NatWest Group PLC (NWG) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to our Interim Results presentation for 2008. Before we begin, could I remind everyone to switch off their mobile phones and could I also draw your attention to the first slide in your pack covering the usual safe harbor provision.

As you all know, this morning we announced a loss before tax of GBP691 million. We are all deeply disappointed to be announcing such results and apologize for the pain this has caused to our shareholders.

We are determined, however, to do everything we can to ensure outstanding performances from our businesses going forward and to deliver results which will restore the company's value as soon as possible. We are all absolutely focused on creating sustained shareholder value.

The results we announced today were broadly expected following the previous announcements associated with the mark-downs and the rights issue. So, in a sense there's no surprise. This morning, however, gives us a chance to set these results in context and to share with you our analysis and the reasons why we believe we are now well placed for the future.

Let's remember that in 2007, RBS delivered GBP10 billion of profit. Yes, we've taken major hits in the credit markets but, as you will see, the underlying earnings power of the Group remains strong, even through these difficult markets.

In view of the deteriorating environment, in April the Board acted quickly and prudently to set out a new capital plan for the business, including significantly raised target capital ratios.

To us, the balance of risks had changed for the worse in the early months of 2008 and it was the Board's view that they were likely to remain so. Against that backdrop, we signaled that these conditions would lead us to take GBP5.9 billion of write-downs in our credit market exposures.

The next step in the new capital plan was the completion of a GBP12 billion rights issue and we are grateful that over 95% of our shareholders supported the issue.

I'm pleased to say we are also making good progress with the other elements of the plan and I've asked Fred to update you on the disposal program and the steps already taken to improve the efficiency of our balance sheet. We are now in a position where we will only dispose of other assets if the valuation is attractive to us.

Turning to the headline results, I've already mentioned the pre-tax loss of GBP691 million, which resulted from the mark downs. But as you can see from this slide, the underlying earnings quality of the Group is satisfactory. Excluding write-offs and other one-off items, the business delivered an operating profit of GBP5.144 billion and adjusted earnings per share of GBP0.213.

Guy will shortly review the contribution from our diversified businesses and I'm sure highlight the excellent performances many of them achieved.

In the current climate, credit conditions are high on the agenda of the Board and of our investors, and we've included significant additional disclosure in today's presentations.

Many of you are particularly interested in the UK economy, where the consensus forecast and this week's IMF assessment still point to growth of around 1.5% in the next 18 months. We would bank that as an outturn today, if we could. But in the meantime, we've conditioned our risk appetite for a tougher credit environment.

Indeed, disclosure is an important theme of these results. The Board is keen to ensure all of our stakeholders have access to the right information on the company's performance and its balance sheet. We have listened to what investors and analysts have said and we are responding.

Another element of the Group's new capital plan relates to our dividend policy. As we announced in April, the Board believes it's prudent to issue new ordinary shares instead of paying an interim dividend. The Board agreed that the capitalization issue would be calculated on the basis of the interim cash amount paid in 2007, which was GBP950 million. We have therefore decided on a capitalization issue of one new ordinary share for every 40 shares held. It remains our intention to pay the 2008 final dividend in cash.

The final important feature of today's presentations is the acquisition of parts of the ABN Amro business for a net consideration of GBP10 billion. The Board is fully engaged with the integration planned and in the delivery of the synergies. Fred's presentation will show we're on track to deliver the original promised synergies and more.

But there's more to ABN than synergies. This acquisition accelerated our pre-existing strategy of earnings diversification and expansion into Asia. RBS now has well-diversified product ranges in mature economies and exciting franchise opportunities in the fast-growing economies. We are well-positioned to thrive in the competitive landscape the current storm will leave behind.

But the Board is realistic about the challenges facing our sector. We face a set of financial and economic conditions whose eventual impact is hard to predict. We are determined to learn the lessons for risk management and capital adequacy stemming from this turbulent period. You will see evidence of this in today's presentations.

We have already taken tough decisions and made a good deal of progress but there's a lot still to do. I'm confident we have an experienced management team who will continue to take the right actions in the interests of all our shareholders.

And now I'll hand over to Guy, to take you through the results for the first half.

Thank you very much, Tom, and good morning, ladies and gentlemen. The results this morning, as you've heard from the Chairman, will and have been inevitably overshadowed by the credit market write-downs of GBP5.9 billion in line with estimates that we indicated back in April and resulted in the loss of GBP690. But underneath that, I think these results will also illustrate a very strong underlying business performance and material progress towards our rebased capital targets.

Total income declined one percentage point, principally driven by weakness in financial markets. Costs were reduced by GBP118 million or 1%, down to just below GBP8.3 billion. Our claims recovering from the flood affected 2007 fell GBP488 million and pre-impairment profits rose 6% to just over GBP6.6 billion.

Impairment costs rose by GBP540 million. Operating profit from our divisions was GBP5.1 billion, a decline of three percentage points over a record first half in 2007.

The impact of credit markets, which I'll highlight in a couple of slides, was GBP5.9 billion, in lines with estimates.

Other items including amortization of intangibles, integration costs and the shared assets of ABN were more than offset by an GBP800 million gain on the fair value of our own debt, the combination of those items resulting in a loss before tax of GBP691 million.

On the important capital ratios, our core tier 1 was up by 170 basis points to 5.7%. Tier 1 at 8.6%, total capital at 13.1% on a proportionate look-through basis, well ahead of the estimates that we published back in April.

Just highlighting the credit market write-downs overall, they are in line with the rights issue announcements. The holdings and valuations of our subprime CDO exposures are in line, and as we published them back in April, our US retail mortgage backed securities, commercial mortgage backed securities and leveraged finance exposures all being reduced at prices and within marks above those estimated in April.

However we have against our monoline exposure reserved an additional GBP300 million since April, recognizing perceived deterioration in that sector. Overall the write-downs were GBP6.1 billion before hedges and GBP5.9 billion after hedge effects.

Just a brief word on monolines. Our net exposure now has come down from GBP2.5 billion at the times of the rights issue to GBP2.4 billion, of which GBP170 million remains to non-investment grade counterparties. We have reserves and hedges against 62% of our gross exposure, which total GBP3.9 billion and this is slightly more than the gross exposure that we have to our insured CDOs and retail mortgage backed securities. The vast majority of our remaining net exposure is to the higher rated monoline counterparties.

Across the board, our exposure to credit markets has been reduced. We see largely a significant impact, of course, because of the markdowns but also some material disposals, notably a large reduction in our inventory of US mortgages and leveraged finance. Leveraged finance has come down from year-end GBP14.5 billion on a funded and unfunded basis to GBP10.8 billion at the end of June.

As we stand here today, an additional further GBP1.3 billion at prices within the marks indicated was sold in July and our net exposure now stands at GBP9.5 billion.

Pre credit markets, divisional operating profit was GBP5.1 billion. Our growth outside GBM, which was heavily affected by levels of activity in financial markets, growth there was ten percentage points. And I'm now going to run through very briefly each of the divisions.

GBM income fell 10%. Costs were held back and reduced by 14%. Impairments rose GBP294 million from a negligible number in 2007 [and] we're up about GBP178 million versus the second half of 2007.

We saw a notably strong performance in local markets, rates, currencies and commodities up 87% and a very good start to our joint venture with Sempra, which closed on April 1.

Credit markets remained weak. We had lower origination volumes, particularly securitization and leverage finance and also some considerable costs in de-risking the balance sheet. These were partly offset by the sale of Angel Trains but income overall in credit markets was down 80%.

We made material progress in de-risking the balance sheet, with over GBP100 billion of nominal assets coming off the GBM balance sheet in the period. And risk-weighted assets fell by 1% including the acquisition of Sempra on a like-for-like basis were down ten percentage points.

