	)		(1,006	)

		3,404			4,513			7,917			(4,096	)		(1,142	)		(1,953	)		726
Reconciling items:
Fair value of own debt		-			(858	)		(858	)		-			-			-			(858	)
Amortisation of purchased intangible assets		-			-			-			(123	)		-			-			(123	)
Integration and restructuring costs		-			-			-			(311	)		-			-			(311	)
Strategic disposals		-			27			27			-			-			-			27
Bonus tax		-			-			-			(15	)		-			-			(15	)
Asset Protection Scheme credit default swap – fair value changes		-			(825	)		(825	)		-			-			-			(825	)

		3,404			2,857			6,261			(4,545	)		(1,142	)		(1,953	)		(1,379	)
RFS Holdings minority interest		7			(182	)		(175	)		(6	)		-			-			(181	)

Total statutory		3,411			2,675			6,086			(4,551	)		(1,142	)		(1,953	)		(1,560	)

Notes (continued)

7. Segmental analysis (continued)

Analysis of divisional operating profit/(loss) (continued)

	Net interest income			Non- interest income			Total income			Operating expenses			Insurance net claims			Impairment losses			Operating profit/(loss)
Quarter ended 30 June 2010		£m			£m			£m			£m			£m			£m			£m

UK Retail		1,001			294			1,295			(744	)		25			(300	)		276
UK Corporate		647			340			987			(399	)		-			(198	)		390
Wealth		150			116			266			(178	)		-			(7	)		81
Global Transaction Services		237			411			648			(366	)		-			(3	)		279
Ulster Bank		194			53			247			(143	)		-			(281	)		(177	)
US Retail & Commercial		502			275			777			(504	)		-			(144	)		129
Global Banking & Markets		320			1,627			1,947			(1,033	)		-			(164	)		750
RBS Insurance		90			1,015			1,105			(176	)		(1,132	)		-			(203	)
Central items		71			(53	)		18			32			(1	)		-			49

Core		3,212			4,078			7,290			(3,511	)		(1,108	)		(1,097	)		1,574
Non-Core		472			401			873			(592	)		(215	)		(1,390	)		(1,324	)

		3,684			4,479			8,163			(4,103	)		(1,323	)		(2,487	)		250
Reconciling items:
Fair value of own debt		-			619			619			-			-			-			619
Amortisation of purchased intangible assets		-			-			-			(85	)		-			-			(85	)
Integration and restructuring costs		-			-			-			(254	)		-			-			(254	)
Gain on redemption of own debt		-			553			553			-			-			-			553
Strategic disposals		-			(411	)		(411	)		-			-			-			(411	)
Bonus tax		-			-			-			(15	)		-			-			(15	)
Asset Protection Scheme credit default swap – fair value changes		-			500			500			-			-			-			500

		3,684			5,740			9,424			(4,457	)		(1,323	)		(2,487	)		1,157
RFS Holdings minority interest		(8	)		21			13			4			-			-			17

Total statutory		3,676			5,761			9,437			(4,453	)		(1,323	)		(2,487	)		1,174

Notes (continued)

7. Segmental analysis (continued)

Analysis of divisional operating profit/(loss) (continued)

	Net interest income			Non- interest income			Total income			Operating expenses			Insurance net claims			Impairment losses			Operating profit/(loss)
Nine months ended 30 September 2010		£m			£m			£m			£m			£m			£m			£m

UK Retail		2,990			1,014			4,004			(2,198	)		(54	)		(938	)		814
UK Corporate		1,919			993			2,912			(1,240	)		-			(542	)		1,130
Wealth		449			336			785			(556	)		-			(12	)		217
Global Transaction Services		711			1,212			1,923			(1,096	)		-			(6	)		821
Ulster Bank		574			158			732			(437	)		-			(785	)		(490	)
US Retail & Commercial		1,450			798			2,248			(1,594	)		-			(412	)		242
Global Banking & Markets		1,001			5,324			6,325			(3,332	)		-			(156	)		2,837
RBS Insurance		271			3,024			3,295			(526	)		(3,055	)		-			(286	)
Central items		(68	)		352			284			177			-			1			462

Core		9,297			13,211			22,508			(10,802	)		(3,109	)		(2,850	)		5,747
Non-Core		1,325			1,370			2,695			(1,827	)		(492	)		(4,265	)		(3,889	)

		10,622			14,581			25,203			(12,629	)		(3,601	)		(7,115	)		1,858
Reconciling items:
Fair value of own debt		-			(408	)		(408	)		-			-			-			(408	)
Amortisation of purchased intangible assets		-			-			-			(273	)		-			-			(273	)
Integration and restructuring costs		-			-			-			(733	)		-			-			(733	)
Gain on redemption of own debt		-			553			553			-			-			-			553
Strategic disposals		-			(331	)		(331	)		-			-			-			(331	)
Bonus tax		-			-			-			(84	)		-			-			(84	)
Asset Protection Scheme credit default swap – fair value changes		-			(825	)		(825	)		-			-			-			(825	)

		10,622			13,570			24,192			(13,719	)		(3,601	)		(7,115	)		(243	)
RFS Holdings minority interest		7			(153	)		(146	)		(2	)		-			-			(148	)

Total statutory		10,629			13,417			24,046			(13,721	)		(3,601	)		(7,115	)		(391	)

Notes (continued)

8. Financial instruments

Classification

The following tables analyse the Group’s financial assets and liabilities in accordance with the categories of financial instruments in IAS 39: held-for-trading (HFT), designated as at fair value through profit or loss (DFV), available-for-sale (AFS), loans and receivables (LAR) and other financial instruments. Assets and liabilities outside the scope of IAS 39 are shown separately.

	HFT		DFV		AFS		LAR		Other financial instruments		Non financial instruments		Finance leases		Group before RFS MI		RFS MI		Group
30 September 2010		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m
Cash and balances at central banks		-		-		-		61,416		-		-		-		61,416		-		61,416
Loans and advances to banks
- net loans and advances		26,044		-		-		34,286		-		-		-		60,330		4		60,334
- reverse repos		43,536		-		-		4,871		-		-		-		48,407		-		48,407
Loans and advances to customers
- net loans and advances		27,987		1,478		-		487,415		-		-		11,169		528,049		-		528,049
- reverse repos		32,907		-		-		11,596		-		-		-		44,503		-		44,503
Debt securities		105,390		603		113,151		7,266		-		-		-		226,410		-		226,410
Equity shares		18,007		1,611		2,137		-		-		-		-		21,755		-		21,755
Settlement balances		-		-		-		22,874		-		-		-		22,874		-		22,874
Derivatives (1)		548,805		-		-		-		-		-		-		548,805		-		548,805
Intangible assets		-		-		-		-		-		14,369		-		14,369		-		14,369
Property, plant and equipment		-		-		-		-		-		17,398		-		17,398		-		17,398
Deferred taxation		-		-		-		-		-		5,907		-		5,907		2		5,909
Prepayments, accrued income and other assets		-		-		-		1,209		-		10,694		-		11,903		5		11,908
Assets of disposal groups		-		-		-		-		-		16,537		-		16,537		913		17,450
Group before RFS MI		802,676		3,692		115,288		630,933		-		64,905		11,169		1,628,663
RFS MI		-		-		-		4		-		920		-				924
Total assets		802,676		3,692		115,288		630,937		-		65,825		11,169						1,629,587

Deposits by banks
- bank deposits		39,781		-		-		-		40,405		-		-		80,186		118		80,304
- repos		24,871		-		-		-		16,594		-		-		41,465				41,465
Customer accounts
- customer deposits		11,220		4,494		-		-		404,925		-		-		420,639				420,639
- repos		59,295		-		-		-		27,992		-		-		87,287				87,287
Debt securities in issue		6,279		44,141		-		-		184,663		-		-		235,083				235,083
Settlement balances		-		-		-		-		20,628		-		-		20,628				20,628
Short positions		44,004		-		-		-		-		-		-		44,004				44,004
Derivatives (1)		543,397		-		-		-		-		-		-		543,397				543,397
Accruals, deferred income and other liabilities		-		-		-		-		1,737		21,449		464		23,650		17		23,667
Retirement benefit liabilities		-		-		-		-		-		2,606		-		2,606		31		2,637
Deferred taxation		-		-		-		-		-		2,237		-		2,237		33		2,270
Insurance liabilities		-		-		-		-		-		6,782		-		6,782				6,782
Subordinated liabilities		-		1,152		-		-		26,738		-		-		27,890				27,890
Liabilities of disposal groups		-		-		-		-		-		15,667		-		15,667		487		16,154
Group before RFS MI		728,847		49,787		-		-		723,682		48,741		464		1,551,521
RFS MI		-		-						135		551		-		-		686
Total liabilities		728,847		49,787		-		-		723,817		49,292		464						1,552,207
Equity																				77,380
																				1,629,587

Note:

(1)	Held-for-trading derivatives include hedging derivatives.

Notes (continued)

8. Financial instruments (continued)

Classification (continued)

	HFT		DFV		AFS		LAR		Other financial instruments		Non financial instruments		Finance leases		Group before RFS MI		RFS MI			Group
At 30 June 2010		£m		£m		£m		£m		£m		£m		£m		£m		£m			£m
Cash and balances at central banks		-		-		-		29,591		-		-		-		29,591		-			29,591
Loans and advances to banks
- net loans and advances		22,966		-		-		31,505		-		-		-		54,471		18			54,489
- reverse repos		43,787		-		-		3,876		-		-		-		47,663					47,663
Loans and advances to customers
- net loans and advances		21,236		1,631		-		504,541		-		-		11,932		539,340		35			539,375
- reverse repos		27,655		-		-		11,741		-		-		-		39,396					39,396
Debt securities		103,161		619		123,941		8,539		-		-		-		236,260					236,260
Equity shares		13,768		688		2,870		-		-		-		-		17,326					17,326
Settlement balances		-		-		-		20,718		-		-		-		20,718					20,718
Derivatives (1)		522,871		-		-		-		-		-		-		522,871					522,871
Intangible assets		-		-		-		-		-		14,482		-		14,482					14,482
Property, plant and equipment		-		-		-		-		-		17,608		-		17,608					17,608
Deferred taxation		-		-		-		-		-		5,841		-		5,841		(2	)		5,839
Prepayments, accrued income and other assets		-		-		-		1,175		-		12,455		-		13,630		465			14,095
Assets of disposal groups		-		-		-		-		-		21,656		-		21,656		684			22,340
Group before RFS MI		755,444		2,938		126,811		611,686		-		72,042		11,932		1,580,853
RFS MI		-		-		-		53		-		1,147		-				1,200
Total assets		755,444		2,938		126,811		611,739		-		73,189		11,932							1,582,053

Deposits by banks
- bank deposits		37,270		-		-		-		59,344		-		-		96,614		96			96,710
- repos		24,594		-		-		-		19,571		-		-		44,165		-			44,165
Customer accounts
- customer deposits		12,268		4,037		-		-		404,585		-		-		420,890		-			420,890
- repos		45,869		-		-		-		24,786		-		-		70,655		-			70,655
Debt securities in issue		5,703		39,947		-		-		171,667		-		-		217,317		-			217,317
Settlement balances		-		-		-		-		19,730		-		-		19,730		-			19,730
Short positions		42,994		-		-		-		-		-		-		42,994		-			42,994
Derivatives (1)		508,966		-		-		-		-		-		-		508,966		-			508,966
Accruals, deferred income and other liabilities		-		-		-		-		1,898		22,456		488		24,842		25			24,867
Retirement benefit liabilities		-		-		-		-		-		2,600		-		2,600		11			2,611
Deferred taxation		-		-		-		-		-		2,126		-		2,126		69			2,195
Insurance liabilities		-		-		-		-		-		6,521		-		6,521		-			6,521
Subordinated liabilities		-		1,107		-		-		26,416		-		-		27,523		-			27,523
Liabilities of disposal groups		-		-		-		-		-		16,999		-		16,999		616			17,615
Group before RFS MI		677,664		45,091						727,997		50,702		488		1,501,942
RFS MI		-		-		-		-		96		721		-				817
Total liabilities		677,664		45,091		-		-		728,093		51,423		488							1,502,759

Equity																					79,294
																					1,582,053

Note:

(1)	Held-for-trading derivatives include hedging derivatives.

Notes (continued)

8. Financial instruments (continued)

Classification (continued)

	HFT		DFV		AFS		LAR		Other financial instruments		Non financial instruments		Finance leases		Group before RFS MI		RFS MI			Group
At 31 December 2009		£m		£m		£m		£m		£m		£m		£m		£m		£m			£m

Cash and balances at central banks		-		-		-		51,548		-		-		-		51,548		713			52,261
Loans and advances to banks
- net loans and advances		18,563		-		-		30,214		-		-		-		48,777		7,879			56,656
- reverse repos		26,886		-		-		8,211		-		-		-		35,097		-			35,097
Loans and advances to customers
- net loans and advances		15,371		1,981		-		524,204		-		-		13,098		554,654		132,699			687,353
- reverse repos		26,313		-		-		14,727		-		-		-		41,040		-			41,040
Debt securities		111,413		2,429		125,382		9,871		-		-		-		249,095		18,159			267,254
Equity shares		11,318		2,083		2,559		-		-		-		-		15,960		3,568			19,528
Settlement balances		-		-		-		12,024		-		-		-		12,024		9			12,033
Derivatives (1)		438,199		-		-		-		-		-		-		438,199		3,255			441,454
Intangible assets		-		-		-		-		-		14,786		-		14,786		3,061			17,847
Property, plant and equipment		-		-		-		-		-		17,773		-		17,773		1,624			19,397
Deferred taxation		-		-		-		-		-		6,492		-		6,492		547			7,039
Prepayments, accrued income and other assets		-		-		-		1,421		-		17,183		-		18,604		2,381			20,985
Assets of disposal groups		-		-		-		-		-		18,432		-		18,432		110			18,542
Group before RFS MI		648,063		6,493		127,941		652,220		-		74,666		13,098		1,522,481
RFS MI		7,042		283		18,250		140,707				7,723						174,005
Total assets		655,105		6,776		146,191		792,927		-		82,389		13,098							1,696,486

Deposits by banks
- bank deposits		32,647		-		-		-		82,995		-		-		115,642		(11,504	)		104,138
- repos		20,962		-		-		-		17,044		-		-		38,006		-			38,006
Customer accounts
- customer deposits		11,217		5,256		-		-		397,778		-		-		414,251		131,598			545,849
- repos		41,520		-		-		-		26,833		-		-		68,353		-			68,353
Debt securities in issue		3,925		41,444		-		-		200,960		-		-		246,329		21,239			267,568
Settlement balances		-		-		-		-		10,412		-		-		10,412		1			10,413
Short positions		40,463		-		-		-		-		-		-		40,463		-			40,463
Derivatives (1)		421,534		-		-		-		-		-		-		421,534		2,607			424,141
Accruals, deferred income and other liabilities		-		-		-		-		1,889		22,269		466		24,624		5,703			30,327
Retirement benefit liabilities		-		-		-		-		-		2,715		-		2,715		248			2,963
Deferred taxation		-		-		-		-		-		2,161		-		2,161		650			2,811
Insurance liabilities		-		-		-		-		-		7,633		-		7,633		2,648			10,281
Subordinated liabilities		-		1,277		-		-		30,261		-		-		31,538		6,114			37,652
Liabilities of disposal groups		-		-		-		-		-		18,857		-		18,857		33			18,890
Group before RFS MI		572,268		47,977						768,172		53,635		466		1,442,518
RFS MI		2,738		3,417						143,901		9,281		-				159,337
Total liabilities		575,006		51,394						912,073		62,916		466							1,601,855

Equity																					94,631

																					1,696,486

Note:

(1)	Held-for-trading derivatives include hedging derivatives.

Notes (continued)

8. Financial instruments (continued)

Reclassification of financial instruments

As permitted by amended IAS 39, the Group reclassified certain financial assets from the HFT and AFS categories into the LAR category and from the HFT category into the AFS category in 2008 and 2009. There were no reclassifications in the nine months ended 30 September 2010. The following tables detail the effect of the reclassifications and the balance sheet values of the assets.

	Reduction in profit for the quarter ended 30 September 2010 as a result of reclassifications
	£m

From HFT to:
AFS	81
LAR	162

	243

	30 September 2010				30 June 2010				31 December 2009
	Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value
		£m		£m		£m		£m		£m		£m

From HFT to:
AFS		6,843		6,843		7,343		7,343		7,629		7,629
LAR		9,703		8,131		10,596		8,861		12,933		10,644

		16,546		14,974		17,939		16,204		20,562		18,273
From AFS to:
LAR		449		405		969		808		869		745

		16,995		15,379		18,908		17,012		21,431		19,018

During the quarter ended 30 September 2010, the balance sheet value of reclassified assets decreased by £1.9 billion, primarily due to disposals and repayments across a range of securities and loans.

For assets reclassified from HFT to AFS, net unrealised losses recorded in equity at 30 September 2010 were £0.3 billion (30 June 2010 - £0.4 billion; 31 December 2009 - £0.6 billion).

Notes (continued)

8. Financial instruments (continued)

Financial instruments carried at fair value

Refer to Note 11 Financial instruments of the 2009 Annual Report and Accounts for valuation techniques. Certain aspects relating to the valuation of financial instruments carried at fair value are discussed below.

Valuation reserves

When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity, credit risk and future administrative costs.

Valuation reserves and adjustments comprise:

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Credit valuation adjustments:
Monoline insurers		2,678			3,599			3,870			3,796
Credit derivative product companies		622			791			465			499
Other counterparties		1,937			1,916			1,737			1,588

		5,237			6,306			6,072			5,883

Bid-offer and liquidity reserves		3,092			2,826			2,965			2,814

		8,329			9,132			9,037			8,697

Debit valuation adjustments (‘own credit’):
Debt securities in issue		(1,786	)		(2,604	)		(2,151	)		(2,331	)
Derivatives		(485	)		(551	)		(475	)		(467	)

Total debit valuation adjustments		(2,271	)		(3,155	)		(2,626	)		(2,798	)

Credit valuation adjustments (CVA) represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures. CVA is discussed in Risk and capital management - Other risk exposures: Credit valuation adjustments on page 124. Bid-offer and liquidity reserves and own credit is discussed on pages 79 and 80 below.

Notes (continued)

8. Financial instruments (continued)

Valuation reserves (continued)

Bid-offer and liquidity reserves

Fair value positions are adjusted to bid or offer levels, by marking individual cash based positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures.

The bid-offer approach is based on current market spreads and standard market bucketing of risk. Risk data are used as the primary sources of information within bid-offer calculations and are aggregated when they are more granular than market standard buckets.

