Re-building and Recovery Debt Investor Presentation Q1 2010 Results Important Information Certain sections in this presentation contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited, to: the Group’s restructuring plans, capitalisation, portfolios, capital ratios, liquidity, risk weighted assets, return on equity, cost-to-income ratios, leverage and loan-to-deposit ratios, funding and risk profile; the Group’s future financial performance; the level and extent of future impairments and write-downs; the protection provided by the APS; and the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; developments in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes, including changes in regulatory capital regulations; a change of UK Government or changes to UK Government policy; changes in the Group’s credit ratings; the Group’s participation in the APS and the effect of such scheme on the Group’s financial and capital position; the conversion of the B Shares in accordance with their terms; the ability to access the contingent capital arrangements with Her Majesty’s Treasury (“HM Treasury”); limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; changes in competition and pricing environments; the financial stability of other financial institutions, and the Group’s counterparties and borrowers; the value and effectiveness of any credit protection purchased by the Group; the extent of future write-downs and impairment charges caused by depressed asset valuations; the ability to achieve revenue benefits and cost savings from the integration of certain of the businesses and assets of RBS Holdings, N.V. (formerly ABN AMRO); natural and other disasters; the inability to hedge certain risks economically; the ability to access sufficient funding to meet liquidity needs; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain non-core assets and assets and businesses required as part of the EC State aid approval; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this presentation speak only as of the date of this presentation, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The information, statements and opinions contained in this presentation do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of an offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. 2 Agenda Introduction to RBS, the strategic vision and Q110 highlights Building blocks of the RBS Recovery External factors Internal metrics Reducing and managing risk Funding & Liquidity RBS compared to peers Concluding remarks Appendices 3 The New RBS – What we aspire to be What did we set out to achieve in February 2009? RBS’s 2013 vision To be one of the world’s most admired, valuable and stable universal banks To return to >15% sustainable RoEs, powered by market-leading businesses in large customer-driven markets To deliver its strategy from a stable AA category risk profile and balance sheet The business mix to produce an attractive blend of profitability, stability and sustainable growth – anchored in the UK and in retail and commercial banking together with customer driven wholesale banking, and with credible growth prospects geographically and by business line Management hallmarks to include an open, investor-friendly approach, discipline and proven execution effectiveness, strong risk management and a central focus on the customer 5 How are we going to do it? RBS’s Strategic Plan A reshaped New management business disciplines Focus on UK and US franchises, and move balance of Group towards UK A cost base that is reduced, controlled Retail and Commercial businesses and transparent Resize and refocus GBM on corporate Returns and balance sheet use targeted and financial institutions franchises and and measured core locations A strong risk management organisation Reposition other overseas businesses to and processes align with Group competencies and A management framework and reduce risk incentives to reward longer-term Use smaller balance sheet with much performance less wholesale funding reliance Management and accounting Understand and manage down our Non- mechanisms for Non-Core assets Core bank effectively 6 Progress to date Strategic plan timeline 2009 2010 2011 2011 onwards Core profits build, Non-Core losses fall Target >15% RoE Formation of the Execution and Return to Group Ongoing revenue and cost Strategic Plan implementation profitability initiatives Creation of Non-Core phase of the plan Initial cost Completion of Non-Core run- £2.5bn cost saving ‘Roll up our reduction down programme announced sleeves’ programmes 2013 targets achieved Business restructuring Economic completed – Returns and reinvestment recovery takes Interest rates start – Risk New Management and hold to rise – Franchise Board Retail & APS entered into and Commercial starts Recapitalisation to rebound completed ‘Tools for the job’ in place 7 Progress to date Current position versus 2013 targets Key performance Worst FY 09 Q1 10 2013 indicator point Actual Actual Target Core Tier 1 Capital 4%(1) 11.0% 10.6% >8% Loan : deposit ratio (net of provisions) 154%(2) 135% 131% c100% Wholesale funding reliance(3) £343bn(4) £250bn £222bn <£150bn Liquidity reserves(5) £90bn(4) £171bn £165bn c£150bn Leverage ratio(6) 28.7x(7) 17.0x 17.6x <20x Return on Equity (RoE) (31%)(8) Core 13%(9) Core 15%(9) >15% Cost : income ratio net of claims 97%(10) Core 53% Core 54% Core <50% 1As at 1 January 2008. 2 As at October 2008 3 Amount of unsecured wholesale funding under 1 year. 2009 includes £109bn of bank deposits and £141bn of other wholesale funding. 2013 target is for <£65bn of bank deposits, <£85bn of other wholesale funding. 4 As at December 2008 5 Eligible assets held for contingent liquidity purposes including cash, government issued securities and other securities eligible 8 with central banks. 6 Funded tangible assets divided by Tier 1 Capital. 7 As at June 2008 8 Group return on tangible equity for 2008 9 Indicative Core attributable profit taxed at 28% on attributable core spot tangible equity (c70% of Group tangible equity based on RWAs). 10 2008 Key Q1 10 Results Highlights Core Business (Retail & Commercial, GBM, GTS and Insurance) Core Business (Retail & Commercial, GBM, GTS and Insurance) – Core customer franchises remain strong – UK Retail now serves >12.8m current account customers – Operating profit: £2.3bn, +92% vs Q409 driven by seasonally strong results in GBM and improving Retail & Commercial trends – ROE: 15%, in line with long run targets – NIM: 2.11%, +5bps vs Q409 driven by GBM – Credit profile: ongoing improvement, impairment losses reduced 25% q-o-q to £971m – RWAs: £421bn, +7%, driven by ABN AMRO migration Group profile Group Profile – Group operating profit of £713m vs loss of £1.4bn Q409 – Impairments: £2.7bn, -14% q-o-q driven by improvements in Core and Non-Core – Non-Core run off: tracking to plan, a further 4% (£8bn) reduction in TPAs in Q1 – Core Tier 1 ratio 10.6%, RBS remains a highly capitalised bank – Good progress made against key metrics published in our Strategic Plan 1 Note: All financial information contained in these materials in relation to the performance of the Group in the first quarter of the calendar year 2010, and comparisons of such data with the fourth quarter of the calendar year 2009, the first quarter of the calendar year 