By contrast, Global Transaction Services delivered much of the hoped and expected -- much of what was hoped and expected at its formation. It is a highly complementary customer product and revenue opportunity for the Group and income rose 12 percentage points, profits rose 15%. Average balances, an important driver of income, rose 13% over the time period.

We saw particularly strong growth in our international activities with cash management up 21% and merchant acquiring up 14% and trade finance growing by 60%.

In our UK retail and commercial banking businesses, we saw strong performance across all of the major business lines. We saw steady growth in income and falling impairment costs. Retail impairment charges fell 8% or GBP50 million, largely on an improving, unsecured loan book. These were partially offset by a GBP34 million increase in corporate provisions.

Our retail banking profits were up 9% in the first half of 2007. Our corporate and commercial profits rose by 6% and our private banking businesses rose 14%. Good loan growth was complemented by a rise in average deposits of ten percentage points.

In the United States, facing a tough economic climate, income grew by 2%, expenses grew by 1% and impairments rose markedly, leading to a 31% decline in contribution to just over $1 billion and a 41% decline in operating profit after the allocation of manufacturing costs.

Within the impairment rise, it's important to know there are two main elements to this. There is the core citizens' portfolio which I think has been recognized for a long time as a high quality book of business, which continues to perform very well in its marketplace. And the -- as we previously disclosed, a line of home equity business which was originated through broker distribution channels, known as the SBO portfolio, which continues to perform quite poorly. And I will just highlight a couple of those comments.

The core portfolio here, well diversified across consumer and corporate lending activities, with charge-off rates currently running at around 73 basis points on an annualized basis. The corporate commercial and commercial real estate books all performing well. Charge-offs at 80 basis points across those portfolios with reserves now standing at 1.6 times the non-performing loan amounts.

Our retail books, mostly the citizens' originated high quality credits, continue to perform well and certainly very well against their US peer group. The core home equity and mortgage books with a FICO score of 748 average and a loan-to-value of 64 continue to experience, I think, some industry-leading credit performance at this point.

And just for clarity, we've provided a little extra information here around the distribution of loan to value, which again continues to illustrate the overall strength of the main part of the book.

The SBO portfolio has been of greater problem. It is now closed to new business. It was closed last year and is in run-off. Exposures there have come down from a nominal $9.3 billion in the middle of last year to now $7.7 billion as at June 30. We've taken cumulative provisions of $675 million against this portfolio and our current reserves stand at $413 million or roughly 2.7 times the non-performing loan amount.

We remain cautious about its outlook. However, the delinquency graph which you can see there is showing some signs of leveling and certainly at this stage, the book of business is performing in line with the estimates that we announced at the time of the rights issue.

Within Europe and the Middle East, we saw a 13% growth in profits, principally as the benefits of a strong euro in constant currency terms income rose 7%, costs rose 15%, largely reflecting the completion of the journey to one investment program in Ulster Bank. Impairments rose GBP27 million from the run rate at the second half of 2007 and in local currency terms, profits declined by 1%.

Encouragingly, we're seeing new business margins now rising especially in Ireland. And I highlight at the bottom the bullet point in the Middle East and whilst still only a small part of this division representing just 5% of Europe and the Middle East, we are very pleased to see an income growth there of 39% during the first half of the year.

In Asia, a very positive story. The region -- regional commercial banking businesses moved into profit in 2008 with a 30% uplift in contribution and strong growth, as you can see, across all the areas of consumer finance, affluent banking, business banking and private banking. And certainly an opportunity here for us to leverage the Group manufacturing support going forward and we would expect to see good profitable growth coming through in this division.

RBS Insurance rebounded from the 2007 floodings, with profits up at a headline number of 56%. We continued with the theme of differentiation between our own brand distribution channels and our partnership channels, own brand income rising 3%, partnerships income fell 8% as we discontinued a number of relationships. But importantly, the partnership contribution grew by 18% to the bottom line.

Net claims fell 13% to GBP1.86 billion on a headline basis and fell 6% on an underlying basis, adjusting for last year's flood effect, reflecting the de-risking of customer selection that has been progressing well over the last year or two.

Underlying profits rose 5% and the combined operating ratio fell from 95.8% to 94.6%.

In Group manufacturing, we continued the theme of productivity gains, largely offsetting continued investment and business volume growth. Results there were impacted by foreign exchange rates and at a constant currency basis, costs grew just two percentage points, and certainly contributed towards holding the cost income ratio for the Group flat at 48.2% versus the first half of 2007 not -- despite the slight headline decline in income across the Group.

Net interest income grew by 30% in the first half of 2007 to just over GBP7.5 billion and represented 45% of Group income. Business margins remained broadly stable in the first half, mix effect principally higher mortgage originations contributing to a decline in UK retail and commercial banking.

Across all of our front books, we're starting to see margins rising as the risk premium in the marketplace has been added to new business origination. Whilst we're still picking up some lag effect on back book pricing, more notably in Europe and the Middle East, underlying NIM for the Group was favorable at around 2.02%.

Credit metrics remained stable in the first half of 2008. Whilst we are seeing some evidence of leading indicators flagging weakness ahead, certainly the first half results showed strength and quality of the portfolio. Our loans grew 7% during the period and non-performing loans by about the same amount, leaving our non-performing loans to loan ratio very similar to the levels at the end of last year.

Our impairment charge rose from 37 basis points to 46 basis points, principally in -- as a result of GBM and the US retail and commercial business.

Provision coverage declined slightly, reflecting charge-offs along with the higher proportion of the non-performing loan book being in well-secured assets, where we have a reduced expectation of loss.

And finally on a half that has been, I think, dominated by capital and discussions around capital, we've made substantial progress towards our re-based capital targets, obviously supported by the GBP12 billion rights issue the Chairman referred to, but coupled with very strong balance sheet control.

Risk-weighted assets across the Group were up by slightly less than 1%. We made material progress on de-risking the balance sheet and our core Tier 1, at 5.7%, was well ahead of the 5% that we indicated at the time of the rights issue and tier 1 at 8.6% and total capital of 13.1% on a proportionate basis already ahead of our revised targets. We are well on track to meet our core Tier 1 target of being above 6% at the end of 2008.

On a consolidated basis, capital ratio is showing the strength and support in the rest of the consortium of 6.7% core Tier 1 and 9% on a Tier 1 basis.

And with that, I'll hand over to Fred. Thank you.

Thanks Guy. Good morning everyone. I don't want to go back over all of the ground that Guy has covered so what I'll do is just pick out a couple of themes which I think are important, then address the outlook, and then we'll go on to the opportunity to try and answer any of your questions.

And the themes I'd like to talk about are ABN Amro, separation and integration, capital, and outlook.

ABN Amro, we tend to think of it in terms of integration but, of course, because of the way in which the business was acquired by the consortium, there's actually quite a big task to go on out there of separating ABN Amro into the parts which belong to each of the consortium members and transferring them to the consortium members. And that is going on in parallel with the integration of the business.

A quick reminder back to one of the slides we used last year. We were characterizing what was -- would happen in terms of separation in two parts really. There was the snipping off of the connections of some relatively discrete business units within ABN Amro and then the altogether more complicated separation of BU Netherlands, which was built -- which was enmeshed with the part of the business at the center which RBS was taking.

As we've got into the business and formed our detailed plans, that is precisely what has happened and how we're going about it. And that is precisely how things have progressed.

The last piece in the equation to be separated will be BU Netherlands although I think we're already moving up the timescale in that to do that rather quicker than we first thought.

