1 interim management statement the royal bank of scotland group third quarter operating loss of...

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Interim management statement

The Royal Bank of Scotland Group third quarter operating loss of £1,525 million, down from £3,533 million in the second quarter

Core business operating profit of £1,193 million

Operating performance benefited from stable NIM, good expense control and lower provisions

Good progress against the key metrics in our 5 year strategy

Key points

• Operating loss narrowed to £1.5 billion(1) in 3Q09. Pre-impairment profit, adjusted for fair value

of own debt, improved to £2.2 billion.

• Net interest margin stabilising at 1.75%.

• Efficiency improvements beginning to gain ground, with cost:income ratio improved to 59.1%

(2Q - 66.4%).

• Impairments remain high but fell 30% from 2Q09 and seem to be plateauing around 1H09

levels.

• Pro forma Core Tier 1 capital ratio at 30 September 2009, adjusted for capital issuance and

revised APS coverage, stood at 11.1%.

• Key funding and liquidity ratios improving well.

• Customer franchises resilient.

• £45.5 billion of new lending to UK companies so far in 2009, including a 5% increase in

lending to SME customers compared with the second quarter. Note: (1) (Loss)/profit before tax, purchased intangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals and write-down of goodwill and other intangible assets.

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Interim management statement (continued)

Stephen Hester, Group Chief Executive, comments: “The release of our third quarter results today provides a timely reminder of why we are confident that we can restore RBS to standalone strength whilst serving customers well. Along the way we must also restore strong profitability and sustain a successful commercial spirit at RBS, without which value for all shareholders and a profitable exit for the UK taxpayer is not possible. The results also show the headwinds we face and the legacy we are purposefully working out of. As I have repeatedly said, the journey will take some years. This week marked a crucial milestone in RBS’s recovery with announcement of the terms of the UK Asset Protection Scheme (“APS”) participation and agreement in principle with the European Commission on state aid compensatory measures. While not all we wanted, we now have the tools to do our job. We greatly appreciate the steadfast support we have been given by the UK Government and taxpayers. We are completely concentrated on repaying that confidence and support by doing the job outlined for us above. The faster the pressures on us become similar to those on our competitors, the more likely we are to succeed – a goal which rather clearly aligns staff, customers, shareholders and UK taxpayers. Today our results show strong and even growing customer franchises and the majority of our businesses operating without surprises in the face of enormous pressures and change. They show progress in risk reduction and improved liquidity and funding strength. They show progress in efficiency. They show the decline in net interest margin arrested. Behind these results lie intense activity throughout the Bank, tough decisions being made, investments in the future taking place and a determination to make good on the recovery targets we published in August as part of our five year plan. However, we owe it to everyone to be realistic and transparent. Economic recovery is likely to be slow and the pain of economic adjustment will take years to subside. Our business will reflect these issues. Profitability in our core businesses will recover fully only when our own actions are also complemented by more normal interest rates and bad debt experience. The excess credit exposures in our Non-Core Division will also take time to work down with losses along the way. We further have to adjust our business and manage the changes required by the EC and will publish revised plans in that regard in February. Finally, regulatory pressures on all banks will continue to increase the cost of doing business and require higher margins and more capital than previously. The redesign of APS announced this week has our full support. We do not expect to draw down the contingent capital and asset insurance for our “base case”, though it is currently needed to meet the FSA stress test framework. Our operating outlook and that for impairments have not deteriorated from that established in Q2. In fact there are early signs in our budgets for 2010 of improvements anticipated. As such a less powerful, more affordable and more flexible scheme, with an annual fee, makes sense. We will work hard to minimise dilution from additional B share issuance and forced disposals. We at least have time to do this.

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Interim management statement (continued) Stephen Hester, Group Chief Executive, comments (continued): In general I am upbeat, though realistic. We have a tough job but we are making good progress. While not without risk of setback, economies and markets do seem to be recovering. In turn that should mean RBS can move forward from here with purpose and, in time, growing momentum.” Third quarter 2009 results summary Current trading The Group reported an operating loss of £1,525 million in the third quarter, compared with £3,533 million in the second quarter. Adjusting for movements in the fair value of own debt, pre-impairment operating profit improved to £2,237 million, compared with £2,090 million in the previous quarter. Global Banking & Markets revenues, as we signalled in August, have returned to more normalised levels from the exceptionally strong conditions seen in the first and, to a lesser extent, second quarters. UK Corporate and GTS results are solid, but profitability in the UK, Ireland and US retail divisions remains subdued. The Non-Core division is now operational and is thus far meeting its run-off forecasts. The Non-Core operating loss decreased to £2,718 million from £4,975 million in the second quarter. Group net interest margin beat our forecasts in the quarter at 1.75%, compared with 1.70% in the second quarter and 2.05% in the third quarter of 2008. All divisions have made good progress in improving asset margins to reflect the increased cost of funding, risk and additional capital requirements, and there has been some improvement in wholesale funding markets. Deposit margins remain under pressure, however. Funding and liquidity positions have continued to improve, and the loan:deposit ratio, gross of provisions, declined to 142.3%, compared with 144.5% at the end of the second quarter. Our liquidity pool, at £140 billion, is now close to our 2013 target of £150 billion, though its make-up will become more costly as government bonds are required to increase sharply as part of the total. Reliance on central bank funding is now down 69% from its peak, reflecting the marked improvement in short term money markets. Net tangible equity per share increased to 59.4p at 30 September 2009, from 58.0p at 30 June, with positive movements in available for sale reserves and currency translation outweighing the attributable loss of £1.8 billion. Efficiency RBS’s cost:income ratio improved to 59.1% in the third quarter from 66.4% in the second quarter. Adjusted for insurance claims, the cost:income ratio improved from 78.3% to 70.5%. Our efficiency programme is progressing well though this will, regrettably but inevitably, mean further job losses as we continue our restructuring to meet the changed market realities.

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Interim management statement (continued)

We are actively re-tooling our businesses for future success as part of our five year strategic plan. These actions will require some reinvestment of cost savings into increased information technology and marketing spending, but they also involve making each of our businesses better and more efficient at serving their customers. Impairments Although impairments remained high at £3,279 million in the quarter, third quarter trends are encouraging, notwithstanding a modest increase in default rates. Impairments and credit market write-downs remain concentrated in the Non-Core division, though Ulster Bank particularly and Citizens are still experiencing increased impairment losses, reflecting the difficult economic environments they operate in. Capital Our Core Tier 1 capital ratio declined to 5.5% at the end of September, reflecting in part the loss recorded in the quarter, which reduces our capital base, but just as importantly an increase of £47.4 billion in risk-weighted assets to £594.7 billion. This increase in RWAs was driven primarily by the fall in credit ratings for monolines, the effect of procyclicality in Basel II models and by foreign exchange movements. The majority of these effects occurred in the Non-Core division, which in time will be run down. Nominal assets were broadly stable at constant exchange rates. On 3 November we announced plans to accede to the Asset Protection Scheme and to issue additional capital to HM Treasury. These measures increase the Group’s pro forma Core Tier 1 ratio at 30 September to 11.1%. The significant strengthening of our capital base will enable the Group to maintain robust capital ratios in the face of continuing high impairment levels, rising RWAs from the impact of procyclicality and increasing regulatory capital demands. Serving our customers Our core customer franchises have demonstrated remarkable resilience in the face of very difficult economic conditions. Except for those activities earmarked for run-off or exit, RBS has sustained its market positions and customer service measures. Customer numbers are growing or stable in all major businesses. UK Retail added 139,000 current account customers and 25,000 mortgage customers during the quarter, while Ulster Bank and Citizens have held their customer bases steady. The stability of our retail franchises helped RBS to increase customer deposits by £8.5 billion during the quarter. In business markets, RBS lent £15.2 billion to UK SMEs and corporates in the third quarter, taking total lending to £45.5 billion in the first nine months of the year. Lending to SMEs increased to £9.7 billion in the third quarter, up 5% from the previous quarter. Demand for lending remains muted, and overdraft utilisation rates across the SME and mid-corporate segments have remained low at 44%. SME and mid-corporate customers still have access to undrawn committed facilities of more than £27 billion. The average interest rate on new lending to SMEs fell to 3.4%, compared with 7.0% in 3Q08.

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Interim management statement (continued) Outlook While the third quarter has shown a number of encouraging trends, we remain cautious about economic prospects as the recovery seems likely to be slow and unemployment continues to rise. Net interest margin is stabilising, but we expect competition for retail deposits to remain intense and overall NIM is expected to remain broadly stable in the next few quarters. Impairments appear to be plateauing in line with first half levels, although there may be volatility around that trend in coming quarters. While the APS and capital issuance plans we have agreed on with the Government will take our Core Tier 1 capital ratio to well above our target of 8%, it is clear that the next two years will bring a number of further pressures, including the impact of procyclicality and increasing regulatory demands. Core business profits will take time to recover and build, especially as GBM results normalise. Non-Core losses remain likely to drive a continuing overall loss next year. Contacts For analyst enquiries: Richard O’Connor Head of Investor Relations +44 (0) 20 7672 1758 For media enquiries: Neil Moorhouse Head of Group Media Centre +44 (0) 131 523 4414 +44 (0) 7786 690029

Analysts’ conference call Stephen Hester, Group Chief Executive, and Bruce Van Saun, Group Finance Director will be hosting an analyst and investor conference call this morning:

6 November 2009 at 9.00am

Dial in Details: International – +44 (0) 1452 568 172 UK Free Call – 0800 694 8082 Slides Slides accompanying this document will be available on www.rbs.com/ir

http://www.rbs.com/ir

Third quarter 2009 results

Contents Page

Forward-looking statements 3

Presentation of information 4

Results summary – pro forma 5

Results summary – statutory 7

Business and strategic update 8 Pro forma results 13

Summary consolidated income statement 13

Condensed consolidated statement of comprehensive income 15

Summary consolidated balance sheet 15

Key metrics 16

Results summary 18

Divisional performance 26UK Retail 28UK Corporate 31Wealth 34Global Banking & Markets 36Global Transaction Services 39Ulster Bank 41US Retail & Commercial 44RBS Insurance 51Central items 53Non-Core 54

Allocation methodology for indirect costs 59

Condensed consolidated balance sheet 61

Commentary on condensed consolidated balance sheet 62

Notes 63

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Contents (continued) Page Risk and capital management 76

Capital resources and ratios 76

Credit risk 78

Liquidity risk 83

Market risk 87

Market turmoil exposures 89 Statutory results 101

Condensed consolidated income statement 102

Condensed consolidated statement of comprehensive income 103

Financial review 104

Condensed consolidated balance sheet 105

Commentary on condensed consolidated balance sheet 106

Notes 107

Capital resources and ratios 114 Additional information 116

Statutory results 116 Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets

Appendix 2 Analysis by quarter

Appendix 3 Asset Protection Scheme

Appendix 4 Businesses outlined for disposal

Appendix 5 Revisions

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Forward-looking statements Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘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 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: RBS obtaining the requisite approvals and agreeing the requisite documents to finalise its accession into the APS; the effect of the APS and State Aid remedies on RBS's financial and capital position; the continuation or further deepening of recessionary conditions; the ability of the Group to access sufficient funding to meet its liquidity needs; the developments in the current crisis in the global financial markets, and their impact on the financial industry in general and the Group in particular; the effect on the Group’s capital of write downs in respect of credit market exposures and impairments; general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 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; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; the value and effectiveness of any credit protection purchased by RBS; and the success of the Group in managing the risks involved in the foregoing. The forward-looking statements contained in this document speak only as of the date of this announcement, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

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Presentation of information Acquisition of ABN AMRO On 17 October 2007, RFS Holdings B.V. ('RFS Holdings'), a company jointly owned by The Royal Bank of Scotland Group plc (‘RBS’), Fortis Bank Nederland (Holding) N.V. ('Fortis') and Banco Santander S.A. ('Santander') (together, the 'Consortium Members'), completed the acquisition of ABN AMRO Holding N.V. ('ABN AMRO').

RFS Holdings is implementing an orderly separation of the business units of ABN AMRO with RBS retaining the following ABN AMRO business units:

• Continuing businesses of Business Unit North America; • Business Unit Global Clients and wholesale clients in the Netherlands (including former Dutch wholesale clients) and Latin America (excluding Brazil); • Business Unit Asia (excluding Saudi Hollandi); and • Business Unit Europe (excluding Antonveneta).

Certain other assets will continue to be shared by the Consortium Members.

On 3 October 2008, the State of the Netherlands acquired Fortis Bank Nederland (Holding) N.V. including Fortis' participation in RFS Holdings that represents the acquired activities of ABN AMRO.

The separation of the main platform shared between RBS and its Dutch state-owned partner has been completed and the Group expects that, subject to legal process and regulatory approvals, the legal separation of the constituent parts of ABN AMRO will be complete in early 2010. From that point RBS will cease to consolidate the Dutch state's interest in RBS Group statutory accounts.

Pro forma results Pro forma results have been prepared to include only those business units of ABN AMRO that will be retained by RBS. The financial review and divisional performance and discussion of risk and capital management in this Interim Management Statement focus on the pro forma results. The basis of preparation of the pro forma results is detailed on page 63.

Statutory results RFS Holdings is jointly owned by the Consortium Members. It is controlled by RBS and is therefore fully consolidated in its statutory financial statements. The interests of the State of the Netherlands and Santander in RFS Holdings are included in minority interests.

Restatements Divisional results for 2008 have been restated to reflect the Group’s new organisational structure that includes a Non-Core division comprising individual assets, portfolios and lines of business that the Group intends to run off or dispose of. The Non-Core division is reported separately from the divisions which form the Core Group. In addition, separate reporting of Business Services (formerly Group Manufacturing) and Centre results has changed and, with the exception of certain items of a one off nature, costs incurred are now allocated to the customer-facing divisions and included in the measurement of the returns which they generate. The changes do not affect the Group’s results. Comparatives have been restated accordingly.

The pro forma and statutory results for 2008 have been restated for the amendment to IFRS 2 ‘Share-based Payment’. This has resulted in an increase in staff costs amounting to £37 million for the third quarter of 2008 and £72 million for the first nine months of 2008.

The pro forma and statutory results for 2008 have been restated for the finalisation of the ABN AMRO acquisition accounting.

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Results summary – pro forma

Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Core

Total income (1) 7,154 7,015 7,529 24,862 21,699

Operating expenses (2) (3,729) (3,638) (3,531) (11,474) (10,742)

Insurance net claims (1,019) (788) (764) (2,596) (2,353)

Operating profit before impairment losses (3) 2,406 2,589 3,234 10,792 8,604

Impairment losses (1,213) (1,147) (512) (3,390) (1,184)

Operating profit (3) 1,193 1,442 2,722 7,402 7,420

Non-Core

Total income (1) (60) (894) 1,056 (2,977) (1,463)

Operating expenses (2) (466) (428) (529) (1,454) (1,711)

Insurance net claims (126) (137) (170) (440) (508)Operating (loss)/profit before impairment losses (3) (652) (1,459) 357 (4,871) (3,682)

Impairment losses (2,066) (3,516) (768) (7,410) (1,575)

Operating loss (3) (2,718) (4,975) (411) (12,281) (5,257)

Total*

Total income (1) 7,094 6,121 8,585 21,885 20,236

Operating expenses (2) (4,195) (4,066) (4,060) (12,928) (12,453)

Insurance net claims (1,145) (925) (934) (3,036) (2,861)

Operating profit before impairment losses (3) 1,754 1,130 3,591 5,921 4,922

Impairment losses (3,279) (4,663) (1,280) (10,800) (2,759)

Operating (loss)/profit (3) (1,525) (3,533) 2,311 (4,879) 2,163

(Loss)/profit before tax (4) (2,077) 59 1,903 (2,062) 1,177 (Loss)/profit attributable to ordinary shareholders (1,800) (140) 871 (2,842) 44

* Includes fair value of own debt impact (483) (960) 1,281 (412) 2,093

Performance ratios

Return on equity - annualised (5) (11.2%) (26.6%) 9.8% (15.6%) 2.4%

Net interest margin** 1.75% 1.70% 2.05% 1.74% 2.06%

Cost:income ratio (6) 59.1% 66.4% 47.3% 59.1% 61.5%

Adjusted cost:income ratio (7) 70.5% 78.3% 53.1% 68.6% 71.7%

Continuing operations: Pre-impairment Core adjusted earnings per

ordinary share (8) 2.5p 2.6p 11.5p 15.1p 38.9p

Core adjusted earnings per ordinary share (9) 1.0p 1.0p 9.5p 9.7p 33.0p

Basic earnings per ordinary share (10) (3.2p) (0.2p) 5.6p (5.6p) 0.9p For definitions of the notes see pages 16 and 17. ** Net interest margin for the quarter ended 30 June 2009 has been revised. See Appendix 5.

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Results summary – pro forma

Capital and balance sheet 30 September

2009 30 June

2009 Change 31 December

2008 Change

Total assets £1,680.3bn £1,644.4bn 2% £2,218.7bn (24%)

Funded balance sheet (11) £1,127.8bn £1,088.6bn 4% £1,227.2bn (8%)

Loan:deposit ratio (gross of provisions) 142.3% 144.5% (220bp) 152.4% (1,010bp)

Loan:deposit ratio (net of provisions) 138.8% 142.9% (410bp) 150.3% (1,150bp)

RWAs £594.7bn £547.3bn 9% £577.8bn 3%

Total equity £58.9bn £57.8bn 2% £64.3bn (8%)

Core Tier 1 ratio 5.5% 6.4% (90bp) 5.9% (40bp)

Tier 1 ratio 8.0% 9.0% (100bp) 9.9% (190bp)

Tier 1 leverage ratio (12) 23.4x 21.7x 8% 21.2x 10%

Tangible equity leverage ratio (13) 3.0% 3.0% - 2.4% 60bp

Net tangible equity per share 59.4p 58.0p 2% 73.8p (20%)

For definitions of the notes see pages 16 and 17.

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Results summary – statutory Highlights • Income of £8,080 million. • Pre-tax loss of £2,169 million for Q309. • Core Tier 1 ratio 6.5%. Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Total income 8,080 11,453 9,962 29,921 23,804

Operating expenses (5,552) (5,732) (5,321) (17,443) (16,040)

Operating profit before impairment losses 1,319 4,674 3,595 9,135 4,529

Impairment (3,488) (4,970) (1,397) (11,548) (3,058)

Operating (loss)/profit before tax (2,169) (296) 2,198 (2,413) 1,471 (Loss)/profit attributable to ordinary shareholders (1,800) (140) 871 (2,842) 44

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Business and strategic update Strategic plan In August, RBS detailed its plans, first announced in February, for a radical restructuring of its businesses to set the Group on a path to sustainability, stability and customer focus. Businesses and portfolios that did not meet the Group’s strategic criteria, including both stressed and non-stressed assets, were transferred to the Non-Core division. Within the Core Bank, comprehensive changes have been set in motion to improve the business and adapt to the future banking climate. The balance sheet and capital framework were also clearly set out, anticipating substantially increased regulatory pressures and much greater emphasis on liquidity. While updates to the Plan and related targets will be published in February, reflecting the new APS agreement and EU remedies, we currently expect the Plan’s integrity and key aspirations to remain valid. The Group’s strategy has been embedded in five-year plans across divisions, and the more recent 2010 budgets provide encouraging support for these plans. There remain many uncertainties in the economic environment and the Group has made it clear that it expects the path to rebuilding standalone strength and shareholder value to be multi-year in duration. Some encouraging progress has, nevertheless, been made in the third quarter towards some of the Group’s intermediate goals: • Despite intense competition for retail savings, customer deposits, excluding repos, grew in the

quarter, up 2% or £8.5 billion compared with 2Q09, with encouraging deposit-gathering performances from all our retail divisions as well as from Global Transaction Services.

• Loans and advances to customers, excluding reverse repos, reduced by 1% compared with 2Q09 and by 15% compared with December 2008, with the bulk of the reduction coming in Global Banking & Markets and Non-Core.

• The Group’s loan to deposit ratio improved to 142% at the end of September, an improvement of

220 basis points from the end of June and of 1,010 basis points from the end of December 2008. The Group’s 2013 target is to achieve a ratio of approximately 100%.

• Risk-weighted assets, however, increased by 9% in the quarter, mainly due to the fall in credit

ratings for monolines, the effect of procyclicality in Basel II models and foreign exchange movements.

• Efforts to improve efficiency have continued to make headway, and the Group is on track for its

three year cost saving targets. The Group cost:income ratio year to date improved by 2 percentage points, compared with the same period of 2008.

• We issued £4.8 billion of unguaranteed term debt during the third quarter, taking the total issued to

end September to £9.2 billion. In general, the picture on liquidity is rapidly improving, albeit from a poor starting point.

Return on equity remains negative. The Group’s 2013 target is to achieve a sustainable return on equity in excess of 15%, powered by market-leading franchises in large, customer-driven markets.

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Business and strategic update (continued) Non-Core division and disposal programme The Non-Core Division is now fully operational and continues actively to reduce risk and manage the run-down and sale options for the £190.3 billion of RWAs for which it is now responsible. Finalising APS has been the greatest priority to date, in the knowledge that market conditions overall will take time to offer acceptable value and liquidity. Significant and encouraging market improvements are, nevertheless, visible. The disposal of the majority of our Retail & Commercial businesses in Asia, along with some of our Global Banking & Markets (GBM) businesses, continues to progress well and we remain in advanced stages of negotiations with bidders for the remaining markets. Elsewhere, in addition to normal amortisations, improved market conditions have enabled us to unwind legacy trades. The current market rally has also significantly reduced monoline and CDPC exposures. Our plan will continue to be affected by external factors such as economic conditions, risk appetite and liquidity in the market, as well as foreign exchange rates. Risk As part of its strategic review RBS has a clearly stated ambition to achieve a standalone AA category risk rating and risk management within the Group is now implementing revised risk appetite and controls in order to achieve this objective. While economic conditions and outlook have improved since the first half results, they remain fragile, with corporate failures and consequent unemployment not expected to peak until 2010. The outlook for impairments has improved somewhat and these may now be plateauing at 1H09 levels although we are still seeing a modest increase in default rates. Economic conditions in the UK and more so Ireland, two key markets for RBS, remain relatively weak. Our impairments and write-downs remain concentrated in the Non-Core division with better quality credit metrics in most of our Core divisions. The Group continues to reduce its exposure to country risk and a new country risk framework is now well embedded across the Group. Total cross border exposure to countries in the emerging economies has declined since June 2008 by over 20% adjusted for currency movements. Single Name Concentrations continue to receive a high level of attention and further refinements to the risk management framework will be implemented during the fourth quarter. A programme to improve reporting is now well underway increasing transparency of risk exposures and improving the ability of management to take mitigating action as part of the process of reducing the risk in RBS’s balance sheet. Market risk as measured by Value at Risk (VaR) has increased materially, primarily reflecting the rise in Non-Core credit spread VaR resulting from the increased volatility in the most recent two years’ of market data, as well as additional hedges against the risk of counterparty failure, which is not itself recorded in VaR.

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Business and strategic update (continued) Risk (continued) The potential for increased Operational Risk emanating from the implementation of the Strategic Plan is an issue which is being actively managed by each division and monitored by the independent risk function. We also have an active programme of engagement with the very significant regulatory change agenda across prudential requirements, banking capital, bank licensing and supervision. The regulatory agenda is all-consuming of itself, with multiple initiatives to prepare for and react to significant uncertainties still to wash through for all banks. UK Lending Commitments In February, as a pre-requisite to its proposed participation in the APS, the Group agreed to make available an additional £25 billion of lending (£9 billion of mortgage lending and £16 billion of business lending) to creditworthy customers on commercial terms, and subject to market demand, over the ensuing 12 months, and a similar amount over the following year. RBS is unambiguous in its view that these commitments are being met. However, as is normal in recessions, our customers are generally seeking to repair their balance sheets, not to increase borrowing. As a result, the demand for our lending is muted, especially from business customers. By comparison in the United States, where economic growth has already resumed, the fall in loan demand has been even greater. Increased borrowing is not the route to sustainable recovery. Since entering into this commitment RBS has achieved strong results in the mortgage market: • Gross lending year to date totals £13.9 billion, including over £2.3 billion of lending to first time

buyers. Gross lending during the quarter was 23% higher than in 2Q09 and at 30 September 2009, UK mortgage balances totalled £88.7 billion, 11% higher than at the end of 2008.

• The acceptance rate for mortgage lending, at 90%, remains high. With net mortgage lending year to date totalling £8.6 billion, the Group is on target to surpass the £9 billion mortgage lending commitment.

In business markets, RBS has achieved gross lending of £45.5 billion year to date. Gross lending during 3Q09 was £15.2 billion, 2% lower than 2Q09. After taking account of loan repayments and overdraft movements, RBS’s business lending, including Ulster Bank, at 30 September 2009 totalled £154.3 billion, a decline of 6% since the end of 2008. • In the SME segment, gross lending in the first nine months of 2009 was £28.5 billion. Demand

remains subdued, with credit applications down 26% by value 3Q09 compared with 3Q08. The acceptance rate across all categories of SME credit remains stable at 85%.

• The average interest rate on new lending to SMEs has fallen to 3.4% in the third quarter,

compared with 7.0% for 3Q08. In November 2008, we gave a promise not to increase small business customers’ overdraft pricing until the end of 2009 unless the risks associated with lending to them have increased. As a result, in the third quarter 94% of SME customers had overdrafts renewed at the same margin or lower.

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Business and strategic update (continued) UK Lending Commitments (continued) • SME repayments have accelerated as many business and commercial customers seek to

deleverage (term loan repayments are up 37% in 2009 year to date). • Overdraft utilisation rates across the SME and mid-corporate segments have remained low at 44%.

SME and mid-corporate customers still have access to undrawn committed facilities of more than £27 billion. Our SME Committed Overdraft promise ensures that customers’ committed facilities remain in place for at least 12 months.

• Significant marketing activity to reiterate an ‘Open for Business’ message and the success of the

Regional Funds programme has enabled balances to be held stable year to date. We have also recently launched a new Business Hotline which offers businesses, whether they are customers or not, a second opinion in cases where their lending proposition has been declined.

• Gross new lending to mid- and large corporates totalled £5.4 billion in the quarter, 13% lower than

the 2Q09 total, and £17.0 billion year to date. • Many larger corporates are actively deleveraging to repair their balance sheets. RBS has been a

significant player in facilitating access to the debt and equity markets for its larger clients. RBS has been bookrunner for circa £5 billion of the £55 billion of bond issuance by UK corporates and has been actively involved in circa £25 billion of equity issuance in the year to date. Much of this finance raised has been used to repay bank borrowing.

Notwithstanding the Group’s willingness to lend to creditworthy customers and our clarity that the requisite funds are available, thereby fulfilling our commitments, indications remain that it is unlikely that RBS’s net business lending will increase by the £16 billion that we are making available, in the light of the subdued demand we currently experience.

30 September

2008 31 December

2008 Gross lending

during 2009 Net lending during 2009

30 September 2009

£bn £bn £bn £bn £bn

Mortgages 79.2 80.1 13.9 8.6 88.7 Total Business 161.1 163.4 45.5 (9.1) 154.3 SME 67.4 68.0 28.5 (0.1) 67.9 Mid-corporate 48.5 49.3 11.2 (3.7) 45.6 Large corporate 45.2 46.1 5.8 (5.3) 40.8

Total Lending 240.3 243.5 59.4 (0.5) 243.0 Note: The above figures include Ulster Bank and Wealth lending and represent drawn balances, with the exception of Large Corporate numbers which are committed lending (as per RBS’s Lending Commitments agreement). Unsecured personal lending and non-UK lending are not included in the above data.

11

Business and strategic update (continued) Customer Accounts Crucial to the Group’s prospects for future success and return to standalone health is the resilience of its customer franchises. Except for the activities earmarked for restructuring, run-off or exit, RBS has sustained its customer market positions during the third quarter, with customer numbers steady or growing in all the Group’s major businesses. • UK Retail added 139,000 current account customers during the third quarter, with current account

numbers rising by 3% over the last year to 12.7 million at 30 September. Over 1 million savings accounts have been added over the last 12 months.

• UK Retail added 25,000 mortgage customers during the third quarter, taking mortgage customer

numbers to 826,000, 8% up on 3Q08. • Ulster Bank has held SME and corporate customer numbers stable over the last year and

increased consumer accounts by 4%, compared with 3Q08. • US Retail’s consumer customer base held steady during the quarter at 4.0 million. • RBS Insurance achieved strong growth in own brand policy numbers, both through direct brands

and through the bank branch channel. Direct own brand policies were up 11% in motor and 13% in home, compared with 3Q08. Bank channel home policies have risen 13% from 3Q08.

12

Summary consolidated income statement for the quarter ended 30 September 2009 – pro forma (unaudited) In the income statements set out below, amortisation of purchased intangible assets, gain on redemption of own debt, strategic disposals, write-down of goodwill and other intangible assets and integration and restructuring costs are shown separately. In the statutory condensed consolidated income statement on page 102, these items are included in income and operating expenses as appropriate. Data for 2008 have been restated for the amendment to IFRS 2 'Share-based Payment'. Quarter ended Nine months ended

30 September

2009 *30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Core

Net interest income* 3,030 3,111 3,432 9,357 10,242

Non-interest income (excluding insurance net premium income)* 2,996 2,799 2,940 12,160 7,924

Insurance net premium income 1,128 1,105 1,157 3,345 3,533

Non-interest income 4,124 3,904 4,097 15,505 11,457

Total income (1) 7,154 7,015 7,529 24,862 21,699 Operating expenses (2) (3,729) (3,638) (3,531) (11,474) (10,742)

Profit before other operating charges 3,425 3,377 3,998 13,388 10,957 Insurance net claims (1,019) (788) (764) (2,596) (2,353)

Operating profit before impairment losses 2,406 2,589 3,234 10,792 8,604 Impairment losses (1,213) (1,147) (512) (3,390) (1,184)

Operating profit (3) 1,193 1,442 2,722 7,402 7,420 Non-Core

Net interest income 231 211 404 764 1,095

Non-interest income (excluding insurance net premium income) (464) (1,301) 400 (4,354) (3,295)

Insurance net premium income 173 196 252 613 737

Non-interest income (291) (1,105) 652 (3,741) (2,558)

Total income (1) (60) (894) 1,056 (2,977) (1,463)Operating expenses (2) (466) (428) (529) (1,454) (1,711)

(Loss)/profit before other operating charges (526) (1,322) 527 (4,431) (3,174)Insurance net claims (126) (137) (170) (440) (508)

Operating (loss)/profit before impairment losses (652) (1,459) 357 (4,871) (3,682)Impairment losses (2,066) (3,516) (768) (7,410) (1,575)

Operating loss (3) (2,718) (4,975) (411) (12,281) (5,257)

For definitions of the notes see pages 16 and 17. * Certain income reported in other operating income in the interim results for the half year ended 30 June 2009 has been reclassified to net interest income. The reclassification amounted to £205 million and does not affect total income or operating profit. Further details are included in Appendix 5.

13

Summary consolidated income statement for the quarter ended 30 September 2009 – pro forma (unaudited) (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Total

Net interest income 3,261 3,322 3,836 10,121 11,337

Non-interest income (excluding insurance net premium income) 2,532 1,498 3,340 7,806 4,629 Insurance net premium income 1,301 1,301 1,409 3,958 4,270


Total income (1) 7,094 6,121 8,585 21,885 20,236 Operating expenses (2) (4,195) (4,066) (4,060) (12,928) (12,453)

Profit before other operating charges 2,899 2,055 4,525 8,957 7,783 Insurance net claims (1,145) (925) (934) (3,036) (2,861)

Operating profit before impairment losses (3) 1,754 1,130 3,591 5,921 4,922 Impairment losses (3,279) (4,663) (1,280) (10,800) (2,759)

Operating (loss)/profit (3) (1,525) (3,533) 2,311 (4,879) 2,163 Amortisation of purchased intangible assets (73) (55) (119) (213) (381)Integration and restructuring costs (324) (355) (289) (1,058) (605)Gain on redemption of own debt - 3,790 - 3,790 - Strategic disposals (155) 212 - 298 -

Operating (loss)/profit before tax (4) (2,077) 59 1,903 (2,062) 1,177 Tax 576 640 (724) 988 (421)

(Loss)/profit from continuing operations (1,501) 699 1,179 (1,074) 756 Loss from discontinued operations, net of tax (7) (13) (46) (65) (87)

(Loss)/profit for the period (1,508) 686 1,133 (1,139) 669 Minority interests (47) (83) (43) (601) (191)Preference share and other dividends (245) (432) (219) (791) (434)

(Loss)/profit attributable to ordinary shareholders before write-down of goodwill and other intangible assets (1,800) 171 871 (2,531) 44

Write-down of goodwill and other intangible assets - (311) - (311) -

(Loss)/profit attributable to ordinary shareholders (1,800) (140) 871 (2,842) 44

For definitions of the notes see pages 16 and 17.

