NatWest Group PLC (NWG) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Today's conference call will be hosted by Philip Hampton, Chairman of RBS.

Good morning, ladies and gentlemen. And welcome to RBS's annual results for 2010. The figures are of course a big improvement on last year, and a dramatic improvement on two years ago, quite easy to achieve really against two years ago.

Essentially our Core businesses are all making profits that are reasonable to good, in my view. Our Non-Core division has been getting on really effectively with the job of reducing the risks and improving the structure of the balance sheet.

It's fair to say that we had a pretty fair wind I think, compared with what we expected a year ago, both affecting the Core businesses and the Non-Core businesses. But we've also had great efforts from everybody in the business, led of course by Stephen and Bruce, you'll hear from them in a moment. But Stephen's top team, and I think one or two new entrants, are also in the front row, taking a little bit of time off from the front line that they normally inhabit.

One further comment, very briefly, from me. I was talking to the Investor Relations team just yesterday saying the thing that's missing from normal introductory remarks from a Chairman is a point about the dividend. Our dividend of course remains a very large round number, but I do think that if we continue to make the progress that we are currently making, then it will start to be at least a glimmer on the horizon, I long for that day. That will mean that we are clearly and definitively back where we should be in capital markets.

So I'll hand over to Steve.

Thank you, Philip.

Well as Philip mentioned the essence of what we are saying today, and clearly Bruce will go through the figures in more detail as I know most of you want, is that the RBS strategy is on track, we are if anything ahead of where we thought we'd be at this stage of our plan. We beat all our budgets over the last year, maybe that's because they weren't set right, but we did.

We think within that, of course, a headline of moving from GBP6 billion operating loss to nearly GBP2 billion operating profit, an attributable loss still, though not in the fourth quarter, but thanks only to the payment, or provision of payment, on the asset protection scheme.

As Philip mentioned, within that we really have two things going on at the macro level in the bank, the burnishing and improvement of the business that will drive us in the future, our Core businesses. We think the customer franchises are strong, I'll take about these. There is of course a real improvement in the balance as Retail & Commercial comes back, and across the Group our cost and investment programs are aiding that.

Then the other thing reducing risk, terrific progress both in the Bank's balance sheet and liquidity as a whole, and in the specific, if you like, risk concentration that we've earmarked and set aside in Non-Core.

Again in financial terms, although Bruce will be covering this in much more detail, you'll see the metrics of the Core business. As Philip said, actually compare business-by-business, reasonably well already with our competitors but clearly not where we believe they can be, and where we want them to be.

So GBP7.4 billion of operating profit, a return on equity, albeit it's attributed equity within our total mix, just over our cost of capital, but with a much better balance between the Retail & Commercial businesses which are now recovering as the economy improves, and as we do things to them. And GBM, which still has a pretty decent ROE, I'll come back to that.

Interest margin you know, unlike many banks, we've been able to get our cost down even in Core, in addition to the Non-Core reductions, and we've reached our own self-described gold standard of taking in GBP1 of people's deposits for every GBP1 of loan we're making in the Core business, and we're fast approaching that for the Group overall. As I said, at the overall level, risk reduction going well in Non-Core and in our capital strength.

Now I put this strategy slide up not because it's new, it isn't new, it's exactly what you've seen on each occasion that I've stood up, but because I think it's important that we do anchor our discussions on this transformation journey for RBS all the time in the fact that we know how we're trying to play our cards.

We believe that, if we accomplish our goals, that it will represent something that is both achievable and attractive, has the ingredients of what makes companies, and in our case banks, attractive, and we're sticking to it, and we believe it is achievable.

All of that said across the different dimensions, management, disciplines, balance, return, risk, the type of customer focused business we have, all of that said, we will continue to be pragmatists. We're obviously not blind, there are threats out there in the world, there are occasions when we have to reassess strategy on a micro level, and perhaps on a macro level in the light of whether it be regulatory changes, or others.

But for the time being this represents the way we think we can play our cards best, and what we think will be a good result for our customers and our shareholders.

When we look at the targets that we set out at the beginning of our five-year initial phase journey, we think that we have made more than two years worth of progress towards these targets.

You can see in the top of the page that there is a mixture, and it's very important if you like to the way we're managing RBS that we're looking at inputs as well as outputs. We're looking at the balance between measures, not just simply growth, not just simply profits, but the way we accomplish it. You can see across, I think, all the balance sheet measures terrific progress in the return measures on the right track, and when you move into the individual divisions, the same is true.

We have deliberately not changed our 2013 targets at this juncture, with one exception I'll come back to. That's in part because we don't want to duck and weave, and by sleight of hand, adjust things, we want to be able to be judged and for you to judge us from what we said in the beginning.

In part because we think that they're also still achievable and appropriate, and in part because there are -- we think in particular in 2011 hopefully, is the finalizing of some of the key external influences, not just the path of the economy, but in terms of regulation, and hopefully in terms of outcome of the IBC that will influence some of these targets.

Therefore if we have to revisit them in the light of those things, we'll do that in a year's time after the three-year mark of our plan. But for the time being we think that they're achievable.

So let's then, in terms of my slides, divide the remainder of what I'm going to say into these two components, what is happening in our Core business, and then what is happening in risk reduction.

As we have said, we think that the Core results were solid, I suppose that's code for slightly down, but solid and increasingly well balanced. And we think that they compare well for this stage of our journey, business by business, against those we compete.

