NatWest Group PLC (NWG) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to our annual results presentation. 2007 was quite a year in banking, but it's been a very good year for RBS. Our businesses are performing very well, and delivered a record Group operating profit of GBP10.3 billion, up 9%. Adjusted earnings per share were up 18% to 78.7p, and the Board increased the dividend by 10% to 33.2p for the full year. So a very good operating performance.

In addition to that, we acquired ABN Amro, together with our friends in Fortis and Santander. Now, you'll hear a good deal more about that and what it means for the Group going forward from Fred and Johnny Cameron, but first I'd like to hand over to Guy to take you through the results in more detail. Guy?

Thank you very much, Tom, and good morning, ladies and gentlemen. 2007 was a very strong year for the Group. Operating profit at GBP10,282 million is up 9%, profit attributable to shareholders rose by 18% to just over GBP7.3 billion. Our adjusted earnings per share rose by a similar amount, our return on equity increased to 19.9%, and our Tier 1 capital ratio at the end of the year was 7.3%.

These results incorporate many strong performances across many of our businesses. They also incorporate the 76 days that we acquired ABN, and they incorporate a number of moving parts. And what I would like to do is run through the results on RBS, excluding ABN on a business-as-usual basis, look at some of the unusual items which occurred throughout 2007, talk a little bit about the ABN business that we acquired, and then hand over to Fred who will talk about the enlarged Group, the revised organizational structure, and the outlook.

Group income grew by 3% in 2007, principally driven by a 7% rise in net interest income as margins across the Group stabilized, or in some cases even widened. Our costs were brought down by 1 percentage point, and our cost income ratio fell to, I think, a record low of 40.7%, down 1.4 points. We saw a stable corporate credit environment, we saw declining UK impairments, we saw a slight uptick in impairments in the United States, but, overall, our risk elements in lending fell from 1.57% to 1.49%, and credit costs declined 1% to GBP1.86 billion. As a result, our profits rose by GBP884 million, or 9%, to just under GBP10.3 billion.

Once again, I think these results demonstrated the strength, the flexibility, and the diversity of the business model that we operate. There were good performances within all of our divisions, and there were some particularly strong collective performances in UK Corporate Banking, in the Retail division, in Wealth Management, and in Ulster. And I'll now walk through each of those divisions.

Many areas of our Global Banking and Markets division had a very good year indeed. We saw a 33% uplift in fees on origination and distribution of loans and bonds. We saw a 67% growth in our combined rates and currencies business. We saw almost doubling of income and profits in Asia, a 39% year-over-year improvement in Europe building on a long succession of growth in these markets.

We also took advantage of very favorable market conditions to realize a number of gains and dispose of a variety of assets throughout the year. However, as you can see from the headline numbers these results were held back by the second half write-downs in the credit markets ,absent the extraordinary effect of the gains and the write-downs, the underlying business in Global Banking grew 10%.

As we highlighted at the trading statement we took a number of marks related to credit markets principally in the second half of the year. We remain comfortable with the marks that we took at the trading statement and we remain so. However, in the light I think of the weaker credit profile of some of the monoline financial guarantors that we had exposure to, we announced this morning an additional GBP4

So if you take the GBP950 million number that we talked about at the trading statement, we add about GBP150 million or so for the first half write-downs that were incorporated in the results that we shared with you back in August and the GBP456 million as of today, you see total write-downs to the credit markets netted out at GBP1.6 billion. You take the costs associated with these deals out of the profit line, it impacted our profits by about GBP1.1 billion.

On the positive side the gain on Southern Water, the sale and leaseback and the sale of our small equity holdings in both London Stock Exchange and Master Card realized gains of around GBP1.4 billion, and again stripping out the costs and also allowing some goodwill payments that we've made out of the Group center over the course of the year have added about GBP1.1 billion to our profit. The net effect of these gains and these write-downs impacted the Group operating profit by a positive GBP24 million.

The slide behind illustrates now the combined exposure that we had as at the end of the year to these instruments, as I say, they were marked at the time of the trading statement. And we remain comfortable with the RVF marks that were applied to that portfolio.

In the year end review we looked at the ABN high grade super senior CDO and we've took an additional 10 percentage points write-down to that, marking it down from 90 to 80 and that's incorporated in the weighted average price that you see in the top right-hand corner of this page.

As I say the aggregate ABN combined year of exposure to both our CDO exposures, all subprime inventory, any residual securitization activity and our leveraged finance book.

Just heading back into the divisions. UK Corporate Banking had a great year. Profits grew 11% to almost GBP2 billion. It is the leading Corporate and Commercial Bank in the UK. It is relationship driven, top rated for customer service by its clients and gaining market share. We grew income by 8% or just over GBP3.75 million. We are continuing to invest in the future. You can see from the impairment cost decline, it's a very careful management of the risk profile and a business which once again has delivered the results.

We saw a very good performance in our UK Retail Banking division, again leading customer satisfaction scores almost 1 million new accounts added in 2007, the leading position in the UK current accounts. The cautious approach to lending which Gordon has talked to you about over the last year or two has led to a 9% decline in impairments on a year-over-year basis. On the other hand we've seen a very strong growth in savings and investments with income there up 14%. Our Bank assurance annualized premium equivalent grew 28%. Our deposit base grew by 11%, again exceeding growth in loans in this particular area. We kept a tight rein on costs and saw improving margins coming through in the second half momentum and this business feels strong into 2008.

Wealth Management saw income rise by 16% to just over GBP1 billion and profits rise by 30% to just over GBP400 million. Led by growth in our UK Private Banking and in Asia. Very good mix of business here around 70% of our income derived from banking activities and about 30% comes from investment activities. Assets under management grew 24% over the year. We continue to invest in physical distribution here in the UK and abroad and we continue to be recruiting private bankers with a growth rate of 12% on a year-over-year basis.

It's a similar and quite familiar story now of growth and investment in Ulster Bank. Income up 15% to GBP1.3 billion. Profits up 22% to over GBP500 million. Good growth on both sides of the balance sheet. Deposits up 17%. Mortgage lending up 17% and we're starting to see real momentum coming through on the Corporate side of the business there with good growth in capital markets in conjunction with GBM colleagues in Europe and around the world. And a good growth in business lending which saw 29% year-over-year increase in volume. Credit metrics as evidenced by flat credit costs remain very strong.

The Citizens Group, I think you would describe it as a resilient performance against a weaker economic backdrop. After a number of years of declines net interest margins started to widen in 2007 and this led to net interest income growing by about 3 percentage points on fairly modest balance sheet growth. We saw good progress in our Corporate and Commercial expansion with lending up 13%. We kept a very tight rein on costs and profits before impairment lines were up over 5 percentage points.

However I think the stand out number on the page from historic lows of around 30 basis points, we started to see some rise in impairment costs in 2007. In part these were due to planned growth in the Corporate lending book, in part of course related to the weaker housing market and also in the fourth quarter in some considerable part to build our reserves in that business. Overall the portfolio remains very high quality and our retail customer FICO scores on average are above 700.

[Back in] insurance. It really was a, actually a very good result overshadowed by the floods. A very good underlying improvement for the business performance really built around three areas. Firstly, much tighter control on costs and improving productivity. Secondly, a sharper differentiation between our own brand distribution channel being managed for growth and our partnership distribution channels being managed for profitability and over the course of the year we have exited some of these partner distribution channels.

And the third element is built around improved risk selection moving away from volumes at any price in what is a very competitive market. It's looking at segments of the market which offer more attractive risk and return characteristics. This will be evidenced, although distorted by the flood numbers, our net claims excluding the floods actually fell by 7 percentage points and I think, if I dare make the pun, weather permitting, the outlook for 2008 seems somewhat brighter for this business.