2009 or any other period, are extracted without amendment from the announcement on 7 May 2010 of the financial results of the 9 Group for the end of the first quarter of the calendar year 2010 in its Interim Management Statement Q1 2010, disseminated to the London Stock Exchange via RNS announcement on that date. Key Q1 10 Results Highlights Funding Funding – Short Term wholesale funding reduced to £222bn (£128bn excluding bank deposits) in Q1 2010, on the way to target of under £150bn in 2013 – c. £8bn of unguaranteed long-term issuance in Q1 2010 (£21bn 2009) covering a range of maturities. – Re-introducing issuance of different currencies to the funding platform and building the yield curve in existing markets for RBS name – Limited impact of run-off of Government funding schemes. Asset reduction outpaces maturities of CGS and SLS – Establishment of an FSA regulated RBS residential mortgage-backed Covered Bond programme launched on April 1st 2010 Liquidity Liquidity – Net Stable Funding Ratio1 of 90% as at Q110 - up from 79% in at FY08 – Significant increase in liquidity reserves; increasing from £90bn in FY08 to £165bn in Q110, with higher quality of liquidity – FSA-eligible government bonds portfolio in the Plc will increase under the current plan from £25bn at Q1 2010 to £50bn at 2013 to strengthen Group liquidity (£1bn FY08, £20bn FY09) – Ongoing collateral enablement effort to expand and diversify secured funding resources 10 1 Net Stable Funding Ratio measures the level of net stable funding divided by long-term assets (RBS Definition) Building blocks of the RBS Recovery Building blocks of the RBS Recovery What are the necessary external factors and internal metrics to achieve the plan? World economic recovery continues External Interest rates normalise factors Strong but rational competition going forward Path of regulatory change will be phased and sensible We have strong franchises in large customer-driven markets Sustained and improving customer satisfaction levels Strategic plan, investment and income initiatives drive sustainable growth Liability margins to improve – asset margins to hold Internal We can deliver good cost efficiency metrics Impairments trend to “normalised” levels Remain well capitalised and can deliver our funding plan Non-Core run-off drives the decline in risk concentrations and wholesale funding reliance Management execute the plan well and drive cultural change 12 Building blocks of the RBS Recovery External Factors Internal Metrics 13 Building blocks of the RBS Recovery – External factors Current position Possible risks Outlook is better than expected 6-12 months ago Economic growth falters US and UK current account and savings deficits are starting to improve Economic imbalances World economic Sovereign credit risks UK housing market has performed better than expected recovery Confidence in markets has improved but will remain sensitive to news flow Wholesale funding, liquidity risks continues and market developments Harsh capital and liquidity regimes hinder growth Low interest rates have improved liquidity which could continue Interest rates, inflation rise rapidly Strong but rational competition - competitors have similar capital, funding New market entrants / return of foreign banks and return targets Irrational behaviour from established competitors Banking, similar to other mature capital intensive industries, is relatively Return of irrational wholesale and securitisation Strong but concentrated markets rational New business margins are broadly consistent with industry return targets Banks move up risk profile again to generate competition Increased industry funding costs e.g. liquidity, capital and funding need to increased returns going forward be reflected as interest rates normalise Regulatory intervention Banks are capital intensive and becoming more so and cannot survive without moving to exceed cost of capital (CoE 10-15%) Path of More penal at implementation regulatory Proposals published, but subject to consultation and impact assessment Shortened timeline for introduction change will be phased and Implementation likely phased so as not to destabilise Banking System Failure to gain global agreement, UK or EU ‘goes sensible it alone’ Debates around industry structure, bank specific UK and other Governments have been supportive taxes and levies and Basel III capital / liquidity Government proposals policy UK Government, through UKFI, has remained a constructive shareholder and operated in line with shareholder best practice Impact of consumer legislation – e.g. overdraft fees 14 Building blocks of the RBS Recovery External Factors Internal Metrics 15 Building blocks of the RBS Recovery – Internal metrics We have strong franchises in large customer-driven markets Q1 Customer Numbers Market Positions Income FY09 Deposits Q110 >12.8m current accounts UK Retail #2 Current Accounts £4.9bn £89.4bn 10m savings accounts UK 1.2m Business, Commercial & #1 SME £3.6bn £91.4bn Corporate Corporate customers #1 Corporate & Commercial 258,000 UK Wealth #1 Private Banking in the UK £1.1bn £36.4bn Wealth customers #1 UK, #3 Europe, #6 USA, Top tier in key product areas £11.0bn £47.0bn GBM #7 APAC1 #5 Trade Finance GTS >1.2m customers £2.5bn £64.6bn #4 Merchant Acquirer #1 in Northern Ireland Ulster 1.9m customer accounts £1.0bn £23.7bn #3 in island of Ireland 3.9m Retail Top 5 in 8 of top 10 markets in US R&C £2.7bn £62.5bn 0.5m SME & Corporate which we operate 11.1m own brand policies Insurance #1 Motor insurance £4.5bn n.a. 6.6m other policies2 Our franchises have sustained market positions, with customer numbers steady or growing 16 1 2010 Greenwich Associates H209 data (Large Corporate Banking study), rankings relate to Total Relationships. 2 Partnership, broker and other policies Building blocks of the RBS Recovery – Internal metrics Liability margins to improve – asset margins to hold Current Position Outlook Q110 Q409 2011-13 Overall margin Group NIM 1.92% 1.83% Asset margins Liability margins R&C NIM1 3.01% 3.01% R&C margin Margin GBM margin GBM 1.11% 0.89% Non-Core margin Impact of funding & liquidity Non-Core 1.25% 1.17% Overall deposit margin To achieve the plan: Possible risks: Current new business asset margins hold steady Irrational competition Interest rates remain near zero for extended Interest rates rise towards end of plan period period 1 Underlying, adjusted for days in month; 2.97% (Q110) and 3.04% (Q409) on a reported basis 17 Building blocks of the RBS Recovery – Internal metrics Strategic plan, investment and income initiatives drive sustainable growth Non Interest Income - Leveraging for growth Investment - major programmes underway In systems, proposition, technologies and 5 year spend > £6bn to foster growth & efficiency Investment staff Example projects: Leverage group capabilities e.g: Multi-channel / internet development – c12% of spend New affluent proposition in UK Retail – UK Retail; build new channel platforms & capabilities GBM Capital Market products in UK – UK Retail; migrate customers to remote channels & Cross-sell Corporate improve productivity New Bancassurance platform in Ulster – GTS; on-line portals/cash mgt/trade services GTS products available across the Reduce cost to serve – c55% of spend corporate franchise – Group - process