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Important information This presentation may contain forward looking statements, including such statements within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements concern or may affect future matters, such as the Group's economic results, business plans and strategies, and are based upon the current expectations of the directors. They are subject to a number of risks and uncertainties that might cause actual results and events to differ materially from the expectations expressed in or implied by such forward looking statements. Factors that could cause or contribute to differences in current expectations include, but are not limited to, regulatory developments, competitive conditions, technological developments and general economic conditions. These factors, risks and uncertainties are discussed in the Group's SEC filings. The Group assumes no responsibility to update any of the forward looking statements contained in this presentation. 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. The information contained in this presentation is subject to, and must be read in conjunction with, all other publicly available information, including, where relevant any fuller disclosure document published by the Group. Any person at any time acquiring the securities must do so only on the basis of such person s own judgement as to the merits of the suitability of the securities for its purposes and only on such information as is contained in public information having taken all such professional or other advice as it considers necessary or appropriate in the circumstances and not in reliance on the information contained herein. The information is not tailored for any particular investor and does not constitute individual investment advice. Information in this presentation relating to the price at which investments have been bought or sold in the pastor the yield on investments cannot be relied upon as a guide to future performance. Slide 2
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The 3-5 Year Journey to Standalone Strength Restructure as premier financial institution, anchored in the UK while serving individual and institutional customers here and globally Rebuild attractive shareholder value for all and enable UK Government to sell down its shareholding profitably Be leaders in our markets effective and disciplined in our management Re-commit the entire organisation to delivering for our customers Our primary task is to rebuild standalone strength and value Slide 4
Building Blocks Necessary for Recovery Recapitalisation & Government funding support Management and Board changes Analysis and Presentation of the problems New Strategy roadmap to unite people and resources Asset Protection Scheme improve protection against extreme loss during strategy execution Severity of downturn manageable Today Today Tbd What now Execution! Slide 5
Today The strategy we announce today will: Shift ~20% of funded assets to Non-Core Division for disposal/run down Cut more than 2.5bn out of the cost base Benefit from the Government Asset Protection Scheme Radically restructure GBM, taking out 45% of capital employed Deliver substantive change in all businesses Centre on UK with tighter, more focused global operations Target retail and commercial exit outside UK, Ireland and US Drive major changes to management, processes and culture Country exits subject to consultation with works councils, regulators and social partners Slide 6
Action to Date Major decisions on Strategy made Deleveraging and reducing wholesale funding begun New RWA and asset growth constrained Comprehensive cost reduction underway Restructured compensation Fuller suite of management tools deployed Introduced new disciplines on risk concentrations and processes Restructured and simplified management Slide 7
2008 Results Our results for 2008 were bad: Net attributable losses before goodwill of 7.9bn 16.2bn write-down of goodwill paid on prior acquisitions This masks the inherent strengths of RBS businesses and strong or resilient performances by most of the Bank The global economic downturn will test us again in 2009 All our efforts are now focussed on the path to recovery Slide 8
The Past issues to address Leverage ABN AMRO acquisition Strategy Risk controls Profit focus Management & processes Slide 9
Strategic Plan Top Down Tests Regain standalone AA ratings category lower leverage, less reliance on unsecured wholesale funding, stronger businesses 15%+ return on tangible equity (ROE) necessary to cover cost of capital More stable business mix cease proprietary activity, focus on customer flows, risk management & less leverage Tests for each Business Top tier competitive position in enduring customer franchise 15%+ ROE in normal markets Proportionate use of balance sheet, risk & funding Capable of organic growth but market limited Connected to the Group customers, products, people Slide 10
Strategic Plan Non-Core and Core split Non-Core Core UK Retail UK Corporate & Commercial Wealth Ulster Citizens Insurance GBM GTS Non-Core division to be separately managed and wound down within the existing legal structures of the Group All other businesses have been through root and branch strategic review: no sacred cows Many will be significantly restructured All subject to cost programme All have tight RWA targets A self help programme given weakness of disposal markets Slide 11
Non-Core Non-strategic assets Stressed assets Includes portfolios, assets and businesses Vast majority from GBM Retail and commercial businesses continental Europe and Asia Other Retail & Commercial Non- Core 2008 financials ~ 240bn assets (+~ 145bn derivative positions) ~ 155bn RWA ~ 3.9bn revenues ~ 1.1bn direct expenses ~ 3.2bn impairment losses ~ 9.2bn credit market and other trading asset write-downs Separately managed, reporting line to CEO Matrix support from donor Divisions Run-off over 3-5 years as fast as is consistent with value and risk Slide 12