Our manufacturing. I think it's testimony to our operating model. Almost flat costs, certainly support costs were flat on a year-over-year basis. We continue to invest in technology and in property. That's led to a 1% overall rise but I think very much underpinned the growth that we saw right across the Group and a major factor contributing to the 1.4% decline in our cost income ratio that I mentioned earlier.

At the Group center net of goodwill payments, we were the beneficiary of roughly GBP500 million worth of the previously announced gains, the sale and leaseback of some properties, the London Stock Exchange and MasterCard and the fair value adjustments to the carrying value of our own debt. The Group center also benefited from the receipt of about a GBP60 million dividend from the Bank of China and some slightly reduced pension funding costs as our pension fund moved into surplus.

For the ABN Amro businesses that we required, an operating profit of around EUR640 million for the year off income of just under EUR7 billion. It's kind of in line with where we thought they would be, probably slightly ahead of the equivalent number last year. We saw some year-on-year improvements in equities, in rates, in currencies in some of the local markets activities. We saw 7% rise in transaction banking, our International Retail customer base grew by about 12 percentage points, but as you've seen from the very earlier slides, an 86% cost income ratio something with which we are not familiar at RBS and not surprisingly in the time of ownership we've identified some additional synergies which Fred will talk about later.

We ended the year with a balance sheet of GBP609 billion worth risk weighted assets. A core Tier 1 ratio of 4.5%, the Tier 1 as I mentioned earlier of 7.3% and total capital of 11.2% consistent with previous guidance that we had given, our return on equity rose to 19.9%.

And in summary before handing over, I think 2007 I would categorize as a year of strong organic growth for the Group, improved operating leverage, declining credit costs, increased returns and enhanced opportunity and to talk to you about some of those opportunities I will handover to Fred. Thank you.

Thanks Guy, good morning everyone. A lot of moving parts, a lot to absorb, in places something of an accounting fest. And in my section this morning I'm trying to strike a balance between bringing some context to those and to what's been going on in the Group and to give a sense of how we see the future. But also to leave plenty of time for questions at the end, because I know that you all have a lot of things you want to ask. So I'm erring in favor of the latter, so I'm going to try and move through the gears here pretty quickly. I'm happy to go back over any of this or pick up any questions at the end.

But a few things I think would be helpful, starting off with a housekeeping point about the Group's structure. I know that many of you don't like it when we change the Group structure, it doesn't make like easier for your models inability to predict what we're doing. To be honest it doesn't make our lives very much easier either, which is why we've stuck pretty much with the Group structure for the last seven or eight years now. It's served us well, there have, along the way, been one or two minor amendments to it, but we've tried to stick pretty much with this. The world's moved on though, our business is very different now from where it was then and obviously the acquisition of ABN Amro does make a big difference. So with a little reluctance we have moved from our historic model to a new model, which causes the numbers to change.

The new model, I'm not going to go through with any great detail, simply reflecting the fact that we have some genuinely global businesses now, we recognize that. A couple of years ago we set up GBM, Global Banking Markets, simplistically is the business that deals with ocean going companies regardless of -- and financial institutions, regardless of where geographically they're based. We now have a very significant Global Transaction Services business which Johnny will talk a little bit about in a minute. Regional markets are all of our other businesses where the focus on managing them will continue to be regional. RBS Insurance comes through this unscathed and we continue with the very successful manufacturing model, which will cover our global operations.

I'm not going to go through this slide at all, this is a wiring diagram or knitting pattern which you will need to begin to make sense of the numbers that we published at the back of the company announcement today. It's restating all of our comparatives along the new lines for 2006 and 2007. We will be working with you, Richard O'Conner and this team, will be happy to work with you to help walk you, talk you through this and we'll be doing some investor day later in the piece to walk you through, I think all together more importantly the actual businesses which sit beneath these divisions.

So that's all I'm going to say on that for now other than just to give you a quick sense of what these sorts of metrics and dynamics in these business units, some very big units moving at some pace as you will see from the slide. Mostly we have the Global Transaction Services, our payments business, our merchant acquiring business and we'll be one of the top three, four in the world now in that business, punched in just over GBP1.6 billion profit during 2007. I think a business we've always been in but it's been kind of hidden and obscured in the numbers, ABN were one of the top global participants in that particular activity.

Acquisition of ABN Amro. Again in the interest of time, I'm not going to go through all of the clocks and dials about how every single thing is going. I'm very happy to answer questions on that as I know Mark would be and others. But I think the main news is that with a view of all of the businesses, a positive view we had of the ABN businesses has been confirmed. We've had very good engagement with the regulator in The Netherlands and indeed elsewhere and with the staff councils, the works council, a very good -- and important relationships in both cases.

And as we've gone around and you'll see bits of this over time, that as we've looked at the mechanics of separating out some parts of the business, some of them just, the practicalities and the economics of separating some of the businesses in some of the countries just don't make sense. You'll have seen, just before the [year end], we sold Global Clients Brazil to Santander, a transfer (inaudible) for about EUR750 million. There'll be one or two other little things as we go forward, but nothing drastic. And of course one of the key activities has been validating our business plans, our transition plans and of course the synergies.

And looking at ABN Amro it's probably worth just reminding ourselves with everyone, [in the] EUR71 billion, EUR72 billion figure has been much syndicated and socialized, but it's worth I think coming back to the out -- how we see this from the RBS perspective, because we, although we bought 38% of the business, actually we get -- a part of what we bought was cash, the (inaudible) proceeds, [net of the net] asset, so our share of the considerations is just over EUR16 billion.

Our share price came down from the point at which the offer was struck through to when the deal was completed. We made the sale of Brazil, so it brings us round to an acquisition price of about GPB10 billion -- of about GBP5 billion to GBP10 billion which was made up of about 25% equity, the rest in cash. Probably just worth having those numbers in your mind because I think that stopping someone in the street would probably -- you'd probably have guessed a rather higher number there for what our acquisition cost of ABN Amro actually was.

The synergies -- the cost synergies are probably the most -- the easiest piece to imagine and get your mind around. We've gone in and we've validated the estimates and remember these estimates were prepared from outside the business, they were prepared and then we published them. They're actually lower than the equivalent numbers that were mentioned by Barclays. There hasn't been any eureka moments here, there hasn't been, gosh we've discovered a whole new thing. I think actually that's probably quite good news. In fact what we've seen are developments of the themes which were identified initially and an ability to put much more precise figures on them.

But part of the joy from our point of view is they're all really rather mundane, even in the purchasing arena, I can't think of any more mundane purchasing synergy than stationery, where we were able to procure stationery at 20% less than ABN Amro. And so it reads across IT, not all 20% in every case, but in hardware, software and a variety of other areas. So nothing in here that's a silver bullet eureka type additional synergy, just routine mundane run of the mill synergies which I think, as I say, I find deeply reassuring.

Also I think deeply reassuring and in sharp contrast to the equivalent situation in NatWest, there isn't a single huge synergy in here. You'll remember the many happy hours we spent debating the IT issues around NatWest, and so much hung on our ability to make the IT integration work. Here you can pretty much take the synergies and divide them into the total and come away with a sense that there are lots and lots of small things. So they don't all have to go well and it's unlikely they would all go well. So we're confident enough in that number to increase the target today based on all the work that we've performed.

