NatWest Group PLC (NWG) 2009 Q4 法說會逐字稿

Okay, good morning ladies and gentlemen and thank you for joining us at the RBS annual results for 2009.

We are now one year into a five year turnaround plan, and I think we've come an awful long way in that short time. The Board is very pleased indeed, with the progress that Stephen Hester and his new leadership team are making.

And perhaps at this juncture, I can actually show that they exist in human form, and ask the new executive team to stand up and show themselves. So there they are; that's the new team.

In 12 months, both the Board and the management team have been completely restructured. We've secured the capital base of the Company, and set out the strategy and performance targets that need to be met. And today's results represent real progress towards our goals.

In the coming year, we intend to be increasingly seen as -- to increasingly show our Core strengths as a business in which to invest. We completely understand that the public capital support we have, makes us unusually accountable to the public and their political representatives, and we respect that in all of our dealings. But it's in all of our shareholders' and customers' interests that RBS is run soundly and commercially.

Arguably, no business issue has attracted greater public attention in the last year, than the subject of bankers' pay. We understand the anger and the reason for it.

In recognition of this, I think RBS has led the way on reforming our remuneration structures. We secured virtually 100%, 99.96%, shareholder approval for our new bonus deferral scheme in our General Meeting in December, and we're also going to put a new long-term incentive scheme to a shareholder vote at our AGM in April.

Uniquely, for this year, as part of the accession arrangements to the asset protection scheme, we also required the consent of UKFI, our controlling shareholder, to the 2009 bonus settlement, and I'm pleased to confirm that as of yesterday we received that consent.

The compensation ratio is probably the most meaningful disclosure we can give on staff costs. The settlement means that our compensation ratio at 27% for our GBM business is competitive against our peer group, whilst also recognizing some of our particular circumstances.

I understand that there is some interest in whether this ratio is flattered by the impact of deferrals between '08 and '09, and I can confirm, it's in the release anyway, that the net of this impact -- net impact of this, on the ratio, would be to take it to 28%, so it's pretty much de minimis.

The Board's decision here has taken into account all the relevant factors; the overall performance of the Group, the particular performance and strong recovery in the Core GBM business, the market impact of policy support from many governments and central banks including, of course, the capital to support RBS, and the overall risk position of the Bank.

The cost of the Bank payroll tax is expected to be GBP208 million in 2009, with a further GBP160 million deferred over subsequent years. And the Board believes that this settlement represents the minimum necessary to retain and motivate the staff, who are critical to RBS' recovery.

We're now going to focus all of our attention on the remaining four years of the turnaround plan. We are both determined and confident that it will succeed, and I'll now ask Stephen Hester to take you through the presentation, and show you how. Thank you.

Thank you Philip; and good morning everyone. Conventionally, I will go through a few of the things about our performance today and our strategy looking forward. And then ask Bruce, who makes his debut physically, in front of you, as opposed to on the telephone, to take you through in some more detail the figures that we have published today. As a number of you have remarked you have a nice weighty tome of additional disclosure, which we hope will be helpful, and points the way to our determination to be transparent and investor-friendly.

So if you like, starting with a recap of what we think we're saying today, where we think we are. We keep coming back to the three goals we have; serving customers well, restoring the Bank to standalone strength, and rebuilding durable shareholder value.

And an important thing today, I'll talk about it more in a few minutes, is that we are reaffirming the strategic plan and the targets we published last autumn. I know there was some debate about whether we'd be able to do that post EU. I'll talk more about that in a few minutes, but we are reaffirming those targets.

And we believe that during 2009, that we have either met or, in the vast majority of cases, exceeded every target that we set out for this stage of the plan. The management change, decisively happened in the first half of the year, and I believe is working well. The riskiest period is behind us, though with lots more to do.

And we see 2010 as a last foundation year. We are likely to be in overall loss as a Group, in 2010, before moving into Group profit in 2011. There are likely to be precious few really splashy indicators of our success in 2010, as we lay the foundations, but they are being laid, and I believe, successfully so.

And our continuing businesses, the reason we're here, the reason we are worth supporting, the reason we believe, that the shares will get past the Government's hurdle rate, we can get the Government off our share register and rebuild value is in our continuing businesses. They all are market leaders in their markets. Their markets are all customer driven, large, enduring. We believe that we can get 15% plus ROEs out of them, even with more equity held, and that they will gel as a Group, as well as individually.

And the journey to that being the story of RBS, of course, involves risk reduction, involves peeling away the things that nearly brought us down. That journey is going well.

We are something like 70% of the way through already, the balance sheet reduction we have to make overall. The funding profile has done very, very well; we'll talk more about this during the presentation. We obviously have tail risk protection in APS. And we believe -- and there are some areas you'll see there, our tone is improving today, that impairments are likely to now have peaked.

So not dwelling really on all the stuff that we think we deserve pats on the back for last week -- last year, but I think in really summarizing it, we were able, from a starting point of a GBP24 billion loss, of a 10p share price, of chaos in our markets and with the Bank, we were able to get our arms around the problems. We were able to make sure that the essential source of value, our customer franchises and the people who operate them remained intact.

We've set out, I believe, a clear strategy and roadmap to recovery. We have the tools to do the job, some of them we've given ourselves, some of them have been given to us through a very substantial external support and we are delivering, so far, ahead of plan.

So, you will see increasingly, the way we present our business, is trying to help you unpeel the complexity that still will sit with RBS for a little while, and allow you increasingly to focus on the investment case, which we believe will become successively clearer.

And the investment case, of course, is ultimately all about our Core businesses, and where we can take them, and I think that we can see that in 2009, we have some reasonably good things to say about the Core businesses, but much work left to do.

I agree that it's entirely, if you like, illustrative this point, but on an illustrative basis, our Core businesses would have had a return on equity of 13%, operating earnings per share, of 4.9p. And what you will also see is that we are beginning to see the upturn in our Retail and Commercial business. And if you think about our business mix, in steady state, one-third of our Group will be Investing Banking, and two-thirds Retail and Commercial.

Now the story of 2009 of course, was about Investment Banking for us and everywhere else, but the story for the future years, as Investment Banking earnings come off, will be what momentum can we generate in our Retail and Commercial, and at what point does that take over and drive the whole Group forward?

And so in that sense, the beginnings of the turn in Retail and Commercial that we saw in the fourth quarter are important indicators for the future. You can see that in net interest margin, and you can begin to see that in impairments. The cost program is also doing its job.

On the rest, away from our Core businesses, as I mentioned on the previous slide, the impairment charges appear to have peaked. We think that they will come down slowly, but nevertheless they appear to have peaked, absent another severe double dip.

We are making great progress on the loan to deposit ratio, both because loans are coming down, but also because deposits are coming up. And in fact, in our Core business it is already at 104%. So if you believe we can get rid of Non-Core you can see how we get to 100%, actually not far distant from here in Core.

I talked about the balance sheet progress, the core Tier 1 ratio, post the APS and the B share issuance is 11%. That's important, because we want that to be able to absorb firstly, another year of loss; secondly, the extra regulatory charges that are coming down the [pipe] in the coming years, that plus future years retained earnings, and leave us in the position where we are adequately capitalized for the future, and we believe that to be the case.

So a couple of slides really on Core, and I think the essence of the year was for all our Core businesses, it was a foundation year in terms of our turnaround plan but, of course, in performance terms, it was a banner year for our Investment Bank, GBM.