Bid-offer adjustments for each risk factor are determined by aggregating similar risk exposures arising on different products. Additional basis bid-offer reserves are taken where these are charged in the market. Risk associated with non identical underlying exposures is not netted down unless there is evidence that the cost of closing the combined risk exposure is less than the cost of closing on an individual basis.

Bid-offer spreads vary by maturity and risk type to reflect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are widened in comparison to proxies to reflect reduced liquidity or observability. Bid-offer methodologies also incorporate liquidity triggers whereby wider spreads are applied to risks above pre-defined thresholds.

Netting is applied across risk buckets where there is market evidence to support this. For example calendar netting and cross strike netting effects are taken into account where such trades occur regularly within the market. Netting will also apply where long and short risk in two different risk buckets can be closed out in a single market transaction at less cost than by way of two separate transactions (closing out the individual bucketed risk in isolation).

Vanilla risk on exotic products is typically reserved as part of the overall portfolio based calculation e.g. delta and vega risk is included within the delta and vega bid-offer calculations. Aggregation of risk arising from different models is in line with the Group's risk management practices; the model review control process considers the appropriateness of model selection in this respect.

Product related risks such as correlation risk attract specific bid-offer reserves. Additional reserves are provided for exotic products to ensure overall reserves match market close-out costs. These market close-out costs inherently incorporate risk decay and cross-effects which are unlikely to be adequately reflected in the static hedge based on vanilla instruments.

Where there is limited bid-offer information for a product a conservative approach is taken, taking into account pricing approach and risk management strategy.

Notes (continued)

8. Financial instruments (continued)

Own credit

The Group takes into account the effect of its own credit standing, when valuing financial liabilities recorded at fair value, in accordance with IFRS. The categories of financial liabilities on which own credit spread adjustments are made are issued debt, including issued structured notes, and derivatives. An own credit adjustment is applied to positions where it is believed that counterparties would consider the Group’s creditworthiness when pricing trades.

The own credit adjustment does not alter cash flows, is not used for performance management, and is disregarded for regulatory capital reporting processes.

For issued debt and structured notes, this adjustment is based on independent quotes from market participants for the debt issuance spreads above average inter-bank rates, (at a range of tenors) which the market would demand when purchasing new senior or subordinated debt issuances from the Group. Where necessary, these quotes are interpolated using a curve shape derived from credit default swap prices.

The fair value of the Group's derivative financial liabilities has also been adjusted to reflect the Group's own credit risk. The adjustment takes into account collateral posted by the Group and the effects of master netting agreements.

The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserves are stated by the conversion of underlying currency balances at spot rates for each period, however the income statement includes intra-period foreign exchange sell-offs.

The effect of change in credit spreads could reverse in future periods provided the liability is not repaid at a premium or a discount.

Notes (continued)

8. Financial instruments (continued)

Valuation hierarchy

	30 September 2010								30 June 2010								31 December 2009
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets	£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn

Loans and advances to banks
- reverse repos		43.5		-		43.5		-		43.8		-		43.8		-		26.9		-		26.9		-
- collateral		25.1		-		25.1		-		22.3		-		22.3		-		18.4		-		18.4		-
- other		1.0		-		1.0		-		0.7		-		0.7		-		0.1		-		0.1		-

		69.6		-		69.6		-		66.8		-		66.8		-		45.4		-		45.4		-

Loans and advances to customers
- reverse repos		32.9		-		32.9		-		27.7		-		27.7		-		26.3		-		26.3		-
- collateral		21.7		-		21.7		-		15.7		-		15.7		-		9.9		-		9.9		-
- other		7.8		-		6.9		0.9		7.1		-		5.8		1.3		7.5		-		6.4		1.1

		62.4		-		61.5		0.9		50.5		-		49.2		1.3		43.7		-		42.6		1.1

Debt securities
- government		132.5		118.5		14.0		-		132.7		119.0		13.7		-		134.1		118.2		15.9		-
- RMBS (2)		45.1		-		44.6		0.5		48.6		-		48.1		0.5		57.1		-		56.6		0.5
- CMBS (3)		4.0		-		3.8		0.2		4.6		-		4.1		0.5		4.1		-		4.0		0.1
- CDOs (4)		2.8		-		0.9		1.9		3.8		-		0.9		2.9		3.6		-		2.6		1.0
- CLOs (5)		6.0		-		4.2		1.8		9.0		-		7.7		1.3		8.8		-		8.0		0.8
- other ABS (6)		5.6		-		4.2		1.4		5.6		-		4.0		1.6		6.1		-		5.2		0.9
- corporate		10.4		-		9.6		0.8		9.4		-		8.7		0.7		10.5		-		9.9		0.6
- other (7)		12.7		0.1		12.4		0.2		14.0		-		13.8		0.2		14.9		-		14.7		0.2

		219.1		118.6		93.7		6.8		227.7		119.0		101.0		7.7		239.2		118.2		116.9		4.1

Equity shares		21.8		17.6		2.2		2.0		17.3		13.1		2.4		1.8		16.0		12.2		2.5		1.3

Derivatives
- foreign exchange		89.6		0.1		89.4		0.1		85.1		-		85.0		0.1		68.3		-		68.1		0.2
- interest rate		422.1		0.1		420.3		1.7		392.8		0.2		390.7		1.9		321.5		0.3		319.7		1.5
- equities and commodities		6.3		-		6.1		0.2		5.9		0.1		5.8		-		6.7		0.3		6.1		0.3
- credit - APS (8)		0.6		-		-		0.6		1.4		-		-		1.4		1.4		-		-		1.4
- credit - other		30.2		-		26.9		3.3		37.7		-		33.4		4.3		40.3		0.1		37.2		3.0

		548.8		0.2		542.7		5.9		522.9		0.3		514.9		7.7		438.2		0.7		431.1		6.4

Total assets		921.7		136.4		769.7		15.6		885.2		132.4		734.3		18.5		782.5		131.1		638.5		12.9

Of which classified as AFS debt securities
- government		60.5		54.0		6.5		-		66.2		59.6		6.6		-		64.9		58.3		6.6		-
- RMBS (2)		30.3		-		30.1		0.2		34.1		-		33.9		0.2		37.2		-		37.0		0.2
- CMBS (3)		1.4		-		1.4		-		1.5		-		1.5		-		1.6		-		1.6		-
- CDOs (4)		1.9		-		0.5		1.4		2.1		-		0.6		1.5		1.6		-		1.2		0.4
- CLOs (5)		5.0		-		3.7		1.3		5.7		-		5.0		0.7		5.5		-		5.4		0.1
- other ABS (6)		4.4		-		3.2		1.2		4.3		-		3.0		1.3		4.6		-		4.0		0.6
- corporate		2.6		-		2.6		-		2.3		-		2.3		-		2.5		-		2.5		-
- other (7)		7.1		0.1		7.0		-		7.7		-		7.7		-		7.5		-		7.5		-

		113.2		54.1		55.0		4.1		123.9		59.6		60.6		3.7		125.4		58.3		65.8		1.3
Equity shares		2.1		0.3		1.3		0.5		2.9		0.3		1.5		1.1		2.6		0.3		1.6		0.7

		115.3		54.4		56.3		4.6		126.8		59.9		62.1		4.8		128.0		58.6		67.4		2.0

For notes to this table refer to page 82.

Notes (continued)

8. Financial instruments (continued)

Valuation hierarchy (continued)

	30 September 2010								30 June 2010								31 December 2009
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Liabilities	£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn

Deposits by banks
- repos		24.9		-		24.9		-		24.6		-		24.6		-		21.0		-		21.0		-
- collateral		36.8		-		36.8		-		33.6		-		33.6		-		28.5		-		28.5		-
- other		3.0		-		3.0		-		3.7		-		3.7		-		4.1		-		4.1		-

		64.7		-		64.7		-		61.9		-		61.9		-		53.6		-		53.6		-
Customer accounts
- repos		59.3		-		59.3		-		45.8		-		45.8		-		41.5		-		41.5		-
- collateral		9.1		-		9.1		-		9.3		-		9.3		-		9.0		-		9.0		-
- other		6.6		-		6.6		-		7.0		-		6.9		0.1		7.5		-		7.4		0.1

		75.0		-		75.0		-		62.1		-		62.0		0.1		58.0		-		57.9		0.1
Debt securities in issue		50.4		-		48.9		1.5		45.7		-		44.4		1.3		45.4		-		43.1		2.3

Short positions		44.0		34.0		9.3		0.7		43.0		31.7		10.2		1.1		40.5		27.1		13.2		0.2
Derivatives
- foreign exchange		98.4		0.1		98.0		0.3		88.7		-		88.6		0.1		63.6		-		63.6		-
- interest rate		407.5		0.1		406.8		0.6		377.5		0.4		376.2		0.9		309.3		0.1		308.4		0.8
- equities and commodities		9.7		-		9.5		0.2		9.0		-		8.9		0.1		9.5		0.8		8.5		0.2
- credit - other		27.8		-		27.4		0.4		33.8		-		33.3		0.5		39.1		-		38.2		0.9

		543.4		0.2		541.7		1.5		509.0		0.4		507.0		1.6		421.5		0.9		418.7		1.9

Other		1.1		-		1.1		-		1.1		-		1.1		-		1.3		-		1.3		-

Total liabilities		778.6		34.2		740.7		3.7		722.8		32.1		686.6		4.1		620.3		28.0		587.8		4.5

Notes:

(1)	For details on levels 1, 2 and 3 refer to Note 11 - Financial instruments of the 2009 Annual Report and Accounts.
(2)	Residential mortgage-backed securities.
(3)	Commercial mortgage-backed securities.
(4)	Collateralised debt obligations.
(5)	Collateralised loan obligation.
(6)	Asset-backed securities.
(7)	Primarily includes debt securities issued by banks and building societies.
(8)	Asset Protection Scheme.

Notes (continued)

8. Financial instruments (continued)

Valuation hierarchy (continued)

Key points

·	Total assets carried at fair value increased by £36.5 billion in the quarter to £921.7 billion at 30 September 2010, principally reflecting an increase in derivatives of £25.9 billion, collateral of £8.8 billion, reverse repos of £4.9 billion, partially offset by a decrease in debt securities of £8.6 billion.

·	Total liabilities carried at fair value were up by £55.8 billion, with increases in derivatives of £34.4 billion, repos of £13.8 billion, debt securities in issue of £4.7 billion and collateral of £3.0 billion.

·	Level 3 assets represented 1.7% (30 June 2010 – 2.1%; 31 December 2009 – 1.6%) of total assets carried at fair value and decreased by £2.9 billion to £15.6 billion primarily due to disposals and tightening credit spreads.

·	Level 3 liabilities decreased by £0.4 billion, mainly reflecting the impact of tighter credit spreads on short positions.

·	The favourable and unfavourable effects of reasonably possible alternative assumptions on financial instruments carried at fair value were £3.1 billion and £3.0 billion respectively of which £1.2 billion and £1.5 billion related to the APS credit derivative. These sensitivities are not indicative of the total potential effect on the income statement or other comprehensive income.

Notes (continued)

9. Debt securities

	Central and local government						Banks and building societies
	UK		US		Other		Banks and building societies		ABS (2)		Corporate		Other		Group before RFS MI		RFS MI		Group
Measurement classification		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m

30 September 2010
Held-for-trading		5,302		17,164		49,204		4,884		20,475		7,733		628		105,390		-		105,390
DFV (1)		1		-		353		3		227		18		1		603		-		603
Available-for-sale		9,511		17,604		33,323		6,910		42,923		2,654		226		113,151		-		113,151
Loans and receivables		11		-		-		12		6,387		759		97		7,266		-		7,266

Group		14,825		34,768		82,880		11,809		70,012		11,164		952		226,410		-		226,410

30 June 2010
Held-for-trading		8,993		16,642		40,589		5,471		23,614		7,077		775		103,161		-		103,161
DFV (1)		1		-		357		3		234		24		-		619		-		619
Available-for-sale		11,584		17,194		37,459		7,371		47,709		2,324		300		123,941		-		123,941
Loans and receivables		11		-		-		18		7,148		1,274		88		8,539		-		8,539

Group		20,589		33,836		78,405		12,863		78,705		10,699		1,163		236,260		-		236,260
31 December 2009
Held-for-trading		8,128		10,427		50,150		6,103		28,820		6,892		893		111,413		69		111,482
DFV (1)		122		3		385		418		394		1,087		20		2,429		174		2,603
Available-for-sale		18,350		12,789		33,727		7,472		50,464		2,550		30		125,382		17,916		143,298
Loans and receivables		1		-		-		-		7,924		1,853		93		9,871		-		9,871

Group before RFS MI		26,601		23,219		84,262		13,993		87,602		12,382		1,036		249,095
RFS MI		721		183		11,871		3,803		580		906		95				18,159

Group		27,322		23,402		96,133		17,796		88,182		13,288		1,131						267,254

Notes

(1)	Designated as at fair value through profit or loss.
(2)	Asset-backed securities.

See Risk and capital management section for information on ratings.

Notes (continued)

10 Derivatives

	30 September 2010				30 June 2010				31 December 2009
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
		£m		£m		£m		£m		£m		£m

Exchange rate contracts
Spot, forwards and futures		43,109		45,986		37,670		38,402		26,559		24,763
Currency swaps		31,816		38,813		28,232		32,336		25,221		23,337
Options purchased		14,603		-		19,191		-		16,572		-
Options written		-		13,586		-		17,921		-		15,499

Interest rate contracts
Interest rate swaps		345,631		335,541		324,978		313,019		263,902		251,829
Options purchased		74,395		-		65,818		-		55,471		-
Options written		-		69,919		-		62,766		-		55,462
Futures and forwards		2,151		2,051		2,033		1,702		2,088		2,033

Credit derivatives		30,810		27,766		38,981		33,795		41,748		39,127

Equity and commodity contracts		6,290		9,735		5,968		9,025		6,638		9,484

Group before RFS Holdings minority interest		548,805		543,397		522,871		508,966		438,199		421,534
RFS Holdings minority interest (1)		-		-		-		-		3,255		2,607
		548,805		543,397		522,871		508,966		441,454		424,141

Note:

(1)	RFS Holdings minority interest derivatives contracts at 31 December 2009 comprised:
	(a)	Exchange rate assets of £931 million and liabilities of £320 million;
	(b)	Interest rate assets of £2,131 million and liabilities of £2,091 million; and
	(c)	Equity and commodity assets of £193 million and liabilities of £196 million.

The Group enters into master netting agreements in respect of its derivative activities. These arrangements, which give the Group a legal right to set-off derivative assets and liabilities with the same counterparty, do not result in a net presentation in the Group’s balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously, as well as a legally enforceable right to set-off. They are, however, effective in reducing the Group’s credit exposure from derivative assets. The Group has executed master netting agreements with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets. Of the £549 billion derivative assets shown above, £449 billion (30 June 2010 - £422 billion; 31 December 2009 - £359 billion) were subject to such agreements. Furthermore, the Group holds substantial collateral against this net derivative asset exposure, see Risk and capital management: Credit risk: Derivatives on page 107.

Notes (continued)

11. Available-for-sale financial assets

Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs and are subsequently measured at fair value with changes in fair value reported in shareholders’ equity until disposal, at which stage the cumulative gain or loss is recognised in profit or loss. When there is objective evidence that an available-for-sale financial asset is impaired, any decline in its fair value below original cost is removed from equity and recognised in profit or loss.

Impairment losses are recognised when there is objective evidence of impairment. The Group reviews its portfolios of available-for-sale financial assets for such evidence which includes: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and it becoming probable that the issuer will enter bankruptcy or other financial reorganisation. However, the disappearance of an active market because an entity’s financial instruments are no longer publicly traded is not evidence of impairment. Furthermore, a downgrade of an entity’s credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information. A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment. Determining whether objective evidence of impairment exists requires the exercise of management judgment. The unrecognised losses on the Group’s available- for-sale debt securities are concentrated in its portfolios of mortgage-backed securities. The losses reflect the widening of credit spreads as a result of the reduced market liquidity in these securities and the current uncertain macroeconomic outlook in the US and Europe. The underlying securities remain unimpaired.

During the third quarter of 2010 gains were realised by US Retail & Commercial (£215 million) and RBS N.V. (£216 million). The gain in US Retail & Commercial, which was part of its balance sheet restructuring exercise, was largely offset in the income statement by losses crystallised on the termination of swaps hedging fixed-rate funding related hedges. The gain in RBS N.V., which is included in Central items was offset by negative movements relating to IFRS volatility. Available-for-sale reserves at 30 September 2010 amounted to net losses of £1,242 million (30 June 2010 – net losses £1,459 million; 31 December 2009 – net losses £1,755 million), and the movements were as follows:

	Quarter ended 30 September 2010			Half year ended 30 June 2010			Year ended 31 December 2009
Available-for-sale reserves		£m			£m			£m

At beginning of period		(1,459	)		(1,755	)		(3,561	)
Unrealised gains in the period		680			647			1,202
Realised (gains)/losses in the period		(408	)		(127	)		981
Taxation		(55	)		(208	)		(377	)
Recycled to profit or loss on disposal of businesses, net of £6 million tax		-			(16	)		-

At end of period		(1,242	)		(1,459	)		(1,755	)

The above excludes losses attributable to minority interests of £336 million in the year ended 31 December 2009.

Notes (continued)

12. Contingent liabilities and commitments

	30 September 2010						30 June 2010
	Core		Non-Core		Total		Core		Non-Core		Total		31 December 2009
		£m		£m		£m		£m		£m		£m		£m

Contingent liabilities
Guarantees and assets pledged as collateral security		35,334		2,616		37,950		33,428		2,529		35,957		40,008
Other contingent liabilities		12,606		376		12,982		12,503		485		12,988		14,012

		47,940		2,992		50,932		45,931		3,014		48,945		54,020

Commitments
Undrawn formal standby facilities, credit lines and other commitments to lend		240,560		26,126		266,686		245,053		25,478		270,531		291,634
Other commitments		867		2,637		3,504		2,084		2,631		4,715		6,007

		241,427		28,763		270,190		247,137		28,109		275,246		297,641

Total contingent liabilities and commitments		289,367		31,755		321,122		293,068		31,123		324,191		351,661

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

13. Litigation and investigations developments

Except for the developments noted below, there have been no material changes to the litigation or investigations as disclosed in the Form 6-K for the six months ended 30 June 2010.

Payment Protection Insurance ("PPI")

The FSA published its final policy statement on 10 August 2010 and instructed firms to implement the measures contained in it by 1 December 2010. The new rules impose significant changes with respect to the handling of mis-selling PPI complaints. On 8 October 2010, the British Bankers’ Association filed an application for judicial review of the FSA’s policy statement and of related guidance issued by the Financial Ombudsman Service.

Risk and capital management

Presentation of information

The disclosures in this section include only those businesses of RBS N.V. that are retained by RBS.

This presentation is in line with how the Group manages its financial risks.