efficiencies across business areas – GBM - automation of operational processes Leveraging client relationships e.g: Improve MI systems – c4% of spend GBM – deepening corporate and FI Customer Improve & integrate infrastructure – c10% of spend relationships, focus on core clients relationships Retail & Commercial – increasing share – UK Retail – new sales management platform of wallet through client cross-sell – GBM – enhanced trading platforms 18 Building blocks of the RBS Recovery – Internal metrics We can deliver good cost efficiency £bn 17.4 2.4 15.0 FY09 Cost Impact of Non-Core Inflation Volume reduction Disposals roll-off and Core programme other1 Non-Core Core costs broadly flat over the planning horizon Impact of inflation & volume growth in Core offset by business re-investment & cost reduction Rump of Non-Core costs of c£300-400m expected in 2013, falling away rapidly thereafter Target cost:income ratio of less than 50% 1 Includes FX impact 19 Building blocks of the RBS Recovery – Internal metrics Impairments trend to “normalised” levels Impairments – returning to normalised levels £bn % of L&A Outlook 2.5% Non-Core 9.2 5.7 Trend back towards historic levels 1998-2008 avg: 0.6% Core 4.7 1.1 Historic levels flattered by high loan growth 1.1% in 2003-07 period 2003-07 avg: 0.5% Large Non-Core impairment reduction as portfolio runs off – small impairment charges remain in 2013-14 Possible Risks Recovery path not sustained ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ~‘13 Event risk – individual significant shocks Impairment as a % of net L&A 20 Reducing and managing risk Focus on composition of the RBS loan book Reducing & managing risk Improved risk policies & framework Non-Core reduction on track GBM de-leveraged and de-risked Prime Core credit portfolios 22 The New Risk Agenda The Group has seen significant change in risk culture and process Risk agenda – delivering the 5 year plan with strong risk New Head of Restructuring & Risk appointed in H1 2009 management bringing significant changes to senior leadership in risk management function Strategy & Policy Adoption of new, enhanced risk management framework Alignment – risk & business and architecture including appointment of Board Risk strategy Committee and Executive Risk Forum (ERF) Group policy framework Capital / risk adjusted Disciplined RWA usage in the Core bank (value not performance volume) and total balance sheet size controlled and liquidity surprise avoided Operating model Risk Architecture Introduction of new and enhanced risk concentration Governance Risk systems limits – reduced single name, sector and country limits Organisation, people & culture Risk data architecture One risk community Analytics and modelling Regulatory and operational Risk information & reporting Appointment of Board Risk Committee and Executive risk coverage Risk Forum (ERF) Risk Appetite & Framework Ongoing work to fully embed improved risk management Credit approval framework Market risk limits and controls Risk concentrations Country risk Ongoing work to fully embed improved risk management Scenario testing framework including new reporting systems to increase transparency 23 Reduced exposures to CDPCs, monolines and conduits Risk profile – worst should be past Counterparty credit market exposures Total assets held by sponsored conduits £bn £bn Core Monolines Non Core 8.3 49.9 CDPCs 35.0 30.5 27.4 24.1 2.6 2.5 FY08 FY09 Q110 FY08 Q209 Q309 FY09 Q110 Group Credit Risks (REILs1) Significant reduction in exposure to monolines and £bn Stabilising but our outlook remains cautious CDPCs since FY08 60 Exposure to loss from sponsored conduits has also been managed down 40 NPLs2 are showing signs of stabilisation however 20 our outlook remains cautious. Provisions as a percentage of NPLs2 have 0 increased from 43% at FY09 to 46% as at Q110 FY07 FY08 H109 Q309 FY09 Q110 24 1 Risk Elements In Lending 2 Non Performing Loans Reducing credit risk concentrations Portfolio concentrations continue to reduce Country1 Sector1 Top 10 A+ and lower countries by credit risk Top 10 Corporate industry sectors by credit assets risk assets New frameworks, polices and £bn 0 2 4 6 8 10 12 £bn 0 20 40 60 80 100 120 limits in place Good progress on de-risking, with Italy Property proactive management of both Transport & India Storage Core and Non-Core exposures China Manufacturing Reduced concentrations overall Wholesale & Retail but more remains to be done Turkey TMT Exposure to higher risk South Korea economies reduced Public Sector Russia Greek exposure is small, with Building <£1bn of credit risk assets and Tourism & Leisure Poland c. £1.5bn of Greek government Dec 2008 Mexico Dec 2008 Power, Water & Waste debt securities (as at 31/3/10) March 2010 March 2010 Natural Resources Romania & Nuclear Portugal 25 1 Country and Sector charts are based on Credit Risk Assets – see Report and Accounts for further details. Country chart shows ten largest countries rated A+ or below by domicile of borrower. Impairments outlook Impairments appear to have peaked in Q209 but remain elevated No. & value of wholesale cases transferred to Recoveries Group credit trends, Q109 – Q110 Units globally, Q408-Q110 (monthly average) £bn 40 4% 600 9 35 8 500 7 30 3% 400 6 25 5 20 2% 300 4 15 200 3 10 1% 2 100 5 1 0 1 0 0 0% Q408 Q109 Q209 Q309 Q409 Q110 Q109 Q209 Q309 Q409 Q110 Property Construction Transport & Storage REILs Wholesale & Retail Trade Manufacturing Other1 Impairments as a % of gross L&A (annualised) Transfer to GRG reflecting revised management of Ulster non-core property portfolio Average value transferred Average value transferred inc Ulster Q1 continues previous trends seen in 2009 NPLs increased by 4% No large individual cases No individual large names in Q1 Uptick in commercial customers having problems – Ulster Bank Core & Non-Core drove Q1 growth classic late cycle phenomenon 26 1 Other is spread across a large number of sectors and includes TMT, Tourism & Leisure and Business Services Reducing & managing risk Improved risk policies & framework Non-Core reduction on track GBM de-leveraged and de-risked Prime Core credit portfolios 27 Non-Core long term run-off targets Run-off is key to reducing risk on the balance sheet Non Core third party assets (TPAs excluding derivatives & Sempra) run-off targets, £bn Breakdown of changes in TPAs Undrawn commitments 85 TPAs 2009-2013 FX (10)-(20) 36 Rollovers & drawings 20-30 29 c. 212 252 23 Impairments (20)-(30) 1871 19 143 Asset sales (60)-(80) 118 13 82 20-40 Run-off (110)-(130) 2008 2009 2010 2011 2012 2013 Plan revised to reflect removal of c. £30 billion APS securitisation, which is no longer viable under final terms of APS FY 2013 targets revised to £20-40 billion, reflecting removal of securitisation that is partially offset by additional sales Sales selected for pricing and capital preservation 28 1 Excluding Sempra which had £14bn of assets as at 31 December 2009 Non-Core run-off1 current progress Significant progress already achieved on Non-Core run-off £bn 252 (65) 187 (2) (2) (9) 5 179 FY08 Mvmt2 FY 09 Impairments Disposals Run-Off FX Q110 Non-Core assets reduced 4% (£8bn) during Q1 2010 on a reported basis Excluding negative FX moves (£5bn), TPAs reduced 7% (£13bn) Run-off driven by CRE, Corporate and Markets Asset sales primarily