To give you a sense of how that all looks in terms of value, the overall transaction, as you well remember, was in the region of EUR70 billion but it's worth reminding yourself that our piece down at the bottom was only about EUR14 billion. LaSalle there is there in a slightly different color just to remind ourselves that by the time this deal completed, we obtained the cash disposal proceeds of LaSalle rather than the LaSalle business, which obviously had found its way to -- or at least had been sold to Bank of America. The separation of LaSalle to Bank of America took place during our period of ownership. Since then, a lot has happened, broadly as follows.

Asset management was transferred to Fortis during the first half of this year. Antonveneta was sold, as you know, which came out of Santander's share. And in July, post June 30 but before -- obviously an historic event now, Banco Real was transferred to Santander. So in terms of the whole businesses, Santander has pretty much already got all of its parts.

We have acquired LaSalle cash, as you know, so we're left in a situation now where there's about EUR34 billion of the nominal EUR70 billion left, principally belonging to Fortis. Two major parts are separating that now. BU Private Banking which will separate in the early part of 2009, and BU Netherlands which will separate some point during 2009, I say a date I think that is getting nearer rather than further away. It hangs on a -- a piece of IT separation which is well advanced at this point.

Some shared assets in there, relatively small. Again, very good progress has been made there. Some of the sundry stakes and individual bits and pieces have been transferred to their respective owners or sold business unit private equity about 75% complete. There are some very small rump positions now being disposed of. The last remaining item of any substance is to sell the stake in Saudi Hollandi Bank, the minority stake, and in -- that process is pretty well advanced as we speak.

So very good progress in separation. Not finished yet but we are now down to a discrete and small number of items.

In turning then from the separation aspect to the integration aspect, we set out in the original offer document some synergies, both cost and revenue, and we revised those earlier this year to a rather higher figure. I just think we'll stop talking about the synergies in euros now and just we'll flip them into sterling. GBP1.15 million cost savings, GBP500 million or thereby net revenue benefits are what we plan now to deliver.

Just as a passing observation, that represents about four times the annual profit of the businesses which RBS acquired, about four times their annual profit in 2007. So obviously a very material element of the transaction and the benefits which accrue to us.

How are we progressing? As you will have seen from the document, progressing well. Hopefully this is helpful information not just in terms of how we're doing but also in giving you a sense of how these benefits will flow through. Remember these are recurring annual benefits, so that is to say from 2010 onwards we would expect, as a result just of the cost synergies, to be delivering GBP1.15 billion incremental profit year-in, year-out. And the figures you see in the other columns are the annual profit impact, not the amount of synergies we've implemented, because obviously as you implement a synergy in a year you don't get the full year's benefit that year.

So I hope this is helpful to you. This is not information that you've had before I know, you'll probably take a swing at it. But that gives you a sense of how we plan to -- originally plan to deliver.

You'll see from the dark blue bar on the left-hand side that we got out of the blocks pretty quickly. We're materially ahead in terms of the P&L effect which we've generated. I'm sorely tempted to suggest to you that that will translate into higher benefits. I think in the interest of prudence, at this point we'll just leave it that we're going to deliver the benefits faster, so the value created during the integration period will be greater than simply adding the light blue bars together. But let's not rush our fences there. But we've got out of the blocks very quickly and we feel good about the synergies and they're all now in train. There's always a sense, you know, when you have a plan that's all very interesting. It's only when you start to roll it out that you start to get a sense of how deliverable it is. We'll be pleased with those numbers and pleased with that progress.

Turning to the revenues, now revenue synergies are always a much more difficult thing to get your mind around, a rather more nebulous sort of concept. If I could just take a moment to share with you our thinking around revenue synergies. These are synergies which come from specific things which we are doing; they're not intended as a proxy for growth in the business. So we would expect to be able to stand up in front of you and take our total income, deduct these amounts and answer to you in terms of the growth of the net figure as being respectable, having regard to what's been going on in the world in the businesses that we own. So these are -- this is not a proxy for the growth we expect to see from the businesses. This is the incremental revenue which we think we will get from specific revenue synergies.

The story is similar to that with cost. We got out of the blocks pretty quickly here and the numbers are obviously smaller. But again, we're tracking well ahead and I'm tempted -- less tempted than I am in cost, but nevertheless tempted to suggest that we'll get more than this. But for the moment I think we'll settle for getting quicker delivery of the synergies.

A little flesh to go on the bones, what we've been doing behind the numbers. The new Group structure which we announced to you in February actually took quite a lot of engineering to get it into place with our people. Management appointments have to be made, reporting lines have to change. Not in and of itself a huge exercise, but as we're folding two organizations together it is of course of critical importance to make sure that we choose the best person, whether it be the so-called ABN person or the so-called RBS person. They're all RBS people now. But we went through quite a convoluted process as part of that, involving third party consultants to help us conduct interviews, because it's very important in the early days of integration not just to be fair, but to be seen to be fair. We're through that now, but it was a long process and it was tempting just to push on at times. But I think we got the right outcome albeit it took a little bit of time.

Rebranding around the business. We're now -- there are no two countries in which the story is the same in terms of what the regulator thinks, what the legal position is, what the practical position is. But we've now made significant inroads in all of the large jurisdictions to rebranding the business and making it look and feel more like RBS, which is an important part of the cultural shift in all of this. Very good reaction from customers in all of this as we've written to customers to draw to their attention that we will be trading as RBS now rather than ABN Amro. We had a very good reaction and no negative reaction to speak of. So that's another important piece.

IT systems, we've been scaling GBM systems to accept ABN Amro. A huge proportion of the business is now conducted on a comingled basis. ABN Amro numbers as previously don't exist. Various books and businesses have been folded in and are already being run on an integrated basis. There's been a lot of scaling up of our IT systems to enable that to happen.

In how we arrive at delivering the synergies ahead of plan; it ranges from the sublime to the screamingly obvious, I suppose, but the headcount reductions have been accelerated. We had about 2,200 or so people have moved out in the first half of '08 and there'll be -- I know it's never politic to describe what the number will be in the second half, but the process continues to get people -- to move people out of the business as the synergies are being realized. We've ramped down the ABN Amro head office activities in The Netherlands rather quicker than we had first thought.

And then we come to the other end of the spectrum, which is we're just in buying things as mundane as stationery items for ABN Amro. We're achieving significant savings by putting them through the combined Group purchasing processes. Interesting I think as a commentary on the economic situation that the suppliers certainly have very sharp pencils at this moment in time when it comes to quoting for business on the scale of the businesses we can offer up around the world. So these purchasing synergies are very encouraging.

So integration -- separation and integration both going well. I know it's a subject we'll return to again, but off to a good start and the start is always the most difficult part, just to go from a piece of paper with synergies on to actual delivered momentum.

Looking to -- as the Chairman mentioned earlier, we didn't buy the business for the synergies. We got the business for the underlying businesses and again as we've taken ownership, brought these under control and started to move forward with the combined management teams in the new business structure, we've been running through and validating the business rationale, the strategic rationale that was in our mind at the time we took the businesses over.

And so far so good. What we thought was possible in these businesses still looks possible. And we believe it will happen. It does move us forward in the way in which we anticipated.

Clearly what's different though, are the current trading prospects for some of the businesses. Some, but not all, a very crude assessment on the chart, that I grant you, but just to give a sense that the real areas, and they're not small areas, but the areas where current market conditions fall short of what we might have expected at the time we set off on the transaction. And equities, difficult equity market. Not the end of the world, but more difficult than would have been ideal for the business. And in credit markets where -- I need hardly tell you what the markets have been like. That's impacted on the RBS business and the pieces we've acquired from ABN Amro.