But throughout our business, the customer franchises were sustained and intact. The key thing about GBM, and I'll mention it more on the next slide is, of course, all investment banks captured buoyant markets. We were probably middle of the pack, in terms of our capturing, but we had a hell of a lot more distractions as GBM was literally halved in its capital intensity, and despite that, captured that which I think gave the lie to many people, who were not clear about the strength that we had in that area.

I mentioned our Retail and Commercial, very important for the future, it troughed last year, signs are beginning to be positive of the turn, and throughout the Group, cost cutting programs are going to plan.

I won't dwell on this slide at all, you can read it afterwards. It simply provides evidence, partly for the customer franchises being intact, in some instances, for them growing, despite all the things that could have gone the other way last year. And I think it also highlights for you, the strength of our natural deposit franchises, an asset many banks don't have, and which will be increasingly important to us in the new world, a different bank capitalization and funding.

GBM, perhaps an interesting slide for some people; in the top left here, we've gone back to 2007, on the basis that was the last record year for the industry, showing you the GBM results as then reported and then showed you pro forma, Core GBM. In other words, the business lines we are now operating, stripped of the ones we have closed down, and what that would have been in 2007. And then where that went to 2009.

So you can see that our profits of GBP5.7 billion in GBM, like-for-like, compared with GBP1.5 billion in 207, or with GBP3.2 billion if you include the businesses that we subsequently closed down. You can see that balance sheet has halved in that period, from GBP900 billion to GBP400 billion.

The number of people has come down substantially as well. That's a really important restructuring and of course, you can understand why we might be pleased with the results; not complacent, but pleased with the results.

The top right simply shows you where they have been accomplished, and in the bottom left of this slide, the balance which, of course, is not in balance in profit terms; GBM drove our profit last year, but the essential balance of our Group, which we believe is appropriate looking forward.

Now we have long said that last year was an unusual year for Investment Banking, the first quarter in particular. I think you can see in the last three quarters what we regard as a more normal run rate for our Investment Bank. Our expectations for 2010 would be more consistent with that, although it's fair to say that January has started above the more normal run rate trend line. But we always hope the Januarys do that.

And really to say no more in respect of our other businesses, our Retail and Commercial businesses, then last year was a foundation year. They were on their back mostly as a result of the economy; of course, some important exceptions. GTS, a terrific business that I think did very well to have a flat year relative to prior year, our Wealth businesses as well, but in general suffering from the economic downturn.

Nevertheless, we are seeing the signs -- the first signs of recovery, both helped by the economy and by our own efforts. You can see that in the fourth quarter revenues started to come up. You can see for now for two quarters in a row, net interest margin has started to recover, driven by asset margins; there's still quite heavy headwind on the liability side. And we see, in Core impairments plateauing. In Non-Core they've peaked as we said earlier.

So there's not going to be a dramatic renaissance in 2010, but we do think these businesses will improve in 2010, and then that slope of improvement can accelerate once economies and, in particular, interest rates normalize and we can get some relief on the liability margin.

So that's what I wanted to say about Core -- about driving the Core forward. We think that increasingly we can see what those franchises can do. We can have some more confidence in the projections we've made for them. The management are operating their plan well. We have the unusual benefit, as many banks do, of the Investment Bank performance, which we're very grateful for. But we're beginning to see some good things in the rest, which will drive us forward.

A couple of minutes now on the industry and then on strategic plan, I won't take you through these words, you can read them. But obviously one of the crucial strategic issues facing our industry is the change in regulation, the change in capital liquidity requirements and all the things that go with it.

Generally, we are supportive of the initiatives that are ongoing, but clearly the devil lies in the detail. In particular, the calibration exercise for this year and the timetable over which Basel changes will be brought in, which can make a very big difference to banks one way or another and, clearly, will cause inevitable uncertainty for all of us over the next year as these things ricochet around the international authorities. But we're preparing ourselves for them. We're not opposing them. We're just seeking that the implementation be appropriate, with an appropriate period of adjustment.

And just simply to, if you like, highlight really the two important bites that this thing comes in. The first important bite is really the trading book changes which come in at the beginning of 2011. There is still substantial detail to work through to be absolutely sure of the impact.

At the moment, in very rough terms, we think it might cost us GBP60 billion of risk-weighted assets. Roughly half of that is continuing in Core, and half of it is in Non-Core, which obviously will go away subsequently.

Clearly the post-2012 changes, which mostly are about deductions from core Tier 1 and changing the nature of capital, are far too early to give numbers on. They're speculative in terms of both the timing of implementation and what will actually be implemented. But you will see in the 300 or so pages that you've got, disclosure of each of the items on this list as to what those items are now; you can use your own skills to judge how those items will change over the coming years before they have to be introduced; some will go up, some will go down, and with what pace you think they will be introduced. But we'll all be on a bit of a voyage of understanding as we go through this.

The vision for RBS, you've seen it before, I won't again go over it. But we are clear that our Core businesses represent a coherent whole. Something that can be a strong competitor in every one of its markets that make sense in balance together, both geography, by funding, a giver and taker, by type of business that the universal banking model is one that can work for us, and we feel good about that as a competitive platform, albeit one which we have a lot of work to do upon.

I mentioned our targets. As you'll recall we put out some comprehensive targets, unusually last summer. We put them out for the Group as a whole, and we put them out for each of our divisions. We've kept all of those and in your papers are the divisional details, which I don't replicate here.

There was a setback, as you know, in the fourth quarter of this last year with the forced divestitures from the EU, where lots of people worried about the earnings dilution that might hit us as a result of that. And with the Basel changes coming into greater view, the extra equity that banks would have to catch, again I know many of you worried about that as an impact on our returns.

So I'm pleased to say to you today that we are reaffirming the targets unchanged. In other words, we believe that we can make up for those headwinds of divestitures and regulatory change, and still produce the returns we thought we could last summer.

In the divisional detail there's one minor change to the cost income ratio in our GTS business as a result of the GMS disposal. But in essence our position is unchanged. Now of course they're only targets. We might not hit them. There may be lots of things that go wrong. But for the time being, we think this is the right thing to aim for and that we have a reasonable chance of getting there. You'll also see the progress made on this chart in 2009 on many of the measures.

So now let's just turn, having really concentrated on Core business and strategy to, if you like, risk or the rest, and what I'm going to seek to persuade you -- not today, I'm going to give you the concept today, but I hope you will start to believe it over time -- is that increasingly we can see the wind down of Non-Core, the remainder of the risk profile as an NAV adjuster as opposed to a driver of value, as something that is catered for in our existing capital structure, together with the retained earnings during the period.

And as and when you start believing that the risk, indeed, is down to that level, it makes the investment case much easier to deal with. I'm not saying we're there now, but I'm saying we're well along the path to getting there.

And so again, endless detail in your packs, but put very simply, as I said, we're 70% of the way through the balance sheet reduction we need to do. The liquidity improvement has been tremendous and the main effort now is to increase the government bond component of our liquidity as opposed to the total liquidity. The funding profile has improved substantially. The counter-party credit risk exposures you've seen coming down.

And, importantly, in the bottom right here the REILs leading indicator of impairments we believe flattening for the first time in quite a few quarters. If that trend continues that would be supportive of our impairments having peaked, but at least -- but, of course, one quarter does not create certainty, as we all know.