On the revenue synergy side, always a slightly more nebulous concept I grant you. Probably the big, the most obvious piece here is that at the time of the takeover, you'll remember we said we didn't make any assumptions about synergies in the retail businesses, we couldn't get our mind very well around the international retail business. The big retail business which there were in Asia, we can do that now and you'll see a big part of the synergy comes simply from that. Including a synergy where there wasn't one before. Again considerable confidence around their ability to deliver these synergies and again no big silver, individual silver bullet items, no eureka moments since the bid.

Again somewhat abstracted and theoretical nevertheless, but just -- had we known those synergies at the time, those are how the model metrics would have looked, taking what were already very attractive and I think making them even more attractive. Somewhat abstract I grant you.

Commonsense checking all of this. So supposing we did achieve those synergies, do they take us to a ridiculous place? Well actually no, you could argue they take us to a not all that impressive a place by achieving all of those synergies and sticking them on top of the 2007 numbers down the line, 2007 numbers, we only get to a 61% cost income ratio which doesn't feel to be something that we'd be bragging about. But at least from the point of view of validating the synergies I think it's as good a test, a good a check -- a cross check any.

Much more that we could talk about in ABN Amro, as I say, I'm very happy to take questions, but in the interest of time we'll just move through it.

The outlook, predicting the future is a topic I always try and avoid and in fact do avoid, but it's quite reasonable and rational we should all be thinking about the future. Arguably more so than ever at this particular juncture.

What to look at? Well, historically I've looked at these numbers. I'm not going to spend a lot of time looking at these this morning other than to point out the obvious, perhaps, that things do tend to turn out better than you think. This time last year a view on economic growth, actually the consensus view on economic growth, turned out to be understated everywhere except in the United States. So it is the forecast of 2008 as we've progressed through 2007 have moved. It's difficult to argue with the fact that they have moved in one direction.

But rather than pull the blankets over our head and go away and decide things are slowing down next year, there's no business to be done, I think a much better way to look at it actually is just in terms of, where is that growth happening? And in that respect I think we have moved forward quite a lot in the last year. We now have presence in nine of the ten top contributors to GDP growth, and as you'll see from the top of slide it has moved on quite a way.

We now have the ABN businesses in China, about 1,200 people on our payroll in China in addition to the relationship and joint ventures with the Bank of China. The US you know about, we're adding on business unit North American there obviously, but we had clearly a critical mass in the US before that. UK not much to say. But as we run down the list, Germany has organic growth over the last seven, eight years, ditto France. We now have a meaningful business in Russia. India, I'd spilt those numbers about 50/50 between the back office AC's function which ABN Amro had and a front facing profit generating, profit making, customer facing franchise in India which we're very excited about., Italy, Spain and so on.

So GDP growth can slow down from the rate of growth that we had this year, or last year I should say, but there's still lots of growth out there to go after. And we're well represented in the economies where a) there is growth and b) where there are significantly sized economies. Another thought is that of all the GDP growth that took place last year, we're active in 91% of -- we have 91% of that available to ourselves by being in the countries where it took place.

But again, all pretty abstract stuff, you can have your own views about economic forecasts for GDP growth, and I wouldn't attach too much significance to them other than the fact that they're there and they still forecast growth in the coming year.

A much better lens for it all I think is to start to look at our individual businesses. I'm not going to go through all of these, I think in many respects the prospects for next year are sort of linear for lots of these businesses. But an area where I don't think for a moment that it could be described as linear is in our new Global Markets division. Those are the numbers as restated to follow the organization structure entry just a moment or so ago. And let me now just invite Johnny to come forward and talk, give you just a little bit of sense of the outlook viewed through the Global Market's lens.

Well, good morning everyone. Like Fred, I'll also try and move at a reasonable pace. People often say markets like this, there are lots of opportunities and the thing we have is that we have our opportunity already, which is ABN. I'm also very aware that it's good in times like this to have a project, and I think I can say with confidence that my colleagues in GBM are a great deal busier than some of our colleagues in other banks at the moment. We have a lot to do and we're getting on with it.

It's an important opportunity, integrating ABN. We've told you before what we're trying to do here; we're trying to exploit the larger customer franchise, the greater geographic reach and our much broader product range. It's a progression of what we were doing in RBS before, but there's no doubt that the ABN acquisition accelerates that very, very significantly.

And in particular, and something perhaps we haven't highlighted enough yet, is our position now as a real leader in Global Transaction Services. So I'll talk about that a little bit more. The point I want to leave you with is that we've got much greater diversification in 2008 than we had in 2007 and that leaves us better placed to face the future. Let me just run through these points very briefly.

This is the slide that Fred and others used in the acquisition, you've all seen it hundreds of times I think. It just makes the point that ABN and RBS coming together in a Global Banking and Market's arena, we're much stronger by product, we're much stronger in geographic terms and we're much stronger in client terms, in terms of the enlarged customer franchise. You've seen it a lot before. I'm just putting it up because I wanted to remind you that is the anchor for what we're trying to do in GBM.

Global Transaction Services is worth dwelling on a little bit more; this is a slide you haven't seen before. What we're doing in Global Transaction Services is we're bringing together what RBS had, in particular a leading position in merchant acquiring in the UK and in continental Europe, and to a lesser extent through RBS LYNK in America. Taking those merchant acquiring businesses, we're taking the domestic money transmission businesses for corporates in Britain and in America and we're adding that to ABN's very strong position in international cash management in trade finance around the world. And this is creating a global leader in a business which has got very high barriers to entry. It is something that people don't go out and build today; you just can't build a network in 53 countries; you can't put in the IT infrastructure.

So we're in a position where we're in the top three or four in the world, as Fred says, in this business, in a business that others can't easily get into. It's a stable business, it's largely deposit income and fee income, it's also very useful as an entry point for GBM products. This is part of the enlarged customer franchise that we have to work with. We believe that there is far more opportunity than has yet been grasped to sell GBM products into transaction banking clients, transaction services clients across the world.

So this is an important new development, it's a new thing for RBS to have a business like this, and I've got high hopes of its synergistic benefits within Global Transaction Services, the synergies of bringing together the RBS bits of it with the ABN bits of it. And they're also important synergies, as I said a moment ago, with Global Banking and Markets.

Just an update on the market position as you bring the two bits of GBM together. In 2007 the figures I showed you first were the original slides, so they were 2006 numbers. In 2007 in the all debt league table, the league table I think everyone agrees is the best global table, that is all bonds, all loans, all currencies, all countries where do we rank as an underwriter, putting ABN and RBS together in 2007, we were number three. That's a fantastic position, a fantastic position, demonstrating the power of the franchise. And of course, it's not just the income you earn off underwriting bonds and loans that is the driver for so much of our other income in derivatives and foreign exchange and so on.

The other three tables on this chart just remind you where we are in terms of customers, again updated for 2007. And the point is that we're in the top five in all the three main regions. I haven't put UK up because obviously we're number one by a distance in the UK. But in Continental Europe we're number one, we're number five in America, number five in Asia, excluding Japan. So this is why we can claim to be maybe the top one or two Corporate Banks in the world today. Again, a demonstration of the power of the franchise that we now have to work with.

Just turning to the performance of the business in 2007 and looking, I'll just emphasize this, underlying income as we've defined it, and this is 2007, you can see here, and there are two key points to bring out immediately. Diversity, that we have a diverse range of products, and diversity of growth so you can see here, as we've mentioned already, that rates and currencies had a very strong year in 2007 in both banks, particularly in RBS perhaps.