Non-Core Non-Core Assets by Division, 2008 bn Non-Core Assets by Region, 2008 bn GBM 205 145 350 UK 60 40 UK R&C 14 US 60 30 Citizens 15 EME 95 70 EME R&C 1 Asia R&C 5 Asia 25 5 Total 240 145 385 Total 240 145 385 Third Party Assets excluding derivatives MTM GBM geographic split based on client view Derivatives MTM Slide 13
Global Banking & Markets Re-size and re-focus GBM Retention Rationale Restructured and de-risked business will deliver steady and significant profits Can maintain top tier customer businesses Natural complement to corporate businesses No viable market exit opportunity Planned actions 350bn in assets to non-core: Exit balance sheet heavy, niche segments Focus on major financial centres, scale back presence elsewhere Exit illiquid products/proprietary trading New risk management disciplines and substantial operating cost reductions Goals 20%+ ROE 150bn RWA (45% lower than today) Business limited to liquid customer franchises with top tier competitive position Major re-balancing of funding requirement Slide 14
Global Banking & Markets Split between Core and Non-Core Core Non-Core Core businesses Essential to our clients Resilient origination and distribution markets Restructured core businesses Re-sized market opportunity Reduced RBS capacity Non-Core assets and businesses Distressed asset prices and closed markets Non strategic to RBS, including some highly valuable businesses FX and options Rates Money markets Commodities Cash equities DCM ECM Restructuring and advisory ~ 153bn RWA ABS Trading Flow Credit Trading Equity derivatives Equity financing Prime ABS origination Corporate and FI lending Structured credit trading Illiquid proprietary trading Structured derivatives Asset management Non-conforming ABS origination Real estate lending Leveraged finance lending Project finance lending Asset finance ~ 126bn RWA Slide 15
GBM & GTS International Network Streamlined footprint, while maintaining global proposition Primary countries Australia, China, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Netherlands, Russia, Singapore, Spain, Sweden, UAE, UK, US Refocused countries Austria, Belgium, Brazil, Canada, Czech Republic, Denmark, Finland, Greece, Indonesia, Korea, Luxembourg, Malaysia, Mexico, Norway, Poland, Qatar, South Africa, Switzerland, Taiwan, Thailand, Turkey Explore new ownership Argentina, Bahrain, Chile, Colombia, Egypt, Kazakhstan, New Zealand, Pakistan, Philippines, Portugal, Romania, Slovakia, Uzbekistan, Venezuela, Vietnam Subject to consultation with works councils, regulators and social partners Slide 16
Citizens Focus on retail and commercial customer relationships in core footprint Retention Rationale Strong franchise and attractive portfolio in core markets Meets the Group strategic tests over cycle Improves Group funding ratios Improves Group geographic balance and opportunities Sale would be destructive of value and capital Planned actions Exit most activities outside core footprint Cost restructuring in order to re-invest in the core franchise (incl technology and marketing spend) Improved cross-sell to in-footprint customers Resize risk portfolios Revitalise retail (sales, technology, deposits) Goals Top 5 in the markets we serve Disciplined use of balance sheet: 1:1 ratio loans/deposits Retain below average risk profile 15%+ ROE Greater organic growth Increase connectivity with rest of Group Slide 17
UK and Wealth UK Retail UK Corporate & Commercial Wealth Key Actions Reduce costs: Online, lean, automation Segment service by value Invest in systems and sales Manage portfolio stress Reduce cost base, tailor cost to serve to value Invest in systems and service Consolidate UK and international Grow RM base, enhance productivity Investment in platform ROE 15%+ ROE 15%+ Maintain high ROE Goals Funding growing faster than assets Customer service leadership Lending commitments Work off risk concentrations Stronger credit, portfolio management processes Deposit growth Continued AuM growth Sustain UK market leadership Lending commitments Slide 18
Other businesses Ulster Bank Insurance GTS Key actions Re-balance assets/ liabilities Pro-actively manage risk Increase and diversify deposit base Move to single brand Significant cost restructuring Re-invigorate top line growth by investing efficiencies Strengthen multichannel distribution Maximize value of global capabilities Rightsize the global network (incl. country exits) Maintain service levels Slimmed down operating model 15%+ ROE 20%+ ROE Maintain high ROE Goals Improved loan:deposit ratio Risk concentration reduced Franchises maintained Extend lead Lowest cost operations Strong UK commercial lines Europe as core base Leading SEPA bank Explore in-organic options Slide 19
Management disciplines and culture Financial discipline Improved controls and costs/capital fully allocated to Divisions Focus on funding balance Disciplined RWA usage in the core (value not volume) Focus on returns (and setting of return targets) not just profits Total balance sheet size controlled and liquidity surprises avoided Risk management disciplines Reduced single name, sector & country concentration limits Earnings volatility/ impairments managed down Strengthened risk function role Drive business performance through focus on returns and strategy New reporting systems increase transparency Underpinned by new management processes and incentives Slide 20
Expenses Deliver greater than 2.5bn (16%) efficiency cost savings by 2011 versus 2008, at constant exchange rates Maximising efficiency crucial to restoring shareholder value This includes the remaining 0.5bn already promised from ABN AMRO integration not reflected in 2008 The greatest savings arise in GBM and Manufacturing Restructuring charges likely over next 3 years: 1.5-1.75 year payback targeted The programme does not include effect of inflation, incentive pay movements, or cost reductions arising from business exits or the impact of new projects (if any) Slide 21