Corporate C. £40bn targeted reduction pa. Excluding the FX movement Q110 is on track for FY2010 1 Third party assets excluding Sempra, excluding mark to market derivatives 29 2 Run-off, MTM, disposals, impairments and FX Non-Core make up by division Good run-off progression across all asset classes 2008 Y/E TPAs1 by asset class 2009 Y/E TPAs1 by asset class Other Other Corporate RBS Insurance £2.0bn Corporate RBS Insurance £1.5bn Retail & Commercial Project & Export Finance Project & Export Finance Retail & Commercial Countries £20.6bn Countries £6.7bn £21.3bn £4.3bn Bank of China / Linea Asset Finance £24.2bn Asset Finance £22.2bn Other Whole Businesses £3.3bn Directa £4.5bn Leveraged Finance £15.9bn Leveraged Finance ABN AMRO Shared Assets £1.3bn £13.1bn Other Whole businesses Corp & Warehouse Loans Asset Management £1.6bn Corp & Warehouse Loans £4.2bn £41.6bn 21 £23.2bn ABN AMRO Shared Assets 12 £1.5bn Asset Management £1.9bn 21 Retail 16 UK Mortgages & Personal Lending Retail 103 £2.4bn 79 UK Mortgages & US Mortgages & Personal Lending 41 Personal Lending 25 £3.2bn £7.8bn US Mortgages & Ireland Mortgages Personal Lending £6.1bn £11.0bn Ireland Mortgages £6.5bn 4 61 52 3 SME Markets Markets UK SME £1.9bn Structured Credit Portfolio Structured Credit US SME £0.9bn £20.1bn Portfolio £14.9bn Equities £5.0bn Commercial Property SME Equities £2.0n Commercial Property Credit Collateral Financing UK £26.0bn UK SME £2.3bn Credit Collateral UK £23.6bn £8.6bn Ireland £9.9bn US SME £1.6bn Financing £4.8bn Exotic Credit Trading £1.4bn Ireland £8.1bn Rest of Europe £15.1bn Other £2.9bn Other £6.2bn Europe £13.0bn US £7.3bn US £4.7bn APAC £2.9bn APAC £2.3bn 30 1Excluding MTM derivatives and Sempra Based on data from RBS risk systems Total Assets = £252bn Total Assets = £187bn Non-Core impairments1 stabilised in Q1 Impairments appear to have stabilised, albeit at elevated levels Q110 Q110 Q409 FY09 Q1 10 Key Sector Impairments: £m % L&A1 % L&A1 % L&A1 UK Retail 5 0.8 1.1 2.1 Mortgage & Personal lending UK Corporate 155 1.9 3.9 4.8 Property & construction 34% of total Ulster Bank2 552 13.0 7.0 8.3 Property £461m, 84% of total US R&C 208 7.4 7.6 9.7 SBO/Home Equity £102m, and CRE £63m - 80% of total GBM 753 3.6 4.1 4.9 Property £472m, 62% of total Other 31 3.7 6.5 9.3 Mainly Wealth Absence of large individual cases but with Ulster Total 1,704 4.6 4.6 5.7 Bank remaining at elevated levels Non-Core impairments by asset type Q109, Q409 & Q1102, £bn Non-Core provision coverage of 39%, +300bps q-o-q 2.1 1.8 1.8 1.7 Property Manufacturing Other Mortgages Other personal Other Total Non-Core Corporate Q109 Q309 Q409 Q110 31 1 Excludes Available for sale impairments. 2 Includes EMEA. Reducing & managing risk Improved risk policies & framework Non-Core reduction on track GBM de-leveraged and de-risked Prime Core credit portfolios 32 GBM - Strategy GBM strategy refocused to a capital efficient business model GBM Summary – FY07 vs FY09 & Q110 FY07 “Old” GBM Core GBM FY09 Q110 Top 5 wholesale bank in chosen markets Income, £bn 9.11 6.7 11.0 2.8 Fewer, deeper client relationships Costs, £bn (5.8)2 (5.1) (4.7) (1.3) Clear product choices Profit, £bn 3.21 1.5 5.7 1.5 Global, focused on major hubs ROE, % 10.8% 10.4% 30.7% 28.4% Financing and risk management-led Balance Sheet, £bn 873.8 617.3 412.2 443.7 “Flow monster” People 24,100 20,900 16,8003 n.d Leadership in fixed income Focus on core clients Enhanced equity and advisory 26,000+ Client base Tight risk, capital and funding control Corporates FI’s Sustainable efficient platform New management team ~5,800 43% 57% “Old Core Distribution of 1 Core + Non Core 33 2 Source: GBM Finance (Core only, excluding Sempra) GBM” GBM Core Clients 3 Source: Published FY09 financials (Core only, excluding Sempra) GBM – De-leveraged and de-risked Continuing focus on deleveraging and risk management GBM balance sheet, £bn Continued focus on de-leveraging 874 Securities R – Reported 56% reduction from FY07 CFX Reverse Repos C – Constant Currency Loans & Advances Remaining within target range of Settlement balances c£400-450bn Other 412 444 FX driving £11bn (33%) of Q110 360 381 growth Settlement Balances driving £12bn (37%) of Q110 growth Excluding FX and Settlement R C R C R C Balances, total assets declined 1% Q-o-Q FY07 ‘Old GBM’ FY09 GBM Core Q110 GBM Core Loan Impairments by quarter (£m) 269 272 Recent impairments lower than Q109 & Q309 peaks, Future quarterly trend likely to be ‘lumpy’ given 130 nature of counterparties Risk for larger impairments in 2010 remains high, 32 outer-year outlook will develop alongside the (31) developing economic picture 34 Q109 Q209 Q309 Q409 Q110 Reducing & managing risk Improved risk policies & framework Non-Core reduction on track GBM de-leveraged and de-risked Prime Core credit portfolios 35 Group loan portfolio breakdown Well diversified loan portfolio across geographies and customer segments Breakdown of Loans & Advances (Q110 Gross, £612bn)1 Loan Impairments (£bn)3 Non-Core UK Retail 17% 3.5 24% 8.2% 2.1 1.8 1.8 5.4% 1.7 UK Corporate 2.8% 4.6% 4.6% US R&C 1.2 1.3 19% 1.0 1.1 8% 1.0% 1.2% 1.0 0.9% 0.8% 0.9% Ulster 6% Wealth GTS 2% Q109 Q209 Q309 Q409 Q110 2% 2 GBM 22% Core impairments Non Core impairments A well diversified portfolio with UK Retail and Corporate representing c. 36%, GBM c. 22% and other divisions c. 18% of gross loans Non Core loans < 25% of assets, but approximately two thirds of impairments per quarter Impairments plateauing in Core and demonstrating improvements in Non Core though volatility remains likely 36 1 Gross loans and advances including provisions. 2 GBM loans and advances include L&A to banks 3 Figures represent loan impairments as percentage of gross loans & advances Core Retail1 Loan Book Core Retail exposure dominated by secured, prime residential mortgages Core Retail L&A by geography (Q110 Gross, £168bn) Core Retail L&A by product £164bn £159bn £164bn £165bn £168bn US 8% 7% 9% 8% 7% 18% 4% 4% 4% 4% 4% 12% 11% 12% 12% 12% Ulster 11% 76 % 76 % 77 % 78 % 78 % UK 71% Q109 Q209 Q309 Q409 Q110 Retail / Secured Personal Cards Other Strategic focus shifted to generating mortgages through retail branch networks with secured lending now representing over 78% of the book – share of UK mortgage market increased significantly in 2008/09 Ulster Bank represents 11% of retail loans with the balance originating in the US Unsecured personal loans and credit cards gradually declining through exit from non-bank channels and falling demand as customers reduce overall debt levels 37 1 Retail comprises UK Retail, Wealth, and retail parts of Ulster and US R&C Mortgage Book Loan To Values Mortgage lending further protected by low average LTVs Cumulative LTV distribution as % of book volume1 % 61 61 Dec-08 Jun-09 Dec-09 98% of the UK mortgage book is Core and only 7% buy-to-let UK Retail4 54 35 32 29 27 Average LTV of 59% (67% for the buy-to-let 27 22 19 15 15 11 portfolio) 13 11 8 8 5 Rising house prices in H2 09 led to reduction >50% >75% >80% >90% >95% >100% in value of houses over 95% LTV Cumulative LTV distribution as % of book volume2 % Dec-08 Jun-09 Dec-09 Average indexed LTV of 63% Ulster Bank4 59 53 56 40 Mortgage impairments 0.8% of loans and 36 37 32 27 32 24 29 24 advances 18 19 20 13 9 15 Continued stress in the Irish residential mortgage