Not surprisingly you can see that securitization and asset-backed and CDOs quite significantly down in terms of income. And then the bottom two rows are worth highlighting underlining that Asset & Portfolio Management, Global Transaction Services, which are basically stable businesses.; that's where all the net income lies in Asset & Portfolio Management and Global Transaction Services, as I've emphasized, it's deposit income and fee income. They're very large, stable, but growing businesses, in the case of Global Transaction Services.

So I hope you find that a helpful description of the business we have going into 2008. And of course, in 2008 there's the same slide, but you can see at the bottom there, commodities. We still expect to close on acquiring our share of Sempra Commodities on April 1. We expect to get the final approvals very shortly indeed. That will add another very significant string to our bow in terms of product diversity. We will then have I think everything you can possibly think of and need to be the best Corporate Bank in the world.

I look at the outlook, like Fred, I'm extremely nervous of forecasting precisely how we will do. And I would emphasize really rather than focus on which is the one tick, which is two ticks, so to speak, I'm sure I've got one or two of those wrong. But there will be a mixture and that's what gives me confidence, that because of the diversity we're going to have as good a 2008 as you could expect, and indeed better than anyone else. Thank you, back to you, Fred.

Thanks, Johnny. If I pick up the theme now, as I say I'm not going to go through every single line, I'm not going to go through UK Retail & Commercial Banking division. You can see a very substantial, the biggest part of the business. But I think if I leave you with the thought there's a linear progression there in UK Corporate Bank and in the Retail division, linear and good and very much in the right direction.

Touch on the US momentarily, and again, I'll do the same as Johnny and break out product by product; and give you a sense of what's been going on within the retail and commercial franchise.

The underlying for the year, Citizens has continued to diversify away from just being a retail deposit taker who lent all the money on to the US Government. We've made considerable progress now over the last few years, and that's reflected in actually some of the income growth that was achieved during 2007, where commercial lending in deposits has been something we've been building up strongly, moved ahead in double-digits. And in terms of income growth, our credit and debit card business moved ahead, and sales of investment products, rather along the lines that we do within our UK branch network, has moved ahead, again, in double-digit terms.

Deposit margins have stabilized, and indeed, margins in Citizens have gone up from, I think, about 2.72% to 2.8%. And if we take out a one-off last year, the actual income growth in Citizens was about 4% this year, so quite a good and positive metric, and a change of direction from where we've been heading in the last couple of years.

Similar to Johnny's chart, there we are, spread across -- 2006, 2007, spread across a range of products. In the interests of time, I'm not going to go through all of them, or indeed very many of them, but just to echo the points I made a moment ago, about commercial lending, commercial deposit taking, down at the bottom there, seeing good strong progress. Continuing to move forward in credit and debit cards; but obviously in personal lending coming back as we've refined our risk appetite.

Outlook for next year; a bit like Johnny, we could argue about and individual tick or two, or a cross or two, but there are ticks and there are crosses, and I think it will remain a mixed picture in the United States going forward. There's no point in chasing risky business or unprofitable business, and we've got no intention of doing so.

But there's enough there in the chart, we feel, for us to be going on with, particularly in the commercial lending arena, where as a result of the acquisition of business unit North America, we take a significant notching up in terms of numbers of customers in that segment. That's something we do a lot of in the UK, and as a segment, we feel very comfortable in.

It comprises, as you'll see from the sharp lending and deposit taking, not to mention the opportunities to sell money transmission, and to sell the other products in Johnny's business. One of the big outstanding successes in Citizens has been the growth in selling white labeled simple derivative products to do interest rate protection and foreign currency protection to US mid corporate and commercial customers, and indeed, even down into the SME customer base.

Asia, a few moments on Asia. Quite interesting in Asia, just to remind ourselves that what the business we're talking about here is the retail and commercial piece, but within Johnny's businesses is another chunk which takes us to a place where, if our growth rates in Asia slow down by 50% next year, we'll still pass through the GBP1 billion in profits generated in Asia, which is quite a move forward from where RBS was a little while ago. And I wouldn't encourage you to think that we think our growth rates are going to slow down in Asia next year. I think the reverse.

What's in that business? Quite an assortment I think, to be kind to it. A variety of branches and a variety of countries, but you'll see, and remind yourselves of the slide [earlier] about GDP growth around the world, there's no shortage of GDP growth in the countries we're looking at.

One of the challenges for us in this business though is that ABN have a vast and complex and rich infrastructure. On the one hand, it's nice to be able to provide all of these products and have all of these capabilities in all of these countries. In truth, I think it's a little unrealistic to think that we can achieve scale in all of these countries and all of these products.

So I think as we go forward, notwithstanding our commitment and desire to grow in Asia, we will be pruning back some of this product capability. It's very expensive to maintain and deploy on the ground, and I doubt whether it's the best use of our time and effort trying to get critical mass in all of these markets and all of these products. But the takeaway that I would encourage you towards is that we have got the delivery mechanisms we need in the economies where we need it to deliver substantial growth in Retail and Commercial Banking in Asia.

Still on this subject of outlook, well, how do I draw all of that together? What would I ask you to -- you'll have different views about the prospects for individual of these business lines. I'm sure you'll have different views about individual countries and so on. But in thinking about it all, I think there's a high level takeaway from all of this. There are a number of ingredients to the RBS outlook for 2008 and beyond.

The first ingredient, I think, and I think by far and away the most important, we have existing organic momentum in our businesses, and we don't have to start growing organically, we are growing organically. And I think as you look at our divisional results, you'll see that very clearly.

We have a lot of new customers this year, new in inverted commas, that is to say, a lot of ABN Amro customers are not new to the enlarged entity, but they're new to the RBS product range; they're new to the RBS business model, and it feels very new to us, and it contributes a lot to some of the excitement that Johnny was talking about, and some of the ambitions we have for the business next year. There's a lot of people out there we've got very confident about selling to because we have existing relationships with them.

There are also a lot of new products within the Group, not just the RBS products to be sold to ABN Amro customers, but the money transmission business, the Global Transaction Services businesses are new to the RBS customer base, and open up a number of opportunities for us to develop deeper and more productive relationships. And we are, clearly, operating a number of markets which are new to the Group.

Leaving aside the generalities of all of the above, we've got some very specific and substantial synergy plans, specific synergy plans, and things that we're going to be doing to deliver that growth next year. It's not worth thinking about the growth, we're actually actively engaged in delivering it, which [should take me] to a place, unequivocally and clearly a theme next year for RBS will be revenue growth. We have very clear and very RBS-specific revenue opportunities next year, regardless of what you may think may happen to various parts of the market.

On the other side of the house, we have a global manufacturing model. It's existed in RBS for some time. ABN Amro also had the manufacturing philosophy, but perhaps hadn't deployed the model with quite the same rigor as it had been deployed within RBS. So moving to the global manufacturing model is a real opportunity for us.

It's helped by the fact, and indeed the prospects for the business going forward, are helped by the fact that our platforms largely overlap, the significant platform overlaps which is very conducive to cost reduction and very conducive to the manufacturing model. And, of course, again, it's not just a theory of all of this, we have distilled it down to specific action plans which are being implemented and acted upon as we speak.

Which brings me at least to the place of saying, well a theme for us next year in 2008 and beyond is improving efficiency. So in terms of the outlook for the Group, we can argue the toss about growth rates, GDP growth this, GDP growth that; whether it should be one tick this, two ticks that, a cross the other; you come back to this, I think gives you a much better picture of the outlook for the Group, which will be about revenue growth and improving efficiency.

Finally, finally, take away from it all, our businesses are strong and we have good organic momentum. We have secured a very attractive range of additional options for ourselves. They will serve us very well in 2008 and beyond, and it feels [I think] we're very well positioned indeed to face a broad range of market scenarios going forward.