The Asset Protection Scheme RBS objectives Secure asset insurance that protects and enhances capital strength and outlook, thereby Enhancing financial strength and stability for customers and depositors Reducing risk to shareholders Allowing greater support for UK customers via increased lending Facilitating Non-Core run-off plan, leaving Core Bank more free to restructure and progress Slide 22
The Asset Protection Scheme Overview RBS has the opportunity to insure the following portfolios: 225bn third party assets and 44bn undrawn commitments 33bn derivative counterparty risk exposures Total pool of 302bn, RWAs ~ 160bn Insured assets would be: 53% placed in non-core division 47% part of ongoing businesses. Rationale for latter to make room for new UK lending commitments More detail and recommendation to shareholders to follow in the coming weeks Slide 23
The Asset Protection Scheme Core elements of the scheme RWA relief Percentage of first loss borne by RBS on pool Split of second loss Description Estimated at 144bn at 31 Dec 2008 (Reflecting 90/10 risk sharing on second loss) 6% 90% to HMT / 10% to RBS Fee paid 2% of gross pool to be amortised over 7 years 6.5bn fee would be paid up front via issue to HMT of B shares, a Core Tier 1 capital instrument defined as ordinary shares with preferential rights in respect of dividends Additional 13bn of capital would be issued to HMT as part of APS agreement with a further 6bn available thereafter at RBS option Slide 24
Pro forma financial impact 31 Dec 2008 Pre Post RWAs 578bn 434bn Core Tier 1 capital 41bn 54bn Core Tier 1 ratio 7.0% 12.4% Post APS Core Tier 1 impacted by issuance of 19.5bn B shares, offset by the 6bn deduction of first loss exposure (50% of first loss, capped at 8% of RWAs) Over time book value attributable to Ordinary Shareholders eroded by fee amortisation, the cost of the B shares and potential losses on insured assets RBS would also be required to give up the tax shelter from any part of future UK losses prior to returning to profitability Slide 25
UK lending commitments Entry into the APS would also involve RBS committing to: 25bn increase in net lending commitments in 2009 (vs current plan) Further 25bn increase provisionally targeted in 2010 Commitment for each year divided 9bn mortgages 16bn SME and corporate Lending subject to commercial pricing, credit decisions and risk limits Slide 26
Challenges at Hand Executing business as usual is a challenge for all banks in the current economic environment The quantum and urgency of change required at RBS to recover its standalone strength is a major additional challenge Market pessimism, illiquidity, strained funding markets and industry de-leveraging make short cuts unviable Need to retain and motivate our people and rebuild external confidence Market environment very uncertain credit costs are rising, risk of further write-downs Slide 27
Building Blocks Necessary for Recovery Recapitalisation & Government funding support Management and Board changes Analysis and Presentation of the problems New Strategy roadmap to unite people and resources Asset Protection Scheme improve protection against extreme loss during strategy execution Severity of downturn manageable Today Today Tbd What now Execution! Slide 28
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Financial Review
2008 group results bn 26.7 (15.9) (3.7) (7.0) (7.8) (0.5) 1.3 (1.0) (7.9) Total income 1 Costs Insurance Impairments Credit Other 3 Tax MI & Preclaims market ference write-downs 2 shares Attributable loss before goodwill impairments 4 (16.2) Exceptional goodwill impairments 5 1 Net of Bancassurance claims 2 Includes 0.5bn charged to impairments relating to re-classified assets 3 Includes FV of debt of 1.2bn, 0.4bn disposal gains, 0.3bn share of shared assets, 1.1bn integration costs, 0.3bn restructuring costs & 0.4bn amortisation of intangibles 4 Before exceptional goodwill impairments 5 Including tax credit of 0.7bn Slide 31
Income road map bn % change on last year 33.0 0.3 1.2 (0.3) (0.4) (1.3) (2%) 32.5 (5.8) (19%) 26.7 2007 1 Growth ex GBM FX IFRS volatility Funding, GBM lower Income pre GBM 2008 Liquidity & income GBM trading trading underlying other write-downs write-downs income 1 1 Net of Bancassurance claims Slide 32
Cost road map bn % change on last year (66%) (4%) 16.6 (1.9) 0.2 0.1 0.6 0.1 0.2 15.9 2007 Variable FSCS Incremental FX Operating Wage 2008 pay Levy investment lease awards provisions Slide 33
Impairments road map bn % change on last year +230% 3.0 6.9 0.5 7.4 2.1 0.6 0.7 0.4 0.1 2007 UK R&C US R&C EME R&C Asia R&C GBM 2008 total Re-classified asset impairments 1 2008 inc reclassified asset impairments 1 Impairments relating to re-classified assets shown separately in credit market write-downs Slide 34
Divisional operating profit 1 bn 1.3 (3.6) 0.8 0.5 0.1 (0.1) 1.1 0.4 (1.3) 1.8 (0.9) 0.1 UK Retail UK Commercial UK Wealth US R&C EME R&C Asia R&C Insurance GTS GBM 2 Central: funding costs Central: other costs 3 Underlying Group operating profit 1 Post manufacturing costs 2 Excludes 7bn of credit market write-downs & one off items, 0.5bn of impairments relating to re-classified assets, and includes 5.8bn of other trading asset write-downs 3 Includes central function headcount Slide 35
Divisional income bn 2.5 (1.9) 4.4 26.7 5.6 3.0 1.5 0.8 3.2 0.9 6.7 UK Retail 1 UK Commercial UK Wealth US R&C EME R&C Asia R&C Insurance GBM 2 GTS Centre & other 2008 underlying income 1,2 1 Net of Bancassurance claims 2 Excludes 7bn of credit market write-downs & one off items, includes 5.8bn of other trading asset write-downs Slide 36
Net interest margin trends FY07 FY08 Comments 09 Outlook % % UK R&C 3.39 3.21 US R&C 2.74 2.73 Higher funding costs/lower deposit margins Outweigh improved front book pricing EME R&C 2.23 2.02 GBM 0.75 1.19 Strong Money Markets from declining rates Group 2.00 2.10 2009 outlook impacted by: Low interest rates 10-15bps Incremental liquidity costs 5-10bps Lower deposit margins 5-10bps Slide 37