We're by no means despondent about the prospects for credit markets going forward, but just as to how things currently trade against where we thought, those are really the areas where it's pinching at this point. But the strategic rationale for the businesses and their acquisition remains intact.

Capital. Guy has already covered the ratios and I don't have anything additional to say in that respect. We're well ahead of where we expected to be at the half year and we're much closer to the -- as a consequence we're much closer to the year-end target. At core Tier 1 we're already through it in terms of the overall Tier 1 measure.

One of the features which I'll talk about a little bit is disposals. Firstly, our disposals are on track. What does that mean? Well, all of the things which we had in mind to dispose of when we spoke about this in April are -- have either been disposed of or are still in train. Of course, a disposal in train falls well short of a disposal completed and settled and there are a number of material items out there. I know the one that will be at the top of everyone's mind is RBS Insurance. We continue in discussions for RBS Insurance with interested parties. We have not concluded a deal. Obviously we'd announce if we'd concluded a deal. And until you sign a deal, you haven't signed a deal. So we continue with that process; it carries on. We have a figure in mind that we would expect to get for that business. It's a figure that I don't think you would view as unreasonable. But we're determined not to sell the business at an undervalue, not to be a forced seller. This is not a trivial asset.

One of the benefits which, I mean the capital ratios move on more quickly towards our target, is that that pressure on disposals is easy -- there are more disposals out there being progressed than just RBS Insurance. Indeed the Tesco Personal Finance disposal, which we announced recently, is not reflected in the figures, let alone with increased core Tier 1 ratio to 5.8.

As you know, the business tends to generate more capital in the second half of the year and as I'll talk about in a moment, our de-leveraging activity continues into the second half of the year so it feels like we've created some more flexibility in terms of the ways in which we can deliver that core Tier 1 ratio. But all of the businesses that were up for sale remain for sale and all of the process continues. And as soon as we've got anything to announce we'll announce it to you.

Sorry, the other throw-away on that slide, well hardly a throw away, is we're about 25% of the way through delivery of the GBP4 billion contribution to capital as a result of disposals that have already been contracted.

De-leveraging is an important theme as well. I think I mentioned to some of you, and certainly we've talked in the intervening period, about the numbers at December 31 were pretty much bush, two balance sheets cross (inaudible) and that was it. We all knew as part of integration and as part of bringing the two organizations under control there's a lot of meshing together of balance sheets to be achieved, and clearly as market conditions have changed, a lot of de-leveraging to bring about. The chart there gives you a sense just on one part of this, and it's clearly a rather important part within GBM, these are nominal values rather than RWAs, just to give you a sense of how it went. There's still momentum in the businesses through late 2007 but we saw the capital plan and the de-leveraging plan starting to bear fruit from February, March time, driving the numbers down.

There's a cost attached to this. There's an opportunity cost attached to this. But it's clearly the right thing to do for the business and after the initial squeals of pain from the customer-facing colleagues as we start down this path, actually we're managing down this now in a more -- or less painful manner and we're going to see these gains and improvements continuing into the second half as we further de-leverage the balance sheet.

The focus on improving the risk return, there's nothing clever about this. Just want an improved risk return metric as we go forward and generally a smaller balance sheet.

The outlook, I'll put this slide up to start with. As you know I'm not an economist. And as I know, you're not here for an economics lecture. So I'm not going to spend a lot of time going through this. I put these up because we tend to do it historically sometimes for inspiration as we start to think about outlook.

Picking up again a comment that the Chairman made, I think if we could get those July '08 numbers and bank them, we would. I found it interesting looking at this actually how little the numbers had deteriorated from the start of the year through 'til now. It certainly feels as if things have deteriorated more than that. We shall see. The numbers do still forecast growth in most of the major markets in which we operate and, as you can see, in Asia Pacific although the numbers are certainly coming down from this level they're still relatively high compared to the rest of the businesses we operate in.

But in truth we tend not to see the world through the lens of forecasts like this. We see the world through the lens of the businesses that we operate and the customer franchise that we operate.

Not going to go through all of this, but just a vignette as it were of some of the business strands, some of the facets, some of the elements of growth during the first half of the year. And whilst it's right that we focus on some of the areas that are particularly stressed, it's worth noting that there are some very, very strong rates of growth in parts of the business, many of which are new parts of the business to RBS. So growth, there's a lot going on out there and you may be surprised to go around the Group to discover how busy people are in the customer-facing parts of the Group.

Also in thinking about the outlook, I thought it might be helpful to you to again have a split of our income within the business units. These are pretty big chunky business units and we've set out here, and also in the appendix, I didn't want to trawl through them and waste time in this part of the presentation, but if you look in the appendix, we've given a breakdown within each of our operating businesses of their main income streams '07 compared with '08, just to give you a sense of the moving parts.

I think as you, even just to flick through those slides, you would see quickly that by far the most volatile part of the business is GBM. You can see that from that slide, just looking at the -- that's in fact total global markets, but the big gaps between light blue and dark blue bars in both directions highlight just how much volatility there has been within individual business lines. I think the stories behind each of them are pretty well known to you.

But to draw your attention to the fact the global markets are actually less than half of the Group. In income terms we are actually achieving very good growth of our customer franchise and new customer bases that we've accessed through the ABN Amro transaction. The ability to bring RBS products to bear there has given us an important fillip at what is quite a difficult time in the market. And going to speak to customers about new products or getting into new markets with new products is quite a good recipe for growth at times when economies are generally under downward pressure.

Also important, and I'm sure this is a theme we'll return to again over the course of the morning, is that margins are widening out. One of the positive aspects of the dislocation we've seen is that the risk premium has re-emerged and our margins are moving upwards. You can see that in the Group margin and you can see that in individual product margins as you go through.

Another very significant part of this business, Global Transaction Services, as you saw in Guy's slides. Just some of the very significant growth we're achieving in international cash management. Again, a product we didn't really feature in before.

So the diversified income streams in GBM is a very up and down story, but we feel that we have opportunity for growth in the second half and beyond.

Similar run through regional markets. Of course immediately you put the slide up you can see what I was meaning about the gaps between the light and dark blue bars. Far steadier performance across the piece. Now as you go in and look at the individual components of this whether it be the UK, the US, Europe or Asia, the picture's very similar. The bars are all up a little or stable. And that's very much the nature of this business. So about 40% of the Group income, Group underlying income.

We've seen good growth here in the commercial segment as well as in personal. Private banking has remained strong. It will be interesting to see how strong that remains as the economies slow down. We shall see. Personal business is growing despite difficult market conditions. And again in common with what I was saying about global markets, we're starting to see new business margins improving.

So, in conclusion then, we're making good progress in ABN Amro both in terms of the separation and in terms of the integration. And the capital plan remains on track. We're ahead of target at the moment, where we expected to be at the end of June and we've already completed the TPF disposal since which is about -- as I say about ten basis points into those numbers.

The outlook for the global economy is challenging for sure. You'll have your own views on that and I wouldn't necessarily disagree. I don't know what they all are, but I think we're all in a place where we expect the global economy to become more difficult going forward.

It does feel as if we're better placed. It does feel that you would want to have a stronger capital base facing into this kind of environment. It does feel good to have the opportunity to grow our income, not by doing more of the old same old same old but to actually have new products to go to existing customers with and new markets to take new products into. And to be able to do it at a time when we expect to meaningfully improve our efficiency by completing the integration of ABN Amro and realizing GBP1.1 billion, GBP1.2 billion of cost synergies feels like an important card to have in our hand at this time.

So that was all I was proposing to say at this point. If I could invite my colleagues now to join me, we'd be happy to try and answer any questions you have.