So thank you very much for listening. I think I'd invite my colleagues to come up and join me at the top table now, try and answer any questions that you might have.

So there you have the presentation, ladies and gentlemen. We'll take your questions now, and can I remind you to state your name and affiliation before doing so.

First question was up at the back, far left.

Good morning. It's Ian Gordon from Exane. In the lead up to today's results, obviously, there's been a lot of focus on capital, and you've delivered numbers which clearly you're confident with, and within your anticipated ranges. Could I ask two questions on this issue? Firstly, many people in the markets have been trying to take us back to ratios such as equity to assets. Is your view that equity to assets has anything to contribute to a Basel II sophisticated method of capital allocation, or do you regard it as a relic from the past, and something which should be consigned to the dark ages?

And the second question, can you provide any color on the modern day attitude being taken by the regulator and the rating agencies with regard to these issues? Do you believe they are still going to be as focused on diversity of income and other forms of profit and loss protection? Or again, do you sense there's a risk of them following a route down towards these arcane balance sheet measures? Thanks.

I'll come to Fred, and then maybe Guy will want to comment as well.

Just to say though, obviously, in the market conditions we have at the moment, everyone is very conscious of the need to ensure we have good capital position. The Board is fully engaged in that, and we will continue to be so. But, Fred, do you want to pick that up?

Yes. I think you're probably inviting the answer, Ian, you're about to get on the equity to assets thing. But I think the ratios are helpful, and also, ratios are helpful but no ratio is perfect. And I think looking at capital adequacy, a lot of time and energy has gone into Basel II. I think Basel II is not perfect, I should add I'm not completely sold on all aspects of Basel II. I think it does move the game forward and is a better fit for the sort of sophistication we now see in financial markets generally. So, and whether I liked it, or you liked it, or we liked it, it is the prevailing capital adequacy regime, and so we should probably do well just to get on with.

There are other ratios that people might want to use. I don't think equities assets is particularly meaningful or useful in the context of our business. So I'd be -- you'd find me, I think, a similar mind to yourself in that. But I don't want to fall out with anyone over it. If other people like that ratio it's up to them. But I do think we need to move on a bit and use the adequacy ratios that are there, and hanging your hat on any single ratio anyway, never strikes me as terribly smart.

As to what the regulators and the ratings agencies are going to do, I guess, is up to the regulators and the ratings agencies. Clearly each well focused on the stresses and strains facing the industry at the moment. But they've always, to my mind, shown a very good understanding of the realities of where businesses operate, the different business models that are extant amongst the different banks and different financial institutions that they both regulate and rate. And certainly our relationship has always been one that I've felt that the regulators and the ratings agencies understand the business, and we have a good dialogue about it. So I think that attitude has, if anything, developed over the years rather than diminished. And I would be surprised to see it change at this point. I've got no basis for thinking it is about to.

Do you want to comment at all (inaudible)?

[I'll pick up] some of those themes, I think there are a number of different metrics which are relevant to assess suitability of a bank balance sheet, and certainly some of the nominal measures which regulators in the US are very keen on have served at a banking level quite well. I think it depends on the nature and structure of the balance sheet as to exactly which of those ought to be the bounding measure. I think we look at a variety of metrics, not just the nominal metrics but also the risk sensitivity of those assets, not just under a regulatory regime but also under our own risk assessments.

As you know, under Basel II, we've moved to internal assessments of these things, as well as prescribed Hexcel assessments, and I think all of those metrics would say that we are comfortable with the capital ratios that we have. I would also say that these are where we expected them to be, when we went back to the July offer document and the sort of gearing that we anticipated around the ABN transaction, we are sort of where we thought we would be. There is a planned program to get the elements of the capital base back to our medium term operating levels, and the more attractive financial returns that Fred put up I think will help accelerate that process.

Yes, and a question just in from there?

Good morning, it's James Eden from Exane. I've always believed that your acquisition of ABN would destroy less value that Charter One. And I guess today you're inviting us to dream that it might not destroy any value at all. It might even create value. And your foray into Bank of China looks like genius, you've quadrupled your money. Now shareholders opposed both the investment in Bank of China and the acquisition of ABN. Do you think this proves that shareholders often don't know what's good for them and validates your decision to sometimes do some very unpopular things?

I think you're trying to be helpful, James. I don't think -- it sounds a bit like a hospital pass. I think we are happy with -- our shareholders supported us in ABN Amro transactions and I think supported us in the Charter One transaction and we're happy with that and we're determined to deliver value to them through these transactions. Bank of China, we've delivered value, Bank of China. There are no -- you infer some sort of difficulty or angst between us and shareholders, it's not felt from this perspective.

I think it's right to have a dialogue with shareholders and to be challenged on these decisions. These are big, important decisions for the organization and I think it would be a pretty poor show if shareholders didn't have a dialogue or express views about this. We've a very broad base of shareholders and reasonable men can differ about quite a wide range of subjects. So thank you for being helpful, but I'm not taking the hospital pass.

One comment I would add to that. A Board has a fiduciary duty to, and under the new Companies , has a broader duty than previously, but a Board has to think on a timescale that may not be exactly the same timescale as all shareholders. Shareholders have the option to buy and sell, that's absolutely their choice. A Board of Directors really has to do what it believes is right for the long term enduring health of the company. And there is a very different element of thinking that you have to keep in mind when you look at that.

Yes. Yes, please

Thank you very much. It's Tom Rayner from Citigroup. Just at risk of keeping the arcane debate on capital going, could I just focus on the consolidated balance sheet on page 40? Because I wanted to ask you about all your ratios, your regulatory Tier 1, your core Tier 1 and your tangible equity to assets. On a statutory basis you don't appear to have any tangible equity, so clearly this is not perhaps the most useful breakdown. I'm quite interested that on the proportional consolidation what your ratios would look like on all three measures? And also if you could give us a feel for what they would look like under Basel II, as well as Basel I methodology? Thank you.

Johnny?

Yes, I think the -- let me answer in the following way. The separation plans for ABN will leave this consolidated balance sheet in place for a period of one, two, three years, depending on the time of the separation. The calibration of our capital ratios, and the planning that we have done through that separation timeline, will leave us with capital ratios that are core Tier 1 and a Tier 1 level that are at, around, or slightly higher, than today's levels throughout that transitions period. And by the time we do come to the eventual separation of ourselves and the Santander parts and the Fortis parts, we will be at, or above, the levels that we have published today.

Okay, thank you. Am I allowed a quick second on a different subject?

If you insist.

Thank you. Again, it's quite deep --?

I'm sorry. You did mention Basel, I think we --

Oh yes, sorry.

We said -- as I said, we expect the sort of transition from Basel I to Basel II, obviously this is balance sheet, we've had 76 days to try and incorporate the whole of ABN in, but we think the best way to guess it, and certainly the way we're doing at the moment, is it will be about a Basel I line ball switch to Basel II.

Okay, thanks a lot. The second question is very deep in the release as well, on page 59. Could you just talk a little bit about the GBP33 billion of assets? And there is an offsetting liability as well, which is smaller, of assets where there's no observable input, so I guess the valuation and -- there's been no losses taken against those to date, if I'm right. And what your thoughts are about the potential losses, where we can't actually see a market valuation?