market since H2 09 >50% >75% >80% >90% >95% >100% Cumulative LTV distribution as % of book volume % 70 74 66 Dec-08 Dec-09 Average LTV of 72%, 67.5% excluding SBO3 61 57 US R&C5 51 44 SBO3 portfolio fully moved into Non Core 34 30 Average FICO of 737 19 17 Origination focused in mature and stable 9 markets of New England and Mid-Atlantic >50% >60% >70% >80% >90% >100% 38 Excludes wealth and business offset mortgages 1 2 LTV basis current value by volume 3 Serviced by others 4 Core 5 Including Core and Non-Core Core Retail credit trends Mortgage arrears trending below industry average Core Retail1 Loan Impairments by product (£m) RBS UK mortgage arrears vs. CML2 577 3.0 % 595 600 555 517 60 32 502 62 2.5 % 500 131 72 82 130 134 2.0 % 400 106 137 1.5 % 300 247 299 233 1.0 % 282 200 195 0.5 % 100 167 106 106 88 77 - 0 Q4 '03 Q4 '04 Q4 '05 Q4 '06 Q4 '07 Q4 '08 Q4 '09 Q109 Q209 Q309 Q409 Q110 3 Mortgages4 Personal Cards Other CML 3+ % RBS & NW 3+ % Overall retail impairments are seen to be plateauing, albeit at elevated levels Impairment reduction seen predominantly through the unsecured area; derived from a combination of exiting non-bank channels and reduced demand as households de-lever RBS’s mortgage impairments are stable in absolute terms and are trending below industry trends 39 1 Retail comprises UK Retail, Wealth, and retail parts of Ulster and US R&C 2 Council of Mortgage Lenders 3 3 months average 4 Including Home Equity Core Corporate Loan Book Core Corporate1 loan book (£155bn as at Q110) Core Corporate1 L&A by geography (Q110 Gross, £155bn) Core Corporate L&A by sector (£bn)2 164 US 154 156 152 155 150 22.8 13% 21.2 21.9 21.1 20.3 24.2 20.5 20.5 19.5 20.5 100 38.1 36.8 38.2 Ulster 36.6 36.1 13% 6.3 6.1 6 5.7 5.8 4.6 4.5 6.1 6.3 6.5 10.5 10.1 10.1 9.8 10.1 7 6.7 6.8 50 8.5 6.4 6.4 8.5 8.5 8.5 8.8 5.1 4.9 4.9 4.6 4.7 36.6 35.2 34.7 34.2 33.8 0 Q109 Q209 Q309 Q409 Q110 UK 74% Property Asset & invoice finance Housebuilding & construction Hotels & restaurants Wholesale & retail trade, repairs Banks & FI Manufacturing Other US Corporate Ulster Corporate Corporate loan book well diversified by product UK Corporate represents circa 74% of the corporate lending portfolio Portfolio concentration reducing towards a more balanced business mix 40 1 Corporate comprises UK Corporate and Corporate sections of Ulster and US R&C 2 US and Ulster Corporate sector breakdown not provided Total Commercial Real Estate Exposure Credit quality remains under pressure but no major shift from year-end Global CRE portfolio by division (Q1 10, £85.2bn) Global CRE portfolio by sector (Q1 10, £85.2bn) GBM 3% Commercial 50 Investment 3 51 Residential 13 3 Investment 13 UK Corporate Commercial 9 Non-Core 37% Development 4 10 Q110 44% Residential 12 FY09 4 Development 11 1 Other 1 85 Total 86 US R&C Ulster 5% 11% 0 10 20 30 40 50 60 Global exposure has remained broadly stable (£85.2bn at Q110 vs £86.3bn at FY 09) of which 44% has been transferred to Non Core GBM interest cover ratio (ICR) 1.60x1, UK Corporate ICR 1.64x1 Exposure principally dominated by commercial investment properties, c. 60% of total exposure Low interest rates are supporting ongoing debt-servicing Credit quality remains under pressure but no major shift from year-end 1 Includes Core and Non-Core portfolios 3 Investment properties are income generating, ie occupied with a tenant 41 2 2009 restated on a comparable basis 4 Development is any stage through construction but will include speculative deals that remain empty. Core Corporate & Commercial credit trends Core Corporate impairments are stabilising albeit at elevated levels Core UK Corporate Loan Impairments by product (£m) UK Business Banking (SME) – Debtflows1 Total Portfolio £18.5bn; Core £16.3bn, Non-Core £2.2bn 450 Debtflow as % of balances 0.30% 0.25% 0.20% 187 190 186 0.15% 100 0.10% 0.05% Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 0.00% Property Asset & invoice finance Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Housebuilding & Construction Hotels & Restaurants Other Impairments have risen since Q1 09 reflecting the deteriorating economic environment during the year Q2 09 impairments included a charge of £271m for latent loss provisioning Impairments charge has been biased towards the housebuilding, property and construction sectors Excluding latent loss provisioning, impairments appear to have stablised in recent quarters albeit at high levels; though the financial condition of many clients remains delicate 42 1 Debt flow rate is calculated by looking at the monthly default balances (also known as transfer into recoveries or debt flow) as a % of total Loans & Receivables in that month Funding & Liquidity Good progress made, more to do Ongoing de-leveraging Overall deleveraging progress in line with plan Funded balance sheet road map FY07 – Q110 £bn FX vs FY09 Liquidity portfolio 1,500 1,322 1,227 1,084 1,121 Key Ratios FY 2009 Q1 2010 Leverage ratio1 17.0x 17.6x Tangible common equity ratio2 5.2% 5.1% Tangible equity per share 51.3p 51.5p Core Tier 1 Ratio 11.0% 10.6% 0 FY07 FY08 FY09 Q110 Total BS decreased by £636bn since FY08 despite £75bn increase in the liquidity portfolio to £165bn at Q110 Long run funded balance sheet target of £1.1trn Significantly reduced leverage ratio of 17.6x (vs 23x at the worst point) On-going risk reduction 44 1 Tier 1 leverage ratio is based on total tangible assets (after netting derivatives) divided by Tier 1 capital 2 Tangible equity leverage ratio is based on total tangible equity divided by total tangible assets (after netting derivatives) 3 Excluding Sempra Funding and Liquidity Reducing wholesale funding requirements Wholesale funding maturity £bn 350 Funding Metrics Key Key Funding Metrics 300 H109 FY09 Q110 Reduction in Loan:deposit ratio (Group)1 143% 135% 131% 250 55% 53% 50% 47% funding requirement Core 110% 104% 102% 200 seen in short Loan:deposit gap (Group)2 £180bn £142bn £131bn term bucket 150 Core £41bn £16bn £10bn 100 Liquidity reserves £121bn £171bn £165bn Stable >1yr absolute Of which central govt bond 50 £7bn £20bn £25bn funding portfolio: 0 Net Stable Funding Ratio3 83% 90% 90% FY08 HY09 FY09 Q110 Wholesale funding > 1 year4 47% 50% 53% > 5 years 1 - 5 years < 1 year Reduction of £42bn in overall wholesale funding requirements between FY08 and Q110 Absolute wholesale funding greater than 1 year remains stable despite total wholesale funding requirement declining. Mix of wholesale funding greater than 1 year increases to 53%, +3% from FY09 Strong term issuance programme with over £8bn of public and private unguaranteed issuance in Q110 €15bn covered bond programme registered with the FSA on 01 April 2010 45 1 Net of provisions 3Net Stable Funding Ratio measures the level of net stable funding divided by long-term assets 2 Net loans & advances to customers less customer deposits (excluding repos) 4 Excluding bank deposits Funding and Liquidity Refinancing requirement outweighed by run-off in Non-Core Non-Core third party assets (TPAs excl MTMs) run- Refinancing requirement outweighed by run-off in off targets1 trend with the Group Loan:Deposit gap Non-Core third party assets2 £bn £bn 300 50 250 40 200 30 150 20 100 10 50 0 0 2008 1H09 FY09 2010e 2011e 2012e 2013e 2010e 2011e 2012e 2013e TPAs Loan to deposit gap2 Run-off of Non-Core Group