And really not a whole lot to say about the EU disposals. We're very pleased to make a fast start with the most volatile of them, which was the Sempra trading business where you've seen a little over half that business go at a reasonable premium to J.P. Morgan. We hope to get Merchant Acquiring and the UK SME done by the end of this year.

And Insurance, as we've always said, because we think we can improve the result substantially, because it doesn't use balance sheet or capital. And at present it makes a whole lot of sense to save that disposal, or IPO, because it's more likely to be [into] the outer years, and that's our current plan. And we have the other constraints upon us which you're aware of.

So just turning into the final straights of my remarks, outlook. And again really coming back to trying to make a start on helping you to unpeel the investment case; I'll do more on the next slide.

We do see our Core businesses as increasingly the things to focus on as the uncertainties elsewhere recede.

All our businesses should do better, regardless of economic climate, as we work on them and as our management actions over the next two or three years bite. And that's why we've so aggressively started in terms of management actions, cost efficiency, investment, and so on.

And in steady state, the two-thirds of our Group, that would be Retail and Commercial, is very important in thinking of earnings drivers over the next four years.

But nevertheless, even with more capital, even with less favorable markets, we're holding GBM to account to produce 15% plus ROEs going forward.

In 2010 it's early days and there is uncertainty in the world economy, so we can't get too carried away. But our current view would be Core profits will reduce, because we think that GBM earnings will normalize faster than the recovery in Retail and Commercial will offset. That may turn out to be right or wrong, but that's how we see it today, but will nevertheless be healthy.

Non-Core impairments and write-downs we believe will be lower than last year, but still high. And so I expect 2010 to be our last year of [Group] loss, and we'll see how that goes as the year runs through.

We do expect a gently falling Group impairment charge and a gently rising NIM if current trends can be sustained. And of course, we expect to make further progress in the rundown of Non-Core according to the schedule that we've put out.

Now of course, there are economic uncertainties which feed into the credit outlook. And of course, there are regulatory and governmental uncertainties, and there is execution risk to our plan. All of these reduce over time, and there will clearly be a transparency as we go through that.

I think as a sort of post-script to Philip's point in his opening on bonuses, the bonuses that were paid in this Group for 2009 were the Board's recommendation. They were not an imposition and they were not reduced by the outside world. Of course, we reduced them in the sense that we wanted them to be restrained, we wanted them to be responsible, but they were consistent with the commercial running of RBS for its shareholders. And we believe that is the model that we must follow going forward.

And then finally, again starting to help you with the building blocks of the investment case, the business case for RBS I think is clear; market leading businesses in large enduring customer-driven markets; the Retail and Commercial businesses to drive the earnings recovery from here, but GBM being very important to us. A Group that is well capitalized with tail risks ensured; a turnaround story, but with execution risk; and another year of pretty hard slog and low visibility before things get [sunnier] thereafter.

But as we think about the investment case, and again not in any way trying to rush our fences here, as we hit the planned targets in the coming quarters and years, as the external uncertainty, some of which are political and economic particularly this year, and regulatory, start reducing, we think that the RBS investment case will clarify.

And we think that there are really, if you like, three building blocks that have to be concentrated on. The out-year earnings per share driver, where we've given you our view of what we think we can accomplish in ROE, cost income and so on terms.

A cross-check to the risk; if we turn out to be right that the current capitalization structure encompasses the losses from Non-Core wind down, and if the book multiple from that is reasonable, then in a sense that's already in the book as opposed to in the EPS.

And of course, there will be, for some period of time, valuation complexities around how to think of getting out of APS contingent capital, in particular the B shares, which will take some time to resolve. But nevertheless I think that this onion will be peeling in front of your eyes, and hopefully we won't be crying as that process goes through.

With that I would very much like to hand over to Bruce. Thank you.

Good morning. I'd like to walk through the consolidated financial highlights and then break that down into an analysis of our Core and our Non-Core results. I'll then comment on our key funding and capital considerations, along with a progress report on how we're managing risk.

Comparing full year '09 to '08 results, revenues increased by 43% while expenses were up by only 7%. This drove an improvement in PBI losses from GBP0.5 billion in '08 to GBP7.7 billion in '09. However, impairment losses were up by GBP6.5 billion in '09, reducing the operating loss improvement to GBP700 million.

Our attributable loss in '09 was a smaller GBP3.6 billion, reflecting gains from liability management exercise and curtailment of benefits in our pension plans.

Last year's significant attributable loss of GBP24 billion reflects a GBP16 billion goodwill and intangible write-off.

For the fourth quarter income was up 6% sequentially, and we had a pre-tax profit reflecting the pension curtailment. All in all, signs of solid progress.

At the bottom of the schedule, take note of the progress in terms of funded asset and RWA reduction. Core Tier 1 ended the year at a robust 11%, reflecting the benefit of B share issuance to HMT, and the APS, RWA relief. Our TNAV is now slightly over 51p. The decline in Q4 reflects the B share issuance at 50p, and an increase in the pension deficit.

A big driver of our improving performance over the second half has been rebounding NIM. During Q2 NIM reached a [NATA] of 1.7%, but that's increased in Q3 to 1.75% and in Q4 to 1.83%. This increase has been powered by improvement in asset margins in our Retail and Commercial businesses. We've been able to book new loans at higher margins in these businesses, which has more than offset pressure on deposit margins.

Of course, one other drag on the NIM has been our effort to strengthen our liquidity and our funding position. We now have GBP170 billion liquidity portfolio, with GBP20 billion in FSA eligible government securities and a percentage of wholesale funding that's greater than a year in maturity now stands at 50%.

That said, we should be able to continue to absorb that and post stable to improving NIM in 2010. And as rates rise in 2011 and beyond, that should boost NIM further while deviating deposit spread compression.

Another driver of our improved operating performance in 2009 was the positive operating leverage I referred to on our first slide. Our cost to income ratio has improved to 59% as our cost reduction plan delivered GBP1.3 billion of benefits in 2009.

The overall uptick in expenses reflects growth tied to higher revenues as well as foreign exchange. We do plan to bring expenses down on an absolute basis in 2010 as we continue to implement our cost reduction initiatives, and we rundown Non-Core.

So let's focus now on our Core performance. Core operating profit was up 89% to GBP8.3 billion as GBM drove higher revenues, and positive operating leverage was 23%. While impairments were up by GBP2.2 billion, they have leveled off and stabilized. The illustrative ROE for our Core activities was 13% for the year. Q4 results, adjusting for selective one-time items, were broadly stable with Q3.

So, scanning through the Core divisions on the next couple of slides, let me offer the brief following observations. UK Retail PBIL was up 10% versus '08. We've made excellent progress in attracting new customers, improving our service model while lowering costs and gaining mortgage market share.

Unfortunately, we suffered a GBP600 million plus increase in impairments, largely on the Personal Loan portfolio, reflecting weak economic conditions. The good news is that the PBIL momentum will continue into 2010, and impairments will level off, driving better profitability.

UK Corporate showed stable PBIL versus '08. Loan volumes were up as customers delivered. And NIM dropped in the first half but rebounded in the second as asset margins have expanded. Expenses were tightly managed, declining by 7% year-over-year.

Again, similar to UK Retail, impairments were up over GBP600 million reflecting the weak economic environment. But as with Retail we expect UK Corporate to perform better in 2010 with modest growth in PBIL combined with lower impairments.