Shall I take that one as well? There's some narrative underneath, we've tried to describe them and I would say there have been some losses taken against it because included in those are the high grades and mezzanine CDO exposures that I outlined earlier, as well as some of the other inventory that is in there. You can see there's certain structured debt securities, certain over-the-counter derivatives, certain syndicated loans that have been part of that group. As I say, in total terms it represents around 3%, slightly less than 3%, of assets. And, you can imagine, these are subject to scrutiny and review from all interested parties. So the numbers you see today fully reflect all that we know about them.

Peter?

I take on board what you say about capital ratio -- spot capital ratios being inappropriate. But on your own sort of measure you're looking for a target Tier 1 of 7%, 30% non-equity gearing, so basically a 5% equity Tier 1. At the moment you're on 4.5%. But ex-minority interest for the businesses, of ABN businesses, that you don't intend to hold, I suspect you'd be at about 4%. So there's a 1 percentage point gap on GBP500 billion of risk weighted assets, or GBP5 billion capital shortfall. I wonder if you could tell us how we should think about that in terms of the business's future development, in terms of WRA growth, or disposals of assets? Or indeed --?

OK, a quick round. Firstly we'd be unable to split ourselves up even if we wanted to. So we are supported by the entirety of the balance sheet. We are supported by the entirety of the capital base. I refer back to my earlier comments around the separation plans and the time that it will take to do that, and the capital generation that will occur in that intervening period.

Just in terms of metrics, we have talked about operating within a 7% to 8% range. We've typically been in the middle to the upper half of that. I think we would all sit here saying we'd be quite happy to see ourselves recover to that sort of basis. That would in fact, imply a slightly higher core Tier 1 target than the one that you referred to. I think we talked about GBP5.25 billion earlier results announcements, and as I say, I would encourage you to think more towards that end of the spectrum than the numbers that you put out.

Yes, question over here.

Robert Law of Lehman. Could I follow on that with some questions on the balance sheet please? In your commentary about the end of the period when you split off, you'd expect to be roughly at these kind of levels, can you say whether that statement includes any capital raisings or disposals, other than the announced split offs?

[I can't say] anything of that nature, there are no unusual disposals, capital raisings or one-timers in that. The plans are principally built around the business performance and the capital generation that we typically demonstrate.

What I'm checking there is how we read into that, is -- whether that's an aspiration or whether you've actually got plans as you currently stand, with the Group as it is, without making additional disposals or raisings, other than you've already announced, to get to that target? That's why I'm asking the question.

Fred, yes.

The short answer is, we do Robert, that's -- we don't tend to throw numbers out unless we've got some idea how we're going to do them, but anything relating to the future, ultimately is an aspiration. But you'll see from the results we're delivering today for the incremental synergies we expect from ABN Amro and from our historic track record in generating profit and driving these ratios up are the basis for the comments where Guy very accurately described what we're planning to do. There are no plans for inorganic capital raisings or anything of the sort.

Secondly, can I ask what the attributable goodwill is on the balance sheet to the businesses that you are retaining, so that we can actually work out what the tangible book value per share is for your stock?

Can we come back to you on that?

What I'd say -- I'm going to say it's about eight, but I'll just confirm the exact number to you outside? Eight, I believe is a pretty good number, or I'll confirm that to you.

I think that's an important number for us to have. Finally, could I ask, in addition, on the capital markets assets, which you've taken P&L mark downs for, have there been any movements through the balance sheet on those assets as well? I don't think there have, it looks like it's basically Bank of China.

No, there have not. They're all carried at fair value through P&L.

It looks as though it's eight, including intangibles. Yes, we'll take this question here then, at the side.

Hi morning, it's Simon Samuels, Citigroup. I'm afraid I just wanted to carry on really both Tom and Peter and Rob's questions on the balance sheet. Just, first of all I don't think we got an answer to Peter's question, so can you tell us Guy, what is the core equity Tier 1 ratio on a kind of a look through basis? So, excluding the pieces of ABN that you don't own, are you saying it's a number that you know, and you don't want to share it with us, or it's not knowable?

It's a number that you can work out. It's not a number that we can ever realize, because we will never get to the point where we can split it up to do that. It does begin with a four and it does begin with a seven, I think would be as much as we would like to say at this point.

Sorry, we can work out or you can work out? I'm just confused.

(inaudible)

Well, can you just tell us what the number is then?

You make some assumptions, but it's not a meaningful number in terms of how we operate right now, because in the Group, [this is a Group], until you have the separation take place, and that will perhaps take place in different phases and so on, so it's a pretty theoretical kind of number, but you can calculate it.

Okay.

Because we have our capital ratio Simon, and we talked about the capital ratios as calculated in accordance with Basel and all the rest of it. If you want to calculate other ratios as people have historically, then feel free, but it's not a ratio that we stand behind.

Okay. Alright, thank you. And second question if I can, just operationally actually, is just on the credit trends in the United States, I guess for [Ellen], but I'm not sure. Second half of the year, looked like Citizens credit [costs] went from $160 million in the first half of the year, to over $500 million charge in the second half, so clearly a huge increase half-on-half. Clearly, there's some reserve build in Q4. The question really is really, what should we be expecting for '08? Does the second half of '07 form a good run rate in terms of the likely shape of the credit charges for '08, does the environment deteriorate from here, or does the reserve build in Q4 just mean we should ignore the second half '07 as an aberration?

Sure, in the second half of last year we did increase the impairment at Citizens, but you have to realize it was coming from a very, very low base. Part of that impairment was actual charge-offs in commercial, commercial real estate and in home equity. The other large part of it was we increased our reserves against the portfolio. All said though, our impairment is only about 60 basis points on the entire portfolio, which is very low. It reflects the conservative credit policies that Citizens has had in the past. And as I believe Guy and Fred mentioned earlier, over 70 FICO scores average over 700 on the portfolio, 97% of our facilities are secured.

And what would your expectations be for the year ahead?

It would just be -- there's going to be continued pressure in the housing market, but we feel we're comfortable with our reserve levels at Citizens.

Okay, and just beside you?

Thank you. Good morning, it's Jonathan Pierce at Credit Suisse. I've got the first block of questions back on capital I'm afraid -- are you the only bank I think so far that's not given us a detailed Basel II breakdown of the numbers? I appreciate you've been pretty busy with ABN and the like. Will we get that with the report and accounts? And just following on from that, will we -- it sounds like the answer is no, but will we ever get a proportionally consolidated balance sheet at any point?

Well, I think we've dealt with the second part, I think we've dealt with that, but do you want to --?

We're sort of trawling over old ground. I think in terms of the Basel position, as you can imagine, after 76 days, it's -- we've not yet managed to do the full integration of all the risk modeling and risk systems to ABN, and of course the ABN situation is slightly unique, inasmuch as the eventual home for those assets will be divided amongst the three consortium partners. And so the precise details of how that regulatory oversight will happen, are still a matter of some discussion, which is why I can't give you the precise answer today, and why I didn't give you a precise answer earlier.

Okay thanks. The second question is on the investment gains, probably one for Johnny actually. There's a comment in the release about how the private equity portfolio has been sold into a fund which is now managed by RBS, giving more stable returns on that portfolio moving forwards. Can you just explain in a bit more detail, what has actually happened there, and maybe give us some guidance as you have historically, on where the other operating income line might come out in 2008?

Yes sure. Partly actually for reasons relating to Basel II, we took a view quite some time ago, that the right thing to do was to take our principal private equity business and put it into a fund and manage it, retaining an interest in the fund. And so we took the huge bulk of our private equity assets in the middle of the year, put it into a so-called opportunities fund, raised equity from a range of investors, very well supported. We have a stake in the fund as I say, and we manage it. So that -- we have got some equity investments left in bits and -- in various parts of GBM, so there still will be other operating income going forward. But clearly not -- I think we talked last year about four digits, we're going to be well back from that, going forward, well back.