maturing term TPAs p.a. funding p.a.3 Reduction in the loan to deposit gap expected to continue trending closely with the run-off of Non-Core TPAs Future wholesale funding requirement is significantly outweighed by the level of run-off from Non-Core TPAs 1 Run-off at constant year-end 2008 FX rates 46 2 Net customer loans less customer deposits excluding repos 3 Maturing term funding includes government guaranteed MTNs, unguaranteed MTNs and subordinated debt. Figures exclude RBS NV (£15bn total) Benchmarking Well capitalised, funding & liquidity still improving Well capitalised, funding & liquidity still improving Among the best capitalised banks in the peer group Deposit Ratio Funding Gap Gross Loans coverage of Impairment Core Tier 1 Provisions charge to Liquidity Reserve RBS remains among the best Loan to NPLs ratio capitalised banks compared to the UK and European peer group UK Banks (FY09) RBS in the middle of the pack for RBS Core 104% £(16)bn 1.1% 67% impairments against UK peers RBS Group 135% £(142)bn 2.3% 43% £171bn 11.0% Barclays 130% £(109)bn 1.7% 42% £127bn 10.0% Majority of our impairments HSBC 77% £146bn 2.7% 57% £58bn 9.4% (63%) generated by the Non- Lloyds Banking Group 169% £(289)bn 3.4% 44% £151bn 8.1% Core division which is meeting Standard Chartered 80% £29bn 1.0% 71% n/d 8.9% its reduction targets RBS Rank (Core/Group) 3 /4 rd th 3 /4rd th 2 /3 nd rd 2 /4 nd th 1 st 1st Group loan:deposit ratio is European Banks (FY09) improving, reducing from 151% Credit Suisse 83% £29bn 0.2% 61% n/d 11.2% Deutsche Bank 100% £8bn 1.0% 37% £49bn 8.7% at FY08 to 131% at Q1 2010 Santander 135% £(172)bn 1.4% 73% £89bn 8.6% Core loan:deposit ratio already at UBS 75% £60bn 0.6% 39% n/d 11.9% RBS Rank (Core/Group) 4th/~4th 4th/4th 5th/5th 2nd/4th 1st 3rd 102% US Banks (FY09) Bank of America ML 87% £56bn 5.4% 108% £75bn 7.8% Citi 66% £151bn 6.6% 107% n/a 10.9% JP Morgan 64% £136bn 4.5% 160% n/a 8.8% Wells Fargo 92% £25bn 2.8% 91% n/a 6.5% RBS Rank (Core/Group) 5th/5th 5th/5th 1st/1st 5th/5th n/m 1st RBS Overall Rank 10th/~11th 10th/11th 6th/7th 7th/10th 1st 3rd Green – Better than RBS Blue – In-line with RBS 48 Red – Worse than RBS Further to go Middle of the pack Amongst the best Concluding remarks Conclusion The New RBS in 2013 Leading positions in all our customer businesses Top tier market franchises Strong, predictable and resilient business performance Complementary portfolio with clear cohesion logic and synergies Balanced portfolio Balanced by geography, growth, risk profile and business cycle Solid profitability and Commitment to RoE >15% on an expanded equity base attractive return potential Attractive and sustainable income characteristics Low volatility Clean balance sheet with a CT1 target >8% underpinned by strong balance sheet Criteria for standalone AA category rating met Proven management track record, universal disciplines in place Standalone strength and solid foundations Roadmap to orderly UK Government stake sell down Transparent and responsive communication with few negative surprises Investor friendly Clearly articulated strategy with evidence of it working Delivering the plan should create an attractive investment case 50 Appendices Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 52 Building blocks of the RBS Recovery – External factors World economic recovery continues Current position Consensus Economic Data1 Outlook is better than expected 6-12 months ago UK (%) 2009 2010 2011 2012 2013 US and UK current account and savings deficits are GDP1 -4.9 1.3 2.3 2.1 2.4 starting to improve Unemployment2 5.2 5.2 n.a. n.a. n.a. UK housing market has performed better than Inflation (CPI)1 2.2 2.7 1.7 2.1 2.5 expected US (%) 2009 2010 2011 2012 2013 Confidence in markets has improved but will remain GDP 1 -2.4 3.2 3.1 3.4 3.2 sensitive to news flow and market developments Unemployment 2 9.6 9.1 n.a. n.a. n.a. Low interest rates have improved liquidity which could continue Possible Risks Economic growth falters Assumptions Economic imbalances Subdued loan growth as economies recover slowly Sovereign credit risks and customers delever Wholesale funding, liquidity risks RBS deposit growth marginally ahead of nominal GDP growth; c4-5% p.a. Harsh capital and liquidity regimes hinder growth Interest rates move and “normalise” from 2011 Interest rates, inflation rise rapidly 53 1 Consensus economics (April 2010 survey) 2 Claimants count Building blocks of the RBS Recovery – External factors Strong but rational competition going forward Current position and outlook Strong but rational competition Banking, similar to other mature capital intensive industries, is relatively concentrated New business margins are broadly consistent with industry return targets Increased industry funding costs e.g. liquidity, capital and funding need to be reflected as interest rates normalise Competitors have similar capital, funding and return targets Banks are capital intensive and becoming more so and cannot survive without moving to exceed cost of capital (CoE 10-15%) Possible risks New market entrants / return of foreign banks Irrational behaviour from established competitors Return of irrational wholesale and securitisation markets Banks move up risk profile again to generate increased returns Regulatory intervention 54 Building blocks of the RBS Recovery – External factors Path of regulatory change will be phased and sensible BASEL II CHANGES e.g.: Capital – Stressed VaR RWA Correlation Trading Book impacts To be phased in from 2012 Liquidity LIQUIDITY REQUIREMENTS: CHANGES TO CAPITAL DEDUCTIONS e.g.: Increased liquidity reserves Deferred Tax Assets Costs of holding Material holdings Pension deficit 2010 2011 2012 2013 2014 Observations: Proposals published, but subject to consultation and impact assessment Implementation likely phased so as not to destabilise Banking System Risks: More penal at implementation Shortened timeline for introduction Failure to gain global agreement, UK or EU ‘goes it alone’ 55 Counterparty & OTC Derivative reforms expected to impact RWAs from 2012 Building blocks of the RBS Recovery – External factors Government policy UK and other Governments have been supportive ̶ Liquidity and funding support can now wind down ̶ Crucial task for RBS to provide opportunity for UK Government to sell down stake Support profitably UK Government, through UKFI, has remained a constructive shareholder and operated in line with shareholder best practice Lending commitments 2010: RBS ̶ Residential lending – make available £8bn net Commitments ̶ Business lending – make available £50bn gross new facilities Competition – EU mandated sales Debates around: ̶ Industry structure Risks ̶ Bank specific taxes and levies ̶ Basel III capital and liquidity proposals Impact of consumer legislation – e.g. overdraft fees 56 Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 57 Credit Agency Ratings – LT Issuer Ratings Peer’s Ratings Moody’s S&P Fitch RBS Group Ratings Moody’s S&P Fitch JPMorgan Chase Bank NA Aa1 AA- AA- RBS (Bank Level) Aa3 A+ AA- Credit Suisse AG Aa1 A+ AA- RBS (Group Level) A1 A AA- BNP Paribas Aa2 AA AA NatWest (Bank) Aa3 A+ AA- HSBC Bank plc Aa2 AA AA RBS Citizens A2 A- A+ Santander Aa2 AA AA Ulster Bank Ltd A2 A A+ BBVA Aa2 AA AA- Ulster Bank Ireland Ltd A2 A A+ Société Génerale Aa2 A+ A+ RBS