Capital

The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements as capital adequacy and risk management are closely aligned. The Group’s regulatory capital resources calculated in accordance with FSA definitions, set out below.

	30 September 2010			30 June 2010			31 December 2009
Risk-weighted assets		£m			£m			£m

Credit risk		404,000			409,400			410,400
Counterparty risk		75,600			80,200			56,500
Market risk		75,200			70,600			65,000
Operational risk		37,100			37,100			33,900

		591,900			597,300			565,800
Asset Protection Scheme relief		(116,900	)		(123,400	)		(127,600	)

		475,000			473,900			438,200

Risk asset ratio	%		%		%

Core Tier 1		10.2		10.5		11.0
Tier 1		12.5		12.8		14.4
Total		13.5		13.9		16.3

Key points

·	The attributable loss and reduced risk-weighted assets (RWA) relief on the Asset Protection Scheme (APS) led to a decline of 30 basis points to 10.2% in the Core Tier 1 ratio and to 12.5% in the Tier 1 ratio. The Total Capital ratio declined by 40 basis points to 13.5%.

·	Gross RWAs were broadly flat at £592 billion, reflecting successful Non-Core de-leveraging counterbalanced by the roll-off of the capital relief trades within Global, Banking & Markets (GBM).

·	RWAs eligible for APS relief declined by £6.5 billion to £117 billion, reflecting disposals and repayments as well as changes in risk parameters.

Risk and capital management (continued)

Capital (continued)

	30 September 2010			30 June 2010			31 December 2009
Composition of regulatory capital (proportional)		£m			£m			£m

Tier 1
Ordinary and B shareholders' equity		70,856			72,058			69,890
Minority interests		1,542			2,109			2,227
Adjustments for:
- goodwill and other intangible assets - continuing businesses		(14,369	)		(14,482	)		(14,786	)
- goodwill and other intangible assets - discontinued businesses		(516	)		(757	)		(238	)
- unrealised losses on available-for-sale (AFS) debt securities		1,347			1,553			1,888
- reserves: revaluation of property and unrealised gains on AFS equities		(170	)		(117	)		(207	)
- reallocation of preference shares and innovative securities		(548	)		(548	)		(656	)
- other regulatory adjustments*		(1,038	)		(1,229	)		(950	)
Less excess of expected losses over provisions net of tax		(2,083	)		(1,903	)		(2,558	)
Less securitisation positions		(2,032	)		(2,004	)		(1,353	)
Less APS first loss		(4,678	)		(4,936	)		(5,106	)

Core Tier 1 capital		48,311			49,744			48,151
Preference shares		5,584			5,630			11,265
Innovative Tier 1 securities		4,623			4,768			2,772
Tax on the excess of expected losses over provisions		830			759			1,020
Less material holdings		(173	)		(271	)		(310	)

Total Tier 1 capital		59,175			60,630			62,898

Tier 2
Reserves: revaluation of property and unrealised gains on AFS equities		170			117			207
Collective impairment provisions		713			763			796
Perpetual subordinated debt		1,835			1,839			4,200
Term subordinated debt		16,962			16,829			18,120
Minority and other interests in Tier 2 capital		11			11			11
Less excess of expected losses over provisions		(2,913	)		(2,662	)		(3,578	)
Less securitisation positions		(2,032	)		(2,004	)		(1,353	)
Less material holdings		(173	)		(271	)		(310	)
Less APS first loss		(4,678	)		(4,936	)		(5,106	)

Total Tier 2 capital		9,895			9,686			12,987

Supervisory deductions
Unconsolidated Investments
- RBS Insurance		(4,040	)		(4,016	)		(4,068	)
- other investments		(323	)		(176	)		(404	)
Other deductions		(352	)		(274	)		(93	)

Deductions from total capital		(4,715	)		(4,466	)		(4,565	)

Total regulatory capital		64,355			65,850			71,320

* Includes reduction for own liabilities carried at fair value		(765	)		(1,378	)		(1,057	)

Movement in Core Tier 1 capital	£m
At 30 June 2010	49,744
Attributable loss net of movements in fair value of own debt	(532	)
Foreign currency reserves	(670	)
Loss of minority interest and reduction in goodwill due to partial disposal of Sempra	(309	)
Other	78

At 30 September 2010	48,311

Risk and capital management (continued)

Capital (continued)

Basel 2.5 and Basel III Impacts

CRD3, CRD4 and Basel III, commonly referred to as ‘Basel 2.5 and Basel III’, are a comprehensive set of reforms to strengthen the regulation, supervision, risk and liquidity management of the banking sector.

At its September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and endorsed the broad agreements it reached in July 2010 on the overall design of its capital and liquidity reform proposals including the definition of capital, the treatment of counterparty credit risk, the leverage ratio and global liquidity standards. There are transition arrangements proposed for implementing these new standards as follows:

·	National implementation of increased capital requirements will begin on 1 January 2013;

·	There will be a phased five year implementation of new deductions and regulatory adjustments to Core Tier 1 capital commencing 1 January 2014;

·	The de-recognition of non-qualifying non common Tier 1 and Tier 2 capital instruments will be phased in over 10 years from 1 January 2013; and

·	After an observation period beginning in 2011, the liquidity coverage ratio will be introduced on 1 January 2015. The revised net stable funding ratio will move to a minimum standard by 1 January 2018.

RBS is advanced in its planning to implement these new measures and is appropriately well-capitalised with Tangible Equity of £56 billion, Core Tier 1 capital of £48 billion and a Core Tier 1 ratio of 10.2% at 30 September 2010.

Set out below are indicative impacts and timings of the major Basel 2.5 and Basel III proposals on the Group’s Core Tier 1 ratio. These are preliminary estimates and are subject to change; a high degree of uncertainty still remains around implementation details as the appropriate guidelines are yet to be finalised and then converted into rules by the FSA.

A substantial part of the mitigating impacts mentioned in the following paragraphs relate to run-off in the normal course of business and de-leveraging of legacy positions and securitisations, including Non-Core, as well as more ‘industry standard’ actions we are taking to de-risk market and counterparty exposures.

CRD3 (Basel 2.5): Published rules for market risk and re-securitisations. Proposed implementation date 31 December 2011

Estimated impact on pro-forma end 2011 RWAs post mitigation is an increase of £25 billion to £30 billion, split equally between Core GBM and Non-Core. This is lower than previously indicated (c.£60 billion) due to proposed changes to the rules affecting trading book securitisations, along with mitigating actions.

Risk and capital management

Capital (continued)

Basel III Counterparty risk: Proposed implementation date 1 January 2013

Impact on RWAs in 2013 is currently estimated at £45 billion to £50 billion post mitigation and deleveraging, although there may still be movement in the final framework around this risk.

Basel III Securitisations: Proposed implementation date 1 January 2013

Under the proposals, current deductions under Basel 2 (50% Core Tier 1, 50% Tier 2) for securitisation positions are switched to RWAs weighted at 1250%. This change would add c.£50 billion to RWAs, but reduce deductions from Core Tier 1 and Tier 2 capital by c. £2 billion each as at 30 September 2010. Post the run-off of these securitisation positions and mitigating actions, the impact on end 2012 RWAs is expected to be an increase of £30 billion to £35 billion with a corresponding reduction in deductions from Core Tier 1 and Tier 2 capital of £1.2 billion to £1.4 billion each. The net RWA equivalent of this change assuming a 10% Core Tier 1 ratio would be an increase in RWAs of £18 billion to £20 billion.

Summary RWA Impacts

To illustrate the impact of these changes on Core Tier 1 assume RWAs of c.£600 billion and a Core Tier 1 ratio of 10%. The impacts referenced above would lower the Core Tier 1 ratio by approximately 1.3%.

Basel III Capital Deductions and Regulatory Adjustments

In addition to the changes outlined above, Basel III will also result in revisions to regulatory adjustments and capital deductions. These will be phased in over a five year period from 1 January 2014. The initial deduction is expected to be 20%, rising 20 percentage points each year until full deduction by 1 January 2018. However, this is subject to final implementation rules determined by the FSA. The proportion not deducted in the transition years will continue to be subject to existing national treatments.

The major categories of deductions include:

·	Expected loss net of provisions;

·	Deferred Tax Assets not relating to timing differences; and

·	Unrealised losses on available-for-sale securities.

The net impact of these adjustments is expected to be manageable as most of these drivers reduce or are eliminated by 2014.

Risk and capital management

Credit risk

Credit risk is the risk arising from the possibility that the Group will incur losses owing to the failure of customers to meet their financial obligations. The quantum and nature of credit risk assumed across the Group’s different businesses varies considerably, while the overall credit risk outcome usually exhibits a high degree of correlation to the macroeconomic environment.

Credit risk assets

Credit risk assets consist of loans and advances (including overdraft facilities), instalment credit, trade finance, finance lease receivables, trade-related instruments, financial guarantees and traded instruments across all customer types. Reverse repurchase agreements and issuer risk (primarily debt securities - see page 104) are excluded. Where relevant, and unless otherwise stated, the data reflects the effect of credit mitigation techniques.

Risk and capital management (continued)

Credit risk: Country concentration risk

The country risk table below shows credit risk assets exceeding £1 billion by borrowers domiciled in countries with an external rating of A+ and below, from either Standard & Poor’s, Moody’s and/or Fitch, and are stated gross of mitigating action, which may have been taken to reduce or eliminate exposure to country risk events.

	Personal	Central and local government		Financial institutions	Corporate		Total		Core		Non-Core
	£m		£m	£m		£m		£m		£m	£m

30 September 2010
Italy	27		261	2,231		3,476		5,995		3,812	2,183
India	382		1	1,695		3,605		5,683		4,921	762
China	49		76	2,396		978		3,499		3,241	258
Turkey	11		300	536		1,999		2,846		2,178	668
Russia	59		-	822		1,514		2,395		2,076	319
South Korea	1		-	1,434		874		2,309		2,257	52
Mexico	1		-	311		1,235		1,547		1,117	430
Portugal	7		118	433		823		1,381		944	437
Romania	461		81	208		608		1,358		8	1,350
Poland	6		20	150		1,036		1,212		1,088	124
Brazil	5		-	914		292		1,211		1,070	141
Pakistan	114		-	164		769		1,047		99	948

30 June 2010
Italy	28		165	2,210		3,495		5,898		3,607	2,291
India	458		2	1,616		3,800		5,876		5,033	843
China	39		118	1,862		1,097		3,116		2,784	332
Turkey	11		297	555		1,757		2,620		1,742	878
Russia	66		-	217		1,938		2,221		2,024	197
South Korea	1		-	1,537		965		2,503		2,438	65
Mexico	1		42	189		1,339		1,571		1,065	506
Portugal	6		21	414		811		1,252		846	406
Romania	445		80	214		680		1,419		31	1,388
Poland	8		20	94		1,205		1,327		1,175	152
Brazil	4		-	1,127		334		1,465		1,311	154
Pakistan	129		1	197		837		1,164		129	1,035

31 December 2009
Italy	27		91	1,704		5,697		7,519		3,921	3,598
India	619		305	1,045		3,144		5,113		4,308	805
China	51		50	1,336		1,102		2,539		2,198	341
Turkey	11		302	628		2,010		2,951		2,190	761
Russia	41		-	172		2,045		2,258		1,782	476
South Korea	1		-	1,575		1,448		3,024		2,916	108
Mexico	1		2	276		1,304		1,583		694	889
Portugal	5		42	324		1,007		1,378		952	426
Romania	508		102	438		753		1,801		66	1,735
Poland	6		57	85		1,582		1,730		1,617	113
Brazil	3		-	902		423		1,328		1,113	215
Pakistan	137		8	203		573		921		100	821

Risk and capital management (continued)

Credit risk: Loans and advances to customers by geography and industry

The following table analyses the balance sheet value of loans and advances to customers excluding reverse repos and disposal groups, by industry and geography (by location of office).

	30 September 2010									30 June 2010									31 December 2009
	Core			Non-Core			Total			Core			Non-Core			Total			Core			Non-Core			Total
		£m			£m			£m			£m			£m			£m			£m			£m			£m

Total (1)
Central and local government		9,766			1,204			10,970			9,527			1,370			10,897			6,128			1,532			7,660
Finance		54,723			8,650			63,373			54,244			8,979			63,223			50,673			9,713			60,386
Individuals – home		139,457			6,351			145,808			132,046			11,933			143,979			127,975			12,932			140,907
Individuals – other		34,129			4,183			38,312			35,167			5,397			40,564			35,313			6,358			41,671
Property		42,269			49,919			92,188			47,769			46,746			94,515			49,054			50,372			99,426
Construction		8,994			3,623			12,617			9,147			3,723			12,870			9,502			5,258			14,760
Manufacturing		26,255			9,339			35,594			28,438			9,894			38,332			30,272			14,402			44,674
Service industries and business activities		97,738			25,983			123,721			100,434			26,538			126,972			100,438			33,638			134,076
Agriculture, forestry and fishing		3,952			158			4,110			3,920			144			4,064			3,726			553			4,279
Finance leases and instalment credit		8,233			9,541			17,774			8,076			10,529			18,605			8,147			11,956			20,103
Interest accruals		847			278			1,125			920			426			1,346			1,179			549			1,728

Loans and advances to customers – gross		426,363			119,229			545,592			429,688			125,679			555,367			422,407			147,263			569,670
Loan impairment provisions		(7,664	)		(9,879	)		(17,543	)		(7,504	)		(8,523	)		(16,027	)		(6,786	)		(8,230	)		(15,016	)

Total loans and advances to customers		418,699			109,350			528,049			422,184			117,156			539,340			415,621			139,033			554,654

By geographical region:
UK domestic
Central and local government		3,942			147			4,089			4,160			183			4,343			2,951			223			3,174
Finance		17,122			3,506			20,628			18,595			3,497			22,092			14,658			2,365			17,023
Individuals – home		97,615			1,695			99,310			95,170			1,775			96,945			90,687			1,896			92,583
Individuals – other		23,395			706			24,101			23,414			768			24,182			24,109			1,136			25,245
Property		14,995			27,862			42,857			18,083			27,877			45,960			18,057			30,802			48,859
Construction		4,390			2,235			6,625			4,500			2,260			6,760			4,493			3,287			7,780
Manufacturing		7,604			2,052			9,656			8,252			2,162			10,414			8,747			2,678			11,425
Service industries and business activities		38,669			10,801			49,470			38,477			10,851			49,328			39,188			12,472			51,660
Agriculture, forestry and fishing		2,891			77			2,968			2,858			78			2,936			2,775			138			2,913
Finance leases and instalment credit		5,487			8,683			14,170			5,192			9,638			14,830			5,343			10,843			16,186
Interest accruals		447			99			546			486			130			616			718			175			893

		216,557			57,863			274,420			219,187			59,219			278,406			211,726			66,015			277,741

Risk and capital management (continued)

Credit risk: Loans and advances to customers by geography and industry (continued)

	30 September 2010						30 June 2010						31 December 2009
	Core		Non-Core		Total		Core		Non-Core		Total		Core		Non-Core		Total
		£m		£m		£m		£m		£m		£m		£m		£m		£m

UK international (2)
Central and local government		4,260		40		4,300		3,253		46		3,299		1,402		53		1,455
Finance		19,435		3,082		22,517		15,296		3,194		18,490		14,615		3,640		18,255
Individuals – home		439		-		439		427		-		427		1		-		1
Individuals – other		334		7		341		366		7		373		504		1		505
Property		19,867		4,085		23,952		18,912		3,969		22,881		18,350		4,585		22,935
Construction		2,695		336		3,031		2,606		357		2,963		2,471		353		2,824
Manufacturing		4,099		770		4,869		4,953		637		5,590		5,715		577		6,292
Service industries and business activities		22,980		2,747		25,727		23,042		3,303		26,345		23,558		3,393		26,951
Agriculture, forestry and fishing		168		10		178		184		14		198		171		-		171
Interest accruals		2		-		2		-		2		2		-		2		2

		74,279		11,077		85,356		69,039		11,529		80,568		66,787		12,604		79,391

Europe (1)
Central and local government		351		967		1,318		786		1,047		1,833		334		1,164		1,498
Finance		3,430		645		4,075		2,642		1,399		4,041		3,973		904		4,877
Individuals – home		19,726		634		20,360		13,328		5,765		19,093		15,055		6,718		21,773
Individuals – other		2,264		631		2,895		2,111		1,026		3,137		1,877		1,009		2,886
Property		5,490		13,072		18,562		8,474		9,392		17,866		10,812		9,417		20,229
Construction		1,303		845		2,148		1,486		878		2,364		1,946		1,167		3,113
Manufacturing		6,646		5,011		11,657		6,885		5,080		11,965		7,311		8,609		15,920
Service industries and business activities		17,233		7,066		24,299		18,569		6,508		25,077		19,088		9,883		28,971
Agriculture, forestry and fishing		843		70		913		838		52		890		737		356		1,093
Finance leases and instalment credit		377		831		1,208		378		864		1,242		379		1,094		1,473
Interest accruals		129		97		226		131		196		327		165		246		411

		57,792		29,869		87,661		55,628		32,207		87,835		61,677		40,567		102,244

US
Central and local government		214		45		259		207		65		272		196		64		260
Finance		8,440		643		9,083		9,744		719		10,463		9,524		1,771		11,295
Individuals – home		21,271		3,829		25,100		22,715		4,221		26,936		21,842		4,317		26,159
Individuals – other		6,747		2,837		9,584		7,881		3,155		11,036		7,373		3,599		10,972
Property		1,203		3,510		4,713		1,631		3,862		5,493		1,498		3,788		5,286
Construction		455		95		550		479		127		606		490		132		622
Manufacturing		5,358		678		6,036		5,555		1,015		6,570		5,895		1,200		7,095
Service industries and business activities		13,670		3,161		16,831		14,900		3,625		18,525		14,078		4,505		18,583
Agriculture, forestry and fishing		32		-		32		34		-		34		27		-		27
Finance leases and instalment credit		2,323		-		2,323		2,498		-		2,498		2,417		-		2,417
Interest accruals		181		78		259		219		88		307		204		94		298

		59,894		14,876		74,770		65,863		16,877		82,740		63,544		19,470		83,014

Risk and capital management (continued)

Credit risk: Loans and advances to customers by geography and industry (continued)

	30 September 2010						30 June 2010						31 December 2009
	Core		Non-Core		Total		Core		Non-Core		Total		Core		Non-Core		Total
		£m		£m		£m		£m		£m		£m		£m		£m		£m

RoW (3)
Central and local government		999		5		1,004		1,121		29		1,150		1,245		28		1,273
Finance		6,296		774		7,070		7,967		170		8,137		7,903		1,033		8,936
Individuals – home		406		193		599		406		172		578		390		1		391
Individuals – other		1,389		2		1,391		1,395		441		1,836		1,450		613		2,063
Property		714		1,390		2,104		669		1,646		2,315		337		1,780		2,117
Construction		151		112		263		76		101		177		102		319		421
Manufacturing		2,548		828		3,376		2,793		1,000		3,793		2,604		1,338		3,942
Service industries and business activities		5,186		2,208		7,394		5,446		2,251		7,697		4,526		3,385		7,911
Agriculture, forestry and fishing		18		1		19		6		-		6		16		59		75
Finance leases and instalment credit		46		27		73		8		27		35		8		19		27
Interest accruals		88		4		92		84		10		94		92		32		124

		17,841		5,544		23,385		19,971		5,847		25,818		18,673		8,607		27,280

Notes:

(1)	The industry classification for Europe, and consequently total loans and advances to customers at 30 June 2010, have been revised.
(2)	UK international represents transactions concluded through offices in the UK which service international banking transactions.
(3)	Rest of the World.