Yes, in the middle, the one at the back.

Thanks, it's Tim Sykes from Execution. Three questions if I can, Sir Tom. A very quick one on the tax rate. We saw the tax rate fall from 29.3% to 21.1%. I wondered Guy, how we should think about that, looking forward into 2008?

Reverting to more normal levels, I think is the right way to think about it. We were the beneficiary of the reduction in corporation tax, and the deferred tax liability. Some of the gains that I referred to were either low tax or almost no tax. The weaker US performance obviously was a higher tax rate environment and therefore less from that. I think they are the -- there's some prior year settlements as well. And I think they probably added or took around 7 percentage points to 8 percentage points off the tax rate in 2007 and I think I would just put them all back on for 2008.

Thank you. A quick question on bad debts if I can. We glossed over the Commercial Bank and Retail Bank, there's a strong performance on bad debts within the UK. Obviously there's a more challenging environment in the US. I just wondered if you could comment on the outlook for bad debts from the more UK perspective please?

Gordon?

Yes, on the retail side obviously we took a very conservative approach about two years ago. Pulled in our haul, particularly on direct lending, that's shown through very well. Bad debt new flows were down 14% this year and our recoveries process has actually been through a significant GBP20 million investment program, so almost heading to having a world class recovery system if it all happens again.

Clearly we're very nervous about what might or might not be coming, but quite frankly it's pretty heavy levels of employment still in this country. We're very strongly concentrated in the South-East which is probably still the most dynamic part of the economy. There's nothing, being realistic, I wouldn't like to comment on 12 months ahead, we're looking three months ahead, I can't see anything that actually puts it on my top three lists of priorities quite frankly.

At some point it's going to level off but we do -- we've not re-aged our book, we've not changed our methodologies or any other nice forms of words. Bad debts have been dealt with as they've come in and therefore I'm expecting to see a steady trickle down. At some point it must level off mustn't it. I think we can probably exchange a fiver on when.

[Ellen] would you like to add anything further to your earlier comments?

No, just accept that you really can't predict where the US real estate market is going to bottom out now. So there's still a lot of uncertainty -- there's some strong pockets of performance in the US but in the real estate market it's still very, very weak, the whole housing sector.

Thanks. Just one last question to Tom on the integration. Just looking forward into integrating the ABN Amro businesses, obviously there is a market perception that ABN Amro was very badly run which presented you with the opportunity. If we look at NatWest, that was an acquisition that had a materially different scale to Royal Bank of Scotland. If we look at ABN Amro it has -- it doesn't necessarily have scale but it has scope, I think Johnny referred to the increase in opportunities that it brings. Can you just share with us how you will approach the businesses that are relatively new to you, such as Asian Retail and also certain aspects of the Wholesale Bank such as cash equity [is one thing], so?

Maybe start with Gordon.

Well obviously on the Asian Retail side, since we didn't have an obvious owner I've been shadowing it during the period of the bid and working obviously for both beforehand in terms of our initial thinking, but then also once we've got on board with the team there. We announced a new team in Asia, we've pretty much the team that was there with ABN Amro actually, a couple of weeks ago. I'm very impressed with the people we've found, I'm very impressed with the franchise. Fred's point is absolutely right, they're almost over invested in many of these countries in terms of scale, and there's a slightly bizarre statistic, I think there's actually three staff for every customer which probably puts us in a -- almost in a five star hotel league. Obviously a lot of the staff are actually part time because there's a lot of direct sales agents, but there are some slightly new figures for me to get my mind round.

We're particularly strong in the Indian subcontinent, I'll be in India for the second time, visiting the team there in about a weeks time and then going into Pakistan where we have acquired a very useful bank that we're actually in the middle of re-branding at the moment. Both those countries, it's been made very clear to us, we're very welcome by the regulators. We bring lots of GBM experience for example in project finance, that they're desperate to get their hands on.

So I think it does really open -- we were already looking at India, we had a team hidden there under a wealth banner for about six months, a year ago looking at how we'd get into India and this has brought us forward five years. I'm particularly pleased that as part of the deal Fortis has agreed to sell on to us, the Indian private client business, which we announced I think a week ago. That gives us 28 private bankers. There will be no problem in doubling the size of that and obviously RBS could stay in place particularly well in the Indian market. So I think that will be one additional synergy that we haven't given a moments thought to that we're now working up.

I think it's very exciting, at the end of the day retail bankers are retail bankers and it's interesting, they have exactly the same issues we do in the UK, different economies. The issue really is to find something distinctive to do and not take the local banks on face on. And we've got plenty of distinctive things.

Very good, thanks Gordon. Johnny?

Yes I'll pick up my other two. On equities if you looked at the chart I put up you'll see that equities had a good performance in 2007. Frank McKirgan who runs it, we think is doing a good job and we've just reinforced really what he's doing. That business is going well. What we have done is, actually the Rothschild joint venture in equity capital markets and combined that with the whole barrette which I think -- everyone at ABN thinks it's long overdue, so we've got one equity capital markets business globally so I think that will be a spur to the business.

So we're happy with what's happening in equities. Transaction Services is the new division, will be headed up by a Royal Bank of Scotland executive, Brian Stevenson who has been with us for many years, but was a senior executive in Deutsche Bank's transaction, banking business so it brings excellent experience in that area and so we're very comfortable about how to run that.

Mark maybe, you're over there as chief executive of ABN Amro, perhaps you would like to share any views?

Yes I think when we did the bid we talked about ABN being a good bank but maybe not such a good business. That is generally what we're finding. Is good customer franchise, good capability, overly complex, over staffed at the center and poor on execution. And we're really trying to cut away all those bad bits and exploit the good bits with some very good staff who are aligning and very enthusiastic to what we want to do. So we're very pleased with what we've found, but there's a lot of work to do to get there.

Just not to prolong it, but just exactly as Mark put it. The issue was not the people on the ground doing business with the customers, it was between there and the top was where the problem was. So we've got a lot of good customer facing people and we've got a lot of good management as well.

Yes, a question here?

Yes good morning, it's Leigh Goodwin from Fox-Pitt Kelton. Just a question please on your -- the write-downs that you took in what looked like the final month of the year, quite a substantial increase it would seem to me and a lot of that obviously you've related to monoline exposures. And thank you for the disclosure on those as well. I just really wanted to invite you to make a comment on how we might think about what's happened so far this year, we're two months into the year, we can read the newspapers and see what seems to be happening elsewhere and I wonder whether you wanted to say something just about what might have happened so far this year?

So far this year we've traded very well, we continue to watch those issues carefully. I don't think -- the amount you read about the monolines daily I don't know there's much I can add to that conversation. But the mark we took at the end of last year, again as you've described it pretty accurately Leigh was to reflect how we saw the situation then. As things continue to move we take the marks, now that's the most important piece here, that you don't start with what you want the P&L to be. We all must at all times make sure that we mark our book the way we think it is going and that is the policy and that is the practice in the organization.

I think, I don't know, I could add any great wisdom to the monolines beyond anyone else in the room could, Johnny I don't know if you feel inclined to?

Just to underline though, we had an excellent trading month in January, started the year well. Notwithstanding the general market conditions.

Okay thank you. Can I just have a second question if I may. Just on the leveraged finance portfolio really and I'm just interested to get a little bit more idea of where that's going. How well it's shifting at the moment the backlog and so on?

