REG - Royal Bk Scot.Grp. - Half Year Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 1

NatwestAnnouncement

05/08/2016 07:08

RNS Number : 3371G
Royal Bank of Scotland Group PLC
05 August 2016
Independent review report to The Royal Bank of Scotland Group plc
Introduction
We have been engaged by The Royal Bank of Scotland Group plc (the 'Company' or the 'Group') to review the Condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016, which comprise the Condensed consolidated income statement, the Condensed consolidated statement of comprehensive income, the Condensed consolidated balance sheet, the Condensed consolidated statement of changes in equity, the Condensed consolidated cash flow statement, related Notes 1 to 19, the financial information in the segment results on page 26 to 59, and the Capital and risk management disclosures set out in Appendix 1 except for those indicated as not reviewed (together 'the Condensed consolidated financial statements').We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Condensed consolidated financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. 
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The Condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34, ''Interim Financial Reporting,'' as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the Condensed consolidated financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 


Independent review report to The Royal Bank of Scotland Group plc
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Statutory Auditor
London, United Kingdom
4 August 2016

Risk factors
The Group is subject to the following new risk factors:
Economic, regulatory and political uncertainty arising from the outcome of the recent referendum on the UK's membership of the European Union ("EU Referendum") could adversely impact the Group's business, results of operations, financial condition and prospects. 
In a referendum held on 23 June 2016, a majority voted for the UK to leave the EU. Immediately following the EU Referendum result, the UK and global stock and foreign exchange markets commenced a period of significant volatility, in addition to which there is now prevailing uncertainty relating to the process, timing and negotiation of the UK's relationships with the EU and other multilateral organisations, as well as individual countries. 
Once the exit process is triggered by the UK government, a two year period of negotiation will begin to determine the new terms of the UK's relationship with the EU, after which period its EU membership will cease. These negotiations will run in parallel to standalone bilateral negotiations with many individual countries and multilateral counterparties with which the UK currently has trading arrangements by virtue of its membership of the EU. The timing of, and process for, such negotiations and the resulting terms of the UK's future economic, trading and legal relationships are uncertain. See also "The result of the EU Referendum has revived political uncertainty regarding Scottish independence resulting in additional risks to the Group."
The longer term effects of the EU Referendum are difficult to predict but are likely to include further financial instability and slower economic growth, in the UK in particular, but also in Republic of Ireland ("ROI"), Europe and the global economy, at least in the short to medium term. 
As part of its revised strategy, the Group has been refocusing its business in the UK and ROI and, accordingly is more exposed to a slow-down of the British and Irish economies. Further decreases in interest rates by the Bank of England or sustained low or negative interest rates will put further pressure on the Group's interest margins and adversely affect the Group's profitability and prospects. Furthermore, such market conditions may also result in an increase in the Group's pension deficit. 


Risk factors
A challenging macroeconomic environment, reduced profitability and greater market uncertainty could negatively impact the Group's performance and potentially lead to credit ratings downgrades which could adversely impact the Group's ability and cost of funding. The Group's ability to access capital markets on acceptable terms and hence its ability to raise the amount of capital and funding required to meet its regulatory requirements and targets, including those relating to loss-absorbing instruments to be issued by the Group, could be effected. The major credit rating agencies have downgraded and changed their outlook to negative on the UK's sovereign credit rating following the results of the EU Referendum, resulting in the loss of its last remaining AAA rating.
The Group is in the process of implementing a large number of key restructuring and strategic initiatives, including the restructuring of its CIB business, the implementation of the UK ring-fencing regime, a significant cost reduction programme, and the divestment of Williams & Glyn, all of which will be carried out throughout this period of significant uncertainty which may impact the prospects for successful execution and impose additional pressure on management. In addition, the uncertainty resulting from the impact of the EU Referendum on foreign nationals' long term residency permissions in the UK may make it challenging for the Group to retain and recruit adequate staff, which may adversely impact the execution of these restructuring activities and business strategy.
The Group and its subsidiaries are subject to substantial EU-derived regulation and oversight. There is now significant uncertainty as to the respective legal and regulatory environments in which the Group and its subsidiaries will operate when the UK is no longer a member of the EU. In particular, the Group and its counterparties may no longer be able to rely on the European passporting framework for financial services and could be required to apply for authorisation in multiple EU jurisdictions, the costs, timing and viability of which is uncertain. This uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules may have a significant impact on the Group's operations, profitability and business model. 
These risks and uncertainties are in addition to the pre-existing discussed in the Group's 2015 Annual Report & Accounts, also as filed on Form 20-F, which could individually or collectively have a material adverse effect on the Group's financial condition and results of operations.
The result of the EU Referendum has revived political uncertainty regarding Scottish independence resulting in additional risks to the Group.
The Royal Bank of Scotland Group plc and The Royal Bank of Scotland plc ("RBS plc"), its principal operating subsidiary, are both headquartered and incorporated in Scotland. A referendum on Scottish independence took place on 18 September 2014, the outcome of which was a vote in favour of Scotland remaining part of the UK. However, the outcome of the EU Referendum was not supported by the majority of voters in Scotland who voted in favour of remaining in the EU. This has revived the political debate on a second referendum on Scottish independence creating further uncertainty as to whether such a referendum may be held and as to how the Scottish parliamentary process may impact the negotiations relating to the UK's exit from the EU and its future economic, trading and legal relationship with the EU.


Risk factors
Although the fact of, the timing and outcome of any further referendum on Scottish independence is very uncertain, such a referendum would greatly increase the risks the Group currently faces as a result of the EU Referendum. An affirmative result would result in significant additional constitutional, political, regulatory and economic uncertainty and would likely significantly impact the Group's credit ratings and funding and other costs and the fiscal, monetary, legal and regulatory landscape in which the Group operates. 
In addition to the above, set out below is a summary of certain risks which could adversely affect the Group. This summary updates, and should be read in conjunction with, the fuller description of these and other risk factors included on pages 390 to 414 of the 2015 R&A and on pages 384 to 408 of the Group's Form 20-F filed with the US Securities and Exchange Commission on 24 March 2016. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.
On 28 April 2016, the Group announced that there was a significant risk that the separation and divestment of Williams & Glyn would not be achieved by 31 December 2017. The Board has determined that it would not be prudent to continue with the current plan of record for separating and divesting Williams & Glyn and is actively exploring various alternative divestment structures including asset or business sales to third parties. However, there is no certainty any will be viable and each entails significant structural, execution, regulatory and cost risks.
While RBS remains committed to meeting the deadline for achieving a divestment, there is a significant risk it will be unable to do so. Challenging market conditions, Williams & Glyn's high cost base and the complexity of the business previously known as Williams & Glyn (and attendant integration/transfer challenges for any potential counterparty), transfer costs and accounting impacts may inhibit interest in its assets or business and/or result in RBS only being able to achieve a price materially below the book value of those assets, which may result in a significant loss on any divestment transaction and have an adverse effect on the Group's capital position.
The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group's operations, operating results, reputation, financial position and future prospects. For more details on certain of the Group's ongoing legal, governmental and regulatory proceedings, see pages 95 to 105.
The Group has been, and will remain, in a period of major restructuring through to 2019, which carries significant execution and operational risks, and there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer-focused and profitable bank.
Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group.
Operational risks are inherent in the Group's businesses and these risks could increase as a result of a number of factors including, as the Group implements its strategic programme, the UK ring-fencing regime, its cost reduction programme and the divestment of Williams & Glyn.


Risk factors
The Group's businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions and other global risks and the Group will be increasingly impacted by developments in the UK as its operations become increasingly concentrated in the UK.
Changes in interest rates, foreign exchange rates, credit spreads, bond, equity and commodity prices, basis, volatility and correlation risks and other market factors have significantly affected and will continue to affect the Group's business and results of operations. 
The Group's business performance and financial position could be adversely affected if its capital is not managed effectively or if it is unable to meet its capital targets.
Failure by the Group to comply with regulatory capital, liquidity and leverage requirements, including as a result of, international, EU or UK changes or a requirement by the Group's regulators to increase the levels of capital the Group should hold or the manner in which it calculates its risk weighted assets and risk exposure may result in intervention by its regulators and loss of investor confidence, and may have a material adverse effect on its results of operations, financial condition and reputation and may result in distribution restrictions and adversely impact existing shareholders and other security holders. 
Failure by the Group to comply with its capital requirements or to maintain sufficient distributable profits in the Royal Bank of Scotland Group plc, (RBSG) may restrict its ability to make discretionary distributions, including the payment of coupons on certain capital instruments and dividends to its ordinary shareholders. RBSG distributable profits are sensitive to the accounting impact of factors including the redemption of preference shares, restructuring costs and impairment charges and the carrying value of its investments in subsidiaries which are carried at the lower of cost and their prevailing recoverable amount. Recoverable amounts depend on discounted future cash flows which can be affected by restructurings, such as the requirement to create a ring fenced and non ring-fenced bank or banks, or unforeseen events. The RBSG distributable reserves also depend on the receipt of income from subsidiaries, principally as dividends. The ability of subsidiaries to pay dividends is subject to their performance and applicable local laws and other restrictions, including their respective regulatory requirements. Any of these factors, including restructuring costs, impairment charges and a reduction in the carrying value of RBSG subsidiaries or a shortage of dividends from them could limit the Group's ability to maintain sufficient distributable profits to be able to the pay coupons on certain capital instruments and dividends to its ordinary shareholders.
The Group is subject to stress tests mandated by its regulators in the UK and in Europe which may result in additional capital requirements or management actions which, in turn, may impact the Group's financial condition, results of operations and investor confidence or result in restrictions on distributions.
As a result of extensive reforms being implemented within the EU and the UK relating to the resolution of financial institutions, material additional requirements will arise to ensure that financial institutions maintain sufficient loss-absorbing capacity. Such changes to the funding and regulatory capital framework may require the Group to meet higher funding levels than the Group anticipated within its strategic plans and affect the Group's funding costs.
The Group's borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit ratings and, to a lesser extent, on the rating of the UK Government. 
The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access sources of liquidity and funding.
The Group's businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group's key regulators are likely to continue to increase compliance and conduct risks and could have a material adverse effect on how the Group conducts its business and on its results of operations and financial condition.


Risk factors
The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group's IT investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group's operations and its ability to retain or grow its customer business and could require the Group to recognise impairment charges.
The Group's operations are highly dependent on its IT systems. A failure of the Group's IT systems could adversely affect its operations and investor and customer confidence and expose the Group to regulatory sanctions.
The Group is exposed to cyber attacks and a failure to prevent or defend against such attacks could have a material adverse effect on the Group's operations, results of operations or reputation.
The Group's operations entail inherent reputational risk.
The Group is exposed to conduct risk which may adversely impact the Group or its employees and may result in conduct having a detrimental impact on the Group's customers or counterparties.
The Group may be adversely impacted if its risk management is not effective and there may be significant challenges in maintaining the effectiveness of the Group's risk management framework as a result of the number of strategic and restructuring initiatives being carried out by the Group simultaneously.
The Group is currently in the process of implementing a strong risk culture across the organisation and a failure by the Group to do so could adversely affect the Group's ability to achieve its strategic objectives.
The Group is subject to pension risks and may be required to make additional contributions to cover pension funding deficits. In addition, it may be required to restructure its pension schemes as a result of the implementation of the UK ring-fencing which may result in additional or increased cash contributions.
Pension risk and changes to the Group's funding of its pension schemes may have a significant impact on the Group's capital position. 
The impact of the Group's pension obligations on its results and operations are also dependent on the regulatory environment in which it operates.
The Group's business and results of operations may be adversely affected by increasing competitive pressures and technology disruption in the markets in which it operates.
The Group operates in markets that are subject to intense scrutiny by the competition authorities and its business and results of operations could be materially affected by competition rulings and other government measures.
As a result of the commercial and regulatory environment in which it operates, the Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations.
HM Treasury (or UKFI on its behalf) may be able to exercise a significant degree of influence over the Group and any further offer or sale of its interests may affect the price of securities issued by the Group.
The Group's earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions.
The financial performance of the Group has been, and may continue to be, materially affected by customer and counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments.


Risk factors
The Group is committed to executing the run-down and sale of certain businesses, portfolios and assets forming part of the businesses and activities being exited by the Group. Failure by the Group to do so on commercially favourable terms could have a material adverse effect on the Group's operations, operating results, financial position and reputation.
The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.
The Group relies on valuation, capital and stress test models to conduct its business, assess its risk exposure and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro- and macroeconomic environment in which the Group operates could have a material adverse effect on the Group's business, capital and results. If found deficient by the Group's regulators, the Group may be required to make changes to such models or may be precluded from using such models, which could result in the Group maintaining additional capital.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Its results in future periods may be affected by changes to applicable accounting rules and standards.
The Group and its subsidiaries are subject to a new and evolving framework on recovery and resolution, the impact of which remains uncertain, and which may result in additional compliance challenges and costs.
The Group may become subject to the application of stabilisation or resolution powers in certain significant stress situations, which may result in various actions being taken in relation to the Group and any securities of the Group, including the write-off, write-down or conversion of the Group's securities.
In the UK and in other jurisdictions, the Group is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers.
The Group's results could be adversely affected in the event of goodwill impairment.
Recent and anticipated changes in the tax legislation in the UK are likely to result in increased tax payments by the Group and may impact the recoverability of certain deferred tax assets recognised by the Group (including the timing for the recoverability of such deferred tax assets). 

Statement of directors' responsibilities
We, the directors listed below, confirm that to the best of our knowledge:
the condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting';


the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and


the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).
By order of the Board
Howard Davies
Ross McEwan
Ewen Stevenson
Chairman
Chief Executive
Chief Financial Officer
4 August 2016
Board of directors
Chairman
Executive directors
Non-executive directors
Howard Davies
Ross McEwan
Ewen Stevenson
Sandy Crombie
Frank Dangeard 
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Brendan Nelson
Baroness Noakes
Mike Rodgers

Additional information
Share information

30 June
2016
31 March
2016
31 December
2015




Ordinary share price
171.60p
222.70p
302.00p




Number of ordinary shares in issue
11,755m
11,661m
11,625m
Financial calendar


2016 third quarter interim management statement 
28 October 2016

Forward-looking statements
Certain sections in this document contain 'forward-looking statements' as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words 'expect', 'estimate', 'project', 'anticipate', 'believe', 'should', 'intend', 'plan', 'could', 'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal', 'objective', 'may', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on these expressions.
In particular, this document includes forward-looking statements relating, but not limited to: The Royal Bank of Scotland Group's (RBS) restructuring which includes divestment of Williams & Glyn, litigation, government and regulatory investigations, the proposed restructuring of RBS's CIB business, the implementation of the UK ring-fencing regime, the implementation of a major development program to update RBS's IT infrastructure and the continuation of its balance sheet reduction programme, as well as capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios and requirements liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, AT1 and other funding plans, funding and credit risk profile; RBS's future financial performance; the level and extent of future impairments and write-downs; including with respect to Goodwill; future pension contributions and RBS's exposure to political risks, operational risk, conduct risk and credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in the Annual Report and Accounts 2015. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes (including where resolved by settlement); the economic, regulatory and political uncertainty arising from the majority vote to leave in the referendum on the UK's membership in the European Union and the revived political uncertainty regarding Scottish independence; the divestment of Williams & Glyn; RBS's ability to successfully implement the various initiatives that are comprised in its restructuring plan, particularly the proposed restructuring of its CIB business and the balance sheet reduction programme as well as the significant restructuring required to be undertaken by RBS in order to implement the UK ring fencing regime; the significant changes, complexity and costs relating to the implementation of its restructuring, the separation and divestment of Williams & Glyn and the UK ring-fencing regime; whether RBS will emerge from its restructuring and the UK ring-fencing regime as a viable, competitive, customer focused and profitable bank; RBS's ability to achieve its capital and leverage requirements or targets which will depend on RBS's success in reducing the size of its business and future profitability; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; the ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS's strategic refocus on the UK the impact of global economic and financial market conditions (including low or negative interest rates) as well as increasing competition. In addition, there are other risks and uncertainties. These include operational risks that are inherent to RBS's business and will increase as a result of RBS's significant restructuring; the potential negative impact on RBS's business of actual or perceived global economic and financial market conditions and other global risks; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates; the risk of failure to realise the benefit of RBS's substantial investments in its information technology and systems, the risk of failing to preventing a failure of RBS's IT systems or to protect itself and its customers against cyber threats, reputational risks; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; risks relating to increased pension liabilities and the impact of pension risk on RBS's capital position; increased competitive pressures resulting from new incumbents and disruptive technologies; RBS's ability to attract and retain qualified personnel; HM Treasury exercising influence over the operations of RBS; limitations on, or additional requirements imposed on, RBS's activities as a result of HM Treasury's investment in RBS; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS's financial statements; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject; the recoverability of deferred tax assets by the Group; and the success of RBS in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

Appendix 1
Capital and risk management

Appendix 1 Capital and risk management

Page
Presentation of information
2
General overview 
2
Capital management
Pillar 2A and MDA
6
Capital resources
8
Capital flow statement
9
Loss absorbing capital
10
Risk-weighted assets
11
Liquidity and funding risk
Liquidity risk
13
Funding risk
15
Credit risk
Key developments: Exposure measure
16
Management basis:
18
 Key loan portfolios 
18
 Country risk 
37
Balance sheet analysis:
39
 Loans and related credit metrics
39
 Debt securities
43
 Derivatives
44
 Valuation reserves
45
Regulatory basis:
46
 EAD and RWA density
46
Market risk

Trading portfolios
50
Non-trading portfolios
52
Net interest income and foreign exchange risk
55


Appendix 1 Capital and risk management
Presentation of information
Except as otherwise indicated by an asterisk (*), information in the Capital and risk management appendix is within the scope of the Independent review report by Ernst & Young LLP. Unless otherwise indicated, disclosures in this section include disposal groups in the relevant exposures. 
General overview*
RBS's main risks are described in Capital and risk management - Risk coverage in the 2015 Annual Report and Accounts. The table below is an overview of these risks, including any developments during H1 2016.
Risk type
Overview
Capital and 
leverage
The CET1 ratio decreased by 100 basis points in H1 2016 to 14.5% primarily reflecting management actions to normalise the ownership structure and improve the long-term resilience of RBS. These included the final DAS payment of 1.2 billion and the accelerated payment of 4.2 billion relating to the outstanding deficit on the pension Main Scheme. Additional litigation and conduct charges contributed to a 2.0 billion reduction in CET1 capital.