GBM underlying income 2008 Revenue = 10.2bn Rates: 3.5bn (+40%) Credit Markets: 1.4bn (-50%) A&PM: 2.4bn (-28%) 2008 bn 2007 bn Underlying revenue 10.2 10.9 (6) Trading write-downs (5.8) - - Published underlying revenue 4.4 10.9 (60) Credit market write-downs (7.0) (1.8) - % Equities: 0.4bn (-64%) Currencies: 1.7bn (+55%) Commodities: 0.8bn Published headline revenue (2.5) 9.1 - Rates, Currencies and Commodities strong Other items: 2008 bn 2007 bn Debt and Equity subdued Write-downs as previously indicated - RBS Sempra Commodities 0.8 - - other operating income 0.6 1.9 Note:Published write-downs = 7.0bn. This includes total losses of ( 9.0bn) plus gains on fair value own debt and CDS hedging of 2.0bn A&PM = Asset & Portfolio Management Slide 38
Risk Management
GBM Trading asset write-downs Write-down 1 bn Comments Structured credit 2.4 MTM write-downs on run-off businesses Counterparty 2.3 Lehman Brothers ( 0.7bn) Icelandic Banks ( 0.6bn) Madoff ( 0.6bn) CDPCs 0.6 CVA increase of 1.3bn offset by hedging benefits Principal Finance 0.5 Principal losses on Merchant Banking and Private Equity portfolios Total Trading write-downs 5.8 0.8bn total Q3 08 4.1bn total Q4 08 1 Pre-tax write-downs for full year 2008 Slide 40
GBM Credit Market write-downs Write-down 1 bn Net Exposure 2 Avg Price % Comments ABS CDOs 3.0 1.3 21 Legacy positions US Residential Mortgages 1.5 0 n/a Legacy positions now exited US Commercial Mortgages 0.1 0.4 87 Legacy positions exposures much reduced Monolines Exposures 3.1 4.8 n/a CVA of 6bn, over 50% reserved Leveraged Loans - HFT 1.1 0.1 n/a Legacy portfolio - small remaining exposure in HFT 3 CLOs 0.2 0.5 81 Legacy portfolio small remaining exposure in HFT 3 CDS Hedging 1.6 Total 7.3 1 Pre-tax write-downs for full year 2008 excluding 0.5bn relating to re-classified assets 2 Exposures as at 31 December 2008 net of hedges and write-downs Slide 41 3 Held-for-trading
Impairments by division UK Retail & Wealth UK Corporate & Commercial US Retail & Commercial EME Impairments bn 1.3 0.7 1.0 0.5 Comments Personal unsecured flat, weaker H2 Primarily small business deterioration Mainly house builder and development property Losses concentrated in smaller end of corporate sector Retail deterioration, SBO build and Commercial Real Estate Primarily residential investment and development Asia GBM 0.2 3.2 Deterioration in consumer credit portfolios 2.7bn in Q4, including LyondellBasell ( 0.9bn) and other smaller cases 2008 Total 6.9 Total 4.8bn higher than 2007 Re-classified assets 0.5 IAS 39 re-classified assets 2008 inc reclassified assets 7.4 Slide 42
Credit quality Gross Loans & Advances (L&A) 1 bn NPL + PPL bn NPL + PPL % of L&A Impairment charge % L&A 2 Provision coverage % 3 FY 2008 701 18.9 2.69% 0.91 50 FY 2007 59 Change (reported) 563 25% 8% 1.49% 8.4 126% 113% 0.37 Change (constant FX) NPLs increased 10bn: 50% GBM, 50% Regional Markets Provision balance 60% RM 40% GBM Lower coverage ratio reflects changing mix from unsecured personal to secured exposures and writeoffs of 3bn 1 Gross loans & advances to customers excluding reverse repurchase agreements and stock borrowing 2 Impairment charge calculation excludes impairments from available-for-sale securities Slide 43 3 Provision coverage is in respect of both customers and banks
Portfolio quality overview Exposure by division % of portfolio by division 10 20 30 40 50 60 Exposure 1 risk rating % of portfolio by grade 0 10 20 30 Normal monitoring Heightened monitoring Non-Performing Book Portfolio performance bn Normal monitoring 703 GBM AQ1 Financial institutions 110 UKCB UK Retail Citizens Ulster Other AQ2 AQ3 AQ4 AQ5 AQ6 Corporates and personal Heightened monitoring Financial institutions Corporates and personal 593 133 64 69 AQ7 NPLs 19 AQ8 Total 855 AQ9 AQ10 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), installment credit, finance lease receivables, debt securities 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 Slide 44
Portfolio quality by country and sector Normal monitoring Heightened monitoring Non-Performing Book Exposure by country Exposure by sector % of portfolio by country United Kingdom Western Europe (Excluding UK) North America Asia & Pacific Latin America CEE & Central Asia Middle East & Africa 0 10 20 30 40 % of portfolio by sector 0 5 10 15 20 25 30 Personal Banks, other FIs Property Manufacturing Transport and Storage Public Sectors & Quasi-Government TMT Wholesale and retail trade Building Power, Water & Waste Natural Resources and Nuclear Tourism and Leisure Business Services Agriculture and Fisheries 1 Exposures are defined as credit risk assets consisting of loans and advances (including overdraft facilities), installment credit, finance lease receivables, debt securities and other traded instruments across all customer types. Slide 45
Commercial Property exposure 1 Global portfolio: 97bn By Division: RBS EME 18% US R&C 7% GBM 32% UK portfolio 2, 3 : 56bn Core portfolio cumulative LTV distribution: 90% 71% 45% 27% RBS UK 43% 17% 8% 4% 1% >50% >60% >70% >75% >80% >85% >90% >100% 58% UK lending, 12% RoI, 8% US, Western Europe 17% o/w Spain 3%, Germany 6% 73% investment, 24% development Less than 2% speculative lending Average LTV 84% 3 Occupier markets are weakening Lower interest rates mitigates the impact on tenant cash flow 1 Includes commercial property and residential property developers 2 Includes RBS UK ( 41bn), GBM ( 9bn) & UB NI ( 6bn). LTV calculation based on a sub portfolio of 43bn where LTVs are applicable 3 Basis of valuation - Cumulative LTVs, most recent valuation; Average LTVs - based on stress testing and applying property index movements to update valuations Slide 46
Single Name Concentration 1 exposure Total committed exposure (TCE) 2, bn % of total TCE 2 Investment grade % TCE 2 /entity, bn Heightened monitoring cases Financial Institutions Total (127 FIs) Of which top 20 132 253 25% 13% 93% 100% 2.0 6.6 5 2 Corporate Total (170 corporates) Of which top 20 44 160 16% 4% 75% 83% 0.9 2.1 18 2 1 Single Name Concentration defined as names > 0.5bn total committed exposure 2 TCE (Total committed exposure) includes both credit and counterparty risk. Total TCE group-wide as of year end 2008 = 1trn Slide 47