Thank you, Fred, and before we take the first question could I just ask people to state their name and affiliation before they place their question. So we'll start up here and I'll kind of work my way around.

Good morning. It's Lee Goodwin from Fox-Pitt Kelton. Actually I've got a question just on the balance sheet and then a question on impairments, if I may. Just on the balance sheet, I was just interested in what's happening in terms of the customer deposits. Because it looks as if in the first half of this year customer deposits across the Group seem to have grown by only about 1%, I think it's 6 billion or so. When I look at loans, they've grown by 7%, or GBP45 billion. And so obviously that leads us to think well where is -- why is that happening? Is it because you're not wanting to compete as aggressively as maybe some of your competitors in that market? But how much longer might that sort of trend go on for and where does that take the loan deposit ratio?

You've partly answered the question, Lee, but if I pass it both to Gordon and Johnny to give you their respective -- there are similarities but differences between the --

We've seen, I suppose partly were taken, partly were given from customers. I think you've clearly seen the personal sector I would say reducing liquidity actually available. Several other banks have reported figures on current account balances. We're not as bad as some of the figures which are shown but I would certainly say flat is probably an average. And what you normally see at this point in the year, you normally see balances which would have a peak say in last December and then come down to March and then come up. So it wouldn't at all surprise me actually to see deposit balances actually showing a lowish figure at this point in the year. I'd normally be expecting to see momentum going upwards, just though natural activity and I -- we're not seeing that at the moment. I think most of our competitors have said something similar. So I think you are seeing from an available in the market point of view there is less available. And then there are people out there who are clearly -- I'll not use the word more desperate than us but there are clearly rates out there which suggest people have a greater demand than us. That's something we're clearly going to have to look at in the second half of the year.

When you say lending growth, lending growth is essentially at the moment really mortgages. So to some extent that is discretionary. If we continue to get good margins in the mortgage market, then clearly we will have to look at a way of funding that growth. Interesting enough, in the last few weeks we've actually seen some of those very strong new business margins already begin to tail off, which suggests that the banks are already beginning to lose sense of reality perhaps. But I think it's going to be an interesting challenge for the second half of the year. I think it's a market issue and our issue particularly. The corporate market we're still seeing very strong opportunities for lending growth and deposit growth. If we want to do one we'll have to find a way of doing the other. There's no question about that. Johnny?

Well, in GBM -- not GTS, GBM the distinction between customer deposits and money market deposits is somewhat artificial. There's a lot of strange things going on in the money markets as you know with LIBOR and LIBOR fixings and so on. We've got absolutely no shortage of deposits at the levels that we want them at, is the short answer. But everything we take tends to be at the money market rates. We're getting slightly better than most. So I don't think you can see any trends in -- I don't think you should read anything into the trends in customer deposits in GBM. It's more a question of what we want to do and the price at which we want to do it.

Okay, thank you. If I may, just a second question on impairments. I'm just interested in the -- what's going on in GBM? There's a tick-up in impairments there. And in addition, on the US SBO portfolio, I think going back to April you were guiding that there may be a provision of $1 billion you envisage taking against that portfolio, and I wondered if you could just clarify, please, that the amount that you've shown for the first half, how that squares with the $1 billion you are envisaging for the year?

Without wishing to repeat myself again, it's quite difficult to talk about trends in GBM in the sense that provisions are somewhat lumpy. But there is a tick-up and I think that's surprising given the economic environment in which we find ourselves. Not sure I can add anything beyond that.

The SBO, Guy?

On the -- we -- again for the purposes of capital planning we estimated a charge of around $1 billion and as I've tried to illustrate in my slides we've taken around $675 million of that where we continue to manage it as a loan book in decline and several expect to recognize those on an as-incurred basis going forward. But I think that overall number still seems to be a good number.

There was a question here.

Thank you, it's Michael Helsby from Morgan Stanley. There's clearly a lot of focus on bad debts at the moment. I'm actually very interested in the levers that you can pull. It's interesting, Fred, that you mentioned margins, how they've stabilized and look like they've reached an inflection point. I was wondering if you could talk a little bit more about that?

But also on costs, if I look outside of GBM, it looks like your costs on a divisional basis are flat to down pretty much everywhere, so I was wondering, clearly we know about the opportunity you've got in ABN, I was wondering what cost opportunity you've got in the old Royal Bank franchise? Thanks.

Okay. Well in terms of -- if we start with levers, we can pull on the credit front, I mean there are still a variety, but the most effective lever you can pull is getting in early, getting a hold of the customer early to start working things through as opposed to waiting for the phone call to tell you that the receiver's been called.

One of the metrics that we look at quite closely are the flows, is there flow of business into SLS and some of you who if you can remember back to 2001, 2002, we put slides up showing the movement of cases into SLS.

We operate on a basis with our relationship managers, basically there's an amnesty. If they move the thing into SLS, they're not to blame, whereas if it sits on their books and goes bad, then it goes less well for them and in terms of their budgets and their performance, they get immunized from it if it goes into the center.

The flow of business into SLS is moving up. It's been moving up since early '07, but the important thing within SLS, round about 60% of what goes in comes out, back into the normal banking business, having been through a period of intensive care.

So one of the -- I don't know if you'd call it a lever or not Michael, but that's one of the tools that we use to get in early with these guys. And at that point, if you get in early enough you can still sometimes give someone an opportunity to re-bank which is one lever we can pull, but getting in early is a simple key for all that as best, and, of course, we don't always, but that's the best thing there.

To the remainder of the business and cost, yes, there are cost opportunities and as we move forward with our scale it helps a lot. A lot of the scale benefits for cost though tend to come in manufacturing and Guy's slide he put up, the manufacturing headline is up 5%. At constant currency though, it's only up 2%, and if you take out the property element in that where we're increasing the number of properties we occupy, then -- to allow our growth to take place and manufacturing bears the cost of properties around the Group, our cost of actually supporting customers fell in constant currency.

So that model, that continues as we go forward and we're all -- ABN had their own -- they had got the manufacturing concept, so that a lot of progress had already been made in ABN Amro. RBS has had the manufacturing concept for a long time and if you bring the two together, we do see quite powerful opportunities to bring down cost.

The bit you see in the divisions tends to be the very direct cost at the front end. That really is the numbers of people out there doing business. So it tends to have less scope to come down, but insofar as there is variable remuneration, particularly in something like GBM, if we aren't doing the business, then you're not incurring that cost.

So it's maybe a long-winded answer on costs, but there are plenty of levers, a lot of them though in manufacturing more than in the individual businesses.

And on margin, sorry?

Oh yes. I think, as I was trying to say, a lot of moving parts with margins, but the fact of the matter is that the price has gone up.

I had a customer in to see me on Monday, someone who if I mentioned his name, you would all instantly know who it was and realize that they're a very significant customer. He was in just -- he was in for a -- chatting around the subject which was just sounding us out whether we would be interested in something.

I said, well, of course, there's no question of us being interested in that, other than a materially higher price and, oh yes, yes, yes, yes, yes, yes, and just everybody understands that the price of credit has gone up materially. It has to us, our funding costs have gone up too, so it's not all good news.

So -- but if we'd been having that conversation not so long ago, he'd have been telling me the price or trying to tell me the price for the deal. That has now turned around quite a lot and as you go through product-by-product, it's hard to see it in products where the margin hasn't gone up.

Deposits could be an exception where some people are pushing for more deposits for what I would consider to be strategic reasons or structural reasons. It feels quite good not to have that immediate need to do that, but if you look at mortgages, mortgage margin's gone it must be up 100 basis points.