RWAs increased by 2.6 billion to 245.2 billion during H1 2016 reflecting lending growth in UK PBB and Commercial Banking and the adverse impact of exchange rate movements being partially offset by Capital Resolution disposals and run-off.

There was a 10 basis points decrease in the CET1 ratio in Q2 2016 driven by a 0.7 billion decrease in CET 1 capital in Q2 2016, offset by 4.3 billion reduction in RWAs. The reduction in RWAs related to disposals and run-off in Capital Resolution, and removal of that element of operational risk RWAs relating to Citizens, following regulatory approval (3.9 billion); these were partly off-set by the weakening of sterling mainly due to the EU Referendum (4.4 billion).

Leverage ratio reduced by 40 basis points in H1 2016 to 5.2%, reflecting lower CET1 capital and loan growth.

Under current total loss absorbing capital (TLAC) guidance, RBS will be required to hold a minimum loss absorbing capital of 16% of RWAs by the beginning of 2019 and 18% by the beginning of 2022. This estimate is subject to final guidance from the Bank of England's proposed approach to MREL. Estimated loss absorbing capital at 30 June 2016 was 59.9 billion (31 December 2015 - 60.3 billion) which was 24.4% of RWAs and 8.3% of leverage exposure. 

The current estimated headroom to fully phased MDA trigger in 2019 is 2.2%. This is based on our target CET1 ratio of 13% versus 10.8% MDA requirement, which remains subject to change, comprising: 4.5% Pillar 1 minimum, the capital conservation buffer of 2.5%, 2.8% of Pillar 2A ratio and 1.0% GSIB buffer.

RBS continued to strengthen its balance sheet and RBSG plc issued 1.5 billion 7 year 2.5% senior notes and $1.5 billion 10 year 4.8% senior notes in Q1 2016; both of which are expected to be MREL-eligible, subject to regulatory finalisation.

There has been significant volatility in the capital markets during the year, most notably in the AT1 market. We continue to target up to 2 billion of AT1 issuance in 2016, subject to market conditions.

The EBA announced the results of its 2016 EU-wide stress test in July 2016, RBS's CET1 ratio was 8.1% and leverage ratio was 3.6%. There was no pass / fail threshold for this test.

We remain actively engaged with regulators in the UK and beyond on upcoming regulatory developments, including those relating to Basel Committee proposals on RWAs and the Bank of England's proposed approach to MREL for UK banks; our capital plans will evolve accordingly.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
General overview* (continued)
Risk type
Overview
Liquidity and funding
RBS has not experienced any significant impact to its liquidity position as a result of the EU Referendum. All key liquidity risk metrics met minimum requirements at 30 June 2016.
The liquidity position remains strong with the liquidity portfolio of 153 billion covering total wholesale funding, including derivative collateral, by 1.9 times.

The liquidity portfolio decreased by 2.9 billion in H1 2016, and by 3.7 billion in Q2, with payments totalling 5.4 billion in March 2016 relating to the pension fund and the final DAS dividend. The second quarter decrease comprised a 7 billion reduction in cash at central banks being partially offset by an increase in loans (secondary liquidity) in the central Treasury portfolio as well as lower liquidity requirements in RBS N.V. as rundown of the balance sheet continued. 

Liquidity coverage ratio (LCR) reduced from 136% at the year end to 121% at the end of the first quarter and 116% at 30 June 2016. The trend reflected the pension fund and DAS dividend payments and lending growth in UK PBB and Commercial Banking. These factors reduced RBS's excess liquidity.

Net stable funding ratio (NSFR) was 119%, comfortably above the minimum target of 100%, reflecting RBS's funding strategy of relying on stable customer deposits. 

The loan:deposit ratio was 92%, up from 90% at Q1 and 89% at the year end. Mortgage growth in UK PBB and higher corporate lending in Commercial Banking outweighed deposit increases. Deposit growth in UK PBB, Private Banking and RBSI was partially offset by Capital Resolution exits and run-off.

RBS has continued to manage down its overall wholesale funding, which has reduced from 83.5 billion at 31 December 2014 to 55.1 billion at 30 June 2016. The primary drivers have been calls and buybacks (12.0 billion) and maturities (19.3 billion), partially offset by new issuances (2.9 billion). The H1 2016 reduction of 3.6 billion from 58.7 billion at December 2015 is largely due to calls and buybacks (5.3 billion) and maturities (6.1 billion), offset by new issuances (2.3 billion) and the effect of changes in market values (5.4 billion).
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
General overview* (continued)
Risk type
Overview
Conduct and regulatory
Conduct and litigation costs were 1.3 billion in both H1 2016 and in H1 2015. H1 2016 included provisions in respect of the UK 2008 rights issue shareholder litigation and additional charge for PPI. RBS continued to remediate historical conduct issues and to work on a number of regulatory change programmes. The UK's Senior Managers and Certification regime was successfully implemented, and work continues on the UK's ring-fencing requirements.
Credit risk
The growth in UK mortgage lending continued in line with UK PBB strategy.
Risk appetite limits for sector, product and asset class frameworks were reduced to take account of the revised risk appetite associated with restructured CIB.

Impairment provisions were 6.5 billion and covered REIL by 55% compared with 7.1 billion and 59% at 31 December 2015. REIL of 11.8 billion were 3.5% of customer loans and advances, down from 3.6% at Q1 2016 and 4.8% a year ago. 

Challenging market conditions have persisted in the Shipping sector, resulting in customers being subject to heightened credit monitoring. Impairment provisions were 445 million on REIL of 1,023 million at 30 June 2016 (31 March 2016 - 374 million on 827 million; 31 December 2015 - 181 million on 434 million). Forbearance has also increased. Q2 2016 also saw impairment charges in the Oil & Gas and Metals & Mining sectors of 97 million and 29 million respectively. 

Impairment provisions relating to the Property sector reduced from 2.3 billion to 1.5 billion, driven predominantly by the reduction in CRE exposures managed by Capital Resolution. The run-down in lower quality assets in Capital Resolution has improved the overall credit quality.
Market risk
Traded VaR continued to decline despite the increased volatility and reduced liquidity resulting from macroeconomic and political factors including the economic slowdown in China, the reduction in US quantitative easing, the low interest rate environment in Europe and the EU Referendum. Average internal traded VaR was 15.4 million (FY 2015 - 18.9 million). The EU Referendum had no significant impact on traded VaR during H1 2016.

Non-traded credit spread VaR was 57.7 million at 30 June 2016 (31 December 2015 - 30.6 million). The rise largely reflected an increase in longer-dated bonds within Treasury's liquidity portfolio and greater credit spread volatility, primarily affecting US dollar bond swap spreads with tenors of over ten years.

Non-traded interest rate VaR, capturing the risk arising from earnings from retail and commercial banking activities, was 21 million and was broadly stable during the period, with fluctuations well within risk appetite.

The sensitivity of net interest income to an immediate upward 25 basis point shift in interest rates from the base-case forecast was broadly unchanged at 68 million, but the impact of a downward shift increased from 96 million to 140 million.

The equity structural hedge fell to 35 billion from 42 billion, primarily reflecting the 4.2 billion pension fund payment and the 1.2 billion final DAS dividend payment.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
General overview* (continued)
Risk type
Overview
Operational
Development of the operational risk framework continued, including: (i) the cascade of RBS-wide risk appetite statements for the most material risks; and (ii) the embedding of the enhanced Risk & Control Assessment approach developed in 2015. The effects on the bank's risk profile of the wide-ranging change portfolio, especially the divestment of Williams & Glyn, continued to be closely monitored. 
Reputational
The importance of managing reputational risk is reinforced through an overarching risk appetite statement. This addresses the internal risk of RBS making decisions without taking reputational risk into account.

The most material threats to RBS's reputation continued to originate from conduct issues, both historical and more recent.
Pension
RBS made a 4.2 billion payment to the RBS Group Pension Fund in March 2016. This removed an element of pension risk. RBS and the Trustee also agreed that the next valuation of the RBS Group Pension Fund will take place as at 31 December 2018, providing greater certainty to pension funding commitments until at least 2019, an important period running up to the implementation of UK ring-fencing legislation.
Business
RBS continued to reduce its business risk profile by implementing its strategic plan to shift the business mix towards the UK and retail and commercial banking segments, with higher risk activities in CIB and Capital Resolution curtailed through disposals and run-downs. RBS also continued with its simplification and cost reduction programmes.

Market conditions have become more volatile following the EU Referendum result, and RBS continues closely to monitor and assess the operating environment and its impact on business risk.
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Capital management*
RBS aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the aims of: (i) meeting minimum regulatory capital requirements; and (ii) ensuring RBS maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting its business franchises and funding capacity. For a description of the capital management framework, governance and basis of preparation refer to Capital management in the 2015 Annual Report and Accounts.
Pillar 2A and MDA
RBS's current total Pillar 2A requirement is 5.0% of RWAs (31 December 2015 - 5.0%). From 1 January 2015, 56% of the total Pillar 2A or 2.8% of RWAs is required to be met from CET1 capital. Pillar 2A is a point in time regulatory assessment of the amount of capital required to meet the overall financial adequacy rules. This PRA assessment may change over time, including as a result of an at least annual assessment and supervisory review of RBS's Internal Capital Adequacy Assessment Process (ICAAP); the latest ICAAP based on the end of 2015 data was submitted to the PRA for supervisory review in May 2016.
RBS's capital risk appetite framework, which informs its capital targets, includes consideration of the maximum distributable amount (MDA) requirements. These requirements are expected to be phased in from 2016, with full implementation by 2019. 
Based on current capital requirements, on the illustrative assumption that current estimates of Pillar 2A remain constant, RBS estimates that its 'fully phased' CET1 MDA requirement would be 10.8% in 2019, assuming RBS's current risk profile is unchanged. It should be noted that this estimate does not reflect the anticipated impact of RBS's planned restructuring, changes in the regulatory framework or other factors that could impact target CET 1 ratio. The estimated 2019 MDA requirement comprises: 
4.5% Pillar 1 minimum CET1 ratio;
2.5% Capital conservation buffer;
2.8% Pillar 2A CET1 ratio; and
1.0% Global Systemically Important Institution buffer.
Based on the assumptions above, assuming a 13% steady state CET1 capital ratio is achieved, RBS currently estimates that it would have headroom of 2.2% to fully phased MDA trigger in 2019. This headroom will be subject to ongoing review to reflect our risk appetite and accommodate regulatory and other changes.
Developments in prudential regulation
Following the EU Referendum, a period of uncertainty is expected regarding the regulatory landscape that will apply at the point in time that the UK leaves the EU. EU regulation will continue to apply during the intervening period, expected to be two years or longer, whilst the UK remains a member of the EU. RBS remains actively engaged and continues to monitor developments with the regulatory bodies in the UK and beyond regarding the scope of regulation that may apply to RBS in the future. In its July 2016 Financial Stability Report, the FPC reduced the countercyclical buffer rate to UK bank's exposures from 0.5% to 0%.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Pillar 2A and MDA* (continued)
In the first half of 2016 the Basel Committee of Banking Supervision (BCBS) framework has continued to evolve, additionally there have been revisions to Capital Requirements Regulations (CRR) and additional local rules for UK banks from the PRA. The BCBS developments were:
Credit risk: the proposals on Standardised and Internal Ratings Based approaches to calculating credit risk (including counterparty) restrict both portfolios where internal models are permitted to be used, and modelling approaches where modelling persists. Whist the final requirements are not expected until end 2016, capital requirements are expected to increase.
Market risk:

The Interest Rate Risk in the Banking Book (IRRBB) standard issued in April 2016 maintains the Pillar 2 approach with enhanced market disclosure (Pillar 3), allowing local supervisors to take account of individual circumstances when setting capital requirements.

The Fundamental Review of the Trading Book final standard was issued in January 2016. The major changes include: revisions to the approach for banking book/trading book boundary, the replacement of VaR with an expected shortfall model and new, more risk sensitive standardised methodologies which will need to be calculated for the entire book, regardless of whether a firm has permission to use a modelled approach. Capital requirements are expected to increase.
Operational risk: The consultation published in March 2016 addresses perceived weakness in the current framework by revising the calculation methodology to include a firm's past operational losses, including conduct and litigation; capital requirements are expected to increase under these proposals.
Pillar 3 disclosures: The 'Phase 2' proposal was issued in March 2016 and focused on the consolidation of separate disclosure requirements and initiatives currently in development. A number of initiatives are subject to substantial debate or industry interpretation.
Leverage: The comprehensive review is likely to result in changes of approach for leverage exposure, including but not limited to: settlement balances, derivative exposures and off-balance sheet items.
MREL: The EBA launched a consultation in July 2016 on the implementation and design of MREL, the EU equivalent of TLAC, but the scope is not limited to G-SIBs. The requirement will be set on a case- by-case basis by the resolution authorities. We currently anticipate initial guidance from the Bank of England on its proposed approach to MREL in the second half of 2016.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Capital management disclosures
Refer to Analysis of results - Capital and leverage for information on Capital, RWAs and leverage and the Pillar 3 supplement for capital and leverage relating to significant subsidiaries and also CRR templates. 
Capital resources








End-point CRR basis (1)

PRA transitional basis (1)

30 June
31 March
31 December

30 June
31 March
31 December
2016
2016
2015

2016
2016
2015

m
m
m

m
m
m








Shareholders' equity (excluding







 non-controlling interests)







Shareholders' equity 
52,907
53,377
53,431

52,907
53,377
53,431
Preference shares - equity
(3,305)
(3,305)
(3,305)

(3,305)
(3,305)
(3,305)
Other equity instruments
(2,536)
(2,646)
(2,646)

(2,536)
(2,646)
(2,646)









47,066
47,426
47,480

47,066
47,426
47,480
Regulatory adjustments and deductions







Own credit
(587)
(371)
(104)

(587)
(371)
(104)
Defined benefit pension fund adjustment
(209)
(458)
(161)

(209)
(458)
(161)
Cash flow hedging reserve
(1,603)
(1,141)
(458)

(1,603)
(1,141)
(458)
Deferred tax assets
(1,040)
(1,075)
(1,110)

(1,040)
(1,075)
(1,110)
Prudential valuation adjustments
(603)
(408)
(381)

(603)
(408)
(381)
Goodwill and other intangible assets
(6,525)
(6,534)
(6,537)

(6,525)
(6,534)
(6,537)
Expected losses less impairments
(831)
(936)
(1,035)

(831)
(936)
(1,035)
Other regulatory adjustments
(14)
(73)
(86)

(14)
(73)
(64)









(11,412)
(10,996)
(9,872)

(11,412)
(10,996)
(9,850)








CET1 capital
35,654
36,430
37,608

35,654
36,430
37,630








Additional Tier 1 (AT1) capital







Eligible AT1
1,997
1,997
1,997

1,997
1,997
1,997
Qualifying instruments and related 







 share premium subject to phase out
-
-
-

4,365
4,365
5,092
Qualifying instruments issued by







 subsidiaries and held by third parties
-
-
-

1,394
1,394
1,627








AT1 capital
1,997
1,997
1,997

7,756
7,756
8,716








Tier 1 capital
37,651
38,427
39,605

43,410
44,186
46,346








Qualifying Tier 2 capital







Qualifying instruments and related 







 share premium 
6,443
5,960
5,745

7,188
6,406
6,265
Qualifying instruments issued by







 subsidiaries and held by third parties
2,585
2,462
2,257

5,855
6,622
7,354








Tier 2 capital
9,028
8,422
8,002

13,043
13,028
13,619








Total regulatory capital
46,679
46,849
47,607

56,453
57,214
59,965
Note:
(1) 
Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on available-for-sale (AFS) securities which has been included from 2015 for the PRA transitional basis.


Appendix 1 Capital and risk management
Capital flow statement*
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital during the half year ended 30 June 2016.

CET1
AT1
Tier 2
Total

m
m
m
m





At 1 January 2016
37,608
1,997
8,002
47,607
Loss for the period
(2,045)
-
-
(2,045)
Own credit
(483)
-
-
(483)
Share capital and reserve movements in respect of employee share schemes
187
-
-
187
Ordinary shares issued
85
-
-
85
Foreign exchange reserve
1,032
-
-
1,032
AFS reserves
(75)
-
-
(75)
Goodwill and intangibles deduction
12
-
-
12
Deferred tax assets
70
-
-
70
Prudential valuation adjustments
(222)
-
-
(222)
Expected loss over impairment provisions
204
-
-
204
Net dated subordinated debt/grandfathered instruments
-
-
(364)
(364)
Foreign exchange movements
-
-
1,390
1,390
Other movements
(719)
-
-
(719)





At 30 June 2016
35,654
1,997
9,028
46,679
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Loss absorbing capital*
The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries.