Impairments outlook 2008: No. of corporate cases transferred to Recoveries Units Globally Property Wholesale & Retail Trade Construction Manufacturing Transport & Storage Other* Value transferred into recoveries unit No. of cases bn 450 400 14 13 12 350 300 250 200 11 10 9 8 7 6 Case flow reflects economic downturn Cyclical industries impacted first e.g. Property, construction Signs of broader weakness now showing 150 100 5 4 3 50 0 Jan Mar Jun Sep Oct Nov Dec 2 1 0 * Other includes TMT, Tourism & Leisure, Business Services, Banks & FIs and others Slide 48
Risk mitigation actions Problem recognition and management Trading counterparties Scale up of recoveries units globally Early transfer to specialist monitoring and management units Reduced trading positions Reduced credit markets inventory Tightened collateral management Single name concentrations Targeted reduction of biggest exposures Country risk concentration Reduced limits to 25 emerging markets countries by 31% APS Significant risk mitigation across credit and trading portfolios Slide 49
GBM Derivative Trading Assets Derivatives: majority is flow product in liquid markets bn 980 796 Uncollateralised Derivative Portfolio 2008 bn % Government 8 8 Investment Grade 48 50 Monolines & CDPCs 17 18 Non-Investment Grade 23 24 Total 96 100 184 88 96 Collateralised exposure: 95% G7 cash or government bonds, 5% other securities with haircut Gross MTM 1 Netting Benefit Net MTM Collateral Offset Uncollateralised MTM Uncollateralised exposure: Includes mid-corporate exposure in non-investment grade 9.9bn reserve against uncollateralised exposure Asset (Gross MTM) 2008 bn 2007 bn % Chg Growth in position driven by: Interest rate 648 201 223% 80% market parameters; i.e. interest rates/credit spreads Currency 162 46 250% 12% FX related Credit derivatives 161 26 526% 8% volume related Equity 9 6 38% GBM Total 1 980 279 251% Slide 50 1 Excludes 11bn of non-gbm derivatives. The net MTM is the MTM post legal netting applied in RBS GBM credit management systems
Funding & Capital
Composition of the balance sheet Total value ex MTM trading derivatives Net other Assets 1.2trn Liabilities 1.2trn Net other Reverse Repos Repos Total balance sheet 2.2trn Trading assets Short-term liabilities 1.2trn funded balance sheet Funded Balance Sheet Loans to banks Customer loans Deposits by banks Customer deposits Funded BS reduced 17% on a constant currency basis Leverage ratio on adjusted basis 4.7% 1 excluding derivatives Term funds & capital MTM trading derivatives - 1.0trn - 1.0trn MTM trading derivatives 1 Tier 1 ratio divided by assets excluding MTM trading derivatives Slide 52
GBM funded balance sheet Reported vs Constant FX bn 874 874 767 750 692 594 Loans & Advances Reverse Repos Securities Other R Reported currency C Constant currency R C R C R C FY07 H108 FY08 Funded assets reduced 21% on a reported basis Funded assets reduced 31% on a constant currency basis Securities & Repos reduced by 41% and 73% on a constant currency basis L&A up 14% underlying, predominantly reflecting increased drawdowns Slide 53
RWA progression bn 486 22 8 5 66 3 (12) 578 Full year 2007 GBM Other corporate Retail FX Sempra & small disposals Other items 1 Full year 2008 Pro-cyclicality 1 Includes Basel II model benefits, underlying performance and methodology changes Slide 54
Capital progression Core Tier One Ratio % 2.7 (1.7) 0.9 7.0 (0.2) 6.8 2.2 (0.4) (0.6) 0.5 (0.1) 4.0 (0.5) FY07 Dividends 12bn Rights Issue RWA procyclicality RWA FX impact FX capital hedge Other 1 15bn Capital Raising Attributable loss 5bn Preference share conversion Pro forma 2008 Tier 1 deductions Per FSA guideline 1 Other includes underlying RWA reduction and pension adjustment Slide 55
Illustrative target shape of balance sheet 3-5 years bn What would it take to get there? Reduce risk focused on core business Core Tier 1 Ratio 6.5% RWA* Nominal assets 470 900 ~ 110bn reduction in RWA ~ 250bn reduction in nominal assets Non core bank Balanced funding position Customer loans/deposits 100% Customer deposits Customer loans Customer loansdeposits 0 550 550 3.6% CAGR in customer deposits ( 90bn total increase) 4.4% annual reduction in customer assets ( 140bn total decrease) Stable returns Return on equity 15%+ Weathering 2009-11 Smoothing volatility with APS Core businesses generating strong earnings by 2012-13 Slide 56
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Appendix Supplementary Slides
Appendix - table of contents Strategic Review 60 GBM Pg Pg UK Retail 61 Impairment losses 82 UK Commercial 62 Non-derivative trading assets 83 Wealth 63 Reverse repos 84 Ulster Bank 64 UK R&C Insurance 65 Impairment losses UK Retail 85 Global Transaction Services (GTS) 66 Mortgages 86 Geographic Income GBM & GTS 67 Impairment losses UK Corporate & Commercial 87 Profit Road Maps: US R&C Global Banking & Markets 68 Consumer Portfolio 88 Global Transaction Services 69 Impairment losses US Retail 89 UK Retail & Commercial (inc Wealth) 70 Consumer lending metrics 90 US Retail & Commercial 71 Commercial Property 91 EME Retail & Commercial 72 Impairment losses US Commercial 92 Asia Retail & Commercial 73 Ulster Bank Insurance 74 UB Portfolio 93 Manufacturing 75 Impairment losses UB Retail 94 Exposures Commercial Property 95 Credit by Corporate Sectors 76 Impairment losses UB Commercial 96 UK Commercial Property 77 Asian Consumer Finance 97 Slide 59
Strategic review - evaluation of businesses against 5 criteria 1 Customer franchise Is our business based on an enduring customer franchise? Do we have clear competitive advantage and strong market shares? Have we taken account of how the market and competitive environment will change? 2 Returns If we fully allocate costs and properly measure equity, can our businesses meet a hurdle rate of 15% after-tax return on tangible equity in normal times, looking forward? For riskier businesses the hurdle rate should be higher 3 Growth Are the businesses capable of at least 5 10% organic growth in normal times? 4 Risk and funding Are the businesses proportionate users of risk and balance sheet relative to franchise and profitability? Importantly, we need to consider funding sources too 5 Connectivity Do the businesses fit with each other are there shared skills efficiencies, client transactions, etc.? Slide 60