14

Condensed consolidated statement of comprehensive income for the quarter ended 30 September 2009 (unaudited) – pro forma Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

(Loss)/profit for the period (1,508) 375 1,133 (1,450) 669 Other comprehensive income: Available-for-sale financial assets 2,861 1,319 (2,056) 1,228 (3,671)Cash flow hedges 155 277 (97) 676 (220)Currency translation 659 (2,262) 1,691 (1,788) 2,424 Tax on other comprehensive income (846) (154) 498 (438) 989

Other comprehensive income for the period, net of tax 2,829 (820) 36 (322) (478)

Total comprehensive income for the

period 1,321 (445) 1,169 (1,772) 191 Attributable to: Equity shareholders 1,243 (364) 1,135 (1,903) 199 Minority interests 78 (81) 34 131 (8)

1,321 (445) 1,169 (1,772) 191 Summary consolidated balance sheet at 30 September 2009 (unaudited) – pro forma

30 September

2009 30 June

2009 31 December

2008 £m £m £m

Loans and advances to banks 97,464 83,700 129,499 Loans and advances to customers 631,459 640,762 731,265 Debt securities and equity shares 268,111 243,279 275,357 Derivatives and settlement balances 581,100 579,134 1,009,307 Other assets 102,182 97,570 73,265

Total assets 1,680,316 1,644,445 2,218,693 Owners’ equity 56,666 55,666 58,879 Minority interests 2,185 2,123 5,436 Subordinated liabilities 33,085 32,106 43,678 Deposits by banks 178,400 179,743 262,609 Customer accounts 493,234 490,282 518,461 Derivatives, settlement balances and short positions 609,413 594,914 1,023,673 Other liabilities 307,333 289,611 305,957

Total liabilities and equity 1,680,316 1,644,445 2,218,693

15

Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

Performance ratios Return on equity - annualised (5) (11.2%) (26.6%) 9.8% (15.6%) 2.4%Net interest margin* 1.75% 1.70% 2.05% 1.74% 2.06%Cost:income ratio (6) 59.1% 66.4% 47.3% 59.1% 61.5%Adjusted cost:income ratio (7) 70.5% 78.3% 53.1% 68.6% 71.7%Continuing operations: Pre-impairment Core adjusted earnings per

ordinary share (8) 2.5p 2.6p 11.5p 15.1p 38.9p Core adjusted earnings per ordinary share (9) 1.0p 1.0p 9.5p 9.7p 33.0p Basic earnings per ordinary share (10) (3.2p) (0.2p) 5.6p (5.6p) 0.9p

* Net interest margin for the quarter ended 30 June 2009 has been revised. See Appendix 5.

30 September

2009 30 June


2008 Change

Capital and balance sheet Funded balance sheet (11) £1,127.8bn £1,088.6bn 4% £1,227.2bn (8%)Risk-weighted assets £594.7bn £547.3bn 9% £577.8bn 3%Core tier 1 ratio 5.5% 6.4% (90bp) 5.9% (40bp)Tier 1 ratio 8.0% 9.0% (100bp) 9.9% (190bp)Risk elements in lending (REIL) £35.0bn £30.7bn 14% £18.8bn 86%Risk elements in lending as a % of loans and

advances 5.74% 5.01% 73bp 2.66% 308bp Provision balance as % of REIL/PPLs 43% 44% (100bp) 50% (700bp)Loan:deposit ratio (gross of provisions) 142.3% 144.5% (220bp) 152.4% (1,010bp)Loan:deposit ratio (net of provisions) 138.8% 142.9% (410bp) 150.3% (1,150bp)Tier 1 leverage ratio (12) 23.4x 21.7x 8% 21.2x 10%Tangible equity leverage ratio (13) 3.0% 3.0% - 2.4% 60bpNet tangible equity per share 59.4p 58.0p 2% 73.8p (20%)

Notes:

(1) Excluding gain on redemption of own debt and strategic disposals.

(2) Excluding purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration and restructuring costs.

(3) (Loss)/profit before tax, purchased intangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals and write-down of goodwill and other intangible assets.

(4) Excluding write-down of goodwill and other intangible assets.

(5) (Loss)/profit from continuing operations attributable to ordinary shareholders adjusted for purchased intangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals and write-down of goodwill and other intangible assets divided by average ordinary shareholders equity.

(6) The cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above.

(7) The adjusted cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above and after netting insurance claims against income.

(8) (Loss)/profit from continuing operations attributable to ordinary shareholders adjusted for Non-Core operations, impairment losses, purchased intangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals and write-down of goodwill and other intangible assets divided by weighted average number of shares in issue.

16

Key metrics (continued) Notes (continued):

(9) (Loss)/profit from continuing operations attributable to ordinary shareholders adjusted for Non-Core operations, purchasedintangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals and write-down of goodwill and other intangible assets divided by weighted average number of shares in issue.

(10) (Loss)/profit from continuing operations attributable to ordinary shareholders divided by weighted average number of shares in issue.

(11) Funded balance sheet is defined as total assets less derivatives.

(12) The Tier 1 leverage ratio is based on total tangible assets (after netting derivatives) divided by Tier 1 capital.

(13) The tangible equity leverage ratio is based on total tangible equity divided by total tangible assets (after netting derivatives).

17

Results summary Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Net interest income £m £m £m £m £m


Net interest margin - Group 1.75% 1.70% 2.05% 1.74% 2.06%

- Global Banking & Markets 1.08% 1.48% 1.24% 1.52% 1.07%- Rest of Group 1.92% 1.77% 2.31% 1.80% 2.38%

Selected average balances: Loans and advances to banks 56,984 55,062 29,386 51,984 44,132 Loans and advances to customers 554,047 585,925 594,762 586,173 586,764 Debt securities 118,791 129,190 102,449 122,303 82,623 Interest earning assets 729,822 770,177 726,597 760,460 713,519 Deposits by banks 119,317 128,733 141,728 134,291 135,688 Customer accounts 350,298 359,539 373,805 360,224 386,955 Subordinated liabilities 35,922 33,813 37,311 36,130 33,827 Interest bearing liabilities 665,290 688,432 696,762 680,612 663,598 Non-interest bearing deposits 35,464 36,790 32,020 36,264 31,658 Selected average yields (%): Loans and advances to banks 1.38 1.85 5.69 1.74 4.66 Loans and advances to customers 3.35 4.07 6.03 3.77 6.00 Debt securities 2.98 2.96 6.04 3.45 5.53 Interest earning assets 3.13 3.72 4.51 3.58 5.86 Deposits by banks 1.92 2.23 4.19 2.33 4.41 Customer accounts 1.10 1.49 3.19 1.37 3.50 Subordinated liabilities 3.11 3.60 5.23 3.73 5.36 Interest bearing deposits 1.52 2.26 4.13 2.05 4.08

Non-interest bearing deposits as a percentage of interest earning assets 4.86 4.78 4.41 4.77 4.44

Key points • Net interest margin increased by 5 basis points in 3Q09 and declined by 30 basis points compared

with 3Q08. • GBM net interest margin declined due to lower money market income, partially offset by higher

margins on GBM banking assets. • UK Retail margin declined in the quarter as increased mortgage margins only partially offset

reduced deposit margins and adverse asset mix impacts. UK Corporate margins benefited from improved pricing on new loans, while the US Retail & Commercial margin increased slightly due to improved asset margins.

• For the near-term, margins are expected to be broadly stable as increased funding and liquidity

costs offset further asset margin improvements.

18

Results summary (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Non-interest income £m £m £m £m £m

Net fees and commissions 1,374 1,530 1,781 4,489 4,959

Income from trading activities 1,051 384 1,274 3,095 (2,067)

Other operating income 107 (416) 285 222 1,737

Non-interest income (excluding insurance premiums)* 2,532 1,498 3,340 7,806 4,629

Insurance net premium income 1,301 1,301 1,409 3,958 4,270

Total non-interest income 3,833 2,799 4,749 11,764 8,899 * Includes fair value of own debt impact (483) (960) 1,281 (412) 2,093 Key points 3Q09 versus 2Q09 • Net fees and commissions fell £156 million primarily due to declines in GBM (£71 million) due to

lower credit and equity market activity, UK Retail (£18 million) driven by payment protection insurance and US Retail & Commercial (£50 million) due to lower mortgage activity.

• Income from trading activities rose in 3Q09 principally due to lower credit market losses reflecting

improved valuations of super senior CDOs coupled with lower losses on CDS hedges. • Insurance net premium income was stable principally reflecting the continuation of the good

performance in the Group’s own brand sales. • Other operating income improved by £523 million primarily due to the movement in fair value of

own debt.

19


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Operating expenses £m £m £m £m £m

Staff costs 2,175 2,150 2,146 6,835 6,704 Premises and equipment 619 587 652 1,850 1,533 Other 943 915 787 2,904 2,907

Administrative expenses 3,737 3,652 3,585 11,589 11,144 Depreciation and amortisation 458 414 475 1,339 1,309

Operating expenses 4,195 4,066 4,060 12,928 12,453

General insurance 1,054 895 930 2,919 2,793 Bancassurance 91 30 4 117 68

Insurance net claims 1,145 925 934 3,036 2,861 Total staff expense as a percentage of total

income 30.7% 35.1% 25.0% 31.2% 33.1% Key points 3Q09 versus 2Q09 • Staff costs were up £25 million, largely reflecting an increase in resourcing of the Non-Core

division balanced by small reductions elsewhere as restructuring programmes start to take effect. • Premises and equipment costs rose by £32 million due to the cost of new completed buildings

coming on stream. • Other expenses rose £28 million principally as a result of a one-off recovery of legal fees in 2Q09. • General insurance claims rose by £159 million primarily because of higher estimated costs of

bodily injury claims within our motor lines of business. • Bancassurance claims rose by £61 million due to increased returns on investments being passed

on to customers.

20

Results summary (continued) Quarter ended Nine months ended 30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Impairment losses £m £m £m £m £m

Impairment losses by division UK Retail 404 470 287 1,228 727 UK Corporate 187 450 55 737 150 Wealth 1 16 3 23 8 Global Banking & Markets 272 (31) 2 510 20 Global Transaction Services 22 4 7 35 14 Ulster Bank 144 90 17 301 35 US Retail & Commercial 180 146 134 549 260 RBS Insurance 2 1 - 8 - Central items 1 1 7 (1) (30)

Core 1,213 1,147 512 3,390 1,184 Non-Core 2,066 3,516 768 7,410 1,575

3,279 4,663 1,280 10,800 2,759 Analysis of impairment losses by asset

category Loans and advances 3,262 4,520 1,023 10,058 2,429 Available-for-sale securities 17 143 257 742 330

3,279 4,663 1,280 10,800 2,759

Loan impairment charge as % of gross loans

and advances excluding reverse repurchase agreements 2.14% 2.98% 0.64% 2.21% 0.51%

Key points 3Q09 versus 2Q09 • Impairment losses were £3,279 million compared to £4,663 million. Impairment losses in the Core

divisions increased by £66 million sequentially, while Non-Core losses declined by £1,450 million. • In the Core businesses, the biggest increase relates to a sizeable individual loss in GBM.

Increases were also seen in Ulster Bank and US Retail & Commercial reflecting the difficult economic environment. Partially offsetting these increases were declines in UK Retail and UK Corporate as credit trends currently appear to be stabilising around 1H09 levels.

• Non-Core losses were lower in the quarter with reduced charges in UK corporate and GBM

portfolios, which included a number of large, single name impairments in the second quarter. Ulster Bank’s Non-Core impairments have increased materially as its market has continued to deteriorate.

• Impairment losses overall appear to be stabilising compared with the first half of 2009, although

they are expected to remain at elevated levels for the next few quarters as non-performing loans have continued to rise, and economic recovery looks to be gradual.

21


30 September

200930 June

2009 30 September

2008 30 September

2009 30 September

2008 Credit and other market losses* £m £m £m £m £m

Monoline exposures 106 7 109 1,653 2,229 CDPCs 276 371 162 846 241 Super senior CDOs (148) 151 - 389 1,892 US mortgages - - 172 - 1,310 Leveraged finance - - 36 - 899 CLO’s 1 - 69 1 182 Other credit exotics 46 (15) (130) 588 231 Equities 12 13 132 34 168 Other 55 51 (78) 97 (142)

348 578 472 3,608 7,010 CDS Hedging 426 816 (367) 1,465 (568)

774 1,394 105 5,073 6,442 * Included in ‘Income from trading activities’ on page 19. Key points 3Q09 versus 2Q09 • Credit and other market write-downs were substantially lower in the third quarter, down from

£1,394 million to £774 million with the widening in monoline spreads more than offset by reduced losses on CDS hedging and CDPCs.

Further analysis of these credit market losses and exposures is contained in the Risk and Capital Management section, pages 76 to 100.

22


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Other non-operating items £m £m £m £m £m

Amortisation of purchased intangible assets (73) (55) (119) (213) (381)Integration and restructuring costs (324) (355) (289) (1,058) (605)Gain on redemption of own debt - 3,790 - 3,790 - Strategic disposals (155) 212 - 298 -

(552) 3,592 (408) 2,817 (986)

Key points 3Q09 versus 2Q09 • Integration and restructuring costs totalled £324 million in 3Q09 (2Q09 - £355 million) with

reduced ABN AMRO integration activity offset by increased restructuring activity as strategic plans are implemented. We expect an increase in 4Q09 as our restructuring plans move to a higher degree of implementation.

• In 2Q09 the Group posted a gain of £3,790 million on a liability management exercise to redeem a

number of Tier 1 and upper Tier 2 securities. In 3Q09 the Group recorded a loss of £155 million from Non-Core disposals, primarily relating to our Retail and Commercial Asian businesses.

23

Results summary (continued)

Capital resources and ratios 30 September

200930 June

200931 December

2008

Core Tier 1 £33.0bn £35.2bn £34.0bn

Tier 1 £47.6bn £49.4bn £57.1bn

Total capital £62.1bn £64.0bn £82.2bn

RWAs £594.7bn £547.3bn £577.8bn

Core Tier 1 ratio 5.5% 6.4% 5.9%

Tier 1 ratio 8.0% 9.0% 9.9%

Total capital ratio 10.4% 11.7% 14.2%

Pro forma Core Tier 1 ratio 11.1% 12.5% Key points • The RWA increase relative to 2Q09 of £47.4 billion is principally due to the effect of procyclicality

of £33 billion (of which £22.2 billion is due to lower credit ratings for Monolines), increase in market risk, £6 billion, and the effect of exchange rate movements, £9.3 billion.

• The RWA increase relative to 4Q08 of £16.9 billion stems primarily from the effect of procyclicality

of £69 billion (of which £22 billion is due to lower credit ratings for Monolines), increase in market risk £16 billion offset by reductions due to de-leveraging of £47 billion and the effect of exchange rate movements, £19 billion.

• Core Tier 1 capital fell by £2.2 billion principally reflecting the attributable loss of £1.8 billion and

increased deductions due to higher expected losses and other regulatory adjustments of £0.4 billion.

• As a consequence of the above factors, Core Tier 1 capital ratio fell by 0.9% to 5.5%, and Tier 1

capital ratio by 1% to 8%. Pro-forma for B share issuance and APS cover, these ratios would be 11.1% and 14.5%, respectively.

• In 2010, ABN AMRO will move from an adjusted Basel I methodology to Basel II, which is

expected to result in an increase in RWAs.

24

Results summary (continued)

Balance sheet 30 September

200930 June

200931 December

2008

Total assets £1,680.3bn £1,644.4bn £2,218.7bn

Loans and advances to customers £631.5bn £640.8bn £731.3bn

Customer accounts £493.2bn £490.3bn £518.5bn

Loan:deposit ratio (gross of provisions) 142.3% 144.5% 152.4%

Loan:deposit ratio (net of provisions) 138.8% 142.9% 150.3%

Total wholesale funding £437.9bn £416.4bn £492.1bn Key points • Total assets and funded assets are up 2% and 4% respectively, primarily due to currency

movements. On a constant currency basis, total assets were broadly flat. Continuing Non-Core asset reductions of £12 billion, at constant currency, were offset by small growth elsewhere.

• The loan:deposit ratio (gross of provisions) has improved by 220 basis points to 142.3%, due to

deposits, excluding repos, increasing by £9 billion and loans, excluding reverse repos, falling by £5 billion.

A further analysis of our funding and liquidity positions is contained on pages 83 to 86 of the document.

25

Divisional performance The operating profit/(loss) of each division before amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gain on redemption of own debt and strategic disposals is shown below. Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Operating profit before impairment losses by division

UK Retail 468 490 420 1,329 1,361 UK Corporate 566 535 523 1,522 1,613 Wealth 120 134 103 354 287 Global Banking & Markets 647 1,116 616 5,608 1,699 Global Transaction Services 275 269 275 784 771 Ulster Bank 59 78 98 208 288 US Retail & Commercial 137 136 236 455 653 RBS Insurance 13 142 150 236 450 Central items 121 (311) 813 296 1,482

Core 2,406 2,589 3,234 10,792 8,604 Non-Core (652) (1,459) 357 (4,871) (3,682)

Group operating profit before impairment losses 1,754 1,130 3,591 5,921 4,922

Included in the above are movements in fair value of own debt of:

Global Banking & Markets (320) (482) 648 (155) 1,232 Central items (163) (478) 633 (257) 861

(483) (960) 1,281 (412) 2,093 Impairment losses by division UK Retail 404 470 287 1,228 727 UK Corporate 187 450 55 737 150 Wealth 1 16 3 23 8 Global Banking & Markets 272 (31) 2 510 20 Global Transaction Services 22 4 7 35 14 Ulster Bank 144 90 17 301 35 US Retail & Commercial 180 146 134 549 260 RBS Insurance 2 1 - 8 - Central items 1 1 7 (1) (30)

Core 1,213 1,147 512 3,390 1,184 Non-Core 2,066 3,516 768 7,410 1,575

Group impairment losses 3,279 4,663 1,280 10,800 2,759

Key point Operating profit in the divisions before impairment losses, adjusted for movement in fair value of own debt was £2,237 million in 3Q09. This compares with £2,090 million in 2Q09 (increase of 7% sequentially) and £2,310 million in 3Q08 (down 3% year on year).

26

Divisional performance (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Operating profit/(loss) by division UK Retail 64 20 133 101 634 UK Corporate 379 85 468 785 1,463 Wealth 119 118 100 331 279 Global Banking & Markets 375 1,147 614 5,098 1,679 Global Transaction Services 253 265 268 749 757 Ulster Bank (85) (12) 81 (93) 253 US Retail & Commercial (43) (10) 102 (94) 393 RBS Insurance 11 141 150 228 450 Central items 120 (312) 806 297 1,512

Core 1,193 1,442 2,722 7,402 7,420 Non-Core (2,718) (4,975) (411) (12,281) (5,257)

Group operating (loss)/profit (1,525) (3,533) 2,311 (4,879) 2,163

30 September

200930 June


2008 Change £bn £bn % £bn %

Risk-weighted assets by division UK Retail 51.6 54.0 (4) 45.7 13 UK Corporate 91.0 89.5 2 85.7 6 Wealth 10.7 10.3 4 10.8 (1)Global Banking & Markets 131.9 122.4 8 162.4 (19)Global Transaction Services 18.9 16.7 13 17.4 9 Ulster Bank 28.5 26.2 9 24.5 16 US Retail & Commercial 62.8 55.6 13 63.9 (2)Other 9.0 8.5 6 7.1 27

Core 404.4 383.2 6 417.5 (3)Non-Core 190.3 164.1 16 160.3 19

Total 594.7 547.3 9 577.8 3

27

UK Retail Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Income statement £m £m £m £m £m

Net interest income 848 868 821 2,513 2,331

Net fees and commissions - banking 303 321 365 961 1,179 Other non-interest income (net of insurance

claims) 69 69 34 191 173

Non-interest income 372 390 399 1,152 1,352

Total income 1,220 1,258 1,220 3,665 3,683

Direct expenses - staff (206) (214) (243) (634) (688)- other (99) (102) (109) (316) (320)Indirect expenses (447) (452) (448) (1,386) (1,314)

(752) (768) (800) (2,336) (2,322)

Operating profit before impairment losses 468 490 420 1,329 1,361 Impairment losses (404) (470) (287) (1,228) (727)

Operating profit 64 20 133 101 634 Analysis of income by product: Personal advances 303 311 310 919 948 Personal deposits 319 354 557 1,070 1,567 Mortgages 319 273 93 799 314 Bancassurance 69 69 34 190 166 Cards 225 212 205 641 623 Other (15) 39 21 46 65

Total income 1,220 1,258 1,220 3,665 3,683 Analysis of impairment by sector: Mortgages 26 41 9 89 22 Personal 247 299 144 741 399 Cards 131 130 134 398 306

Total impairment 404 470 287 1,228 727 Loan impairment charge as % of gross

customer loans and advances by sector Mortgages 0.13% 0.21% 0.05% 0.15% 0.04%Personal 6.81% 8.31% 3.76% 6.81% 3.48%Cards 8.59% 8.52% 8.25% 8.70% 6.28%

1.60% 1.94% 1.23% 1.62% 1.04%

28

UK Retail (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

Performance ratios Return on equity (1) 4.6% 1.4% 9.4% 2.4% 15.0%Net interest margin 3.47% 3.69% 3.62% 3.54% 3.52%Cost:income ratio 57.4% 59.6% 65.4% 61.8% 61.9%

30 September

200930 June



Capital and balance sheet Loans and advances to customers – gross - mortgages 80.3 76.6 5 72.2 11 - personal 14.5 14.4 1 15.3 (5)- cards 6.1 6.1 - 6.3 (3)Customer deposits (excluding

bancassurance) 85.6 83.4 3 78.9 8 Assets under management – excluding

deposits 5.0 4.7 6 5.7 (12)Risk elements in lending 4.7 4.5 4 3.8 24 Loan:deposit ratio (excluding repos) 117.8% 116.4% 139bp 119.0% (120bp)Risk-weighted assets 51.6 54.0 (4) 45.7 13 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Operating profit of £64 million in 3Q09 was up from the previous quarter, with lower income more

than offset by reduced costs and impairment charges. • Our focus in 2009 has been to grow secured lending to meet our Government commitments and

at the same time to build customer deposits, reducing the Group’s reliance on wholesale funding. o Mortgage balances were up 5% sequentially or 11% compared with end December 2008, with

good retention of existing customers and new business sourced predominantly from the existing customer base. Gross mortgage market share increased to 12.0% from 10.5% in 2Q09, and the Group is on track to deliver its commitments to the Government on net lending. Unsecured lending is flat compared with 2Q09 as the Group continued to focus on lower risk secured lending.

o Deposit growth remained strong, with balances up 3% on 2Q09 or 8% compared with end 2008. Savings balances were up 8% on end 2008, outperforming the market despite an increasingly competitive environment, while personal current account balances were up 10% over the same period, with a 2% growth in accounts.

29

UK Retail (continued) Key points (continued) • Net interest margin declined by 22 basis points in 3Q09 but remains stable year to date.

o At the product level lending margins widened further in the quarter, although the growth in mortgages and the reduction in unsecured balances led to a drop in the blended total asset margin.

o Liability margins decreased, as competition on savings accounts increased and as the interest rate hedges established in a higher rate environment began to roll off.

• Fee income fell by 5% from the previous quarter, reflecting a provision taken on payment

protection insurance and weak activity levels in cards. Year to date, fees are down 15%. As a result of the change in the structure of overdraft administration charges, an annual reduction in fee income of approximately £270 million is anticipated, which will impact results from October 2009.

• Expenses decreased a further 2% over 2Q09, and are now showing a 6% reduction against 3Q08.

As the benefits of process re-engineering and technology investment start to flow through, headcount has been reduced by over 3%, with a cumulative reduction of 9% on prior year. Year to date costs are up less than 1%, despite higher deposit insurance levies.

• RBS continues to progress towards a more convenient, lower cost operating model, with over 4

million active users of online banking and a record share of new sales achieved through direct channels. More than 2.4 million accounts have switched to paperless statements and over 218 branches now utilise automated cash deposit machines.

• Impairment losses were 14% lower than in 2Q09, which had recorded a sharp rise in provisions to

reflect the reduction in expected cash recoveries. We anticipate that the level of impairment charge will resume its upward trajectory, peaking in the middle of 2010. o Mortgage impairments were £26 million on a total book of £80.3 billion. Arrears rates show

little increase and remain well below the industry average, as reported by the Council of Mortgage Lenders. Repossessions have shown only a small increase in 3Q09 as we continue to support customers facing financial difficulty.

o Unsecured impairment charges amounted to £378 million in the quarter, on a book of £20.6 billion. Industry benchmarks for cards arrears indicate a flattening trend, with RBS continuing to perform better than the market.

• Risk-weighted assets declined by £2.4 billion in the quarter as the impacts of volume growth were offset by a reduction in through-the-cycle loss given default for mortgages. RWAs grew by 13% compared with 31 December 2008.

30

UK Corporate Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September



Net fees and commissions 223 219 222 636 614 Other non-interest income 106 109 114 332 353

Non-interest income 329 328 336 968 967

Total income 936 888 954 2,634 2,827

Direct expenses - staff (174) (182) (206) (541) (591)- other (71) (46) (96) (191) (245)Indirect expenses (125) (125) (129) (380) (378)

(370) (353) (431) (1,112) (1,214)

Operating profit before impairment losses 566 535 523 1,522 1,613 Impairment losses (187) (450) (55) (737) (150)

Operating profit 379 85 468 785 1,463 Analysis of income by business: Corporate and commercial lending 616 586 542 1,740 1,637 Asset and invoice finance 59 57 60 164 188 Corporate deposits 241 263 342 794 928 Other 20 (18) 10 (64) 74

Total income 936 888 954 2,634 2,827 Analysis of impairment by sector: Manufacturing 7 17 5 28 15 Housebuilding and construction 58 55 6 119 11 Property 69 149 11 229 18 Asset and invoice finance 4 47 24 72 61 Other 49 182 9 289 45

Total impairment 187 450 55 737 150 Loan impairment charge as % of gross

customer loans and advances (excluding reverse repurchase agreements) by sector:

Manufacturing 0.56% 1.36% 0.41% 0.75% 0.41%Housebuilding and construction 4.64% 4.40% 0.41% 3.17% 0.25%Property 0.92% 1.81% 0.15% 1.02% 0.08%Asset and invoice finance 0.18% 2.09% 1.13% 1.07% 0.96%Other 0.30% 1.20% 0.06% 0.59% 0.09%

0.66% 1.60% 0.19% 0.86% 0.18%

31

UK Corporate (continued)


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008


30 September

2009 30 June



Capital and balance sheet Total assets 117.3 116.2 1 121.0 (3)Loans and advances to customers – gross - Manufacturing 5.0 5.0 - 5.4 (7)- Housebuilding and construction 5.0 5.0 - 5.9 (15)- Property 30.0 33.0 (9) 30.5 (2)- Asset and invoice finance 9.0 9.0 - 8.5 6 - Other 64.9 60.6 7 66.6 (3)Customer deposits 86.7 85.6 1 82.0 6 Risk elements in lending 2.5 2.4 4 1.3 92 Loan:deposit ratio 131.4% 131.6% (16bp) 142.7% (1,130bp)Risk-weighted assets 91.0 89.5 2 85.7 6 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Net interest margin increased by 21 basis points from the second quarter of 2009, as lending rates

have been repriced upwards to reflect the Group’s increased cost of funding. NIM year to date remains 33 basis points lower than in the prior year, reflecting this increase in funding costs and the highly competitive market for deposits.

• Loans and advances to customers have increased by £1.3 billion from 2Q09, but demand for

credit remains subdued and repayments have accelerated, leaving balances down 3% from year-end 2008.

• Deposits have grown steadily over the course of 2009 and increased by £1.1 billion during 3Q09

reflecting a range of initiatives undertaken to defend and grow the deposit base. • Non-interest income has remained resilient despite a slightly lower level of cross-sales of GBM

products in the quarter, benefiting from early repayment fees as customers seek to deleverage.

32

UK Corporate (continued)

Key points (continued) • Costs reduced slightly in 3Q09, excluding the benefit of a £19 million legal fee recovery in the prior

quarter. Year to date costs are down 8%, as initiatives within the Group-wide cost reduction programme continue to deliver savings on headcount and non-staff costs.

• Impairments were reduced from 2Q09, which included a substantial increase in provisions to

reflect deteriorating economic conditions. Year to date impairments remain substantially higher than in the same period of 2008, with the charge biased towards the house building, property and construction sectors.

• Risk-weighted assets increased by 2% compared with 2Q09, partly reflecting additional lending

volumes, but also resulting from the effect of deteriorating economic conditions on risk weightings.

33

Wealth Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Net interest income 168 176 153 502 418



Total income 279 287 270 835 784


(159) (153) (167) (481) (497)

Operating profit before impairment losses 120 134 103 354 287 Impairment losses (1) (16) (3) (23) (8)

Operating profit 119 118 100 331 279 Analysis of income: Private Banking 232 242 211 693 598 Investments 47 45 59 142 186

Total income 279 287 270 835 784

34

Wealth (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

Performance ratios Net interest margin 4.34% 4.82% 4.68% 4.54% 4.50%Cost:income ratio 57.0% 53.3% 61.9% 57.6% 63.4%

30 September

2009 30 June



Capital and balance sheet Loans and advances to customers – gross - mortgages 6.1 5.6 9 5.3 15 - personal 4.8 4.7 2 5.0 (4)- other 2.5 2.1 19 2.1 19 Customer deposits 36.3 35.3 3 34.1 6 Assets under management – excluding

deposits 31.7 29.8 6 34.7 (9)Risk elements in lending 0.2 0.2 - 0.1 100 Loan:deposit ratio 36.9% 35.2% 172bp 36.3% 60bpRisk-weighted assets 10.7 10.3 4 10.8 (1)

Key points • Deposits showed modest growth from 2Q09, mainly in the UK, and balances have now returned to

the same level as at the end of 3Q08. Continued pressure on deposit margins, including a reduction in internal pricing applied to the Wealth deposit base, resulted in a decline in net interest income.

• Assets under management rose 6% compared with 2Q09 reflecting improved market conditions, but continuing lack of investor appetite to commit to longer term investments and a preference for lower return and more liquid assets has left AUM 9% lower than at the end of 2008, with a resulting impact on fee income.

• Loans and advances increased by 8% compared with the prior quarter, and by 8% against 31 December 2008, with lending margins continuing to improve. Loan growth has come primarily in the UK, where Wealth remains on track to achieve its share of the Group’s UK lending commitments.

• Expenses in 3Q09 were marginally higher than in 2Q09, which had benefited from changes to remuneration policy, including bonus deferral. 3Q09 expenses were slightly below the prior year quarter, benefiting from a 9% reduction in headcount versus a year ago.

35

Global Banking & Markets Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Net interest income from banking activities 447 660 535 1,919 1,386

Net fees and commissions receivable 338 409 405 1,038 1,030 Income from trading activities 1,184 1,338 760 6,851 2,942 Other operating income (net of related

funding costs) (110) (97) (22) (300) (83)


Total income 1,859 2,310 1,678 9,508 5,275

Direct expenses - staff (760) (762) (618) (2,523) (2,204)- other (261) (231) (284) (792) (911)Indirect expenses (191) (201) (160) (585) (461)

(1,212) (1,194) (1,062) (3,900) (3,576)

Operating profit before impairment losses 647 1,116 616 5,608 1,699 Impairment losses (272) 31 (2) (510) (20)

Operating profit 375 1,147 614 5,098 1,679 Analysis of income by product: Rates - money markets 287 466 384 1,606 893 Rates - flow 694 536 - 2,527 1,370 Currencies 141 384 417 1,083 1,091 Commodities 120 239 47 587 396 Equities 282 364 21 1,017 582 Credit markets 475 690 (105) 2,023 (1,094)Portfolio management and origination 180 113 266 820 805 Fair value of own debt (320) (482) 648 (155) 1,232

Total income 1,859 2,310 1,678 9,508 5,275 Analysis of impairment by sector: Manufacturing and infrastructure 33 23 - 72 - Property and construction - 4 - 50 12 Transport 2 1 - 3 - Banks and financial institutions 237 39 - 280 (8)Other - (98) 2 105 16

Total impairment 272 (31) 2 510 20

Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) 0.60% (0.11%) - 0.48% 0.02%

36

Global Banking & Markets (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008


30 September

2009 30 June



Capital and balance sheet Loans and advances (including banks) 157.0 156.0 1 225.5 (30)Reverse repos 75.4 75.2 - 88.8 (15)Securities 117.6 115.5 2 127.5 (8)Cash and eligible bills 63.8 51.5 24 20.2 216 Other 50.8 46.2 10 42.9 18

Total third party assets (excluding derivatives mark to market) 464.6 444.4 5 504.9 (8)

Net derivative assets (after netting) 81.5 70.7 15 113.0 (28)Customer deposits (excluding repos) 58.1 65.0 (11) 88.6 (34)Risk elements in lending 1.6 1.1 49 0.7 112 Loan:deposit ratio 192.4% 182.7% 962bp 192.0% 40bpRisk-weighted assets 131.9 122.4 8 162.4 (19) Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 10% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Income fell 20% from the strong second quarter, but year to date income is up 80% relative to the

same period of 2008. Rates flow business remained very strong, benefiting from good client activity, with income up 29% versus 2Q09 and 84% year to date. Currencies income declined, with no repeat of the favourable market conditions of the first half. Commodities and equities were down on 2Q09 but remain well ahead of the previous year, with core equities growth driven by a strong equity capital markets performance.

• Credit markets income was down 31% versus the second quarter but remains strongly improved

from the comparable period of 2008, with performance benefiting from greater liquidity and a more positive trading environment driving increased activity, particularly in the US liquid mortgage trading business.

• Expenses remain tightly controlled, with total expenses for the quarter up 2% on 2Q09 and staff

costs flat. Year to date expenses are up 9% on prior year, reflecting the inclusion of Sempra for the full nine months in 2009 and the impact of adverse exchange rate movements, partly offset by restructuring and efficiency benefits.

37

Global Banking & Markets (continued) Key points (continued) • Impairments of £272 million for the quarter included a large individual failure. Year to date

impairments were £510 million, representing 0.48% of loans and advances to customers compared with 0.02% in the prior year.

• Losses of £320 million were incurred in the third quarter on the fair value of own debt, as the

Group’s credit spreads tightened further. In 3Q08 widening spreads led to a gain being booked. • Total third party assets excluding derivatives (TPAs) were up 1% at constant exchange rates from

2Q09, with most of the growth in cash and liquid bills. Compared with 31 December 2008 TPAs have been reduced by 8%, as asset inventories have been run down. Risk-weighted assets increased by 8% during the quarter, or 5% at constant exchange rates, reflecting the roll-off of relief trades. RWAs at 30 September 2009 are 19% down from 31 December 2008, or 16% at constant exchange rates, reflecting the Group’s focus on reducing its risk profile and balance sheet usage.