Key points

●	Total gross loans and advances to customers decreased by £9.8 billion or 2% in Q3 2010, with decreases in manufacturing, service industries and business activities, property and unsecured personal lending being partially offset by the increase in residential mortgages.

●	Residential mortgages increased by £1.8 billion primarily in the UK.

●	Overall property lending declined by £2.3 billion. However, there were increases in certain geographic regions including the Republic of Ireland due to foreign currency movements.

●	US lending declined by £8.0 billion or 10% across most sectors reflecting a lack of demand due to weak housing market, continued high unemployment and foreign currency movements.

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions by industry and geography

The tables below analyse gross loans and advances to customers (excluding reverse repos and disposal groups) and risk elements in lending (REIL) and closing provisions relating to these loans, by industry and geography (by location of office). Finance leases below include instalment credit.

	30 September 2010										30 June 2010										31 December 2009
	Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL
Total		£m		£m		£m	%		%			£m		£m		£m	%		%			£m		£m		£m	%		%
Central and local government		10,970		-		-		-		-		10,897		-		-		-		-		7,660		-		-		-		-
Finance		63,373		1,014		561		1.6		55.3		63,223		1,156		460		1.8		39.8		60,386		1,539		419		2.5		27.2
Individuals – home		145,808		4,194		753		2.9		18.0		143,979		3,795		732		2.6		19.3		140,907		3,284		551		2.3		16.8
Individuals – other		38,312		3,839		3,129		10.0		81.5		40,564		3,826		3,056		9.4		79.9		41,671		3,940		2,926		9.5		74.3
Property		92,188		19,270		6,273		20.9		32.6		94,515		17,895		5,199		18.9		29.1		99,426		14,318		3,422		14.4		23.9
Construction		12,617		2,225		764		17.6		34.3		12,870		1,749		691		13.6		39.5		14,760		2,232		519		15.1		23.3
Manufacturing		35,594		1,120		515		3.1		46.0		38,332		1,317		544		3.4		41.3		44,674		3,131		2,088		7.0		66.7
Service industries and business activities		123,721		5,381		2,215		4.3		41.2		126,972		5,584		2,220		4.4		39.8		134,076		5,308		1,860		4.0		35.0
Agriculture, forestry and fishing		4,110		173		93		4.2		53.8		4,064		150		69		3.7		46.0		4,279		137		73		3.2		53.3
Finance leases		17,774		837		482		4.7		57.6		18,605		603		348		3.2		57.7		20,103		894		418		4.4		46.8
Interest accruals		1,125										1,346										1,728
Latent						2,758										2,708										2,740

		545,592		38,053		17,543		7.0		46.1		555,367		36,075		16,027		6.5		44.4		569,670		34,783		15,016		6.1		43.2
of which:
UK domestic		274,420		18,721		8,500		6.8		45.4		278,406		17,688		8,103		6.4		45.8		277,741		15,791		6,811		5.7		43.1
UK international		85,356		287		134		0.3		46.7		80,568		278		127		0.3		45.7		79,391		313		111		0.4		35.5
Europe		87,661		14,553		6,075		16.6		41.7		87,835		13,313		4,954		15.2		37.2		102,244		13,184		5,292		12.9		40.1
US		74,770		2,465		1,798		3.3		72.9		82,740		2,870		1,915		3.5		66.7		83,014		4,115		2,020		5.0		49.1
RoW		23,385		2,027		1,036		8.7		51.1		25,818		1,926		928		7.5		48.2		27,280		1,380		782		5.1		56.7

		545,592		38,053		17,543		7.0		46.1		555,367		36,075		16,027		6.5		44.4		569,670		34,783		15,016		6.1		43.2

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions by industry and geography (continued)

	30 September 2010										30 June 2010										31 December 2009
	Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL
Core		£m		£m		£m	%		%			£m		£m		£m	%		%			£m		£m		£m	%		%
Central and local government		9,766		-		-		-		-		9,527		-		-		-		-		6,128		-		-		-		-
Finance		54,723		610		408		1.1		66.9		54,244		638		307		1.2		48.1		50,673		1,038		259		2.0		25.0
Individuals – home		139,457		3,910		590		2.8		15.1		132,046		3,076		515		2.3		16.7		127,975		2,670		341		2.1		12.8
Individuals – other		34,129		3,353		2,762		9.8		82.4		35,167		3,361		2,707		9.6		80.5		35,313		3,344		2,560		9.5		76.6
Property		42,269		2,751		613		6.5		22.3		47,769		3,432		755		7.2		22.0		49,054		1,766		468		3.6		26.5
Construction		8,994		486		171		5.4		35.2		9,147		418		210		4.6		50.2		9,502		457		131		4.8		28.7
Manufacturing		26,255		438		246		1.7		56.2		28,438		379		199		1.3		52.5		30,272		491		191		1.6		38.9
Service industries and business activities		97,738		2,307		882		2.4		38.2		100,434		2,518		905		2.5		35.9		100,438		1,762		669		1.8		38.0
Agriculture, forestry and fishing		3,952		111		54		2.8		48.6		3,920		101		46		2.6		45.5		3,726		90		46		2.4		51.1
Finance leases		8,233		231		134		2.8		58.0		8,076		208		124		2.6		59.6		8,147		303		116		3.7		38.3
Interest accruals		847										920										1,179
Latent						1,804										1,736										2,005

		426,363		14,197		7,664		3.3		54.0		429,688		14,131		7,504		3.3		53.1		422,407		11,921		6,786		2.8		56.9
of which:
UK domestic		216,557		8,914		4,665		4.1		52.3		219,187		8,574		4,615		3.9		53.8		211,726		7,481		4,171		3.5		55.8
UK international		74,279		167		33		0.2		19.8		69,039		165		29		0.2		17.6		66,787		314		38		0.5		12.1
Europe		57,792		3,280		1,872		5.7		57.1		55,628		3,473		1,730		6.2		49.8		61,677		2,348		1,574		3.8		67.0
US		59,894		961		891		1.6		92.7		65,863		1,001		906		1.5		90.5		63,544		1,497		876		2.4		58.5
RoW		17,841		875		203		4.9		23.2		19,971		918		224		4.6		24.4		18,673		281		127		1.5		45.2

		426,363		14,197		7,664		3.3		54.0		429,688		14,131		7,504		3.3		53.1		422,407		11,921		6,786		2.8		56.9

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions by industry and geography (continued)

	30 September 2010										30 June 2010										31 December 2009
	Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loans		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL		Gross loan		REIL		Provisions		REIL as a % of loans		Provisions as a % of REIL
Non-Core		£m		£m		£m	%		%			£m		£m		£m	%		%			£m		£m		£m	%		%
Central and local government		1,204		-		-		-		-		1,370		-		-		-		-		1,532		-		-		-		-
Finance		8,650		404		153		4.7		37.9		8,979		518		153		5.8		29.5		9,713		501		160		5.2		31.9
Individuals – home		6,351		284		163		4.5		57.4		11,933		719		217		6.0		30.2		12,932		614		210		4.7		34.2
Individuals – other		4,183		486		367		11.6		75.5		5,397		465		349		8.6		75.1		6,358		596		366		9.4		61.4
Property		49,919		16,519		5,660		33.1		34.3		46,746		14,463		4,444		30.9		30.7		50,372		12,552		2,954		24.9		23.5
Construction		3,623		1,739		593		48.0		34.1		3,723		1,331		481		35.8		36.1		5,258		1,775		388		33.8		21.9
Manufacturing		9,339		682		269		7.3		39.4		9,894		938		345		9.5		36.8		14,402		2,640		1,897		18.3		71.9
Service industries and business activities		25,983		3,074		1,333		11.8		43.4		26,538		3,066		1,315		11.6		42.9		33,638		3,546		1,191		10.5		33.6
Agriculture, forestry and fishing		158		62		39		39.2		62.9		144		49		23		34.0		46.9		553		47		27		8.5		57.4
Finance leases		9,541		606		348		6.4		57.4		10,529		395		224		3.8		56.7		11,956		591		302		4.9		51.1
Interest accruals		278										426										549
Latent						954										972										735

		119,229		23,856		9,879		20.0		41.4		125,679		21,944		8,523		17.5		38.8		147,263		22,862		8,230		15.5		36.0
of which:
UK domestic		57,863		9,807		3,835		16.9		39.1		59,219		9,114		3,488		15.4		38.3		66,015		8,310		2,640		12.6		31.8
UK international		11,077		120		101		1.1		84.2		11,529		113		98		1.0		86.7		12,604		90		73		0.7		81.1
Europe		29,869		11,273		4,203		37.7		37.3		32,207		9,840		3,224		30.6		32.8		40,567		10,745		3,718		26.5		34.6
US		14,876		1,504		907		10.1		60.3		16,877		1,869		1,009		11.1		54.0		19,470		2,618		1,144		13.4		43.7
RoW		5,544		1,152		833		20.8		72.3		5,847		1,008		704		17.2		69.8		8,607		1,099		655		12.8		59.6

		119,229		23,856		9,879		20.0		41.4		125,679		21,944		8,523		17.5		38.8		147,263		22,862		8,230		15.5		36.0

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions (continued)

Risk elements in lending (REIL) and potential problem loans (PPL)

The table below analyses the Group's loans to banks and customers that are classified as REIL and PPL.

	30 September 2010									30 June 2010									31 December 2009
	Core			Non-Core			Total			Core			Non-Core			Total			Core			Non-Core			Total
		£m			£m			£m			£m			£m			£m			£m			£m			£m

Non-accrual loans (1):
- Domestic (2)		7,306			8,596			15,902			7,100			7,924			15,024			6,348			7,221			13,569
- Foreign (2)		5,191			13,769			18,960			5,382			12,526			17,908			4,383			13,859			18,242

		12,497			22,365			34,862			12,482			20,450			32,932			10,731			21,080			31,811

Accruing loans past due 90 days or more (3):
- Domestic (2)		1,610			1,210			2,820			1,470			1,192			2,662			1,135			1,089			2,224
- Foreign (2)		231			282			513			340			320			660			223			731			954

		1,841			1,492			3,333			1,810			1,512			3,322			1,358			1,820			3,178

Total REIL		14,338			23,857			38,195			14,292			21,962			36,254			12,089			22,900			34,989

PPL (4):
- Domestic (2)		332			113			445			292			174			466			137			287			424
- Foreign (2)		36			136			172			179			353			532			135			365			500

Total PPL		368			249			617			471			527			998			272			652			924

Total REIL and PPL		14,706			24,106			38,812			14,763			22,489			37,252			12,361			23,552			35,913

REIL as a % of gross loans to customers (5)		3.3	%		19.5	%		6.9	%		3.3	%		16.8	%		6.5	%		2.8	%		15.1	%		6.1	%

REIL and PPL as a % of gross loans to customers (5)		3.4	%		19.7	%		7.1	%		3.4	%		17.3	%		6.6	%		2.9	%		15.5	%		6.2	%

Notes:

(1)	Loans which have defaulted and against which an impairment provision is held.
(2)	Domestic activities consist of the UK domestic transactions of the Group. Foreign activities comprise the Group’s transactions conducted through the offices outside the UK and those offices in the UK specifically organised to service international banking transactions.
(3)	Loans where an impairment event has taken place but no impairment provision recognised. This category is used for fully collateralised non-revolving credit facilities.
(4)	Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for advances and revolving credit facilities where the past due concept is not applicable.
(5)	Excludes reverse repos and includes gross loans relating to disposal groups.

100

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions (continued)

REIL, PPL and coverage ratios by division and movement in REIL

The table below analyses the Group's loans and advances to banks and customers by division that are classified as REIL, PPL and coverage ratios.

	REIL		PPL		REIL & PPL		Total provision		Provision as a % of REIL		Provision as a % of REIL & PPL
		£m		£m		£m		£m	%		%

30 September 2010
UK Retail		4,994		-		4,994		2,937		59		59
UK Corporate		3,343		299		3,642		1,623		49		45
Wealth		203		35		238		63		31		26
Global Transaction Services		171		11		182		173		101		95
Ulster Bank		3,172		1		3,173		1,289		41		41
US Retail & Commercial		833		-		833		523		63		63

Retail & Commercial		12,716		346		13,062		6,608		52		51
Global Banking & Markets		1,622		22		1,644		1,183		73		72

Core		14,338		368		14,706		7,791		54		53
Non-Core		23,857		249		24,106		9,879		41		41

		38,195		617		38,812		17,670		46		46

30 June 2010
UK Retail		4,845		-		4,845		2,887		60		60
UK Corporate		2,928		245		3,173		1,477		50		47
Wealth		229		48		277		64		28		23
Global Transaction Services		174		13		187		169		97		90
Ulster Bank		3,484		6		3,490		1,321		38		38
US Retail & Commercial		865		-		865		514		59		59

Retail & Commercial		12,525		312		12,837		6,432		51		50
Global Banking & Markets		1,767		159		1,926		1,201		68		62

Core		14,292		471		14,763		7,633		53		52
Non-Core		21,962		527		22,489		8,533		39		38

		36,254		998		37,252		16,166		45		43

101

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions (continued)

REIL, PPL and coverage ratios by division and movement in REIL (continued)

	REIL		PPL		REIL & PPL		Total provision		Provision as a % of REIL		Provision as a % of REIL & PPL
		£m		£m		£m		£m	%		%

31 March 2010
UK Retail		4,706		-		4,706		2,810		60		60
UK Corporate		2,496		106		2,602		1,367		55		53
Wealth		219		45		264		58		26		22
Global Transaction Services		184		7		191		184		100		96
Ulster Bank		2,987		3		2,990		1,157		39		39
US Retail & Commercial		710		-		710		523		74		74

Retail & Commercial		11,302		161		11,463		6,099		54		53
Global Banking & Markets		1,237		177		1,414		1,298		105		92

Core		12,539		338		12,877		7,397		59		57
Non-Core		23,997		255		24,252		9,430		39		39

		36,536		593		37,129		16,827		46		45

31 December 2009
UK Retail		4,641		-		4,641		2,677		58		58
UK Corporate		2,330		97		2,427		1,271		55		52
Wealth		218		38		256		55		25		21
Global Transaction Services		197		4		201		189		96		94
Ulster Bank		2,260		2		2,262		962		43		43
US Retail & Commercial		643		-		643		478		74		74

Retail & Commercial		10,289		141		10,430		5,632		55		54
Global Banking & Markets		1,800		131		1,931		1,289		72		67

Core		12,089		272		12,361		6,921		57		56
Non-Core		22,900		652		23,552		8,252		36		35

		34,989		924		35,913		15,173		43		42

102

Risk and capital management (continued)

Credit risk: Loans, REIL and impairment provisions (continued)

REIL, PPL and coverage ratios by division and movement in REIL (continued)

The table below details the movement in REIL.

	Quarter ended									Half year ended
	30 September 2010									30 June 2010
	Core			Non-Core			Total			Core			Non-Core			Total
Movement in REIL		£m			£m			£m			£m			£m			£m

At beginning of period		14,292			21,962			36,254			12,089			22,900			34,989
Intra-Group transfers		(1,142	)		1,142			-			587			(587	)		-
Currency translation and other adjustments		80			791			871			(53	)		(614	)		(667	)
Additions		3,528			3,382			6,910			4,832			5,949			10,781
Disposals, restructurings and repayments		(1,383	)		(2,724	)		(4,107	)		(1,933	)		(2,738	)		(4,671	)
Amounts written-off		(1,037	)		(696	)		(1,733	)		(1,230	)		(2,948	)		(4,178	)

At end of period		14,338			23,857			38,195			14,292			21,962			36,254

Key points

●	Total REIL increased by £1.9 billion in Q3 2010 (£1.3 billion increase in the first half of 2010). In Core, additions of £3.5 billion were offset by write-offs of £1.0 billion, transfers to Non-Core of £1.1 billion and repayments, restructuring and disposals.

●	REIL and PPL for Core were flat in Q3 2010 relative to Q2 2010. Net increases in Non-Core non-accrual loans of £1.9 billion were mainly due to a deterioration in the Ulster Bank development property portfolio as well as foreign currency movements of £0.9 billion.

103

Risk and capital management (continued)

Credit risk: Debt securities

The table below analyses debt securities by issuer and external ratings.

	Central and local government
	UK		US		Other		Banks and building societies		ABS		Corporate		Other		Total
External rating		£m		£m		£m		£m		£m		£m		£m		£m

30 September 2010
AAA		14,825		34,768		48,561		2,914		50,026		1,153		-		152,247
AA to AA+		-		-		19,237		2,913		6,591		855		3		29,599
A to AA-		-		-		10,604		4,593		3,911		2,112		41		21,261
BBB- to A-		-		-		3,386		1,002		3,898		3,342		395		12,023
Non investment grade		-		-		877		190		4,213		2,020		101		7,401
Unrated		-		-		215		197		1,373		1,682		412		3,879

		14,825		34,768		82,880		11,809		70,012		11,164		952		226,410

30 June 2010
AAA		20,589		33,836		44,520		3,626		56,330		1,088		-		159,989
AA to AA+		-		-		20,869		3,482		7,367		1,090		11		32,819
A to AA-		-		-		8,762		4,490		4,848		1,680		568		20,348
BBB- to A-		-		-		2,014		864		4,232		2,147		9		9,266
Non investment grade		-		-		1,739		163		4,616		3,075		3		9,596
Unrated		-		-		501		238		1,312		1,619		572		4,242

		20,589		33,836		78,405		12,863		78,705		10,699		1,163		236,260

31 December 2009
AAA		26,601		23,219		44,396		4,012		65,067		2,263		-		165,558
AA to AA+		-		-		22,003		4,930		8,942		1,429		-		37,304
A to AA-		-		-		13,159		3,770		3,886		1,860		-		22,675
BBB- to A-		-		-		3,847		823		4,243		2,187		-		11,100
Non investment grade		-		-		353		169		3,515		2,042		-		6,079
Unrated		-		-		504		289		1,949		2,601		1,036		6,379

		26,601		23,219		84,262		13,993		87,602		12,382		1,036		249,095

Key points

·	59% of securities were issued by central and local governments (30 June 2010 – 56%; 31 December 2009 – 54%).