UK Retail Re-position in a changing market Position Leading UK retail franchise with 15m+ customers Significant revenue pressures from economic environment and regulation Planned actions Reduce costs: shift online; lean processes and automation Segment service propositions by value Invest in sales: improve cross-selling and front-line productivity Goals 15%+ ROE regained Maintain customer service reputation Funding growing faster than assets Leading sales and cross-sales productivity Support customers and fulfil lending commitments Slide 61
UK Corporate and Commercial Optimise the value of market leadership Position Market leaders with 30%+ market share Significant exposure to property Client stress a major short term challenge Considerable opportunities to grow cross-sell, build deposits and lower costs Planned actions Manage portfolio stress Reduce cost base and tailor cost to serve to value Improve funding contribution Invest in credit and MI systems, new channels and branch service Goals ROE 15%+ Improved balance sheet diversity Stronger credit processes and portfolio management Improved risk/return per customer Faster than market deposit growth Maintain market leadership Support customers and fulfil our lending commitments support customers Slide 62
Wealth Further growth opportunities Position UK market leader, well positioned in its international markets Market leading performer on revenue margin and asset growth Large profitable Group contribution with headroom to grow Planned actions Consolidate UK and International Wealth businesses Grow RM base, enhance productivity Continue investment in platform Goals Maintain high ROE Continued AuM growth from greater share of wallet and market penetration Sustain UK market leadership Slide 63
Ulster Bank Manage tightly through economic weakness Retention Rationale Leader in Northern Ireland and #3 position in Republic of Ireland Franchise is strong, fully invested and shares UK infrastructure Meets the Group tests over cycle Planned actions Support our customers whilst rebalancing assets/liabilities Increase and diversify deposit base and reduce reliance on wholesale Pro-actively manage risk exposures Move to a single brand strategy Achieve significant cost reduction Goals ROE 15%+ Improved loan to deposit ratio Leading franchises maintained Risk concentration significantly reduced Slide 64
Insurance UK market leader Retention Rationale UK s #1 personal lines insurer; operates the two leading direct brands Well capitalised and self-funding Provides source of stable and differentiated earnings (e.g., insurance cycle not strongly correlated with banking) Tied to renewed focus on UK Recent sale process demonstrated sale option currently value destructive Planned actions Reinvigorate top line UK growth by investing cost and claims efficiencies into pricing, capability and other growth initiatives Strengthen multi-channel distribution: Bank channels Online Goals Extend lead as UK s largest and most profitable personal lines insurer Target lowest cost operations Build strong UK commercial lines business Sustain 20%+ ROE Slide 65
Global Transaction Services Strong product capabilities supporting Group customers Retention Rationale High ROE, low risk Major contributor of funds to Group Integral to wholesale/ commercial businesses in core markets Planned actions Maximize value of global capabilities acquired from ABN AMRO Rightsize the global network (including country exits) ensuring minimal impact on key global clients Maintain service levels during change Implement a slimmed down GTS/ Manufacturing front to back operating model Goals Establish Europe as our core base Become a leading SEPA bank Continue to deliver high ROE and funding to the Group Explore in-organic options on segments of business Slide 66
Geographic income GBM and GTS GBM: FY08 Underlying income 10.2bn GTS: FY08 Income 2.5bn Asia-Pacific 14% RoW 2% UK 45% Americas 14% Asia-Pacific 6% RoW 1% UK 61% Americas 22% Europe 18% Europe 17% Slide 67
Profit road map - GBM bn 4.6 2.4 (1.3) (0.7) (0.9) 1.3 (3.2) (5.8) (7.4) (11.0) 2007 operating profit RLMCC 1 Credit markets Equities A&PM Cost reduction Impairments Trading asset writedowns Credit market writedowns 2 2008 operating loss 3 Exceptional performance in Rates, FX and Currencies Cost reductions driven by lower variable compensation 91% of Impairments occurred in H2 1 Rates, Local Markets, Currencies & Commodities 2 Includes 0.5bn of impairments relating to re-classified assets 3 Operating loss after credit market write-downs ( 7.0bn) impairments on re-classified assets ( 0.5bn) and other trading asset write-downs ( 5.8bn) Slide 68
Profit road map - GTS m 1,198 129 96 42 (81) (45) 1,339 2007 operating profit Cash Management Trade Finance GMSCC 1 Costs Impairments 2008 operating profit Income growth driven by Cash Management up 9% and Trade Finance up 57% Cost increase driven by divisional development, investment in Global Merchant Services and Manufacturing allocation 1 Global Merchant Services & Commercial Cards Slide 69
Profit road map - UK Retail & Commercial bn 4.0 0.5 (0.1) (0.1) (0.1) (0.1) (0.6) (0.2) 3.3 2007 operating profit BS volume growth Increased funding costs Reduction in loan fee income Other Non interest income Lombard Residual Value Impairments Manufacturing costs 2008 operating profit Strong balance sheet growth improving net interest income Reduced appetite for unsecured loan products & bancassurance impacting non interest income Impairment growth primarily in small business & commercial Slide 70