Wealth operating profit was up 21% in 2009, given 5% income growth and tight expense management. That said, the low rate environment and competition for deposits has continued to challenge the business.

GBM was already covered by Stephen. Suffice it to say, they had an outstanding year in refocusing the business model and taking advantage of market conditions. The first half of the year was clearly above trend-line, but the business was able to generate GBP2 billion in income per quarter in the second half, which is back to trend levels.

I'll add that this year, so far, we are pleased with the performance of the businesses to date.

Continuing on with GTS, operating profit was essentially flat with '08. Compression on deposit margins continues but balances have resumed growth in Q4. Outlook is stable for this business.

Ulster has had a tough year. Impairments were up by over GBP500 million, reflecting the weak economy in Ireland. The business has taken steps to strengthen PBIL through pricing and expense reduction initiatives, but 2010 will be another tough year on the credit side.

The US businesses at Citizens suffered mightily from lower interest rates and higher credit costs, resulting in a small loss in 2009. We do expect actions taken to bolster the NIM, as well as the improving economy, to return Citizens to profitability in 2010.

Lastly, Insurance had a rough year as net claims were up by over GBP600 million, including a GBP448 million additional charge for personal injury claims resulting in a steep drop in operating profit.

Significant revamping of the business is occurring on the pricing, [expense], underwriting and claims processing dimensions which we believe will result in a bounce back year in 2010.

Moving now to the analysis of Core, a snapshot of impairments shows that most divisions have stabilized, save Ulster, at relatively high levels. We would expect to see some improvement over the course of 2010.

So let me move on to Non-Core. Year-over-year, not a pretty picture; Non-Core lost a little less money before impairments, about GBP1 billion less, but impairments jumped by over GBP4 billion, resulting in a lost of GBP14.6 billion.

One bright spot though is that both impairment losses and operating loss have narrowed for the second consecutive quarter. Non-Core's Q4 operating loss annualizes to about GBP10 billion. So while that's still significant, the trend is in the right direction.

TPAs were down meaningfully in 2009 and RWAs dropped sharply in Q4. We continue to look for economical ways to accelerate the run-down of assets and trading exposures.

The next slide on impairments gives more detail on losses by [standing] division and by asset type. GBM and UKC drove the biggest losses, which were centered around property and manufacturing assets. We expect impairments here to remain at a relatively high level in 2010 given the nature of these legacy exposures.

Total assets declined from GBP343 billion to GBP221 billion over the course of 2009. Of the reduction, GBP53 billion was in derivatives and GBP65 billion in third party assets, of which disposals and run-off accounted for GBP47 billion. This is GBP15 billion ahead of Non-Core's 2009 TPA reduction target.

So let's move on to the Group balance sheet and we'll cover funding and capital. Our total balance sheet has decreased by almost GBP700 billion since the peak, and about half of that is on the funded balance sheet and the other half in derivatives.

As you know, we bolstered our capital ratios through B Share and APS in Q4. As a result, our leverage TCE loan to deposit core Tier 1 ratios are certainly much improved versus a year ago.

As we run-down our Non-Core assets we facilitate our ability to achieve better loan to deposit measures which we expect to continue over the planning horizon. This gives us comfort with respect to rollover risk on wholesale funding in light of the winding down of government support programs. We simply won't need as much wholesale funding as our Non-Core assets run off.

We still have work to do, however, to enhance the quality of our liquidity portfolio and to continue to lengthen the maturities of our wholesale funds. This will continue on a steady but gradual basis over the planning horizon and the cost is included in our NIM guidance given earlier.

The new liquidity and funding guidelines by Basel and the FSA are directionally in line with our plans.

On the capital front we gained 5.1 percentage points of Core Tier 1 during 2009. The biggest positives were B Share issuance, 4.4%; net APS RWA release, 1.6%; and the liability management exercise in the first half, again 1.6%. These moves more than offset the attributable loss and other impacts.

Let me continue on to briefly cover the progress that we're making on managing risk. But first off, I'd like to say we've developed a much more effective risk management paradigm in the short time I've been here under the leadership of Nathan Bostock working with our line managers and their risk teams. Having said that, we still have significant legacy issues to work our way through.

The headlines here are that RWAs are down in Q4, credit metrics are improving and we're very focused on cutting some of our tall tree exposures.

Now first on RWAs, we suffered from pro-cyclicality over Q1 to Q3 but this was less of a factor in Q4. We focused on restructuring and hedging of exposures to monolines and CDPCs where feasible and this, combined with tightening spreads on underlying assets, is showing benefits.

In addition, customer and our own deleveraging are also having an impact. And, of course, APS will provide about GBP130 billion of relief based on the current composition of our balance sheet.

Going forward, we expect several negative impacts that will have to be absorbed. The first is the impact of migrating ABN assets to RBS Basel II, which, including the roll-off of historic capital relief trades, should increase RWAs at mid-year by about GBP15 billion. This estimate reflects mitigating actions we plan to take, plus the fact that we've already absorbed GBP8 million higher RWAs in Q4.

Next is the new Basel proposals on market risk and securitization treatment to be implemented in 2011. We would expect the impact after mitigation to be a further GBP60 billion. Now most of the additional capital required to support these higher RWAs in our Core segment will be allocated to GBM, who will be tasked with maintaining targeted return on equity.

I've covered impairments already at some length but I think it's worth noting, however, that REILs were flat in Q4 relative to Q3 after previously showing significant increases. In addition, the case referrals into our workout group, GRG, has declined sharply over the past two quarters.

So while the trend is definitely better, we still have a lot of inventory to pass through the [pipe]. Rest assured, we've bolstered our resources in this area and we have highly skilled personnel all over these assets.

We've made good progress reducing our legacy credit risk concentrations in areas such as country risk, sectors and single names. We've implemented new frameworks, policies and limits in each of these areas. It would be fair to say, however, that the process of de-risking will take time. This is a multi-year program and there's still much more to do.

So let me conclude by offering a few key takeaways.

Certainly the strength of our Core franchise was demonstrated in 2009; our operating profit up 89%. GBM had outsized performance in terms of the contribution in 2009, but we're starting to see signs that the Retail and Commercial business is gaining momentum as we head into 2010.

Our fourth quarter NIM strengthened after downward pressure earlier in the year and I'd say our outlook is clearly stable to positive. The Group impairments have shown signs of having peaked. Our capital position remains robust at 11% core Tier 1 ratio.

We've reduced a lot of balance sheet risk; there's certainly still plenty there but we're hard at work on it, total assets having decreased by GBP696 billion in 2009.

And lastly, as I said again, I think that rebounding performance in Retail and Commercial and the smaller losses in Non-Core bode well for 2010.

So with that I think we're ready to take some questions.

If you introduce yourself and your organization as appropriate before you ask your question that will help our organization. Why don't we start over here?

Good morning. It's Ian Gordon from Exane BNP Paribas. Three quick ones, if I may. Firstly, could I ask you to add some color on your comments around NIM in terms of the underlying 2011 rate rise assumptions you have by country, timing and approximate quantum?

Secondly, on capital I noticed that you referenced your remarks around your strong base to your Core capital measures. Can you just update us firstly whether your views on the necessity of preserving your Non-Core capital have moved on since November? And, additionally, under what circumstances might you seek release from the contingent capital subscription, or more specifically the cost thereof?