·	67% of securities were AAA rated (30 June 2010 – 68%; 31 December 2009 – 66%).

·	Of the asset-backed securities (ABS) portfolios 71% were AAA rated (30 June 2010 – 72%; 31 December 2009 – 74%) and 51% were guaranteed by G10 governments or covered bonds (30 June 2010 - 48%; 31 December 2009 – 49%).

·	67% of corporate debt securities were investment grade (30 June 2010 – 56%; 31 December 2009 – 63%).

·	Unrated securities declined from £6.4 billion at 31 December 2009 to £4.2 billion at 30 June 2010 and to £3.9 billion at 30 September 2010.

104

Risk and capital management (continued)

Credit risk: Debt securities (continued)

The table below analyses debt securities by issuer and measurement classification.

	Central and local government
	UK			US			Other			Banks and building societies			ABS			Corporate			Other			Total
Measurement classification		£m			£m			£m			£m			£m			£m			£m			£m

30 September 2010
Held-for-trading		5,302			17,164			49,204			4,884			20,475			7,733			628			105,390
DFV		1			-			353			3			227			18			1			603
Available-for-sale		9,511			17,604			33,323			6,910			42,923			2,654			226			113,151
Loans and receivables		11			-			-			12			6,387			759			97			7,266

		14,825			34,768			82,880			11,809			70,012			11,164			952			226,410
Short positions		(4,494	)		(11,815	)		(17,902	)		(1,771	)		(916	)		(3,581	)		(660	)		(41,139	)

Net		10,331			22,953			64,978			10,038			69,096			7,583			292			185,271

30 June 2010
Held-for-trading		8,993			16,642			40,589			5,471			23,614			7,077			775			103,161
DFV		1			-			357			3			234			24			-			619
Available-for-sale		11,584			17,194			37,459			7,371			47,709			2,324			300			123,941
Loans and receivables		11			-			-			18			7,148			1,274			88			8,539

		20,589			33,836			78,405			12,863			78,705			10,699			1,163			236,260
Short positions		(5,609	)		(10,002	)		(16,890	)		(2,171	)		(1,768	)		(3,053	)		(720	)		(40,213	)

Net		14,980			23,834			61,515			10,692			76,937			7,646			443			196,047

31 December 2009
Held-for-trading		8,128			10,427			50,150			6,103			28,820			6,892			893			111,413
DFV		122			3			385			418			394			1,087			20			2,429
Available-for-sale		18,350			12,789			33,727			7,472			50,464			2,550			30			125,382
Loans and receivables		1			-			-			-			7,924			1,853			93			9,871

		26,601			23,219			84,262			13,993			87,602			12,382			1,036			249,095
Short positions		(5,805	)		(8,957	)		(14,491	)		(1,951	)		(3,616	)		(2,199	)		(512	)		(37,531	)

Net		20,796			14,262			69,771			12,042			83,986			10,183			524			211,564

Key points

·	The net increase in HFT debt securities reflects an increase in government securities, partially offset by a reduction in ABS. The increase was primarily in Japanese and Swiss treasury bills and the decrease was due to the sale of US collateralised debt obligations and CLO positions in Non-Core.

·	AFS securities were £10.8 billion lower principally reflecting reductions in GBM as well as in US Retail and Commercial and RBS N.V., adjusting down their liquidity portfolios.

·	The reduction in LAR securities reflected ABS and corporate bond maturities.

105

Risk and capital management (continued)

Credit risk: Debt securities (continued)

The table below analyses available-for-sale (AFS) debt securities and related AFS reserves relating to debt securities issued by governments and other entities by country for those exceeding £0.5 billion together with the total of those less than £0.5 billion.

	30 September 2010											30 June 2010											31 December 2009
	Government		ABS		Other		Total		AFS reserves			Government		ABS		Other		Total		AFS reserves			Government		ABS		Other		Total		AFS reserves
		£m		£m		£m		£m		£m			£m		£m		£m		£m		£m			£m		£m		£m		£m		£m

US		17,604		20,140		824		38,568		127			17,194		25,603		900		43,697		745			12,789		24,788		668		38,245		(302	)
UK		9,511		4,317		2,487		16,315		(114	)		11,584		4,171		2,758		18,513		(68	)		18,350		4,372		3,267		25,989		(169	)
Germany		11,166		1,409		553		13,128		151			12,027		918		400		13,345		179			12,283		1,036		406		13,725		(24	)
Netherlands		3,246		6,939		513		10,698		(31	)		4,482		6,503		513		11,498		(324	)		4,329		7,522		1,558		13,409		(115	)
France		6,645		598		874		8,117		171			7,207		535		914		8,656		86			6,456		543		812		7,811		9
Spain		97		7,087		222		7,406		(898	)		108		6,591		217		6,916		(665	)		162		8,070		355		8,587		(117	)
Japan		3,379		-		66		3,445		-			4,661		-		258		4,919		(2	)		1,426		-		100		1,526		(7	)
Australia		-		445		1,724		2,169		(32	)		-		832		1,670		2,502		(62	)		-		581		1,213		1,794		(85	)
Italy		968		251		45		1,264		(75	)		1,200		248		31		1,479		(77	)		1,007		380		72		1,459		(39	)
Belgium		815		34		234		1,083		(26	)		743		32		270		1,045		48			788		34		397		1,219		(24	)
Switzerland		876		-		149		1,025		12			855		-		93		948		13			653		-		28		681		11
Greece		977		-		-		977		(517	)		919		-		-		919		(494	)		1,389		-		-		1,389		(196	)
Singapore		715		13		197		925		3			759		14		182		955		3			564		13		105		682		-
Hong Kong		859		-		9		868		3			819		-		10		829		3			975		-		-		975		-
India		615		-		253		868		3			628		-		184		812		(74	)		480		-	-			480		3
Denmark		646		-		171		817		4			660		-		213		873		-			659		-		256		915		2
Republic of Ireland		120		180		468		768		(59	)		121		581		421		1,123		(132	)		150		529		319		998		(154	)
Austria		292		42		232		566		(27	)		397		145		10		552		(31	)		249		202		142		593		(17	)
South Korea		-		500		-		500		(19	)		-		164		-		164		-			-		526		-		526		(3	)
Luxembourg		150		79		264		493		27			-		186		356		542		20			-		222		307		529		11
Portugal		100		103		55		258		(32	)		96		107		41		244		(25	)		552		125		45		722		(18	)
Other (<£0.5 billion)		1,657		786		450		2,893		(18	)		1,777		1,079		554		3,410		(696	)		1,605		1,521		2		3,128		(654	)

		60,438		42,923		9,790		113,151		(1,347	)		66,237		47,709		9,995		123,941		(1,553	)		64,866		50,464		10,052		125,382		(1,888	)

106

Risk and capital management (continued)

Credit risk: Derivatives

The table below analyses the fair value of the Group's derivative assets by contract type and residual maturity. Master netting arrangements in respect of mark-to-market (mtm) values and collateral do not result in a net presentation in the Group’s balance sheet under IFRS.

	< 3 months		3 – 6 months		6 – 12 months		1 – 5 years		> 5 years		Gross assets		Counterparty mtm netting			Net exposure
Contract type		£m		£m		£m		£m		£m		£m		£m			£m

30 September 2010
Exchange rate		31,943		8,260		10,033		24,551		14,741		89,528		(65,366	)		24,162
Interest rate		5,598		8,177		11,781		117,241		279,380		422,177		(358,824	)		63,353
Credit derivatives		1,323		83		337		13,678		15,389		30,810		(22,719	)		8,091
Equity and commodity		1,782		566		284		3,078		580		6,290		(2,443	)		3,847

		40,646		17,086		22,435		158,548		310,090		548,805		(449,352	)		99,453

Cash collateral held against derivative exposures																	(39,507	)

Net exposure																	59,946

30 June 2010
Exchange rate		29,147		8,394		9,712		23,892		13,948		85,093		(64,879	)		20,214
Interest rate		8,277		4,636		14,288		118,683		246,945		392,829		(323,262	)		69,567
Credit derivatives		375		141		455		19,357		18,653		38,981		(29,462	)		9,519
Equity and commodity		1,090		1,133		311		2,936		498		5,968		(4,094	)		1,874

		38,889		14,304		24,766		164,868		280,044		522,871		(421,697	)		101,174

Cash collateral held against derivative exposures																	(36,709	)

Net exposure																	64,465

31 December 2009
Exchange rate		19,127		5,824		7,603		23,831		11,967		68,352		(47,885	)		20,467
Interest rate		8,415		8,380		16,723		111,144		176,799		321,461		(270,791	)		50,670
Credit derivatives		201		112		390		19,859		21,186		41,748		(36,411	)		5,337
Equity and commodity		1,562		436		1,109		3,057		474		6,638		(3,830	)		2,808

		29,305		14,752		25,825		157,891		210,426		438,199		(358,917	)		79,282

Cash collateral held against derivative exposures																	(33,667	)

Net exposure																	45,615

Key points

·	Exchange and interest rate contracts fair values increased during Q3 2010, primarily due to changes in interest rates, currency movements and higher trading volumes.

·	Credit derivative fair values and net exposures declined during the quarter primarily due to restructuring of certain monoline exposures, tightening credit spreads, and also foreign currency effects. The value of the APS credit derivative decreased by £0.8 billion.

107

Risk and capital management (continued)

Funding and liquidity risk

The objective of the Group’s funding and liquidity management framework is to ensure that at all times the Group can meet its obligations as they fall due. Liquidity management within the Group specifies prudent limits and controls over risk arising from maturity mismatch across the balance sheet and exposure to undrawn commitments or contingent obligations.

The Group has a highly diversified funding structure which avoids excessive reliance on any particular source. Funding is raised through various distribution channels, from a wide range of investors and clients.

The table below shows the composition of the Group’s primary funding sources, excluding repurchase agreements.

	30 September 2010				30 June 2010				31 December 2009
		£m	%			£m	%			£m	%

Deposits by banks		80,186		10.5		96,614		12.7		115,642		14.3

Debt securities in issue:
- Commercial paper		30,424		4.0		30,865		4.1		44,307		5.5
- Certificates of deposits		50,497		6.6		45,888		6.0		58,195		7.2
- Medium-term notes and other bonds		133,403		17.5		122,981		16.1		125,800		15.6
- Securitisations		20,759		2.7		17,583		2.3		18,027		2.2

		235,083		30.8		217,317		28.5		246,329		30.5

Subordinated liabilities		27,890		3.6		27,523		3.6		31,538		3.9

Total wholesale funding		343,159		44.9		341,454		44.8		393,509		48.7
Customer deposits		420,639		55.1		420,890		55.2		414,251		51.3

		763,798		100.0		762,344		100.0		807,760		100.0

Key points

·	The Group has continued to reduce reliance on wholesale funding and diversify funding sources. Debt securities in issue increased as issuance of long-term debt securities and securitisation of UK retail mortgages exceeded maturities in the period. Deposits by banks decreased by 17% in Q3 2010.

·	The Group has increased the proportion of its funding from customer deposits during 2010, from 51% at 31 December 2009 to 55% at 30 September 2010.

·	The Group was able to reduce short-term unsecured wholesale borrowing by £20 billion to £178 billion (including £77 billion of deposits from banks) from £198 billion at 30 June 2010 (including £92 billion of deposits from banks). The successful medium-term notes, covered bond and RMBS issuances in the quarter contributed to this reduction. These programmes tapped markets in multiple currencies, geographies and maturities. The impact was to strengthen the overall liability structure of the Group.

108

Risk and capital management (continued)

Funding and liquidity risk (continued)

The table below shows the Group’s debt securities and subordinated liabilities (sub-debt) by maturity.

	30 September 2010								30 June 2010								31 December 2009
	Debt securities in issue		Sub- debt		Total				Debt securities in issue		Sub- debt		Total				Debt securities in issue		Sub- debt		Total
		£m		£m		£m	%			£m		£m		£m	%			£m		£m		£m	%

< 1 year		99,714		1,660		101,374		38.5		103,630		2,422		106,052		43.3		136,901		2,144		139,045		50.0
1-5 years		90,590		10,371		100,961		38.4		77,266		7,575		84,841		34.7		70,437		4,235		74,672		26.9
> 5 years		44,779		15,859		60,638		23.1		36,421		17,526		53,947		22.0		38,991		25,159		64,150		23.1

		235,083		27,890		262,973		100.0		217,317		27,523		244,840		100.0		246,329		31,538		277,867		100.0

Key points

·	The Group has improved its funding and liquidity position by extending the average maturity of debt securities in issue.

·	The proportion of debt instruments with a remaining maturity of greater than one year has increased in 2010 from 50% at 31 December 2009 to 57% at 30 June 2010 and 62% at 30 September 2010.

The table below shows the amount and type of debt securities issued by the Group with a maturity of one year or greater, by quarter for year-to-date 2010 and 2009.

	Quarter ended								Quarter ended
	31 March 2010		30 June 2010		30 September 2010		Nine months ended 30 September 2010		31 March 2009		30 June 2009		30 September 2009		Nine months ended 30 September 2009
		£m		£m		£m		£m		£m		£m		£m		£m

Public
- unsecured		3,976		1,882		6,254		12,112		-		3,123		4,062		7,185
- unsecured: guaranteed		-		-		-				8,804		4,520		858		14,182
- secured		-		1,030		5,286		6,316		-		-				-
Private
- unsecured		4,158		2,370		6,299		12,827		1,637		2,654		6,053		10,344
- unsecured: guaranteed		-		-		-		-		6,493		2,428		-		8,921

Gross issuance		8,134		5,282		17,839		31,255		16,934		12,725		10,973		40,632

In addition there was further term issuance in October of £3.9 billion bringing year-to-date issuance to £35.2 billion. This exceeds the original full year target of £25 billion.

The Group also executes other long-term funding arrangements (predominately term repurchase agreements) not reflected in the analysis above.

109

Risk and capital management (continued)

Funding and liquidity risk (continued)

The table below shows the residual maturity and currency breakdown of long-term debt securities issued in 2010.

Residual maturity	£m	%

< 1 year	836		2.7
1-3 years	8,208		26.3
3-5 years	6,889		22.0
5-10 years	8,356		26.7
> 10 years	6,966		22.3

	31,255		100.0

Currency	£m	%

GBP	3,842		12.3
EUR	15,719		50.3
USD	8,540		27.3
Other	3,154		10.1

	31,255		100.0

Key points

·	Term funding markets improved in Q3 2010 as European sovereign concerns subsided. The Group issued more term funding in Q3 2010 than in the first half of 2010 and accessed unsecured and secured markets in the US, Europe, Asia, Australia and the UK.

·	The Group’s €15 billion covered bond programme, launched in April 2010, is an important step in diversifying funding sources across product types and markets. To date, €4.75 billion of covered bonds with maturities ranging between 3 and 10 years were issued from this programme.

·	During Q3 2010, the Group executed its largest ever public issuance in the Australian dollar market and its first public Singapore dollar bond issuance. The Group also executed a £4.6 billion public RMBS issuance, which is the largest public transaction in this market since 2007.

110

Risk and capital management (continued)

Funding and liquidity risk (continued)

The table below shows the composition of the Group’s liquidity portfolio. The Group has refined the presentation of its liquidity portfolio. Treasury bills and government bonds which were previously reported under Central Group Treasury portfolio, Unencumbered collateral and Other liquid assets are now included in their respective asset classes.

	30 September 2010		30 June 2010		31 March 2010		31 December 2009
Liquidity portfolio		£m		£m		£m		£m

Cash and balances at central banks		56,661		29,591		42,008		51,500
Treasury bills		15,167		16,086		24,030		30,010
Central and local government bonds
- AAA rated governments (1)		31,251		41,865		36,148		30,140
- AA- to AA+ rated governments		1,618		1,438		1,858		2,011
- governments rated below AA		1,189		1,149		1,766		1,630
- local government		5,981		5,692		6,216		5,706
		40,039		50,144		45,988		39,487
Unencumbered collateral (2)
- AAA rated		16,071		16,564		23,048		20,246
- below AAA rated and other high quality assets		22,636		24,584		29,817		29,418
		38,707		41,148		52,865		49,664

Total liquidity portfolio		150,574		136,969		164,891		170,661

Notes:

(1)	Includes AAA rated US government guaranteed agencies.
(2)	Includes assets eligible for discounting at central banks, comprising loans and advances and debt securities.

Key points

·	The Group’s liquidity portfolio increased by £14 billion to £151 billion in the quarter. Within this, cash and balances at central banks increased by £27 billion to £57 billion. The Group manages the composition of its liquidity portfolio based on a number of considerations. These include market opportunities, internal and external liquidity metrics and potential near term cash requirements. Further, during Q3 2010, US Retail & Commercial and RBS N.V. reduced their G10 government securities as part of their respective balance sheet restructurings.

·	The Group is targeting a total liquidity portfolio of £150 billion as part of its strategic plan. However, the final level will be influenced by balance sheet size, maturity profile and regulatory requirements.

111

Risk and capital management (continued)

Funding and liquidity risk (continued)

The table below shows recent trends for the Group’s loan to deposit ratio and customer funding gap.

	Loan to deposit ratio				Customer funding
	Group		Core		gap Group
	%		%		£bn

30 September 2010		126		101		107
30 June 2010		128		102		118
31 March 2010		131		102		131
31 December 2009		135		104		142
30 September 2009		142		108		164
30 June 2009		145		110		178
31 March 2009		150		118		225
31 December 2008		151		118		233

Notes:

(1)	Excludes repurchase agreements, bancassurance deposits to 31 March 2010 and loans are net of provisions.
(2)	Adjusting for customer loans and deposits classified as held-for-trading and designated as at fair value under IFRS (see note 10 Financial instruments classification on page 74 to 76), the loan to deposit ratio and customer funding gap at 30 September 2010 were 123% and £94 billion, respectively.

Key point

·	The loan to deposit ratio improved by 200 basis points in Q3 2010 to 126% and the customer funding gap narrowed by £11 billion to £107 billion at 30 September 2010, due primarily to a reduction in Non-Core customer loans.

112

Risk and capital management (continued)

Funding and liquidity risk (continued)

The table below shows the Group’s net stable funding ratio (NSFR), the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding and equity, computed in accordance with guidance issued by the Basel Committee in July 2010.