At 30 June 2016

31 December 2015


Balance




Balance



Par
sheet
Regulatory
LAC

Par
sheet
Regulatory
LAC

value (1)
value 
value (2)
value (3)

value (1)
value 
value (2)
value (3)

bn
bn
bn
bn

bn
bn
bn
bn
CET1 capital (4)
35.7
35.7
35.7
35.7

37.6
37.6
37.6
37.6










Tier 1 capital: end point CRR compliant AT1









of which: RBSG plc (holdco)
2.0
2.0
2.0
2.0

2.0
2.0
2.0
2.0
of which: RBSG operating subsidiaries (opcos)
-
-
-
-

-
-
-
-

2.0
2.0
2.0
2.0

2.0
2.0
2.0
2.0










Tier 1 capital: non-end point CRR compliant









of which: holdco
6.1
6.4
6.0
4.7

6.0
6.0
5.9
4.6
of which: opcos
0.3
0.3
0.3
0.3

2.5
2.5
2.5
0.3

6.4
6.7
6.3
5.0

8.5
8.5
8.4
4.9










Tier 2 capital: end point CRR compliant









of which: holdco
6.5
7.0
6.4
5.2

5.8
5.9
5.7
4.4
of which: opcos
5.8
6.0
4.0
5.4

5.1
5.5
3.8
5.5

12.3
13.0
10.4
10.6

10.9
11.4
9.5
9.9










Tier 2 capital: non-end point CRR compliant









of which: holdco
0.3
0.3
0.2
0.1

0.3
0.3
0.2
0.1
of which: opcos
3.6
3.9
2.7
3.2

3.3
3.6
3.0
2.9

3.9
4.2
2.9
3.3

3.6
3.9
3.2
3.0










Senior unsecured debt securities issued by:









RBSG holdco
5.9
6.0
-
3.3

4.9
5.0
-
2.9
RBSG opcos
13.7
14.3
-
-

17.7
18.1
-
-

19.6
20.3
-
3.3

22.6
23.1
-
2.9
Total 
79.9
81.9
57.3
59.9

85.2
86.5
60.7
60.3










RWAs 



245.2




242.6
Leverage exposure 



720.7




702.5










LAC as a ratio of RWAs



24.4%




24.9%
LAC as a ratio of leverage exposure



8.3%




8.6%
Notes:
(1)
Par value reflects the nominal value of securities issued.
(2)
Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the TLAC/MREL criteria.
(3)
LAC value reflects RBS's interpretation of the 9 November 2015 FSB Term Sheet on TLAC and the Bank of England's consultation on their approach to setting MREL, published on 11 December 2015. MREL policy and requirements remain subject to further consultation, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the TLAC/MREL criteria.
(4)
Corresponding shareholders' equity was 52.9 billion (31 December 2015 - 53.4 billion). 
(5)
Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Risk-weighted assets*
The tables below analyse the movement in RWAs on the end-point CRR basis during the half year, by key drivers.

Credit risk RWAs

Non-counterparty
Counterparty
Total

bn
bn
bn




At 1 January 2016
166.4
23.4
189.8
Foreign exchange movement
7.5
-
7.5
Business movements
(3.5)
3.1
(0.4)
Risk parameter changes
2.3
(1.2)
1.1
Methodology changes
(0.2)
-
(0.2)
Model updates
0.7
1.1
1.8
Other changes
(0.7)
(0.3)
(1.0)




At 30 June 2016
172.5
26.1
198.6




Modelled (1)
135.3
23.0
158.3
Non-modelled
37.2
3.1
40.3





172.5
26.1
198.6

Market risk RWAs
Operational


CIB
Other
Total
riskRWAs
Total

bn
bn
bn
bn
bn






At 1 January 2016
13.8
7.4
21.2
31.6
52.8
Business and market movements
(0.4)
0.1
(0.3)
(5.9)
(6.2)






At 30 June 2016
13.4
7.5
20.9
25.7
46.6






Modelled (1)
11.5
5.0
16.5
-
16.5
Non-modelled
1.9
2.5
4.4
25.7
30.1







13.4
7.5
20.9
25.7
46.6
Note:
(1) 
Modelled refers to advanced internal ratings (AIRB) basis for non-counterparty credit risk, internal model method (IMM) for counterparty credit risk, and value-at-risk and related models for market risk. These principally relate to Commercial Banking (62.5 billion).
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Risk-weighted assets* (continued)
The table below analyses the movement in end-point CRR RWAs by segment during the half year.













Ulster






Central



Bank
Commercial
Private


Capital

items


UK PBB
RoI
Banking
Banking
RBSI
CIB
Resolution
W&G
& other
Total 
Total RWAs
bn 
bn 
bn 
bn 
bn 
bn 
bn 
bn 
bn 
bn 











At 1 January 2016
33.3
19.4
72.3
8.7
8.3
33.1
49.0
9.9
8.6
242.6
Foreign exchange movement
-
2.3
1.5
-
0.5
0.3
2.5
-
0.4
7.5
Business movements
0.5
(0.2)
2.7
0.2
0.8
2.6
(6.4)
(0.2)
(6.6)
(6.6)
Risk parameter changes (1)
3.9
(0.8)
(0.1)
-
-
0.1
(2.1)
0.2
(0.1)
1.1
Methodology changes
-
-
-
(0.1)
-
-
(0.1)
-
-
(0.2)
Model updates (2)
0.1
-
0.2
-
-
0.6
0.5
-
0.4
1.8
Other changes 
(0.8)
0.2
0.9
(0.7)
-
-
(1.1)
-
0.5
(1.0)











At 30 June 2016
37.0
20.9
77.5
8.1
9.6
36.7
42.3
9.9
3.2
245.2











Credit risk










 - non-counterparty
29.1
19.7
71.0
7.0
8.9
4.6
22.7
8.5
1.0
172.5
 - counterparty
-
0.1
-
-
-
14.7
11.2
-
0.1
26.1
Market risk
-
-
-
-
-
13.4
5.6
-
1.9
20.9
Operational risk
7.9
1.1
6.5
1.1
0.7
4.0
2.8
1.4
0.2
25.7











Total RWAs
37.0
20.9
77.5
8.1
9.6
36.7
42.3
9.9
3.2
245.2
Notes:
(1) 
Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD). 
(2)
Credit risk models were updated during the year including:
 - UK PBB: non standard LGD model for mortgages and business banking EAD model.
 - CIB: large corporate PD model.
Key points
The CET1 ratio of 14.5% decreased by 100 basis points which reflected a decrease in CET1 capital (2.0 billion) and higher RWAs (2.6 billion). 
RWAs increased by 2.6 billion to 245.2 billion in H1 2016, primarily as a result of adverse exchange rate movements (7.5 billion) and risk parameter recalibrations (1.1 billion) negating the improvements in operational risk RWAs (5.9 billion).
The foreign exchange movement occurred primarily in Capital Resolution (2.5 billion), Ulster Bank RoI (2.3 billion) and Commercial Banking (1.5 billion) as sterling weakened against major currencies following the EU Referendum.
The annual operational risk recalculation resulted in a decrease of 2.0 billion and a further 3.9 billion reduction relating to the removal of the element relating to Citizens, following PRA approval.
UK PBB RWAs increased by 3.7 billion following ongoing UK mortgage PD calibration and loan growth. This was partially offset by the transfer of Northern Ireland loans to Commercial Banking.
Growth in both new and existing lending and the transfer of Northern Ireland loans from UK PBB were the key contributors to the 5.2 billion increase in Commercial Banking. 
RWAs in CIB increased by 3.6 billion reflecting market volatility, foreign exchange movements alongside implementation of new risk metric models.
Private Banking RWAs decreased by 0.6 billion primarily due to mortgage calibration improvements relating to buy-to-let mortgages.
Capital Resolution RWAs continued to decrease in line with risk reduction strategy with RWAs falling by 6.7 billion. Reductions were across portfolios, the largest in Markets (3.1 billion) relating to derivative restructuring, Global Transaction Services exits and run-off (1.4 billion) and some of the Shipping portfolio being impaired following difficult market conditions and a fall in vessel values (1 billion).
The Central items decrease of 5.4 billion is significantly driven by the operational risk reduction relating to Citizens. 
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Liquidity and funding risk
Liquidity and funding risk is the risk that RBS is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due. The risk arises through the maturity transformation role that banks perform. It is dependent on RBS specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour. For a description of the liquidity and funding risk framework, governance and basis of preparation refer to Capital and risk management - Liquidity and funding risk in the 2015 Annual Report and Accounts.
Regulatory developments
The UK liquidity regime follows the EU CRD IV framework which is expected to remain in force within the UK legal framework for the foreseeable future. RBS will continue to monitor the regulatory landscape with respect to liquidity as it evolves following the result of the EU Referendum.
Liquidity risk
Key metrics*
The table below sets out the key liquidity and related metrics monitored by RBS.





30 June
31 March
31 December
2016
2016
2015




Liquidity portfolio
153bn
157bn
156bn
Stressed outflow coverage (SCR) (1)
213%
218%
227%
LCR (2)
116%
121%
136%
NSFR (3)
119%
119%
121%
Loan:deposit ratio
92%
90%
89%
Notes:
(1)
RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS' ILAA. This assessment is performed in accordance with PRA guidance.
(2)
On 1 October 2015 the LCR became the PRA's primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. UK banks are required to meet a minimum standard of 80% initially rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.
(3)
BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018. Pending further guidelines from the EU and the PRA, RBS uses the definitions and proposals from the BCBS paper and internal interpretations, to calculate the NSFR. Consequently RBS's ratio may change over time and may not be comparable with those of other financial institutions.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Liquidity portfolio
The table below shows the liquidity portfolio by product, liquidity value and by carrying value. Liquidity value is lower than carrying value as it is stated after discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.

Liquidity value

Period end

Average

UK DoLSub (1)
Other
Total

Quarter
H1 2016
30 June 2016
m
m
m

m
m







Cash and balances at central banks 
52,758
2,873
55,631

57,380
61,037
Central and local government bonds 






 AAA rated governments
4,712
644
5,356

4,362
4,144
 AA- to AA+ rated governments and US agencies
19,781
1,293
21,074

22,059
23,172








24,493
1,937
26,430

26,421
27,316







Primary liquidity
77,251
4,810
82,061

83,801
88,353
Secondary liquidity (2)
69,456
1,261
70,717

66,083
65,642







Total liquidity value
146,707
6,071
152,778

149,884
153,995







Total carrying value
173,235
6,274
179,509










31 December 2015





FY 2015







Cash and balances at central banks 
67,790
1,611
69,401

70,978
69,736
Central and local government bonds 






 AAA rated governments
3,201
1,098
4,299

4,254
5,263
 AA- to AA+ rated governments and US agencies
18,238
3,216
21,454

23,597
22,546
 Below AA rated governments
-
-
-

-
46
 Local government
-
-
-

-
12








21,439
4,314
25,753

27,851
27,867







Primary liquidity
89,229
5,925
95,154

98,829
97,603
Secondary liquidity (2)
59,201
1,369
60,570

57,841
57,654







Total liquidity value
148,430
7,294
155,724

156,670
155,257







Total carrying value
181,240
7,494
188,734



Notes:
(1)
The PRA regulated UK Domestic Liquidity Subgroup (UK DoLSub) comprising RBS's five licensed deposit-taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company plc. In addition, certain of RBS's significant operating subsidiaries - RBS N.V. and Ulster Bank Ireland DAC - hold managed portfolios that comply with local regulations that may differ from PRA rules.
(2)
Comprises assets eligible for discounting at the Bank of England and other central banks. 
(3)
FY 2015 average includes Citizens up to the date of deconsolidation; excluding Citizens: 143,945 million. 


Appendix 1 Capital and risk management
Funding risk
The composition of RBS's balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
The table below summarises the key funding metrics.











Short-term wholesale

Total wholesale

Net inter-bank
funding (1)
funding
funding (2)

Excluding
Including

Excluding
Including

Deposits
Loans (3)
Net
derivative
derivative
derivative
derivative
inter-bank
collateral
collateral
collateral
collateral
funding

bn
bn

bn
bn

bn
bn
bn










30 June 2016
14.7
38.3

55.1
78.6

7.8
(8.3)
(0.5)
31 March 2016
16.6
39.9

58.9
82.3

8.4
(8.9)
(0.5)
31 December 2015
17.2
37.6

58.7
79.1

7.7
(7.3)
0.4
30 September 2015
16.8
39.0

65.9
88.1

8.4
(10.2)
(1.8)
30 June 2015 (4)
25.0
47.0

76.4
98.4

13.5
(12.3)
1.2
Notes:
(1)
Short-term wholesale funding is funding with a residual maturity of less than one year.
(2)
Excludes derivative cash collateral.
(3)
Principally short-term balances.
(4)
Incorporating Citizens short-term and total wholesale funding including and excluding derivative collateral of 4.5 billion and 5.9 billion respectively.
The table below shows the carrying values of the principal funding sources.









30 June 2016

31 December 2015

Short-term
Long-term


Short-term
Long-term


less than
more than
Total

less than
more than
Total
1 year
1 year
1 year
1 year

m
m
m

m
m
m








Deposits by banks







derivative cash collateral
23,576
-
23,576

20,367
-
20,367
other deposits (1)
7,576
236
7,812

7,336
359
7,695









31,152
236
31,388

27,703
359
28,062
Debt securities in issue







certificates of deposit 
271
58
329

742
202
944
medium-term notes 
5,042
14,994
20,036

6,639
15,540
22,179
covered bonds
737
3,840
4,577

2,171
3,414
5,585
securitisations 
3
2,203
2,206

4
2,438
2,442









6,053
21,095
27,148

9,556
21,594
31,150
Subordinated liabilities
1,066
19,047
20,113

323
19,524
19,847








Notes issued
7,119
40,142
47,261

9,879
41,118
50,997








Wholesale funding
38,271
40,378
78,649

37,582
41,477
79,059








Customer deposits







derivative cash collateral (2)
13,005
-
13,005

10,373
-
10,373
financial institution deposits
50,479
984
51,463

45,134
1,226
46,360
personal deposits
158,239
2,449
160,688

154,066
3,212
157,278
corporate deposits
129,511
1,182
130,693

130,514
1,466
131,980








Total customer deposits 
351,234
4,615
355,849

340,087
5,904
345,991








Total funding excluding repos
389,505
44,993
434,498

377,669
47,381
425,050
Total repos


40,881



37,378
Total funding including repos


475,379



462,428
Notes:
(1)
Includes 0.8 billion relating to RBS's participation in central bank financing operations under the European Central Bank's Targeted Long Term Refinancing Operations.
(2)
Cash collateral includes 10,948 million (31 December 2015 - 9,504 million) from financial institutions.

Appendix 1 Capital and risk management
Credit risk
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. For a description of RBS's credit risk framework, governance, policies and methodologies refer to Capital and risk management - Credit risk in the 2015 Annual Report and Accounts.
Key developments: Exposure measure
RBS has changed its measure of credit risk exposure from Credit Risk Assets (CRA) to current exposure and potential exposure. The table below summarises the differences between these measures.

CRA
Current exposure
Potential exposure
Lending exposureComprises cash balances at central banks
as well as loans and advances to banks and customers.
Drawn balances (gross of impairment provisions). 
Drawn balances.
Legally committed limits. (1)
Measured net of individual, collective and latent provisions unless otherwise stated.
Counterparty exposure 
Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and regulator-approved models but before the effect of collateral. Calculations are gross of credit value adjustments.
Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and net of legally enforceable financial collateral. (2)
Measured using scaled credit limit utilisation, which takes into account mark-to-market movements, any collateral held and expected market movements over a specified horizon. (1,2)
Current and potential exposure are measured net of credit valuation adjustments (CVA) unless otherwise stated.
Contingentobligations
Primarily letters of credit and guarantees.
Drawn balance
Drawn balance.
Legally-committed amount. (1)
Exclusions
Trading book bonds
Trading book bonds.

Equity securities
Equity securities.

Settlement risk
Settlement risk.

Intra-group credit exposures
Suretyships.

Securities financing transactions (repos)
Intra-group credit exposures.

Banking book debt securities


Other


Net of cash and gold collateral.



Current exposure and potential exposure are reported against the guarantor of a transaction to reflect the transfer of risk.
Notes:
(1)
Cannot be less than current exposure.
(2)
Current exposure and potential exposure for exchange-traded derivatives are defined as Exposure At Default (EAD).


Appendix 1 Capital and risk management
Key developments: Exposure measure (continued)
The disclosures that follow use the current exposure or potential exposure measure as indicated. Comparatives have been restated.
Comparing the current exposure measure to the previous CRA measure, the following changes are noted:
Exposures to the Sovereign sector are higher. This is primarily due to the inclusion of government bond exposure held in the banking book and managed in Treasury and Capital Resolution. The increased current exposure value, compared to CRA, is also a result of risk transfer related to guarantees (pledged by sovereign customers) for obligors active in other sectors.
In the Banks & Other Financial Institutions sector, the netting of financial collateral reduced the current exposure value compared to CRA. Risk transfer also reduced current exposure compared to CRA. 
Outside these sectors, the impact of risk transfer is less material. However, the impact of netting impairment provisions means that for most other wholesale sectors current exposure is less than CRA.

Appendix 1 Capital and risk management
Credit risk: Management basis
Key loan portfolios*
The table below summarises current exposure, net of provisions and after risk transfer, by sector and geographic region(1).
30 June 2016

Wholesale


Banks &


Natural
Retail &


Personal
Other FIs
Sovereign(6)
Property
Resources
Leisure
Other
Total
m
m
m
m
m
m
m
m









UK
142,737
21,531
49,970
38,928
8,136
15,694
39,309
316,305
RoI (2)
15,064
582
2,339
987
511
1,008
2,243
22,734
Other Western Europe
519
9,510
34,218
2,512
2,580
1,254
5,189
55,782
US
307
9,067
19,973
536
809
633
2,676
34,001
RoW (3)
1,434
6,863
5,429
833
799
330
6,435
22,123









Total
160,061
47,553
111,929
43,796
12,835
18,919
55,852
450,945









Flow into forbearance (4)
829
4
-
621
472
307
876
3,109
Provisions
2,637
69
1
1,541
269
618
1,321
6,456
- Individual & Collective
2,191
61
-
1,501
260
567
1,244
5,824
- Latent
446
8
1
40
9
51
77
632
AQ10 (5)
4,277
628
-
1,916
370
144
1,235
8,570









31 December 2015**

















UK
136,024
21,187
60,068
37,328
7,386
14,857
37,929
314,779
RoI (2)
13,440
433
1,624
692
436
1,125
1,635
19,385
Other Western Europe
548
9,481
33,942
2,408
2,144
899
6,002
55,424
US
301
8,121
21,819
622
864
767
2,530
35,024
RoW (3)
2,806
7,050
6,141
808
952
469
7,974
26,200









Total
153,119
46,272
123,594
41,858
11,782
18,117
56,070
450,812









Flow into forbearance (4)
1,829
85
-
1,035
643
368
1,044
5,004
Provisions
3,003
73
1
2,282
133
661
987
7,140
- Individual & Collective
2,613
60
-
2,232
124
601
924
6,554
- Latent
390
13
1
50
9
60
63
586
AQ10 (5)
3,765
769
1
2,284
149
223
1,062
8,253









Notes:
(1)
Within the Credit Risk key loan portfolios section, unless otherwise stated, geographic region is based on country of operation.
(2)
RoI: Republic of Ireland
(3)
Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank.
(4)
Completed during the period.
(5)
(6)
Net of provisions.
Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of asset quality (AQ) on a current exposure basis, net of provisions and after risk transfer, is set out below.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_1-2016-8-5.pdf
Note:
(1)
AQ10 represents exposure with a 100% probability of default. For further information regarding AQ band classifications refer to the Capital and risk management section on page 188 of the 2015 Annual Report and Accounts. 
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Key points
The following commentary refers to current exposure, net of provisions and after risk transfer. In this section, the following key portfolios are discussed in more detail:

Commercial Real Estate (CRE) (in Property);

Oil & Gas (in Natural Resources);

Shipping (in Other); and

Mortgages (in Personal).