38

Global Transaction Services Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Net interest income 234 225 244 679 688 Non-interest income 388 398 375 1,171 1,087

Total income 622 623 619 1,850 1,775


(347) (354) (344) (1,066) (1,004)


Operating profit 253 265 268 749 757 Analysis of income by product: Domestic cash management 202 204 203 608 585 International cash management 183 179 179 531 522 Trade finance 71 77 60 223 171 Merchant acquiring 134 131 147 394 409 Commercial cards 32 32 30 94 88

Total income 622 623 619 1,850 1,775

39

Global Transaction Services (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

Performance ratios Net interest margin 9.63% 9.23% 8.54% 9.03% 8.35%Cost:income ratio 55.8% 56.8% 55.6% 57.6% 56.6%

30 September

2009 30 June



Capital and balance sheet Total third party assets 21.4 19.4 10 22.2 (4)Loans and advances 14.5 13.5 7 14.8 (2)Customer deposits 58.6 54.0 9 61.8 (5)Risk elements in lending 0.2 0.1 - 0.1 - Loan:deposit ratio 25.6% 25.9% (29bp) 25.1% 50bpRisk-weighted assets 18.9 16.7 13 17.4 9 Key points • Operating profit was resilient overall, declining by 5% or 2% at constant foreign exchange rates

compared with 2Q09, as a result of modest impairments, offset by slightly improved income and costs.

• Income increased 2% in the quarter at constant foreign exchange rates. Liability margins

remained compressed in the low interest rate environment and there was a reduction in trade finance volumes and pricing.

• Cash Management performance for the nine months to 30 September 2009 was robust, with

deposits up 9% during the quarter supported by additional mandates from new and existing clients, offset by liability margin compression, although balances remained below year-end 2008 levels.

• Global Merchant Services saw improving transaction volumes and turnover, offset by reduced

margins resulting in part from the continued customer migration from credit to debit cards. • There was a reduction in Trade Finance volumes in 3Q09 and some softening of previous

repricing to account for risk; however, income was up 11% year to date at constant foreign exchange rates.

• Expenses were tightly controlled and down 1% on 2Q09 at constant foreign exchange rates, with

modest movements in transaction-related and indirect costs, and were flat year to date. • Modest impairment losses arose as a result of a small number of defaults in Trade Finance and

Cash Management. Overall impairments year to date remain small, at 0.3% of loans and advances.

40

Ulster Bank


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Net interest income 176 208 207 586 599

Net fees and commissions 45 39 69 130 178 Other non-interest income 10 12 - 33 34


Total income 231 259 276 749 811


(172) (181) (178) (541) (523)


Operating (loss)/profit (85) (12) 81 (93) 253 Analysis of income by business: Corporate 134 138 160 434 479 Retail 104 101 107 298 304 Other (7) 20 9 17 28

Total income 231 259 276 749 811 Analysis of impairment by sector: Mortgages 30 10 5 54 13 Corporate 87 66 3 193 1 Other 27 14 9 54 21



Mortgages 0.72% 0.25% 0.13% 0.43% 0.11%Corporate 1.59% 1.23% 0.06% 1.18% 0.01%Other 5.40% 3.50% 1.61% 3.60% 1.27%

1.42% 0.92% 0.18% 0.99% 0.13%

41

Ulster Bank (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

Performance ratios Return on equity (1) (12.7%) (2.0%) 17.3% (4.6%) 18.0%Net interest margin 1.74% 2.03% 2.04% 1.88% 1.96%Cost:income ratio 74.5% 69.9% 64.5% 72.2% 64.5%

30 September

2009 30 June



Capital and balance sheet Loans and advances to customers – gross - mortgages 16.7 16.0 4 18.1 (8)- corporate 21.9 21.2 3 23.8 (8)- other 2.0 1.8 11 2.1 (5)Customer deposits 20.9 18.9 11 24.3 (14)Risk elements in lending - mortgages 0.5 0.4 25 0.3 67 - corporate 1.3 1.1 18 0.8 63 - other 0.2 0.1 100 0.1 100 Loan:deposit ratio 194.0% 206.3% (1,237bp) 181.1% 1,291bpRisk-weighted assets 28.5 26.2 9 24.5 16 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Deteriorating operating results largely reflect increased impairment losses and funding costs,

against the backdrop of difficult economic conditions across the island of Ireland. • Net interest margin was 29 basis points lower in the quarter and 8 basis points lower year to date.

The benefits of asset repricing initiatives have been offset by the increased cost of acquiring and retaining customer deposits. Year to date, net interest income declined by 12% in constant currency terms.

• At constant exchange rates, loans to customers declined by 2% compared with 2Q09 and by 4%

compared with December 2008, reflecting a reduction in new business demand, partially offset by lower redemption levels. Customer deposits rose by 5% in the quarter on a constant currency basis, reflecting the continued focus on improving the Bank’s funding profile, with balances 11% lower than December 2008, on the same basis, due to strong competition from institutions covered by the Irish Government guarantee scheme.

• Year to date, non-interest income has fallen by 28% from the prior year at constant currency rates,

driven by reduced activity levels across all business lines, most notably in Bancassurance and Capital Markets.

42

Ulster Bank (continued) Key points (continued) • Ulster Bank continues to implement its restructuring programme, resulting in a 4% decrease in

costs in constant currency terms compared with 2Q09, and this trend is expected to continue into 2010. The programme will encompass the merger of the First Active and Ulster Bank businesses and other cost management initiatives across the group. Total costs year to date are down 2% versus prior year on a constant currency basis.

• Impairment charges increased to £144 million for the quarter, driven by the continued deterioration

in the Irish economic environment and resultant impact on credit risk metrics, particularly in property-related lending. Year to date impairment charges of £301 million are significantly higher than the prior year.

• Customer account numbers increased by 3% compared with 3Q08, with growth fuelled by strong

current account activity and new-to-bank savings customers.

43

US Retail & Commercial (£ Sterling) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September





Total income 634 702 640 2,080 1,808


(497) (566) (404) (1,625) (1,155)


Operating (loss)/profit (43) (10) 102 (94) 393 Analysis of income by product: Mortgages and home equity 112 130 88 384 263 Personal lending and cards 116 113 86 336 243 Retail deposits 200 202 256 633 721 Commercial lending 127 140 98 408 277 Commercial deposits 97 89 97 290 266 Other (18) 28 15 29 38

Total income 634 702 640 2,080 1,808 Average exchange rate – US$/£ 1.640 1.551 1.892 1.543 1.948

44

US Retail & Commercial (£ Sterling) (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m Analysis of impairment by sector: Residential mortgages 29 12 16 64 28 Home equity 82 43 20 154 45 Corporate & Commercial 65 61 54 234 94 Other consumer 4 30 44 97 93



Residential mortgages 1.68% 0.66% 0.74% 1.24% 0.43%Home equity 2.05% 1.08% 0.53% 1.28% 0.40%Corporate & Commercial 1.27% 1.19% 1.11% 1.53% 0.65%Other consumer 0.20% 1.45% 2.17% 1.64% 1.53%

1.41% 1.12% 1.04% 1.43% 0.68%

45

US Retail & Commercial (£ Sterling) (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Performance ratios Return on equity (1) (2.5%) (0.7%) 7.4% (1.9%) 9.5%Net interest margin 2.34% 2.30% 2.79% 2.32% 2.67%Cost:income ratio 78.4% 80.6% 63.1% 78.1% 63.8%

30 September

2009 30 June



Capital and balance sheet Total assets 76.9 75.6 2 87.5 (12)Loans and advances to customers (gross): - Residential mortgages 6.9 7.3 (5) 9.5 (27)- home equity 16.0 15.9 1 18.7 (14)- corporate and commercial 20.5 20.5 - 23.7 (14)- other consumer 7.8 8.3 (6) 9.8 (20)Customer deposits 62.1 60.2 3 64.4 (4)Risk elements in lending - retail 0.3 0.3 - 0.2 50 - commercial 0.2 0.1 - 0.2 - Loan:deposit ratio 82.6% 86.7% (410bp) 96.6% (1,400bp)Risk-weighted assets 62.8 55.6 13 63.9 (2) Spot exchange rate - US$/£ 1.599 1.644 1.460 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Sterling has weakened over the course of the quarter, and the average exchange rate in 3Q09

reflects a 6% appreciation of the dollar. As a result, weak income and profit trends have been exacerbated in sterling terms.

• Variances are fully described in the US dollar based financials that follow.

46

US Retail & Commercial (US Dollar) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Income statement $m $m $m $m $m



Non-interest income 370 393 377 1,122 1,157

Total income 1,050 1,089 1,211 3,209 3,520


(821) (877) (766) (2,505) (2,249)

Operating profit before impairment losses 229 212 445 704 1,271 Impairment losses (296) (231) (258) (847) (507)

Operating (loss)/profit (67) (19) 187 (143) 764 Analysis of income by product: Mortgages and home equity 186 203 166 593 512 Personal lending and cards 190 174 164 518 474 Retail deposits 329 315 483 976 1,402 Commercial lending 210 217 186 629 540 Commercial deposits 160 138 185 448 519 Other (25) 42 27 45 73

Total income 1,050 1,089 1,211 3,209 3,520

47

US Retail & Commercial (US Dollar) (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 $m $m $m $m $m Analysis of impairment by sector: Residential mortgages 47 19 30 99 54 Home equity 131 65 37 238 87 Corporate & Commercial 107 99 106 360 184 Other consumer 11 48 85 150 182



Residential mortgages 1.69% 0.63% 0.77% 1.19% 0.46%Home equity 2.05% 1.00% 0.55% 1.24% 0.43%Corporate & Commercial 1.31% 1.18% 1.23% 1.47% 0.71%Other consumer 0.34% 1.41% 2.36% 1.60% 1.69%

1.45% 1.08% 1.13% 1.38% 0.74%

48

US Retail & Commercial (US Dollar) (continued) Key metrics Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 Performance ratios Return on equity (1) (2.5%) (0.8%) 7.6% (1.8%) 10.3%Net interest margin 2.37% 2.32% 2.80% 2.34% 2.68%Cost:income ratio 78.2% 80.5% 63.2% 78.1% 63.9%

30 September

2009 30 June


2008 Change $bn $bn % $bn %

Capital and balance sheet Total assets 122.9 124.4 (1) 127.8 (4)Loans and advances to customers (gross): - Residential mortgages 11.0 12.0 (8) 13.9 (21)- home equity 25.6 26.1 (2) 27.2 (6)- corporate and commercial 32.7 33.6 (3) 34.7 (6)- other consumer 12.5 13.7 (9) 14.3 (13)Customer deposits 99.3 99.0 - 94.0 6 Risk elements in lending - retail 0.5 0.4 25 0.3 67 - commercial 0.3 0.3 - 0.2 50 Loan:deposit ratio 82.6% 86.7% (410bp) 96.6% (1,400bp)Risk-weighted assets 100.4 91.3 10 93.2 8 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of

divisional risk-weighted assets, adjusted for capital deductions). Key points • Deteriorating operating loss in the quarter reflects continuing pressure on income lines and further

rises in impairments, partially offset by reduced expenses. • Net interest margin improved by 5 basis points compared with 2Q09, with wider lending margins

as a result of strategic repricing, particularly on auto and home equity loans, as well as changes to deposit pricing and mix. However, net interest margin for the year to date is 34 basis points lower than in the same period of 2008, reflecting the decline in deposit margins in the low interest rate environment.

• Fee income has fallen as mortgage banking fee income dropped 30%, compared with 2Q09,

reflecting a decline in refinancing applications from the record levels seen in the prior period. • Consumer loans and advances were 4% lower compared with 2Q09, primarily driven by a

decision to reduce activity in the student loan market. Compared with 3Q08, consumer lending is down 14%, with increased prepayments and sales of residential mortgages and reduced demand for auto loans. Commercial lending is down 3% compared with 2Q09 and 6% against 3Q08, reflecting a lack of credit demand.

49

US Retail & Commercial (US Dollar) (continued) Key points (continued) • Customer deposits have been maintained in the third quarter. Compared with 3Q08 overall

deposit balances are flat, but the mix has altered, with non-interest bearing deposits up 14% and wholesale deposits reduced by $7 billion, or 90%. The loan to deposit ratio has improved further to 82.6%.

• Increased impairments reflect challenging conditions in the home equity, residential mortgage and

commercial real estate portfolios. Charge-offs remain in line with 2Q09, representing 0.75% of loans and advances, but were 22 basis points higher than in 3Q08. The provision balance increased by $134 million in 3Q09.

50

RBS Insurance Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Earned premiums 1,145 1,119 1,128 3,370 3,391 Reinsurers' share (43) (40) (51) (128) (158)

Insurance net premium income 1,102 1,079 1,077 3,242 3,233 Net fees and commissions (95) (95) (102) (282) (303)Other income 112 104 107 324 374

Total income 1,119 1,088 1,082 3,284 3,304


(178) (188) (173) (569) (569)

Gross claims (941) (776) (777) (2,515) (2,348)Reinsurers' share 13 18 18 36 63

Net claims (928) (758) (759) (2,479) (2,285)

Operating profit before impairment losses 13 142 150 236 450 Impairment losses (2) (1) - (8) -

Operating profit 11 141 150 228 450 Analysis of income by product: Motor own-brand 517 495 492 1,489 1,451 Household and Life own-brands 214 210 200 628 600 Motor partnerships and broker 141 145 167 431 520 Household and Life, partnerships and broker 78 81 88 242 269 Other (international, commercial and central) 169 157 135 494 464

Total income 1,119 1,088 1,082 3,284 3,304

51

RBS Insurance (continued)


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008

In-force policies (thousands) - Motor own-brand 4,894 4,789 4,434 4,894 4,434 - Own-brand non-motor (home, rescue, pet,

HR24) 6,150 5,890 5,468 6,150 5,468 - Partnerships & broker (motor, home, rescue,

pet, HR24) 5,371 5,609 6,052 5,371 6,052 - Other (International, commercial and

central) 1,212 1,210 1,122 1,212 1,122

Gross written premium (£m) 1,186 1,147 1,159 3,456 3,382

Performance ratios Return on equity (1) 1.2% 17.7% 18.8% 8.6% 18.8%Cost:income ratio 15.9% 17.3% 16.0% 17.3% 17.2%Adjusted cost:income ratio (2) 93.2% 57.0% 53.6% 70.7% 55.8%

Balance sheet General insurance reserves – total (£m) 6,839 6,601 6,661 6,839 6,661 Notes: (1) Based on divisional operating profit after tax, divided by divisional notional equity (based on regulatory capital). (2) Based on total income and operating expenses above and after netting insurance claims against income. Key points • Income grew by 3% compared with 2Q09, driven by the success of the Group’s own brands, with

the partnerships and broker segment remaining flat. Churchill and Privilege have benefited from deployment on selected price comparison websites, with motor policy numbers up 25% and 13% respectively, and home policies up 33% and 186% respectively, compared with 3Q08. Year to date own brand premium income is up 10% against the prior year.

• Investment income declined 10% in the quarter and is 41% lower year to date, reflecting lower interest rates earned on the division’s conservatively invested portfolio.

• Expenses fell by 5% in the quarter, mainly reflecting the phasing of marketing activity and a reduction in industry levies. Year to date, costs were held flat at £569 million, with wage inflation offset by efficiency reductions in headcount and reduced marketing spend.

• Net claims were significantly higher than expected in the quarter, with an increase of 22% compared with 2Q09. This was largely due to greater claims being made against our drivers for bodily injury accidents, resulting in the need to strengthen both current and prior years' claims reserves by a total of £118 million above that projected for the quarter. Significant action has now been taken to mitigate this impact including motor price increases and refining our claims handling processes. Year to date net claims were up 8%, with the additional impact of increases in creditor claims and home claims from cold weather in 1Q09.

• The UK combined operating ratio, including statutory business services costs was 104.2%, compared with 91.3% in the second quarter, with the impact of the increase in reserves for bodily injury claims only partially mitigated by commission and expense ratio improvement. The year to date combined ratio rose to 98.3%.

52

53

Central items Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Fair value of own debt (163) (478) 633 (257) 861 Other 283 166 173 554 651

Central items not allocated 120 (312) 806 297 1,512

Key points • Funding and operating costs have been allocated to operating divisions, based on direct service

usage, requirement for market funding and other appropriate drivers where services span more than one division.

• Residual unallocated items relate to volatile corporate items that do not naturally reside within a

division. • Items not allocated in the quarter amounted to a net credit of £120 million and comprised an

increase in the carrying value of own debt partially offset by a net credit on a number of other volatile items, including the impact of economic hedges that do not qualify for IFRS hedge accounting.

Non-Core Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September


Net interest income from banking activities 287 274 479 956 1,391

Net fees and commissions receivable 132 82 260 392 752 (Loss)/income from trading activities (735) (1,390) 68 (4,990) (5,186)Insurance net premium income 173 196 252 613 737 Other operating income 83 (56) (3) 52 843

Non-interest income (347) (1,168) 577 (3,933) (2,854)

Total income (60) (894) 1,056 (2,977) (1,463)


(466) (428) (529) (1,454) (1,711)

Operating (loss)/profit before other operating charges and impairment losses (526) (1,322) 527 (4,431) (3,174)

Insurance net claims (126) (137) (170) (440) (508)Impairment losses (2,066) (3,516) (768) (7,410) (1,575)

Operating loss (2,718) (4,975) (411) (12,281) (5,257) Analysis of income: Banking & Portfolio (92) (772) 739 (774) 2,015 Retail, Commercial & Countries 537 570 773 1,769 2,291 Trading (505) (692) (456) (3,972) (5,769)

(60) (894) 1,056 (2,977) (1,463) Key metrics

Performance ratios Net interest margin 0.55% 0.45% 0.38% 0.54% 0.67%Cost:income ratio (776.7%) (47.9%) 50.1% (48.8%) (117.0%)

30 September

2009 30 June



Capital and balance sheet* Total third party assets (including

derivatives**) 220.2 231.9 (5) 325.1 (32)Loans and advances to customers - gross 158.7 163.6 (3) 190.6 (17)Customer deposits 14.7 13.4 10 26.6 (45)Risk elements in lending 23.3 20.5 14 11.2 108 Loan:deposit ratio 1,078.5% 1,282.2% (16) 718.1% 50 Risk-weighted assets 190.3 164.1 16 160.3 19 * includes disposal groups. ** Derivatives were £23.6 billion at 30 September 2009 (30 June 2009 - £30.5 billion; 31 December 2008 - £73.4 billion)

54

Non-Core (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Credit and other market write-downs:* Monoline exposures 106 7 109 1,653 2,229 CDPCs 277 371 162 846 242 Super senior CDOs (148) 151 - 389 1,892 Leveraged finance - - 36 - 899 CLO’s 1 - 69 1 182 Other credit exotics 46 (15) (130) 588 231 Equities 12 13 132 34 168 Other 55 51 (78) 97 (142)

349 578 300 3,608 5,701 CDS Hedging 386 813 (368) 1,382 (516)

735 1,391 (68) 4,990 5,185 Impairment losses: Banking & Portfolio 878 1,619 252 3,320 498 Retail, Commercial & Countries 1,234 1,638 360 3,592 887 Trading (46) 259 156 498 190

2,066 3,516 768 7,410 1,575 Loan impairment charge as % of gross

customer loans and advances: Banking & Portfolio 4.04% 7.16% (0.33%) 5.01% 0.24%Retail, Commercial & Countries 7.22% 9.44% 1.95% 7.00% 1.61%Trading (31.73%) 42.09% 7.52% (9.19%) 3.24%

Total 5.37% 8.39% 1.03% 5.66% 0.98% £bn £bn £bn £bn £bn

Gross customer loans and advances: Banking & Portfolio 88.4 93.1 91.1 88.4 91.1 Retail, Commercial & Countries 68.4 69.4 73.5 68.4 73.5 Trading 1.9 1.1 7.5 1.9 7.5

158.7 163.6 172.1 158.7 172.1 Risk-weighted assets: Banking & Portfolio 73.1 61.8 42.9 73.1 42.9 Retail, Commercial & Countries 45.9 48.3 53.8 45.9 53.8 Trading 71.3 54.0 34.0 71.3 34.0

190.3 164.1 130.7 190.3 130.7 * Included in income from trading activities.

55

Non-Core (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Loan impairment losses by donating division and sector

UK Retail Mortgages 1 2 - 4 1 Personal 11 17 12 42 31 Other - - 16 - 43

Total UK Retail 12 19 28 46 75

UK Corporate Manufacturing & Infrastructure 14 13 4 48 13 Property and construction 163 229 45 517 72 Transport 5 2 7 8 8 Telecoms, media and technology - - - - - Banks and financials 1 99 2 102 3 Lombard 27 - - 109 - Invoice finance 2 - - 2 - Other 32 544 29 551 96

Total UK Corporate 244 887 87 1,337 192

Ulster Bank Mortgages 7 11 2 26 3 Commercial inv. & dev. 20 19 2 47 3 Residential inv. & dev. 406 240 6 749 34 Other 148 25 5 184 11 Other EMEA 27 34 20 86 61

Total Ulster Bank 608 329 35 1,092 112

US Retail and Commercial Auto & consumer 49 32 52 110 82 Cards 33 45 18 104 42 SBO/home equity 70 142 51 360 218 Residential mortgages 20 18 2 42 3 Commercial real estate 85 65 32 177 39 Commercial and other 38 19 6 76 11

Total US Retail and Commercial 295 321 161 869 395

Global Banking & Markets 832 1,878 408 3,818 688

Other 75 82 49 248 113 Total impairment losses 2,066 3,516 768 7,410 1,575

56

Non-Core (continued)


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £bn £bn £bn £bn £bn

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

UK Retail Mortgages 2.0 2.0 2.3 2.0 2.3 Personal 0.7 0.9 1.2 0.7 1.2 Other - - 1.9 - 1.9

Total UK Retail 2.7 2.9 5.4 2.7 5.4

UK Corporate Manufacturing & Infrastructure 0.3 0.6 0.3 0.3 0.3 Property and construction 13.0 13.5 13.1 13.0 13.1 Other 22.2 23.0 22.3 22.2 22.3

Total UK Corporate 35.5 37.1 35.7 35.5 35.7

Ulster Bank Mortgages 6.3 5.8 5.2 6.3 5.2 Commercial inv. & dev. 2.8 0.6 1.4 2.8 1.4 Residential inv. & dev. 5.9 7.9 3.9 5.9 3.9 Other 1.1 1.1 3.5 1.1 3.5 Other EMEA 1.1 0.8 1.1 1.1 1.1

Total Ulster Bank 17.2 16.2 15.1 17.2 15.1

US Retail and Commercial Auto & consumer 3.4 3.5 3.7 3.4 3.7 Cards 0.6 0.6 0.6 0.6 0.6 SBO/home equity 3.9 4.0 4.3 3.9 4.3 Residential mortgages 0.9 0.9 1.0 0.9 1.0 Commercial real estate 2.1 2.1 2.4 2.1 2.4 Commercial and other 1.0 1.2 1.0 1.0 1.0

Total US Retail and Commercial 11.9 12.3 13.0 11.9 13.0

Global Banking & Markets 87.4 91.6 92.0 87.4 92.0

Other 1.1 0.8 4.3 1.1 4.3 Total loans and advances to customers 155.8 160.9 165.5 155.8 165.5

57

Non-Core (continued) Key points

• Credit and other market write-downs were substantially lower in the third quarter, down from £1,390 million to £735 million with the widening in monoline spreads more than offset by reduced losses on hedges and credit derivative product companies and a rally in asset-backed securities.

• Impairment losses were £1,450 million lower than in 2Q09, with reduced charges in UK Corporate

and GBM portfolios, which included a number of large, single name impairments in the second quarter. Ulster Bank’s impairments have increased materially as the market has continued to deteriorate.

• Third party assets (including MTM derivatives) were down 5% compared with 2Q09, and have

declined by 32% compared with December 2008, as assets have been run-off and written down. Risk-weighted assets, however, increased by 16% during the third quarter to £190.3 billion and are 19% higher than at end 2008, as continued deterioration in the corporate economic environment has pushed the impact of procyclicality higher, particularly in real estate and leverage finance portfolios and due to downgrades on monolines.

58

Allocation methodology for indirect costs Business Services directly attributable costs have been allocated to the operating divisions, based on their service usage. Where services span more than one division an appropriate measure is used to allocate the costs on a basis which management considers reasonable. Business Services costs are fully allocated and there are no residual unallocated costs. Group Centre directly attributable costs have been allocated to the operating divisions, based on their service usage. Where services span more than one division, the costs are allocated on a basis management considers reasonable. The residual unallocated costs remaining in the Group centre relate to volatile corporate items that do not naturally reside within a division. Treasury costs are allocated to operating divisions as follows: term funding costs are allocated or rewarded based on long term funding gap or surplus; liquidity buffer funding costs are allocated based on share of overall liquidity buffer derived from divisional stresses; and capital cost or benefit is allocated based on share of divisional risk-adjusted RWAs.


30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Business Services costs Property 497 492 427 1,457 1,241 Operations 370 357 358 1,105 1,075 Technology services and support functions 389 474 456 1,318 1,331

1,256 1,323 1,241 3,880 3,647

Allocated to divisions: UK Retail (381) (397) (409) (1,178) (1,201)UK Corporate (106) (109) (112) (325) (330)Wealth (29) (31) (31) (90) (90)Global Banking & Markets (134) (152) (118) (411) (346)Global Transaction Services (207) (215) (203) (638) (595)Ulster Bank (63) (66) (63) (195) (187)US Retail & Commercial (173) (179) (139) (533) (410)RBS Insurance (54) (57) (57) (167) (167)Non-Core (109) (117) (109) (343) (321)

- - - - - Group centre costs 232 196 170 704 484

Allocated to divisions: UK Retail (66) (55) (39) (208) (113)UK Corporate (19) (16) (17) (55) (48)Wealth (13) (10) (8) (39) (22)Global Banking & Markets (57) (49) (42) (174) (115)Global Transaction Services (16) (14) (12) (49) (33)Ulster Bank (10) (9) (8) (30) (24)US Retail & Commercial (18) (15) (14) (53) (41)RBS Insurance (10) (8) (8) (28) (22)Non-Core (23) (20) (22) (68) (66)

- - - - -

59

Allocation methodology for indirect costs (continued) Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Treasury funding costs 334 334 270 1,088 977

Allocated to divisions: UK Retail (66) (29) (37) (144) (142)UK Corporate (47) (63) (41) (211) (149)Wealth 28 30 (17) 67 (67)Global Banking & Markets 24 44 (32) 218 (79)Global Transaction Services 48 38 32 107 69 Ulster Bank (23) 5 (16) (26) (55)US Retail & Commercial (48) (14) (15) (85) (73)RBS Insurance (12) (7) (4) (30) (21)Non-Core (238) (338) (140) (984) (460)

- - - - -

60

Condensed consolidated balance sheet at 30 September 2009 – pro forma (unaudited)

30 September

2009 30 June

2009 31 December

2008 £m £m £m

Assets Cash and balances at central banks 36,567 34,302 11,830 Net loans and advances to banks 60,274 48,624 70,728 Reverse repurchase agreements and stock borrowing 37,190 35,076 58,771 Loans and advances to banks 97,464 83,700 129,499 Net loans and advances to customers 587,996 593,277 691,976 Reverse repurchase agreements and stock borrowing 43,463 47,485 39,289 Loans and advances to customers 631,459 640,762 731,265 Debt securities 251,281 229,059 253,159 Equity shares 16,830 14,220 22,198 Settlement balances 28,634 23,244 17,812 Derivatives 552,466 555,890 991,495 Intangible assets 15,339 15,117 16,415 Property, plant and equipment 18,208 16,292 17,181 Deferred taxation 7,667 7,573 5,786 Prepayments, accrued income and other assets 19,664 20,620 21,573 Assets of disposal groups 4,737 3,666 480

Total assets 1,680,316 1,644,445 2,218,693

Liabilities Bank deposits 138,584 135,601 178,943 Repurchase agreements and stock lending 39,816 44,142 83,666 Deposits by banks 178,400 179,743 262,609 Customer deposits 423,769 415,267 460,318 Repurchase agreements and stock lending 69,465 75,015 58,143 Customer accounts 493,234 490,282 518,461 Debt securities in issue 266,213 248,710 269,458 Settlement balances and short positions 71,891 60,282 54,264 Derivatives 537,522 534,632 969,409 Accruals, deferred income and other liabilities 20,754 21,543 24,140 Retirement benefit liabilities 1,410 1,363 1,564 Deferred taxation 3,275 3,344 3,177 Insurance liabilities 7,480 7,186 7,480 Subordinated liabilities 33,085 32,106 43,678 Liabilities of disposal groups 8,201 7,465 138

Total liabilities 1,621,465 1,586,656 2,154,378

Equity: Minority interests 2,185 2,123 5,436 Owners’ equity* 56,666 55,666 58,879

Total equity 58,851 57,789 64,315

Total liabilities and equity 1,680,316 1,644,445 2,218,693

*Owners’ equity attributable to: Ordinary shareholders 48,820 47,820 45,525 Other equity owners 7,846 7,846 13,354

56,666 55,666 58,879

61

Commentary on condensed consolidated balance sheet – pro forma Total assets of £1,680.3 billion at 30 September 2009 were up £35.9 billion, 2%, compared with 30 June 2009, primarily due to exchange rate movements following the weakening of sterling since June. Loans and advances to banks increased by £13.8 billion, 16%, to £97.5 billion reflecting higher reverse repurchase agreements and stock borrowing ("reverse repos"), up by £2.1 billion, 6% to £37.2 billion, and growth in bank placings, up by £11.7 billion, 24%, to £60.3 billion as a result of increased wholesale lending. Loans and advances to customers were down £9.3 billion, 1%, at £631.5 billion. Within this, reverse repos decreased by 8%, £4.0 billion to £43.5 billion. Excluding reverse repos, customer lending declined by £5.3 billion, 1% to £588.0 billion or £3.9 billion, 1% before impairment provisions. This reflected reductions in Global Banking & Markets of £11.0 billion, Non-Core, £9.5 billion, US Retail & Commercial, £2.2 billion, and Ulster Bank, £0.8 billion, partially offset by growth in Retail, £3.8 billion, UK Corporate & Commercial, £1.3 billion, Wealth, £1.0 billion, and GTS, £0.7 billion, together with the effect of exchange rate movements, £12.5 billion. Debt securities were up £22.2 billion, 10%, to £251.3 billion and equity shares rose by £2.6 billion, 18%, to £16.8 billion, principally due to increased holdings in Global Banking & Markets and Group Treasury, in part reflecting a £6.0 billion growth in the gilt liquidity portfolio. Settlement balances rose by £5.4 billion, 23% to £28.6 billion as a result of increased customer activity. Deposits by banks declined by £1.3 billion, 1% to £178.4 billion. This reflected decreased repurchase agreements and stock lending ("repos"), down £4.3 billion, 10% to £39.8 billion partially offset by increased inter-bank deposits, up £3.0 billion, 2%, to £138.6 billion. Customer accounts were up £3.0 billion, 1% to £493.2 billion. Within this, repos declined £5.6 billion, 7% to £69.5 billion. Excluding repos, deposits increased by £8.5 billion, 2%, to £423.8 billion, with reductions in Global Banking & Markets, down £9.0 billion, more than offset by growth across all other divisions, up £11.1 billion, and the effect of exchange rate movements, £6.4 billion. Debt securities in issue increased £17.5 billion, 7%, to £266.2 billion mainly as a result of growth in Global Banking & Markets and Group Treasury, partly to fund the growth in the gilt liquidity portfolio, together with the effect of movements in exchange rates. Settlement balances and short positions were up £11.6 billion, 19%, to £71.9 billion reflecting increased customer activity. Subordinated liabilities rose by £1.0 billion, 3%, to £33.1 billion, with the redemption of £0.9 billion undated loan capital more than offset by the effect of exchange rate movements and other adjustments, £1.9 billion. Owners' equity increased by £1.0 billion, 2% to £56.7 billion. Reductions in available-for-sale reserve losses of £2.1 billion, net of tax, and exchange rate movements of £0.6 billion were offset in part by the £1.5 billion attributable loss for the period and the payment of other owners dividends of £0.2 billion.

62

Notes to pro forma results 1. Basis of preparation The pro forma financial information shows the underlying performance of the Group including theresults of the ABN AMRO businesses to be retained by the Group. This information is prepared usingthe Group’s accounting policies and is being provided to give a better understanding of the results ofthe RBS operations excluding the results attributable to the other Consortium Members.

Group operating profit on a pro forma basis excludes: • amortisation of purchased intangible assets; • write-down of goodwill and other intangible assets; • integration and restructuring costs; • gain on redemption of own debt; and • gain on sale of strategic investments.

2. Taxation The credit for taxation differs from the tax credit computed by applying the standard UK corporation tax rate of 28% (2008 – 28.5%) as follows: Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

(Loss)/profit before tax (2,077) 59 1,903 (2,062) 1,177

Expected tax (credit)/charge at 28% (2008 – 28.5%) (582) 16 542 (578) 335 Unrecognised timing differences (223) (73) 84 (207) 88 Other non-deductible items 35 38 41 108 203 Non-taxable items: - Gain on redemption of own debt - (692) - (692) - - Other (27) (93) (34) (203) (259)Taxable foreign exchange movements 9 (23) 9 (14) 16 Foreign profits taxed at other rates 126 (18) 87 173 65 Losses/(gains) in year not recognised 83 181 (5) 267 35 Other (6) (25) - (29) - Adjustments in respect of prior periods 9 49 - 187 (62)

Actual tax (credit)/charge (576) (640) 724 (988) 421 The Group has recognised a deferred tax asset at 30 September 2009 of £7,667 million (30 June 2009- £7,573 million; 31 December 2008 - £5,786 million), of which £6,032 million (30 June 2009 - £5,639 million; 31 December 2008 - £4,706 million) relates to carried forward trading losses in the UK. Under the HM Revenue & Customs rules, these UK losses can be carried forward indefinitely to be utilisedagainst profits arising in the future. The Group has considered the carrying value of this asset as at 30September and concluded that it is recoverable based on the base case future profit projection.