Some book margins are basically doubled from the low and are -- but even then, I would argue only back to where we were in 2004, so I would say, they actually ought to be going higher, not going lower, because the risk profile is considerably significantly worse than it was in 2004. So I would see more gravity in the upwards direction still to come in the mortgage market before I got too excited.

I'm working my way across, yes.

Thanks. It's Mike Trippitt at Oriel. A couple of questions actually. Just on the increased synergies in ABN, it maybe a sort of a -- sound like a slightly cynical question, but I'm just wondering how much more cost would have come out anyway given the de-leveraging that's going on in the markets business and just simply, there's probably over the next year or so, less business about anyway.

I'm just trying to understand what costs would have come out from the two organizations naturally, versus the increased synergies?

I've got a second question on impairments.

Well I think to the RBS side of the question, we ran the business fairly tightly, but you have seen how our cost base moved around over the piece. There may well have been costs that would have come out of ABN Amro anyway. It wasn't a business that was normally associated with costs coming out I would observe.

The numbers we've put up on the chart are numbers which we put up in, what, June or so of last year, June and July time of last year, the starting point. So we'd already identified synergies that weren't premised on a drop in activity anything like we're seeing just now, and we revised them upwards in February.

I don't think even then we'd have necessarily forecasted some of the activity falling away as much as we have, but also remember those two columns of ticks I put up there, that insofar as the business is doing less well or market conditions are less favorable, it's really just an equities and credit market. It's not small parts of the business, but -- and not unimportant parts of the business, but by no means in the whole business.

Maybe another way to come at your question though Mike is I would acknowledge that there will some right sizing going on as well to reflect those businesses coming down, but I'm -- and we'll also see costs coming down as variable remuneration costs come down, but the synergies, the savings we're promising you up there are 2010 recurring synergies. So I'd be disappointed to think that we're still seeing variable remuneration coming down in 2010 but I'd acknowledge in the short term you'll see a variable remuneration element reducing.

Okay. So just a second question on the US impairments outside of the SBO, which have also gone up quite significantly, I just wonder if you could give a feel of where we are in terms of impairments versus charge-offs and whether we're in sort of reserve building phase or whether impairments are in line with charge-offs? Just trying to get a flavor of really where that goes in the next couple of halves.

Good question for Ellen Alemany, our CEO in North America.

Sure. Outside of the SBO portfolio, our impairments of roughly $388 million are about 70 basis points. Most of it has been in the retail sector, consumer originated, home equity, auto portfolios, etc., and it's just we feel we're performing much ahead of the rest of the other US banks in this sector and it just reflects the overall deterioration in the consumer segment, but it's a combination of reserves and provisions.

Thanks Ellen. Could I just make a comment on the first part of your question on synergies? The Board sees every month an integration report and it's extremely detailed, made up of individual projects. So the numbers you are seeing here are all clearly identified projects, and the delivery against those is tracked monthly and the Board sees that. This isn't some kind of rolling up of things that were happening anyway, these are all absolutely discrete projects.

Yes.

Thank you. It's Jonathan Pierce of Credit Suisse. I've got two questions. The first is just some disclosure on what the Angel Trains' pretax gain was within these numbers?

And then also, if you can give us some idea on page 52, as to what the fairly sizeable negative items are within the other income lines of non-interest income?

That's sounds like Guy.

I'll take that. The page 52, it's around GBP570 million was the Angel gain reflected in the rental assets line on page 52.

Some of the other markdowns relate to a number of valuation adjustments on carrying values of certain assets. Some of those are mapped into the weak credit markets numbers, which I highlighted on markdowns on the certain assets and a function of part of the de-risking of the GBM balance sheet.

Overall across the GBM division, other operating income came down from around I think it was around GBP950 million this time a year ago to around GBP675 million this year, and that would include the Angel gain of GBP570 million.

Thank you. The second question is on risk-weighted asset progression in GBM again. I'm interested really in the extent to which the reduction in credit exposures, some of the risky credit exposures, has assisted that and, in particular, if I look at the LBO book, GBP3.5 billion to GBP4 billion reduction, I think those assets were risk-weighted at about 390% odd.

So for that portfolio in its entirety, can you give us some feel as to how much of the decline in exposures contributed to the fall in risk-weighted assets in GBM? And perhaps, more importantly, where you see the risk-weighted assets trend moving into the second half of the year?

I think I can give you some flavor around it. I'm not sure I can actually specifically answer the question as phrased. There's a huge effort going on to manage risk-weighted assets in GBM. There are a number of initiatives that go into it, just naming a few. When we bring ABN and RBS together, if we're both lending to the same company, that's -- we don't tend to add one plus one to equal two, that will be a reduced exposure, that's one thing.

We are doing a number of treasury initiatives to manage RWAs dealing with financial counterparties to pass the risk of certain assets to those counterparties, that's a significant activity, always has been in ABN and RBS and that continues.

What you say is true, but there's in terms of the leveraged finance, reductions will have gone towards the reduction in RWAs, but I don't think it's a really significant -- a significant driver if you like. There are so many other moving parts.

There's the Basel II exercise, a switch from Basel I to Basel II and the opportunities that gives again around central management and that's also shifted the -- where our RWAs are if you see what I mean, into the lower end of the credit spectrum.

So there are a great many moving parts and I think that the main thing to emphasize is that there's a team absolutely focused on managing this, working with the front end of the business.

So we have a very rigorous process to look at our deal pipeline and our incoming business, making decisions early about what sort of things we want to do, what sort of things we don't want to do and then a team, there's also a focus on if you like at the back end of managing what we do take in, to make sure that we hit our risk-weighted assets targets, and it starts fundamentally with a target. You know, what are we trying to achieve and working towards achieving that target.

Yes. I'm sure you won't answer this, but can you tell us what that RWA target is for the year? Will the RWAs stay flat or fall again in H2?

I can tell you what it was for June which was to be where it is.

Right, okay.

Certainly Guy and I are involved in this process every week, so we (say) there are targets set to move us down the curve but to give you -- to try and be helpful without answering your question, the moving parts where the meshing together of the businesses, a lot of which took place in the first half.

The -- also against that we had some draw-downs from customers which I mean was a kind of -- that's happened now, which would move it up, and we continue to do customer business.

As we go into the second half, I think you would not see the draw-down part. That's been contained. You wouldn't see so much of the meshing part on the other side of the equation, but you'll see through the weekly process, a continuation of the downward momentum. And Guy, I don't know if you wanted to touch on (inaudible)?

(Inaudible) well, there's a table on page 18 just to highlight the change from Basel I to Basel II in the start points which I'm sure you've seen.

Thanks. We'll move along, you can pick that up later, yes.

On the same point, is there a revenue penalty attached to the reduction in RWAs, some of which might come through in the future accounting period?

And secondly, when you talk about the GBP500 million of revenue synergies from ABN, is that after adjustment for potential revenue attrition which is often a feature of investment banking mergers?

Yes, that's a net number Peter on the synergy, on the revenue synergy question. There will be some revenue loss as a result of having a smaller balance sheet, but relative to the cost of maintaining the larger balance sheet. It's not something we're -- we don't believe we're storing up an issue we're going to come and talk to you about. I think we would prefer to have this smaller.

Can I just say, I mean there is -- the credit market's result within GBM does reflect a one-off cost of particularly reducing the riskier parts of the balance sheet. So some of that, the credit market's result reflects the de-leveraging.

There is some ongoing costs as well in terms of the hedging of risk-weighted assets, which is in these numbers too.

Okay, and here we are.

Hi. It's James Invine here from Dresdner Kleinwort. Fred, could I just ask you to clarify a couple of your comments on the insurance business please, because I think clearly you've said that if you get a good price for it, then you'll sell it, but are you now saying that if actually somebody doesn't offer what you consider to be a sensible price, then you wouldn't be too uncomfortable on the capital position to keep it?