	30 September 2010					30 June 2010					31 December 2009
			ASF(1)					ASF(1)					ASF(1)			Weighting
	£bn		£bn			£bn		£bn			£bn		£bn			%

Equity		77		77			79		79			80		80			100
Wholesale funding > 1 year		165		165			143		143			144		144			100
Wholesale funding < 1 year		178		-			198		-			249		-			-
Derivatives		543		-			509		-			422		-			-
Repurchase agreements		129		-			115		-			106		-			-
Customer deposits		421		379			421		379			415		374			90
Other (2)		116		-			116		-			106		-			-

Total liabilities and equity		1,629		621			1,581		601			1,522		598

Cash		61		-			30		-			52		-			-
Inter bank lending		60		-			54		-			49		-			-
Debt securities		226		45			236		47			249		50			20
Derivatives		549		-			523		-			438		-			-
Reverse repurchase agreements		93		-			87		-			76		-			-
Advances < 1 year		132		66			135		67			139		69			50
Advances >1 year		396		368			404		376			416		387		See note (3)
Other (4)		112		112			112		112			103		103			100

Total assets		1,629		591			1,581		602			1,522		609

Undrawn commitments		267		13			271		14			289		14			5
Total assets and undrawn commitments		1,896		604			1,852		616			1,811		623
Net stable funding ratio				103	%				98	%				96	%

Notes:

(1)	Available stable funding.
(2)	Deferred taxation, insurance liabilities and other liabilities.
(3)	Residential mortgages > 1 year are weighted at 65%; remainder is weighted at 100%.
(4)	Prepayments, accrued income, deferred taxation and other assets.

Key points

·	The Group’s NSFR increased from 98% as at 30 June 2010 to 103% as at 30 September 2010, primarily due to an increase in wholesale funding with maturity greater than one year and a reduction in customer loans.

·	The NSFR will continue to be refined over time in line with regulatory developments.

113

Risk and capital management (continued)

Market risk

Market risk arises from changes in interest rates, foreign currency, credit spread, equity prices and risk related factors such as market volatilities. The Group manages market risk centrally within its trading and non-trading portfolios through a comprehensive market risk management framework. This framework includes limits based on, but not limited to, value-at-risk (VaR), scenario analyses, position and sensitivity analyses.

At the Group level, the risk appetite is expressed in the form of a combination of VaR, sensitivity and scenario limits. VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels. For internal risk management purposes, the Group’s VaR assumes a time horizon of one trading day and a confidence level of 99%. The Group's VaR model is based on a historical simulation model, utilising data from the previous two years trading results.

The VaR disclosure is broken down into trading and non-trading. Trading VaR relates to the main trading activities of the Group and non-trading VaR reflects reclassified assets, money market business and the management of internal funds flow within the Group’s businesses.

As part of the ongoing review and analysis of the suitability of the Group’s VaR model, a methodology enhancement to the ABS VaR was approved and incorporated into the Group’s regulatory model in 2010. The credit crisis in 2007-2009 caused large price changes for some structured bonds and the spread based approach to calculating VaR for these instruments started to give inaccurate risk levels, particularly for bonds trading at a significant discount to par. The methodology enhancement harmonised the VaR approach in the Group’s US and European businesses by replacing the absolute spread based approach with a more reliable and granular relative price based mapping scheme. The enhancement better reflects the risk in the context of position changes, downgrades and vintages as well as improving the differentiation between prime, Alt-A and sub-prime exposures.

All VaR models have limitations, which include:

·	Historical simulation VaR may not provide the best estimate of future market movements. It can only provide a prediction of the future based on events that occurred in the time series horizon therefore, events more severe than those in the historical data series cannot be predicted;

·	VaR that uses a 99% confidence level does not reflect the extent of potential losses beyond that percentile;

·	VaR that uses a one day time horizon will not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day; and

·	The Group computes the VaR of trading portfolios at the close of business. Positions may change substantially during the course of the trading day and intra-day profits and losses will be incurred.

These limitations mean that the Group cannot guarantee that profits or losses will not exceed the VaR.

114

Risk and capital management (continued)

Market risk (continued)

The following tables analyse the VaR for the Group’s trading and non-trading portfolios excluding Structured Credit Portfolios (SCP) for the last four quarters, segregated by type of market risk exposure, and between Core, Non-Core, Counterparty Exposure Management (CEM) and Core excluding CEM.

	30 September 2010									30 June 2010									31 March 2010									31 December 2009
	Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum
Trading		£m		£m			£m		£m		£m		£m			£m		£m		£m		£m			£m		£m		£m		£m			£m		£m

Interest rate		50.5		74.3			74.3		38.6		44.2		42.8			60.4		33.7		47.5		54.4			64.2		32.5		38.8		50.5			59.8		28.1
Credit spread		214.0		190.8			243.2		174.5		167.4		203.0			203.2		125.5		148.8		163.3			191.5		113.0		165.4		174.8			194.7		146.7
Currency		15.4		16.7			26.2		9.3		22.6		21.4			28.0		15.6		18.6		22.2			24.7		13.9		18.9		20.7			25.5		14.6
Equity		7.2		5.4			17.9		2.7		9.6		6.7			12.0		6.6		11.3		8.2			17.3		6.6		11.1		13.1			19.8		2.7
Commodity		8.9		13.8			15.7		3.2		10.9		8.1			15.8		6.7		10.6		10.8			14.0		8.3		14.9		8.9			32.1		6.6
Diversification				(119.2	)								(71.5	)								(126.4	)								(86.1	)

Total		213.1		181.8			252.1		156.1		165.1		210.5			210.5		120.6		140.6		132.5			204.7		103.0		158.8		181.9			188.8		128.7

Core		123.8		115.0			153.4		99.6		103.6		118.1			129.0		81.4		87.2		82.4			145.4		58.9		112.9		127.3			135.4		92.8
CEM		74.7		73.0			82.4		70.4		52.5		75.5			76.5		30.6		37.5		33.6			41.2		30.3		38.5		38.6			41.0		34.3
Core excluding CEM		84.2		78.4			96.5		72.0		85.9		78.6			104.9		71.5		79.5		73.5			108.7		53.6		93.0		97.4			116.5		70.6

Non-Core		135.7		101.8			169.4		97.5		96.1		104.9			108.1		82.7		84.6		87.1			98.8		63.2		78.0		84.8			100.3		58.6

Key points

·		The average and maximum credit spread and Non-Core VaR increased overall in Q3 2010 compared with Q2 2010 due to the Group’s exit from some highly structured Non-Core positions which, due to their complexity and layering, required unwinding with different counterparties over different periods. The timing of the unwind led to an increased VaR for a limited time during the quarter. The exit was completed in October 2010.

·		The Core VaR remained within the expected range reflecting the day-to-day trading activities.

115

Risk and capital management (continued)

Market risk (continued)

	30 September 2010									30 June 2010									31 March 2010									31 December 2009
	Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum		Average		Period end			Maximum		Minimum
Non-trading		£m		£m			£m		£m		£m		£m			£m		£m		£m		£m			£m		£m		£m		£m			£m		£m

Interest rate		9.9		6.8			24.2		6.3		8.8		10.1			11.2		6.5		10.9		11.4			13.6		8.8		12.2		15.0			16.0		9.1
Credit spread		129.1		119.5			139.3		119.4		139.5		125.1			155.1		123.0		169.5		152.7			227.2		150.6		214.8		209.5			227.9		200.5
Currency		2.8		2.0			6.1		1.5		2.1		3.4			7.6		0.9		1.4		0.9			4.9		0.3		1.6		0.6			7.0		0.5
Equity		0.4		0.5			0.5		0.3		0.4		0.4			0.8		0.3		1.3		0.8			3.4		0.2		2.8		2.3			3.4		1.7
Diversification				(22.9	)								(22.4	)								(13.3	)								(31.6	)

Total		118.8		105.9			126.5		105.9		132.3		116.6			156.4		115.0		164.3		152.5			216.2		145.5		200.4		195.8			212.6		187.4

Core		49.6		46.0			58.2		42.1		50.7		31.9			77.8		30.6		93.2		76.2			145.7		76.2		131.0		129.4			140.7		115.7
Non-Core		80.4		76.6			85.3		76.2		84.9		85.5			94.7		70.2		76.2		72.5			79.6		72.5		80.1		72.9			90.9		72.9

Key point

·	The overall reduction in total VaR was primarily driven by reduced credit spread risk during Q3 2010 as a result of disposals of some uninsured super senior tranches of CDOs and AFS assets.

VaR is not always the most appropriate measure of risk for assets in the non-trading book, particularly for those in Non-Core which will diminish over time as the asset inventory is sold down. To better represent the risk of the non-traded portfolios, the table above analyses the VaR for the non-trading portfolios but excludes SCP in Non-Core. These assets are shown separately on a drawn notional and fair value basis by maturity profile and asset class and are managed on both an asset and RWA basis. This portfolio continues to be rundown as part of the Group’s Non-Core disposal strategy.

116

Risk and capital management (continued)

Market risk: Structured credit portfolio (continued)

	Drawn notional (years)										Fair value (years)
		1-2	2-3	3-4	4-5	5-10	>10		Total			1-2	2-3	3-4	4-5	5-10	>10		Total
		£m	£m	£m	£m	£m		£m		£m		£m	£m	£m	£m	£m		£m		£m

CDOs
30 September 2010		-	84.3	-	19.3	99.3		518.9		721.8		-	79.2	-	16.6	85.5		177.2		358.5
30 June 2010		-	75.0	29.8	20.2	90.1		624.2		839.3		-	70.3	23.3	17.2	80.1		232.5		423.4
31 March 2010		42.5	0.7	17.1	16.5	114.7		626.2		817.7		25.5	0.7	15.6	9.9	97.8		208.1		357.6
31 December 2009		-	39.9	18.8	17.4	107.2		593.5		776.8		-	23.9	16.4	3.5	89.7		192.7		326.2

CLOs
30 September 2010		-	19.1	35.0	7.3	365.8		793.2		1,220.4		-	17.6	30.8	7.1	324.5		627.0		1,007.0
30 June 2010		-	20.0	36.7	10.8	438.8		1,004.5		1,510.8		-	18.3	31.8	10.4	389.9		810.4		1,260.8
31 March 2010		-	19.8	19.8	39.6	752.2		1,084.0		1,915.4		-	18.1	17.9	35.2	672.0		879.6		1,622.8
31 December 2009		-	-	18.5	47.1	684.8		1,113.6		1,864.0		-	-	16.8	41.3	593.5		895.6		1,547.2

MBS (1)
30 September 2010		-	46.4	28.8	5.5	403.9		590.8		1,075.4		-	34.8	26.5	4.1	264.6		379.0		709.0
30 June 2010		-	42.5	19.0	38.1	393.6		688.7		1,181.9		-	31.4	17.9	32.9	254.5		419.5		756.2
31 March 2010		-	-	50.6	30.9	436.2		824.1		1,341.8		-	-	38.6	27.0	273.0		514.0		852.6
31 December 2009		-	-	42.3	36.4	424.0		820.0		1,322.7		-	-	31.2	28.8	251.4		468.4		779.8

Other ABS
30 September 2010		58.0	66.5	210.7	56.8	485.1		547.9		1,425.0		50.1	62.5	183.4	52.1	414.3		368.2		1,130.6
30 June 2010		67.5	85.0	297.9	58.6	547.8		607.4		1,664.2		61.2	79.5	239.3	52.8	454.6		386.8		1,274.2
31 March 2010		78.6	19.8	192.5	250.6	555.5		604.2		1,701.2		70.0	18.8	153.6	221.1	462.6		381.2		1,307.3
31 December 2009		81.5	19.4	99.0	331.7	521.5		572.9		1,626.0		67.7	18.1	75.6	275.0	394.0		324.9		1,155.3

Total
30 September 2010		58.0	216.3	274.5	88.9	1,354.1		2,450.8		4,442.6		50.1	194.1	240.7	79.9	1,088.9		1,551.4		3,205.1
30 June 2010		67.5	222.5	383.4	127.7	1,470.3		2,924.8		5,196.2		61.2	199.5	312.3	113.3	1,179.1		1,849.2		3,714.6
30 March 2010		121.1	40.3	280.0	337.6	1,858.6		3,138.5		5,776.1		95.5	37.6	225.7	293.2	1,505.4		1,982.9		4,140.3
31 December 2009		81.5	59.3	178.6	432.6	1,737.5		3,100.0		5,589.5		67.7	42.0	140.0	348.6	1,328.6		1,881.6		3,808.5

Note:

(1)

Mortgage-backed securities (MBS) include sub-prime RMBS with a notional amount of £476.7 million (30 June 2010 - £562.3 million; 31 March 2010 - £696.6 million; 31 December 2009 - £681.7 million) and a fair value of £316.0 million (30 June 2010 - £349.5 million; 31 March 2010 - £457.7 million; 31 December 2009 - £415.1 million), all with residual maturities of greater than 10 years.

117

Risk and capital management (continued)

Other risk exposures

Explanatory note

These disclosures provide information on certain elements of the Group’s credit market activities, the majority of which reside in Non-Core and, to a lesser extent, Global Banking & Markets, US Retail & Commercial and Group Treasury. For certain disclosures – credit valuation adjustments, leveraged finance and conduits - the information presented has been analysed between the Group’s Core and Non-Core businesses.

Asset-backed securities (ABS)

The Group structures, originates, distributes and trades debt in the form of loan, bond and derivative instruments, in all major currencies and debt capital markets in North America, Western Europe, Asia and major emerging markets. The table below analyses the carrying value of the Group’s debt securities.

	30 September 2010		30 June 2010		31 December 2009
	£bn		£bn		£bn

Securities issued by central and local governments		132.5		132.8		134.1
Asset-backed securities		70.0		78.7		87.6
Securities issued by corporates, US federal agencies and other entities		12.1		11.9		13.4
Securities issued by banks and building societies		11.8		12.9		14.0

Total debt securities		226.4		236.3		249.1

The Group’s credit market activities gave rise to risk concentrations in ABS. The Group has exposures to ABS which are predominantly debt securities, but can also be held in derivative form. ABS have an interest in an underlying pool of referenced assets. The risks and rewards of the referenced pool are passed onto investors by the issue of securities with varying seniority, by a special purpose entity. Debt securities include residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), ABS collateralised debt obligations and collateralised loan obligations (CLOs) and other ABS. In many cases the risk associated with these assets is hedged by way of credit derivative protection, purchased over the specific asset or relevant ABS indices. The counterparty to some of these hedge transactions are monoline insurers.

The tables on pages 119 to 121 summarise the gross and net exposures and carrying values of these securities by geography – US, UK, Europe other than UK and Rest of the World (RoW) and by measurement classification – held-for-trading (HFT), available-for-sale (AFS), loans and receivables (LAR) and designated as at fair value through profit or loss (DFV) – of the underlying assets at 30 September 2010, 30 June 2010 and 31 December 2009. Gross exposures represent the principal amounts relating to ABS. G10 government RMBS comprises securities that are: (a) guaranteed or effectively guaranteed by the US government, by way of its support for US federal agencies and government sponsored enterprises or (b) guaranteed by the Dutch government. Net exposures represent the carrying value after taking account of the hedge protection purchased from monoline insurers and other counterparties, but exclude the effect of counterparty credit valuation adjustments. The hedge provides credit protection of both principal and interest cash flows in the event of default by the counterparty. The value of this protection is based on the underlying instrument being protected.

118

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by geography and measurement classification

The table below analyses the gross exposures, carrying values and net exposures of these ABS by geography of the underlying assets and by measurement classification.

	US		UK		Other Europe		RoW		Total		HFT		AFS		LAR		DFV
		£m		£m		£m		£m		£m		£m		£m		£m		£m

30 September 2010
Gross exposure
RMBS: G10 governments		20,924		17		6,592		-		27,533		11,519		16,014		-		-
RMBS: covered bond		137		208		8,580		-		8,925		-		8,925		-		-
RMBS: prime		1,897		4,324		1,845		196		8,262		2,836		5,291		134		1
RMBS: non-conforming		1,241		2,109		92		-		3,442		679		1,331		1,432		-
RMBS: sub-prime		852		499		141		221		1,713		934		565		214		-
CMBS		2,883		1,704		1,667		100		6,354		3,203		1,553		1,393		205
CDOs		11,776		141		466		3		12,386		7,519		4,746		121		-
CLOs		5,936		106		1,312		424		7,778		1,673		5,674		431		-
Other ABS		2,847		1,346		2,715		2,675		9,583		1,971		4,967		2,645		-

		48,493		10,454		23,410		3,619		85,976		30,334		49,066		6,370		206

Carrying value
RMBS: G10 governments		21,276		17		6,167		-		27,460		11,526		15,934		-		-
RMBS: covered bond		141		215		7,864		-		8,220		-		8,220		-		-
RMBS: prime		1,493		3,751		1,279		192		6,715		2,152		4,470		92		1
RMBS: non-conforming		1,030		1,993		92		-		3,115		550		1,133		1,432		-
RMBS: sub-prime		654		336		120		202		1,312		718		387		207		-
CMBS		2,843		1,463		1,085		75		5,466		2,448		1,383		1,409		226
CDOs		2,606		89		262		-		2,957		920		1,924		113		-
CLOs		5,142		74		899		284		6,399		1,004		5,022		373		-
Other ABS		2,697		1,144		2,557		1,970		8,368		1,157		4,450		2,761		-

		37,882		9,082		20,325		2,723		70,012		20,475		42,923		6,387		227

Net exposure
RMBS: G10 governments		21,276		17		6,167		-		27,460		11,526		15,934		-		-
RMBS: covered bond		141		215		7,864		-		8,220		-		8,220		-		-
RMBS: prime		1,321		3,107		732		184		5,344		787		4,464		92		1
RMBS: non-conforming		1,027		1,993		92		-		3,112		547		1,133		1,432		-
RMBS: sub-prime		304		242		112		171		829		300		322		207		-
CMBS		1,146		1,310		679		50		3,185		905		841		1,393		46
CDOs		600		49		242		-		891		308		470		113		-
CLOs		1,268		64		762		45		2,139		708		1,058		373		-
Other ABS		2,203		916		2,555		1,970		7,644		561		4,441		2,642		-

		29,286		7,913		19,205		2,420		58,824		15,642		36,883		6,252		47

119

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by geography and measurement classification (continued)

	US		UK		Other Europe		RoW		Total		HFT		AFS		LAR		DFV
		£m		£m		£m		£m		£m		£m		£m		£m		£m

30 June 2010
Gross exposure
RMBS: G10 governments		23,790		16		6,283		-		30,089		9,973		20,116		-		-
RMBS: covered bond		127		193		7,975		-		8,295		-		8,295		-		-
RMBS: prime		1,942		4,869		2,681		849		10,341		4,886		5,277		177		1
RMBS: non-conforming		1,255		2,205		118		-		3,578		594		1,483		1,499		2
RMBS: sub-prime		1,244		394		175		246		2,059		1,049		779		231		-
CMBS		3,802		1,873		1,524		96		7,295		3,827		1,712		1,540		216
CDOs		14,714		129		484		-		15,327		10,119		5,078		129		1
CLOs		9,216		114		1,608		378		11,316		4,410		6,424		482		-
Other ABS		3,512		1,199		3,016		2,013		9,740		1,496		5,081		3,163		-