And then thirdly, just to help me with the rather more modest 2010 dilution arithmetic, can you advise firstly whether any share-based compensation will be issued with new shares or whether you'll be buying shares in the market to satisfy it?

And secondly, apologies if I've missed it, but do we yet know what proportion of holders of the $1 billion and GBP200 million convertible preference shares have exercised their conversion right? Thanks.

Well, we may as well start as we intend to continue.

I think your first question was on the NIM. I think you want the 2010 [out]. You said 2011 but 2010. I think if you look at the fourth quarter we posted a 1.83. There's a few unusual items in that that I'd say in Non-Core, such as some restructuring income, it's probably closer to 1.80.

But if you looked at 1.70 up to 1.75 up to 1.80, we're seeing about a 5 --there's been about a 5 basis point improvement over the last two quarters. That is being led by a dynamic in the market where we're able to re-price rollover facilities and new loans attractively. How long that continues is a question, but I think currently it seems like we have momentum in that space.

On the liabilities side it's still intensely competitive for deposits and we have some of the swaps rolling off. It's still showing some compression on the liabilities side.

So I think broadly speaking we would expect to see, as Stephen described, a gentle continued improvement in NIM. Potentially the things that could take us off that are changes in the competitive situation that change our ability to get the margins we're getting on the asset side would be one thing. And then potentially changes in the shape of the yield curve; the level of interest rates can also have an impact to that.

Second question was on, I think, the amount of capital and how we're thinking about capital. I think in general, and Stephen, you may want to weigh in on this as well, but we have, I think, a very robust capital ratio recognizing that we're still in a loss-making situation, for the next few quarters in any event. And then we also we have the regulatory uncertainty around some of these Basel capital proposals.

So I think having more capital, a war chest, if you will, is a very good thing to deal with some of these things going forward. And as Stephen indicated, as Non-Core runs down I think we'll see what kind of capital management flexibility we have. But that probably won't be evident until some of the Basel proposals clarify later in the year.

Do you want to add any anything to that, Stephen?

Well, the only point on APS and continuing capital is -- really what we said is that it is not economic for us to get rid of those things until we're at the end of 2012. But somewhere in the 2012/2013 it's our ambition by the end of 2013 to be out of both.

The last one on dilution, clearly we're very sensitive to the increase in share count that's taken place to now. And so as we think about how we're funding the employee bonuses and these conversions of these preferred securities, we're going to be very mindful of that. I'd say we're not going to give explicit guidance today as to what the amount is, but I think in general it won't be very material.

Thank you.

Okay. Who's next? Why don't you just sling it along?

Peter Toeman from HSBC. In slide 41 you've kindly given us the net stable funding ratio, which I'm assuming is how it will be calculated under Basel III. And commensurate with that there's a wholesale funding proportion, 50% more than one year, 50% presumably less than one year. And I wondered if you -- because you're reasonably close to the 100% net funding ratio, are you actually telling us that the mix of wholesale funding is now going to be, as you show it here, with 50% short-term and 50% long-term and that you're happy with that particular mix?

Well, I think we would expect to see that improve, that wholesale funding, and part of it relates to what we said on these slides about the run-down of Non-Core.

So if you looked at wholesale funding being 50/50, a lot of that wholesale funding is oriented against the Non-Core asset portfolio. As Non-Core runs down, let's say, in 2010 the funding that will run off is going to be the wholesale funding that's less than a year. And just by dint of that, it's overall wholesale funding goes down, it's running off from the less than one year pocket, the percentage that's greater than a year is going to go up.

So we don't have a real hard target on that. When we see opportunities in the market to lengthen when -- i.e. when market conditions are favorable, we'll continue to do that and chip away at that. But I don't expect significant headwinds on the lengthening on the wholesale funding side.

Where we will still have to -- some water to carry is in improving the asset quality in the liquidity portfolio, taking our FSA eligible government bond portfolio from 20 to 50 over the next four years. And so there's a cost associated with that in the give up of the interest we're making on the collateral that we'll be replacing with those government bonds. But we've already got that baked in. We did a lot of that in 2009, so I don't think that's an incremental impact on the NIM.

Shall we come over here? There's a lady over there.

Yes, it's Manus Costello at Autonomous. I have a couple of questions on UK Retail, please.

Firstly, there's been recent data showing a slight tightening in competition in the UK mortgage market. I wonder if that's something you've felt over the last few months and if you could give us some color on that?

And secondly, in the fourth quarter you saw a drop down in non-interest income in UK Retail as a result of the lower overdraft fees. Have you got the full impact of that in the fourth quarter? And should we roll that forward as a quarterly run rate for next year?

Do you want to hand the mic. to Brian? Do you want to take it?

Thank you. So on mortgages, yes it is becoming a little more competitive, but we've done very well and continued to grow market share and I think we can continue to do that.

There's a couple of reasons for that. One is that mortgage competition at the moment is highly dependent on the availability of deposits to fund those mortgages. We've been doing very well on deposits and that gives us a fair amount of leeway to continue to grow our mortgage book.

The second thing from a structural point of view, that I think is very exciting about RBS, is that our share of mortgages historically is very low relative to our share of current accounts.

And so simply by regaining what I would consider to be our natural share, which is a function of simply fixing our sales processes in the branches, ramping up marketing and so forth, we can take advantage of the strong brands and strong relationships we have to grow that business.

We've more than met our government targets and I think we'll continue to do that. So -- and at very healthy margins, I might add. So mortgages is looking like a great growth opportunity for us.

On the fee side, we didn't see the full impact of the fee reductions that we made in the fourth quarter, although that certainly did flow through. So there will be a continued run rate effect of the overdraft fees in non-interest income in 2010.

We clearly have taken a divot on fee income from the reduction in PPI insurance revenues as well as the overdraft-related fees. Some of that we're beginning to address through pricing on personal loans. And some of that we still have a gap that we need to fill on the overdraft side and we are thinking that through and it will be interesting to see how that plays out in the industry.

Full-year fee impact is what, about GBP200 million (inaudible)

The fee changes that we made in September were about GBP270 million on a full-year basis, so some of that still needs to flow through.

Thank you, Brian. Simon, do you want to --?

Simon's passed me the microphone so maybe I'll go first. It's Tom Rayner from Barclays Capital. Could I just maybe clarify what I think you're saying on the Group margin guidance, which is obviously a gentle increase this year? Is this really saying that the asset repricing -- positive asset re-pricing trends you're seeing all in is going to outweigh the stiff competition you're still seeing on deposits, plus all of the issues of term structure on wholesale and new liquidity rules?

When you whop it all together, is that the answer, that it's a gentle upward trend?

Yes. That's what you've seen the last two quarters and we would see that continuing.

Okay. And within that, the UK we've just heard on the mortgage side, could you give us a feel for how the mix of the product pricing is changing because SVR, I think it said in the release, is becoming more people are now having to go onto SVR, which is obviously much more attractive from the Bank's point of view? Can you give us any figures on where the percentage is today and where you think that might go in terms of the mix of the mortgage book?

And also the deposits, I think savings margins were stabilized in Q4. Could you comment on that as well, please, whether that's sustainable?

Do you want to take that again, Brian or -- okay.