The increase in the overall portfolio reflected the significant appreciation of both the euro and US dollar against sterling, primarily following the EU Referendum. 
Excluding the impact of foreign exchange movements overall current exposure decreased by 3%. This was driven by a risk reduction and disposal strategy, particularly outside the UK and Western Europe. Current exposure to UK customers and counterparties represents 70% of the total, an increase from 68% at 31 December 2015 on a constant currency basis. 
Portfolio asset quality has slightly weakened due to challenging market conditions in the Oil & Gas, Mining & Metals and Shipping sectors. Asset quality was also affected by recalibrations in the PD models for Banks, Local Authorities, Property, Housing Associations, Housebuilders and Mortgages. 
The decrease in exposure to Sovereigns reflected liquidity management activities.
In the Property portfolio, 35% of exposure is not related to CRE. This comprises exposure of 9.3 billion (31 December 2015 - 8.9 billion) to Housing Associations, 4.5 billion to Construction (31 December 2015 - 4.7 billion) and 1.8 billion to the Building Materials sub-sector (31 December 2015 - 1.6 billion).
In Other, exposure to the Automotive sector decreased from 5.5 billion to 5.0 billion. AQ10 exposure net of provisions totalled 30 million (31 December 2015 - 39 million). Total provisions excluding latent provisions were 52 million (31 December 2015 - 32 million).
The composition of the Retail & Leisure portfolio remained broadly unchanged from 31 December 2015. Forbearance increased during the period driven by a number of individually material cases, while the volume of customers receiving forbearance decreased. Total provisions excluding latent provisions were 561 million (31 December 2015 - 601 million). Credit quality improved with AQ10 exposure, net of provisions, totalling 150 million (31 December 2015 - 223 million).


*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

Key loan portfolios* (continued)
Commercial Real Estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding, housing associations, construction and building materials). For more information, refer to the CRE section on page 195 of the 2015 Annual Report and Accounts.
A dedicated CRE portfolio controls team is responsible for portfolio strategy, credit risk appetite and policies, as well as oversight of valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. 
The table below provides a breakdown of the lending exposure within the CRE portfolio on a current exposure basis, net of provisions and after risk transfer.

Investment

Development


Commercial
Residential
Total

Commercial
Residential
Total
Total
By geography(1)
m
m
m

m
m
m
m









30 June 2016








UK 
16,768
4,011
20,779

484
3,350
3,834
24,613
RoI
446
203
649

28
89
117
766
Other Western Europe
685
25
710

-
34
34
744
US
182
1
183

-
-
-
183
Rest of World
58
9
67

2
56
58
125










18,139
4,249
22,388

514
3,529
4,043
26,431









Of which: Capital Resolution
1,099
45
1,144

1
95
96
1,240
 Williams & Glyn
2,047
608
2,655

106
563
669
3,324









31 December 2015**

















UK 
15,825
4,173
19,998

613
3,251
3,864
23,862
RoI
342
95
437

24
80
104
541
Other Western Europe
597
8
605

15
1
16
621
US
241
1
242

-
-
-
242
Rest of World
211
12
223

5
13
18
241










17,216
4,289
21,505

657
3,345
4,002
25,507









Of which: Capital Resolution
1,318
47
1,365

50
104
154
1,519
 Williams & Glyn
2,080
644
2,724

82
483
565
3,289
Note:
(1)
Geography splits are based on country of collateral risk.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)



Other






Western




UK
ROI
Europe
US
RoW
Total
By sub-sector
m
m
m
m
m
m







30 June 2016






Residential
7,361
292
59
1
65
7,778
Office
3,213
131
500
53
13
3,910
Retail
4,658
101
47
-
5
4,811
Industrial
2,898
38
-
-
-
2,936
Mixed/other
6,483
204
138
129
42
6,996








24,613
766
744
183
125
26,431







31 December 2015**













Residential
7,424
175
9
1
25
7,634
Office
2,938
76
398
85
62
3,559
Retail
4,497
93
85
19
22
4,716
Industrial
2,600
36
39
-
7
2,682
Mixed/other
6,403
161
90
137
125
6,916








23,862
541
621
242
241
25,507
A breakdown of the Commercial Banking UK investment portfolio by UK region at 30 June 2016 is set out below.
UK Region (1)
Proportion
Greater London
25%
Portfolio (2)
25%
Midlands
12%
South East
12%
North
11%
Scotland
8%
Rest of UK
7%
Notes:
(1)
Based on management estimates using the postcode of the security. Percentages are based on current exposure gross of provisions.
(2)
Portfolio includes lending secured against property portfolios comprising numerous properties across multiple UK locations.
Key points 
The following commentary refers to current exposure, net of provisions and after risk transfer.
Lending to the CRE sector in the UK increased to 24.6 billion at 30 June 2016 compared to 23.9 billion at 31 December 2015. However, the growth slowed significantly in the second quarter of 2016. CPB and PBB businesses have appetite to support activity in the sector. Credit underwriting standards have been tightened and appetite for certain sub-sectors moderated. There were no single-name concentration breaches. 
New business is monitored and controlled against agreed underwriting standards. Agreed bank-wide and business franchise portfolio sector limits are in place, with Sub-sector and asset class limits being used to restrict exposure to emerging risks when appropriate. This activity is reviewed and monitored on a regular basis. In addition, market indices are monitored and risk appetite is adjusted if considered appropriate. 
The majority of non-legacy CRE exposure is within Commercial Banking (18.5 billion, 31 December 2015 - 17.9 billion). Lending applications are reviewed by specialist CRE transactional credit teams, including a dedicated development team. Lending guidelines and policy are informed by lessons learned from the 2008 financial crisis.
In the commercial investment sub-sector, new business activity in H1 2016 (including refinancings and increases) in Commercial Banking had a weighted average LTV of 46%. 
The increase in exposure in RoI and Western Europe was primarily due to foreign exchange movements.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
CRE exposure by LTV band
The table below provides a breakdown of the CRE investment portfolio by LTV band on a current exposure basis, net of provisions and after risk transfer.

UK

RoI

Total (3)

AQ1-AQ9
AQ10
Total

AQ1-AQ9
AQ10
Total

AQ1-AQ9
AQ10
Total
m
m
m
m
m
m

m
m
m












30 June 2016











<= 50%
10,180
50
10,230

73
2
75

10,406
52
10,458
> 50% and <= 70%
5,962
131
6,093

100
2
102

6,096
133
6,229
> 70% and <= 80%
565
100
665

78
2
80

643
102
745
> 80% and <= 90%
248
156
404

23
-
23

275
156
431
> 90% and <= 100%
209
47
256

23
-
23

232
48
280
> 100% and <= 110%
159
61
220

12
1
13

172
65
237
> 110% and <= 130%
62
77
139

31
6
37

93
381
474
> 130% and <= 150%
57
32
89

10
8
18

67
52
119
> 150%
113
79
192

42
18
60

156
99
255












Total with LTVs
17,555
733
18,288

392
39
431

18,140
1,088
19,228
Total portfolio average LTV (1)
49%
120%
53%

95%
335%
165%

50%
143%
58%
Minimal security (2)
9
1
10

-
-
-

9
1
10
Other
2,366
115
2,481

178
40
218

2,710
440
3,150
Development (4)
3,617
217
3,834

67
50
117

3,759
284
4,043

23,547
1,066
24,613

637
129
766

24,618
1,813
26,431












31 December 2015**











<= 50%
9,558
70
9,628

60
2
62

9,896
72
9,968
> 50% and <= 70%
5,691
114
5,805

103
2
105

5,964
116
6,080
> 70% and <= 80%
639
124
763

35
1
36

685
125
810
> 80% and <= 90%
323
115
438

26
2
28

353
376
729
> 90% and <= 100%
134
149
283

9
1
10

143
150
293
> 100% and <= 110%
127
74
201

22
1
23

149
75
224
> 110% and <= 130%
187
108
295

34
5
39

221
122
343
> 130% and <= 150%
30
44
74

13
6
19

44
65
109
> 150%
216
173
389

37
19
56

253
199
452












Total with LTVs
16,905
971
17,876

339
39
378

17,708
1,300
19,008
Total portfolio average LTV (1)
51%
167%
60%

94%
315%
164%

52%
167%
63%
Minimal security (2)
1
3
4

-
1
1

2
4
6
Other
2,002
116
2,118

34
24
58

2,253
238
2,491
Development (4)
3,551
313
3,864

67
37
104

3,641
361
4,002

22,459
1,403
23,862

440
101
541

23,604
1,903
25,507
Notes:
(1)
Weighted average by current exposure gross of provisions.
(2)
Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect the relevant asset quality and recovery profile.
(3)
Total includes regions other than UK and RoI.
(4)
The exposure in Development relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points 
The reduction in portfolio average LTV is primarily the result of reductions through repayments, asset sales and write-offs of legacy non-performing assets from Ulster Bank RoI, Commercial Banking and CIB. Remaining exposures with LTVs greater than 100% are predominantly legacy exposures originated before the 2008 financial crisis. 
The exposure in Other relates predominantly to lending to large corporate entities. It is not asset-backed but lent against corporate balance sheets.
Interest payable on outstanding loans was covered 3.4x and 1.6x in Commercial Banking UK and Capital Resolution respectively (unchanged since 31 December 2015). 
*Not within scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of the asset quality of the CRE portfolio is provided below, on a current exposure basis, net of provisions and after risk transfer.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_2-2016-8-5.pdf
Note:
(1)

PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band
Key point
Probability of default models for the Property and Housebuilders sectors have been updated. This recalibration, rather than deterioration in underlying risk, has resulted in downward ratings migrations across asset quality bands.
A breakdown of CRE portfolio lending, gross of provision and after risk transfer, risk elements in lending (REIL) and provisions is provided below.

Total

Commercial Banking

Capital Resolution

30 June
31 December

30 June
31 December

30 June
31 December

2016
2015

2016
2015

2016
2015
CRE loans, REIL and provisions
m
m

m
m

m
m









Lending (gross of provisions)
27,695
27,561

19,075
18,178

1,487
2,842
Of which REIL
2,479
3,560

1,032
1,050

756
1,951
Provisions
1,264
2,054

422
305

247
1,323
REIL as a % of gross loans to customers
9.0%
12.9%

5.4%
5.8%

50.8%
68.6%
Provisions as a % of REIL
51%
58%

41%
29%

33%
68%
Key points 
While lending has increased, non-performing legacy exposure (mostly managed in Capital Resolution) continued to reduce through run-off, divestment and write-offs. 
The non-performing assets in Commercial Banking are predominantly legacy deals originated before the financial crisis. 
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.

Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Natural Resources
Exposure to the Natural Resources sector, on both a current exposure and potential exposure basis, is summarised below, net of provisions and after risk transfer.

30 June 2016

31 December 2015**


Of which:

Of which:


Of which:

Of which:


Capital

Capital


Capital

Capital

CE
Resolution
PE
Resolution

CE
Resolution
PE
Resolution

m
m
m
m

m
m
m
m










Oil & Gas
3,298
902
6,356
1,213

3,544
1,539
6,798
2,117
Mining & Metals
816
188
1,941
299

729
237
1,823
391
Electricity
3,374
1,135
8,583
1,522

2,851
1,128
7,683
1,773
Water & Waste
5,347
3,407
8,665
5,661

4,657
1,648
8,261
3,039











12,835
5,632
25,545
8,695

11,781
4,552
24,565
7,320










Commodity Traders
564
65
1,080
71

900
444
1,320
452
Of which: Natural Resources
427
41
759
48

521
212
752
212
Oil & Gas
Exposure to the Oil & Gas sector, measured on a potential exposure basis net of provisions and after risk transfer, is summarised in the tables below.



Other






Western




UK
RoI
Europe
US
RoW (1)
Total 
30 June 2016
m 
m 
m 
m 
m 
m 







Producers (incl. integrated oil companies)
882
63
1,350
44
225
2,564
Oilfield service providers
746
10
675
265
82
1,778
Other wholesale and trading activities
432
90
554
52
281
1,409
Refineries
22
-
-
357
4
383
Pipelines
98
4
103
9
8
222

2,180
167
2,682
727
600
6,356














Of which:






National oil companies
-
-
-
-
58
58
Integrated oil companies
389
-
812
146
50
1,397
Exploration & Production 
274
-
143
43
131
591







31 December 2015**













Producers (incl. integrated oil companies)
1,177
51
1,028
275
256
2,787
Oilfield service providers
700
10
678
279
51
1,718
Other wholesale and trading activities
450
76
475
45
432
1,478
Refineries
21
2
-
327
18
368
Pipelines
98
-
310
31
8
447

2,446
139
2,491
957
765
6,798







Of which:






National oil companies
-
-
21
-
70
91
Integrated oil companies
654
-
868
273
10
1,805
Exploration & Production 
338
-
38
130
118
624
Note:
(1)
Rest of world comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of asset quality (AQ) for the Oil & Gas portfolio, on a current exposure and potential exposure basis, net of provisions and after risk transfer. is set out below**. 
http://www.rns-pdf.londonstockexchange.com/rns/3368G_3-2016-8-5.pdf
Note:
(1)

PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Key points
The composition of the Oil & Gas portfolio remained broadly unchanged from 31 December 2015. Exposure decreased by 6.5% due to active credit management and the continued run-off of the North American and APAC portfolios.
Credit quality for the portfolio deteriorated slightly, consistent with broader sector trends. At 30 June 2016, 69% of the exposure (31 December 2015 - 76%) was investment grade (AQ1-AQ4 or equivalent to BBB- and above). As well as exposure reduction in the AQ1-AQ4 bands during the normal course of business - and the continued run-off of the North American and APAC portfolios - the change in credit profile was the result of migration from investment grade to sub-investment grade for certain exposures.
RBS had no high-yield bond or loan underwriting positions as at 30 June 2016.
There were a number of forbearance arrangements totalling 554 million. These predominantly involved the relaxation of financial covenants to give customers more financial flexibility given the current environment. Most of the forbearance related to customersin the Exploration & Production and Oilfield Servicessub-sectors where earnings have been more immediately and materially affected by the downturn in the Oil & Gas sector.
At 30 June 2016, total provisions excluding latent provisions were 153 million (31 December 2015 - 49 million). New provisions were due to the credit deterioration of a small number of material exposures, primarily in the Exploration & Production sub-sector.
AQ10 exposure net of provisions was 207 million (31 December 2015 - 47 million). In addition, exposures not transferred to AQ10 but classified as Risk of Credit Loss(1) totalled 30 million. These were managed by Restructuring.
Note:
(1)
In accordance with the revised problem debt management framework, these are non-defaulted exposures that present a potential credit loss in the next 12 months, should mitigating action not be successful or not taken at all.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Mining & Metals 
A breakdown of asset quality for the Mining & Metals portfolio, on a current exposure and potential exposure basis, net of provisions and after risk transfer is set out below**.
http://www.rns-pdf.londonstockexchange.com/rns/3368G_4-2016-8-5.pdf
Note:
(1)
PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band.
Key points
Overall exposure to Mining & Metals increased by 87 million to 816 million on a current exposure basis and by 118 million to 1.9 billion on a potential exposure basis. The increase mainly driven by foreign exchange movements (64% of the portfolio is denominated in US dollars). Excluding the impact of foreign exchange movements, exposure decreased by 2.5%.
Market conditions in the Mining & Metals sector continued to be challenging, resulting in a deterioration in credit quality. Companies in the Mining & Metals sector have reported lower revenues as a result of lower commodity prices. This has had an adverse impact on EBITDA and leverage. At 30 June 2016, 49% (31 December 2015 - 64%) of the portfolio exposure was investment grade (AQ1-AQ4 or equivalent to BBB- and above). Most of the exposure is to market leaders in the sector with globally diversified operations and revenues. 
Exposures in the Mining & Metals portfolio classified as Risk of Credit Loss totalled 0.4 million.
Provisions (excluding latent provisions) increased by 13.0 million to 35.6 million (31 December 2015 - 22.6 million).
At 30 June 2016, AQ10 exposure on a potential exposure basis, net of provisions was 82.0 million (31 December 2015 - 20.8 million). The rise in AQ10 exposure and the increase in provisions mainly resulted from a single material exposure.


Appendix 1 Capital and risk management
Shipping
Exposure to the Shipping sector, on a current exposure and potential exposure basis, is summarised in the table below.

30 June 2016

31 December 2015**


Of which:

Of which:


Of which:

Of which:

Current
Capital
Potential
Capital

Current
Capital
Potential
Capital

Exposure
Resolution
Exposure
Resolution

Exposure
Resolution
Exposure
Resolution

m
m
m
m

m
m
m
m
Shipping
6,765
5,945
7,246
6,049

6,776
6,162
7,301
6,309
Exposure secured by ocean-going vessels and managed by Capital Resolution is summarised in the table below on a current exposure basis. 