Yes, well I think I'm very anxious not to be a tease on this James, and RBS Insurance is up for sale, full stop, but I think there's been enough value destruction without compounding it by selling a business of that size and importance at a price that is not respectable and I think -- or reasonable, however you want to put it.

We have a sense of what that would be, and we have a belief that we can get to that place, but if we don't, then I'd hate to be in a place of saying, well guys, I've just given away RBS Insurance and you would hopefully have got the sense from my remarks that in terms of where we now sit relative to where we sat in April, the capital ratios have moved forward more quickly, the de-leveraging has gone well, and will continue and there have been a number of disposals, there are a number of disposals out there still, not just RBS Insurance, which would leave us today sitting in a better place to have confidence that we'd be able to look north of 6% without having to sell RBS Insurance, but it's not to tease about RBS.

Because whether we think -- we've got a lot of people working in RBS Insurance and I don't want to be playing with [them] which is that the business is for sale, and we will progress that and are progressing that.

Just in front.

Can I just have one more on GBM costs as well? Is there an offset in the GBM cost line because of the credit write-downs? So I mean basically what I'm asking is that the GBP2,184 [million], the adjusted GBM profit number, has that got the negative of write-downs stripped out, but not the positive of any cost offset?

The remuneration, the compensation number for GBM is an accrual. The final determinant of what the variable compensation will be will not be taken until the end of the year, but the accrual does -- is 25% down year-on-year and that obviously partly reflects the performance of the business net of write-downs.

Thank you.

Hi. Straight in front, yes.

Yes, thanks. It's Simon Samuels, Citigroup. It's quite reassuring actually that you seem to have as much trouble forecasting your capital ratios as we do, because I mean I think you've said you're well in excess of what you thought you'd be back in April. So I guess the question I'm interested in is how much of being a long way different from what you expected? I assume most of that's not to do with higher earnings, it's to do with faster balance sheet contraction. How much of that should we think of as just bringing forward what you thought would have developed in the second half of the year, or do you think the capital ratios will now be (inaudible) in excess of what you thought they'd be at the end of year back in April?

I think first of all Simon, there's not -- I don't think there's any bringing forward of the second half, so our view of the second half is that we'll -- what will happen will happen, but I guess when we were sitting back in April time looking at the capital plan going forward, we were very cautious. I mean at that time, the market wasn't exactly what you would call liquid and it's hardly liquid as we speak, but -- although this has improved. So in making assumptions about de-leveraging and so on, we were pretty cautious.

We were cautious about the earnings for the business, so there is earnings in there, the business has performed better. We'd also -- but perhaps one thing that's been brought forward slightly is the degree to which we'd have completed disposals in the first half.

If you remember when Guy was quoting numbers, we made no -- we assumed there'd be no disposals in the first half, we've achieved a little bit. So in that respect, it's possibly I'm bringing forward but only in relation to disposals.

It feels like we've got -- there's a kind of mindset thing about de-leveraging a balance sheet and the business don't especially like it. I mean that's not to say they're resisting, but particularly when you get down to that relationship manager level, it's not what they usually most want to hear, but actually what we've experienced is that it's not as difficult as how you first thought. And as with many things, once you start it becomes easier.

So there's a routine in process through the weekly meeting that Johnny and Brian and I have of -- and there's Guy. So this has now become sort of industrialized.

And it's -- when I look back at slide, what number is it, 41 of yours, which was showing the GBP157 billion reduction in GBM assets since March, can you give us any sense -- it's just it's very difficult for us to forecast, but can you give us any sense of what kind of pace of decline in assets you think is reasonable for the second half, or maybe in 2009? I mean I don't know how you're going to answer that, but in some way, are you a third of the way through the process, or a quarter, or a half or --

I think you're asking for a forecast.

Well yes, no, no, but I mean it's a pretty dramatic step change from growth to shrinkage.

Yes, yes, okay. I mean I understand why you're asking Simon, it's perfectly fair. I don't have an answer because the other slight uncertainty is about the growth in the business in terms of loans and advances, I don't know what the offset there is.

We're certainly a big way through it and that's why the thing to be thinking about is this meshing together of the ABN and RBS balance sheet. It's as Johnny mentioned, combining limits and one-on-one doesn't make two. We're well through that, and that's a non recurring element of it.

So I wouldn't expect you to be seeing the same sort of reduction in the second half as in the first half, but the process will continue.

As far as 2009 is concerned, we do want to get to a place where the balance sheet is de-levered as far as it can sensibly be relatively quickly. This is not -- you know, I don't want this to be a long running saga, we want to get down and then build the business forward from there.

So I'm looking at Johnny and looking at Guy for any more specificity we can give.

I might add a statement of the obvious, which is we're not heading for zero. I mean we have got a business and there is a sensible balance sheet that goes with that business, and that's where we're aiming to get it to, and I think all banks all round the world, in their wholesale activities had perhaps a bigger balance sheet than was needed to service the customers, but we want to keep the balance sheet that is appropriate to service our customers.

Can we move along? Yes?

Thank you very much. It's Tom Rayner from Citigroup. Can I ask a more conceptual question on your capital ratios, just looking on page 58? Because I notice that both yourselves and I think Barclays yesterday don't make the Tier 1 deductions from your measure of core capital ratios and clearly you've indicated that a range of 6% to 7% is where you want to be. And I think again in both cases, if you were to make those deductions, it would knock about 0.3% off.

Now I'm really interested in what is the right way of thinking about those deductions because if I understand them correctly, they largely represent the difference between what Basel II modeling will tell you the losses are likely to be and what IFRS accounting actually allows you to take as provisions to your balance sheet. And I'm just trying to -- well asking you if that is a correct interpretation and how you think about that in setting what is the right capital ratios for you to be managing the business towards?

I would concur with your analysis first of all, I think that's entirely right, we do use the accounting definition of core Tier 1 is consistent with the 4% that we disclosed at the full year results, and 170 basis point improvement is entirely on a like-for-like basis. From a regulatory point of view, some of the deductions that are mandated now, principally the expected loss deduction we have chosen to take out of a total Tier 1 perspective, then from a capital point of view, total Tier 1 is total Tier 1, so the targets we have set have been based off the accounting definition.

I think the thing also, Thomas, is this adds to consistency and transparency. They seem to me the most important parts of it, what's in core Tier 1 versus total Tier 1, or as it's -- as long as we're consistent in setting our targets and articulating them to you, we have been consistent in this.

Can I have a quick follow-up, just on the de-leveraging question? Just trying to get a sense of what's really driving it. I mean, do you think at the end of the day it's going to improve your return on equity, because you're going to get rid of a lot of low margin, maybe inefficient assets? Or is it really about helping reach the capital ratios you want to get to?

It seems to me that it's about good business that we're talking -- the balance sheet was too big, as a result of putting ABN and ourselves together. Also in context of the world changing, the balance sheet was too big.

So that's first and foremost, but clearly it does play through into capital ratios, and it will also play through into return on equity. Our cash earnings on cash equity are pretty respectable figures in the first place, but there'd be no harm in improving them. But first and foremost, we start from almost a Prudential point of saying the balance sheet is not as you would want it to be for the current climate, so let's move through that. It does impact on capital and it does impact on RoE as well.

Thank you.

Yes, come here.

Thank you, it's John Kirk of Redburn Partners. Sorry to carry on on the issue of leverage, but I guess I'm interested in whether you can give us an indication of how much actual risk has been removed from the GBM business? Because the risk-weighted assets are broadly flat on the year, and the trading value at risk has gone up quite a lot. I know that there's probably some ABN Amro positions missing from the number given for the full year, 2000 -- or sorry, for the second half of 2007, but it's still gone up an awful lot, between now and then. So how much risk has actually gone?