NV A2 A+ AA- Barclays Bank Aa3 AA- AA- RBS Aa3 A+ AA- Peers ratings sorted in descending order by Moody’s rating Bank of Scotland Plc Aa3 A+ AA- Ratings correct as at 20th May 2010 Lloyds TSB Bank Aa3 A+ AA- Nationwide Aa3 A+ AA- Deutsche Bank Aa3 A+ AA- Bank of America NA Aa3 A+ A+ ING Bank NV Aa3 A+ A+ UBS Aa3 A+ A+ Commerzbank AG Aa3 A A+ Goldman Sachs Aa3 A A+ Citibank NA A1 A+ A+ Morgan Stanley Bank NA A1 A+ A+ UniCredit Bank AG A1 A A+ Standard Chartered Bank A2 A+ A+ 58 Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 59 Wholesale Funding Issuance Programmes RBS Group plc RBS plc RBS NV Ulster S&P: A/A-1/Stable S&P: A+/A-1/Stable S&P: A+/A-1/Stable S&P: A/A-1/Stable Moody’s: A1/P-1/Stable Moody’s: Aa3/P-1/Stable Moody’s: A2/P-1/Stable Moody’s: A2/P-1/Negative Fitch: AA-/F1+/Stable Fitch: AA-/F1+/Stable Fitch: AA-/F1+/Stable Fitch: A+/F1+/Stable €10bn ECP €20bn ECP A$20bn Australian ECP & €12bn ECP $10bn USCP €20bn French CD ECD €10bn French CD CP/CD $12.5bn USCP €25bn ECP €20bn French CD £90bn EMTN £90bn EMTN £90bn EMTN, $35bn USMTN & WKSI SEC Shelf can MTN $35bn USMTN $35bn USMTN be issued out of either RBSG or RBS plc WKSI SEC Shelf No Limit WKSI SEC Shelf No Limit Securitisation Securitisation programme €15bn CB programme Covered Bond registered with FSA on 01 April 2010 Diversity of wholesale funding programmes, across maturities and markets to support Group needs 60 Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 61 Wholesale funding requirement, Q110 Total funding (£796bn) Wholesale residual maturity excl. bank deposits (£271bn) Bank deposits, CP, £36.6bn, 5% More than 5 £100.2bn, 13% years, 62.3bn, CDs, £57.4bn, 23% 7% MTNs, £126.6bn, Less than 1 16% year, 127.9bn, 47% Securitisations, £18.6bn, 2% Capital Customer securities, 1-5 years, deposits, £31.9bn, 4% 79.9bn, 30% £425.1bn, 53% Strong progress on terming out of wholesale funding requirements with 53% of funding greater than 1 year versus 45% at FY08, driven in the main by a reduction in the wholesale funding requirement1 from £313bn to £271bn Funding across a number of different currencies including GBP (c. 20%), USD (c. 40%), EUR (c.25%) and Other (c. 15%)2 1 2 Excluding bank deposits Approximate figures 62 Liquidity reserves Continued progress in increasing the strength of liquidity reserves Build-up of liquidity reserves £171bn £165bn 20 £140bn 17 £121bn 42 RBS’s contingent liquidity reserves 46 continue to grow in line with new £90bn regulatory liquidity reforms Credit risk associated with liquidity 52 42 reserves is well controlled FSA eligible liquidity portfolio will 10 14 constitute UK, US and G10 European government bond issues 28 20 only 20 25 FY08 Q209 Q309 Q409 Q110 Central Group Treasury Portfolio Treasury Bills Other governm ent securities Cash and central bank balances Unencum bered collateral Other liquid assets 63 Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 64 Core impairments Q110 Q110 Q409 FY09 Q110 Key Sector Impairments: £m % L&A1 % L&A1 % L&A1 UK Retail 387 1.5 1.8 1.6 A reduction in unsecured charges; mortgage growth reflects increased provisions UK Corporate 186 0.7 0.7 0.8 Broadly spread, but property related sectors most prominent Ulster Bank 218 2.3 3.5 1.6 Lower, primarily as a result of a Q409 non recurring latent provision US R&C 143 1.0 1.3 1.4 Broadly stable performance; good improvement in Corporate & Commercial GBM 32 0.1 0.6 0.6 Minimal charge reflecting absence of large single name provisions Other2 5 n.m. 0.2 0.3 Small charge in Wealth Total Core 971 0.9 1.2 1.1 25% decline sequentially driven by improving trends in UK & US Retail Core impairments by division Q109 – Q1103, £bn Core provision coverage of 59%, +200bps q-o-q 1.3 1.2 1.1 1.0 1.0 UK Retail UK Corporate Ulster Bank US R&C GBM Total Core Q109 Q209 Q309 Q409 Q110 65 1 Impairments as a % of L&A excludes Available for Sale 2 Includes Wealth, GTS, RBS Insurance and Central Items. Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 66 Risk Management risk agenda Activity 2009 2010 2011 2012 Strategy & Policy Alignment of risk & business strategy Rationalise group policy framework Capital / risk adjusted performance Risk Appetite & Framework Credit approval framework Concentration risk framework & limits Market risk framework Country risk framework Integrated stress testing and scenarios Regulatory risk and operational risk framework & controls Operating Model Improved governance Organisation, people & culture One risk community Regulatory risk and operational risk framework & controls Risk Architecture Risk systems Risk data architecture Analytics and modelling Risk information and reporting Strategy and Policy Risk appetite and framework Operating Model Risk architecture Development Embedding 67 Adopting a new Risk Framework Group Strategy A high level Risk Strategy and Stable / Efficient Maintain Capital Deliver Stable Maintain Market Appetite A Strategic Board Strategic Risk Profile Access to Risk Profile Adequacy Earnings Growth Confidence Funding B Key Risk Appetite Board Risk B Key Risk Appetite Measures Measures RWA Mgmt Earnings Cost of Funding Committee Volatility Target Agency Capital Allocation Leverage Ratios Rating of AA Detailed Risk Value at Risk Appetite C Risk Stressed ratios Stressed Reputation Risk Limits ERF Leverage Ratios Credit Volatility measures C Credit Risk Single Name Concentration Risk Sector Day to day risk Management Concentration management Asset Class and Product Market Risk Value at Risk Sensitivities Treasury Capital Balance Sheet Risks Funding & Liquidity Operational Policy Standards Risk Regulatory Policy Standards Risk Country Risk Policy Standards 68 Portfolio quality – Core overview Exposure by division Exposure1,2 risk rating Portfolio performance Portfolio by division, % Portfolio by grade, % £bn FY 2009 HY 2009 0 10 20 30 40 0 5 10 15 20 25 Normal monitoring 491 493 £224bn AQ1 £124bn o/w Financial institutions 129 107 GBM £110bn o/w Corporates and 362 386 UK Corporate AQ2 £13bn Personal UK Retail £103bn AQ3 £27bn US R&C £52bn Heightened monitoring 50 72 AQ4 £85bn Ulster Bank £42bn o/w Financial institutions 12 27 £16bn AQ5 £108bn Wealth o/w Corporates and 38 45 GTS £7bn AQ6 £78bn Personal Other £3bn AQ7 £43bn Defaulted assets 16 13 AQ8 £21bn Total 557 578 AQ9 £11bn Normal monitoring AQ10 £16bn Heightened monitoring Average AQ = 4.4 Non-performing book 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), instalment credit, finance lease receivables and other traded instruments across all customer types. Asset Quality (AQ) bands allow the internal reporting and oversight of risk assets by differentiating on the basis of the key drivers of default for a customer type. Bands also map to asset quality and wholesale exposure scales, enabling detailed internal and external reporting of risk depending on audience and business need 2 A further £31bn of assets are covered by the standardised approach for which a PD equivalent to those assigned to assets covered by the internal ratings based approach is not 69 available. Portfolio quality – Non-Core overview Exposure by division Exposure1 risk rating Portfolio performance Portfolio by division, % Portfolio by grade, % £bn FY 2009 HY 2009 0 10 20 Normal monitoring 98 98 0 25 50 75 100 AQ1 £21bn o/w Financial institutions 13 10 o/w Corporates