30 June 2016

31 December 2015**

Current



Current



Exposure
AQ10
Provisions (1)

Exposure
AQ10
Provisions (1)
Vessel type
m (2)
m (2)
m

m (2)
m (2)
m








Container
1,291
54
21

1,164
49
10
Dry bulk
2,040
896
379

2,076
275
153
Tanker
1,290
30
-

1,306
-
-
Gas
1,075
-
-

1,160
-
-
Other
376
62
33

362
25
6
Total
6,072
1,042
433

6,068
349
169
Notes:
(1)
Excluding latent provisions.
(2)
To allow identification of underlying vessel types, this exposure is shown prior to the impact of the risk transfer and gross of provisions.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Asset quality for the Shipping sector, on a current exposure and potential exposure basis, net of provisions and after risk transfer is summarised below.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_5-2016-8-5.pdf
Note:
(1)

PE represents the amount by which potential exposure is larger than current exposure. The total of each stacked column represents the total potential exposure for that AQ band.
Key points
Exposure has remained relatively stable at 6.8 billion (current exposure) and 7.3 billion (potential exposure). Excluding the impact of foreign exchange movements, exposure fell by 10%.
Most of the Shipping portfolio related to exposure secured by ocean-going vessels. This was managed in Capital Resolution. The remainder of the exposure related to the Shipbuilders and Inland Water Transport sub-sectors. Excluding the impact of foreign exchange movements exposure decreased due to scheduled loan repayments, secondary sales and prepayments.
Conditions remained depressed in the dry bulk market as a result of the continuing oversupply of available tonnage and the slowdown in Chinese commodity imports. Tanker rates fell during H1 2016 and remained profitable but asset values were affected. Employment rates for container vessels continued to deteriorate.
The LTV position across the portfolio for ocean-going vessels increased to 93% (31 December 2015 - 85%) primarily as a result of deteriorating asset values in dry bulk, which fell by up to 15% in H1 2016.
Continuing challenging market conditions led to an increase in forbearance granted. This mostly related to the relaxation of minimum security covenants due to deteriorating asset prices and totalled 220 million in H1 2016. In addition there was 191 million of forbearance in process, which has not yet reached legal completion.
At 30 June 2016, exposures classified as Risk of Credit Loss totalled 78 million. As part of standard credit stewardship, a number of customers were classified as Risk of Credit Loss in July 2016. The majority of these cases were in the dry bulk sector.
Total provisions, excluding latent provisions, increased from 169 million to 433 million during the six months to 30 June 2016. This is the result of prolonged poor market conditions, as described above.
At 30 June 2016, AQ10 exposure, net of provisions, was 579 million (31 December 2015 - 210 million).
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.

Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Personal portfolios
This section summarises personal portfolios by type, segment and related credit metrics, on a current exposure basis net of provisions.
Overview of personal portfolios split by product type and segment

30 June 2016

31 December 2015**


Ulster






Ulster





UK
Bank
Private
RBS



UK
Bank
Private
RBS



PBB
RoI
Banking
International
W&G
Total

PBB
RoI
Banking
International
W&G
Total

m
m
m
m
m
m

m
m
m
m
m
m














Mortgages 
111,248
14,376
6,865
2,599
10,716
145,804

104,599
12,713
6,552
2,525
10,430
136,819
Of which:













Interest only variable rate 
11,887
416
3,100
711
1,291
17,405

13,252
407
3,025
730
1,388
18,802
Interest only fixed rate 
11,088
7
2,578
64
1,227
14,964

9,112
6
2,431
49
1,076
12,674
Mixed (capital and interest only)
5,297
78
5
27
709
6,116

5,380
76
7
29
745
6,237














Buy-to-let
15,916
2,020
622
866
1,362
20,786

14,098
1,762
476
835
1,150
18,321














Forbearance stock: arrears status
3,312
3,217
80
42
474
7,125

3,592
2,930
64
43
514
7,143
 - Current
2,824
2,051
76
27
408
5,386

3,089
1,869
64
31
437
5,490
 - 1-3 months in arrears
259
601
-
4
39
903

266
538
-
6
44
854
 - >3 months in arrears
229
565
4
11
27
836

237
523
-
6
33
799














Provisions against forbearance population
22
609
1
1
6
639

29
585
-
1
7
622
Provisions
177
1,185
3
28
24
1,417

180
1,062
4
18
26
1,290














REIL
793
2,875
21
91
97
3,877

878
2,550
19
63
123
3,633














Other lending (1)
8,942
273
1,817
67
1,056
12,155

8,795
233
3,458
62
958
13,506
Provisions
896
52
27
1
119
1,095

1,028
48
22
1
129
1,228
REIL
943
53
50
9
125
1,180

1,028
49
53
5
140
1,275














Total lending
120,190
14,649
8,682
2,666
11,772
157,959

113,394
12,946
10,010
2,587
11,388
150,325
Mortgage LTV ratios (2)













 - Total portfolio
56%
82%
56%
56%
53%
59%

56%
83%
54%
57%
54%
59%
 - New business
69%
74%
58%
67%
69%
68%

69%
77%
57%
66%
68%
68%
 - Buy-to-let
56%
90%
55%
48%
56%
59%

57%
95%
58%
51%
57%
60%
 - Performing
56%
77%
55%
55%
53%
58%

56%
80%
54%
57%
54%
58%
 - Non-performing
61%
103%
66%
97%
57%
86%

63%
106%
92%
96%
60%
83%
Notes:
(1)
Other personal lending excludes loans guaranteed by a company and commercial real estate lending to personal customers.
(2)
Weighted by current exposure gross of provisions.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.

Appendix 1 Capital and risk management
Key loan portfolios* (continued)









Mortgage LTV distribution












50%
70%
80%
90%
100%
110%
130%

Total with


LTV ratio value
<=50%
<=70%
<=80%
<=90%
<=100%
<=110%
<=130%
<=150%
>150%
LTVs
Other
Total
30 June 2016
m
m
m
m
m
m
m
m
m
m
m
m
UK PBB












AQ1-AQ9
42,346
39,526
14,569
9,397
2,689
246
174
88
23
109,058
501
109,559
AQ10
541
676
219
131
64
24
11
6
4
1,676
13
1,689

42,887
40,202
14,788
9,528
2,753
270
185
94
27
110,734
514
111,248
of which: Buy-to-let
5,498
7,586
2,213
415
123
35
30
14
1
15,915
1
15,916













Ulster Bank RoI












AQ1-AQ9
2,671
2,474
1,490
1,345
1,138
1,068
1,706
345
43
12,280
-
12,280
AQ10
250
282
167
184
201
202
421
267
122
2,096
-
2,096

2,921
2,756
1,657
1,529
1,339
1,270
2,127
612
165
14,376
-
14,376
Private Banking












AQ1-AQ9
2,381
2,947
757
167
58
30
70
48
20
6,478
267
6,745
AQ10
21
51
16
8
9
3
1
2
1
112
8
120

2,402
2,998
773
175
67
33
71
50
21
6,590
275
6,865
RBS International 












AQ1-AQ9
1,126
798
348
213
53
6
10
-
18
2,572
-
2,572
AQ10
6
9
4
1
4
1
-
-
2
27
-
27

1,132
807
352
214
57
7
10
-
20
2,599
-
2,599
W&G












AQ1-AQ9
4,507
3,765
1,231
780
174
9
1
-
-
10,467
65
10,532
AQ10
74
79
18
10
2
-
-
-
-
183
1
184

4,581
3,844
1,249
790
176
9
1
-
-
10,650
66
10,716













31 December 2015**












UK PBB












AQ1-AQ9
38,430
38,645
14,372
7,985
2,646
255
174
90
18
102,615
251
102,866
AQ10
483
713
250
152
77
26
12
7
3
1,723
10
1,733

38,913
39,358
14,622
8,137
2,723
281
186
97
21
104,338
261
104,599
Of which: Buy-to-let
4,374
6,879
2,202
431
131
34
30
14
1
14,096
2
14,098













Ulster Bank RoI












AQ1-AQ9
2,276
2,075
1,222
1,155
1,004
964
1,633
410
49
10,788
-
10,788
AQ10
226
258
153
163
179
178
385
264
119
1,925
-
1,925

2,502
2,333
1,375
1,318
1,183
1,142
2,018
674
168
12,713
-
12,713
Private Banking












AQ1-AQ9
2,431
2,846
707
147
30
15
1
12
20
6,209
323
6,532
AQ10
3
1
3
1
9
1
1
-
1
20
-
20

2,434
2,847
710
148
39
16
2
12
21
6,229
323
6,552
RBS International












AQ1-AQ9
985
873
339
190
40
27
19
2
14
2,489
-
2,489
AQ10
5
11
2
3
5
1
3
1
5
36
-
36

990
884
341
193
45
28
22
3
19
2,525
-
2,525
W&G












AQ1-AQ9
4,113
3,738
1,216
648
174
11
1
-
-
9,901
297
10,198
AQ10
71
100
27
18
8
1
-
-
-
225
7
232

4,184
3,838
1,243
666
182
12
1
-
-
10,126
304
10,430
* Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
UK PBB
Key points
Gross new mortgage lending amounted to 14.3 billion (excluding 0.4 billion additional lending to existing customers) in H1 2016. New buy-to-let lending was 2.4 billion (31 December 2015 - 3.8 billion). The concentration to buy-to-let lending increased from 13% to 14%. New lending to owner-occupiers during this period was 11.9 billion (31 December 2015 - 18.9 billion). The growth in mortgage lending in H1 2016 was consistent with UK PBB's growth strategy and risk appetite.
The overall credit quality of new business has remained stable in H1 2016. Average LTV for new mortgage lending, weighted by value, was 69%, (31 December 2015 - 69%) and weighted by volume 68% (31 December 2015 - 68%). New buy to let lending had an average LTV weighted by value and volume of 63% (31 December 2015 - 64%). New lending to owner-occupiers had an average LTV weighted by value of 71% (31 December 2015 - 71%) and 69% weighted by volume (31 December 2015 - 69%)
Of the total portfolio 28.2 billion related to properties in the south east of England, while 21.4 billion related to properties in Greater London.
The table below summarises UK mortgage exposure by region and LTV.
Mortgage LTV distribution














50%
70%
80%
90%
100%
110%
130%

Total with
WA



LTV ratio value
<=50%
<=70%
<=80%
<=90%
<=100%
<=110%
<=130%
<=150%
>150%
LTVs
LTV

Other
Total
30 June 2016
m
m
m
m
m
m
m
m
m
m


m
m
South East
12,068
11,150
3,161
1,430
219
4
7
3
-
28,042
52%

112
28,154
Greater London
13,275
6,503
1,015
407
71
1
2
1
-
21,275
45%

124
21,399
Scotland
3,047
3,652
1,622
1,106
412
40
3
-
-
9,882
59%

46
9,928
North West
2,775
3,795
1,681
1,287
282
12
3
2
-
9,837
60%

53
9,890
South West
3,110
3,795
1,564
929
174
5
4
4
-
9,585
57%

44
9,629
West Midlands
1,779
2,685
1,382
991
296
12
2
2
-
7,149
62%

37
7,186
Other
6,833
8,622
4,363
3,378
1,299
196
164
82
27
24,964
63%

98
25,062
Total
42,887
40,202
14,788
9,528
2,753
270
185
94
27
110,734
56%

514
111,248















31 December 2015**














South East
10,402
10,668
3,279
1,410
318
8
7
6
-
26,098
54%

45
26,143
Greater London
11,402
6,426
1,252
418
90
1
2
1
-
19,592
47%

68
19,660
Scotland
3,198
3,775
1,497
840
323
34
2
-
-
9,669
58%

25
9,694
North West
2,475
3,548
1,662
1,162
476
47
5
-
-
9,375
61%

31
9,406
South West
2,850
3,549
1,581
851
217
8
6
5
-
9,067
58%

23
9,090
West Midlands
1,728
2,601
1,301
737
324
17
2
3
-
6,713
61%

23
6,736
Other
6,858
8,791
4,050
2,719
975
166
162
82
21
23,824
62%

46
23,870
Total
38,913
39,358
14,622
8,137
2,723
281
186
97
21
104,338
56%

261
104,599
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Key points
Based on the Halifax House Price Index at March 2016, the portfolio average indexed LTV by volume was 50% (31 December 2015 - 50%) and 56% by weighted value of debt outstanding (31 December 2015 - 57%). (The 2.2 billion of Northern Ireland mortgages are indexed against the house price index published by the Office of National Statistics).
Fixed interest rate products of varying time durations accounted for approximately 70% of the mortgage portfolio with 2% a combination of fixed and variable rates and the remainder variable rate. 
Approximately 13% of owner-occupied mortgages were on interest-only terms with a bullet repayment and 5% were on a combination of interest-only and capital and interest. 65% of the buy-to-let mortgages were on interest-only terms and 3% on a combination of interest only and capital and interest.
The arrears rate (more than three payments in arrears, excluding repossessions and shortfalls after property sale) reduced from 0.83% at 31 December 2015 to 0.79% at the end of June 2016
The flow of new forbearance was 269 million in H1 2016 compared with 285 million) in H1 2015. The value of mortgages subject to forbearance has decreased by 8% since 31 December 2015 to 3.32 billion (equivalent to 3.0% of the total mortgage book) as a result of improved market conditions and methodology changes.
The impairment charge was 18 million in H1 2016, compared to a release of 4 million in H2 2015. On an annualised basis the H1 2016 impairment charge represents 0.03% of the mortgage portfolio. The charge for newly defaulting debt was stable period on period. The overall increase from the prior period was driven by updated model calibrations for provisions on the non-defaulted book, and reduced provision releases associated with lower house price inflation during the period. 
Other lending relates to credit cards (3.7 billion), unsecured loans (3.5 billion) and overdrafts (1.7 billion). Credit quality of this portfolio remained stable during H1 2016 with an impairment charge of 21 million (H1 2015: 52 million).
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Ulster Bank RoI
Key points
Although the total mortgage portfolio increased by 1.7 billion (13%) from 12.7 billion to 14.4 billion, this was the result of foreign exchange movements. Excluding the impact of exchange rate movements, the portfolio decreased by 0.1 billion (0.9%) from 31 December 2015.
Market demand continued to grow, new business in H1 2016 was 363 million which was a 47% increase compared to H1 2015.
The interest-rate product mix remained stable with approximately 66% of the mortgage portfolio on tracker-rate products (31 December 2015 - 67%), 21% on variable-rate products (31 December 2015 - 20%) and 13% on fixed rate (31 December 2015 - 13%).
The decrease in portfolio average indexed LTV from 83% to 82% reflected positive house price index trends over the last six months. 
At 30 June 2016, 22% of total mortgage assets (3.2 billion) were subject to a forbearance arrangement, an increase of 10% from 31 December 2015. Excluding the impact of exchange rate movements, the value of mortgage assets subject to a forbearance arrangement decreased by 109 million (4%). The majority (82%) of forbearance arrangements were less than 90 days in arrears.
In H1 2016, 411 customers approached Ulster Bank RoI for the first time for forbearance assistance. This was a decrease of 73% compared to H1 2015.
At 30 June 2016, 15% (2.1 billion) of total mortgage assets were classified as AQ10 (31 December 2015 - 15%, 1.9 billion). Excluding the impact of exchange rate movements, the value of mortgage assets classified as AQ 10 decreased by 87 million (4%).
There was an overall release of impairment provisions of 1 million for personal mortgages in H1 2016. 
Private Banking 
Key points
The majority of the Private Banking personal lending portfolio relates to mortgage lending. On a like-for-like basis, the Private Banking mortgage portfolio increased by 5% during H1 2016.
Gross new mortgage lending amounted to 1.5 billion in H1 2016. Lending to owner-occupiers during this period was 1.3 billion (31 December 2015 - 2.2 billion) and had an average LTV by weighted value of 57% (31 December 2015 - 54%). Buy-to-let lending was 0.2 billion (31 December 2015 - 0.2 billion) with an average LTV by weighted value of 56% (31 December 2015 - 64%). 
The number of customers with mortgages in forbearance at 30 June 2016 decreased from 46 to 40 compared to 30 June 2015. In value terms, however, the exposure increased from 49 million to 80 million - although this increase was primarily seen in the offshore business.
A total of 97% (78 million) of forbearance loans were subject to a long-term arrangement (capitalisations, term extensions, economic concessions) at 30 June 2016 (31 December 2015 - 79% or 39 million). Short-term forbearance comprised payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest-only arrangements.
The reduction in other personal lending was driven by the disposal of the international private banking business.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
Key loan portfolios* (continued)
RBSI 
Key points
Gross new mortgage lending amounted to 206 million in H1 2016. Lending to owner-occupiers during this period was 127 million (2015 - 63 million) and had an average LTV by weighted value of 70% (2015 - 66%). Buy-to-let lending was 79 million (2015 - 32 million) with an average LTV by weighted value of 62% (2015 - 57%).
The number of customers granted forbearance in H1 2016 decreased by 36% compared to H1 2015. A total of 15 million of forborne loans were subject to a long-term arrangement (term extensions) at 30 June 2016 (2015 - 13 million). Short term forbearance comprises covenant breaches, payment suspensions and reduced payments.
Williams & Glyn
Key points
Gross new mortgage lending amounted to 1.1 billion in H1 2016. Lending to owner-occupiers during H1 2016 was 0.9 billion (2015 - 1.4 billion) and had an average LTV by weighted value of 71% (31 December 2015 - 70%). Buy-to-let lending was 0.2 billion (2015 - 0.3 billion) with an average LTV by weighted value of 62% (2015 - 64%). 
Fixed interest rate products of varying time durations accounted for approximately 63% (6.8 billion) of the mortgage portfolio with 6% (0.7 billion) a combination of fixed and variable rates and the remainder (3.3 billion) variable rate. 
The flow of new forbearance was 35 million in H1 2016 compared  30 million in H1 2015. The value of mortgages subject to forbearance decreased by 8% in H1 2016 to 481 million (equivalent to 4% of the total mortgage portfolio) as a result of improved market conditions and methodology changes.
Impairment trends were stable. The impairment charge for personal mortgages was 0.5 million in H1 2016 (H1 2015 - 0.6 million).
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Country risk
Country risk is the risk of loss occurring as a result of either a country event or unfavourable country operating conditions. As country events may simultaneously affect all, or many, individual exposures related to a country, country event risk is a concentration risk. Refer to Capital and risk management - Credit risk in the 2015 Annual Report and Accounts for other types of concentration risk such as product, sector or single-name concentration and Country risk for governance, monitoring, management and definitions.

Country exposures
Countries shown below are those which had ratings of A+ or below from Standard and Poor's, Moody's or Fitch at 30 June 2016, and in which current exposure to counterparties operating (or individuals residing) in them exceeded 1 billion. Selected eurozone countries are also included. Figures shown are on a current exposure basis, net of provisions and after risk transfer.