So on the first one, we certainly have seen a shift to SVR, which is helping our margin and will help our revenue growth in the year ahead as well, because the margins are healthier on SVR. And I think as long as rates stay low where they are, that's probably likely to continue. It could turn around if rates start to spike up, obviously, but for the time being that's going to be a good contributor.

I would say -- I forget off the top of my head the exact proportions in variable rate, but I would say in aggregate it's probably around the 30% to 40% range and heading up. And we'll see that continue to flow through. So that will underpin good revenue growth for us this year on the mortgages side.

And sorry, the second question? Savings margins; well, we've continue to see huge competition on the deposit side. Some of the pricing that was going on the savings side in 2009 I think reflected probably borderline panic of some of the banks about being seen to sustain their deposit to loan ratios at reasonable levels. That seems to be settling a little bit, although it still remains very tough.

But I think what the industry has done is increasingly managed the overall NIM and the relationship between deposit pricing and mortgage pricing reasonably effectively. And so I think the indications that Bruce gave are a pretty good summary of how we think we'll continue to manage that.

Thanks very much for that. There was a quick second question, if that's okay. Just on slide 14, Stephen, your comments on the thrust of regulatory change and calibration being a key issue, and it sounds as if if they don't make some changes on some of the proposals you think economic growth could suffer. Is your view that there's going to be a pragmatic solution in the end, which means that some of the more severe proposals actually get watered down, in order to help the industry as a whole get back on its feet? I'm trying to get a sense of what you really mean by that side.

I think in order to be responsible we're prepared for a worse outcome. And obviously -- so we're trying to do our sums, as if these things come in reasonably quickly after 2012 with only modest lags.

However, I do think that there'll be quite a lot of sentiment volatility this year in particular, as different hawks and doves pronounce during the argument process around Basel. What seems to me the case, is that by and large, regulators and central banks feel quite hawkish about tightening up on the banking system, and politicians think that's a great idea until they understand the consequence to the cost and availability of credit, then they think it's a lousy idea. And so there will be a sort of push and pull as you go through there.

My view is that the most likely is simply have a fairly generous implementation period, I don't know, five years, even longer, as things are brought in. And that will be incredibly helpful for us, and one or two deferred tax assets. The most obvious example, where if we have five years to bring that in, is a complete non issue for us, if it comes in straight away, it'll be an issue for a year or two.

So I think deferral or staged implementation is the most likely compromise, but if you think about it, RBS used to run, stupidly, but nevertheless used to run core Tier 1 [of] 4%. We're targeting above 8%, and when you include the capital changes, that's probably another four or five basis points start to finish.

And so RBS would have tripled the amount of capital it holds behind its business. If you multiply that by the worlds banking system, you have a safer banking system and more expensive credit. You won't notice that when interest rates are low, but you sure as hell will notice it when they come up, and I think that will be a really big policy issue that people have to grapple with.

As they say, at the moment if feels to me, they'll grapple with it by pushing the problem out, rather than by backing off the actual proposals, but we'll see.

[Sounds] of course, the height of wisdom at the time. Simon?

Yes thanks, Simon Samuels at Barclays Capital as well. Just on page 20 of your earnings release, looking at your strategic update and your divisional targets, I'm just trying to really understand what you're trying to tell us about the 2011 targets, UK Retail and UK Corporate, because everything obviously suggests that the margins for both those businesses are getting better, and obviously provisions are obviously getting better as well. And yet they seem very modest, just greater than 1% ROE in Retail and greater than 5% in Corporate.

Well, you've got to give us a chance to brag about it, and doing better than our targets sometimes don't you?

Sure.

No, what I said I'd do and what we have done, is we haven't done a full revamp of our strategic plan and updated all the targets. All we did was, we said okay, since August, there are a series of threats from the regulators, that are becoming clearer, and there is a series of earnings dilution from disposals that we hadn't factored in. And so we have only updated the plan for those two things, and those two things are obviously negative.

We believe we can offset them by positive operational income, but we have not attempted to, in a sense, reflect in each of the divisional target, where they could be upgraded. I plan to do that more like on an annual, rather than a semi-annual rhythm. And so I think you're right to point out that there are some of the 2011 targets that are ripe for upgrade, which we'll more formally do on a once a year rhythm.

Shall we go right in the middle?

Hi, thank you very much, Arturo de Frias, from Evolution; three questions also please. First of all, on UK Corporate impairments, you mention in that you think that impairments might have peaked, but in UK Corporate, have already started to fall, and quite noticeably, and I would like your comment on that. Because usually H1 impairments were high, but the macro hasn't strengthened much in the second half, so I wonder why impairments are falling in H2, in UK Corporate.

Second question is on the branches that you expect to sell by the end of this year. You have mentioned that you have, I think, a GBP146 million operating loss in those branches. That compares with an overall Retail ROE of 4%, and overall corporate ROE of 10%. So I wonder why the branches you want to sell are performing so weakly versus the Group in general, and if that could make it difficult? Maybe you don't want to discuss on price or anything like that, but it might be difficult to sell at book value with these numbers.

And finally, one a bit more philosophical question on the target for Retail; the 100% loan to deposits. Obviously 150% was bad. 170% was bad. But why go into 100%? Banking is a leverage business, I think it's reasonably healthy to do a bit more lending than deposit gathering, why you want to go to 100%, is not that a bit tough for the Retail network? Thank you.

Do you want to start with philosophy?

Shall I take two of those questions, and ask Chris to take one specifically on deposits?

On the disposal, the branch and SME disposal, if you broke down our UK Corporate business between SME and all corporate, the SME bit would also be losing money last year, because that's where the impairments worse and the margin improvements have been -- has been slower.

And so what you're -- what I believe is, over time, the particular mix of the profitability of the thing we're disposing, should not be that much different than the profitability of the -- if you like, the host businesses. And we do believe that that business is capable of greater than 15% ROE, once it gets past the impairment peak, and once the costs are taken out, that we're taking out of the business generally.

But that's not say we'll get a good or a bad price for it, but just in order to help you. It is not been an adversely selected business, from our point of view.

On the loan to deposit target, in one sense -- and I can understand, coming from Spain, why you might take the view that also Ireland and the UK took which is, it's fine to use lots of wholesale funding to finance retail businesses. I'm not sure it's helped the three economies to take that view, but the -- we're not tied religiously to these targets. They're -- we're going to always operate with a pragmatic view. And of course, if the market place meant that it was sensible to take a different view we would.

However, as we pointed out already, the loan to deposit ratio of our Core businesses is 104%, and so we're already in the zone. And that's because we enjoy very powerful deposit franchises, which are a great asset of this Group and will be a greater asset when it's straight normalized and we can actually make some money out of it as well.

And I believe that over the long-term, the gold standard for banks has been zip code; as Bruce would say, zip code 100% loan to deposit, which leaves all of your non-loan things to be financed with wholesale funding.

Obviously we have a significant Investment Bank that will largely be funding through wholesale funding, or even -- although even some of that, in terms of structured equity linked deposits, has a retail character. And so I continue to believe that if we are to establish ourselves in the of undoubted capital strength category in the gold standard of banks, that that's the zip code we must be in. Chris?

Okay, thanks. Just on the impairments side, yes, first half we took some extra latent provisions, which we don't obviously have to take in the second half, so we actually found some loans, and we identified them earlier, so we took them as latent provisions. It's about GBP350 million-ish, something like that, first half.