63

Notes to pro forma results 3. Loan impairment provisions Operating (loss)/profit is stated after charging loan impairment losses for 3Q09 of £3,262 million (2Q09- £4,520 million; 3Q08 - £1,023 million; YTD09 - £10,058 million; YTD08 - £2,429 million). The balance sheet loan impairment provisions increased in the three months ended 30 September 2009from £13,773 million to £15,124 million, and the movements thereon were: 30 September 2009

Core Non-Core Total 30 June

2009 31 December

2008 £m £m £m £m £m

At beginning of period 5,575 8,198 13,773 9,451 4,956 Transfers to disposal groups - (312) (312) - - Currency translation and other adjustments 283 (206) 77 (505) 1,023 Disposals - - - - (178)Amounts written-off (438) (1,252) (1,690) (1,932) (2,897)Recoveries of amounts previously written-off 53 61 114 140 261 Charge to income statement 1,107 2,155 3,262 6,796 6,478 Unwind of discount (17) (83) (100) (177) (192)

6,563 8,561 15,124 13,773 9,451

Provisions at 30 September 2009 include £151 million (30 June 2009 - £126 million; 31 December 2008 - £127 million) in respect of loans and advances to banks. 4. Strategic disposals Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Gain on sale of investments in: Bank of China (1) (5) - - 236 - Linea Directa - 212 - 212 - Provision for loss on disposal of Asian

branches (150) - - (150) -

(155) 212 - 298 - Note: (1) YTD09 includes £359 million attributable to minority interests.

64

Notes to pro forma results (continued) 5. Segmental analysis Analysis of divisional contribution The tables below provide an analysis of the divisional contribution for the quarter ended 30 September 2009 and the first nine months of 2009, by main income statement captions. The pro forma divisional income statements on pages 28 to 54 reflect certain presentational reallocations as described in the notes below. These do not affect the overall operating profit/(loss).

Netinterest income

Non- interest income

Total income

Operating expenses

Net insurance

claims Impairment

losses Operating

profit/(loss) £m £m £m £m £m £m £m

Quarter ended 30 September 2009 UK Retail (1) 848 463 1,311 (752) (91) (404) 64 UK Corporate 607 329 936 (370) - (187) 379 Wealth 168 111 279 (159) - (1) 119 Global Banking & Markets (2) 474 1,385 1,859 (1,212) - (272) 375 Global Transaction Services 234 388 622 (347) - (22) 253 Ulster Bank 176 55 231 (172) - (144) (85)US Retail & Commercial 410 224 634 (497) - (180) (43)RBS Insurance 86 1,033 1,119 (178) (928) (2) 11 Central items 32 131 163 (42) - (1) 120

Core 3,035 4,119 7,154 (3,729) (1,019) (1,213) 1,193 Non-Core (3) 226 (286) (60) (466) (126) (2,066) (2,718)Amortisation of purchased intangible assets - - - (73) - - (73)Integration and restructuring costs - - - (324) - - (324)Strategic disposals - (155) (155) - - - (155)

3,261 3,678 6,939 (4,592) (1,145) (3,279) (2,077)RFS Holdings minority interest 602 539 1,141 (960) (64) (209) (92)

Total statutory 3,863 4,217 8,080 (5,552) (1,209) (3,488) (2,169) Notes: (1) Reallocation of netting of bancassurance claims of £91 million from non-interest income. (2) Reallocation of £12 million between net interest income and non-interest income in respect of funding costs of rental assets,

and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £39 million. (3) Reallocation of £56 million between net interest income and non-interest income in respect of funding costs of rental assets

and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £5 million.

65

Notes to pro forma results (continued) 5. Segmental analysis (continued) Analysis of divisional contribution (continued)

Netinterest income

Non- interest income

Total income

Operating expenses

Net insurance

claims Impairment

losses Operating

profit/(loss) £m £m £m £m £m £m £m

Nine months ended 30 September 2009 UK Retail (1) 2,513 1,269 3,782 (2,336) (117) (1,228) 101 UK Corporate 1,666 968 2,634 (1,112) - (737) 785 Wealth 502 333 835 (481) - (23) 331 Global Banking & Markets (2) 1,969 7,539 9,508 (3,900) - (510) 5,098 Global Transaction Services 679 1,171 1,850 (1,066) - (35) 749 Ulster Bank 586 163 749 (541) - (301) (93)US Retail & Commercial 1,352 728 2,080 (1,625) - (549) (94)RBS Insurance 268 3,016 3,284 (569) (2,479) (8) 228 Central items (151) 291 140 156 - 1 297

Core 9,384 15,478 24,862 (11,474) (2,596) (3,390) 7,402 Non-Core (3) 737 (3,714) (2,977) (1,454) (440) (7,410) (12,281)Amortisation of purchased intangible assets - - - (213) - - (213)Integration and restructuring costs - - - (1,058) - - (1,058)Gain on redemption of own debt - 3,790 3,790 - - - 3,790 Strategic disposals - 298 298 - - - 298 Write-down of goodwill and other intangible assets - - - (311) - - (311)

10,121 15,852 25,973 (14,510) (3,036) (10,800) (2,373)RFS Holdings minority interest 2,116 1,832 3,948 (2,933) (307) (748) (40)

Total statutory 12,237 17,684 29,921 (17,443) (3,343) (11,548) (2,413)

Notes: (1) Reallocation of netting of bancassurance claims of £117 million from non-interest income. (2) Reallocation of £39 million between net interest income and non-interest income in respect of funding costs of rental assets,

and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £89 million. (3) Reallocation of £192 million between net interest income and non-interest income in respect of funding costs of rental

assets and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £27 million.

66

Notes to pro forma results (continued) 6. Financial instruments Classification The following tables analyse the Group’s financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately.

Held-for-

trading

Designated at fair value

through profit or loss

Available- for-sale

Loans and receivables

Other (amortised

cost) Finance leases

Other assets/

liabilities Total £m £m £m £m £m £m £m £m

At 30 September 2009 Cash and balances at central banks - - - 36,567 - - - 36,567 Loans & advances to banks 43,469 - - 53,995 - - - 97,464 Loans and advances to customers 47,149 2,127 - 568,394 - 13,789 - 631,459 Debt securities 118,237 2,705 119,232 11,107 - - - 251,281 Equity shares 11,474 2,100 3,256 - - - - 16,830 Settlement balances - - - 28,634 - - - 28,634 Derivatives (1) 552,466 - - - - - - 552,466 Intangible assets - - - - - - 15,339 15,339 Property, plant and equipment - - - - - - 18,208 18,208 Deferred taxation - - - - - - 7,667 7,667 Prepayments, accrued income and other assets - - - 1,588 - - 18,076 19,664 Assets of disposal groups - - - - - - 4,737 4,737

Total assets 772,795 6,932 122,488 700,285 - 13,789 64,027 1,680,316 Deposits by banks 56,980 - - - 121,420 - - 178,400 Customer accounts 58,439 5,719 - - 429,076 - - 493,234 Debt securities in issue 3,032 38,297 - - 224,884 - - 266,213 Settlement balances and short positions 46,427 - - - 25,464 - - 71,891 Derivatives (1) 537,522 - - - - - - 537,522 Accruals, deferred income and other liabilities - - - - 1,647 242 18,865 20,754 Retirement benefit liabilities - - - - - - 1,410 1,410 Deferred taxation - - - - - - 3,275 3,275 Insurance liabilities - - - - - - 7,480 7,480 Subordinated liabilities - 1,414 - - 31,671 - - 33,085 Liabilities of disposal groups - - - - - - 8,201 8,201

Total liabilities 702,400 45,430 - - 834,162 242 39,231 1,621,465 Equity 58,851

1,680,316

67

Notes to pro forma results (continued) 6. Financial instruments (continued) Classification (continued)

Held-for- trading

Designated as at fair

value through profit or loss

Available-for-sale


Other (amortised

cost) Finance leases

Other assets/

liabilities Total £m £m £m £m £m £m £m £m

At 30 June 2009 Cash and balances at central banks - - - 34,302 - - - 34,302Loans & advances to banks 35,849 - - 47,851 - - - 83,700Loans and advances to customers 51,987 1,963 - 573,246 - 13,566 - 640,762Debt securities 107,410 4,446 105,858 11,345 - - - 229,059Equity shares 9,694 1,865 2,661 - - - - 14,220Settlement balances - - - 23,244 - - - 23,244Derivatives (1) 555,890 - - - - - - 555,890Intangible assets - - - - - - 15,117 15,117Property, plant and equipment - - - - - - 16,292 16,292Deferred taxation - - - - - - 7,573 7,573Prepayments, accrued income and other assets - - - 1,461 - - 19,159 20,620Assets of disposal groups - - - - - - 3,666 3,666

Total assets 760,830 8,274 108,519 691,449 - 13,566 61,807 1,644,445 Deposits by banks 58,017 - - - 121,726 - - 179,743Customer accounts 64,743 4,456 - - 421,083 - - 490,282Debt securities in issue 1,051 34,198 - - 213,461 - - 248,710Settlement balances and short positions 37,224 - - - 23,058 - - 60,282Derivatives (1) 534,632 - - - - - - 534,632Accruals, deferred income and other liabilities - - - - 1,618 24 19,901 21,543Retirement benefit liabilities - - - - - - 1,363 1,363Deferred taxation - - - - - - 3,344 3,344Insurance liabilities - - - - - - 7,186 7,186Subordinated liabilities - 1,291 - - 30,815 - - 32,106Liabilities of disposal groups - - - - - - 7,465 7,465

Total liabilities 695,667 39,945 - - 811,761 24 39,259 1,586,656 Equity 57,789

1,644,445

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

68

Notes to pro forma results (continued) 6. Financial instruments (continued) Valuation techniques Refer to note 11 of the 2008 Annual Report and Accounts. Valuation hierarchy The table below shows financial instruments carried at fair value by valuation method. 30 September 2009 30 June 2009 Level 1 (1) Level 2 (2) Level 3 (3) Total Level 1 (1) Level 2 (2) Level 3 (3) Total £bn £bn £bn £bn £bn £bn £bn £bn

Assets Fair value through profit or loss: Loans and advances to banks - 43.4 - 43.4 - 35.8 - 35.8 Loans and advances to customers - 48.2 1.1 49.3 - 52.8 1.1 53.9 Debt securities 62.8 55.0 3.1 120.9 53.3 55.0 3.6 111.9 Equity shares 10.0 3.1 0.5 13.6 9.3 1.8 0.5 11.6 Derivatives 0.8 545.1 6.6 552.5 0.9 546.3 8.7 555.9

73.6 694.8 11.3 779.7 63.5 691.7 13.9 769.1 Available-for-sale: Debt securities 46.5 71.0 1.7 119.2 33.9 70.3 1.6 105.8 Equity shares 1.4 1.3 0.6 3.3 0.9 1.3 0.5 2.7

47.9 72.3 2.3 122.5 34.8 71.6 2.1 108.5

121.5 767.1 13.6 902.2 98.3 763.3 16.0 877.6

Liabilities Deposits by banks and customers - 121.0 0.1 121.1 - 127.0 0.3 127.3 Debt securities in issue 3.7 34.2 3.4 41.3 - 32.1 3.1 35.2 Short positions 36.0 10.2 0.2 46.4 29.9 6.9 0.4 37.2 Derivatives 1.8 532.6 3.1 537.5 1.6 528.8 4.2 534.6 Other financial liabilities (4) - 1.4 - 1.4 - 1.3 - 1.3

41.5 699.4 6.8 747.7 31.5 696.1 8.0 735.6

Notes: (1) Valued using unadjusted quoted prices in active markets for identical financial instruments. This category includes listed

equity shares, certain exchange-traded derivatives, G10 government securities and certain US agency securities. (2) Valued using techniques based significantly on observable market data. Instruments in this category are valued using: (a) quoted prices for identical instruments in markets which are not considered to be active or quoted prices for similar

instruments trading in active or not so active markets; or (b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based

on observable market data. Instruments that trade in markets that are not considered to be active, but for which valuations are based on quoted market

prices, broker dealer quotations, or alternative pricing sources with reasonable levels of price transparency andinstruments valued using techniques include: most government agency securities, investment-grade corporate bonds, certain mortgage products, certain bank and bridge loans, repos and reverse repos, less liquid listed equities, state andmunicipal obligations, most physical commodities, investment contracts issued by the Group’s life assurance businessesand certain money market securities and loan commitments and most OTC derivatives.

69

Notes to pro forma results (continued) 6. Financial instruments (continued) Valuation hierarchy (continued) Notes (continued): (3) Valued using a technique where at least one input (which could have a significant effect on the instrument’s valuation) is

not based on observable market data. Where inputs can be observed from market data without undue cost and effort, the observed input is used. Otherwise, the Group determines a reasonable level for the input.

Financial instruments included within level 3 of the fair value hierarchy primarily include cash instruments which tradeinfrequently, certain syndicated and commercial mortgage loans, unlisted equity shares, certain residual interests insecuritisations, super senior tranches of high grade and mezzanine collateralised debt obligations (CDOs), other mortgage-based products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives wherevaluation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised onthe initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.

(4) Comprise subordinated liabilities and write downs relating to undrawn syndicated loan facilities.

70

Notes to pro forma results (continued) 6. Financial instruments (continued) Level 3 portfolios Carrying value 30 September 2009 30 June 2009

Core £bn

Non-Core £bn

Total £bn

Total £bn

Assets Loans and advances 0.9 0.2 1.1 1.1 Debt securities: - RMBS (1) 0.3 - 0.3 0.4 - CMBS (2) 0.3 - 0.3 0.4 - CDOs (3) 0.3 0.8 1.1 1.5 - CLOs (4) 0.2 0.8 1.0 0.7 - other ABS 0.9 0.3 1.2 0.6 - other 0.2 0.7 0.9 1.6 Equity shares 0.3 0.8 1.1 1.0 Derivatives: - credit 1.4 2.0 3.4 5.1 - other 3.0 0.2 3.2 3.6

7.8 5.8 13.6 16.0 Liabilities Debt securities in issue 3.3 0.1 3.4 3.1 Derivatives - credit 0.8 0.7 1.5 2.7 - other 1.5 0.1 1.6 1.5 Other portfolios 0.1 0.2 0.3 0.7

5.7 1.1 6.8 8.0

Notes: (1) Residential mortgage-backed securities. (2) Commercial mortgage-backed securities. (3) Collateralised debt obligations. (4) Collateralised loan obligations.

Key points

• Level 3 assets and liabilities reduced in the third quarter reflecting general tightening of credit spreads and greater price observability.

• Decrease in level 3 assets of £2.4 billion; derivatives by £2.1 billion mainly due to credit spreadeffects and debt securities by £0.4 billion reflecting better price observability in asset-backed securities market.

• Level 3 liabilities decreased by £1.2 billion with reduction in derivatives and other portfolios due tocredit spread effects partially offset by increase in notes issued with embedded features.

71

Notes to pro forma results (continued) 6. Financial instruments (continued) Own credit When valuing financial liabilities recorded at fair value, the Group takes into account the effect of itsown credit standing. The categories of financial liabilities on which own credit spread adjustments are made are issued debt, including issued structured notes, and derivatives. An own credit adjustment isapplied to positions where it is believed that counterparties would consider the Group’screditworthiness when pricing trades.

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

The fair value of the Group’s derivative financial liabilities has also been adjusted to reflect the Group’sown credit risk. The adjustment takes into account collateral posted by the Group and the effects ofmaster netting agreements. The table below shows the own credit spread adjustments on liabilities recorded in the incomestatement during the first nine months of the year.

Debt securities in issue

Held-for -trading

Designated at fair value

through profit and loss Total Derivatives (1) Total

£m £m £m £m £m

At 1 January 2009 1,346 1,027 2,373 450 2,823 Net effect of changes to credit spreads 242 (73) 169 54 223 Foreign exchange movements (189) (31) (220) - (220)New issues and redemptions (net) (22) 11 (11) - (11)

At 1 July 2009 1,377 934 2,311 504 2,815 Net effect of changes to credit spreads (308) (84) (392) (166) (558)Foreign exchange movements 73 40 113 - 113 New issues and redemptions (net) (9) 11 2 - 2

At 30 September 2009 1,133 901 2,034 338 2,372 Note: (1) The effect of change in foreign exchange rates, new issues and redemptions are not captured separately. The effect of change in credit spreads could be reversed in future periods.

72

Notes to pro forma results (continued) 6. Financial instruments (continued) Reclassification of financial instruments During 2008, as permitted by amended IAS 39, the Group reclassified financial assets from the held-for-trading and available-for-sale categories into the loans and receivables category and from the held-for-trading category into the available-for-sale category. There were further reclassifications from the held-for-trading category to the loans and receivables category in the first nine months of 2009. The effect of the reclassifications and the balance sheet values of the assets were as follows. Additional gains that would have been recognised in

the nine months to 30 September 2009 if reclassifications had not occurred

Additional gains that would have been recognised in the third quarter 2009 if

reclassifications had not occurred

Total Reclassified

in 2009 Reclassified

in 2008 Total Reclassified

in 2009 Reclassified

in 2008 £m £m £m £m £m £m

From held-for-trading to: Available-for-sale 852 - 852 568 - 568 Loans and receivables 1,020 10 1,010 1,546 188 1,358

Total 1,872 10 1,862 2,114 188 1,926

Assets

reclassified in 2009

30 September 2009 All reclassifications

30 June 2009 All reclassifications

Carrying value

Carrying value Fair value

Carrying value Fair value

£m £m £m £m £m

From held-for-trading to: Available-for-sale - 8,159 8,159 8,442 8,442Loans and receivables 1,988 14,971 11,961 16,458 12,158

1,988 23,130 20,120 24,900 20,600 From available-for-sale to: Loans and receivables - 936 878 866 741

1,988 24,066 20,998 25,766 21,341

During the quarter ended 30 September 2009, the balance sheet value of reclassified assets reducedby £1.7 billion. This was primarily due to disposals and repayments of £3.4 billion across a range of asset backed securities and loans, including disposals through restructures of £2.5 billion on realestate and leverage financed positions. Other movements include foreign exchange rate movements of £1.0 billion and gains taken to AFS reserve of £0.6 billion.

For assets reclassified from held-for-trading to available-for-sale, net unrealised losses recorded in equity at 30 September 2009 were £1.3 billion (30 June 2009 - £1.9 billion).

73

Notes to pro forma results (continued) 7. Debt securities

UK central and local

government

US centraland local

government

Other central and

local government

Bank and building society

Asset backed

securities Corporate Other Total £m £m £m £m £m £m £m £m

30 September 2009 Held-for-trading 4,811 13,888 54,452 5,189 29,611 9,784 502 118,237 Designated as at

fair value through profit or loss 374 3 391 453 377 1,101 6 2,705

Available-for-sale 11,940 9,146 31,506 9,014 51,787 5,400 439 119,232 Loans and receivables 11 - 1 41 8,848 2,174 32 11,107

17,136 23,037 86,350 14,697 90,623 18,459 979 251,281 30 June 2009 Held-for-trading 7,753 9,526 43,289 5,079 32,539 8,266 958 107,410 Designated as at

fair value through profit or loss 1,943 3 439 624 354 1,074 9 4,446

Available-for-sale 5,401 9,616 26,727 7,800 48,817 7,010 487 105,858 Loans and receivables - - 31 97 8,746 2,416 55 11,345

15,097 19,145 70,486 13,600 90,456 18,766 1,509 229,059 31 December 2008 Held-for-trading 5,373 9,858 37,519 4,333 39,879 17,627 1,570 116,159 Designated as at

fair value through profit or loss 2,085 510 456 - 236 1,551 456 5,294

Available-for-sale 11,330 6,145 21,735 10,549 62,067 5,689 1,207 118,722 Loans and receivables - - - 114 8,961 3,749 160 12,984

18,788 16,513 59,710 14,996 111,143 28,616 3,393 253,159

74

Notes to pro forma results (continued) 8. Derivatives 30 September 2009 30 June 2009 31 December 2008 Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m

Exchange rate contracts Spot, forwards and futures 34,228 34,628 29,060 28,178 82,963 83,433 Currency swaps 30,838 30,053 32,678 30,841 53,231 54,413 Options purchased 18,528 - 18,384 - 36,688 - Options written - 16,998 - 17,908 - 34,946 Interest rate contracts Interest rate swaps 337,824 327,217 330,175 316,416 547,566 530,843 Options purchased 64,191 - 61,058 - 99,176 - Options written - 64,547 - 60,122 - 102,210 Futures and forwards 2,989 2,772 3,635 2,836 7,600 6,620 Credit derivatives 49,019 42,512 64,382 59,715 142,367 132,734 Equity and commodity contracts 14,849 18,795 16,518 18,616 21,904 24,210

552,466 537,522 555,890 534,632 991,495 969,409 Note: (1) Of the total above at 30 September, £23.6 billion (30 June 2009 - £30.5 billion) of assets and £20.2 billion (30 June 2009 -

£27.9 billion) of liabilities relate to Non-Core. The Group enters into master netting agreements in respect of its derivative activities. These arrangements give the Group a legal right to set-off derivative assets and liabilities with the same counterparty. They do not result in a net presentation in the Group’s balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously, as well as a legally enforceable right to set off. They are, however, effective in reducing the Group’s credit exposure from derivative assets. The Group has executed master netting agreements with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets. Of the £552 billion (30 June 2009 - £556 billion) derivatives assets shown above, £459 billion (30 June 2009 - £461 billion) were under such agreements. Furthermore, the Group holds substantial collateral against this net derivative asset exposure.

75

Risk and capital management General All disclosures in this section focus on the Group before RFS minority interests (hereafter ‘pro forma basis’ or ‘results’).

Capital The Group aims to maintain appropriate levels of capital. For details on capital adequacy, refer to the 2008 Annual Report and Accounts.

Capital resources and ratios The Group’s regulatory capital resources on a proportional consolidation basis, excluding RFS minority interest, at 30 September 2009 and in accordance with the Financial Services Authority (FSA) definitions, were as follows:

30 September

2009 30 June

2009 31 December

2008 £m £m £m

Capital base Core Tier 1 capital: ordinary shareholders’ funds and minority interests less intangibles 32,971 35,177 34,041 Preference shares and tax deductible securities 14,113 13,949 23,091 Tax on the excess of expected losses over provisions 922 599 308 Less deductions from Tier 1 capital (388) (329) (316)

Tier 1 capital 47,618 49,396 57,124 Tier 2 capital 19,256 18,879 28,967 Tier 3 capital - 232 260

66,874 68,507 86,351 Less: Supervisory deductions (4,781) (4,536) (4,155)

Total regulatory capital 62,093 63,971 82,196 Risk-weighted (or equivalent risk-weighted) assets Credit risk 416,500 404,100 433,400 Counterparty risk 82,000 53,000 61,100 Market risk 62,300 56,300 46,500 Operational risk 33,900 33,900 36,800

594,700 547,300 577,800 Risk asset ratio Core Tier 1 5.5% 6.4% 5.9% Tier 1 8.0% 9.0% 9.9% Total 10.4% 11.7% 14.2% Risk asset ratio (statutory basis) Core Tier 1 6.5% 7.0% 6.6% Tier 1 8.8% 9.3% 10.0% Total 11.3% 11.9% 14.1%

76

Risk and capital management (continued) Capital (continued)

Capital resources and ratios (continued)

The components of the Group’s regulatory capital resources, in accordance with FSA definitions, were as follows:

30 September

2009 30 June

2009 31 December

2008 £m £m £m

Composition of regulatory capital Tier 1 Ordinary shareholders' equity 48,820 47,820 45,525 Minority interests 2,185 2,123 5,436 Adjustments for: Goodwill and other intangible assets - continuing (15,339) (15,117) (16,386)Unrealised losses on available-for-sale debt securities 2,317 4,194 3,687 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities (145) (25) (984)Reallocation of preference shares and innovative securities (656) (656) (1,813)Other regulatory adjustments (711) (263) 9 Less expected losses over provisions net of tax (2,313) (1,502) (770)Less securitisation positions (1,187) (1,397) (663)

Core Tier 1 capital 32,971 35,177 34,041 Preference shares 11,313 11,207 16,655 Innovative Tier 1 securities 2,800 2,742 6,436 Tax on the excess of expected losses over provisions 922 599 308 Less deductions from Tier 1 capital (388) (329) (316)

Total Tier 1 capital 47,618 49,396 57,124 Tier 2 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities 145 25 984 Collective impairment allowances 850 744 666 Perpetual subordinated debt 4,230 4,094 9,079 Term subordinated debt 18,830 17,832 20,282 Minority and other interests in Tier 2 capital 11 11 11 Less deductions from Tier 2 capital (4,810) (3,827) (2,055)

Total Tier 2 capital 19,256 18,879 28,967 Tier 3 - 232 260 Supervisory deductions Unconsolidated investments 4,704 4,461 4,044 Other deductions 77 75 111

Total deductions other than from Tier 1 capital 4,781 4,536 4,155 Total regulatory capital 62,093 63,971 82,196

77

Risk and capital management (continued) Credit risk

The key elements of the Group’s credit risk management framework are detailed in the Group’s 2008 Annual Report and Accounts.

Key developments in the year to date are:

• The introduction of a new credit approval framework for wholesale credit, replacing credit committees with individual delegated authorities and requiring at least two individuals to approve each credit decision, one from the business and one from risk management. Both individuals must hold sufficient delegated authority. The level of authority is dependent on their experience and expertise, with only a small number of senior executives holding the highest authority granted under the framework.

• Further refinement and embedding of the frameworks to manage the various dimensions of concentration risk: country, sector and single name.

Credit risk assets Credit risk assets consist of loans and advances (including overdraft facilities), instalment credit, finance lease receivables and other traded instruments across all customer types. Reverse repurchase agreements and issuer risk are excluded.

30 September

2009 30 June

2009 £bn £bn

UK Retail 101 98 UK Corporate 111 100 Wealth 16 14 Global Banking & Markets 257 264 Global Transaction Services 7 7 Ulster Bank 45 40 US Retail and Commercial 55 56 RBS Insurance 3 3

Core 595 582 Non-Core 157 156

752 738

Key points: • Credit risk assets increased by £14 billion, 2% in the third quarter but on a constant currency basis,

credit risk assets fell slightly. • Part of the growth in UK Corporate and decrease in Global Banking & Markets reflects migration

of portfolios between these divisions.

78

Risk and capital management (continued) Credit risk (continued)

Credit risk assets by asset quality band

30 September 2009 Core Non-Core Total 30 June 2009 31 December 2008

Asset quality band PD range £bn £bn £bn % £bn % £bn %

AQ1 0% - 0.034% 138 24 162 21.5 162 22.0 208 24.3AQ2 0.034% – 0.048% 18 3 21 2.8 24 3.3 30 3.5AQ3 0.048% – 0.095% 26 6 32 4.3 33 4.5 45 5.3AQ4 0.095% - 0.381% 95 17 112 14.9 119 16.1 159 18.6AQ5 0.381% - 1.076% 111 28 139 18.5 126 17.1 157 18.4AQ6 1.076% - 2.153% 84 18 102 13.6 102 13.8 107 12.5AQ7 2.153% - 6.089% 40 12 52 6.9 52 7.0 48 5.6AQ8 6.089% - 17.222% 22 5 27 3.6 26 3.5 26 3.0AQ9 17.222% - 100% 13 9 22 2.9 17 2.3 12 1.4AQ10 100% 16 23 39 5.2 34 4.6 19 2.2Other (1) 32 12 44 5.8 43 5.8 44 5.2

595 157 752 100.0 738 100.0 855 100.0

Note: (1) ‘Other’ largely comprises assets covered by the standardised approach for which a probability of default (PD) equivalent to

those assigned to assets covered by the internal ratings based approach is not available. The asset quality analysis above reflects the negative migration of the portfolios, with a general declining trend in the higher quality bands and an increase in lower quality bands. Credit risk assets by industry sector

30 September 2009 Core Non-Core Total

30 June 2009

31 December 2008

£bn £bn £bn £bn £bn

Personal 165 22 187 184 198Banking and financial institutions 145 19 164 152 180Property 58 48 106 104 113Transport and storage 35 16 51 50 59Manufacturing 41 9 50 54 68Technology, media, telecommunications 21 14 35 35 42Wholesale and retail trade 27 4 31 32 35Public sectors and quasi-government 25 3 28 25 40Building 19 5 24 26 29Natural resources and nuclear 15 5 20 20 25Power, water and waste 14 5 19 20 27Tourism and leisure 15 4 19 18 20Business services 12 2 14 14 15Agricultural and fisheries 3 1 4 4 4

595 157 752 738 855 Generally stable trend across most sectors is not reflected in the Banking and financial institutions where the nature of the exposure, largely short term and affected by market factors, tends to result in a more volatile trends.

79


Credit risk assets by geography 30 September 2009

Core Non-Core Total30 June

2009 31 December

2008 £bn £bn £bn £bn £bn

United Kingdom 275 51 326 324 327Western Europe (excluding UK) 142 50 192 182 226North America 101 30 131 136 178Asia & Pacific 35 10 45 41 56Latin America 16 9 25 24 31CEE & Central Asia 16 3 19 17 22Middle East & Africa 10 4 14 14 15

595 157 752 738 855

Outside the UK, changes in part reflect the effect of foreign currency exchange rate movements during the quarter.

80


Risk elements in lending The following table shows the estimated amount of loans classified as non-accrual, accruing past due and potential problem loans. The data is stated before deducting the value of security held or related provisions. 30 September 2009 Core Non-Core Total

30 June 2009

31 December 2008

£m £m £m £m £m

Loans accounted for on a non-accrual basis: (3) - Domestic (1) 6,236 6,621 12,857 11,971 8,579 - Foreign (2) 3,607 15,338 18,945 15,258 8,503

9,843 21,959 31,802 27,229 17,082 Accruing loans which are contractually overdue 90 days or more as to principal or interest: (4) - Domestic (1) 1,446 1,046 2,492 2,444 1,201 - Foreign (2) 405 309 714 1,056 508

1,851 1,355 3,206 3,500 1,709 Total risk elements in lending (REIL) 11,694 23,314 35,008 30,729 18,791 Potential problem loans:(5) - Domestic (1) 181 424 605 273 218 - Foreign (2) 6 8 14 23 8

Total potential problem loans (PPLs) 187 432 619 296 226 Closing provisions for impairment as a % of: REIL 56% 38% 44% 45% 50% REIL and PPLs 55% 37% 43% 44% 50% Risk elements in lending as a % of gross lending to customers excluding reverse repos 2.58% 14.61% 5.74% 5.01% 2.66% Risk elements in lending and potential problem loans as a % of gross lending to customers excluding reverse repos 2.62% 14.88% 5.84% 5.08% 2.69% Notes: (1) United Kingdom domestic transactions of the Group. (2) Transactions conducted through offices outside the UK and through those offices in the UK specifically organised to

service international banking transactions. (3) All loans against which an impairment provision is held are reported in the non-accrual category. (4) Loans where an impairment event has taken place but no impairment recognised. This category is used for fully

collateralised non-revolving credit facilities. (5) Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for

fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.

81


Impairment loss provision methodology The impairment loss provision methodology is detailed in the 2008 Annual Report and Accounts.

Impairment charge The following table shows total impairment losses charged to the income statement. Quarter ended Nine months ended 30 September 2009 Core Non-Core Total

30 June 2009

30 Sept 2008

30 Sept 2009

30 Sept 2008

£m £m £m £m £m £m £m

New impairment losses 1,266 2,127 3,393 4,738 1,329 11,054 2,946 Less: recoveries of amounts previously written off (53) (61) (114) (75) (49) (254) (187)

Charge to income statement 1,213 2,066 3,279 4,663 1,280 10,800 2,759

Comprising: Loan impairment losses 1,107 2,155 3,262 4,520 1,023 10,058 2,429 Impairment losses on available-for-sale securities 106 (89) 17 143 257 742 330

Charge to income statement 1,213 2,066 3,279 4,663 1,280 10,800 2,759

Analysis of loan impairment charge Quarter ended Nine months ended 30 September 2009 Core Non-Core Total

30 June 2009

30 Sept2008

30 Sept2009

30 Sept 2008

£m £m £m £m £m £m £m

Latent loss impairment charge 249 (13) 236 616 137 960 275 Collectively assessed impairment charge 572 463 1,035 1,008 636 3,038 1,576 Individually assessed impairment charge (1) 286 1,689 1,975 2,889 250 6,036 578

Charge to income statement 1,107 2,139 3,246 4,513 1,023 10,034 2,429 Charge as a % of customer loans and advances – gross (2) 0.99% 5.37% 2.14% 2.96% 0.64% 2.21% 0.51% Notes: (1) Excludes loan impairment charges against loans and advances to banks for the quarter of £16 million (quarter ended 30

June 2009 - £7 million, 30 September 2008 - £nil million and nine months ended 30 September 2009 - £24 million and 30 September 2008 - £nil million).

(2) Gross of provisions and excluding reverse repurchase agreements.

82

Risk and capital management (continued) Liquidity risk Global developments in 2009 Following a difficult first quarter, most indicators of stresses in financial markets are close to or better than before the collapse of Lehman Brothers in September 2008. Liquidity conditions in money and debt markets have improved significantly since the beginning of Q2 2009. Contributing to the improvement has been a combination of ongoing central bank and other official liquidity support schemes, guarantee schemes and rate cuts. Signs of improvement in underlying macroeconomic trends also helped to sustain a recovery in debt markets.

Important developments in central bank liquidity programmes since February include:

• In the UK, the Bank of England reduced interest rates to 0.5% in March, and later the same month the Bank of England initiated 'quantitative easing' through its Asset Purchase Facility. Gilt purchases dominate activity to date, while direct purchases of commercial paper and corporate bonds have been relatively small.

• In the US, the Federal Reserve has maintained its target for the funds rate at 0-0.25% while supplementing its credit-easing programmes with a new Term Asset-Backed Securities Loan Facility (TALF) although initial take up of the TALF has been slow.