Personal
Banks &


Natural
Retail &


other FI
Sovereigns
Property
Resources
Leisure
Other
Total
30 June 2016
m
m
m
m
m
m
m
m









Southern Europe








Spain
77
112
8
790
494
152
318
1,951
Italy
25
500
71
111
170
16
142
1,035
Portugal
6
102
10
14
159
1
2
294
Cyprus
11
-
-
-
-
-
43
54
Greece
16
-
-
6
-
2
8
32









Southern Europe total
135
714
89
921
823
171
513
3,366









Eurozone other

















Germany
68
1,745
20,211
73
217
346
1,211
23,871
Ireland
15,064
582
2,339
987
511
1,008
2,243
22,734
Netherlands
29
2,168
5,650
344
141
194
964
9,490
France
68
2,312
3,340
434
506
209
1,111
7,980
Belgium
20
301
755
134
136
-
198
1,544
Luxembourg
11
474
30
339
6
29
133
1,022
Other 
14
268
707
70
28
84
145
1,316









Eurozone
15,409
8,564
33,121
3,302
2,368
2,041
6,518
71,323









Japan
28
577
1,819
-
-
1
336
2,761
India
12
149
776
13
140
3
237
1,330

Personal
Banks &


Natural
Retail &


other FI
Sovereigns
Property
Resources
Leisure
Other
Total
31 December 2015**
m
m
m
m
m
m
m
m









Southern Europe








Spain
79
58
6
671
526
129
272
1,741
Italy
27
428
52
62
175
18
108
870
Portugal
6
87
10
26
139
1
63
332
Cyprus
12
-
-
-
-
-
38
50
Greece
15
1
-
8
-
2
9
35









Southern Europe total
139
574
68
767
840
150
490
3,028









Eurozone other

















Germany
63
1,533
23,801
91
150
172
1,701
27,511
Ireland
13,440
433
1,624
756
437
921
1,788
19,399
Netherlands
30
1,966
4,176
451
94
127
1,137
7,981
France
76
2,309
2,402
357
447
200
1,306
7,097
Belgium
22
702
537
158
44
1
198
1,662
Luxembourg
6
625
21
346
32
28
119
1,177
Other 
14
382
609
55
84
11
146
1,301









Eurozone
13,790
8,524
33,238
2,981
2,128
1,610
6,885
69,156









Japan
31
249
1,417
2
-
1
114
1,814
India
11
227
824
1
92
27
452
1,634









**Restated - refer to page 17 for further details. 







Appendix 1 Capital and risk management
Country risk (continued)
Key points*
Total eurozone exposure increased by 2.2 billion or 3% to 71.3 billion. Exposures to Spain, Italy, Ireland, the Netherlands and France increased while exposures to Portugal, Germany, Luxembourg and Belgium decreased. Increases were partly due to volatility in the currency markets as the euro and the US dollar both appreciated against sterling.
Spain - exposure increased by 0.2 billion to 2.0 billion. This was largely the result of the appreciation of the euro against sterling. Excluding the impact of foreign exchange movements, exposure in Spain increased by 28 million. 
Italy - exposure increased by 0.2 billion to 1.0 billion. This was mostly due to the rise in the value of the euro against sterling. Excluding the impact of foreign exchange movements, exposure in Italy increased by 76 million. Around 9% of this is exposure to banks, of which the majority is collateralised derivatives.
Germany - exposure decreased by 3.6 billion to 23.9 billion. This was largely the result of a decrease in cash deposits with the central bank, driven by liquidity management. Excluding the impact of foreign exchange movements, exposure would have decreased by 7.3 billion.
Ireland - exposure increased by 3.3 billion to 22.7 billion. The increase was largely the result of the appreciation of the euro, and, to a lesser extent, of liquidity management, and increased mortgage lending. Excluding the impact of foreign exchange movements, exposure would have increased by 0.7 billion.
Netherlands - exposure increased by 1.5 billion to 9.5 billion, owing to the appreciation of the euro and to liquidity management. Excluding the impact of foreign exchange movements, exposure increased by 0.5 billion.
Japan - exposure increased by 0.9 billion to 2.8 billion. Half of this increase was driven by a 24% decrease in the value of the sterling against yen and most of the remainder was attributable to liquidity management.
India - exposure decreased by 0.3 billion to 1.3 billion, with reductions in lending both to corporates and to banks owing to RBS's UK-centred strategy.
China - exposure decreased by 0.2 billion to 0.7 billion. The reductions were predominantly driven by a decrease in lending to banks.
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Credit risk: balance sheet analysis
Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and related credit metrics and; movements in risk elements in lending (REIL) and impairment provisions by reportable segment.REIL comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) which carries an impairment provision. For collectively-assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected. 




Credit metrics



Gross loans to
REIL
Provisions
REIL as a %

Provisions 
YTD

of gross
Provisions
as a % of
Impairment
YTD
loans to
as a %
gross loans
losses/
Amounts
Banks
Customers
customers
of REIL
to customers
(releases)
written-off
30 June 2016
m 
m 
m 
m 
%
%
%
m
m










UK PBB
845
127,469
2,273
1,502
1.8
66
1.2
40
205
Ulster Bank RoI
2,664
21,421
4,329
2,474
20.2
57
11.5
(27)
860
Commercial Banking
1,000
100,236
2,150
994
2.1
46
1.0
104
306
Private Banking
103
11,829
93
39
0.8
42
0.3
2
1
RBS International
17
8,501
118
39
1.4
33
0.5
11
5
CIB
6,280
21,560
-
1
-
nm
-
-
-
Capital Resolution
9,130
21,076
2,406
1,122
11.4
47
5.3
266
125
W&G
-
20,558
397
262
1.9
66
1.3
17
29
Central items & other
1,925
367
23
23
6.3
100
6.3
(1)
1











21,964
333,017
11,789
6,456
3.5
55
1.9
412
1,532










31 December 2015



















UK PBB
965
121,552
2,682
1,847
2.2
69
1.5
(6)
695
Ulster Bank RoI
1,971
18,584
3,503
1,911
18.8
55
10.3
(142)
168
Commercial Banking
665
92,002
1,911
749
2.1
39
0.8
69
263
Private Banking
54
11,230
115
37
1.0
32
0.3
13
7
RBS International
6
7,401
92
31
1.2
34
0.4
-
32
CIB
5,696
16,076
-
1
-
nm
-
(7)
-
Capital Resolution
7,097
25,898
3,372
2,266
13.0
67
8.7
(794)
7,689
W&G
-
20,291
461
275
2.3
60
1.4
15
110
Central items & other
2,550
2,077
21
22
1.0
105
1.1
(1)
-











19,004
315,111
12,157
7,139
3.9
59
2.3
(853)
8,964
Key points
Loans to banks increased by 3.0 billion, mainly reflecting higher derivative cash collateral in CIB (0.6 billion) and Capital Resolution (2.0 billion) - also refer to Derivatives. 
Customer loans, excluding derivative cash collateral grew by 12.7 billion. Strong organic growth in UK PBB mortgages (6.6 billion) and Commercial Banking mid and large corporate lending (6.7 billion) was partially offset by Capital Resolution disposals and run-off - also refer to Key loan portfolios. 
REIL decreased by 0.4 billion to 11.8 billion and was 3.5% of customer loans. Impairment coverage on REIL is now 55% compared with 59% at year end, The lower coverage principally reflects Shipping REIL of 1,023 million with provisions of 445 million, coverage of 43% (31 December 2015 - 434 million, 181 million and 42%). 
Impairment provisions were lower at 6.5 billion. Significant write offs were seen in Ulster Bank RoI (860 million, more than 50% of total 1.5 billion) but these were materially offset by the impact of the post EU Referendum depreciation of sterling (0.2 billion).
The impairment charge of 412 million includes 267 million (Q1 2016 - 228 million) in the Shipping portfolio in Capital Resolution, 97 million in the Commercial Banking Oil & Gas portfolio, principally a single name and 29 million in the Mining & Metals portfolio.

Appendix 1 Capital and risk management
Loans and related credit metrics (continued)












Ulster






Central


UK
Bank
Commercial
Private
RBS

Capital

items


PBB
RoI
Banking
Banking
International
CIB
Resolution
W&G
& Other
Total
REIL
m
m
m
m
m
m
m
m
m
m











At 1 January 2016
2,682
3,503
1,911
115
92
-
3,372
461
21
12,157
Inter segment transfers
(191)
1,338
453
-
-
-
(1,600)
-
-
-
Currency translationand other adjustments
18
516
31
-
7
-
267
(31)
4
812
Additions
409
320
567
7
35
-
770
85
-
2,193
Transfers between REIL and potential problem loans
(86)
-
7
(23)
7
-
-
(13)
-
(108)
Transfer to performing book
(145)
(250)
(96)
-
(5)
-
(4)
(19)
-
(519)
Repayments and disposals
(209)
(238)
(417)
(5)
(13)
-
(274)
(57)
(1)
(1,214)
Amounts written-off
(205)
(860)
(306)
(1)
(5)
-
(125)
(29)
(1)
(1,532)











30 June 2016
2,273
4,329
2,150
93
118
-
2,406
397
23
11,789













Ulster






Central


UK
Bank
Commercial 
Private
RBS

Capital 

items


PBB
RoI
Banking
Banking
International
CIB
Resolution
W&G
& Other
Total
Provisions
m
m
m
m
m
m
m
m
m
m











At 1 January 2016
1,847
1,911
749
37
31
1
2,266
275
22
7,139
Inter segment transfers
(173)
1,198
439
-
-
-
(1,464)
-
-
-
Currency translationand other adjustments
-
260
2
2
2
-
169
-
3
438
Amounts written-off
(205)
(860)
(306)
(1)
(5)
-
(125)
(29)
(1)
(1,532)
Recoveries of amountspreviously written-off
14
14
12
-
-
-
16
1
-
57
Charges/(releases) to income statement from continuing operations
40
(27)
104
2
11
-
266
17
(1)
412
Unwind of discount 
(21)
(22)
(6)
(1)
-
-
(6)
(2)
-
(58)











30 June 2016
1,502
2,474
994
39
39
1
1,122
262
23
6,456












Appendix 1 Capital and risk management
Loans and related credit metrics:(continued)
The tables below show gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office.














Credit metrics


30 June 2016



REIL as a
Provisions
Provisions
Impairment

Gross


% of gross
as a %
as a % of
losses/
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
(releases)
written-off
m
m
m
%
%
%
m
m









Central and local government
6,668
1
1
-
100
-
2
1
Finance
38,342
60
57
0.2
95
0.1
(14)
8
Personal 
- mortgages (1)
147,115
3,881
1,097
2.6
28
0.7
19
22

- unsecured
14,373
1,216
1,007
8.5
83
7.0
35
189
Property
35,736
2,434
1,206
6.8
50
3.4
(47)
854
Construction
4,710
276
212
5.9
77
4.5
15
83
of which: CRE
27,695
2,479
1,264
9.0
51
4.6
(40)
840
Manufacturing 
11,062
225
130
2.0
58
1.2
6
39
Finance leases (2)
11,828
98
77
0.8
79
0.7
2
6
Retail, wholesale and repairs
12,863
380
251
3.0
66
2.0
4
65
Transport and storage
8,965
1,136
513
12.7
45
5.7
265
58
Health, education and leisure
11,364
364
172
3.2
47
1.5
1
25
Hotels and restaurants
5,820
287
159
4.9
55
2.7
2
52
Utilities 
4,322
128
83
3.0
65
1.9
15
4
Other
19,849
1,303
860
6.6
66
4.3
96
126
Latent
-
-
631
-
-
-
11
-









Total customers
333,017
11,789
6,456
3.5
55
1.9
412
1,532









Of which







UK








Personal - mortgages
131,212
1,001
158
0.8
16
0.1
22
18
 - unsecured
13,942
1,139
934
8.2
82
6.7
33
184
Property and construction
38,822
2,100
846
5.4
40
2.2
(32)
413
Other

124,174
2,940
1,473
2.4
50
1.2
408
177
Latent

-
-
342
-
-
-
12
-












308,150
7,180
3,753
2.3
52
1.2
443
792










Of which







Europe








Personal - mortgages
15,864
2,876
936
18.1
33
5.9
(3)
4
 - unsecured
364
54
50
14.8
93
13.7
3
5
Property and construction
1,562
590
560
37.8
95
35.9
-
501
Other

5,650
855
719
15.1
84
12.7
(70)
192
Latent

-
-
289
-
-
-
(1)
-












23,440
4,375
2,554
18.7
58
10.9
(71)
702










Banks
21,964
-
-
-
-
-
-
-
For the notes to this table refer to the following page.


Appendix 1 Capital and risk management
Loans and related credit metrics:Loans, REIL, provisions and impairments (continued)














Credit metrics


31 December 2015



REIL as a 
Provisions 
Provisions 
Impairment 

Gross 


% of gross 
as a % 
as a % of 
losses/ 
Amounts 
loans 
REIL 
Provisions 
loans 
of REIL 
gross loans 
(releases) 
written-off 
m 
m 
m 
% 
% 
% 
m 
m 









Central and local government
6,707
1
1
-
100
-
-
-
Finance
31,981
87
61
0.3
70
0.2
(10)
165
Personal 
- mortgages (1)
137,601
3,637
1,006
2.6
28
0.7
(82)
171

- unsecured
16,654
1,331
1,151
8.0
86
6.9
122
513
Property
35,744
3,505
2,012
9.8
57
5.6
(557)
5,999
Construction
4,421
357
269
8.1
75
6.1
(14)
313
of which: CRE
27,630
3,560
2,054
12.9
58
7.4
(811)
6,151
Manufacturing 
9,861
263
154
2.7
59
1.6
-
154
Finance leases (2)
11,443
107
79
0.9
74
0.7
(8)
37
Retail, wholesale and repairs
12,096
434
299
3.6
69
2.5
7
325
Transport and storage
8,909
563
258
6.3
46
2.9
115
370
Health, education and leisure
10,960
394
190
3.6
48
1.7
14
171
Hotels and restaurants
5,372
336
201
6.3
60
3.7
1
346
Utilities 
3,463
131
63
3.8
48
1.8
8
27
Other
19,899
1,010
810
5.1
80
4.1
(37)
340
Latent
-
-
584
-
-
-
(408)
-









Total customers
315,111
12,156
7,138
3.9
59
2.3
(849)
8,931









Of which







UK








Personal - mortgages
123,653
1,083
158
0.9
15
0.1
17
36
 - unsecured
14,348
1,262
1,085
8.8
86
7.6
126
501
Property and construction
38,006
2,814
1,282
7.4
46
3.4
27
2,773
Other

110,193
2,198
1,182
2.0
54
1.1
125
800
Latent

-
-
330
-
-
-
(303)
-












286,200
7,357
4,037
2.6
55
1.4
(8)
4,110










Of which







Europe








Personal - mortgages
13,908
2,550
844
18.3
33
6.1
(101)
135
 - unsecured
775
49
45
6.3
92
5.8
(5)
12
Property and construction
1,993
1,008
966
50.6
96
48.5
(593)
3,539
Other

7,148
1,011
864
14.1
85
12.1
(8)
1,014
Latent

-
-
255
-
-
-
(103)
-












23,824
4,618
2,974
19.4
64
12.5
(810)
4,700










Banks
19,004
1
1
-
100
-
(4)
33
Notes:
(1)
Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
(2)
Includes instalment credit.

Appendix 1 Capital and risk management
Debt securities
The table below analyses debt securities by issuer and IFRS measurement classifications. The other financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor's, Moody's and Fitch.

Central and local government
Banks
Other
Corporate
Total


financial

Of which
UK
US
Other
institutions

ABS 
30 June 2016
m
m
m
m
m
m
m

m










Held-for-trading (HFT)
3,147
5,733
24,141
910
2,324
346
36,601

827
Designated as at fair value
-
-
122
-
-
-
122

-
Available-for-sale (AFS)
8,978
8,622
14,762
2,112
5,013
102
39,589

2,467
Loans and receivables 
-
-
-
210
2,564
155
2,929

2,568
Held-to-maturity (HTM)
4,890
-
-
-
-
-
4,890

-










Debt securities
17,015
14,355
39,025
3,232
9,901
603
84,131

5,862










Of which US agencies
-
-
-
-
299
-
299

-










Short positions (HFT)
(2,495)
(2,927)
(15,513)
(273)
(373)
(212)
(21,793)

-










Ratings



















AAA
-
-
13,333
1,947
4,442
18
19,740

3,684
AA to AA+
17,015
14,355
8,105
588
1,345
10
41,418

355
A to AA-
-
-
10,746
186
1,977
157
13,066

438
BBB- to A-
-
-
6,321
391
1,257
205
8,174

778
Non-investment grade
-
-
520
17
493
112
1,142

420
Unrated
-
-
-
103
387
101
591

187











17,015
14,355
39,025
3,232
9,901
603
84,131

5,862










Available-for-sale









AFS reserves (gross of tax)
26
(99)
221
11
188
(17)
330

78










Gross unrealised gains
908
452
662
12
253
-
2,287

186
Gross unrealised losses
-
-
(3)
(1)
(129)
(7)
(140)

(119)










31 December 2015



















Held-for-trading
4,107
4,627
22,222
576
3,689
636
35,857

707
Designated as at fair value
-
-
111
-
-
-
111

-
Available-for-sale 
9,124
10,359
12,259
1,801
5,599
108
39,250

2,501
Loans and receivables
-
-
-
1
2,242
144
2,387

2,222
Held-to-maturity
4,911
-
-
-
-
-
4,911

-










Debt securities
18,142
14,986
34,592
2,378
11,530
888
82,516

5,430










Of which US agencies
-
-
-
-
806
-
806

-










Short positions (HFT)
(4,697)
(3,347)
(11,796)
(391)
(411)
(165)
(20,807)

-










Ratings



















AAA
-
-
11,696
1,696
5,234
3
18,629

3,366
AA to AA+
18,142
14,986
6,879
119
1,611
66
41,803

261
A to AA-
-
-
8,880
420
1,991
147
11,438

445
BBB- to A-
-
-
6,785
79
1,460
301
8,625

363
Non-investment grade
-
-
352
32
526
200
1,110

446
Unrated
-
-
-
32
708
171
911

549











18,142
14,986
34,592
2,378
11,530
888
82,516

5,430










Available-for-sale









AFS reserves (gross of tax)
12
(78)
90
4
114
4
146

60










Gross unrealised gains
383
104
270
6
110
7
880

90
Gross unrealised losses
(7)
(62)
(9)
(1)
(58)
(3)
(140)

(42)


Appendix 1 Capital and risk management
Debt securities (continued)
Key points 
Held-for-trading: CIB portfolio increased marginally overall principally auction participation in EMEA and higher trading activity, particularly in the US.