And the other thing you've seen is, as the years gone on, you've seen a decreasing level of businesses that are becoming impaired, so the identifications of those are actually becoming smaller month by month, and that's continued into 2010.

Why don't you pass it on Arturo?

Thank you, it's Jonathan Pierce from Credit Suisse. I've got a couple of questions. The first is on the liquidity portfolio again. From what you've said in the presentation this morning, it sounds like there's about GBP40 billion of government bonds in there, which are not FSA eligible, and the other disclosure on the debt securities portfolio suggests most of that is sub-AAA government bonds.

Can you confirm where those bonds are held, and is this the portfolio you're going to start selling, to move into FSA eligible bonds, and will that create a loss?

The actual math is about GBP35 billion on top of the FSA eligible GBP20 billion. A good chunk of that is the investment we received for the B shares, which we put into T-Bills, because we received that money right around Christmas time. So we have short-term UK gilts for GBP25 billion-ish in the number.

And then there's another GBP10 billion which is basically government held, either in Citizens or in ABN Amro, which is very high quality paper, but since it's not in the PLC, we can't count that in terms of our liquidity buffer that the FSA is requiring.

Okay, I'm with you. And the general increase in the cash balances in that portfolio, is that just a simple function of loans on the balance sheet falling particularly to financial institutions and you're just then parking it with a central bank?

Yes, I think in general, we're much more liquid, GBM's balance sheet was more liquid; the Group balance sheet is more liquid. As loans have paid off we've had additional liquidity, and I think that's a good thing.

The second question is on slide 40, which shows some of the maturing of the wholesale funding portfolio, can I just confirm that doesn't include SLS funding? And whether you're willing to give us an update of -- I know you can't disclose this to the exact amount, but the amount of SLS funding, give or take, that you have relative to maybe CGS.

And on the more detailed net stable funding ratio table, which I think is on page 144 of the release, whereabouts in there does the SLS funding sit? I'm not entirely clear whether it falls entirely into wholesale lending, greater than one year, or not?

Well, the SLS funding, overall, is down appreciably, from where it was a year ago. Go ahead, you want to take it?

Well, I'm not allowed to give the number, but it's not a big number -- SLS is not a big number. It's a small number of -- a very small number of tens.

Thank you.

Good morning, it's Steve Hayne from Morgan Stanley. I just had a question around the Investment Bank. It seemed like a lot of the fourth quarter reported from the US, had significant reductions in their Investment Bank. And both yourselves and another major bank have recently reported -- seemed to indicate that fourth quarter wasn't so bad from a European angle, or at least the [print] that you've delivered. So I was wondering if you could give a bit more flavor on what went actually quite well, in fourth quarter, in the Investment Bank.

And a second and related question is what sort of cost income we should expect in that, for 2010, given what you've just delivered, as you say 27%/28%?

John, do you want to have a crack at that?

The fourth quarter had some positives and negatives in it from the point of view of Investment Bank client flows, particularly in the flow of businesses where we're weak across the market, and were weak for us in general.

But our equities business did well, and particularly in the structured deposits area, where we made some good revenues there. And so, it was really a -- from a customer flow perspective quarter, weak in line with the market. But in terms of the revenue delivery we had a strong equity quarter, and we had a strong DCM delivery quarter as well, from our client franchises. But the pure trading and flow businesses were in line with the market, and we were experiencing relatively weak demand from the institutional flow side.

Looking forward, clearly, when you've got one huge quarter, in the first quarter of 2009 then that is not going to repeat. You're more likely to see the cost income ratio of the ensuing three quarters, to be repeating through to 2010, and beyond. That's probably all I would say.

And in terms of -- I think your subset of that was comp to revenues, and I'm not making a prediction for 2010, but I think the more natural place for comp to revenues for us, is mid thirties.

Thank you, good morning, it's Leigh Goodwin from Citi. I've got a couple of questions on the impairments trend, what we saw in the fourth quarter and how you might think about run rates for 2010.

Just on the -- going back to the question you had on the Corporate side, I noticed you had a negative charge in against house building and construction, and I wonder whether what we're seeing now is perhaps some writing back of any of the losses that might have been taken in previous quarters. That's -- and to what extent therefore, the trend that we saw in the fourth quarter reflected movements in the commercial real estate prices.

And secondly, on -- just on the Ulster Bank, there's quite a big jump in the fourth quarter, to what extent was there an element of kitchen sinking in there, or whether we really on a much deteriorating trend, which we might expect to continue through 2010?

Bruce, do you want to have a go on the household construction write-backs?

I think in general, it's a bit early to spot one number there, where you're seeing that recovery, and to start to bake in. We're going to see a lot of that, so I would just be cautionary. I don't know Chris, if you want to add some --?

(Inaudible).

A small re-class yes.

So it was a [shift]. So across divisions it actually [did] go down (inaudible).

Yes, and then I guess, on Ulster, there was a big top up to the latent provision in Ulster. Given what's happened to the Ireland economy, we certainly wanted to get ahead of things a bit, and so we did a deep dive in the fourth quarter, and that's why that popped up so much in Q4.

Okay, any more questions? I think we're thinning out a bit. Let's come over here.

Hi, it's Joe Dickerson from Execution. I just had two questions. The first being, if I look at your [11B] in the preference shares, I was wondering if there was anything you might do to convert that into tangible common, to improve the capital structure further, because you've done a brilliant job so far of improving the capital structure? And if that may not help you to get out of the APS earlier than your guidance? That's question number one.

And question number two is, in the UK we're seeing record levels of corporate debt issuance, and we're seeing banks lending balances in commercial contract. And I'm wondering if the disintermediation trend will finally take off in Europe, and if this would help you produce more [lost] revenues in GBM this year, because this has been very much a lagging trend in Europe relative to the US? Thanks.

Go on Bruce.

On the first one, clearly, we have a window here to study a liability management exercise, and we certainly are considering our alternatives there. I would say it's not an easy equation, with all the changing regulation around capital quantity and capital quality. We're certainly looking through that and considering what course of action we should take.

I would anticipate that some time maybe mid March, we'd have formed a view, and we'll certainly let you know what we're going to do at that point in time.

Just on your second point on deleveraging and, of course, the capital markets had probably their record ever year, from a bond standpoint, last year. So I think that probably gets worse this year, not better.

And as you know, the actual new issuance isn't the highest margin activity out there, it's in the subsequent trading that's facilitated. So I don't think we would point to any great secular trend there. But it is the case, of course, that as a universal bank, we are able to service our customers when they go to the capital markets, if they're not taking loans from us, and that's a benefit of the business structure.

Couple more questions I think, let's see over here.

Thanks, it's Mike Trippitt at Oriel; two quick questions. One on the non-Core, we've talked a lot about impairments, but I just want to ask you about the income line, which is a game of two halves, positive income in both the third and fourth quarters. Is that -- are there any blips in there? Or should we now think of that as being a positive income, albeit obviously on a declining asset base going forward?

And just secondly, on GBM, you've given clues on '010 and size of the business in the future. But I just wondered in terms of either by assets or risk assets, are you there or thereabouts, in terms of balance sheet size that you'd like the business to be, going forward?

Do you want to deal with the second one?

Yes, again, on the second one first. On GBM, I would say for now, the GBM balance sheet is in the rough territory that we think it should be. The risk weighted assets will inflate substantially with the Basel changes, albeit we don't expect to take more risk in GBM, than we're currently taking, but that won't be apparent when you work through the regulatory changes. But that's how we feel about GBM.