• In the Euro Area, the European Central Bank (ECB) decided in early May to hold three 1-year repo operations against its general collateral list. The first of these was received enthusiastically in June, resulting in significant supply of ECB liquidity to the banking system and bringing downward pressure on short term rates.

Following the economic and financial crisis, regulators across the world have continued to review their respective liquidity regulation. In particular the FSA published its new policy statement (PS09/16) at the beginning of October 2009. The new regulation will be phased in over a number of years with the first element covering systems and controls, effective 1 December 2009 and new reporting requirements being introduced during 2010. In addition the requirements for liquidity buffers will be introduced over a number of years recognising the position of the economic cycle and the potential for increased liquidity buffers, above the “back-stop” levels to impact the availability of credit. The Group has a program in place to address the new FSA requirements, with the Group to continue building its liquidity reserves together with reducing the customer funding gap. Liquidity Policy The policy of the Group is to ensure that it is able to meet its obligations as they fall due.

The Group has an approved risk appetite supported by explicit targets and metrics to control the size and extent of both short-term and long-term liquidity risk. The Group Asset and Liability Committee (GALCO), chaired by the Group Finance Director, has the responsibility to set Group policy and ensure that it is cascaded and communicated to the business divisions. Group Treasury is the functional area with responsibility for monitoring and control of the Group's funding and liquidity positions.

Group Treasury is supported by a governance process that includes a Liquidity Risk forum comprising functional areas across the organisation that are responsible for liquidity management, including monitoring through divisional and regional asset and liability committees.

83

Risk and capital management (continued) Liquidity risk (continued) Liquidity management The Group’s liquidity reserves at 30 September 2009 were £140 billion, up £19 billion compared to June 2009. The Group has increased the term of its wholesale funding to improve its liquidity position. The size of medium term note issuance increased from £104,190 million in June 2009 to £112,091 million in September 2009. The overall amount of wholesale funding has increased from £416,417 million to £437,882 million at September 2009. The Group has actively sought to manage its liquidity position through improving the short-term duration of wholesale funding, supplemented by long-term issuance, government guaranteed debt, and a program of ensuring our assets are eligible as collateral using central bank liquidity schemes. Structural balance sheet management Structural balance sheet management focuses principally on ensuring the gap between customer loans and customer deposits is maintained at a reasonable level to reduce the need for wholesale funding, and more importantly short-term wholesale funding. Through pro-actively focussing on customer deposit growth and de-leveraging initiatives, the Group aims to improve the structural balance sheet.

A key structural balance sheet measure for the Group is the Loans to deposits ratio (gross), and this has improved from 145% to 142% at September 2009. The gap between customer loans and customer deposits (excluding repos) improved by £14 billion from £178.0 billion as at 30 June 2009 to £164 billion as at 30 September 2009. The Group is continuing to develop diversified sources of funding across its retail, corporate and wholesale franchises in line with the strategy to rely more on retail and other customer funds to support its lending business.

Additional measures to improve the structural balance sheet have focused on reducing the size of the multi seller conduits business, down by £4.5 billion to £30.5 billion at 30 September 2009, which relies upon funding assets through the issuance of short term asset back commercial paper.

Stress testing The Group uses stress tests as a tool to evaluate the impact of disrupted market conditions and specific events, to measure the impact both on and off balance sheet. The stress tests show the degree of resilience in times of stress and the ability for contingency actions to mitigate stressed conditions. The assumptions and nature of the risks driving the stress tests are refined and updated in light of changing conditions.

Contingency planning Contingency plans developed to anticipate the potential for deterioration in market conditions and ensure that the Group can respond to adverse developments. The contingency plan considers actions including the use of liquid assets, reduction in lending commitments, and the use of collateral and management of derivative exposures.

84

Risk and capital management (continued) Liquidity risk (continued) Funding profile In line with stated targets, the Group will seek to improve its liquidity position by attracting appropriate mix of customer deposits and wholesale funding;

30 September 2009 30 June 2009 31 December 2008 £m % £m % £m %

Deposits by banks (1) 138,584 16.1 135,601 16.3 178,943 18.8

Debt securities in issue: Commercial paper 45,508 5.3 49,270 5.9 69,891 7.3 Certificates of deposits 79,305 9.2 76,095 9.2 73,925 7.8 MTNs 112,091 13.0 104,190 12.5 94,298 9.9 Other (bonds) 12,440 1.4 4,394 0.5 14,231 1.5 Securitisations 16,869 2.0 14,761 1.8 17,113 1.8

266,213 30.9 248,710 29.9 269,458 28.3 Subordinated debt 33,085 3.8 32,106 3.9 43,678 4.6

Total wholesale funding 437,882 50.8 416,417 50.1 492,079 51.7 Customer deposits (1) 423,769 49.2 415,267 49.9 460,318 48.3

Total 861,651 100.0 831,684 100.0 952,397 100.0

Note: (1) Excluding repurchase agreements and stock lending. The mix of funding has remained relatively unchanged from June 2009 to September 2009. Increases in customer deposits of £8,502 million and wholesale funding of £21,465 million resulted in a slightly larger proportion of wholesale funding of 50.8% compared to 50.1% for June 2009. The Group manages actively the funding profile through targeting of structural funding measures such as loans to deposits gaps and also through its liquidity management. Deposits by banks The short term debt markets have improved markedly over the course of 2009 and the Group has been able to readily access this source of funding with improved maturities and reduced costs of spread. This easing of market conditions has enabled the Group to significantly reduce reliance on central bank facilities.

85

Risk and capital management (continued) Liquidity risk (continued) Debt securities in issue and subordinated liabilities The proportion of outstanding debt instruments issued, with a remaining maturity of greater than 12 months, has decreased from 46.8% at 30 June 2009 to 45.7% at 30 September 2009. The outstanding amount with a maturity greater than 12 months has increased from £131,551 million at June 2009 to £136,871 million at 30 September reflecting the increased term funding issuances over the period. 30 September 2009

Debt securities

in issue

Sub- ordinated

debt Total 30 June 2009 31 December 2008 £m £m £m % £m % £m %

Less than one year 159,296 3,131 162,427 54.3 149,265 53.2 172,234 55.0 1-5 years 70,458 4,769 75,227 25.1 67,390 24.0 61,842 19.8 More than 5 years 36,459 25,185 61,644 20.6 64,161 22.8 79,060 25.2

Total 266,213 33,085 299,298 100.0 280,816 100.0 313,136 100.0

Customer deposits An important source of funding for the Group is customer deposits that are diversified across the retail, wealth and small and medium enterprise customer base. The Group maintains customer depositor taking activities across the geographies in which it operates to maintain access to this stable source of core funding. The level of customer deposits increased over the period from £415,267 million at 30 June 2009 to £423,769 million at 30 September 2009.

Repo agreements As at 30 September 2009 the Group had £69.5 billion of customer secured funding and £39.8 billion of bank secured funding which includes borrowing using central bank funding schemes. With markets continuing to stabilise through the course of 2009, the Group has reduced its reliance on secured funding from central bank liquidity schemes significantly.

Undrawn commitments The Group saw an increase in undrawn commitments from £297 billion at 30 June 2009 to £305 billion at 30 September 2009 as a result of a combination of foreign exchange movements and new business.

Conduits The Group has a multi-seller conduit business that funds assets through the issuance of short term asset backed commercial paper. The total of assets held in Group sponsored conduits fell from £35.0 billion at 30 June 2009 to £30.5 billion at 30 September 2009 as the Group reduced its exposure to this business in line with strategy. This reduced the liquidity risk to the Group through the commitments provided for this type of business.

86

Risk and capital management (continued) Market risk

Market risk arises from changes in interest rates, foreign currency, credit spread, equity prices and risk related factors such as market volatilities. The Group manages market risk centrally within its trading and treasury portfolios through a comprehensive market risk management framework. This framework contains limits based on, but not limited to: value-at-risk (VaR), scenario analysis, position and sensitivity analyses.

The VaR disclosure is analysed between trading and non-trading where trading VaR relates to the main trading activities of the Group and non-trading reflects the VaR associated with reclassified assets, money market business and the management of internal funds flow within the Group’s businesses.

Trading VaR (pro forma and statutory basis)

Average Period end Maximum Minimum £m £m £m £m

30 September 2009 (as of and for quarter ended) Interest rate 58.3 43.3 84.6 34.2Credit spread 176.1 150.3 211.6 135.7Currency 17.2 18.2 26.2 10.5 Equity 14.9 19.8 23.2 9.0 Commodity 16.7 25.8 30.0 9.8 Diversification effects (94.8)

175.0 162.6 214.7 121.3

Core 99.5 121.9 134.7 72.9 Non-Core 117.2 91.3 161.0 62.4 30 June 2009 (as of and for quarter ended) Interest rate 70.6 81.4 112.8 48.0 Credit spread 163.3 199.6 231.2 90.8 Currency 15.6 15.6 31.4 9.2 Equity 13.2 11.7 19.0 8.3 Commodity 15.8 11.5 21.4 11.3 Diversification effects (129.2)

167.1 190.6 229.0 97.3

Core 92.0 94.3 125.1 54.2 Non-Core 112.8 130.4 166.5 60.8

Key points: • Trading VaR includes hedges taken against the risk of counterparty failures. The standalone VaR

for these positions was £26.4 million at 30 September 2009 (30 June 2009 - £29.9 million).

• Average interest rate VaR decreased in Q3 due to a reduction in positions in the flow rates business.

• Credit spread period end VaR reduced significantly in Q3 due to positions relating to credit derivative product companies being capitalised under Pillar II approach from end of August 2009 and hence excluded from the VaR measure from this date.

87

Risk and capital management (continued) Market risk (continued)

Non-trading VaR Average Period end Maximum Minimum £m £m £m £m

30 September 2009 (as of and for quarter ended) Interest rate 13.6 13.6 16.3 11.5 Credit spread 220.0 240.5 245.8 180.3 Currency 1.7 3.1 5.8 0.6 Equity 3.5 3.4 3.7 3.3 Diversification effects (35.5)

212.6 225.1 234.3 182.7

Core 123.0 134.0 142.7 81.0 Non-Core 105.5 94.9 120.2 94.9 30 June 2009 (as of and for quarter ended) Interest rate 14.9 16.6 16.7 12.9 Credit spread 214.9 205.4 270.3 189.6 Currency 1.7 1.1 3.8 0.6 Equity 3.0 3.7 3.7 2.2 Diversification effects (27.0)

213.7 199.8 274.9 186.2

Core 88.6 81.6 133.5 65.7 Non-Core 131.9 132.6 145.3 120.2

The data in the tables above exclude exposures to super senior tranches of asset-backed CDOs, as VaR does not provide an appropriate measure of risk for these exposures due to the continued illiquidity and opaqueness of pricing these instruments.

The Group's VaR should be interpreted in light of the limitations of the methodologies used, as follows:

• Historical Simulation VaR may not provide the best estimate of future market movements as it can only provide a prediction of the future based on events that occurred in the two year time series. Therefore, events more severe than those in the historical data series cannot be predicted.

• VaR that uses a 99% confidence level does not reflect the extent of potential losses beyond that percentile.

• VaR uses a one-day time horizon which will not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day.

• The Group computes the VaR of trading portfolios at the close of business however, positions may change substantially during the course of the trading day and intraday profit and losses will be incurred.

These limitations mean that the Group cannot guarantee that losses will not exceed the VaR. Key points: • Non-Core VaR decreased in Q3 due to a reduction in asset-backed security exposures.

• Core VaR increased in Q3 reflecting downgrades in residential mortgage-backed positions and the effect of counterparties exercising put options on credit sensitive bonds.

88

Risk and capital management (continued) Market turmoil exposures

Explanatory note These disclosures are focused around certain of the Group’s exposures which have been particularly affected by the widespread market disruptions. They reflect the recommendations in the report of the Financial Stability Forum on Enhancing Market and Institutional Resilience and the Committee of European Banking Supervisors report on banks’ transparency on activities and products affected by the recent market turmoil. Acronyms used in Market turmoil exposures section The following acronyms are used in this section

ABCP Asset-backed commercial paper ABS Asset-backed security CDO Collateralised debt obligation CDPC Credit derivative product company CDS Credit default swap CLO Collateralised loan obligation CMBS Commercial mortgage-backed security Fannie Mae Federal National Mortgage Association Freddie Mac Federal Home Loan Mortgage Corporation Ginnie Mae Government National Mortgage Association GSE Government Sponsored Entity RMBS Residential mortgage-backed security SPE Special purpose entity US agencies Ginnie Mae, Fannie Mae, Freddie Mac and similar entities

89

Risk and capital management (continued) Market turmoil exposures (continued)

Asset-backed exposures The carrying value of the Group’s debt securities at 30 September 2009 was £251.3 billion compared with £229.1 billion at 30 June 2009. This comprised:

• securities issued by central and local governments of £126.5 billion (30 June 2009 - £104.7 billion);

• securities issued by banks and building societies of £14.7 billion (30 June 2009 - £13.6 billion); • asset-backed securities of £90.6 billion (30 June 2009 - £90.5 billion); and • securities issued by corporates and other entities of £19.4 billion (30 June 2009 - £20.3 billion). The Group’s credit market activities gave rise to risk concentrations in asset-backed securities that have been particularly affected by the market turmoil experienced in the second half of 2007 and in 2008.

The table below summarises the net exposures and balance sheet carrying values of these securities by the product and geography of the underlying assets, at 30 September 2009 and 30 June 2009.

US UK Europe RoW Total Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 £m £m £m £m £m £m £m £m £m £m

Net exposure: RMBS: G10 governments (2) 27,916 30,798 316 271 16,064 14,771 35 37 44,331 45,877 RMBS: prime 3,171 3,184 3,465 3,166 3,416 3,461 211 188 10,263 9,999 RMBS: non-conforming 1,002 912 2,005 2,015 130 124 - - 3,137 3,051 RMBS: sub-prime 516 493 345 340 156 143 299 271 1,316 1,247 CMBS 2,529 2,691 1,159 1,115 659 618 22 39 4,369 4,463 CDOs (3) 1,038 851 83 63 561 542 17 - 1,699 1,456 CLOs 1,055 1,035 55 61 1,266 1,036 181 15 2,557 2,147 Other ABS 2,389 2,392 1,380 1,154 4,750 4,644 1,022 594 9,541 8,784

Total 39,616 42,356 8,808 8,185 27,002 25,339 1,787 1,144 77,213 77,024 Carrying value: RMBS: G10 governments (2) 27,916 30,798 316 271 16,064 14,771 35 37 44,331 45,877 RMBS: prime 3,228 3,242 4,272 3,880 4,462 4,445 290 196 12,252 11,763 RMBS: non-conforming 1,011 919 2,005 2,015 130 123 - - 3,146 3,057 RMBS: sub-prime 1,001 906 349 347 164 152 350 311 1,864 1,716 CMBS 3,248 3,201 1,242 1,199 1,007 1,017 175 145 5,672 5,562 CDOs 2,866 3,895 212 137 719 784 108 140 3,905 4,956 CLOs 6,306 6,199 91 88 1,661 1,400 723 36 8,781 7,723 Other ABS 3,097 2,966 1,468 1,252 4,798 4,694 1,309 890 10,672 9,802

Total 48,673 52,126 9,955 9,189 29,005 27,386 2,990 1,755 90,623 90,456

Key points: • Total asset-backed securities, both net exposure and carrying value, at 30 September 2009 were

at similar levels to the half year due to a combination of foreign exchange effects and tightening credit spreads, offset by redemptions.

90


Asset-backed exposures (continued) Key points (continued) • US securities declined in value. US agency trading portfolio decreased by £3.5 billion reflecting

balance sheet reduction. CDO carrying values reduced by a net £1 billion as a result of some positions being classified as derivatives following change in valuation from macro level pricing to disaggregated collateral net asset values. This net decrease however included an increase in super senior positions reflecting higher prices of underlying collateral, with average prices increasing from 16% at 30 June 2009 to 21% at 30 September 2009.

• European securities increased by £1.6 billion, primarily on Dutch government backed issues due to foreign currency effects and improved pricing.

• Security backed by assets originated in other countries increased by £1.2 billion mainly due to tightening of credit spreads and foreign exchange effects.

91


Asset-backed exposures (continued) The table below summarises the net exposures and balance sheet carrying values of asset-backed securities by the product and measurement classification of the underlying assets, at 30 September 2009 and 30 June 2009.

Held-for-trading

Available-for-sale


Designated at fair value Total

Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 Sept 09 Jun 09 £m £m £m £m £m £m £m £m £m £m

Net exposure: (1) RMBS: G10 governments (2) 13,282 16,228 31,049 29,649 - - - - 44,331 45,877 RMBS: prime 3,449 3,218 5,886 5,910 793 751 135 120 10,263 9,999 RMBS: non-conforming 399 346 1,235 1,217 1,503 1,488 - - 3,137 3,051 RMBS: sub-prime 490 439 452 432 360 363 14 13 1,316 1,247 CMBS 1,227 1,326 1,522 1,531 1,420 1,413 200 193 4,369 4,463 CDOs (3) 813 668 601 464 284 323 1 1 1,699 1,456 CLOs 115 293 1,839 1,287 603 567 - - 2,557 2,147 Other ABS 773 461 4,870 4,466 3,885 3,841 13 16 9,541 8,784

Total 20,548 22,979 47,454 44,956 8,848 8,746 363 343 77,213 77,024

Carrying value: RMBS: G10 governments (2) 13,282 16,228 31,049 29,649 - - - - 44,331 45,877 RMBS: prime 5,438 4,981 5,886 5,910 793 751 135 120 12,252 11,762 RMBS: non-conforming 408 353 1,235 1,217 1,503 1,488 - - 3,146 3,058 RMBS: sub-prime 711 628 779 712 360 363 14 13 1,864 1,716 CMBS 2,298 2,241 1,740 1,704 1,420 1,413 214 204 5,672 5,562 CDOs 2,265 3,243 1,355 1,389 284 323 1 1 3,905 4,956 CLOs 3,435 3,386 4,743 3,770 603 567 - - 8,781 7,723 Other ABS 1,774 1,479 5,000 4,466 3,885 3,841 13 16 10,672 9,802

Total 29,611 32,539 51,787 48,817 8,848 8,746 377 354 90,623 90,456 Notes: (1) Net exposures represent the carrying value after taking account of hedge protection purchased from monolines and other

counterparties but exclude the effect of counterparty credit valuation adjustments. The hedges provide credit protection ofprincipal and interest cash flows in the event of default by the counterparty. The value of this protection is based on the underlying instrument being protected.

(2) RMBS: G10 government securities comprises securities that are: (a) guaranteed or effectively guaranteed by the US government, through its support for US federal agencies and GSEs; (b) guaranteed by the Dutch government; and (c) covered bonds, referencing primarily Dutch and Spanish government-backed loans. (3) Includes super senior net exposures of £796 million (30 June 2009 - £548 million).

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Counterparty valuation adjustments

Credit valuation adjustments Counterparty valuation adjustments (CVAs) represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.

30 September

2009 30 June

2009 £m £m

Monoline insurers 6,300 6,845 CDPCs 592 821 Other counterparties 1,856 1,821

Total CVA adjustments 8,748 9,487

The Group purchased protection from monoline insurers (“monolines”) mainly against specific ABS, CDOs and CLOs. Monolines are entities which specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default by the debt security counterparty. This protection is typically held in the form of derivatives such as credit default swaps (CDSs), referencing the underlying exposures held by the Group.

The Group also purchased credit protection, both tranched and single name credit derivatives, from credit derivative product companies (CDPCs). CDPCs are similar to monolines however they are not regulated as insurers. The Group’s exposure to CDPCs is predominantly due to tranched credit derivatives (“tranches”). A tranche references a portfolio of assets and provides protection against total portfolio default losses exceeding a certain percentage of the portfolio notional (the attachment point) up to another percentage (the detachment point).

The CVA for monolines is calculated on a trade-by-trade basis, and is derived using market observable monoline credit spreads. The majority of the monoline CVAs relate to credit derivative hedging exposures to ABSs. The CDPC CVA is calculated using a similar approach. However, in the absence of market observable credit spreads, the cost of hedging the counterparty risk is estimated by analysing the underlying trades and the cost of hedging expected default losses in excess of the capital available in each vehicle.

The CVA for all other counterparties is calculated by reference to observable credit spreads. The calculation is performed on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the risk.

Key points:

• Monolines: CVA reduced in Q3 2009 due to an increase in the fair value of underlying assets.

• CDPCs: CVA declined primarily due to the effect of higher prices of underlying assets.

• CVA relating to other counterparties increased as additional reserves were taken against specific counterparties following downgrades.

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Monoline insurers The Group’s exposure (all in Non-Core) to monoline counterparties is analysed in the table below: 30 September

2009 30 June

2009 £m £m

Gross exposure to monolines 9,752 10,950 Hedges with financial institutions (539) (524)Credit valuation adjustment (6,300) (6,845)

Net exposure to monolines 2,913 3,581

The net income statement effect arising from the change in level of monoline CVA and related trades is shown below. The reduction in CVA is primarily due to the impact of price increases on underlying assets which reduced the CDS protection against the monolines. These price increases also contributed to a reduction in value of the CDS hedging reclassified debt securities accounted for on an amortised cost basis. Spread tightening on CMBX indices contributed to the losses on the hedges offset. £m

Credit valuation adjustment at 30 June 2009 (6,845)Credit valuation adjustment at 30 September 2009 (6,300)

Decrease in credit valuation adjustment 545 Hedges, foreign exchange and other movements (228)Net effect relating to reclassified debt securities (1) (401)

Net income statement effect (84) Note: (1) Includes impairment losses.

94


The asset categories protected by CDSs written by monolines and the related CVA by monoline credit rating at the balance sheet date are analysed in the table below. 30 September 2009 30 June 2009

Notional amount:

protected assets

Fair value: protected

assets Gross

exposure

Credit valuation

adjustment

Notional amount:

protected assets

Fair value: protected

assets Gross

exposure

Credit valuation

adjustment £m £m £m £m £m £m £m £m

AAA/AA rated 7,421 5,628 1,793 623 7,689 5,601 2,088 910 Sub-investment grade 15,850 7,891 7,959 5,677 15,993 7,131 8,862 5,935

Total: 23,271 13,519 9,752 6,300 23,682 12,732 10,950 6,845 Of which: CDOs 4,870 774 4,096 3,126 4,972 687 4,285 2,745 RMBS 84 70 14 2 79 66 13 2 CMBS 4,317 1,974 2,343 1,592 4,260 1,569 2,691 1,947 CLOs 10,214 8,211 2,003 907 10,563 8,014 2,549 1,396 Other ABS 3,092 2,107 985 502 3,055 1,978 1,077 559 Other 694 383 311 171 753 418 335 196

23,271 13,519 9,752 6,300 23,682 12,732 10,950 6,845

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Monoline insurers (continued) The Group also has indirect exposure to monolines through wrapped securities and other assets with credit enhancement monolines. These securities are traded with the benefit of this credit enhancement. Any deterioration in the credit rating of the monoline is reflected in the fair value of these assets.

Credit derivative product companies The Group’s exposure to CDPCs has reduced considerably due to a combination of tighter credit spreads and a decrease in the relative value of senior tranches compared to the underlying reference portfolios. The overall level of CVA has decreased in line with the reduction in the exposure, however, on a relative basis the CVA has increased. This reflects the perceived deterioration of the credit quality of the CDPCs as reflected by ratings downgrades. The Group’s exposure to CDPC is analysed in the table below:

30 September

2009 30 June

2009 £m £m

Gross exposure to CDPCs 1,593 2,303 Credit valuation adjustment (592) (821)

Net exposure to CDPCs 1,001 1,482

The net income statement effect arising from the change in level of CVA and related trades is shown in the table below. The Group has additional market risk hedges in place which effectively cap the exposure to CDPCs where the Group has significant risk. As the exposure to these CDPCs has reduced, losses have been incurred on the additional hedges. These losses, together with losses arising on trades hedging CVA, are the primary cause of the loss arising on hedges, foreign exchange and other movements.

£m

Credit valuation adjustment at 30 June 2009 (821)Credit valuation adjustment at 30 September 2009 (592)

Decrease in credit valuation adjustment 229 Hedges, foreign exchange and other movements (505)

Net income statement effect (276)

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Further analysis of the Group’s exposure to CDPCs (predominantly Non-Core) by CDPC credit rating is shown below. Some of the CDPCs with the AAA/AA and A/BBB rating at 31 December 2008 were subsequently downgraded or had ratings withdrawn. 30 September 2009 30 June 2009

Notional amount:

protected assets

Fair value: protected reference

assets Gross

exposure

Credit valuation

adjustment

Notional amount:

protected assets

Fair value: protected reference

assets Gross

exposure

Credit valuation

adjustment £m £m £m £m £m £m £m £m

AAA/AA rated 1,683 1,650 33 10 1,636 1,580 56 18 A/BBB rated 1,092 1,062 30 6 15,965 14,484 1,481 470 Sub-investment grade 17,685 16,486 1,199 446 1,399 1,097 302 151 Rating withdrawn 4,041 3,710 331 130 3,914 3,450 464 182

24,501 22,908 1,593 592 22,914 20,611 2,303 821 Leveraged finance The table below shows the Group’s global markets sponsor-led, leveraged finance exposures by industry and geography. All these exposures are in Non-Core.

30 September 2009 30 June 2009 Americas UK Europe RoW Total Americas UK Europe RoW Total £m £m £m £m £m £m £m £m £m £m

Gross exposure: TMT (1) 1,669 1,692 1,578 570 5,509 1,625 1,652 1,477 506 5,260 Industrial 1,634 1,620 1,833 226 5,313 1,616 1,553 1,641 175 4,985 Retail 69 505 1,405 81 2,060 69 1,134 1,327 79 2,609 Other 272 1,536 1,368 146 3,322 350 1,566 1,228 131 3,275

3,644 5,353 6,184 1,023 16,204 3,660 5,905 5,673 891 16,129

Net exposure: TMT (1) 1,340 1,563 1,502 553 4,958 1,283 1,517 1,367 506 4,673 Industrial 497 1,201 1,629 224 3,551 578 1,126 1,416 172 3,292 Retail 69 488 1,329 81 1,967 69 537 1,257 79 1,942 Other 272 1,470 1,354 147 3,243 350 1,383 1,204 131 3,068

2,178 4,722 5,814 1,005 13,719 2,280 4,563 5,244 888 12,975 Of which: Drawn 1,835 3,992 4,537 916 11,280 1,825 3,859 4,193 813 10,690 Undrawn 343 730 1,277 89 2,439 455 704 1,051 75 2,285

2,178 4,722 5,814 1,005 13,719 2,280 4,563 5,244 888 12,975 Of which: Syndicate portfolio (2) 1,423 1,314 1,075 71 3,883 1,428 1,398 1,125 88 4,039 Hold portfolio 755 3,408 4,739 934 9,836 852 3,165 4,119 800 8,936

2,178 4,722 5,814 1,005 13,719 2,280 4,563 5,244 888 12,975

Notes: (1) Telecommunications, media and technology. (2) Includes held-for-trading exposures of £38 million at 30 June 2009. Additionally, there are UK Corporate leveraged finance net exposures of £7.5 billion at 30 September 2009 (30 June 2009 - £6.9 billion) relating to debt and banking facilities provided to UK mid-corporates.

97

Risk and capital management (continued) Market turmoil exposures (continued) The table below analyses the movement in the amounts reported above. Drawn Undrawn Total £m £m £m

Balance at 1 July 2009 10,690 2,285 12,975 Sales (19) 1 (18)Repayments and facility reductions (52) (23) (75)Funded deals 69 (69) - Changes in fair value (10) 28 18 Impairment provisions (170) - (170)Exchange and other movements 772 217 989

Balance at 30 September 2009 11,280 2,439 13,719 During Q3 the Group’s sterling exposure has increased largely as a result of the strengthening of US dollar and Euro against sterling, partly offset by a number of impairments and write-offs. Special purpose entities For background on the Group’s involvement with securitisations and special purpose entities (SPEs), refer to Business Review – SPEs and conduits in the Annual Report and Accounts 2008. Securitisations The table below details the carrying amount by asset category of the assets and associated liabilities for those securitisations and other asset transfers, other than conduits, where the assets continue to be recorded on the Group’s balance sheet. 30 September 2009 30 June 2009 31 December 2008 Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m

Residential mortgages 79,394 18,263 69,266 * 17,812 55,714 * 20,075Credit card receivables 2,975 1,607 2,975 1,567 3,004 3,197 Other loans 9,997 1,039 10,472 1,031 1,679 1,071Finance lease receivables 743 739 950 750 1,077 857* revised The increase in residential mortgage and other loan assets in the third quarter primarily relate to balances that have been securitised to facilitate access to central bank special liquidity schemes. As all the notes issued by the SPEs are purchased by Group companies, securitised assets are significantly greater than secured liabilities.

98


Conduits The exposure from conduits which are consolidated, including those to which the Group is economically exposed on a shared basis with other consortium members and its involvement with third-party conduits, is set out below.

The Group’s multi-seller conduits have continued to fund the vast majority of their assets through ABCP issuance. The relative stability experienced in the first half has continued in Q3 2009 with increased demand from ABCP investors. The average maturity of ABCP issued by the Group’s conduits was 52.2 days at 30 September 2009, relatively consistent with 55.2 days at 30 June 2009.

Sponsored conduits 30 September 2009 30 June 2009 31 December 2008 Core Non-core Total Total Total £m £m £m £m £m

Total assets held by the conduits (1) 26,226 4,277 30,503 35,007 49,857

Commercial paper issued (1) 25,383 3,155 28,538 33,452 48,684

Liquidity and credit enhancements: Deal specific liquidity: - drawn 814 1,165 1,979 1,440 1,172 - undrawn 31,396 3,959 35,355 39,744 57,929 Programme-wide liquidity - - - - - PWCE (2) 1,193 350 1,543 1,663 2,391

33,403 5,474 38,877 42,847 61,492

Maximum exposure to loss (3) 32,199 5,044 37,243 41,184 59,101

Third party conduits 30 September 2009 30 June 2009 31 December 2008 Core Non-core Total Total Total £m £m £m £m £m

Liquidity and credit enhancements: Deal specific liquidity: - drawn 148 2,383 2,531 2,361 3,078- undrawn 517 37 554 1,161 198Programme-wide liquidity: - drawn - - - 99 102- undrawn - - - - 504PWCE (2) - - - - -

665 2,420 3,085 3,621 3,882

Maximum exposure to loss (3) 665 1,874 2,539 3,621 3,882

Notes: (1) Total assets and commercial paper issued relating to conduits shared with consortium members was £9 billion (30 June

2009 - £11 billion; 31 December 2008 - £14 billion). (2) Programme-wide credit enhancement. (3) Maximum exposure to loss is the total of the Group’s liquidity commitments to conduits and programme-wide credit support

which would absorb first loss on transactions where liquidity support is provided by a third party. Third party maximum exposure to loss is reduced by repo trades conducted with an external counter party.

99

Risk and capital management (continued) Market turmoil exposures (continued) Structured investment vehicles The Group does not sponsor any structured investment vehicles. Investment funds set up and managed by the Group The Group has established and manages a number of money market funds for its customers. When a new money market fund is launched, the Group typically provides a limited amount of seed capital to the funds. The Group has investments in these funds of £611.9 million at 30 September 2009 (30 June 2009 - £723.2 million). These funds are not consolidated by the Group. Money market funds The Group’s money market funds held assets of £11.6 billion at 30 September 2009 (30 June 2009 - £13.2 billion). Non-money market funds The Group has also established a number of non-money market funds to enable investors to invest in a range of assets including bonds, equities, hedge funds, private equity and real estate. As the Group does not have significant holdings in these funds, they are not consolidated by the Group.

The Group non-money market funds had total assets of £15 billion at 30 September 2009 (30 June 2009 - £14.2 billion).

100

Statutory results The condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet and related notes presented on pages 102 to 113 inclusive are on a statutory basis and include the results and financial position of ABN AMRO. The interests of the State of the Netherlands and Santander in RFS Holdings are included in minority interests.