Available-for-sale: The overall size of the AFS portfolio, predominantly Treasury liquidity portfolio, is broadly unchanged as maturing securities have been offset by new fixed income investments and FX movements.

Derivatives
The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.










30 June 2016

31 December 2015


Notional
Assets
Liabilities

Notional
Assets
Liabilities


bn
m
m

bn
m
m










Interest rate
22,663
250,850
242,055

19,783
206,138
194,854

Exchange rate 
4,181
73,700
79,036

3,702
54,938
58,243

Credit 
52
859
748

67
909
840

Equity and commodity
15
630
629

18
559
796










Balance sheet

326,039
322,468


262,544
254,733

Counterparty mark-to-market netting

(267,287)
(267,287)


(214,800)
(214,800)

Cash collateral

(33,593)
(32,636)


(27,629)
(25,729)

Securities collateral 

(9,153)
(13,551)


(7,535)
(8,213)










Net exposure

16,006
8,994


12,580
5,991










Banks (1)

1,340
1,324


1,011
1,311

Other financial institutions (2)

4,630
2,646


2,864
1,468

Corporate (3)

8,568
4,385


7,816
3,108

Government (4)

1,468
639


889
104










Net exposure by sector

16,006
8,994


12,580
5,991










UK

9,146
2,636


6,270
1,199

Europe

4,809
3,679


4,069
2,408

US

1,164
1,529


639
714

RoW

887
1,150


1,602
1,670










Net exposure by region of counterparty

16,006
8,994


12,580
5,991

Notes:
(1)
Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
(2)
Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS's external rating.
(3)
Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting. 
(4)
Sovereigns and supranational entities with one way collateral agreements in their favour.
(5)
The notional amount of interest rate derivatives include 13,940 billion (2015 - 11,555 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflect IFRS offset of 243 billion (2015 - 124 billion and 232 billion (2015 - 118 billion) respectively.
Key points 
Derivative exposures, both balance sheet positions as well as net exposures increased principally as a result of market factors in the lead up to and following the EU Referendum, including the impact of volatility leading to higher trading volumes in the foreign exchange and interest rate market, sterling weakening against all major currencies and downward shift in yield curves.
Overall net exposure increased from a net asset position of 6.6 billion to 7.0 billion.
Bank exposures increased by 0.3 billion to a broadly flat net position at H1 2016, from a net derivative liability of 0.3 billion at the year end, largely reflecting derivative asset contracts that do not have a nettable liability exposure, augmented by the impact of foreign exchange movements, as well as the timing of collateral settlement.

Appendix 1 Capital and risk management
Valuation reserves
Valuation reserves reflect adjustments to mid-market valuations to cover bid-offer spread, liquidity and credit risk.

30 June
31 December
2016
2015 

m 
m



Funding valuation adjustment (FVA)
1,084
752
Credit valuation adjustments (CVA)
839
774
Bid-offer reserves
340
304
Product and deal specific
702
660



Valuation reserves
2,965
2,490
Key point
The FVA at 30 June 2016 included additional reserves (Q2 2016 - 220 million; Q1 2016 - 110 million) in Capital Resolution following the estimated widening in implied funding spreads; the Q2 movement reflected the impact of the EU Referendum.
The increase in other reserves mainly reflected sterling weakening against all major currencies following the EU Referendum and widening credit spreads.

Appendix 1 Capital and risk management
Credit risk: Regulatory basis
EAD and RWA density* 
The tables below show exposure at default (EAD) after credit risk mitigation (CRM), RWAs, and related RWA density by sector cluster. 

EAD post CRM 

RWAs

RWA density

IRB
STD
Total

IRB
STD
Total

IRB
STD
Total
30 June 2016
m
m
m

m
m
m

%
%
%












Sector cluster











Sovereign











Central banks
43,529
37,613
81,142

1,602
-
1,602

4
-
2
Central government
23,316
14,128
37,444

2,382
30
2,412

10
-
6
Other sovereign
4,279
1,037
5,316

1,230
209
1,439

29
20
27












Total sovereign
71,124
52,778
123,902

5,214
239
5,453

7
-
4












Financial institutions (FI)











Banks
26,415
520
26,935

13,791
129
13,920

52
25
52
Non-bank FI (1)
32,777
21,945
54,722

16,291
14,557
30,848

50
66
56
SSPEs (2)
10,446
1,001
11,447

3,738
703
4,441

36
70
39












Total FI
69,638
23,466
93,104

33,820
15,389
49,209

49
66
53












Corporates











Property











 - UK
42,623
4,187
46,810

21,047
3,971
25,018

49
95
53
 - RoI
1,714
38
1,752

1,085
38
1,123

63
100
64
 - Western Europe
3,286
357
3,643

1,642
350
1,992

50
98
55
 - US
468
18
486

260
18
278

56
100
57
 - RoW
797
245
1,042

587
189
776

74
77
74












Total property
48,888
4,845
53,733

24,621
4,566
29,187

50
94
54
Natural resources











 - Oil & Gas
4,874
165
5,039

2,432
150
2,582

50
91
51
 - Mining & Metals
1,596
12
1,608

861
9
870

54
75
54
 - Electricity
5,880
60
5,940

3,026
61
3,087

51
102
52
 - Water & Waste
6,606
73
6,679

1,616
60
1,676

24
82
25
Total natural resources
18,956
310
19,266

7,935
280
8,215

42
90
43
Of which: commodity traders
602
-
602

346
-
346

57
-
57
Transport











 - Shipping
5,994
1,502
7,496

3,299
1,504
4,803

55
100
64
 - Automotive
8,045
100
8,145

3,277
92
3,369

41
92
41
 - Other
8,897
431
9,328

4,129
148
4,277

46
34
46
Total transport
22,936
2,033
24,969

10,705
1,744
12,449

47
86
50
Manufacturing
21,760
699
22,459

9,270
609
9,879

43
87
44
Retail & leisure
20,720
2,165
22,885

12,560
2,091
14,651

61
97
64
Services
22,148
1,063
23,211

13,231
996
14,227

60
94
61
TMT (3)
6,866
377
7,243

4,152
370
4,522

60
98
62












Total corporates
162,274
11,492
173,766

82,474
10,656
93,130

51
93
54
Of which: commodity traders
837
-
837

476
-
476

57
-
57












Personal











Mortgages











 - UK
134,434
8,202
142,636

14,271
3,158
17,429

11
39
12
 - RoI
15,952
18
15,970

12,149
13
12,162

76
72
76
 - Western Europe
-
224
224

-
94
94

-
42
42
 - US
-
116
116

-
45
45

-
39
39
 - RoW
-
803
803

-
295
295

-
37
37












Total mortgages
150,386
9,363
159,749

26,420
3,605
30,025

18
39
19
Other personal
29,396
3,573
32,969

11,333
2,547
13,880

39
71
42












Total personal
179,782
12,936
192,718

37,753
6,152
43,905

21
48
23
Other items
-
8,137
8,137

-
6,834
6,834

-
84
84












Total
482,818
108,809
591,627

159,261
39,270
198,531

33
36
34












For the notes to this table refer to page 48.






*Not within the scope of Ernst & Young LLP's review report.







Appendix 1 Capital and risk management
EAD and RWA density* (continued)

EAD post CRM

RWAs

RWA density 

IRB
STD
Total

IRB
STD
Total

IRB
STD
Total
31 December 2015
m
m
m

m
m
m

%
%
%












Sector cluster











Sovereign











Central banks
46,879
48,451
95,330

1,730
-
1,730

4
-
2
Central government
22,561
14,295
36,856

2,028
28
2,056

9
-
6
Other sovereign
4,109
442
4,551

963
225
1,188

23
51
26












Total sovereign
73,549
63,188
136,737

4,721
253
4,974

6
-
4












Financial institutions (FI)











Banks
25,629
893
26,522

11,941
226
12,167

47
25
46
Non-bank FI (1)
30,898
19,121
50,019

15,366
12,504
27,870

50
65
56
SSPEs (2)
10,971
1,232
12,203

4,140
747
4,887

38
61
40












Total FI
67,498
21,246
88,744

31,447
13,477
44,924

47
63
51












Corporates











Property











 - UK
41,992
3,472
45,464

20,827
3,487
24,314

50
100
53
 - RoI
1,836
17
1,853

814
15
829

44
88
45
 - Western Europe
2,992
378
3,370

1,587
374
1,961

53
99
58
 - US
688
19
707

325
19
344

47
100
49
 - RoW
930
266
1,196

792
245
1,037

85
92
87












Total property
48,438
4,152
52,590

24,345
4,140
28,485

50
100
54
Natural resources











 - Oil & Gas
5,467
139
5,606

2,481
133
2,614

45
96
47
 - Mining & Metals
1,497
58
1,555

690
60
750

46
103
48
 - Electricity
5,133
72
5,205

2,586
49
2,635

50
68
51
 - Water & Waste
5,805
68
5,873

1,511
53
1,564

26
78
27
Total natural resources
17,902
337
18,239

7,268
295
7,563

41
88
41
Of which: commodity traders
776
-
776

365
-
365

47
100
47
Transport











 - Shipping
5,811
1,698
7,509

3,790
1,698
5,488

65
100
73
 - Automotive
8,580
87
8,667

3,222
80
3,302

38
92
38
 - Other
8,890
440
9,330

3,964
162
4,126

45
37
44
Total transport
23,281
2,225
25,506

10,976
1,940
12,916

47
87
51
Manufacturing
22,811
661
23,472

9,430
566
9,996

41
86
43
Retail & leisure
20,071
1,972
22,043

12,207
1,936
14,143

61
98
64
Services
22,080
973
23,053

12,884
903
13,787

58
93
60
TMT (3)
7,424
370
7,794

4,495
338
4,833

61
91
62












Total corporates
162,007
10,690
172,697

81,605
10,118
91,723

50
95
53
Of which: commodity traders
1,350
-
1,350

623
-
623

46
100
46












Personal











Mortgages











 - UK
126,295
8,087
134,382

9,397
3,336
12,733

7
41
9
 - RoI
14,048
18
14,066

11,564
12
11,576

82
67
82
 - Western Europe
-
228
228

-
97
97

-
43
43
 - US
-
111
111

-
45
45

-
41
41
 - RoW
-
716
716

-
285
285

-
40
40












Total mortgages
140,343
9,160
149,503

20,961
3,775
24,736

15
41
17
Other personal
29,659
4,731
34,390

11,276
3,468
14,744

38
73
43












Total personal
170,002
13,891
183,893

32,237
7,243
39,480

19
52
21
Other items
-
9,359
9,359

-
8,677
8,677

-
93
93












Total
473,056
118,374
591,430

150,010
39,768
189,778

32
34
32












*Not within the scope of Ernst & Young LLP's review report.








Appendix 1 Capital and risk management
EAD and RWA density* (continued)
Notes:
(1)
Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks.
(2)
Securitisation structured purpose entities (SSPEs) primarily relate to securitisation related vehicles.
(3)
Telecommunications, media and technology.
Key points
Total credit risk exposures remained broadly stable, with EAD post CRM of 592 billion at 30 June 2016. Notable movements during H1 2016 were:
An increase due to exchange rate movements following the EU Referendum.
Exposure reductions in line with business strategy including disposals, limit reductions and early repayments.
Growth in the UK mortgage book in line with business strategy.
Exchange rate movements accounted for a 14 billion increase in the underlying exposure. Excluding this impact, EAD post CRM fell by 2% reflecting a reduction in placements with central banks as part of ongoing liquidity management as well as strategic exposure reductions. This was offset by an increase in mortgage lending in the UK as part of strategy to increase market share. 
RWAs increased 5% to 199 billion. RWA movements during the period were partly driven by recalibrations of the following models: the PD models for banks, local authorities, housing associations and mortgages; and the LGD models for banks and quasi-governmental organisations.

IRB approach
Overall RWA density under the IRB approach rose marginally from 32% to 33% while RWAs increased by 6%, driven in part by the impact of model changes as well as deteriorating credit quality in some sectors during the period. Overall EAD post CRM increased 2% to 483 billion. 
Sovereign: RWA density rose slightly from 6% to 7% as RWAs increased by 10%, predominantly due to the implementation of a more conservative LGD model for quasi-governmental organisations. EAD post CRM fell 3% to 71.1 billion, reflecting ongoing liquidity management by Treasury.
Financial Institutions: RWA density rose from 47% to 49% as RWAs increased by 8%, primarily due to the implementation of the new PD model for banks. EAD post CRM increased 3%, driven by sterling's depreciation against the euro and the US dollar.
Property: Overall RWA density, RWAs and EAD post CRM remained broadly stable for this sector in H1 2016. For the RoI, the increase in RWA density from 44% to 63% reflected write-offs of defaulted exposure during the period.
Oil & Gas: RWA density rose from 45% to 50%, reflecting a further deterioration in credit quality. RWAs fell by 2% due to some assets moving into default, while EAD post CRM fell 11% mainly due to exposure reductions in the normal course of business. 
Mining & Metals: RWA density rose from 46% to 54%, reflecting a further deterioration in the credit quality of this sector. EAD post CRM increased by 7%, while RWAs increased by 25%.
Shipping: RWA density fell from 65% to 55% and RWAs fell by 13%, reflecting some customers moving into default in H1 2016. EAD post CRM increased by 3%, predominantly driven by exchange rate movements, partly offset by scheduled loan repayments, prepayments and secondary sales.
Personal Mortgages: RWA density rose from 15% to 18% while RWAs increased by 26% following quarterly PD recalibrations to reflect observed default rates during the period. EAD post CRM increased by 7%, mainly driven by business strategy to increase UK mortgage lending on the back of the improving UK housing and mortgage market and sustained house price growth. The exposure movements in the RoI were predominantly driven by exchange rate movements. 
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management
EAD and RWA density* (continued)
STD approach
RWA density for the STD approach deteriorated slightly while RWAs remained largely unchanged. EAD post CRM fell by 8%. 
Sovereign: RWAs and RWA density remained broadly stable during the period. EAD post CRM decreased by 16% due to exposure reduction as a result of ongoing liquidity management.
. 
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Market risk
Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market-implied volatilities, that may lead to a reduction in earnings, economic value or both. For a description of market risk framework, governance, policies and methodologies, refer to Capital and risk management - Market risk in the 2015 Annual Report and Accounts. 
Trading portfolios
Value-at-risk
The table below presents the internal value-at-risk (VaR) for trading portfolios split by type of market risk exposure. The internal traded 99% one-day VaR captures all trading book positions. By contrast, the regulatory VaR-based charges take into account only regulator-approved products, locations and legal entities and are based on a ten-day, rather than a one-day, holding period for market risk capital calculations.
















Half year ended

Year ended

30 June 2016

30 June 2015

31 December 2015

Average
Period end
Maximum
Minimum

Average
Period end
Maximum
Minimum

Average
Period end
Maximum
Minimum
Traded VaR (1-day 99%)
m
m
m
m

m
m
m
m

m
m
m
m















Interest rate
12.3
10.2
22.3
7.8

16.0
11.7
29.8
10.8

14.5
12.8
29.8
9.5
Credit spread
8.4
9.7
12.5
5.8

12.5
7.6
16.4
7.5

10.1
7.1
16.4
6.5
Currency
4.0
4.3
9.0
1.0

5.3
5.4
7.8
3.3

4.9
5.0
8.9
1.9
Equity
0.5
0.5
2.1
0.2

2.4
1.2
6.1
1.0

1.6
0.8
6.1
0.4
Commodity
0.6
0.8
1.7
0.2

0.5
0.7
2.2
0.2

0.4
0.5
2.2
0.2
Diversification (1)

(9.6)




(11.6)




(9.1)

















Total
15.4
15.9
27.3
9.9

21.8
15.0
30.1
15.0

18.9
17.1
30.1
12.1
Note:
(1)
RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Key points
Internal traded VaR continued to decline in H1 2016 following a reduction in positions, despite the increased volatility and reduced liquidity resulting from macroeconomic and political factors, notably the economic slowdown in China, the US Federal Reserve's decision to reduce its quantitative easing programme and the low interest rate environment in Europe. The uncertainty in advance of the EU Referendum was one of the main drivers of the reduction in positions.
Average total internal traded VaR fell, compared to both H1 2015 and 2015 as a whole, primarily driven by interest rate and credit spread VaR resulting from a reduction in fixed income securities.

Appendix 1 Capital and risk management
Trading portfolios (continued)
Capital charges*
The total market risk minimum capital requirement calculated in accordance with the Capital Requirements Regulation (CRR) was 1,675 million at 30 June 2016 (31 December 2015 - 1,700 million); this represents 8% of the corresponding RWA amount, 20.9 billion. It comprises a number of regulatory capital requirements split into two categories: (i) the non-modelled position risk requirement (PRR) of 351 million, which has several components; and (ii) the Pillar 1 model-based PRR of 1,324 million, which comprises several modelled charges.
The following table analyses the principal contributors to the Pillar 1 model-based PRR.











31 December


2015

Average
Maximum 
Minimum 
Period end
Period end
30 June 2016
m
m
m
m
m






Value-at-risk
329
352
305
305
377
Stressed VaR (SVaR)
462
480
446
448
477
Incremental risk charge (IRC)
278
297
253
270
248
Risk not in VaR (RNIV)
259
301
212
301
221










1,324
1,323
Key points
The VaR and SVaR charges together decreased by 12%,mainly driven by the euro and US dollar interest rate portfolios as a result of overall risk reduction in Q2 2016 ahead of the EU Referendum.
The RNIV charge increased by 36% as new RNIVs were introduced to supplement the capitalisation of risks against unreliable market data.
The IRC increased by 9%, mainly driven by US government bond positions in RBS Securities Inc. The methodology for calculating the IRC was refined during H1 2016, which had a moderate offsetting downward impact (14 million in RWA terms).
The non-modelled PRR decreased by 7%, largely driven by a reduction in the specific interest rate risk and trading book securitisation components, reflecting disposals in Capital Resolution. 
*Not within the scope of Ernst & Young LLP's review report.