		59,602		10,992		23,864		3,582		98,040		36,354		54,245		7,221		220

Carrying value
RMBS: G10 governments		24,461		16		5,799		-		30,276		10,077		20,199		-		-
RMBS: covered bond		131		195		7,290		-		7,616		-		7,616		-		-
RMBS: prime		1,724		3,884		2,253		256		8,117		3,359		4,597		161		-
RMBS: non-conforming		961		2,084		118		-		3,163		426		1,238		1,499		-
RMBS: sub-prime		674		254		143		227		1,298		596		482		220		-
CMBS		3,337		1,556		1,026		70		5,989		2,764		1,549		1,444		232
CDOs		3,566		64		291		-		3,921		1,768		2,029		124		-
CLOs		7,996		82		1,159		235		9,472		3,351		5,682		438		1
Other ABS		3,010		1,085		2,820		1,938		8,853		1,273		4,317		3,262		1

		45,860		9,220		20,899		2,726		78,705		23,614		47,709		7,148		234

Net exposure
RMBS: G10 governments		24,461		16		5,799		-		30,276		10,077		20,199		-		-
RMBS: covered bond		131		195		7,290		-		7,616		-		7,616		-		-
RMBS: prime		1,669		3,001		1,452		176		6,298		1,538		4,597		162		1
RMBS: non-conforming		958		2,084		118		-		3,160		423		1,238		1,499		-
RMBS: sub-prime		237		242		135		194		808		236		352		220		-
CMBS		2,608		1,398		663		46		4,715		863		1,986		1,444		422
CDOs		1,098		23		269		-		1,390		722		544		124		-
CLOs		1,297		56		920		43		2,316		451		1,426		438		1
Other ABS		2,475		1,057		2,792		1,937		8,261		812		4,318		3,131		-

		34,934		8,072		19,438		2,396		64,840		15,122		42,276		7,018		424

120

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by geography and measurement classification (continued)

	US		UK		Other Europe		RoW		Total		HFT		AFS		LAR		DFV
		£m		£m		£m		£m		£m		£m		£m		£m		£m

31 December 2009
Gross exposure
RMBS: G10 governments		26,644		17		7,016		94		33,771		13,536		20,235		-		-
RMBS: covered bond		49		297		9,019		-		9,365		-		9,365		-		-
RMBS: prime		2,965		5,276		4,567		222		13,030		6,274		5,761		848		147
RMBS: non-conforming		1,341		2,138		128		-		3,607		635		1,498		1,474		-
RMBS: sub-prime		1,668		724		195		561		3,148		1,632		1,020		479		17
CMBS		3,422		1,781		1,420		75		6,698		2,936		1,842		1,711		209
CDOs		12,382		329		571		27		13,309		9,080		3,923		305		1
CLOs		9,092		166		2,169		1,173		12,600		5,346		6,581		673		-
Other ABS		3,587		1,980		5,031		1,569		12,167		2,912		5,252		3,985		18

		61,150		12,708		30,116		3,721		107,695		42,351		55,477		9,475		392

Carrying value
RMBS: G10 governments		26,984		17		6,870		33		33,904		13,397		20,507		-		-
RMBS: covered bond		50		288		8,734		-		9,072		-		9,072		-		-
RMBS: prime		2,696		4,583		4,009		212		11,500		5,133		5,643		583		141
RMBS: non-conforming		958		1,957		128		-		3,043		389		1,180		1,474		-
RMBS: sub-prime		977		314		146		387		1,824		779		704		324		17
CMBS		3,237		1,305		924		43		5,509		2,279		1,637		1,377		216
CDOs		3,275		166		400		27		3,868		2,064		1,600		203		1
CLOs		6,736		112		1,469		999		9,316		3,296		5,500		520		-
Other ABS		2,886		1,124		4,369		1,187		9,566		1,483		4,621		3,443		19

		47,799		9,866		27,049		2,888		87,602		28,820		50,464		7,924		394

Net exposure
RMBS: G10 governments		26,984		17		6,870		33		33,904		13,397		20,507		-		-
RMBS: covered bond		50		288		8,734		-		9,072		-		9,072		-		-
RMBS: prime		2,436		3,747		3,018		172		9,373		3,167		5,480		584		142
RMBS: non-conforming		948		1,957		128		-		3,033		379		1,180		1,474		-
RMBS: sub-prime		565		305		137		290		1,297		529		427		324		17
CMBS		2,245		1,228		595		399		4,467		1,331		1,556		1,377		203
CDOs		743		124		382		26		1,275		521		550		203		1
CLOs		1,636		86		1,104		39		2,865		673		1,672		520		-
Other ABS		2,117		839		4,331		1,145		8,432		483		4,621		3,309		19

		37,724		8,591		25,299		2,104		73,718		20,480		45,065		7,791		382

121

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by rating

The table below summarises the ratings of ABS carrying values. Credit ratings are based on those from rating agencies Standard & Poor’s (S&P), Moody’s and Fitch and have been mapped onto the S&P scale.

	AAA		AA to AA+		A to AA-		BBB- to A-		Non investment grade		Unrated		Total
		£m		£m		£m		£m		£m		£m		£m

30 September 2010
Carrying value
RMBS: G10 governments		25,883		1,555		22		-		-		-		27,460
RMBS: covered bond		7,649		309		262		-		-		-		8,220
RMBS: prime		4,852		496		260		196		846		65		6,715
RMBS: non-conforming		1,748		115		115		451		649		37		3,115
RMBS: sub-prime		312		150		227		48		476		99		1,312
CMBS		3,131		479		1,156		434		258		8		5,466
CDOs		514		422		317		217		1,376		111		2,957
CLOs		2,437		1,830		648		850		275		359		6,399
Other ABS		3,499		1,235		904		1,702		333		695		8,368

		50,025		6,591		3,911		3,898		4,213		1,374		70,012

30 June 2010
Carrying value
RMBS: G10 governments		28,773		1,375		128		-		-		-		30,276
RMBS: covered bond		7,297		85		111		16		-		107		7,616
RMBS: prime		5,887		761		566		157		717		29		8,117
RMBS: non-conforming		1,823		168		72		385		704		11		3,163
RMBS: sub-prime		357		114		223		17		513		74		1,298
CMBS		3,678		509		1,095		438		254		15		5,989
CDOs		717		507		297		582		1,631		187		3,921
CLOs		4,556		2,649		1,184		595		432		56		9,472
Other ABS		3,242		1,199		1,172		2,042		365		833		8,853

		56,330		7,367		4,848		4,232		4,616		1,312		78,705

31 December 2009
Carrying value
RMBS: G10 governments		33,779		125		-		-		-		-		33,904
RMBS: covered bond		8,645		360		67		-		-		-		9,072
RMBS: prime		9,211		676		507		547		558		1		11,500
RMBS: non-conforming		1,981		197		109		160		594		2		3,043
RMBS: sub-prime		578		121		306		87		579		153		1,824
CMBS		3,441		599		1,022		298		147		2		5,509
CDOs		615		944		254		944		849		262		3,868
CLOs		2,718		4,365		607		260		636		730		9,316
Other ABS		4,099		1,555		1,014		1,947		152		799		9,566

		65,067		8,942		3,886		4,243		3,515		1,949		87,602

122

Risk and capital management (continued)

Other risk exposures: Asset-backed securities (continued)

Asset-backed securities by rating (continued)

Key points

·	ABS carrying values decreased by 11%, from £78.7 billion at 30 June 2010 to £70.0 billion at 30 September 2010, principally due to sales and maturities of £18.6 billion, foreign exchange movements of £1.1 billion, partially offset by additions of £10.9 billion and fair value increases of £0.1 billion.

·		US government-backed securities were £21.3 billion at 30 September 2010 (30 June 2010 - £24.5 billion; 31 December 2009 - £27.0 billion). This comprised:

		·	HFT securities of £11.5 billion up from £10.1 billion at 30 June 2010, reflecting reinvestment by GBM mortgage trading of US agency positions following market developments.

		·	AFS exposures of £9.8 billion (30 June 2010 - £14.4 billion; 31 December 2009 - £13.6 billion) of liquidity portfolios in US Retail & Commercial; the decrease reflected balance sheet restructuring during the quarter.

·		Dutch government guaranteed RMBS exposures in Group Treasury’s liquidity portfolio increased by £0.4 billion to £6.2 billion at 30 September 2010 reflecting exchange rate movements.

·		Covered bonds, significantly all issued by Dutch and Spanish financial institutions, also in Group Treasury’s liquidity portfolio, increased by £0.6 billion to £8.2 billion, mainly due to exchange rate movements.

·		CDOs and CLOs decreased by £1.0 billion and £3.1 billion to £3.0 billion and £6.4 billion respectively, reflecting monoline related restructuring as well as disposals of US positions in Non-Core.

·		AAA rated assets decreased from £56.3 billion at 30 June 2010 to £50.0 billion at 30 September 2010, primarily as a result of disposals of US agency and prime securities as well as CLOs.
·		Life-to-date net valuation losses on ABS held at 30 September 2010, including impairment provisions, were £16.0 billion (30 June 2010 - £19.3 billion; 31 December 2009 - £20.1 billion) comprising:

		·		RMBS: £3.1 billion (30 June 2010 - £3.9 billion; 31 December 2009 - £3.6 billion), of which £0.2 billion (30 June 2010 - £0.6 billion; 31 December 2009 - £0.7 billion) was in US sub-prime and £2.6 billion (30 June 2010 - £2.9 billion; 31 December 2009 - £2.3 billion) on European assets of which £1.1 billion related to Group Treasury’s AFS liquidity portfolio, reflecting recent market events.

		·		CMBS: £0.9 billion (30 June 2010 - £1.3 billion; 31 December 2009 - £1.2 billion) of primarily European assets.

		·		CDOs and CLOs of £9.4 billion (30 June 2010 - £11.4 billion; 31 December 2009 - £9.4 billion) and £1.4 billion (30 June 2010 - £1.8 billion; 31 December 2009 - £3.3 billion) respectively, significantly all relating to US assets in Non-Core. Many of these assets have market hedges in place giving rise to a significant difference between the carrying value and the net exposure. The decrease in CDOs and CLOs primarily reflects monoline related restructuring as well as small disposals of US positions.

		·		Other ABS: £1.2 billion (30 June 2010 - £0.9 billion; 31 December 2009 - £2.6 billion).

123

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments

Credit valuation adjustments (CVA) represent an estimate of the adjustment to arrive at fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures. The table below details the Group’s CVA by type of counterparty.

	30 September 2010		30 June 2010		31 March 2010		31 December 2009
		£m		£m		£m		£m

Monoline insurers		2,678		3,599		3,870		3,796
CDPCs		622		791		465		499
Other counterparties		1,937		1,916		1,737		1,588

Total CVA adjustments		5,237		6,306		6,072		5,883

Monoline insurers

The table below summarises the Group’s exposure to monolines, all of which are in Non-Core.

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Gross exposure to monolines		4,445			5,495			6,189			6,170
Hedges with financial institutions		(70	)		(73	)		(548	)		(531	)
Credit valuation adjustment		(2,678	)		(3,599	)		(3,870	)		(3,796	)

Net exposure to monolines		1,697			1,823			1,771			1,843

CVA as a % of gross exposure		60	%		65	%		63	%		62	%

Counterparty and credit risk RWAs		£19.1bn			£25.5bn	*		£8.6bn			£13.7bn

* revised

The net effect to the income statement relating to monoline exposures is shown below:

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Credit valuation adjustment at beginning of quarter		(3,599	)		(3,870	)		(3,796	)		(6,300	)
Credit valuation adjustment at end of quarter		(2,678	)		(3,599	)		(3,870	)		(3,796	)

Decrease/(increase) in credit valuation adjustment		921			271			(74	)		2,504
Net (debit)/credit relating to realisation, hedges, foreign exchange and other movements		(687	)		(270	)		214			(2,125	)
Net credit relating to reclassified debt securities		(16	)		(130	)		(90	)		(1,040	)

Net credit/(debit) to income statement (1)		218			(129	)		50			(661	)

Note:

(1)	Comprises £8 million of reversals of impairment losses and £19 million of other income relating to reclassified debt securities. Income from trading activities was £191 million in Q3 2010.

124

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Monoline insurers (continued)

The table below summarises monoline exposures by rating. Credit ratings are based on those from rating agencies, Standard & Poor’s and Moody’s. Where the ratings differ, the lower of the two is taken.

	Notional: protected assets		Fair value: protected assets		Gross exposure		CVA		Hedges		Net exposure
		£m		£m		£m		£m		£m		£m

30 September 2010
A to AA-		6,641		5,616		1,025		376		-		649
Non investment grade		8,661		5,241		3,420		2,302		70		1,048

		15,302		10,857		4,445		2,678		70		1,697

Of which:
CDOs		1,146		230		916		602
RMBS		3		2		1		-
CMBS		4,226		2,284		1,942		1,336
CLOs		6,969		6,265		704		273
Other ABS		2,407		1,742		665		343
Other		551		334		217		124

		15,302		10,857		4,445		2,678

30 June 2010
A to AA-		7,474		6,342		1,132		439		-		693
Non investment grade		12,247		7,884		4,363		3,160		73		1,130

		19,721		14,226		5,495		3,599		73		1,823

Of which:
CDOs		1,658		496		1,162		836
RMBS		3		3		-		-
CMBS		4,496		2,335		2,161		1,565
CLOs		10,321		9,167		1,154		648
Other ABS		2,708		1,924		784		419
Other		535		301		234		131

		19,721		14,226		5,495		3,599

31 December 2009
A to AA-		7,143		5,875		1,268		378		-		890
Non investment grade		12,598		7,696		4,902		3,418		531		953

		19,741		13,571		6,170		3,796		531		1,843

Of which:
CDOs		2,284		797		1,487		1,059
RMBS		82		66		16		2
CMBS		4,253		2,034		2,219		1,562
CLOs		10,007		8,584		1,423		641
Other ABS		2,606		1,795		811		410
Other		509		295		214		122

		19,741		13,571		6,170		3,796

125

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Monoline insurers (continued)

Key points

·		The decrease in CVA held against exposures to monoline insurers reflects the reduction in exposure due to a combination of restructuring of certain exposures, higher prices of underlying reference instruments, primarily CLOs and CMBS, and the strengthening of sterling against the US dollar.

·		The CVA decreased on a total and relative basis reflecting the reduction in exposure and tightening credit spreads.

·		The majority of the current exposure is to monoline counterparties that are classified as sub-investment grade.

·		Counterparty and credit RWAs decreased by £6.3 billion in the quarter due to restructuring of certain exposures (c. £5 billion) and foreign exchange effects.

·		The net loss on realisation, hedges and foreign exchange movements was driven by a combination of realised losses arising from restructuring certain exposures and foreign currency movements. The net effect of reclassified debt securities reflects the difference between accounting impairments and mark-to-market losses that would have been reported on the assets had they been accounted for on a fair value through profit or loss basis.

The Group also has indirect exposures to monoline insurers through wrapped securities and other assets with credit enhancement from monoline insurers. These securities are traded with the benefit of this credit enhancement. Any deterioration in the credit rating of the monoline is reflected in the fair value of these assets.

Credit derivative product companies (CDPC)

A summary of the Group’s exposure to CDPCs, which is all in Non-Core, at 30 September 2010, is detailed below:

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Gross exposure to CDPCs		1,467			1,747			1,243			1,275
Credit valuation adjustment		(622	)		(791	)		(465	)		(499	)

Net exposure to CDPCs		845			956			778			776

CVA as a % of gross exposure		42	%		45	%		37	%		39	%

Counterparty and credit risk RWAs		£8.1bn			£8.8bn			£7.9bn			£7.5bn

Capital deductions		£297m			£292m			£309m			£347m

126

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Credit derivative product companies (continued)

The table below summarises CDPC exposures by rating.

	Notional amount: protected assets		Fair value: protected reference assets		Gross exposure		Credit valuation adjustment		Net exposure to CDPCs
		£m		£m		£m		£m		£m

30 September 2010
AAA		1,070		1,060		10		6		4
A to AA-		637		618		19		8		11
Non investment grade		19,468		18,286		1,182		476		706
Rating withdrawn		3,426		3,170		256		132		124

		24,601		23,134		1,467		622		845

30 June 2010
AAA		1,128		1,115		13		9		4
BBB- to A-		668		642		26		14		12
Non investment grade		20,051		18,655		1,396		586		810
Rating withdrawn		3,742		3,430		312		182		130

		25,589		23,842		1,747		791		956

31 December 2009
AAA		1,658		1,637		21		5		16
BBB- to A-		1,070		1,043		27		9		18
Non investment grade		17,696		16,742		954		377		577
Rating withdrawn		3,926		3,653		273		108		165

		24,350		23,075		1,275		499		776

Credit ratings are based on those from rating agencies S&P and Moody’s. Where the ratings differ, the lower of the two is taken.

The net income statement effect arising from CDPC exposures is shown below.

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Credit valuation adjustment at beginning of quarter		(791	)		(465	)		(499	)		(592	)
Credit valuation adjustment at end of quarter		(622	)		(791	)		(465	)		(499	)

Decrease/(increase) in credit valuation adjustment		169			(326	)		34			93
Net (debit)/credit relating to hedges, foreign exchange and other movements		(184	)		270			(66	)		(205	)

Net debit to income statement (income from trading activities)		(15	)		(56	)		(32	)		(112	)

127

Risk and capital management (continued)

Other risk exposures: Credit valuation adjustments (continued)

Credit derivative product companies (continued)

Key points

·		Exposure to CDPCs decreased over the period due to a combination of tighter credit spreads of the referenced assets and the strengthening of sterling against the US and Canadian dollar, partially offset by an increase in the relative value of senior tranches compared to the underlying reference portfolios.

·		CVA decreased both on a total and relative basis, reflecting the decreased exposure.

·		The Group has predominantly traded senior tranches with CDPCs. The average attachment and detachment points were 13% and 48% respectively at 30 September 2010 (30 June 2010 – 13% and 50% respectively), and the majority of the reference portfolios are investment grade.

·		Counterparty and credit RWAs relating to gross CDPC exposures decreased by £0.7 billion in the quarter whereas capital deductions increased marginally.

Other counterparties

The net income statement effect arising from the change in level of CVA for all other counterparties and related trades is shown in the table below.