101

Condensed consolidated income statement for the quarter ended 30 September 2009 (unaudited) In the income statement below, amortisation of purchased intangible assets and integration and restructuring costs are included in operating expenses. Data for 2008 have been restated for the amendment to IFRS 2 'Share-based Payment'. Quarter ended Nine months ended

30 September

2009 30 June

2009 30 September

2008 30 September

2009 30 September

2008 £m £m £m £m £m

Interest receivable 7,594 8,941 12,085 25,930 36,263 Interest payable (3,731) (4,962) (7,295) (13,693) (22,778)


Fees and commissions receivable 2,226 2,451 2,550 7,214 7,467 Fees and commissions payable (541) (656) (583) (1,881) (1,771)Income/(loss) from trading activities 1,091 283 1,219 3,085 (2,154)Gain on redemption of own debt - 3,790 - 3,790 - Other operating income (excluding insurance premium income) 169 254 439 1,383 2,074 Net insurance premium income 1,272 1,352 1,547 4,093 4,703


Total income 8,080 11,453 9,962 29,921 23,804

Staff costs (2,792) (2,805) (2,733) (8,800) (8,291)Premises and equipment (748) (745) (623) (2,281) (1,841)Other administrative expenses (1,325) (1,276) (1,207) (4,007) (3,627)Depreciation and amortisation (687) (595) (758) (2,044) (2,281)Write-down of goodwill and other intangible assets - (311) - (311) -

Operating expenses* (5,552) (5,732) (5,321) (17,443) (16,040)

Profit before other operating charges and impairment losses 2,528 5,721 4,641 12,478 7,764 Net insurance claims (1,209) (1,047) (1,046) (3,343) (3,235)Impairment losses (3,488) (4,970) (1,397) (11,548) (3,058)

Operating (loss)/profit before tax (2,169) (296) 2,198 (2,413) 1,471 Tax credit/(charge) 597 682 (785) 1,038 (452)

(Loss)/profit from continuing operations (1,572) 386 1,413 (1,375) 1,019 (Loss)/profit from discontinued operations, net of tax (19) 54 3,526 (81) 3,760

(Loss)/profit for the period (1,591) 440 4,939 (1,456) 4,779 Minority interests 36 (148) (3,849) (595) (4,301)Other owners' dividends (245) (432) (219) (791) (434)

(Loss)/profit attributable to ordinary shareholders (1,800) (140) 871 (2,842) 44

*Operating expenses include:

Integration and restructuring costs: - administrative expenses 321 352 280 1,047 582 - depreciation and amortisation 3 3 9 11 23

324 355 289 1,058 605 Amortisation of purchased intangible assets 73 55 119 213 381

397 410 408 1,271 986

102

Condensed consolidated statement of comprehensive income for the quarter ended 30 September 2009 (unaudited) Quarter ended Nine months ended

30 September 2009

30 June 2009

30 September 2008

30 September 2009

30 September 2008

£m £m £m £m £m

(Loss)/profit for the period (1,591) 440 4,939 (1,456) 4,779 Other comprehensive income: Available-for-sale financial assets 3,079 1,447 (1,737) 1,419 (3,533)Cash flow hedges (90) 472 (619) 274 (293)Currency translation 1,777 (3,726) 1,103 (2,504) 4,612 Tax on other comprehensive income (857) (72) 552 (379) 975

Other comprehensive income for the period, net of tax 3,909 (1,879) (701) (1,190) 1,761 Total comprehensive income for the period 2,318 (1,439) 4,238 (2,646) 6,540 Attributable to: Equity shareholders 1,243 (364) 1,135 (1,903) 199 Minority interests 1,075 (1,075) 3,103 (743) 6,341

2,318 (1,439) 4,238 (2,646) 6,540

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Financial review Loss Loss before tax for the quarter was £2,169 million compared with a loss of £296 million in the second quarter of 2009. Total income Total income fell 29% to £8,080 million in the third quarter of the year. Net interest income decreased by 3% to £3,863 million. Non-interest income decreased to £4,217 million in the quarter. Operating expenses Operating expenses decreased to £5,552 million of which integration and restructuring costs were £324 million compared with £355 million in the second quarter. Net insurance claims Bancassurance and general insurance claims, after reinsurance, increased by 15% to £1,209 million. Impairment losses Impairment losses were £3,488 million, compared with £4,970 million in the second quarter of 2009. Taxation The effective tax rate for the third quarter of 2009 was 27.5% compared with 230.4% in the second quarter. Earnings Basic earnings per ordinary share, including discontinued operations, worsened from a loss of 0.3p to a loss of 3.2p. Capital Capital ratios at 30 September 2009 were 6.5% (Core Tier 1), 8.8% (Tier 1) and 11.3% (Total).

104

Condensed consolidated balance sheet at 30 September 2009 (unaudited)

30 September

200930 June

2009

31 December 2008

(audited) £m £m £m

Assets Cash and balances at central banks 37,147 39,946 12,400 Net loans and advances to banks 68,858 60,330 79,426 Reverse repurchase agreements and stock borrowing 37,190 35,076 58,771 Loans and advances to banks 106,048 95,406 138,197 Net loans and advances to customers 725,766 722,260 835,409 Reverse repurchase agreements and stock borrowing 43,463 47,514 39,313 Loans and advances to customers 769,229 769,774 874,722 Debt securities 270,366 244,089 267,549 Equity shares 20,594 17,580 26,330 Settlement balances 28,639 23,264 17,832 Derivatives 555,072 557,284 992,559 Intangible assets 18,531 18,180 20,049 Property, plant and equipment 19,900 17,895 18,949 Deferred taxation 8,367 8,392 7,082 Prepayments, accrued income and other assets 22,385 23,265 24,402 Assets of disposal groups 4,877 3,848 1,581

Total assets 1,861,155 1,818,923 2,401,652 Liabilities Bank deposits 126,551 126,852 174,378 Repurchase agreements and stock lending 39,816 44,142 83,666 Deposits by banks 166,367 170,994 258,044 Customer deposits 556,088 540,674 581,369 Repurchase agreements and stock lending 69,465 75,015 58,143 Customer accounts 625,553 615,689 639,512 Debt securities in issue 292,419 274,180 300,289 Settlement balances and short positions 71,952 60,287 54,277 Derivatives 540,005 537,064 971,364 Accruals, deferred income and other liabilities 28,802 30,121 31,482 Retirement benefit liabilities 1,808 1,731 2,032 Deferred taxation 4,090 4,022 4,165 Insurance liabilities 10,113 9,542 9,976 Subordinated liabilities 37,663 35,703 49,154 Liabilities of disposal groups 8,232 7,498 859

Total liabilities 1,787,004 1,746,831 2,321,154 Equity: Minority interests 17,485 16,426 21,619 Owners’ equity* Called up share capital 14,120 14,120 9,898 Reserves 42,546 41,546 48,981

Total equity 74,151 72,092 80,498

Total liabilities and equity 1,861,155 1,818,923 2,401,652 *Owners’ equity attributable to: Ordinary shareholders 48,820 47,820 45,525 Other equity owners 7,846 7,846 13,354

56,666 55,666 58,879

105

Commentary on condensed consolidated balance sheet Total assets of £1,861.2 billion at 30 September 2009 were up £42.2 billion, 2%, compared with 30 June 2009, primarily due to exchange rate movements following the weakening of sterling since June.

Loans and advances to banks increased by £10.6 billion, 11%, to £106.0 billion with reverse repurchase agreements and stock borrowing (‘reverse repos’) up by £2.1 billion, 6% to £37.2 billion and growth in bank placings, up £8.5 billion, 14%, to £68.9 billion as a result of increased wholesale lending.

Loans and advances to customers were down £0.5 billion at £769.2 billion. Within this, reverse repos decreased by 9%, £4.0 billion to £43.4 billion. Excluding reverse repos, lending increased by £3.5 billion to £725.8 billion or by £5.1 billion, 1%, before impairment provisions. This reflected reductions in Global Banking & Markets of £11.0 billion, Non-Core, £9.5 billion, US Retail & Commercial, £2.2 billion, and Ulster Bank, £0.8 billion, partially offset by growth in UK Retail, £3.8 billion, UK Corporate & Commercial, £1.3 billion, Wealth, £1.0 billion, and Global Transaction Services, £0.7 billion, together with the effect of exchange rate movements, £22.0 billion.

Debt securities increased by £26.3 billion, 11%, to £270.4 billion and equity shares increased by £3.0 billion, 17%, to £20.6 billion, principally due to increased holdings in Global Banking & Markets, Group Treasury, in part reflecting a £6.0 billion growth in the gilt liquidity portfolio, and the RFS minority interest.

Settlement balances were up £5.4 billion, 23%, at £28.6 billion as a result of increased customer activity.

Deposits by banks declined by £4.6 billion, 3%, to £166.4 billion, largely due to a decrease in repurchase agreements and stock lending (‘repos’), down £4.3 billion, 10%, to £39.8 billion.

Customer accounts were up £9.9 billion, 2%, to £625.6 billion. Within this, repos decreased £5.5 billion, 7%, to £69.5 billion. Excluding repos, deposits increased by £15.4 billion, 3%, to £556.1 billion, with reductions in Global Banking & Markets, down £9.0 billion and the RFS minority interest, down £2.2 billion, more than offset by growth across all other divisions, up £11.1 billion, and the effect of exchange rate movements, £15.4 billion.

Debt securities in issue increased £18.2 billion, 7% to £292.4 billion mainly as a result of growth in Global Banking & Markets and Group Treasury, partly to fund the growth in the gilt liquidity portfolio, together with the effect of movements in exchange rates.

Settlement balances and short positions were up £11.7 billion, 19%, to £72.0 billion reflecting increased customer activity.

Subordinated liabilities rose by £2.0 billion, 5%, to £37.7 billion, due to the issue of £0.7 billion undated loan capital and the effect of exchange rate movements and other adjustments, £2.2 billion, partially offset by the redemption of £0.9 billion undated loan capital.

Owners' equity increased by £1.0 billion, 2% to £56.7 billion. Reductions in available-for-sale reserve losses of £2.1 billion, net of tax, and exchange rate movements of £0.6 billion were offset in part by the £1.5 billion attributable loss for the period and the payment of other owners’ dividends of £0.2 billion.

106

Notes on statutory results 1. Basis of preparation The IMS for the nine months ended 30 September 2009 has been prepared on a going concern

basis. The directors have reviewed the Group's forecasts, projections and other relevant evidenceincluding the ongoing measures from governments and central banks in the UK and around theworld to sustain the banking sector. Whilst the Group has received no guarantees, the directors have a reasonable expectation, based on experience to date, of continued and sufficient accessto funding and capital and, accordingly, that the Group will continue in operational existence forthe foreseeable future.

2. Pensions The pension cost for the nine months ended September 2009 amounting to £674 million (nine

months ended 30 September 2008 - £521 million; full year 2008 - £638 million) is based on the actuarially determined pension cost rates at 31 December 2008. The pension cost and scheme deficits have not been adjusted for market movements since 31 December 2008 or for Board approved changes to the Group’s main scheme.

3. Litigation United Kingdom

In common with other banks in the United Kingdom, RBS and NatWest have received claims and complaints from a large number of customers challenging unarranged overdraft charges (the‘Charges’) as contravening the Unfair Terms in Consumer Contracts Regulations 1999 (the‘Regulations’) or being unenforceable penalties (or both).

On 27 July 2007, the OFT issued proceedings in a test case against the banks which wasintended to determine certain preliminary issues concerning the legal status and enforceability ofcontractual terms relating to the Charges. Because of the test case, most existing and new claims in the County Courts are currently stayed, the FSA temporarily waived the customer complaints-handling process and there is a standstill of Financial Ombudsman Service decisions.

A High Court judgment in April 2008 addressed preliminary issues in respect of the banks’ contractual terms relating to the Charges in force in early 2008 (the ‘Current Terms’). Thejudgment held that the Current Terms used by RBS and NatWest (i) are not unenforceable aspenalties, but (ii) are not exempt from assessment for fairness under the Regulations.

RBSG (in common with the other banks) has accepted that the ruling in the April judgment thatthe Current Terms are not exempt from assessment for fairness applies also to a sample of theRBS and NatWest contractual terms relating to the Charges in force between 2001 and 2007 (the ‘Historic Terms’). The High Court made an order to this effect in October 2008.

RBSG and the other banks have appealed against the rulings in April 2008 and October 2008 that the Current Terms and Historic Terms are not exempt from assessment for fairness under theRegulations. The hearing of the appeal in relation to Current Terms took place before the Court ofAppeal in October and November 2008. The Court of Appeal delivered its judgment on 26 February 2009 and rejected the appeals. The House of Lords granted RBSG and the other banksleave to appeal the Court of Appeal's decision. That further appeal took place on 23 June 2009.The House of Lords’ (now the Supreme Court) judgment is likely to be delivered later in 2009. The appeal in relation to the Historic Terms is stayed pending the resolution of the appeal inrelation to the Current Terms.

107

Notes on statutory results 3. Litigation (continued)

United Kingdom (continued) High Court judgments on further preliminary issues were handed down in October 2008 andJanuary 2009. These judgments primarily addressed the question of whether certain HistoricTerms were capable of being unenforceable penalties. The Judge decided that all of RBS's and most of NatWest’s Historic Terms were not penalties, but that a term contained in a set of NatWest2001 terms and conditions was a contractual prohibition against using a card to obtain anunarranged overdraft. The Judge did not decide whether any charge payable upon a breach of this prohibition was a penalty. RBSG has not appealed that decision.

The issues relating to the legal status and enforceability of the Charges are complex. RBSGmaintains that its Charges are fair and enforceable and believes that it has a number of substantive and credible defences. RBSG cannot at this stage predict with any certainty the final outcome of the customer claims and complaints, the appeals referred to above and any furtherstages of the test case. It is unable reliably to estimate the liability, if any, that may arise as aresult of or in connection with these matters or its effect on the Group’s consolidated net assets,operating results or cash flows in any particular period.

United States Proceedings, including consolidated class actions on behalf of former Enron securities holders,have been brought in the United States against a large number of defendants, including theGroup, following the collapse of Enron. The claims against the Group could be significant; the class plaintiff’s position is that each defendant is responsible for an entire aggregate damageamount less settlements – they have not quantified claimed damages against the Group inparticular. The Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. Recent decisions by the US SupremeCourt and the US Federal Court for the Fifth Circuit provide further support for the Group’sposition. In light of these developments the Group does not expect that these claims will have amaterial impact on its consolidated net assets, operating results or cash flows in any particularperiod.

RBS Group companies have been named as defendants in a number of purported class action and other lawsuits in the United States that relate to the sub-prime mortgage business. In general, the cases involve the issuance of sub-prime-related securities or the issuance of shares in companies with sub-prime-related exposure, where the plaintiffs have brought actions against the issuers and underwriters (including RBS Group companies) of such securities claiming thatcertain disclosures made in connection with the relevant offerings of such securities were false ormisleading. The Group considers that it has substantial and credible legal and factual defences tothese claims and will continue to defend them vigorously. The Group does not currently expectthat these lawsuits, individually or in the aggregate, will have a material impact on its consolidated net assets, operating results or cash flows in any particular period.

108

Notes on statutory results 3. Litigation (continued)

United States (continued) RBS Group and a number of its subsidiaries and certain individual officers and directors have been named as defendants in a class action filed in the United States District Court for theSouthern District of New York. The consolidated amended complaint alleges certain false andmisleading statements and omissions in public filings and other communications during the period 1 March 2007 to 19 January 2009, and variously asserts claims under Sections 11, 12 and 15 ofthe Securities Act 1933, Sections 10 and 20 of the Securities Exchange Act 1934 and SEC Rule10b-5. The putative class is composed of (1) all persons who purchased or otherwise acquiredRBS Group securities between 1 March 2007 and 19 January 2009; and/or (2) all persons whopurchased or otherwise acquired RBS Series Q, R, S, T and/or U Non-cumulative Dollar Preference Shares issued pursuant or traceable to the 8 April 2005 Registration Statement andwere damaged thereby. Plaintiffs seek unquantified damages on behalf of the putative class. TheGroup considers that it has substantial and credible legal and factual defences to these claims and will defend them vigorously. The Group is unable reliably to estimate the liability, if any, thatmight arise or its effect on the Group’s consolidated net assets, operating results or cash flows inany particular period. Summary of other disputes, legal proceedings and litigation Members of the Group are engaged in other litigation in the United Kingdom and a number ofoverseas jurisdictions, including the United States, involving claims by and against them arising inthe ordinary course of business. The Group has reviewed these other actual, threatened andknown potential claims and proceedings and, after consulting with its legal advisers, does notexpect that the outcome of these other claims and proceedings will have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.

4. Regulatory enquiries and investigations The Group’s businesses and financial condition can be affected by the fiscal or other policies and

other actions of various governmental and regulatory authorities in the UK, the European Union,the United States and elsewhere. The Group has engaged, and will continue to engage, indiscussions with relevant regulators, including in the UK and the United States, on an ongoing and regular basis informing them of operational, systems and control evaluations and issues asdeemed appropriate or required, and it is possible that any matters discussed or identified mayresult in investigatory actions by the regulators, increased costs being incurred by the Group,remediation of systems and controls, public or private censure or fines. Any of these events orcircumstances could have a material adverse impact on the Group, its business, reputation,results of operations or the price of securities issued by it.

There is continuing political and regulatory scrutiny of the operation of the retail banking andconsumer credit industries in the UK and elsewhere. The nature and impact of future changes inpolicies and regulatory action are not predictable and are beyond the Group’s control but couldhave an adverse impact on the Group’s businesses and earnings.

109

Notes on statutory results 4. Regulatory enquiries and investigations (continued)

European Union In the European Union, regulatory actions included an inquiry into retail banking in all of the then25 member states by the European Commission’s Directorate General for Competition. Theinquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission announced that barriers to competition in certain areas of retail banking, paymentcards and payment systems in the European Union had been identified. The EuropeanCommission indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition lawswhere appropriate.

In 2007, the European Commission issued a decision that while interchange is not illegal per se,MasterCard’s current multilateral interchange fee (“MIF”) arrangement for cross-border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in theEuropean Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross border MIFs by 21 June 2008. MasterCard appealed against the decision to the European Court of First Instance on 1 March 2008, and the Group has intervenedin the appeal proceedings. In April 2009 MasterCard agreed a level of cross-border MIF with the European Commission and as a result the European Commission has advised it will no longerinvestigate this issue (although MasterCard is continuing with its appeal). Visa’s MIFs were exempted in 2002 by the European Commission for a period of five years up to 31 December 2007 subject to certain conditions. On 26 March 2008, the European Commission opened aformal inquiry into Visa’s current MIF arrangements for cross-border payment card transactions with Visa branded debit and consumer credit cards in the European Union and on 6 April 2009 theEuropean Commission announced that it had issued Visa with a formal Statement of Objections.There is no deadline for the closure of the inquiry.

United Kingdom In the UK, in September 2005, the OFT received a super-complaint from the Citizens Advice Bureau relating to payment protection insurance (“PPI”). As a result, the OFT commenced amarket study on PPI in April 2006. In October 2006, the OFT announced the outcome of themarket study and, on 7 February 2007, following a period of consultation, the OFT referred thePPI market to the Competition Commission (“CC”) for an in-depth inquiry. The CC published its final report on 29 January 2009. It found a lack of competition in the PPI market as a result of various factors, including a lack of transparency and barriers to entry for standalone providers.The CC therefore announced its intention to impose by order a range of remedies, including a prohibition on actively selling PPI at point of sale of the credit product (and for 7 days thereafter), a ban on single premium policies and other measures to increase transparency (in order toimprove customers’ ability to search and improve price competition). Barclays subsequentlyappealed certain CC findings to the Competition Appeal Tribunal (the “CAT”). On 16 October2009, the CAT handed down judgment, quashing the ban on selling PPI at the point of sale ofcredit products and remitted the matter back to the CC for review.

110


United Kingdom (continued) The FSA has been conducting a broad industry thematic review of PPI sales practices and inSeptember 2008 announced that it intends to escalate its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies have been made to banks and to the FOS and many of these are being upheld by the FOS against thebanks.

In September 2009, the FSA issued a consultation paper on guidance on the fair assessment of PPI mis-selling complaints and, where necessary, the provision of an appropriate level of redress.The consultation also covers rules requiring firms to re-assess (against the new guidance) all PPI mis-selling complaints received and rejected since 14 January 2005. A policy statement containingfinal guidance and rules is expected by the end of December 2009, for implementation in January2010. The consultation currently indicates that the FSA will be requiring firms to have completed their review of past complaints within 12 months of the date the new rules areimplemented. Separately, discussions continue between the FSA and RBS in respect of concerns expressed by the FSA over certain categories of historic PPI sales.

The OFT has carried out investigations into Visa and MasterCard domestic credit cardinterchange rates. The decision by the OFT in the MasterCard interchange case was set aside bythe Competition Appeals Tribunal in June 2006. The OFT’s investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. The outcome is not known, butthese investigations may have an impact on the consumer credit industry in general and,therefore, on the Group’s business in this sector. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards.

On 29 March 2007, the OFT announced that, following an initial review into bank current accountcharges, it had decided to conduct a market study into personal current accounts in the UK and aformal investigation into the fairness of bank current account charges.

On 16 July 2008, the OFT published the results of its market study into personal current accountsin the UK. The OFT found evidence of competition and several positive features in the personalcurrent account market but believes that the market as a whole is not working well for consumersand that the ability of the market to function well has become distorted. The OFT then began a process of consultation with the banking industry, consumer groups and interested parties on itsreport.

On 7 October 2009, the OFT published a report summarising the initiatives agreed between theOFT and personal current account providers to address the OFT's concerns about transparency and switching, following its market study. Personal current account providers will take a number ofsteps to improve transparency, including providing customers with an annual summary of the costof their account and making charges prominent on monthly statements. To improve the switchingprocess, a number of steps are being introduced following work with Bacs, the paymentprocessor, including measures to reduce the impact on consumers of any problems withtransferring direct debits.

111


United Kingdom (continued) The OFT’s investigation into the fairness of bank current account charges is ongoing. On 12August 2008, the OFT indicated to the Group and other banks that, although it had not concludedits investigation and had reached no final view, it had serious concerns that contractual termsrelating to the Charges in personal current account agreements were unfair under theRegulations. The OFT is currently consulting with the Group and other banks on this issue. The OFT has advised it will make further comments on the complexity of unarranged overdrafts afterthe judgment from the Supreme Court regarding the test case, referred to in Note 3 above, has been handed down.

Given the stage of the investigation, the Group cannot reliably estimate the impact of any adverseoutcome of the OFT’s market study or investigation upon it, if any. However, the Group is co-operating fully with the OFT to achieve resolution of the matters under investigation.

On 26 January 2007, the FSA issued a Statement of Good Practice relating to Mortgage ExitAdministration Fees. On 1 March 2007, the Group adopted a policy of charging all customers thefee applicable at the time the customers took out the mortgage or, if later, varied their mortgage.RBS believes that it is currently in compliance with the Statement of Good Practice and willcontinue to monitor its performance against those standards.

In April 2009 the FSA notified the Group that it was commencing a supervisory review of theacquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct,systems and controls within the Global Banking & Markets division of the Group. The Group and its subsidiaries are cooperating fully with the review and investigation.

United States In connection with a previously disclosed investigation of ABN AMRO’s New York Branch by USregulatory authorities, ABN AMRO and members of ABN AMRO’s management continue to provide information to law enforcement authorities relating to ABN AMRO’s dollar clearingactivities, United States Department of Treasury compliance procedures and other Bank SecrecyAct of 1970 compliance matters. Although no written agreement has yet been reached and negotiations are ongoing, ABN AMRO has reached an agreement in principle with the UnitedStates Department of Justice that would resolve all presently known aspects of the ongoinginvestigation. Under the terms of the agreement in principle, ABN AMRO and the United Stateswould enter into a deferred prosecution agreement in which ABN AMRO would waive indictmentand agree to the filing of information in the United States District Court charging it with certainviolations of federal law based on information disclosed in an agreed factual statement. ABNAMRO would also agree to continue co-operating in the United States’ ongoing investigation andto settle all known civil and criminal claims currently held by the United States for the sum of $500 million. The precise terms of the deferred prosecution agreement are still under negotiation.

112


United States (continued) The New York State Attorney General has issued subpoenas to a wide array of participants in thesub-prime mortgage industry, focusing on the information underwriters obtained as part of the duediligence process from the independent due diligence firms. RBS Securities Inc. has produced documents requested by the New York State Attorney General principally related to sub-prime loans that were pooled into one securitisation transaction and will continue to cooperate with theinvestigation. More recently, the Massachusetts Attorney General has issued a subpoena to RBSSecurities Inc. seeking information related to residential mortgage lending practices and sales andsecuritisation of residential mortgage loans. The investigation is in its very early stages andtherefore it is difficult to predict the potential exposure from such an investigation. At this time RBSSecurities Inc. is fully cooperating with the request.

In addition to the above, certain of the Group’s subsidiaries have received requests for informationfrom various United States governmental agencies, self-regulatory organisations and state governmental agencies, including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. In particular, during March 2008, the Group was advised by the Securities and ExchangeCommission that it had commenced a non-public, formal investigation relating to the Group’s United States sub-prime securities exposures and United States residential mortgage exposures. RBS and its subsidiaries are co-operating with these various requests for information andinvestigations.

5. Goodwill The Group’s goodwill acquired in business combinations is reviewed annually as at 30 September

for impairment by comparing the recoverable amount of each cash generating unit to whichgoodwill has been allocated with its carrying value.

Impairment reviews have been undertaken in respect of all RBS businesses as at 30 September2009 and no further impairment of goodwill has been identified.

Due to complexities relating to legal separation of the other consortium members’ interests in ABNAMRO, the detailed impairment review of goodwill attaching to the minority interest in ABN AMROhas not yet been completed. A preliminary review indicates that goodwill relating to the State ofNetherlands minority interest is not impaired; the detailed impairment review will be completedprior to the Group’s financial year end.

113

Capital resources and ratios – statutory

30 September

200930 June

2009 31 December

2008 £m £m £m

Capital base Core Tier 1 capital 44,831 46,173 46,190 Preference shares and tax deductible securities 15,745 14,793 24,038 Deductions from Tier 1 capital net of tax credit on expected losses 184 (79) (381)

Tier 1 capital 60,760 60,887 69,847 Tier 2 capital 21,616 21,078 32,223 Tier 3 capital - 232 260

82,376 82,197 102,330 Less: Supervisory deductions (4,781) (4,536) (4,155)

Total regulatory capital 77,595 77,661 98,175 Risk-weighted assets Credit risk 510,400 512,000 551,300 Counterparty risk 82,000 53,000 61,100 Market risk 62,300 56,300 46,500 Operational risk 33,900 33,900 36,900

688,600 655,200 695,800

Risk asset ratio Core Tier 1 6.5% 7.0% 6.6%Tier 1 8.8% 9.3% 10.0%Total 11.3% 11.9% 14.1%

114

Capital resources and ratios – statutory Capital resources

30 September

200930 June

2009 31 December

2008 Composition of regulatory capital £m £m £m

Tier 1 Ordinary shareholders' equity 48,820 47,820 45,525 Minority interests 17,485 16,426 21,619 Adjustments for: Goodwill and other intangible assets – continuing (18,531) (18,180) (20,049)Unrealised losses on available-for-sale debt securities 2,317 4,194 3,687 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities (145) (25) (984)Reallocation of preference shares and innovative securities (656) (656) (1,813)Other regulatory adjustments (959) (507) (362)Less expected losses over provisions (2,313) (1,502) (770)Less securitisation positions (1,187) (1,397) (663)

Core Tier 1 capital 44,831 46,173 46,190 Preference shares 11,313 11,207 16,655 Innovative Tier 1 securities 4,432 3,586 7,383 Tax on the excess of expected losses over provisions 922 599 308 Less deductions from Tier 1 capital (738) (678) (689)

Total Tier 1 capital 60,760 60,887 69,847 Tier 2 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities 145 25 984 Collective impairment allowances 850 744 666 Perpetual subordinated debt 4,980 4,844 9,829 Term subordinated debt 20,790 19,630 23,162 Minority and other interests in Tier 2 capital 11 11 11 Less deductions from Tier 2 capital (5,160) (4,176) (2,429)

Total Tier 2 capital 21,616 21,078 32,223 Tier 3 - 232 260 Supervisory deductions Unconsolidated investments 4,704 4,461 4,044 Other deductions 77 75 111

Total deductions other than from Tier 1 capital 4,781 4,536 4,155 Total regulatory capital 77,595 77,661 98,175

115

116

Additional information Statutory results Financial information contained in this document does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 (‘the Act’). The statutory accounts for the year ended 31 December 2008 have been filed with the Registrar of Companies. The auditors have reported on these accounts: their report was unqualified and did not contain a statement under section 237(2) or (3) of the Act.

Appendix 1


Reconciliations of pro forma to statutory income statements and

balance sheets

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Income statement for the quarter ended 30 September 2009 Adjustments

Pro forma RFS Minority

interest Reallocation

of one-off items Statutory £m £m £m £m

Net interest income 3,261 602 - 3,863

Non-interest income (excluding insurance net premium income) 2,532 568 (155) 2,945

Insurance net premium income 1,301 (29) - 1,272

Non-interest income 3,833 539 (155) 4,217

Total income 7,094 1,141 (155) 8,080 Operating expenses (4,195) (960) (397) (5,552)

Profit/(loss) before other operating charges 2,899 181 (552) 2,528 Insurance net claims (1,145) (64) - (1,209)

Operating profit/(loss) before impairment losses 1,754 117 (552) 1,319 Impairment losses (3,279) (209) - (3,488)

Group operating loss (1,525) (92) (552) (2,169)Amortisation of purchased intangible assets (73) - 73 - Integration and restructuring costs (324) - 324 - Strategic disposals (155) - 155 -

Loss before tax from continuing operations (2,077) (92) - (2,169)Tax 576 21 - 597

Loss from continuing operations (1,501) (71) - (1,572)Loss from discontinued operations, net of tax (7) (12) - (19)

Loss for the period (1,508) (83) - (1,591)Minority interests (47) 83 - 36 Preference share and other dividends (245) - - (245)

Loss attributable to ordinary shareholders (1,800) - - (1,800)

1

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Income statement for the quarter ended 30 June 2009 Adjustments





Non-interest income (excluding insurance net premium income) 1,498 622 4,002 6,122

Insurance net premium income 1,301 51 - 1,352

Non-interest income 2,799 673 4,002 7,474

Total income 6,121 1,330 4,002 11,453 Operating expenses (4,066) (945) (721) (5,732)

Profit before other operating charges 2,055 385 3,281 5,721 Insurance net claims (925) (122) - (1,047)

Operating profit before impairment losses 1,130 263 3,281 4,674 Impairment losses (4,663) (307) - (4,970)

Group operating (loss)/profit (3,533) (44) 3,281 (296)Amortisation of purchased intangible assets (55) - 55 - Integration and restructuring costs (355) - 355 - Write-down of goodwill (311) - 311 - Gain on redemption of own debt 3,790 - (3,790) - Strategic disposals 212 - (212) -

Loss before tax from continuing operations (252) (44) - (296)Tax 640 42 - 682

Profit/(loss) from continuing operations 388 (2) - 386 Loss/(profit) from discontinued operations, net of tax (13) 67 - 54

Profit for the period 375 65 - 440 Minority interests (83) (65) - (148)Preference share and other dividends (432) - - (432)

Loss attributable to ordinary shareholders (140) - - (140)

2

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Income statement for the quarter ended 30 September 2008 Adjustments





Non-interest income (excluding insurance net premium income) 3,340 285 - 3,625


Non-interest income 4,749 423 - 5,172

Total income 8,585 1,377 - 9,962 Operating expenses (4,060) (853) (408) (5,321)

Profit/(loss) before other operating charges 4,525 524 (408) 4,641 Insurance net claims (934) (112) - (1,046)


Group operating profit/(loss) 2,311 295 (408) 2,198 Amortisation of purchased intangible assets (119) - 119 - Integration and restructuring costs (289) - 289 -

Profit before tax from continuing operations 1,903 295 - 2,198 Tax (724) (61) - (785)

Profit from continuing operations 1,179 234 - 1,413 Loss/(profit) from discontinued operations, net of tax (46) 3,572 - 3,526

Profit for the period 1,133 3,806 - 4,939 Minority interests (43) (3,806) - (3,849)Preference share and other dividends (219) - - (219)

Profit attributable to ordinary shareholders 871 - - 871

3

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Income statement for the nine months ended 30 September 2009 Adjustments




Net interest income 10,121 2,116 - 12,237

Non-interest income (excluding insurance net premium income) 7,806 1,697 4,088 13,591


Non-interest income 11,764 1,832 4,088 17,684

Total income 21,885 3,948 4,088 29,921 Operating expenses (12,928) (2,933) (1,582) (17,443)

Profit before other operating charges 8,957 1,015 2,506 12,478 Insurance net claims (3,036) (307) - (3,343)

Operating profit before impairment losses 5,921 708 2,506 9,135 Impairment losses (10,800) (748) - (11,548)

Group operating (loss)/profit (4,879) (40) 2,506 (2,413)Amortisation of purchased intangible assets (213) - 213 - Integration and restructuring costs (1,058) - 1,058 - Write-down of goodwill (311) - 311 - Gain on redemption of own debt 3,790 - (3,790) - Strategic disposals 298 - (298) -

Loss before tax from continuing operations (2,373) (40) - (2,413)Tax 988 50 - 1,038

(Loss)/profit from continuing operations (1,385) 10 - (1,375)Loss from discontinued operations, net of tax (65) (16) - (81)

Loss for the period (1,450) (6) - (1,456)Minority interests (601) 6 - (595)Preference share and other dividends (791) - - (791)

Loss attributable to ordinary shareholders (2,842) - - (2,842)

4

5

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Income statement for the nine months ended 30 September 2008 Adjustments

Pro forma

RFS Minority interest

Reallocation of one-off items

Restated statutory

£m £m £m £m

Net interest income 11,337 2,148 - 13,485

Non-interest income (excluding insurance net premium income) 4,629 987 - 5,616 Insurance net premium income 4,270 433 - 4,703

Non-interest income 8,899 1,420 - 10,319

Total income 20,236 3,568 - 23,804 Operating expenses (12,453) (2,601) (986) (16,040)

Profit/(loss) before other operating charges 7,783 967 (986) 7,764 Insurance net claims (2,861) (374) - (3,235)


Group operating profit/(loss) 2,163 294 (986) 1,471 Amortisation of purchased intangible assets (381) - 381 - Integration costs (605) - 605 -

Profit before tax from continuing operations 1,177 294 - 1,471 Tax (421) (31) - (452)

Profit from continuing operations 756 263 - 1,019 (Loss)/profit from discontinued operations, net of tax (87) 3,847 - 3,760

Profit for the period 669 4,110 - 4,779 Minority interests (191) (4,110) - (4,301)Preference share and other dividends (434) - - (434)

Profit attributable to ordinary shareholders 44 - - 44

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Balance sheet at 30 September 2009 Pro forma Transfers Statutory £m £m £m

Assets Cash and balances at central banks 36,567 580 37,147Net loans and advances to banks 60,274 8,584 68,858Reverse repurchase agreements and stock borrowing 37,190 - 37,190Loans and advances to banks 97,464 8,584 106,048Net loans and advances to customers 587,996 137,770 725,766Reverse repurchase agreements and stock borrowing 43,463 - 43,463Loans and advances to customers 631,459 137,770 769,229Debt securities 251,281 19,085 270,366Equity shares 16,830 3,764 20,594Settlement balances 28,634 5 28,639Derivatives 552,466 2,606 555,072Intangible assets 15,339 3,192 18,531Property, plant and equipment 18,208 1,692 19,900Deferred taxation 7,667 700 8,367Prepayments, accrued income and other assets 19,664 2,721 22,385Assets of disposal groups 4,737 140 4,877