Appendix 1 Capital and risk management
Non-trading portfolios
Non-traded credit spread risk 
The main component of total non-traded VaR is credit spread VaR, which captures the risk in Treasury arising primarily from portfolios held for liquidity and collateral management purposes. Non-traded credit spread VaR was 57.7 million (31 December 2015 - 30.6 million). The rise largely reflected an increase in longer-dated bonds within Treasury's liquidity portfolio and greater credit spread volatility, primarily affecting US dollar bond swap spreads with tenors of over ten years.
Non-traded interest rate risk 
Interest rate risk arises from two main sources in the non-trading portfolios.
The VaR relating to interest rate risk arising from earnings from retail and commercial banking activities at a 99% confidence level is presented below, together with a currency analysis at the period-end. This excludes positions in financial instruments which are classified as held-for-trading.








Average
Period end
Maximum
Minimum
Six months ended

m
m
m
m






30 June 2016

21
21
28
10
30 June 2015 - excluding Citizens

16
17
22
9
30 June 2015 - Citizens

9
6
16
3
30 June 2015 - Total

17
13
25
11
31 December 2015 - excluding Citizens

17
10
25
9
31 December 2015 - Citizens

5
-
16
-
31 December 2015 - total

18
10
25
10







30 June
30 June 2015
31 December

2016
excl. Citizens
Citizens
Total
2015
Period end VaR
m
m
m
m
m






Euro
3
2
-
2
3
Sterling
22
13
-
13
5
US dollar
1
15
6
14
5
Other
3
4
-
4
4
Key points
VaR remained stable during H1 2016, with fluctuations well within risk appetite.
As the VaR includes pipeline fixed-rate mortgage hedges but not the underlying mortgages, sterling VaR is relatively high, reflecting this mismatch. At 31 December 2015, there were offsetting risk exposures mainly relating to the pension fund contribution. Including the expected mortgage pipeline, sterling VaR would be 5.5 million and total VaR would be 5.6 million.
The VaR relating to interest rate risk arising from money-market portfolios was 3.7 million at 30 June 2016 (31 December 2015 - 2.5 million).


Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Sensitivity of net interest income*
Earnings sensitivity to rate movements is derived from a central forecast over a 12 month period. A simplified scenario is shown based on the period-end balance sheet assuming that non-interest rate variables remain constant. Market implied forward rates are used to generate a base case earnings forecast, which is then subjected to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
The following table shows the sensitivity of net interest income, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel with the exception that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base case earnings sensitivity and mismatches in the re-pricing dates of loans and deposits.
Multi-year forward projections would increase the negative impact of a downward change in rates or, conversely, the benefit of an immediate upward change in interest rates to current market rates. This is because, over time a greater proportion of maturing structural hedges will be reinvested at prevailing rates which may be higher or lower. Also, in the absence of dynamic assumptions relating to further management actions, the variance to the base case income forecast arising from margin compression or expansion on managed rate products will continue to accrue.
However, reported sensitivities should not be considered predictive of future performance. They do not capture potential management action in response to sudden changes in the interest rate environment. Actions that could reduce the net interest income sensitivity and mitigate adverse impacts are changes in pricing strategies on both customer loans and deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account non-interest income in addition to net interest income.







Euro
Sterling
US dollar
Other
Total
30 June 2016
m
m
m
m
m






+ 25 basis point shift in yield curves
-
49
16
3
68
- 25 basis point shift in yield curves
-
(125)
(16)
1
(140)
+ 100 basis point shift in yield curves
(20)
393
65
11
449
- 100 basis point shift in yield curves
-
(298)
(46)
3
(341)






31 December 2015











+ 25 basis point shift in yield curves
(6)
48
25
1
68
- 25 basis point shift in yield curves
(7)
(66)
(24)
1
(96)
+ 100 basis point shift in yield curves
(17)
385
94
7
469
- 100 basis point shift in yield curves
(7)
(345)
(79)
2
(429)


















*Not within the scope of Ernst & Young LLP's review report.







Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Key points
Implied forward rates fell between December 2015 and June 2016, so that the June 2016 base-case forecast incorporated a 25-basis-point cut in the UK base rate within the 12-month forecast horizon whereas the December 2015 base-case forecast incorporated a 25-basis-point rate rise.
The largest change in net interest income sensitivity in H1 2016 relates to the negative impact of an immediate 25-basis-point downward change in interest rates from the base-case forecast. This sensitivity increased from 96 million to 140 million, primarily due to the decline in interest rates during the period as customer deposit pricing is assumed to floor at or close to zero interest rates. Any further falls in market rates therefore reduce income. Maturing structural hedges are also reinvested at lower rates.
Structural hedging*
RBS has the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream. 
After hedging the net interest rate exposure of the bank externally, Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve. Over time, the hedging programme has built up a portfolio of interest rate swaps that provide a basis for stable income attribution to the product and equity hedges.
Product hedging*
Product structural hedges are used to minimise the volatility on earnings related to specific products, primarily customer deposits. The balances are primarily hedged with medium-term interest rate swaps, so that reported income is less sensitive to movements in short-term interest rates. The size and term of the hedge are based on the stability of the underlying portfolio.
The table below shows the impact on net interest income associated with product hedges managed by Treasury. These relate to the main UK banking businesses except Private Banking and RBS International. Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve after hedging the net interest rate exposure of the bank externally. This internal allocation has been developed over time alongside the bank's external hedging programme and provides a basis for stable income attribution to the product and equity hedges.
*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

Six months ended
Net interest income - impact of structural hedging
30 June
30 June
31 December
2016
2015
2015
m
m
m




UK Personal & Business Banking
170
187
186
Commercial Banking
118
127
129
Capital Resolution
6
14
7
Williams & Glyn
21
22
23




Total product hedges
315
350
345
Key points
The incremental impact on net interest income above LIBOR from structural hedging was positive in H1 2016 as short-term interest rates remained low. Swap rates continued to fall, resulting in the average book yield falling to 1.28% in H1 2016 from 1.51% in H1 2015 and 1.44% in H2 2015. This was due to maturing hedges being reinvested at lower rates and new hedges being added at prevailing market rates. At 30 June 2016, the equivalent yield available in the market was 0.44% compared to 1.45% at 31 December 2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.
The notional size of the hedge increased from 74 billion in H2 2015 to 87 billion in H1 2016. The split by business was broadly in line with the proportion of income shown above. The yield will broadly track medium-term swap rates.However, as the hedge notional increases, the profile is adjusted to incorporate short-term hedging instruments so that the weighted average life of the hedge is not increased.The yield will fall until the short-term hedges are rolled into longer-term instruments on maturity. If the hedged notional were to remain stable, the yield would eventually replicate a time series of medium-term swap rates.Additional hedging activity is not captured in the product hedging yield.
At 30 June 2016, the five-year sterling swap rate was 0.44% compared to 1.45% at 31 December 2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.


Appendix 1 Capital and risk management
Equity hedging*
Equity structural hedges are also used to minimise the volatility on earnings arising from returns on equity. The hedges managed by Treasury relate mainly to the UK banking businesses and contributed 0.3 billion to these businesses in H1 2016 (H1 2015 - 0.4 billion; H2 2015 - 0.3 billion), which is an incremental benefit relative to short-term wholesale cash rates. The size of the hedge in H1 2016 was 35 billion, lower than H12015 (42 billion) and H2 2015 (42 billion), primarily reflecting the payment of 4.2 billion into the pension fund and the 1.2 billion payment of the final DAS dividend.
The equity hedge also aims broadly to track a time series of medium-to-longer-term swap rates although the yield will be affected by changes in the capital composition of the bank.Other factors, such as the impact of the sale of risk-free securities or additional hedging activity, are not captured in the equity yield. The yield of the equity and product hedge combined was 1.59% at 30 June 2016. 
Foreign exchange risk
Treasury seeks to limit the potential volatility impact on RBS's CET1 capital ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals the CET1 ratio. The sensitivity of the CET1 ratio to exchange rates is monitored monthly and reported to the ALCo at least quarterly.





Structural





Net assets

foreign currency

Residual

Net assets

of overseas
Net
exposures

structural
of overseas

operations
investment
pre-economic
Economic
foreign currency
operations
NCI (1)
excluding NCI
hedges
hedges
hedges (2)
exposures
30 June 2016
m
m
m
m
m
m
m








US dollar
989
-
989
(24)
965
(965)
-
Euro
7,662
(123)
7,539
(677)
6,862
(2,238)
4,624
Other non-sterling
3,686
(633)
3,053
(2,576)
477
-
477









12,337
(756)
11,581
(3,277)
8,304
(3,203)
5,101








31 December 2015














US dollar
1,172
-
1,172
(134)
1,038
(1,038)
-
Euro
6,562
(127)
6,435
(573)
5,862
(1,963)
3,899
Other non-sterling
3,599
(524)
3,075
(2,364)
711
-
711









11,333
(651)
10,682
(3,071)
7,611
(3,001)
4,610
Notes:
(1)
Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners' equity.
(2)
Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.
Key points
Sterling's depreciation against all currencies following the EU Referendum increased residual structural foreign currency exposures by 0.6 billion; this was partially offset by lower underlying residual exposures.
Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of 0.4 billion in equity, respectively (2015 - 0.4 billion).
*Not within the scope of Ernst & Young LLP's review report.

Appendix 2
Williams & Glyn

Williams & Glyn financial information
In the main body of this results document, W&G is presented as a segment within RBS, reflecting the contribution made by W&G's ongoing business to RBS. This does not reflect the allocation of separation costs or the financial impact of any disposal transaction. The segmental performance of W&G has been extracted from the 2016 Interim results, which are subject to the independent review performed by EY. 
In this appendix, W&G's financial information is shown on two different bases:
 
A non-statutory 'carve out' internally managed basis for the half years ended 30 June 2016, 30 June 2015 together with the year ended 31 December 2015 which reflects the adjustments to the W&G segmental information, relating to a) the full allocation of additional costs for the services W&G received from RBS during these periods and b) the inclusion of certain customer portfolios that are currently reported through other segments in RBS. 
 
An illustrative standalonebasis of presentation which provides an indicativeview of W&G's standalone profile for the period ended 30 June 2016.
During the periods presented, W&G has been an integral part of RBS and has not operated as a separate legal entity. As such, the non-statutory carve out basis of presentation does not fully reflect the actual cost base, funding, liquidity and capital profile of a standalone bank. 
In respect of the illustrative standalone basis, W&G's actual cost base, funding, liquidity and capital requirements as a separated bank may ultimately differ materially from those implied by this illustrative financial information. The illustrative financial information presented herein is based on certain assumptions, which may prove to be incorrect. As such, this illustrative financial information should be treated as solely indicative of currently modelled parameters and should not be construed as an indication or projection of W&G's actual or future results or financial position on a standalone basis. When considering this information, readers should take this and the risks inherent in preparing such financial information into consideration. For a description of the risks and uncertainties relating to the W&G separation and divestment see the risk factors on page 391 in the RBS 2015 Annual Report and Accounts. 
The illustrative standalone financial information presented in this appendix does not comply with the UK rules relating to the preparation of proforma financial information under the Prospectus Directive rules or Regulation S-X in the United States, and if presented in accordance with these rules, such presentation would be different than that presented herein. 
The illustrative standalone financial information presented in this appendix has not been audited or reviewed by EY. 






Non-statutory carve out financial statements








Half year

Half year

ended
Year ended
ended

30 June
31 December
30 June

2016
2015
2015
Income statement
m
m
m
Net interest income
335
679
338




Net fees and commissions
85
173
85
Other operating income
9
16
9




Non-interest income
94
189
94




Total income
429
868
432




Administrative expenses
(278)
(522)
(244)
Restructuring expenses
(45)
(28)
-
Depreciation
(5)
(11)
(5)




Total operating expenses
(328)
(561)
(249)
Operating profit before impairment (losses)/releases
101
307
183
Impairment (losses)/releases
(13)
(15)
11




Operating profit before taxation
88
292
194
Tax charge
(25)
(60)
(40)




Profit for the year 
63
232
154




Performance ratios







Loan impairment charge as a % of gross customer loans and advances 
0.1%
0.1%
(0.1%)
Net interest margin excluding central IEAs
3.32%
3.42%
3.47%
Cost:income ratio
76%
65%
58%
Cost:income ratio - adjusted (1)
66%
61%
58%


30 June
31 December

2016
2015
Balance sheet 

m
m
Assets



Cash and balances at central banks

39 
94 
Loans and advances to customers

20,653 
20,325 
Derivatives

193 
102 
Property, plant and equipment

88 
90 
Prepayments, accrued income and other assets

11 
11 




Total assets

20,984 
20,622 




Liabilities



Deposits by banks

14 
14 
Customer deposits

25,239 
25,209 
Derivatives

90 
17 
Amounts due to related undertakings

3,020 
3,174 
Other liabilities

18 
28 
Provisions

50 
50 




Total liabilities

28,431 
28,492 
Net investment from RBS Group

(7,447)
(7,870)




Net investment from RBS Group and liabilities

20,984 
20,622 




Ratios







Loan:deposit ratio (excluding repos)

82%
81%
Risk-weighted assets bn 

10.4 
10.0 
Note:
(1) Excluding restructuring costs.


Income statement on a non-statutory carve out basis
W&G's net interest income remained relatively flat as the growth in the balance sheet was offset by the reduction in the net interest margin.
Operating expenses increased by 79 million compared with H1 2015 as W&G continued to develop its capability to operate as a standalone bank. This included the investment of 45 million in restructuring costs principally associated with the development of the W&G future IT platform.
Net impairment losses were 13 million compared to a net release of 11 million in H1 2015. The H1 2015 impairments benefited from a number of releases in the Commercial business. 
Balance sheet on a non-statutory carve out basis
Customer net lending grew by 328 million, or 2%, to 20.7 billion in H1 2016 driven by growth in mortgage lending. 
Customer deposits were stable at 25.2 billion in H1 2016 with current accounts representing 7.3 billion, or 29% of total customer deposits.
Williams & Glyn illustrative standalone results 
An illustration of W&G's standalone income statement and balance sheet for H1 2016 prepared as though it operated independently of the RBS Group is presented below based on certain assumptions.
The major adjustments made in preparing this illustrative standalone information compared to W&G's financial information presented on a "carve out" basis are in respect of:
 
Costs - W&G is assumed to have a fully developed cost base, reflecting the people and infrastructure required to operate on a standalone basis
 
Capital - Illustrative levels of equity and capital securities have been included on the balance sheet
 
Liquidity - W&G is assumed to manage its own funding and liquidity position which, combined with the assumed addition of capital, drives a high level of liquid assets
See page 1 above with respect to important disclosures relating to the preparation of this information. 








Williams & Glyn Standalone Financial information





Non-statutory

Illustrative



carve 
Illustrative
Williams & Glyn
Segmental
Adjustments
out financial
adjustments
standalone financial
performance
(1)
statements
(2)
statements
Half year ended 30 June 2016
m
m
m
m
m
Income statement





Net interest income
324 
11 
335 
(14)
321 






Net fee and commission income
79 
6 
85 
-
85 
Other operating income
8 
1 
9 
-
9 
Non interest income
87 
7 
94 
-
94 






Total income
411 
18 
429 
(14)
415 






Administrative expenses
(197)
(81)
(278)
(23)
(301)
Restructuring expenses
(45)
-
(45)
45 
-
Depreciation
-
(5)
(5)
-
(5)






Total operating expenses
(242)
(86)
(328)
22 
(306)






Operating profit before impairment losses
169 
(68)
101 
8 
109 
Impairment losses
(17)
4 
(13)
-
(13)
Operating profit before taxation
152 
(64)
88 
8 
96 






Tax charge (3)
-
(25)
(25)
(2)
(27)






Profit for the year
152 
(89)
63 
6 
69 






Performance ratios





Loan impairment charge as a % gross 





 customer loans and advances 
0.2%

0.1%

0.1%
Net interest margin excluding central IEAs
3.30%

3.32%

3.17%
Cost:income ratio
59%

76%

74%
Cost:income ratio - adjusted (4)
48%

66%

74%






Assets





Cash and balances at central banks
36 
3 
39 
3,384 
3,423 
Loans and advances to customers
20,297 
356 
20,653 
-
20,653 
Available-for-sale financial assets
-
-
-
3,477 
3,477 
Derivatives
-
193 
193 
-
193 
Property, plant and equipment
-
88 
88 
-
88 
Prepayments, accrued income and other
10 
1 
11 
9 
20 
 assets











Total assets
20,343 
641 
20,984 
6,870 
27,854 






Liabilities





Deposits by banks
12 
2 
14 
-
14 
Customer deposits
23,909 
1,330 
25,239 
-
25,239 
Derivatives
-
90 
90 
-
90 
Debt securities in issue
-
-
-
415 
415 
Amounts due to related undertakings
-
3,020 
3,020 
(3,020)
-
Other liabilities
18 
-
18 
-
18 
Provisions
50 
-
50 
-
50 






Total liabilities
23,989 
4,442 
28,431 
(2,605)
25,826 






Net Investment





Net investment from RBS Group (5)
(3,646)
(3,801)
(7,447)
9,200 
1,753 
AT1 Instruments
-
-
-
275 
275 






Net investment from RBS Group
(3,646)
(3,801)
(7,447)
9,475 
2,028 






Total equity and liabilities
20,343 
641 
20,984 
6,870 
27,854 






Balance sheet metrics





Loan:deposit ratio (excluding repos)
85%

82%

82%
Risk-weighted assets bn (6)
9.9 

10.4 

14.2 
Notes:
(1)
Adjustments made in respect of RBS recharges and perimeter (e.g. inclusion of customers currently within the NatWest brand) as set out on page 1 of this appendix.
(2)
The illustrative adjustments include assumptions with respect to W&G's fully developed cost base, and capitalisation and liquidity adjustments illustrative of a standalone entity. These are management estimates based on a number of assumptions and as a result should not be considered as an indication of W&G's actual or future results as a standalone bank which may be materially different.
(3)
Indicative tax charge at 28.5%.
(4)
Excluding restructuring costs
(5)
W&G is not a separate legal entity and a number of items on the balance sheet are presented as allocations of transactions of the wider RBS Group. The net funding/capital position with RBS Group represents a combination of the overall receivables and payables with W&G and the funding balances with RBS Group, which cannot be separately identified or allocated.
(6)
The segmental performance and non-statutory carve out financial information RWAs have been presented on an Advanced Internal Rating Basis (AIRB), while the "illustrative standalone" Williams & Glyn financial information RWAs have been presented on a standardised basis.

This information is provided by RNS
The company news service from the London Stock Exchange
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IR SSSSEIFMSEEA