Profit road map - US Retail & Commercial $bn 2.3 0.1 (0.1) (1.0) (0.3) 1.0 2007 operating profit Asset margin income Deposit margin income Non-SBO impairments SBO impairments 2008 operating profit Widening asset margins Hitting deposit floors due to low rate environment Prime loan portfolios impacted by US economic weakness Slide 71
Profit road map - EME Retail & Commercial m 140 (167) 463 (39) (306) (91) 70 70 2007 operating profit Income growth Funding costs Costs Impairments Other EME profit reduction 1 FX 2008 operating profit Ulster Bank Deterioration in credit metrics, particularly property and construction sectors Sale of ECF and Spanish business Increased funding costs & impairment growth 1 Includes ECF discontinued business Slide 72
Profit road map - Asia Retail & Commercial m 39 (111) 47 (20) (52) (16) (113) 2007 operating loss Private Banking income Cards & Consumer Finance income Cost Increased provisioning Manufacturing costs 2008 operating loss Good growth in Private Banking and Cards & Consumer Finance Increased business investment driving cost growth Increased provisioning related primarily to Indian franchise Slide 73
Profit road map - Insurance m 274 (212) 681 78 47 (88) 780 2007 operating profit Own brand underlying profit Partnership & broker underlying profit Realised & unrealised investment losses 2007 floods Prior year reserve releases 2008 operating profit Record operating profit of 780m Good growth in own brand motor & home insurance Continued strong claims management Continued strategy to focus on profitability within partnership and broker Slide 74
Cost road map - Manufacturing bn 4.5 0.2 0.1 0.1 0.1 (0.2) 4.8 2007 costs FX Business investment Increased volume Inflation Productivity gains 2008 costs 2% growth at constant FX Investment in the Group s Corporate Banking network & Manufacturing infrastructure Productivity gains absorbing volume & inflation growth Slide 75
Credit by corporate sector - Shipping By sub-sector Other 9% 16bn total portfolio, almost entirely within GBM Gas/ Offshore 14% Container 10% Dry bulk 29% Primarily lending to SPVs with full security over the asset & related cashflow Long relationships with established independent owners 5bn customer deposits across the portfolio Average LTV 56% 86% of lending against vessels built since 2000 Tankers 38% LTV calculation basis Calculated quarterly by reference to local ship brokers. Latest valuation 31 st December 2008. Slide 76
Credit by corporate sector - Oil & Gas By sub-sector By geography Oilfield Services 20% RoW 1% Vertically Integrated / Exploration & Production 39% Western Europe (Excluding UK) 20% Asia & Pacific 5% CEE & Central Asia 13% Refining & Marketing 19% United Kingdom 12% Latin America 9% Middle East & Africa 7% Midstream 21% 24bn portfolio, 90% GBM, 5% UKCB, 5% other North America 34% Exploration & production exposures are principally secured borrowing base facilities, referenced to conservative forward looking oil price assumptions, adjusted on a regular basis Slide 77
Credit by corporate sector Automotives 1 By sub-sector By geography Rental 17% OEM 23% Western Europe (Excluding UK) 30% Asia & Pacific 6% CEE & Central Asia 7% Latin America 1% Captive Finance Companies 8% North America 27% Retailers / Services 35% Component Suppliers 17% United Kingdom 29% 14bn portfolio - 62% GBM, 23% UKCB, 9% US, 6% other Maintaining a cautious approach to the sector Relationships with largest players Expect pressure on the portfolio due to the scale of market downturn 1 Automotive exposure excludes conduits Slide 78
Credit by corporate sector - Project Finance By geography Western Europe, portfolio Americas 15% Other 13% France 3% Asia Pacific 9% Western Europe 60% Italy 4% Spain 11% UK 69% CEEMEA 16% 16bn portfolio, of which Western Europe 60% Total deals 615 Average deal size based on limits - 51m 10bn portfolio Slide 79
Credit by corporate sector - Retailers By geography By type North America 17% Asia Pacific 4% Other 6% UK 40% Food retailers 23% Other 50% Department stores 13% Western Europe 33% White goods/diy 14% 18.2bn total exposure GBM 50%, UKCB 27%, Ulster 12%, US R&C 10% Cautious stance taken in 2008/09 Small number of cases in Restructuring unit currently Slide 80
Commercial Property by type RBS UK & GBM RBS UK 1 by property type portfolio: 42bn GBM 2 by property type portfolio: 25bn Industrial 12% Corporate (General) Funding 5% Residential 14% Medical/Car e 4% Industrial 4% Other 6% Office 33% Residential 5% Retail 19% Office 20% Mixed 7% Leisure and Tourism 15% Mixed 30% Retail 26% 1 RBS UK Sector split based on RBS UK core portfolio Slide 81 2 Excludes 6bn relating to ABN AMRO and debt securities
Impairment Losses by division GBM 3,643m 1 1389 722 67 1055 Manufacturing & Infrastructure Property & Construction Transport & Technology Banks & Financial Institutions Other Trends Analysis 2008 2007 NPL as % of L&A 1.9% 0.3% 122m 122 410 FY07 FY 08 1 Includes 466m on re-designated assets Slide 82
GBM Non-Derivative Trading Assets bn 322 204 Asset 2008 bn 2007 bn Y-o-Y % 16 60 Debt securities & reverse repos 204 476 (57%) T Bills 16 16 - Loans & advances 60 42 42% Equities 11 29 (62%) Other 31 23 35% 11 31 GBM Total 322 586 (45%) Nonderivative trading assets Debt securities & reverse repos T Bills L&A Equities Other Slide 83
GBM Reverse Repos bn Exposure by counterparty 2008 bn 2007 bn Y-o-Y % Reverse Repos Banks 57 166 (66%) 96 57 Reverse Repos Customers 39 143 (73%) Total 96 309 (69%) 39 Maturity profile % of total MTM < 3 months 83% < 6 months 12% < 1 year 4% > 1 year 1% Total 100% Collateral quality distribution Total Reverse Repos Banks Customers Government 89% Corporates 7% Other 4% Total 100% Collateral quality distribution and tenor distribution are calculated based on gross reverse repos Slide 84
Impairment Losses by division UK Retail Banking m 1,184 21 1,281 33 610 666 Mortgages Personal Cards Business Banking Other 420 359 Trends Analysis 2008 2007 NPL as % of L&A 4.1% 3.9% IL as a % of closing book loans Mortgages <0.1% <0.1% Credit Cards 6.6% 4.6% Personal 3.8% 3.9% Business Banking 0.8% 0.4% 80 158 58 61 FY07 FY 08 Business = companies with turnover below 1m Slide 85