Total assets 1,680,316 180,839 1,861,155 Liabilities Bank deposits 138,584 (12,033) 126,551Repurchase agreements and stock lending 39,816 - 39,816Deposits by banks 178,400 (12,033) 166,367Customer deposits 423,769 132,319 556,088Repurchase agreements and stock lending 69,465 - 69,465Customer accounts 493,234 132,319 625,553Debt securities in issue 266,213 26,206 292,419Settlement balances and short positions 71,891 61 71,952Derivatives 537,522 2,483 540,005Accruals, deferred income and other liabilities 20,754 8,048 28,802Retirement benefit liabilities 1,410 398 1,808Deferred taxation 3,275 815 4,090Insurance liabilities 7,480 2,633 10,113Subordinated liabilities 33,085 4,578 37,663Liabilities of disposal groups 8,201 31 8,232

Total liabilities 1,621,465 165,539 1,787,004 Equity: Minority interests 2,185 15,300 17,485Owners’ equity 56,666 - 56,666 Total equity 58,851 15,300 74,151 Total liabilities and equity 1,680,316 180,839 1,861,155

6

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Balance sheet at 30 June 2009 Pro forma Transfers Statutory £m £m £m

Assets Cash and balances at central banks 34,302 5,644 39,946 Net loans and advances to banks 48,624 11,706 60,330 Reverse repurchase agreements and stock borrowing 35,076 - 35,076 Loans and advances to banks 83,700 11,706 95,406 Net loans and advances to customers 593,277 128,983 722,260 Reverse repurchase agreements and stock borrowing 47,485 29 47,514 Loans and advances to customers 640,762 129,012 769,774 Debt securities 229,059 15,030 244,089 Equity shares 14,220 3,360 17,580 Settlement balances 23,244 20 23,264 Derivatives 555,890 1,394 557,284 Intangible assets 15,117 3,063 18,180 Property, plant and equipment 16,292 1,603 17,895 Deferred taxation 7,573 819 8,392 Prepayments, accrued income and other assets 20,620 2,645 23,265 Assets of disposal groups 3,666 182 3,848

Total assets 1,644,445 174,478 1,818,923 Liabilities Bank deposits 135,601 (8,749) 126,852 Repurchase agreements and stock lending 44,142 - 44,142 Deposits by banks 179,743 (8,749) 170,994 Customer deposits 415,267 125,407 540,674 Repurchase agreements and stock lending 75,015 - 75,015 Customer accounts 490,282 125,407 615,689 Debt securities in issue 248,710 25,470 274,180 Settlement balances and short positions 60,282 5 60,287 Derivatives 534,632 2,432 537,064 Accruals, deferred income and other liabilities 21,543 8,578 30,121 Retirement benefit liabilities 1,363 368 1,731 Deferred taxation 3,344 678 4,022 Insurance liabilities 7,186 2,356 9,542 Subordinated liabilities 32,106 3,597 35,703 Liabilities of disposal groups 7,465 33 7,498

Total liabilities 1,586,656 160,175 1,746,831 Equity: Minority interests 2,123 14,303 16,426 Owners’ equity 55,666 - 55,666 Total equity 57,789 14,303 72,092 Total liabilities and equity 1,644,445 174,478 1,818,923

7

8

Appendix 1 Reconciliations of pro forma to statutory income statements and balance sheets Balance sheet at 31 December 2008 Pro forma Transfers Statutory £m £m £m

Assets Cash and balances at central banks 11,830 570 12,400 Net loans and advances to banks 70,728 8,698 79,426 Reverse repurchase agreements and stock borrowing 58,771 - 58,771 Loans and advances to banks 129,499 8,698 138,197 Net loans and advances to customers 691,976 143,433 835,409 Reverse repurchase agreements and stock borrowings 39,289 24 39,313 Loans and advances to customers 731,265 143,457 874,722 Debt securities 253,159 14,390 267,549 Equity shares 22,198 4,132 26,330 Settlement balances 17,812 20 17,832 Derivatives 991,495 1,064 992,559 Intangible assets 16,415 3,634 20,049 Property, plant and equipment 17,181 1,768 18,949 Deferred taxation 5,786 1,296 7,082 Prepayments, accrued income and other assets 21,573 2,829 24,402 Assets of disposal groups 480 1,101 1,581

Total assets 2,218,693 182,959 2,401,652 Liabilities Bank deposits 178,943 (4,565) 174,378 Repurchase agreements and stock lending 83,666 - 83,666 Deposits by banks 262,609 (4,565) 258,044 Customer deposits 460,318 121,051 581,369 Repurchase agreements and stock lending 58,143 - 58,143 Customer accounts 518,461 121,051 639,512 Debt securities in issue 269,458 30,831 300,289 Settlement balances and short positions 54,264 13 54,277 Derivatives 969,409 1,955 971,364 Accruals, deferred income and other liabilities 24,140 7,342 31,482 Retirement benefit liabilities 1,564 468 2,032 Deferred taxation 3,177 988 4,165 Insurance liabilities 7,480 2,496 9,976 Subordinated liabilities 43,678 5,476 49,154 Liabilities of disposal groups 138 721 859

Total liabilities 2,154,378 166,776 2,321,154 Equity: Minority interests 5,436 16,183 21,619 Owners’ equity 58,879 - 58,879

Total equity 64,315 16,183 80,498 Total liabilities and equity 2,218,693 182,959 2,401,652

Appendix 2


Analysis by quarter

1

Appendix 2 Analysis by quarter Summary consolidated income statement – pro forma

2008 2009 Q3 2009 vs.

Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 £m £m £m £m £m

Net interest income 3,836 4,427 3,538 3,322 3,261 (15%) (2%)

Non-interest income (excluding insurance net premium income) 3,340 (5,503) 3,776 1,498 2,532 (24%) 69% Insurance net premium income 1,409 1,439 1,356 1,301 1,301 (8%) -

Total income 8,585 363 8,670 6,121 7,094 (17%) 16% Operating expenses (4,060) (3,735) (4,667) (4,066) (4,195) 3% 3%

Profit/(loss) before other operating charges 4,525 (3,372) 4,003 2,055 2,899 (36%) 41%

Insurance net claims (934) (1,056) (966) (925) (1,145) 23% 24%

Operating profit before impairment losses 3,591 (4,428) 3,037 1,130 1,754 (51%) 55% Impairment losses (1,280) (4,673) (2,858) (4,663) (3,279) 156% (30%)

Group operating profit/(loss)* 2,311 (9,101) 179 (3,533) (1,525) (166%) (57%)Amortisation of purchased

intangible assets (119) (62) (85) (55) (73) (39%) 33% Integration and restructuring costs (289) (752) (379) (355) (324) 12% (9%)Write-down of goodwill - (16,196) - (311) - - - Gain on redemption of own debt - - - 3,790 - - - Strategic disposals - 442 241 212 (155) - (173%)

Profit/(loss) before tax 1,903 (25,669) (44) (252) (2,077) - - Tax (724) 1,701 (228) 640 576 (180%) (10%)

Profit/(loss) from continuing operations 1,179 (23,968) (272) 388 (1,501) - -

Loss from discontinued operations (46) 1 (45) (13) (7) (85%) (46%)

Profit/(loss) for the period 1,133 (23,967) (317) 375 (1,508) - - Minority interests (43) (221) (471) (83) (47) 9% (43%)Preference share and other

dividends (219) (162) (114) (432) (245) 12% (43%)

Profit/(loss) attributable to ordinary shareholders 871 (24,350) (902) (140) (1,800) - -

*profit/(loss) before tax, purchased intangibles amortisation, integration and restructuring costs, and write-down of goodwill and other intangible assets.

Key metrics

Cost:income ratio 47.3% 1,028.9% 53.8% 66.4% 59.1% (1,184bp) 730bp Net interest margin 2.05% 2.10% 1.78% 1.70% 1.75% (30bp) 5bp Risk-weighted assets £543.1bn £577.8bn £575.7bn £547.3bn £594.7bn 10% 9% Risk elements In lending £10.8bn £18.8bn £23.7bn £30.7bn £35.0bn - 14% Provision balance as % of

REIL/PPLs* 51% 50% 45% 44% 43% (800bp) (100bp)* includes disposal groups. Note: 2008 data have been restated for the amendment to IFRS 2 'Share-based Payment' and the finalisation of the ABN AMRO acquisition accounting in the second half of 2008.

2

Appendix 2 Analysis by quarter Divisional performance The profit/(loss) of each division before amortisation of purchased intangible assets, write-down of goodwill and other assets, integration and restructuring costs, and after allocation of manufacturing costs is shown below. The Group manages costs where they arise. Customer-facing divisions control their direct expenses whilst Manufacturing is responsible for shared costs.

2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

£m £m £m £m £m

Operating profit/(loss) before impairment losses

UK Retail 420 381 371 490 468 11% (4%)UK Corporate 523 487 421 535 566 8% 6% Wealth 103 77 100 134 120 17% (10%)Global Banking & Markets 616 (2,597) 3,845 1,116 647 5% (42%)Global Transaction Services 275 285 240 269 275 - 2% Ulster Bank 98 36 71 78 59 (40%) (24%)US Retail & Commercial 236 312 182 136 137 (42%) 1% RBS Insurance 150 176 81 142 13 (91%) (91%)Central items 813 (476) 486 (311) 121 (85%) 139%

Core 3,234 (1,319) 5,797 2,589 2,406 (26%) (7%)Non-Core 357 (3,109) (2,760) (1,459) (652) - 55%

Operating profit/(loss) before impairment losses 3,591 (4,428) 3,037 1,130 1,754 (51%) 55%

Included in the above are

movements in fair value of own debt:

Global Banking & Markets 648 (875) 647 (482) (320) (149%) (34%)Central items 633 14 384 (478) (163) (126%) (66%)

1,281 (861) 1,031 (960) (483) (138%) (50%) Impairment losses by division UK Retail 287 292 354 470 404 41% (14%)UK Corporate 55 169 100 450 187 - (58%)Wealth 3 8 6 16 1 (67%) (94%)Global Banking & Markets 2 505 269 (31) 272 - - Global Transaction Services 7 40 9 4 22 - - Ulster Bank 17 71 67 90 144 - 60% US Retail & Commercial 134 177 223 146 180 34% 23% RBS Insurance - 42 5 1 2 - 100% Central items 7 11 (3) 1 1 (86%) -

Core 512 1,315 1,030 1,147 1,213 137% 6% Non-Core 768 3,358 1,828 3,516 2,066 169% (41%)

Total impairment losses 1,280 4,673 2,858 4,663 3,279 156% (30%)

3

Appendix 2 Analysis by quarter Divisional performance (continued) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 £m £m £m £m £m

Operating profit/(loss) by division

UK Retail 133 89 17 20 64 (52%) - UK Corporate 468 318 321 85 379 (19%) - Wealth 100 69 94 118 119 19% 1% Global Banking & Markets 614 (3,102) 3,576 1,147 375 (39%) (67%)Global Transaction Services 268 245 231 265 253 (6%) (5%)Ulster Bank 81 (35) 4 (12) (85) - - US Retail & Commercial 102 135 (41) (10) (43) (142%) - RBS Insurance 150 134 76 141 11 (93%) (92%)Central items 806 (487) 489 (312) 120 (85%) (138%)

Core 2,722 (2,634) 4,767 1,442 1,193 (56%) (17%)Non-Core (411) (6,467) (4,588) (4,975) (2,718) - (45%)

Group operating profit/(loss) 2,311 (9,101) 179 (3,533) (1,525) (166%) (57%) Loan impairment losses 1,023 4,049 2,276 4,520 3,262 - (28%)Impairment losses on available-for-

sale securities 257 624 582 143 17 (93%) (88%)

1,280 4,673 2,858 4,663 3,279 156% (30%) Loan impairment charge as % of

gross loans and advances excluding reverse repurchase agreements 0.64% 2.24% 1.34% 2.98% 2.14% 150bp (84bp)

2008 2009 30 Sept 2009 vs 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Risk-weighted assets by division

UK Retail 46.2 45.7 49.6 54.0 51.6 12% (4%)UK Corporate 88.7 85.7 86.2 89.5 91.0 3% 2% Wealth 10.8 10.8 10.6 10.3 10.7 (1%) 4% Global Banking & Markets 165.4 162.4 148.6 122.4 131.9 (20%) 8% Global Transaction Services 19.4 17.4 18.7 16.7 18.9 (3%) 13% Ulster Bank 22.2 24.5 26.2 26.2 28.5 28% 9% US Retail & Commercial 51.4 63.9 64.3 55.6 62.8 22% 13% Other 8.3 7.1 7.8 8.5 9.0 9% 5%

Core 412.4 417.5 412.0 383.2 404.4 (2%) 6% Non-Core 130.7 160.3 163.7 164.1 190.3 46% 16%

Total risk-weighted assets 543.1 577.8 575.7 547.3 594.7 10% 9%

4

Appendix 2 Analysis by quarter UK Retail 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income 821 856 797 868 848 3% (2%)

Net fees and commissions - banking 365 345 337 321 303 (17%) (6%)

Other non-interest income (net of insurance claims) 34 54 53 69 69 103% -

Non-interest income 399 399 390 390 372 (7%) (5%)

Total income 1,220 1,255 1,187 1,258 1,220 - (3%)

Direct expenses - staff (243) (236) (214) (214) (206) (15%) (4%)- other (109) (101) (115) (102) (99) (9%) (3%)Indirect expenses (448) (537) (487) (452) (447) - (1%)

(800) (874) (816) (768) (752) (6%) (2%)

Operating profit before impairment losses 420 381 371 490 468 11% (4%)

Impairment losses (287) (292) (354) (470) (404) 41% (14%)

Operating profit 133 89 17 20 64 (52%) - Analysis of income by product: Personal advances 310 296 305 311 303 (2%) (3%)Personal deposits 557 470 397 354 319 (43%) (10%)Mortgages 93 186 207 273 319 - 17% Bancassurance 34 51 52 69 69 103% - Cards 205 208 204 212 225 10% 6% Other 21 44 22 39 (15) (171%) (138%)

Total income 1,220 1,255 1,187 1,258 1,220 - (3%) Analysis of impairment by

sector: Mortgages 9 9 22 41 26 189% (37%)Personal 144 169 195 299 247 72% (17%)Cards 134 114 137 130 131 (2%) 1%

Total impairment 287 292 354 470 404 41% (14%) Loan impairment charge as % of

gross customer loans and advances by sector:

Mortgages 0.05% 0.05% 0.12% 0.21% 0.13% 8bp (8bp)Personal 3.76% 4.42% 5.20% 8.31% 6.81% 305bp (149bp)Cards 8.25% 7.24% 9.13% 8.52% 8.59% 34bp 7bp

1.23% 1.24% 1.50% 1.94% 1.60% 37bp (34bp)

5

Appendix 2 Analysis by quarter UK Retail (continued) 2008 2009 Q3 2009 vs. Key metrics Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

Performance ratios Return on equity (1) 9.4% 6.5% 1.2% 1.4% 4.6% (480bp) 320bp Net interest margin 3.62% 3.73% 3.46% 3.69% 3.47% (15bp) (22bp)Cost:income ratio 65.4% 63.8% 69.0% 59.6% 57.4% 800bp 227bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Loans and advances to customers - gross - mortgages 71.5 72.2 73.3 76.6 80.3 12% 5% - personal 15.3 15.3 15.0 14.4 14.5 (5%) 1% - cards 6.5 6.3 6.0 6.1 6.1 (6%) - Customer deposits (excluding

bancassurance) 76.5 78.9 80.3 83.4 85.6 12% 3% AUMs – excluding deposits 6.4 5.7 4.6 4.7 5.0 (22%) 6% Risk elements in lending 3.4 3.8 4.1 4.5 4.7 38% 4% Loan:deposit ratio (excluding

repos) 121.9% 119.0% 117.5% 116.4% 117.8% (408bp) 139bp Risk-weighted assets 46.2 45.7 49.6 54.0 51.6 12% (4%)

Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of

divisional risk-weighted assets, adjusted for capital deductions).

6

Appendix 2 Analysis by quarter UK Corporate 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income 618 588 499 560 607 (2%) 8%

Net fees and commissions 222 215 194 219 223 - 2% Other non-interest income 114 107 117 109 106 (7%) (3%)

Non-interest income 336 322 311 328 329 (2%) -

Total income 954 910 810 888 936 (2%) 5%

Direct expenses - staff (206) (210) (185) (182) (174) (16%) (4%)- other (96) (73) (74) (46) (71) (26%) 54% Indirect expenses (129) (140) (130) (125) (125) (3%) -

(431) (423) (389) (353) (370) (14%) 5%

Operating profit before impairment losses 523 487 421 535 566 8% 6%

Impairment losses (55) (169) (100) (450) (187) - (58%)

Operating profit 468 318 321 85 379 (19%) - Analysis of income by business: Corporate and commercial lending 542 529 538 586 616 14% 5% Asset and invoice finance 60 53 48 57 59 (2%) 4% Corporate deposits 342 338 290 263 241 (30%) (8%)Other 10 (10) (66) (18) 20 100% -

Total income 954 910 810 888 936 (2%) 5% Analysis of impairment by

sector: Manufacturing 5 6 4 17 7 40% (59%) Housebuilding and construction 6 31 6 55 58 - 5% Property 11 6 11 149 69 - (54%)Asset & invoice finance 24 39 21 47 4 (83%) (91%)Other 9 87 58 182 49 - (73%)

Total impairment 55 169 100 450 187 - (58%) Loan impairment charge as %

of gross customer loans and advances (excluding reverse repurchase agreements) by sector:

Manufacturing 0.41% 0.44% 0.32% 1.36% 0.56% 15bp (80bp)Housebuilding and construction 0.41% 2.10% 0.40% 4.40% 4.64% 423bp 24bp Property 0.15% 0.08% 0.14% 1.81% 0.92% 77bp (89bp)Asset & invoice finance 1.13% 1.84% 0.93% 2.09% 0.18% (95bp) (191bp)Other 0.06% 0.52% 0.36% 1.20% 0.30% 25bp (90bp)

0.19% 0.58% 0.34% 1.60% 0.66% 47bp (94bp)

7

Appendix 2 Analysis by quarter UK Corporate (continued) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Key metrics

Performance ratios Return on equity (1) 18.6% 12.9% 12.7% 3.2% 13.7% (490bp) 1,050bp Net interest margin 2.40% 2.20% 1.88% 2.17% 2.38% (2bp) 21bp Cost:income ratio 45.2% 46.5% 48.0% 39.8% 39.5% 565bp 22bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Total assets 117.8 121.0 120.1 116.2 117.3 - 1% Loans and advances to customers - gross - manufacturing 4.9 5.4 5.0 5.0 5.0 2% - - housebuilding and construction 5.8 5.9 6.0 5.0 5.0 (14%) - - property 30.0 30.5 32.0 33.0 30.0 - (9%)- asset and invoice finance 8.5 8.5 9.0 9.0 9.0 6% - - other 64.8 66.6 64.7 60.6 64.9 - 7% Customer deposits 85.9 82.0 82.9 85.6 86.7 1% 1% Risk elements in lending 1.5 1.3 2.0 2.4 2.5 67% 4% Loan:deposit ratio (excluding

repos) 132.7% 142.7% 140.8% 131.6% 131.4% (125bp) (16bp) Risk-weighted assets 88.7 85.7 86.2 89.5 91.0 3% 2%



8

Appendix 2 Analysis by quarter Wealth 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income 153 160 158 176 168 10% (5%)

Net fees and commissions 98 96 90 90 92 (6%) 2% Other non-interest income 19 19 21 21 19 - (10%)

Non-interest income 117 115 111 111 111 (5%) -

Total income 270 275 269 287 279 3% (3%)

Direct expenses - staff (94) (97) (90) (78) (82) (13%) 5% - other (34) (51) (33) (34) (35) 3% 3% Indirect expenses (39) (50) (46) (41) (42) 8% 2%

(167) (198) (169) (153) (159) (5%) 4%

Operating profit before impairment losses 103 77 100 134 120 17% (10%)

Impairment losses (3) (8) (6) (16) (1) (67%) (94%)

Operating profit 100 69 94 118 119 19% 1% Analysis of income: Private Banking 211 221 219 242 232 10% (4%)Investments 59 54 50 45 47 (20%) 4%

Total income 270 275 269 287 279 3% (3%) Key metrics

Performance ratios Net interest margin 4.68% 4.56% 4.47% 4.82% 4.34% (34bp) (48bp)Cost:income ratio 61.9% 72.0% 62.8% 53.3% 57.0% 486bp (368bp) 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Loans and advances to customers

gross - mortgages 5.0 5.3 5.5 5.6 6.1 22% 9% - personal 4.9 5.0 4.6 4.7 4.8 (2%) 2% - other 2.0 2.1 2.2 2.1 2.5 25% 19% Customer deposits 35.8 34.1 34.9 35.3 36.3 1% 3% AUMs – excluding deposits 34.6 34.7 31.3 29.8 31.7 (8%) 6% Risk elements in lending 0.1 0.1 0.1 0.2 0.2 100% - Loan:deposit ratio (excluding

repos) 33.3% 36.3% 35.3% 35.2% 36.9% 360bp 172bp Risk-weighted assets 10.8 10.8 10.6 10.3 10.7 (1%) 4%



9

Appendix 2 Analysis by quarter Global Banking & Markets 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income from banking activities 535 1,054 812 660 447 (16%) (32%)

Net fees and commissions receivable 405 187 291 409 338 (17%) (17%)

Income/(loss) from trading activities 760 (2,918) 4,329 1,338 1,184 56% (12%)

Other operating income (net of related funding costs) (22) (119) (93) (97) (110) - 13%

Non-interest income 1,143 (2,850) 4,527 1,650 1,412 24% (14%)

Total income 1,678 (1,796) 5,339 2,310 1,859 11% (20%)

Direct expenses - staff (618) (178) (1,001) (762) (760) 23% - - other (284) (421) (300) (231) (261) (8%) 13% Indirect expenses (160) (202) (193) (201) (191) 19% (5%)

(1,062) (801) (1,494) (1,194) (1,212) 14% 2%

Operating profit/(loss) before impairment losses 616 (2,597) 3,845 1,116 647 5% (42%)

Impairment losses (2) (505) (269) 31 (272) - -

Operating profit/(loss) 614 (3,102) 3,576 1,147 375 (39%) (67%) Analysis of income by product: Rates - money markets 384 748 853 466 287 (25%) (38%)Rates - flow - 16 1,297 536 694 - 29% Currencies 417 414 558 384 141 (66%) (63%)Commodities 47 403 228 239 120 155% (50%)Equities 21 (214) 371 364 282 - (23%)Credit markets (105) (2,341) 858 690 475 - (31%)Portfolio management and

origination 266 53 527 113 180 (32%) 59% Fair value of own debt 648 (875) 647 (482) (320) (149%) (34%)

Total income 1,678 (1,796) 5,339 2,310 1,859 11% (20%) Analysis of impairment by

sector: Manufacturing and infrastructure - 39 16 23 33 - 43% Property and construction - - 46 4 - - - Transport - - - 1 2 - 100% Banks and financial institutions - 194 4 39 237 - - Others 2 272 203 (98) - - -

Total impairment 2 505 269 (31) 272 - - Loan impairment charge as %

of gross customer loans and advances (excluding reverse repurchase agreements) - 1.13% 0.68% (0.11%) 0.60% 60bp 71bp

10

Appendix 2 Analysis by quarter Global Banking & Markets (continued) 2008 2009 Q3 2009 vs. Key metrics Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

Performance ratios Return on equity (1) 10.5% (54.1%) 66.1% 25.1% 7.7% (280bp) (1,740bp)Net interest margin 1.24% 1.99% 2.02% 1.48% 1.08% (16bp) (40bp)Cost:income ratio 63.3% (44.6%) 28.0% 51.7% 65.2% (191bp) (1,351bp) 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Loans and advances (including

banks) 188.6 225.5 206.5 156.0 157.0 (17%) 1% Reverse repos 206.5 88.8 80.6 75.2 75.4 (63%) - Securities 157.6 127.5 124.3 115.5 117.6 (25%) 2% Cash and eligible bills 35.3 20.2 28.6 51.5 63.8 81% 24% Other assets 72.3 42.9 43.1 46.2 50.8 (30%) 10%

Total third party assets (excluding derivatives mark to market) 660.3 504.9 483.1 444.4 464.6 (30%) 5%

Net derivative assets (after netting) 73.0 113.0 98.0 70.7 81.5 12% 15%

Customer deposits (excluding repos) 91.0 88.6 81.8 65.0 58.1 (36%) (11%)

Risk elements in lending 0.3 0.7 0.8 1.1 1.6 - 49% Loan:deposit ratio (excluding

repos) 158.7% 192.0% 194.4% 182.7% 192.4% 3,368bp 962bp Risk-weighted assets 165.4 162.4 148.6 122.4 131.9 (20%) 8%



11

Appendix 2 Analysis by quarter Global Transaction Services 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income 244 249 220 225 234 (4%) 4% Non-interest income 375 407 385 398 388 3% (3%)

Total income 619 656 605 623 622 - -

Direct expenses - staff (91) (93) (95) (87) (87) (4%) - - other (38) (42) (35) (38) (37) (3%) (3%)Indirect expenses (215) (236) (235) (229) (223) 4% (3%)

(344) (371) (365) (354) (347) 1% (2%)

Operating profit before impairment losses 275 285 240 269 275 - 2%

Impairment losses (7) (40) (9) (4) (22) - -

Operating profit 268 245 231 265 253 (6%) (5%) Analysis of income by product: Domestic cash management 203 210 202 204 202 - (1%)International cash management 179 200 169 179 183 2% 2% Trade finance 60 70 75 77 71 18% (8%)Merchant acquiring 147 145 129 131 134 (9%) 2% Commercial cards 30 31 30 32 32 7% -

Total income 619 656 605 623 622 - - Key metrics

Performance ratios Net interest margin 8.54% 8.00% 8.29% 9.23% 9.63% 109bp 40bp Cost:income ratio 55.6% 56.6% 60.3% 56.8% 55.8% (22bp) 103bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Total third party assets 23.9 22.2 21.1 19.4 21.4 (10%) 10% Loans and advances 18.0 14.8 14.7 13.5 14.5 (19%) 7% Customer deposits 60.3 61.8 58.3 54.0 58.6 (3%) 9% Risk elements in lending 0.2 0.1 0.1 0.1 0.2 - 100% Loan:deposit ratio (excluding

repos) 31.3% 25.1% 26.4% 25.9% 25.6% (578bp) (29bp) Risk-weighted assets 19.4 17.4 18.7 16.7 18.9 (3%) 13%

12

Appendix 2 Analysis by quarter Ulster Bank 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income 207 174 202 208 176 (15%) (15%)

Net fees and commissions 69 60 46 39 45 (35%) 15% Other non-interest income - (6) 11 12 10 - (17%)

Non-interest income 69 54 57 51 55 (20%) 8%

Total income 276 228 259 259 231 (16%) (11%)

Direct expenses - staff (84) (87) (89) (81) (79) (6%) (2%)- other (23) (24) (22) (25) (20) (13%) (20%)Indirect expenses (71) (81) (77) (75) (73) 3% (3%)

(178) (192) (188) (181) (172) (3%) (5%)

Operating profit before impairment losses 98 36 71 78 59 (40%) (24%)

Impairment losses (17) (71) (67) (90) (144) - 60%

Operating profit/(loss) 81 (35) 4 (12) (85) - - Analysis of income by business: Ulster corporate 160 139 162 138 134 (16%) (3%)Ulster retail 107 92 93 101 104 (3%) 3% Other 9 (3) 4 20 (7) (178%) (135%)

Total income 276 228 259 259 231 (16%) (11%) Analysis of impairment by

sector: Mortgages 5 4 14 10 30 - - Corporate 3 43 40 66 87 - 32% Other 9 24 13 14 27 - 93%

Total impairment 17 71 67 90 144 - 60% Loan impairment charge as % of

gross customer loans and advances excluding reverse repurchase agreements by sector:

Mortgages 0.13% 0.10% 0.32% 0.25% 0.72% 59bp 48bp Corporate 0.06% 0.72% 0.71% 1.23% 1.59% 153bp 36bp Other 1.61% 4.60% 2.58% 3.50% 5.40% 379bp 190bp

0.18% 0.65% 0.64% 0.92% 1.42% 124bp 50bp

13

Appendix 2 Analysis by quarter Ulster Bank (continued) 2008 2009 Q3 2009 vs. Key metrics Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

Performance ratios Return on equity (1) 17.3% (6.5%) 0.7% (2.0%) (12.7%) (3,000bp) (1,070bp)Net interest margin 2.04% 1.67% 1.87% 2.03% 1.74% (30bp) (29bp)Cost:income ratio 64.5% 84.2% 72.6% 69.9% 74.5% (997bp) (458bp) 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Loans and advances to customers

gross: - mortgages 15.5 18.1 17.4 16.0 16.7 8% 4% - corporate 19.3 23.8 22.8 21.2 21.9 13% 3% - other 2.2 2.1 2.0 1.8 2.0 (9%) 11%

Customer deposits 21.5 24.3 19.5 18.9 20.9 (3%) 11% Risk elements in lending: - mortgages 0.2 0.3 0.4 0.4 0.5 150% 25% - corporate 0.2 0.8 1.0 1.1 1.3 - 18% - other 0.1 0.1 0.1 0.1 0.2 100% - Loan:deposit ratio (excluding

repos) 172.3% 181.1% 217.4% 206.3% 194.0% 2,165bp (1,237bp) Risk-weighted assets 22.2 24.5 26.2 26.2 28.5 28% 9%



14

Appendix 2 Analysis by quarter US Retail and Commercial (£ Sterling) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m


Net fees and commissions 171 183 198 209 159 (7%) (24%)Other non-interest income 29 84 52 45 65 124% 44%

Non-interest income 200 267 250 254 224 12% (12%)

Total income 640 779 744 702 634 (1%) (10%)

Direct expenses - staff (159) (175) (218) (184) (174) 9% (5%)- other (92) (120) (143) (188) (132) 43% (30%)Indirect expenses (153) (172) (201) (194) (191) 25% (2%)

(404) (467) (562) (566) (497) 23% (12%)

Operating profit before impairment losses 236 312 182 136 137 (42%) 1%

Impairment losses (134) (177) (223) (146) (180) 34% 23%

Operating profit/(loss) 102 135 (41) (10) (43) (142%) - Average exchange rate - US$/£ 1.892 1.570 1.436 1.551 1.640 Analysis of income by product: Mortgages and home equity 88 112 142 130 112 27% (14%)Personal lending and cards 86 90 107 113 116 35% 3% Retail deposits 256 279 231 202 200 (22%) (1%)Commercial lending 98 128 141 140 127 30% (9%)Commercial deposits 97 111 104 89 97 - 9% Other 15 59 19 28 (18) - (164%)

Total income 640 779 744 702 634 (1%) (10%) Analysis of impairment by

sector: Residential mortgages 16 13 23 12 29 81% 142% Home equity 20 22 29 43 82 - 91% Corporate & commercial 54 87 108 61 65 20% 7% Other 44 55 63 30 4 (91%) (87%)

Total impairment 134 177 223 146 180 34% 23% Loan impairment charge as % of

gross customer loans and advances (excluding reverse repurchase agreements) by sector:

Residential mortgages 0.74% 0.55% 1.00% 0.66% 1.68% 95bp 102bp Home equity 0.53% 0.47% 0.62% 1.08% 2.05% 152bp 97bp Corporate & commercial 1.11% 1.46% 1.79% 1.19% 1.27% 16bp 8bp Other 2.17% 2.24% 2.57% 1.45% 0.20% (197bp) (124bp)

1.04% 1.15% 1.44% 1.12% 1.41% 37bp 29bp

15

Appendix 2 Analysis by quarter US Retail and Commercial (£ Sterling) (continued) 2008 2009 Q3 2009 vs. Key metrics Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

Performance ratios Return on equity (1) 7.4% 7.9% (2.4%) (0.7%) (2.5%) (990bp) (180bp)Net interest margin 2.79% 2.59% 2.33% 2.30% 2.34% (45bp) 4bp Cost:income ratio 63.1% 60.0% 75.4% 80.6% 78.4% (1,526bp) 224bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Total assets 77.9 87.5 94.9 75.6 76.9 (1%) 2% Loans and advances to customers

(gross): - residential mortgages 8.7 9.5 9.2 7.3 6.9 (21%) (5%)- home equity 15.2 18.7 18.8 15.9 16.0 5% 1% - corporate and commercial 19.4 23.7 24.2 20.5 20.5 6% - - other consumer 8.0 9.8 9.8 8.3 7.8 (2%) (6%)Customer deposits 55.6 64.4 67.9 60.2 62.1 12% 3% Risk elements in lending - retail 0.2 0.2 0.3 0.3 0.3 50% - - commercial - 0.2 0.1 0.1 0.2 - 100% Loan:deposit ratio (excluding

repos) 92.8% 96.6% 91.5% 86.7% 82.6% (1,016bp) (410bp) Risk-weighted assets 51.4 63.9 64.3 55.6 62.8 22% 13% Spot exchange rate - US$/£ 1.783 1.460 1.433 1.644 1.599



16

Appendix 2 Analysis by quarter US Retail and Commercial (US Dollar) (continued) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement $m $m $m $m $m


Net fees and commissions 325 294 284 324 266 (18%) (18%)Other non-interest income 52 142 75 69 104 100% 51%

Non-interest income 377 436 359 393 370 (2%) (6%)

Total income 1,211 1,273 1,070 1,089 1,050 (13%) (4%)

Direct expenses - staff (302) (278) (313) (287) (289) (4%) 1% - other (172) (201) (206) (289) (219) 27% (24%)Indirect expenses (292) (277) (288) (301) (313) 7% 4%

(766) (756) (807) (877) (821) 7% (6%)