and 85 88 Non-Core £151bn AQ2 £2bn personal AQ3 £6bn Heightened monitoring 30 41 AQ4 £17bn o/w Financial institutions 6 8 AQ5 £27bn o/w Corporates and 24 33 AQ6 £19bn Personal AQ7 £14bn Defaulted assets 23 21 AQ8 £5bn Total 151 160 AQ9 £6bn AQ10 £23bn Normal monitoring Average AQ = 5.6 Heightened monitoring Non-performing book 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), instalment credit, finance lease receivables and other traded instruments across all customer types. Asset Quality (AQ) bands allow the internal reporting and oversight of risk assets by differentiating on the basis of the key drivers of default for a customer type. Bands also map to asset quality and wholesale exposure scales, enabling detailed internal and external reporting of risk depending on audience and business need 2 A further £11bn of assets are covered by the standardised approach for which a PD equivalent to those assigned to assets covered by the internal ratings based approach is not 70 available. Core portfolio quality – by region and sector Exposure by region Exposure by sector Portfolio by region, % Portfolio by sector, % 0 10 20 30 40 50 0 5 10 15 20 25 30 United Personal £165bn £272bn Kingdom Banks, other FIs £134bn Western Europe Property £57bn £134bn (Excluding UK) Manufacturing £31bn Transport and Storage £31bn North America £89bn Wholesale and retail trade £25bn Public Sectors & £22bn Asia & Pacific £29bn Quasi-Government £19bn TMT Building £17bn Latin America £14bn Tourism and Leisure £16bn Business Services £13bn CEE & £10bn Central Asia Natural Resources £12bn and Nuclear Middle East Power, Water & Waste £12bn £9bn & Africa Agriculture and Fisheries £3bn Normal monitoring Heightened monitoring Non-performing book 71 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), installment credit, finance lease receivables and other traded instruments across all customer types Non-core portfolio quality – by region and sector Exposure by region Exposure by sector Portfolio by region, % Portfolio by sector, % 0 10 20 30 40 0 5 10 15 20 25 30 35 Western Europe Property £46bn £50bn (Excluding UK) Personal £21bn United Banks, other FIs £19bn £48bn Kingdom Transport and Storage £15bn Manufacturing £10bn North America £25bn TMT £8bn Wholesale and retail trade £7bn Asia & Pacific £10bn Power, Water & Waste £6bn Building £5bn Latin America £9bn Natural Resources £5bn and Nuclear CEE & Tourism and Leisure £4bn £6bn Central Asia Public Sectors £3bn & Quasi-Government Middle East £2bn £3bn Business Services & Africa Agriculture and Fisheries £0bn Normal monitoring Heightened monitoring Non-performing book 72 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), installment credit, finance lease receivables and other traded instruments across all customer types Appendices External factors Peer group credit ratings Funding programmes Funding and liquidity Core Impairments Risk GBM 73 Progress to date - Risk revolution + – 1 July 08 1 Jan 09 1 July 09 31 Dec 09 Profit days (#) Loss days (#) Total Profit days (%) Loss days (%) H2 08 94 38 132 71% 29% H1 09 123 2 125 98% 2% H2 09 115 14 129 89% 11% ■ Radical upgrading of front office risk management frameworks ■ Moved VaR to 99 percentile tail risk ■ Created a market leading Counterparty Exposure Management business ■ GBM’s daily profitability improved considerably in 2009 74 Note: Chart data shows GBM’s daily Markets revenues (excluding Sempra) GBM – De-leveraged and de-risked Proportion of liquidity in Debt Securities & Reverse GBM Core Assets GBM Core Assets (Q409) Repo held by businesses 655 35 Significant reduction in Also highly liquid 80% of GBM Core Assets in debt securities and reverse Q409 are liquid assets repo in H208 Other Flow Rates Trading 8% 11% Equities 207 499 12% 20 476 459 STMF1 + Flow Rates 29 438 Trading = 80% 89 64 412 52 These are high grade, 81 very short term assets 74 Cash & T- 74 75 bills Cash & T-bills 69% 75 STMF 225 16 6 73 Reverse 73 Note: Reverse repo in Flow Rates Trading is managed by Reverse Repo 16 1 Repo STMF 31 Other (mainly DPS3) 15 6 16 4 12 Equity shares 13 7 Trading Other Flow Rates Trading Assets 94 Debt Securities Emerging Markets 9% 3% Flow Credit 224 46 9% 31% 205 Derivative collateral 18 8 STMF + Flow Rates 15 5 15 6 (booked in CEM)2 12 8 Loan Trading = 53% 82 These are high grade Lending portfolio4 debt securities 26% Q308 Q408 Q109 Q209 Q309 Q409 Q409 2 22% Mortgage STMF Trading 1 Short Term Markets and Financing (“STMF”) includes repo financing and Money Markets. 2 Cash collateral posted in relation to derivative liabilities across GBM. 75 3 Deals pending settlement 4 Lending portfolio also includes a proportion of assets that could be liquidated swiftly, prices depend on market conditions. GBM - Non-Derivative trading book assets £bn 254 144 FY09 FY08 Asset £bn £bn % change Debt securities 74.2 94.2 (21%) Reverse repos1 69.5 90.1 (23%) 27 T Bills 26.5 16.0 66% 50 Loans & advances 50.3 54.8 (8%) Equities 10.7 10.8 (1%) 11 23 Other 22.7 25.3 (10%) GBM Core2 253.9 291.3 (13%) Non- Debt T bills L&A Equities Other3 derivative securities trading & reverse assets repos 1 Trading book reverse repos 2 Excludes Non-Core portfolio of £32.5bn 3 Mainly comprises of DPS (deals pending settlement) 76 GBM - Reverse repos1 FY09 FY08 % Exposure by counterparty £bn £bn change £bn Reverse repos – Banks 34 57 (40%) Reverse repos – Customers 39 32 22% 73 Total 73.3 88.8 (18%) 34 % of total MTM 39 Maturity profile FY09 FY08 < 3 months 91.7 82.6 < 6 months 3.9 12.1 < 1 year 4.4 4.4 Total Banks Customers > 1 year 0.0 0.8 reverse Total 100 100 repos Collateral quality distribution FY09 % FY08 % Only 4% of portfolio (£2.9bn) in Non-Core Government 85.9 89.3 Corporates 10.7 7.2 Other 3.4 3.5 Total 100.0 100.0 1 Including assets transferred to non-core. Banking and trading book repos. Note:Collateral quality distribution and tenor distribution are calculated based on gross reverse repos 77 GBM - Debt securities1 £bn 70 FY09 Asset £bn Central & Local Government 41.9 Mortgage & asset-backed securities 30.6 Treasury & other bills 28.3 24 Banks & Building Society 7.2 11 Corporate (inc Financials) 5 4 2 2 Debt Securities total 113 AAA AA A BBB- BB+ Unrated and and below below – Majority of non-related linked to exposures in ABS, Fund derivatives and Corporates – Excess liquidity invested in Treasury and Other Bills 1 Core debt securities – banking book & trading book, excludes £13.5bn of unanalysed securities 78 GBM debt securities total consists of £32.5bn T Bills included in Cash & T-Bills and £94bn Debt Securities on summary slide 17 GBM - Credit portfolio by credit grade GBM – Credit grade exposures1 GBM – Sector exposures1 Core Core £224.4bn 2% 1% 1% 12% 5% 4% 4% 14% 4% 38% 46% 4% Property: 6% 3% 3% 15% Average rating 6% 8% 4% AQ3.0 9% 14% Non Core Non Core £87.7bn 14% 13% 11% 4% 2% 2% 16% 4% 5% 1% 6% 6% 9% 11% 15% 9% Property: 12% 26% 10% 24% Average rating 26% AQ5.4 Banks and Building Societies Financial Interm ediaries AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Manufacturing Transport and Storage Property TMT Pow er, Water & Waste Natural Resources and Nuclear Public Sectors Other 79 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), installment credit, finance lease receivables and other traded instruments across all customer types.