UK Retail mortgages UK portfolio 1 : 75bn Mortgages Arrears vs CML 3 Cumulative LTV distribution as % of book value 1, 2 : 73% 1.8% 1.6% 1.4% 1.2% 41% 33% 1.0% 19% 12% 7% 0.8% 0.6% 0.4% >50% >75% >80% >90% >95% >100% 0.2% 0.0% Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 93% Mainstream, 7% Buy-to-let CML 3+ % RBS & NW 3+ % Mainstream LTV 54% Buy-to-let LTV 63% Average LTV 55% Mortgage impairment charge in 2008-32m 1 Excludes Northern Ireland & business off-set mortgages 2 LTV basis current valuation 3 Council of Mortgage Lenders Slide 86
Impairment Losses by division UK Corporate & Commercial Banking m 671m 206 303 Commercial Corporate Lombard Other Trends Analysis 2008 2007 NPL as % of L&A 2.7% 1.2% IL as % of closing book loans Commercial 0.6% 0.1% Corporate 0.4% 0.1% Lombard 1.8% 0.4% Other 0.5% 0.6% 180m 35 80 112 22 43 50 FY07 FY 08 Sector Split of IL m Other consumer Latent Construction Real Estate Instalment Debtors Manufacturing Wholesale and Retail Trade Private Sector Finance Leases 23 20 92 37 64 53 87 150 145 Commercial = companies with turnover between 1-25m Corporate = companies with turnover above 25m Slide 87
US Retail & Commercial Total Portfolio - $113bn Home Equity & Residential Mortgage Portfolio (ex SBO) Residential Mtg / Home Equity 38% Corporate & Industrial 27% Commercial Real Estate 10% Cumulative LTV distribution as % of book value: 56% 36% 27% 14% 9% 6% >60% >75% >80% >90% >95% >100% SBO 6% Auto & Other Consumer 19% Average LTV 63% Average FICO 700+ LTV basis most recent valuation Slide 88
Impairment Losses by division US Retail $m $685m 52 329 21 29 112 85 57 $1,540m 82 592 128 87 196 175 280 Small business Home equity - SBO Home equity - other Residential mortgages Cards Auto Other consumer Trends Analysis 2008 2007 NPL as % of L&A 0.9% 0.5% IL as a % of closing book loans Small business 5.9% 3.8% Home equity 0.5% 0.1% SBO 8.4% 3.8% Residential mortgages 0.6% 0.1% Cards 8.2% 4.8% Auto 1.6% 0.7% Other consumer 3.2% 0.7% FY07 FY 08 Other consumer also includes Unallocated & General reserves and IFRS adjustments Slide 89
US Retail consumer lending metrics Residential Mortgage Core Home Equity SBO Home Equity Indirect Auto Outstanding Balance $14bn $28bn $7bn $11bn Percentage of Loans 14% 25% 6% 10% Weighted Average FICO 732 747 712 747 Weighted Average CLTV 66% 62% 100% - Fixed Rate Loans 63% 58% - - Adjustable Rate Loans 37% 42% - - First Lien 99% 49% 3% - Second Lien 1% 51% 97% - Portfolio 2008 5% 14% 0% 34% Vintage 2007 11% 17% 19% 29% 2006 11% 16% 38% 18% 2005 32% 12% 38% 15% Pre 2004 41% 41% 5% 4% Cumulative >700 79% 82% 58% 85% FICO >660 89% 91% 72% 98% Distribution >520 99% 98% 89% 100% SBO book is closed, amortising book FICOs & LTVs are current not at point of origination Slide 90
US Retail & Commercial - commercial property Total portfolio: $9bn By Geography By Property Type California 0.4% Florida 0.7% Other 6% Mid Atlantic 21% Mixed Use 3% Land 4% Other 9% Residential 27% Lodging & Hospitality 6% New England 41% Industrial 7% Midwest 31% Office 18% Retail 26% Average LTV 62% Average loan size <$3m LTV basis current valuation Slide 91
Impairment Losses by division US Commercial $m $389m 177 CRE Commercial & Industrial Trends Analysis 2008 2007 NPL as % of L&A 1.3% 0.6% IL as a % of closing book loans Commercial Real Estate 1.6% 0.2% Commercial & Industrial 0.7% -0.1% 212 $(5)m 15-20 FY07 FY 08 FY07 benefitted from a number of write backs and methodology changes Slide 92
Ulster Bank Total portfolio 60bn Personal Other 4% Mortgages 40% UB mortgage portfolio: 25bn Cumulative LTV distribution as % of book value 1 : Corporate Other 24% 53% 32% 28% 18% 13% 9% Property 32% >50% >75% >80% >90% >95% >100% 40% of book is mortgage funding, secured by properties Very low exposure to unsecured consumer lending 32% of book across commercial development & investment, residential development & investment and contractors/building suppliers 1 Calculated based on volume. LTV basis current valuation Average LTV 47% Buy to Let LTV 55% Slide 93
Impairment Losses by division Ulster Bank Retail m 68m Trends Analysis 2008 2007 23 NPL as % of L&A 2.1% 1.2% IL as a % of closing book loans 34m 16 32 UB - Mortgages UB - Personal banking UB - Cards UB Mortgages 0.1% 0.1% UB Personal Banking 3.5% 1.5% UB Cards 3.9% 2.9% 11 7 13 FY07 FY 08 Slide 94
Ulster Bank - Commercial Property Portfolio: 17bn By type: Cumulative LTV distribution as % of book value: Residential Development 31% 88% 77% Commercial Investment 47% 55% 35% Residential Investment 4% Commercial Development 18% 21% 12% 9% 3% >50% >60% >70% >75% >80% >85% >90% >100% 65% Republic of Ireland, 35% UK 1.8% speculative lending, capped at 3% Average LTV 70%, average ICR 136% Excludes house builders of 1.7bn and contractors/building suppliers of 0.8bn LTVs, basis for calculation is most recent valuation Slide 95
Impairment Losses by division Ulster Bank Corporate m 326m 10 265 Commercial Investment & Development Residential Investment & Development Trends Analysis 2008 2007 NPL as % of L&A 8.0% 1.5% IL as a % of closing book loans Commercial Investment & Development 0.1% 0.0% Residential Investment & Development 3.2% 0.5% Other 0.3% 0.1% 44m Other 34 51 10 FY07 FY 08 Slide 96
Asian Consumer Finance Country Product Program Balance ( m) 90+ past due Taiwan Credit Cards 447 2% Mortgages 93 0% TTBB Legacy Mortgages 88 6% TTBB Legacy Personal Loans 114 5% India Credit Cards 217 7% Personal Loans 343 4% Mortgages 194 2% SME 228 1% Indonesia Credit Cards 49 3% Unsecured Personal Loans 71 3% Pakistan Personal Loans 40 7% Credit Cards 39 9% Singapore Credit Cards 92 1% Unsecured Personal Loans 93 1% Private Banking SME 52 0% Investments 45 1% Investment Secured Loans 42 0% Mortgages 62 8% Hong Kong Unsecured Personal Loans & Revolving Loans 73 0% Only Portfolios with Balances over 40m ( 38m) shown TTBB was bought by ABN AMRO prior to the acquisition and is currently in run-off. Slide 97