Operating profit before impairment losses 445 517 263 212 229 (49%) 8%

Impairment losses (258) (304) (320) (231) (296) 15% 28%

Operating profit/(loss) 187 213 (57) (19) (67) (136%) - Analysis of income by product: Mortgages and home equity 166 183 204 203 186 12% (8%)Personal lending and cards 164 143 154 174 190 16% 9%Retail deposits 483 451 332 315 329 (32%) 4%Commercial lending 186 211 202 217 210 13% (3%)Commercial deposits 185 179 150 138 160 (14%) 16%Other 27 106 28 42 (25) (193%) (160%)

Total income 1,211 1,273 1,070 1,089 1,050 (13%) (4%) Analysis of impairment by

sector: Residential mortgages 30 22 33 19 47 55% 145%Home equity 37 38 42 65 131 - 102%Corporate & commercial 106 151 154 99 107 1% 9%Other 85 93 91 48 11 (87%) (78%)

Total impairment 258 304 320 231 296 15% 28% Loan impairment charge as % of

gross customer loans and advances (excluding reverse repurchase agreements) by sector:

Residential mortgages 0.77% 0.63% 1.00% 0.63% 1.69% 92bp 106bp Home equity 0.55% 0.56% 0.62% 1.00% 2.05% 150bp 105bp Corporate & commercial 1.23% 1.74% 1.78% 1.18% 1.31% 9bp 14bp Other 2.36% 2.60% 2.58% 1.41% 0.34% (202bp) (107bp)

1.13% 1.35% 1.44% 1.08% 1.45% 32bp 37bp

17

Appendix 2 Analysis by quarter US Retail and Commercial (US Dollar) (continued) 2008 2009 Q3 2009 vs. Key metrics Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009

Performance ratios Return on equity (1) 7.6% 8.5% (2.3%) (0.8%) (2.5%) (1,010bp) (170bp)Net interest margin 2.80% 2.70% 2.33% 2.32% 2.37% (43bp) 5bp Cost:income ratio 63.2% 59.4% 75.4% 80.5% 78.2% (1,497bp) 231bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 $bn $bn $bn $bn $bn

Capital and balance sheet Total assets 138.9 127.8 136.0 124.4 122.9 (12%) (1%)Loans and advances to customers

(gross): - residential mortgages 15.5 13.9 13.2 12.0 11.0 (29%) (8%)- home equity 27.0 27.2 26.9 26.1 25.6 (5%) (2%)- corporate and commercial 34.6 34.7 34.7 33.6 32.7 (5%) (3%)- other consumer 14.5 14.3 14.1 13.7 12.5 (14%) (9%)Customer deposits 99.2 94.0 97.4 99.0 99.3 - - Risk elements in lending - retail 0.3 0.3 0.4 0.4 0.5 67% 25% - commercial 0.1 0.2 0.2 0.3 0.3 - - Loan:deposit ratio (excluding

repos) 92.8% 96.6% 91.5% 86.7% 82.6% (1,016bp) (410bp) Risk-weighted assets 91.7 93.2 92.1 91.3 100.4 9% 10%



18

Appendix 2 Analysis by quarter RBS Insurance 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Earned premiums 1,128 1,121 1,106 1,119 1,145 2% 2%Reinsurers' share (51) (48) (45) (40) (43) (16%) 8%

Insurance premium income 1,077 1,073 1,061 1,079 1,102 2% 2%Net fees and commissions (102) (93) (92) (95) (95) (7%) - Other income 107 146 108 104 112 5% 8%

Total income 1,082 1,126 1,077 1,088 1,119 3% 3%

Direct expenses - staff (64) (77) (70) (69) (67) 5% (3%)- other (44) (54) (67) (54) (47) 7% (13%)Indirect expenses (65) (72) (66) (65) (64) (2%) (2%)

(173) (203) (203) (188) (178) 3% (5%)

Gross claims (777) (788) (798) (776) (941) 21% 21%Reinsurers' share 18 41 5 18 13 (28%) (28%)

Net claims (759) (747) (793) (758) (928) 22% 22%

Operating profit before impairment losses 150 176 81 142 13 (91%) (91%)

Impairment losses - (42) (5) (1) (2) - 100%

Operating profit 150 134 76 141 11 (93%) (92%) Analysis of income by product: Motor own-brands 492 491 477 495 517 5% 4%Household and Life own-brands 200 206 204 210 214 7% 2%Motor partnerships and broker 167 166 145 145 141 (16%) (3%)Household and Life, partnerships

and broker 88 85 83 81 78 (11%) (4%)Other (International, commercial

and central) 135 178 168 157 169 25% 8%

Total income 1,082 1,126 1,077 1,088 1,119 3% 3% In-force policies (thousands) - Own-brand motor 4,434 4,492 4,601 4,789 4,894 10% 2%- Own-brand non-motor (home,

rescue, pet, HR24) 5,468 5,560 5,643 5,890 6,150 12% 4%- Partnerships & broker (motor,

home, rescue, pet, HR24) 6,052 5,898 5,750 5,609 5,371 (11%) (4%)- Other (international, commercial

and central) 1,122 1,206 1,211 1,210 1,212 8% - General insurance reserves – total

(£m) 6,661 6,672 6,630 6,601 6,839 3% 4%

19

Appendix 2 Analysis by quarter RBS Insurance (continued) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Key business metrics Return on equity (1) 18.8% 16.8% 9.5% 17.7% 1.2% (1,760bp) (1,650bp)Cost:income ratio 16.0% 18.0% 18.9% 17.3% 15.9% 8bp 137bp Adjusted cost:income ratio (2) 53.6% 53.6% 71.5% 57.0% 93.2% 3,960bp 3,620bp Gross written premiums (£m) 1,159 1,002 1,123 1,147 1,186 2% 3% Notes: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on regulatory

capital). (2) Adjusted cost:income ratio is based on total income and operating expenses after netting insurance claims against total

income.

20

Appendix 2 Analysis by quarter Central items 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 £m £m £m £m £m Fair value of own debt 633 14 384 (478) (163) (126%) 66% Other 173 (501) 105 166 283 64% 70%

Central items not allocated 806 (487) 489 (312) 120 (85%) 138%

21

Appendix 2 Analysis by quarter Non-Core 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 Income statement £m £m £m £m £m

Net interest income from banking activities 479 765 395 274 287 (40%) 5%

Net fees and commissions

receivable 260 166 178 82 132 (49%) 61% Income/(loss) from trading

activities 68 (3,320) (2,865) (1,390) (735) - (47%)Other operating income (net of

related funding costs) (3) (194) 25 (56) 83 - - Insurance net premium income 252 249 244 196 173 (31%) (12%)

Non-interest income 577 (3,099) (2,418) (1,168) (347) (160%) (70%)

Total income 1,056 (2,334) (2,023) (894) (60) (106%) (93%) Direct expenses - staff (141) (110) (188) (71) (111) (21%) 56% - other (257) (321) (230) (220) (223) (13%) 1% Indirect expenses (131) (152) (142) (137) (132) 1% (4%)

(529) (583) (560) (428) (466) (12%) 9%

Operating profit/(loss) before other operating charges and impairment losses 527 (2,917) (2,583) (1,322) (526) - (60%)

Insurance net claims (170) (192) (177) (137) (126) (26%) (8%)Impairment losses (768) (3,358) (1,828) (3,516) (2,066) 169% (41%)

Operating loss (411) (6,467) (4,588) (4,975) (2,718) - (45%) Key metrics

Performance ratios Cost:income ratio 50.1% (25.0%) (27.7%) (47.9%) (776.7%) - - Net interest margin 0.38% 1.36% 0.61% 0.45% 0.55% 17bp 10bp 2008 2009 30 Sept 2009 vs. 30 Sept 31 Dec 31 Mar 30 June 30 Sept 30 Sept 2008 30 June 2009 £bn £bn £bn £bn £bn

Capital and balance sheet Total third party assets (including

derivatives) 293.8 325.1 297.1 231.9 220.2 (25%) (5%)Loans and advances to customers

(gross): 172.1 190.6 183.1 163.6 158.7 (8%) (3%)Customer deposits 24.7 26.6 21.9 13.4 14.7 (40%) 10% Risk elements in lending 4.8 11.2 14.7 20.5 23.3 - 14% Loan:deposit ratio 691.2% 718.1% 844.6% 1,282.2% 1,078.5% 56% (16%) Risk-weighted assets 130.7 160.3 163.7 164.1 190.3 46% 16%

22

Appendix 2 Analysis by quarter Non-Core (continued) 2008 2009 Q3 2009 vs. Q3 Q4 Q1 Q2 Q3 Q3 2008 Q2 2009 £m £m £m £m £m

Analysis of income: Banking & Portfolio 739 669 90 (772) (92) (112%) (88%)Retail, Commercial & Countries 773 689 662 570 537 (31%) (6%)Trading (456) (3,692) (2,775) (692) (505) 11% (27%)

Total income 1,056 (2,334) (2,023) (894) (60) (106%) (93%) Impairment losses: Banking & Portfolio 252 1,004 823 1,619 878 - (46%)Retail, Commercial & Countries 360 945 720 1,638 1,234 - (25%)Trading 156 1,409 285 259 (46) (129%) (118%)

Total impairment 768 3,358 1,828 3,516 2,066 169% (41%) Loan impairment charge as % of

gross customer loans and advances:

Banking & Portfolio (0.33%) 6.98% 3.37% 7.16% 4.04% 437bp (312bp)Retail, Commercial & Countries 1.95% 4.70% 3.66% 9.44% 7.22% 527bp (222bp)Trading 7.52% 12.91% (124.58%) 42.09% 31.73% 2,421bp (1,036bp)

1.03% 6.12% 2.82% 8.39% 5.53% 450bp (286bp) £bn £bn £bn £bn £bn Gross customer loans and

advances (1): Banking & Portfolio 91.1 106.7 103.5 93.1 88.4 (3%) (5%)Retail, Commercial & Countries 73.5 79.9 78.7 69.4 68.4 (7%) (1%)Trading 7.5 4.0 0.9 1.1 1.9 (75%) 73%

172.1 190.6 183.1 163.6 158.7 (8%) (3%) Note: (1) Including disposal groups. Risk-weighted assets: Banking & Portfolio 42.9 46.4 71.6 61.8 73.1 70% 18%Retail, Commercial & Countries 53.8 49.9 51.1 48.3 45.9 (15%) (5%)Trading 34.0 64.0 41.0 54.0 71.3 110% 32%

130.7 160.3 163.7 164.1 190.3 46% 16%

Appendix 3

Asset Protection Scheme

Appendix 3 Asset Protection Scheme THE ASSET POOLS TO BE COVERED BY THE ASSET PROTECTION SCHEME WERE ONLY AGREED VERY RECENTLY. THE DATA FOR 30 SEPTEMBER 2009 ARE ESTIMATES AND ACTUAL NUMBERS WILL BE PROVIDED IN THE CIRCULAR TO SHAREHOLDERS. Page

1. Summary of APS revisions 2

2. Asset coverage 2.1 Roll forward of covered assets to 30 June 2009 3 2.2 Covered assets at 30 June 2009 and 31 December 2008 4 2.3 Credit impairments and write downs 6 2.4 Risk elements in lending and potential problem loans 6 2.5 Credit quality 7 2.6 Risk-weighted assets 7

3. Basis of asset selection 8

4. Pro forma capital ratios 9

1

Appendix 3 Asset Protection Scheme 1. Summary of APS revisions

Original APS Revised APS Capital injection £19.5 billion £25.5 billion Contingent capital reserve £6.0 billion £8.0 billion,

(fee of 4% p.a.) Details on Insurance cover: Covered assets at 31 December 2008 £325 billion £282 billion RWA relief at 30 June 2009 £149.6 billion £140.7 billion First loss £42.2 billion £60.0 billion - provisions recorded at 31 December 2008 £22.7 billion £21.3 billion - remaining £19.5 billion £38.7 billion Fees: - base £6.5 billion £700 million p.a.

(2009 to 2011), £500 million thereafter

- in deferred tax assets (‘DTA’) give up £5.2 billion historical

plus DTA on future tax losses

Nil

Termination rights Limited At any time provided

FSA stress test framework is met

Exit fees Negotiable £2.5 billion less

cumulative fees paid FSA stress test Meets FSA framework Meets FSA framework

Key messages: • RBS continues to meet the FSA stress test framework • RBS is exposed to higher credit losses and less capital relief under revised APS • However, RBS will have more capital to serve as offsets through:

(a) lower fees and retention of deferred tax assets (b) issuance of additional B shares (c) access to contingent capital

• Original APS structure provided higher equivalent capital benefits relative to 8% CT1 target than revised APS because of the way the securitisation formula works. Lower deductible policy resulted in lower capital charges through the period as the first loss is fully utilised.

2

Appendix 3 Asset Protection Scheme 2. Asset coverage 2.1 Roll forward of covered assets to 30 June 2009 £bn Covered assets at 31 December 2008 – as announced on 26 February 2009 325.0 Asset pool refinements (9.2)

Covered assets at 31 December 2008 – as published on 7 August 2009 315.8 Refinements and exclusions

o asset pool refinements (1.1) o credit derivative product companies (7.2) o derivatives buffer (4.8) o conduits (6.3) o reverse repurchase agreements (5.2) o assets potentially eligible for other sovereign schemes (6.9) o other asset removals (2.8)

Covered assets at 31 December 2008 – as announced on 3 November 2009 281.5 Disposals, rollovers and repayments (12.9) Effect of foreign currency movements (14.8) Amortisations and other movements (11.0)

Covered assets at 30 June 2009 242.8 Removals are a function of ineligibility in line with the Scheme rules, operational complexity, eligibility for other sovereign schemes and more economic forms of covering risk.

3

Appendix 3 Asset Protection Scheme 2. Asset coverage (continued) 2.2 Covered assets* at 30 June 2009 and 31 December 2008 The tables below show balances by asset classes, as defined by the Scheme, with underlying product categories, at 30 June 2009 and 31 December 2008.

Carrying

value (1)

Provisions and adjustments to

par value Par value

Undrawn commitments, and

other adjustments (2)Covered amount

£m £m £m £m £m30 June 2009 (a) (b) (c)=(a)+(b) (d) (e)=(c)+(d)

Residential mortgages 15,052 204 15,256 10 15,266

Consumer finance 17,944 2,405 20,349 2,361 22,710Personal loans 8,203 1,864 10,067 1,395 11,462Business and commercial loans 9,741 541 10,282 966 11,248

Commercial real estate finance 33,241 1,179 34,420 4,727 39,147

Leveraged finance 14,549 3,820 18,369 5,201 23,570

Lease finance 4,945 331 5,276 614 5,890

Project finance 1,535 24 1,559 312 1,871

Structured finance 16,782 7,523 24,305 4,397 28,702Structured loans 11,188 743 11,931 3,002 14,933Asset-backed securities 5,594 6,780 12,374 1,395 13,769

Loans 42,201 4,008 46,209 23,795 70,004

Bonds (3) 719 (8) 711 21 732

Derivatives 13,231 7,178 20,409 14,464 34,873Monoline insurers 4,104 6,845 10,949 8,832 19,781Other counterparties 9,127 333 9,460 5,632 15,092

Total 160,199 26,664 186,863 55,902 242,765

UK Retail 16,909 1,772 18,681 1,363 20,044UK Corporate 33,608 504 34,112 13,245 47,357Global Banking & Markets 33,023 1,453 34,476 20,035 54,511Ulster 10,170 210 10,380 829 11,209Non-Core 66,489 22,725 89,214 20,430 109,644

160,199 26,664 186,863 55,902 242,765

Loans and advances 142,455 10,914 153,369 40,022 193,391Debt securities 6,313 6,772 13,085 1,416 14,501Derivatives 11,431 8,978 20,409 14,464 34,873

160,199 26,664 186,863 55,902 242,765

4

Appendix 3 Asset Protection Scheme 4. Asset coverage (continued) 2.2 Covered assets* at 30 June 2009 and 31 December 2008 (continued)

Carrying

value (1)

Provisions and adjustments to par

value Par value

Undrawn commitments and

other adjustments (2)Covered amount

£m £m £m £m £m31 December 2008 (a) (b) (c)=(a)+(b) (d) (e)=(c)+(d)

Residential mortgages 15,283 144 15,427 - 15,427

Consumer finance 20,297 2,003 22,300 2,085 24,385Personal loans 9,544 1,687 11,231 1,440 12,671Business and commercial loans 10,753 316 11,069 645 11,714

Commercial real estate finance 41,367 975 42,342 9,077 51,419

Leveraged finance 16,290 2,944 19,234 5,112 24,346

Lease finance 5,880 236 6,116 890 7,006

Project finance 1,642 58 1,700 414 2,114

Structured finance 19,478 7,047 26,525 5,700 32,225Structured loans 12,674 261 12,935 3,294 16,229Asset-backed securities 6,804 6,786 13,590 2,406 15,996

Loans 55,537 1,373 56,910 27,510 84,420

Bonds (3) 1,285 (103) 1,182 65 1,247

Derivatives 21,068 6,575 27,643 11,272 38,915Monoline insurers 5,620 5,892 11,512 10,758 22,270Other counterparties 15,448 683 16,131 514 16,645

Total 198,127 21,252 219,379 62,125 281,504

UK Retail 18,186 1,565 19,751 1,415 21,166UK Corporate 39,191 330 39,521 12,165 51,686Global Banking & Markets 49,487 2,142 51,629 23,415 75,044Ulster 11,772 167 11,939 1,163 13,102Non-Core 79,491 17,048 96,539 23,967 120,506

Total 198,127 21,252 219,379 62,125 281,504

Loans and advances 168,970 7,994 176,964 48,382 225,346Debt securities 8,089 6,683 14,772 2,471 17,243Derivatives 21,068 6,575 27,643 11,272 38,915

Total 198,127 21,252 219,379 62,125 281,504 Notes: (1) Carrying value represents the amounts recorded on the balance sheet and includes assets classified as loans and

receivables, fair valued through profit or loss and available-for-sale (2) Other adjustments include: add-back of available-for-sale reserves (taken through equity) and adjustment to covered

amounts for derivatives (for 30 June 2009 only) and rollovers and refinancing (for 30 June 2009 only) (3) Comprises non asset-backed securities *Detailed information is presented as at 30 June 2009 and 31 December 2008. Information as at 30 September 2009 is being updated for incorporation in the APS shareholder circular.

5

Appendix 3 Asset Protection Scheme 2. Asset coverage (continued) 2.3 Credit impairments and write downs Cumulative credit impairment losses and adjustments to par value relating to covered assets are set out below: Closing balance 30 June 2009 31 December 2008 £m £m

Loans and advances 10,914 7,994 Debt securities 6,772 6,683 Derivatives 8,978 6,575

Total 26,664 21,252

UK Retail 1,772 1,565 UK Corporate 504 330 Global Banking & Markets 1,453 2,142 Ulster 210 167 Non-Core 22,725 17,048

26,664 21,252 2.4 Risk elements in lending and potential problem loans Risk elements in lending (REILs) and potential problem loans (PPLs) for the Group and the amount relating to assets in the Scheme are set out below.

30 June 2009 31 December 2008

Group APS

Group APS £m £m £m £m Non-performing loans 27,229 20,627 17,082 12,679 Other REIL 3,500 2,900 1,709 1,498

Total REIL 30,729 23,527 18,791 14,177 PPLs 296 239 226 187

REIL and PPLs 31,025 23,766 19,017 14,364 Core 10,364 6,711 Non-Core 20,661 17,055

31,025 23,766

Key points: • More than 75% of the Group’s REILs and PPLs relate to assets in the Scheme. • Of the REILs and PPLs in Non-Core, more than 80% were in APS.

6

Appendix 3 Asset Protection Scheme 2. Asset coverage (continued) 2.5 Credit quality The internal reporting and oversight of risk assets principles are set out in the Group 2008 Report and Accounts credit risk section on page 90. The table below shows the credit quality of the Group’s credit risk assets by risk bands and the proportion relating to assets in the Scheme. 30 June 2009 31 December 2008

Asset quality band Probability of default Group % relating to assets

in the Scheme Group % relating to assets

in the Scheme £bn £bn

AQ1 0% - 0.034% 109 2% 127 3%AQ2 0.034% - 0.048% 20 9% 26 16%AQ3 0.048% - 0.095% 33 10% 38 17%AQ4 0.095% - 0.381% 114 16% 150 15%AQ5 0.381% - 1.076% 121 26% 148 28%AQ6 1.076% - 2.153% 99 32% 103 36%AQ7 2.153% - 6.089% 49 45% 46 52%AQ8 6.089% - 17.222% 25 42% 26 46%AQ9 17.222% - 100% 17 55% 12 69%AQ10 100% 33 81% 18 72%Other (1) 38 5% 41 8%

658 24% 735 24%

Notes: (1) ‘Other’ largely comprises assets covered by the standardised approach for which a probability of default (PD) equivalent to

those assigned to assets covered by the internal ratings based approach is not available. (2) Reverse repurchase agreements, carrying value relating to net derivative positions and issuer risk relating to debt

securities are excluded from both Group numbers and APS covered assets above. Over 80% of Group’s credit risk assets with 100% probability of default are in the Scheme. 2.6 Risk-weighted assets Risk-weighted assets (RWAs) were as follows:

30 September 2009 30 June 2009 31 December 2008

£bn % £bn % £bn %

APS 166.5 28 140.7 26 158.7 27 Non APS 428.2 72 406.6 74 419.1 73 Group 594.7 100 547.3 100 577.8 100

30 June 2009

APS Non APS Total Risk-weighted assets by division: £bn £bn £bn UK Retail 18.3 35.7 54.0 UK Corporate 32.5 57.0 89.5 Global Banking & Markets 29.3 93.1 122.4 Ulster 8.1 18.1 26.2 Other divisions - 91.1 91.1

Core 88.2 295.0 383.2 Non-Core 52.5 111.6 164.1

Group 140.7 406.6 547.3

7

Appendix 3 Asset Protection Scheme 3. Basis of asset selection The selection has been carried out primarily between February and April 2009 and was driven by three principal criteria

(1) Risk and degree of impairment in base case and stressed scenarios; (2) Liquidity of exposure; and (3) Capital intensity under procyclicality.

The approach for high volume commercial and retail exposures was on a portfolio basis. Selection for large corporates and GBM was at the counterparty/asset level. Set out below are the selection criteria for the affected divisions.

GBM*

• Banking book: Selection by individual asset pool (e.g., Corporate loans, Real estate finance, Leveraged finance), Global Restructuring Group (GRG) work-out unit counterparties/assets and high risk counterparties/assets. Additional counterparties/assets were selected through an individual risk review of the total portfolio.

• Trading book: Selection by individual assets (e.g., Monolines, Derivatives, Mortgage trading).

UK Corporate*

• Commercial & Corporate real estate: All defaulted assets in the work-out/restructuring unit or in high risk bands.

• Corporate: All defaulted assets in the work-out/restructuring unit. Corporate banking clients in high risk sectors or with high concentration risk.

• Business Banking: Portfolios in the work out / restructuring unit or in high risk bands.

UK Retail*

• Mortgages: assets with higher Loan to Values and in higher risk segments (e.g. LTVs >97% on general book, LTVs >85% on buy-to-let book), and those assets in arrears (at 31 December 2008).

• Loans and overdrafts - higher risk customers based on internal bandings, and those assets in arrears (as at 31 December 2008).

EME* (Corporate & Retail)

• Mortgages: Assets with greater than 85% LTV, broker mortgages and interest only with a higher probability of default.

• Retail: Portfolios of accounts in default, >1 month arrears, <2 years old and a higher probability of default.

• Corporate: Counterparties/assets in work-out / restructuring groups or in high risk bands, and other assets identified as part of an individual review of cases.

* including assets transferred to Non-Core division

8

9

Appendix 3 Asset Protection Scheme 4. Pro forma capital ratios 30 September 2009 (estimated)

RWAs

Core tier 1

capital

Core tier 1

capital ratio

Tier 1

capital

Tier 1

capital ratio Total capitalTotal capital

ratio

£bn £bn % £bn % £bn % As reported 594.7 33.0 5.5% 47.6 8.0% 62.1 10.4% Pro forma effects: B share issuance 25.5 25.5 25.5 Less CDS Value (2.5) (2.5) (2.5) Contingent Capital fee deducted upfront

(1.6)

(1.6)

(1.6)

Capital requirements at 8% (13.4) APS coverage benefit at 4% 6.7 Net (BiPru 9) deduction (6.7) (6.7) (6.7) Tier 2 deduction (6.7) RWA relief (166.5) 428.2 47.7 11.1% 62.3 14.5% 70.1 16.4% 30 June 2009

RWAs

Core tier 1

capital

Core tier 1

capital ratio

Tier 1

capital

Tier 1

capital ratio Total capitalTotal capital

ratio

£bn £bn % £bn % £bn % As reported 547.3 35.2 6.4% 49.4 9.0% 64.0 11.7% Pro forma effects: B share issuance 25.5 25.5 25.5 Less CDS Value (2.5) (2.5) (2.5) Contingent Capital fee deducted upfront

(1.6)

(1.6)

(1.6)

Capital requirements at 8% (11.2) APS coverage benefit at 4% 5.6 Net (BiPru 9) deduction (5.6) (5.6) (5.6) Tier 2 deduction (5.6) RWA relief (140.7) 406.6 51.0 12.5% 65.2 16.0% 74.2 18.2% Key messages:

• CT1, Tier 1 and Total Capital ratios are significantly improved on a pro forma basis • Legacy credit losses will be absorbed through higher capital base • APS coverage provides capital equivalent benefit versus the RBS Group targeted 8% CT1 ratio of

approximately £6.7 billion (30 June 2009: £5.6 billion) which, net of the valuation of the CDS (minimum fee), is approximately £4.2 billion (30 June 2009: £3.1 billion).

• Contingent capital fee for 5 year option deducted upfront

Appendix 4

Businesses outlined for

disposal

Appendix 4 Businesses outlined for disposal

Businesses outlined for divestment To comply with EC State Aid requirements RBS has agreed a series of restructuring measures to be implemented over a four year period. This will supplement the measures in the Strategic Plan already announced by RBS. This comprises divesting fully RBS Insurance, Global Merchant Services and RBS Sempra Commodities. Further, the Group is to divest the RBS branch based business in England & Wales and the NatWest branch network in Scotland, along with the Direct SME customers across the UK. This will reduce RBS market share by 2% of the UK retail market, 5% in the SME market and 5% of the mid-corporate market. Income statement dimensions The table below shows the estimated associated Total Income and Operating Profit of the businesses currently identified for disposal.

Total income Operating profit before

impairments Operating profit Businesses outlined for disposal

6 monthsended

30 June 2009

Year ended 31 December

2008

6 months ended

30 June 2009


2008

6 months ended

30 June 2009


2008

£m £m £m £m £m £mRBS Insurance (1) 2,165 4,430 223 626 217 584Global Merchant Services (2) 264 552 121 286 121 276RBS Sempra Commodities (3) 454 765 62 212 62 209Total 2,883 5,747 406 1,124 400 1,069

1

2

Appendix 4 Businesses outlined for disposal Balance sheet dimensions The table below shows the estimated associated risk weighted assets, total assets and estimated capital of the businesses currently identified for disposal. RWAs Total Assets Estimated Capital Businesses outlined for disposal

30 June 2009

31 December 2008

30 June2009

31 December 2008

30 June 2009

31 December 2008

£bn £bn £bn £bn £bn £bn £bnRBS Insurance (1) (4) n/m n/m 11.5 10.8 4.2 3.8Global Merchant Services 1.5 1.5 0.6 0.8 - -RBS Sempra Commodities 10.2 10.7 14.7 17.8 - -Total 11.7 12.2 26.8 29.4 The table below shows estimated forecast risk weighted assets, total assets, loans and deposits as at 31 December 2009 in respect of the UK Retail Markets and UK Corporate businesses identified for reduction. It is estimated that the income of these businesses for the six months ended 30 June 2009 was approximately £400 million and that, broadly, they broke even during the period. 31 December 2009 RWAs Total Assets Loans Deposits

UK Retail Markets and UK Corporate Businesses outlined for reduction (£’bn) (2) 18.0 20.0 20.0 19.0

Notes: (1) As reported in the Interim Results for the half year ended 30 June 2009 and excluding non-core business. (2) The figures are estimates. (3) Sempra Commodities was acquired in April 2008 and the 2008 income statement data are from the date of acquisition. The

figures shown, other than total income, are net of the minority interest attributable to Sempra for the six months ended 30 June 2009 and the twelve months ended 31 December 2008. The operating profit before minority interest of the business was £206 million and £373 million respectively for the periods shown.

(4) Estimated Capital includes approximately £1.0 billion of goodwill.

Appendix 5


Revisions

Appendix 5 – Revisions Revision to net interest income Certain income reported in other operating income in the interim results for the half year ended 30 June has been reclassified to net interest income. This reclassification does not affect total income, results of operation or profit before tax. The effect of the reclassification on the income statement for the quarter ended 30 June 2009 is as follows:

Previously

reported Adjustment Revised £m £m £m

Net interest income 3,117 205 3,322

Non-interest income (excluding insurance net premium income) 1,703 (205) 1,498

Net interest margin – quarter ended 30 June 2009 1.60% 0.10% 1.70%

Net interest margin – half year ended 30 June 2009 1.69% 0.05% 1.74%

1

Appendix 5 – Revisions Divisional revisions Divisional results have been revised to reflect the finalisation of transfers to Non-Core and between divisions. These changes do not affect the Group’s results. Quarter ended 31 March 2009 Quarter ended 30 June 2009

Previously reported Adjustment Revised


UK Retail £m £m £m £m £m £m

Net interest income 807 (10) 797 877 (9) 868 Direct expenses - other (118) 3 (115) (103) 1 (102)Indirect expenses (487) - (487) (451) (1) (452)Operating profit 24 (7) 17 29 (9) 20 UK Corporate £m £m £m £m £m £m

Net interest income 473 26 499 533 27 560 Non-interest income 273 38 311 296 32 328 Direct expenses - staff costs (172) (13) (185) (170) (12) (182)- other costs (66) (8) (74) (40) (6) (46)Impairment losses (101) 1 (100) (450) - (450)Operating profit 277 44 321 44 41 85

£bn £bn £bn £bn £bn £bn

Total assets 108.7 11.4 120.1 106.0 10.2 116.2 Loans and advances to customers – gross 105.4 11.3 116.7 102.4 10.2 112.6 Customer deposits 81.2 1.7 82.9 84.1 1.5 85.6 Risk weighted assets 81.6 4.6 86.2 85.1 4.4 89.5 Wealth £m £m £m £m £m £m

Net interest income 160 (2) 158 179 (3) 176 Non-interest income 112 (1) 111 113 (2) 111 Direct expenses - staff costs (90) - (90) (79) 1 (78)- other costs (33) - (33) (35) 1 (34)Operating profit 97 (3) 94 121 (3) 118


Loans and advances to customers – gross 12.6 (0.3) 12.3 12.7 (0.3) 12.4 Customer deposits 35.3 (0.4) 34.9 35.7 (0.4) 35.3 Risk weighted assets 10.8 (0.2) 10.6 10.5 (0.2) 10.3

2

Appendix 5 – Revisions (continued) Quarter ended 31 March 2009 Quarter ended 30 June 2009



Global Banking & Markets £m £m £m £m £m £m

Net interest income 848 (36) 812 712 (52) 660 Non-interest income 4,587 (60) 4,527 1,683 (33) 1,650 Direct expenses - staff costs (1,014) 13 (1,001) (773) 11 (762)- other costs (306) 6 (300) (233) 2 (231)Impairment losses (269) - (269) 32 (1) 31 Operating profit 3,653 (77) 3,576 1,220 (73) 1,147


Loans and advances (including banks) 217.9 (11.4) 206.5 166.4 (10.4) 156.0 Reverse repos 80.6 - 80.6 75.2 - 75.2 Securities 124.3 - 124.3 115.5 - 115.5 Cash and eligible bills 28.6 - 28.6 51.5 - 51.5 Other 43.1 - 43.1 46.3 (0.1) 46.2

Total third party assets (excluding derivatives mark to market) 494.5 (11.4) 483.1 454.9 (10.5) 444.4 Customer deposits (excluding repos) 83.1 (1.3) 81.8 66.0 (1.0) 65.0 Risk weighted assets 153.1 (4.5) 148.6 126.6 (4.2) 122.4 Global Transaction Services £m £m £m £m £m £m

Net interest income 220 - 220 226 (1) 225 Non-interest income 385 - 385 397 1 398 Direct expenses - staff costs (95) - (95) (88) 1 (87)- other costs (35) - (35) (37) (1) (38)Operating profit 231 - 231 265 - 265


Total third party assets 20.9 0.2 21.1 19.7 (0.3) 19.4 Loans and advances 14.4 0.3 14.7 13.8 (0.3) 13.5 Customer deposits 58.2 0.1 58.3 54.0 - 54.0 Risk weighted assets 17.9 0.8 18.7 16.7 - 16.7 Central items £m £m £m £m £m £m

Operating profit 489 - 489 (314) 2 (312)

3

4

Appendix 5 – Revisions (continued) Quarter ended 31 March 2009 Quarter ended 30 June 2009

Previously

reported Adjustment Revised Previously

reported Adjustment Revised Non-Core £m £m £m £m £m £m

Net interest income 373 22 395 239 35 274 Non-interest income (2,442) 24 (2,418) (1,172) 4 (1,168)Staff costs (187) (1) (188) (72) 1 (71)Other costs (371) (1) (372) (358) 1 (357)Impairment losses (1,827) (1) (1,828) (3,517) 1 (3,516)Contribution (4,631) 43 (4,588) (5,017) 42 (4,975)


Total third party assets (including derivatives) 297.1 - 297.1 231.1 0.8 231.9

Loans and advances to customers - gross 183.1 - 183.1 166.3 (2.7) 163.6 Customer deposits 22.0 (0.1) 21.9 20.8 (7.4) 13.4 Risk weighted assets 164.4 (0.7) 163.7 164.0 0.1 164.1

1 interim management statement the royal bank of scotland group third quarter operating loss of...

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