Now of course, it will be important to see how regulatory changes impact all of our industry, but that bit in particular, and there are individual business lines that could be particularly impacted, such as the mortgage business, from the Basel changes. And so I think, at the moment, all one can do in a sense, is have a holding view, pending the working through of some of those things.

On the -- on Non-Core, I don't know whether you want Nathan or you want to take it?

I'll take it and Nathan, if you want to add anything?

In non-Core, we've had some volatility around the trading activity line, so we have the special asset unit there, and we're working down those exposures. The fact is those positions, as the markets have improved, the losses there have reduced, and we've also been taking active steps to restructure, and hedge that exposure, so I think you're starting to see the fruits of that, in the second half of the year.

And we're also I think, have a much cleaner allocation of interest income, and so the interest income levels that you're now seeing in the fourth quarter, we would expect to sustain in 2010. Is there anything you'd want to add?

Can I just sneak in a little follow-up, because the net interest income was pretty double the run rate, Q4 over the previous years quarter, so you're saying that is a sort of -- ?

Well, there's any updraft from our application models internally, as part of that percentage I mentioned earlier. And when I said the 1.83% was probably closer to 1.80%. There was also some restructuring interest that we received, that boosted that number to some degree.

Thank you.

Good, any more? Yes?

Morning, it's Michael Helsby from Bank of America-Merrill Lynch. I've just got one question, just two small points of clarification. Firstly, clearly the US business has been very challenging over the last couple of years, and it feels like with NPLs plateauing, the margin's clearly gone up, and you're signaling a sharp increase, it looks like, for 2010. So I was just wondering if you could give us more color on the US business.

And then, just some points of clarification. I'm trying to read between the lines on your margin guidance. It feels like you're telling us that the 5 basis point increase we've seen in the last couple of quarters is what we should think of as a reasonable trajectory going into 2010. So I'd just appreciate it if you could comment on that.

And also, very appreciate of the comments around the Group still being in loss in 2010. I'm just wondering if you could clarify is that at the operating level or at the statutory level? Thank you.

Do you want to deal with that one?

You're determined to get me in jail one way or the other, aren't you?

No, I think we'll let Bruce deal with that.

I've got the pinstripes on already. Okay, I guess I'll start with -- do we want to offer anything on the US business to start?

Yes.

I would say one thing; I said that the US business would return to profitability, I didn't say sharp. So while I think the conditions draws a small loss in 2009, the things that you're pointing out, in terms of improving pipeline on NPLs and impairments, that's going to be positive. And the NIM -- some of the actions they've taken on the NIM also will be positive. So I think they'll return to profitability. I wouldn't say it's a huge rebound at this point, but certainly it's better to be profitable than unprofitable.

Ellen, you want to add more?

No, I think that sums it up.

Okay. The next thing, on the margin guidance, I don't think we like to be an explicit guidance business of telling you exactly the number of basis points. I think we've said gentle. You've seen 5 basis points normalized for the last two quarters.

And unless -- until we see some competitive dynamic change, or something in the yield environment, or interest rate environment change, that kind of feels okay; something, zero to 5. But there's a lot of things that move from the NIM, and that can be volatile from quarter-to-quarter. So, anyway, that's what I'd say on that.

And on the losses --

I think we should invite our audience here to identify who's been really accurate at forecasting bank profitability or losses in recent years. It's not a fantastic track record. Okay. Now, Robert, you had a question.

Thank you. Robert Law at Nomura. Could I have two questions on the balance sheet, please? Firstly, on the capital position, you've emphasized the strength of the capital position, but I think you regard it in your statement as appropriate, or adequate, which isn't particularly strong phraseology. And I think from the presentation I've got the impression that you view the capital as supporting the run-off in the non-core assets.

Could I invite you to just comment a bit more on this? What would it take for you to feel that you actually now have more than an appropriate level of capital position? And do we, from this, take the view that you expect the run-off the core -- of the non-core assets to absorb the capital that's now backing them?

Well, I think the best way, Robert, to answer that is, that as we've said, our target, where Non-Core is no longer an issue and when the new regulatory rules are in place, is 8% plus. That's what we've reaffirmed for 2013.

Now, of course, you can put square brackets around that if you want, because it does depend on what the new regulatory rules are, and so on, and so forth. And so, and for now I think we're thinking that the 11% that we currently have can go down to a steady state, 8% plus, after absorbing non-core losses and increased regulatory requirements.

But you could easily imagine, for example, if the regulatory requirements came in very abruptly and in a severe way, you could imagine us dipping below that level, particularly in something like the DTAs. Or if the new regulatory requirements came in at a much slower and milder way, you could imagine us having a significant -- substantial -- very substantial, capital cushion above that, which we would then need to decide, if you like, what to do with.

So I do think that we, and all banks, are in a particularly difficult position to comment on these two things. But at the moment, that's probably the best that we can say in terms of our thoughts about capital.

I appreciate it's difficult because of the uncertainties around, but you'd only regard your capital position as adequate, was the phrase you said used?

I would just -- I didn't say adequate. I did say I thought we had a strong capital position. I think I might have even used the word war chest. But I think it's appropriate to have that in light of the regulatory changes, and the forecast for the non-core run-down.

No, I was referring to the CEO's comments initially, but anyway. Fine.

If I move on to the second question, which was on the funding structure, in slide 40 you're helpfully referring to the run-off of the non-core assets and the maturing wholesale funding that you've got. Could I ask you to just comment on what your funding requirements you think will be, despite that situation in the wholesale markets? And do you think the market is responsive enough to allow this kind of run-off to proceed at this point?

And if may ask, what is the total amount of government-backed funding that you have at the moment?

Okay, so just as a data point, we issued GBP20 billion of unguaranteed wholesale funding last year. And I think that type of number is a number that we feel comfortable we can get done this year, without commenting specifically on what those plans are. And, again, some of that will relate to the path of the non-core run-down.

In terms of the government-guaranteed funding, I'm not sure we've disclosed that -- what's that? Is that discloseable? Okay.

For those hard of hearing, it was GBP50 billion.

So that's about GBP50 billion.

Yes, good. Okay, has anybody else got a brilliant and burning question? No, it doesn't look -- Stephen, do you want to say some -- make some final remarks?

Thank you for sitting through all of that. I just, in bringing it together, wanted to be clear where we are.

We are very pleased with the progress that RBS has made last year. We think that we have hit and beaten the targets for that stage of the journey, and we think that that makes the rest of the journey more credible. And, if you like, that positive sentiment is echoed in some of the, if you like, minor body language around NIM and impairments for next year, and the other targets that we have reaffirmed for the outer years.

But we do have to be very, very clear that while the worst year may be behind us, there is plenty of heavy lifting to go, and there are plenty of uncertainties in the world economy. We do expect 2010 to be a tough slog. We are not particularly trying to change consensus for 2010 with this meeting, although hopefully it will narrow.

So, we are still cautious -- cautiously positive turning to more positive in the outer years. And this is a big ship to turn around. We think we're doing it. The people are doing a fantastic job at that, but it still is a big turnaround.

Well, I hope you enjoy your 280 pages of reading. Certainly, it's sorted out most of your weekends, I hope. Thank you all for coming, and see you next time.