A big moving part that's probably worth just defining in there John, is Sempra. Sempra came in, in April. Sempra would be about GBP20 billion of risk-weighted assets. So if you took that out, the GBM RWAs are down about ten from a Basel II start, to Basel II half year. And the VaR is similarly impacted by the inclusion of not just ABN Amro, but the Sempra VaR into it. So it's not meant to be a change the risk taking stance, but it just mechanically goes up when you include a business like Sempra.

I mean fair enough, but I guess the position is still the same though, isn't it? That there is as much risk, probably if not slightly more, in that business now, than there was last year, or am I misinterpreting the numbers?

I think one of the lessons of the last 12 months, is there's no one ideal measure of risk. There are lots and lots of measures of risk. You comment on VaR, there's also the market risk input to risk-weighted assets. Actually the market risk input to risk-weighted assets has not gone up by anything like the increase in VaR. The market risk RWAs is driven by a number of things, not just by VaR.

To answer the question, how much risk has been taken out of the balance sheet, is a sort of how long is a piece of string question. We definitely have de-risked it. You'd have to take a sort of dashboard of measures and look at them all, and take a sort of holistic view to say, I can't say it's down 10% or 11.3%, it's just not up -- it's not a question and answer in those terms. But we have de-risked it undoubtedly, and the RWA has been flat, notwithstanding the growth and loans and advances to customers, I think it's the best sort of -- guess, combination of facts to dwell on.

Question here?

I have two questions.

Stop, stolen on the way.

Stolen, don't worry I'll hand it over. I only have two. The first question relates to the unrealized losses of GBP750 million within the AFS, that was driven by ABN assets, but just looking for a bit more color as to what securities drove that?

And secondly, if you could comment on the EUR2.5 billion payment that Fortis has supplied as part of its re-capitalization plan that it says it's owed by yourselves and Santander, as to how much of that EUR2.5 billion is your share, and when you expect to pay it?

The FS [adjustment saying] the total around EUR1.3 billion, of which something like EUR400 [million] or so related to change in value of the Bank of China investment. Of the balance, about half of that related to ABN conduit business. No sort of impairments to flag those change in recurring value of those assets, reflected through reserves.

And the Fortis side --?

On the Fortis piece, on the EUR2.5 billion, it was always envisaged in part of our capital plans and as part of the separation plan, that we would be, both ourselves and Santander, providing some additional capital over and above the tangible equity they acquired with their businesses at the time of the acquisition and that was to say, indicated around the EUR2.5 billion.

There's a plan to do that, by way of a preference share in the second half of this year, and we estimate the impact on our capital ratios will be around three basis points, and that's taken into the plans that we have.

Yes, morning, it's Sandy Chen from Panmure Gordon. Trying to sort of carry on the risk-weighted asset discussion, I think, between Jonathan and Johnny, the -- I noticed on page 60, on the credit derivatives loan item, just on the face of the balance sheet, there's been a big increase, both on asset and liability side, in credit derivatives, from about GBP34 billion at the end of last year, to about GBP63 billion on the asset side, end of June. Now I think Johnny talked about using risk transfer to sort of mitigate any increases in risk weightings.

My question really, is that, given what some others have been taking in terms of CDS write-downs related to counterparty risks, is there a risk that the sort of -- one of -- do you see any counterparty risks in that CDS position, especially keeping in mind that the notional contracts have probably grown from the GBP2.4 trillion that it was at, at year end? And would there be an associated risk weighting impact as well?

The short answer is yes, then the size of those exposures are a function both of nominal contracts outstanding, as well as volatility and underlying asset class. But as we do with all derivative contracts, and we provide a credit valuation reserve against the size of that exposure, and if the exposure has increased to whatever counterparty it is, then we will -- providing, and depending on the underlying financial strength of that counterparty, a larger or smaller reserve is taken into consideration in computing our risk-weighted assets.

And is there a way of building in potential counterparty risks into the market risk assessment or anything in the RWA calculation or will that just have to wait until a counterparty --?

Obviously the more risky the counterparty is, we sort of demonstrated for instance, with monoline, the greater the reserve you put up there. But if you have highly rated financial institutions and banking groups as your counterparties, you'd have a correspondingly smaller number.

Thanks.

Yes, it happens dynamically yes.

Yes, question here?

Robert Law of Lehman. I've got three points, and I'll try to keep them brief. You've, in the past, given the size of your investment portfolio, could you update us on where that is now?

12, I think of the top of my head.

Sorry, but it's a very different portfolio these days. That 12 is mostly made up of ABN assets which are typically fixed income assets. Four of its rental assets, and they have got some equity upside, but eight is much more debt securities type assets, so don't think that we've got GBP12 billion of equity.

Secondly, on the risk-weighted assets question, can I ask you to comment on the effects of pro cyclicality on Basel II, in the second half?

I guess that will depend on the sort of ratings migration over the course of the second half, and the path of how things go. We still -- I think we mentioned at the time of the rights issue, we estimated the sort of year one impact of a 1990 style recession as being in the sort of 30 to 50 basis point range, and probably narrow that down to something like the 40 to 50 basis point range that had been talked about, and that sort of remains our estimate.

Thanks, and finally, could I ask you to give some more color on the increase in impairment charges in GBM up to the GBP300 million? Is there any particular region there or is there any particular type of loan or any particular size of loan that's caused that? Because I don't see how the banks are seeing that at this point.

Honestly, not really Robert. There are half a dozen, there's sort of 30 odd type numbers and there's no common feature to that half dozen, so I don't think it is useful to try and generalize.

The 294 odd does include about 100, just over GBP100 million of an impairment recorded against an AFS security, again as part of the de-risking exercise.

Okay, I think we've one remaining question.

James Alexander from M&G. It's a question about the -- about impairments again. I'm a bit surprised by the small growth in the problem loans and non-performing loans in GBM, given the -- given your well known appetite for rather risky leverage property transactions around Europe. And the German bank did announce a rather large provision couple of days ago, for a -- I think, for a transaction that you were co-leading with them in. They announced EUR250 million, and you don't seem to have announced anything of that size. I'm just wondering what's going on with the Spanish property lending, German property lending that you've been doing?

Well, the answer to the first half of the -- first of all, I don't accept the premise about the -- we're only going to do all the risky lending in Europe, if I can just park that point. Secondly, the definition of non-performing loans and potential problem loans is run by risk, and they bring forward and that's the number, and that is the trend. Again, it probably might reflect the de-risking point, I don't know whether that is why it hasn't gone up so much as you would expect, but that is the number produced by the independent risk department.

And thirdly, Spanish property, yes, difficult markets. We are working with some of our customers there. We are appropriately provisioned today, and very comfortable with that. Who knows, looking forward?

The property exposure in Spain, about three in total.

Okay, well --

Sorry, (inaudible).

Wondered what it was looking like today, it can't be that good, can it, given the number of bankruptcies going on in Spanish property developers and you have been very active in lending to property developers, so I'm wondering what's -- how you're not seeing more?

We've tended to be very much at the larger end, the high quality end, we're not -- we haven't got a big property developer book. We've two or three, maybe four or five names, and they are -- they're pretty good names, notwithstanding the comments that you made about the German bank and our shared exposure there, by and large we're in with the better quality names.

Obviously we're all watching that closely and are working at working with our customers to see it through. But we are provisioned appropriately as of June 30.

Well, ladies and gentlemen, thank you very much for coming along this morning, and thank you for your questions.