Well I think a statistic is worth throwing out and this applies to our entire book of syndicated loans, not just leverage. But we've sold down GBP3.6 billion of loans so far this year. So people can over estimate the stickiness of the market, we have sold GBP3.6 billion of loans, as I say, this year. As far as leverage loans are concerned we've always had a very strong credit cut through in RBS and we're very happy with the credits that we've underwritten and we see no sign of deterioration in those credits. We've shown you the actual exposure here.

In Americas particularly, it's still -- there still is difficultly getting buyers sellers to agree on a price. But I think the general view of the banks would be that the marked prices are an over reaction, they suggest risk of default but is way off the chart in terms of anything we've ever seen before and that's what's causing the overhang if you like. Because we, the banks, are saying, here we are, we're a credit that we're happy with, there's no sign of deterioration. The price you're saying you're going to pay us for this credit is ridiculous and we're sort of stuck there at the moment. But that will -- that will change, I can't say, I agree with Fred, it's not going to be an overnight sudden change, but it will gradually leak away. But we're in a very comfortable position and we're certainly comfortable with the marks.

Okay thank you.

Yes, let's start here, and can you try to keep them fairly succinct?

Yes I'll keep it succinct. The -- just first question on the CDO exposures. Thanks for the exposure, their net of hedging, can you give an idea of what the overall hedging coverage is on the CDO book etc.? And specifically in the CDO squared side it was a zero exposure to CDO squared, should we take that to mean that there's no exposure to synthetic CDOs?

Do you want to take that [item]?.

There's no exposure to CDO squared, synthetic CDOs are very similar exposure to synthetic CDOs. But they are included in those totals, they are a notional amount which includes both the funded and unfunded CDOs.

Look, I know most CDOs in the market are synthetic.

Right, okay, and so -- and then the hedge coverage level, of hedge coverage or [swap] coverage on the CDO book to get -- so that we can get a growth exposure estimate?

Our gross is about 8.3 against a net of 3.8.

Okay thanks very much.

There was a question here?

Thank you it's Michael Helsby from Morgan Stanley, I'm just looking at page, sorry slide 46, where you break out the revenue in GBM. We can take a view of ABS, CDO and equity finance, I was just wondering if you could help us in terms of the other credit markets, clearly a lot of markets have closed down, just what proportion of that bar, if you like, isn't active at the moment?

It's my slide.

It's your slide is it?

Yes..

Okay.

The property section, diversifying income stream.

I can -- I certainly can't do it mathematically, I can only tell you anecdotally so to speak. The investment grade business, the corporate business is moving along reasonably well and indeed many of our corporate customers are seeing opportunities and the private equity community is less active. So you are seeing pretty substantial deals in that area.

Securitization is extremely quiet, leveraged finance again we're seeing and are able to execute small to mid sized deals, so we're quite busy in that area. Real estate is patchy depending on what geography you're talking about.

What else is in there? I think there's the bonds, America is going well and I'm particularly pleased with our performance in bonds. We've finished in December, we underwrote dollar bonds for Marks & Spencer and British Telecom which for RBS is a sign of just how far we've come in that dollar bond market. And that's probably the most active bond market in the world today. So I'm pleased that we've established ourselves in that and are taking advantage -- able to take advantage of that activity.

So what proportion? I don't think I can put a X% is going fine, and a Y% is bad, but it's a collection of ticks and crosses within one bar that is in itself a tick or a cross.

Do you mind if I have a -- just one quick follow-up question just on a slightly different topic? On the non-observable inputs which Tom was asking about, there's clearly a hell of a lot of assets that must have an active market. I've got a lot of feedback from investors that obviously invest in bonds and they can't believe at the moment that the banks can actually find active prices because a lot of the bond markets are frozen up. So I was just wondering, in the active part, is there any of mark-to-model within that book as well, or is that all genuine mark-to-market on the rest of the balance sheet?

The quick answer is everything in our balance sheet is genuine, it's all audited and if we say it's level 1 it's level 1 and mark to an observable price. Level 2 is the grey area and level 3 is unobservable input as reported.

And in the center here?

Derek Chambers from Standard & Poor's Equity Research. A similar theme, some questions about the credit market exposures. I think you've made it plain that everything is fair value to where you can and you seem to be making a distinction between your trading book to the ABS CDOs which are proprietary models and other things. You've noted that the overall marks for most of this is much the same at end December as at end November, whereas to the extent that one can observe things like some of the indices, there was a deterioration in some areas in December. So I'm wondering if, is this because your particular portfolio and detachment points didn't deteriorate in line with the market or because your methodology means that you didn't experience any movement relative to November?

And then on a slightly different area, or two slightly related questions. One is I think you've indicted an extra 10% on some of the ABN exposures which looks like about GBP100 million, did that go through the consolidated income statement or was it part of the fair value adjustments?

And then finally on this area, you've disposed some Alt-A net exposures of GBP2.2 billion, I'm not sure if that's quite on the same basis as you discussed in the conference call. Could you just say what your view on the integrity of that is or at least on the -- how that's performing?

I'll just remind you that we issued - yes I'll come to you in moment, we issued our trading statement based on later data than most other organizations and indeed on a very prudent basis, so that's the background to the trading statement. But Guy can you pick up on --?

I think what we tried to do at the trading statement was clearly take not just the output from our model but to the extent the accounting allowed to put in some sort of prudent buffer in place. I think it's fair to say there was actually no movement in the ABN -- ABX index between November and December. In fact if anything, it moves slightly higher.

You rightly say that these instruments are specific rather than generic in their characters. We took a -- characteristics, we took another look at the ABN portfolio and we felt it prudent to take an additional 10% mark that was around the number that you've indicated and that was reflected as a pre-acquisition adjustment taken as -- through the balance sheet.

And of the Alt-A is that a different (inaudible) from what you discussed at the trading statement and has there been any impairment in that?

Alt-As, not --

Johnny do you want to take that?

Sure yes. We have -- the Alt-A portfolio, we have taken a few minor marks through the P&L. It's not viewed as unusual, so it's not [a brought] out, but they're small numbers. The vast bulk of Alt-A is AAA, we've marked the small amount that's not investment grade down to a very low price.

I think in the conference at the trading statement you might have indicated a rather different exposure. Is it a different -- was that a gross figure rather than the net figure?

There have been some slight movements in the net figures as we've taken hedges off or -- and things like that, but there's not been a -- 100 I think is that sort of number isn't it? I'm not sure which number you're referring to, but there have been some very slight movements in the exposures across the piece. But they reflect just day-to-day, as I say, trading, taking hedges off, putting hedges on.

Okay. Yes one more, one last one go on. Okay

Thanks very much. I was -- the assets that you've given out, I was wondering if you've got any just normal residential mortgage-backed securities either in the US or European? There's no actual just normal residential mortgage-backed securities that you're disclosing on your balance sheet, I was just wondering -- it's just quite strange that there isn't any there, I was just wondering how many there is?

Yes is the answer. There's a portfolio of some mortgage-backed securities in Citizens, that's long been part of the, if you like, the natural hedging program to the retail deposit base covering the precise (inaudible) around the GBP20 billion number of principally agency collateral, agency securities. So bog standard US conforming mortgage stuff. Dotted around European and the UK I'm not aware of any --

ABN.

Has a significant portfolio of European RMBS.

Right, any idea of value?

Yes, why don't we do that afterwards, I haven't got the number here but (inaudible).

The exact number for Citizens is $27 billion.

Thanks, dollars?

Dollars.

Okay, thanks.

Well thank you all very much for your questions, and please follow up with any more detail with Richard and the IR team and join us for some coffee outside. Thank you all.