	30 September 2010			30 June 2010			31 March 2010			31 December 2009
		£m			£m			£m			£m

Credit valuation adjustment at the beginning of the quarter		(1,916	)		(1,737	)		(1,588	)		(1,856	)
Credit valuation adjustment at the end of the quarter		(1,937	)		(1,916	)		(1,737	)		(1,588	)

(Increase)/decrease in credit valuation adjustment		(21	)		(179	)		(149	)		268
Net credit/(debit) relating to hedges, foreign exchange and other movements		37			185			12			(204	)

Net credit/(debit) to income statement (income from trading activities)		16			6			(137	)		64

Key points

·		The increase in CVA was primarily driven by an increase in exposure, reflecting market movements and rating downgrades of certain counterparties in the quarter. This was partially offset by the tightening of credit spreads.

·		Gains on hedges are the primary driver of the £37 million credit to the income statement in Q3 2010.

128

Risk and capital management (continued)

Other risk exposures: Leveraged finance

The table below details the Group’s global markets sponsor-led leveraged finance exposures, all in Non-Core, by industry and geography.

	30 September 2010										30 June 2010										31 December 2009
	Americas		UK		Other Europe		RoW		Total		Americas		UK		Other Europe		RoW		Total		Americas		UK		Other Europe		RoW		Total
		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m		£m

Gross exposure:
TMT (1)		871		1,513		775		519		3,678		1,044		1,592		849		531		4,016		1,781		1,656		1,081		605		5,123
Industrial		393		1,052		1,249		312		3,006		726		1,110		1,334		334		3,504		1,584		1,523		1,781		207		5,095
Retail		8		437		1,060		63		1,568		24		380		1,083		60		1,547		17		476		1,354		71		1,918
Other		198		1,100		771		216		2,285		235		1,301		1,022		231		2,789		244		1,527		1,168		191		3,130

		1,470		4,102		3,855		1,110		10,537		2,029		4,383		4,288		1,156		11,856		3,626		5,182		5,384		1,074		15,266

Net exposure:
TMT (1)		795		1,325		759		401		3,280		928		1,430		845		428		3,631		1,502		1,532		1,045		590		4,669
Industrial		274		949		1,083		302		2,608		535		1,001		1,178		329		3,043		524		973		1,594		205		3,296
Retail		8		424		1,006		60		1,498		24		366		1,028		57		1,475		17		445		1,282		68		1,812
Other		197		1,025		765		216		2,203		233		1,232		1,013		232		2,710		244		1,461		1,147		191		3,043

		1,274		3,723		3,613		979		9,589		1,720		4,029		4,064		1,046		10,859		2,287		4,411		5,068		1,054		12,820

Of which:
Drawn		938		3,260		2,829		806		7,833		1,313		3,604		3,332		870		9,119		1,944		3,737		3,909		950		10,540
Undrawn		336		463		784		173		1,756		407		425		732		176		1,740		343		674		1,159		104		2,280

		1,274		3,723		3,613		979		9,589		1,720		4,029		4,064		1,046		10,859		2,287		4,411		5,068		1,054		12,820

Notes:

(1)	Telecommunications, media and technology.
(2)	All of the above are classified as loans and receivables, except for £153 million (30 June 2010 - £154 million; 31 December 2009 - £143 million) that is classified as held-for-trading.

129

Risk and capital management (continued)

Other risk exposures: Leveraged finance (continued)

The table below analyses the movements in leveraged finance exposures.

	30 September 2010									30 June 2010			31 March 2010
	Drawn			Undrawn			Total			30 June 2010			31 March 2010
		£m			£m			£m			£m			£m

Balance at beginning of quarter		9,119			1,740			10,859			11,609			12,820
Transfers		(29	)		-			(29	)		68			8
Sales and restructurings		(1,203	)		(60	)		(1,263	)		(573	)		(929	)
Repayments and facility reductions		(196	)		48			(148	)		(120	)		(387	)
Funded deals		(1	)		1			-			-			-
Changes in fair value		41			-			41			17			(2	)
Accretion of interest		9			-			9			15			13
Net recoveries/(impairment provisions)		8			-			8			268			(198	)
Exchange and other movements		85			27			112			(425	)		284

Balance at end of quarter		7,833			1,756			9,589			10,859			11,609

Key points

·		The Group’s exposure to leveraged finance has reduced primarily as a result of sales of £1.3 billion, as part of the active management in line with the Non-Core strategy.

·		Credit impairments in the quarter were £85 million which were more than offset by recoveries of £93 million.

·		Approximately 90% of the above exposures represent senior lending.

Not included in the table above are:
·		UK Corporate leveraged finance net exposures of £6.5 billion at 30 September 2010 (30 June 2010 - £7.2 billion; 31 March 2010 - £7.5 billion) related to debt and banking facilities provided to UK mid-corporates. Of this £3.8 billion (30 June 2010 - £4.0 billion; 31 March 2010 – £4.2 billion) relates specifically to debt transactions financing UK mid-market buyouts, supplementing equity capital provided by third party private equity investors. The balance was senior debt transactions to mid-corporate clients supporting acquisitions, recapitalisations or general corporate purposes where higher leverage criteria were met.

·		Ulster Bank leveraged finance net exposure was £0.6 billion (30 June 2010 - £0.6 billion; 31 March 2010 - £0.6 billion).

130

Risk and capital management (continued)

Other risk exposures: Special purpose entities

The table below sets out the asset categories, together with the carrying value of the assets and associated liabilities for those securitisations and other asset transfers, other than conduits (discussed below), where the assets continue to be recorded on the Group’s balance sheet.

	30 September 2010				30 June 2010				31 December 2009
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
		£m		£m		£m		£m		£m		£m

Residential mortgages		74,351		18,164		71,022		15,012		69,927		15,937
Credit card receivables		4,059		1,592		4,148		1,585		2,975		1,592
Other loans		31,364		1,003		34,097		986		36,448		1,010
Finance lease receivables		582		582		621		621		597		597

Assets are significantly greater than liabilities, as all notes issued by funding-related own asset securitisation SPEs are purchased by Group companies.

Conduits

Group-sponsored conduits can be divided into multi-seller conduits and own-asset conduits. The Group consolidates both types of conduits where the substance of the relationship between the Group and the conduit vehicle is such that the vehicle is controlled by the Group. Liquidity commitments from the Group to the conduit exceed the nominal amount of assets funded by the conduit as liquidity commitments are sized to cover the funding cost of the related assets.

During the period both multi-seller and own asset conduit assets have been reduced in line with wider Group balance sheet management. The total assets held by Group-sponsored conduits were £19.8 billion at 30 September 2010 (30 June 2010 - £22.5 billion; 31 December 2009 - £27.4 billion).

The exposure to conduits which are consolidated by the Group, the assets held and commercial papers issued by these vehicles is set out below.

	30 September 2010						30 June 2010						31 December 2009
	Core		Non-Core		Total		Core		Non-Core		Total		Core		Non-Core		Total
		£m		£m		£m		£m		£m		£m		£m		£m		£m

Total assets		16,183		3,642		19,825		18,645		3,841		22,486		23,409		3,957		27,366
Commercial paper issued		15,430		2,563		17,993		17,987		2,592		20,579		22,644		2,939		25,583

Liquidity and credit enhancements:
Deal specific liquidity:
- drawn		733		1,104		1,837		637		1,274		1,911		738		1,059		1,797
- undrawn		22,472		3,277		25,749		26,049		3,367		29,416		28,628		3,852		32,480
PWCE (1)		918		275		1,193		1,119		316		1,435		1,167		341		1,508

		24,123		4,656		28,779		27,805		4,957		32,762		30,533		5,252		35,785

Maximum exposure to loss (2)		23,205		4,381		27,586		26,686		4,641		31,327		29,365		4,911		34,276

Notes:

(1)	Programme-wide credit enhancement.
(2)	Maximum exposure to loss is determined as the Group’s total liquidity commitments to the conduits and additionally programme-wide credit support which would absorb first loss on transactions where liquidity support is provided by a third party. Third party maximum exposure to loss is reduced by repo trades conducted with an external counterparty.

131

Risk and capital management (continued)

Other risk exposures: Conduits (continued)

Multi-seller conduits accounted for 42% of the total liquidity and credit enhancements committed by the Group at 30 September 2010 (30 June 2010 and 31 December 2009 – 43%). The Group’s multi-seller conduits have continued to fund the vast majority of their assets solely through asset-backed commercial paper (ABCP) issuance. There have been no significant systemic failures within the financial markets similar to that experienced in the second half of 2008 following Lehman Brothers bankruptcy filing in September 2008. The improvement in market conditions has allowed these conduits to move towards more normal ABCP funding and reduced the need for backstop funding from the Group.

Key points

·		The maturity of the commercial paper issued by the Group’s conduits is managed to mitigate the short-term contingent liquidity risk of providing back-up facilities. The Group’s limits sanctioned for such liquidity facilities at 30 September 2010 totalled approximately £21.9 billion (30 June 2010 - £24.3 billion; 31 December 2009 - £25.0 billion). For a very small number of transactions within one multi-seller conduit the liquidity facilities have been provided by third-party banks. This typically occurs on transactions where the third-party bank does not use, or have, its own conduit vehicles.

·		The Group’s maximum exposure to loss on its multi-seller conduits is £22.0 billion (30 June 2010 - £24.5 billion; 31 December 2009 - £25.2 billion), being the total amount of the Group’s liquidity commitments plus the extent of PWCE of conduit assets for which liquidity facilities were not provided by third parties.

·		The demand for high quality ABCP continued during the period to 30 September 2010 with a higher demand for longer dated paper, compared with the previous quarter.

·		The average maturity of ABCP issued by the Group’s conduits at 30 September 2010 was 68.3 days (30 June 2010 – 62.7 days; 31 December 2009 - 58.4 days).

·		The Group holds two own-asset conduits, which have assets that were previously funded by the Group. The Group’s maximum exposure to loss on these two conduits was £5.6 billion at 30 September 2010 (30 June 2010 - £6.9 billion; 31 December 2009 - £9.1 billion), with £3.2 billion of ABCP outstanding at that date (30 June 2010 - £4.2 billion; 31 December 2009 - £7.7 billion).

·		Additionally the Group has established an own-asset conduit with a committed liquidity of £26.0 billion (30 June 2010 - £26.0 billion; 31 December 2009 - £25.1 billion) to access the Bank of England’s open market operations for contingent funding purposes.

The Group also extends liquidity commitments to multi-seller conduits sponsored by other banks, but typically does not consolidate these entities as the Group does not retain the majority of risks and rewards. The Group’s exposure from third-party conduits was £136 million (30 June 2010 - £403 million; 31 December 2009 - £587 million) representing deal specific liquidity.

132

Additional information

Selected financial data

The dollar financial information included below has been translated for convenience at a rate of £1.00 to US$1.5731, being the Noon Buying Rate on 30 September 2010.

Summary consolidated income statement

	Quarter ended
	30 September			30 September			30 June			30 September*
	2010			2010			2010			2009
		$m			£m			£m			£m

Net interest income		5,366			3,411			3,676			3,120
Non-interest income		4,209			2,675			5,761			3,686

Total income		9,575			6,086			9,437			6,806
Operating expenses		(7,159	)		(4,551	)		(4,453	)		(4,590	)

Profit before other operating charges and impairment losses		2,416			1,535			4,984			2,216
Insurance net claims		(1,796	)		(1,142	)		(1,323	)		(1,145	)
Impairment losses		(3,073	)		(1,953	)		(2,487	)		(3,279	)

Operating (loss)/profit before tax		(2,453	)		(1,560	)		1,174			(2,208	)
Tax credit/(charge)		464			295			(825	)		617

(Loss)/profit from continuing operations		(1,989	)		(1,265	)		349			(1,591	)
Profit/(loss) from discontinued operations		28			18			(1,019	)		-

Loss for the period		(1,961	)		(1,247	)		(670	)		(1,591	)

(Loss)/profit attributable to:
Minority interests		159			101			946			36
Preference dividends		-			-			(19	)		(245	)
Ordinary shareholders		(2,275	)		(1,146	)		257			(1,800	)

* restated for the reclassification of results attributable to other Consortium Members as discontinued operations

Summary consolidated balance sheet

	30 September 2010		30 September 2010		30 June 2010		31 December 2009
		$m		£m		£m		£m

Loans and advances		1,071,736		681,289		680,923		820,146
Debt securities and equity shares		390,388		248,165		253,586		286,782
Derivatives and settlement balances		899,308		571,679		543,589		453,487
Other assets		202,071		128,454		103,955		136,071

Total assets		2,563,503		1,629,587		1,582,053		1,696,486

Owners’ equity		118,926		75,600		76,802		77,736
Minority interests		2,800		1,780		2,492		16,895
Subordinated liabilities		43,874		27,890		27,523		37,652
Deposits		788,033		500,943		632,420		756,346
Derivatives, settlement balances and short positions		956,490		608,029		571,690		475,017
Other liabilities		653,380		415,345		271,126		332,840

Total liabilities and equity		2,563,503		1,629,587		1,582,053		1,696,486

133

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/ Rajan Kapoor
Rajan Kapoor Group Chief Accountant 15 December 2010

134

Appendix 1

The Asset Protection Scheme

135

Appendix 1 The Asset Protection Scheme

Covered assets: roll forward to 30 September 2010

The movements in covered assets during the quarter are detailed below.

	Covered amount
	£bn

Covered assets at 30 June 2010		215.5
Disposals		(3.5	)
Maturities, amortisation and early repayments		(7.3	)
Effect of foreign currency movements and other adjustments		0.7

Covered assets at 30 September 2010		205.4

Covered assets at 31 December 2009		230.5

Note:

(1)	The Asset Protection Agency (APA) and the Group have now reached agreement on substantially all eligibility issues.

Key points

·	The reduction in covered assets was due to disposals, early repayments and maturing loans.

·	As part of the Group’s risk reduction strategy significant disposals were made from the structured credit portfolio (£1.8 billion); additionally the Group took advantage of market conditions and executed sales from its derivative, loan and leveraged finance portfolios (£1.7 billion).

136

Appendix 1 The Asset Protection Scheme

Credit impairments and write downs

The table below analyses the cumulative credit impairment losses and adjustments to par value (including AFS reserves) relating to covered assets.

	30 September 2010		30 June 2010		31 December 2009
		£m		£m		£m

Loans and advances		17,360		16,702		14,240
Debt securities		12,113		13,980		7,816
Derivatives		2,341		1,828		6,834

		31,814		32,510		28,890

By division:
UK Retail		2,880		2,765		2,431
UK Corporate		1,026		927		1,007
Ulster Bank		697		730		486

Retail & Commercial		4,603		4,422		3,924
Global Banking & Markets		1,769		1,528		1,628

Core		6,372		5,950		5,552
Non-Core		25,442		26,560		23,338

		31,814		32,510		28,890

Key points

·	Cumulative credit impairments and write downs decreased by £0.7 billion in the quarter, primarily due to disposals of debt securities in the Non-Core division of £1.2 billion and movements in exchange rates of £0.5 billion, partially offset by impairments and write downs of £0.7 billion.

·	The APA and the Group have reached agreement on the classification for the purposes of the Scheme of some structured credit assets which has resulted in adjustments to credit impairments and write downs mainly between debt securities and derivatives.

137

Appendix 1 The Asset Protection Scheme (continued)

First loss utilisation

For definitions of triggered amounts and other related aspects, refer to page 129 of the Group’s 2009 Form 20-F - Business review - Asset Protection Scheme.

The table below summarises the triggered amount and related cash recoveries by division.

	30 September 2010						30 June 2010						31 December 2009
	Triggered amount		Cash recoveries to date		Net triggered amount		Triggered amount		Cash recoveries to date		Net triggered amount		Triggered amount		Cash recoveries to date		Net triggered amount
		£m		£m		£m		£m		£m		£m		£m		£m		£m

UK Retail		3,613		371		3,242		3,503		232		3,271		3,340		129		3,211
UK Corporate		4,027		1,032		2,995		3,431		777		2,654		3,570		604		2,966
Ulster Bank		1,387		109		1,278		917		78		839		704		47		657

Retail & Commercial		9,027		1,512		7,515		7,851		1,087		6,764		7,614		780		6,834
Global Banking & Markets		3,057		464		2,593		2,579		289		2,290		1,748		108		1,640

Core		12,084		1,976		10,108		10,430		1,376		9,054		9,362		888		8,474
Non-Core		29,502		2,888		26,614		26,590		1,792		24,798		18,905		777		18,128
		41,586		4,864		36,722		37,020		3,168		33,852		28,267		1,665		26,602

Loss credits						732						-						-

						37,454						33,852						26,602

Notes:

(1)	The triggered amount on a covered asset is calculated when an asset is triggered (due to bankruptcy, failure to pay after a grace period or restructuring with an impairment) and is the lower of the covered amount and the outstanding amount for each covered asset. The Group expects additional assets to trigger upon expiry of relevant grace periods based on the current risk rating and level of impairments on covered assets.
(2)	Following the reclassification of some structured credit assets from derivatives to debt securities the APA and the Group also reached agreement regarding changes to triggers in respect of these assets. An additional criterion – implied write down – was agreed. This occurs if (a) on two successive relevant payment dates, the covered asset has a rating of Caa2 or below by Moody’s, CCC or below by Standard & Poor’s or Fitch or a comparable rating from an internationally recognised credit rating agency or (b) on any two successive relevant payment dates, the mark-to-market value of the covered asset is equal to or less than 40 per cent of the par value of the covered asset, in each case as at such relevant payment date.
(3)	Under the Scheme rules, the Group may apply to the APA for loss credits in respect of the disposal of non-triggered assets. A loss credit counts towards the first loss threshold and is typically determined by the APA based on the expected loss of the relevant asset.
(4)	The Group and the APA are currently in discussion with regard to loss credits in relation to the withdrawal of £2.9 billion of derivative assets during Q2 2010 and the disposal of approximately £1.5 billion of structured finance and leveraged finance assets in Q3 2010.
(5)	Under the rules of the Scheme the data in the table above at the quarterly reporting date may be revised over a rolling twelve month period.

Key point

·	The Group currently expects recoveries on triggered amounts to be approximately 45% over the life of the relevant assets. On this basis, the expected loss on triggered assets at 30 September 2010 is approximately £23 billion (38%) of the £60 billion first loss threshold under the APS.

138

Appendix 1 The Asset Protection Scheme

Risk-weighted assets

The table below analyses the divisional risk-weighted assets (RWAs) covered by the APS.

	30 September 2010		30 June 2010		31 December 2009
	£bn		£bn		£bn

UK Retail		13.4		13.5		16.3
UK Corporate		24.0		25.7		31.0
Ulster Bank		8.3		8.3		8.9

Retail & Commercial		45.7		47.5		56.2
Global Banking & Markets		13.2		15.5		19.9

Core		58.9		63.0		76.1
Non-Core		58.0		60.4		51.5

APS RWAs		116.9		123.4		127.6

Key point

·	APS RWAs decreased by £6.5 billion, reflecting disposals and early repayments as well as changes in risk parameters.

139