Of course the key feature is a strong increase in Retail & Commercial profitability despite heavy losses still in Ireland. GBM down to the levels that we thought were normal, and indeed that we were budgeting for the year in terms of markets being weaker. We've talked about the good cost re-engineering, the loan to deposit ratio that we've accomplished across pretty much every one of our businesses.

The new management teams we put in place in 2009 have now had a year, or a year plus, under their belts, so I think we're increasingly seeing traction from the initiatives that have been put in, which of course needs humans to drive them, and I hope that that will carry through and become more visible as each year goes by.

This other slide again is not new, but I think it is important. The Core business of RBS, the business that we're driving forward, we believe is an enduring picture we're putting in place. Disciplines that will last for many years, businesses that have the resilience to last and power us for many years, and a business mix that makes sense, as I said, something about which we will be pragmatic and thoughtful, but we believe makes sense.

As you can see there is a real balance here, whether that be two-thirds Retail & Commercial, and one-third Investment Banking. Whether that be two-thirds of our business that have some kind of international flows, influence, spread of business, and one-third in the UK, or actually 40/60. Whether that be the sharing of costs as the synergies in our IBC submission we put out from these Group balances, we think that this makes sense.

Actually last year and this year showed some of the strengths of that balance as different bits of the business carried us more strongly than others, and that's what we're pushing forward, unless and until anything happens to make us reconsider that.

The key aspects then of our performance start with customers. Again every one of our Core businesses was selected and is being managed to be based on big customer-driven markets where we have leadership positions, all of which we'd like to do better in, nevertheless.

Now of course almost because of that self-definition, the changes year-to-year are often going to be small, even though they can take an awful lot of effort to create. That was good on the downside in terms of the resilience we showed in difficult times.

But I think that we can see that on a range of measures each one of our businesses is starting to make progress, is solidifying its positions, starting to improve. And some of the customer satisfaction, in particular, measures that are lead indicators of the amount of business we do, and in many cases, most cases, the base of business, the type of business we're doing, is broadening out.

Again thinking across how are our businesses doing? And of course one of the things that is important to all of you is how credible are the return targets? What kind of value can these businesses produce? We've put here the three central targets that we established for each of our businesses; return on equity; cost/income ratio; loan/deposit ratio.

Not only to show you that we're making very good progress across all of these, in fact in loan to deposit ratio we're more or less where we need to be in aggregate, we are where we need to be in aggregate. But also to show/ if we just simply look at the return on equity, there are only two of our divisions that are not already at their cost of capital, and obviously Ulster Bank is very much a story of impairment.

In the case of Retail & Commercial, I'll come back to that, there's a story both of the economy recovering and of the things we're doing ourselves to improve income and the productivity of our costs. But we think that this should give us encouragement that we're not on the wrong path in believing that there are strong and credible returns, not just that we can get now but that we can get in the future from our Core businesses.

Let me canter quickly through, and I appreciate as normal these slides are a bit busy, but they're busy not really to confuse you now, or so that I'll talk for a long time to each one, but so you can take them away for reference.

Clearly the star of the show in business terms for us over the last year was the recovery from low levels of our Retail profitability. But I think that what we're pleased with is not just that recovery and that profitability, but how we're doing it.

So we're doing it first with customer focus. Although early days, that's showing through both in terms of customer satisfaction measures, where they are in absolute terms year on year and relative to our competitors.

And in terms of the balance, our weak suits in our Retail franchise from a product standpoint were deposits and mortgages. Our strong suit was obviously current accounts and loans. And our weak suits are improving but they're improving in a balanced way.

We're doing all of that through a huge amount of investment, which is both cutting costs, which not everyone is accomplishing in the retail markets, and investing in the things that can improve our customer service and drive our revenues. As a result that is financially rewarding us, but doing it, I think, in the right way.

Our other big UK division, obviously UK Corporate. A similar story though less marked in the year, that is to say that we do obviously have a leading market share in this area; some of that is in the process of being divested. We're overcoming all of those uncertainties and disruption, which will continue through this year.

You can see we're overcoming it not just in the minds of our customers, where they continue to feel on balance that we're doing a good job, both absolute compared to the past and compared to competitors. But we're also developing the business with better balance, without the two key vulnerabilities that put us on the wrong track in UK Corporate in the past; and that was too much real estate and an unbalanced funding model.

So we've got a fantastic performance as we're really broadening our relationship with clients, getting the deposits up very close to matching the loans we make. And in a market where it's very difficult to shift the balance, and in a market where our lending commitments from the Government put some handcuffs on us in terms of shifting the balance, we are managing nevertheless to rebalance with our property concentration gradually going down, and our lending to other customers going up.

You can see all that also is improving profitability. We're about at the cost of capital for this business. We need to and we believe we can go further.

Our US Retail & Commercial business, again I think the picture, hopefully, that you're seeing is there's some consistency of approach for what we're doing in each of our businesses. And that's we're starting with the customers, and shorn back to its 12 State region, which was the key, the refocusing of our Citizens business.

In our 12 State region we're making progress on customer matrices, both in Corporate and in Retail. In asset terms, we need a rebalancing, we have no issue on funding, in fact we have more deposits than we have loans. So our issue is really how do we do more business with our customers, that's an increase towards the Commercial side.

But by both growing, and of course we were in loss last year, we have an important margin rebuild to do. We've done a lot of that, and we also then have more penetration to drive revenues further with impairments coming down to continue the ROE progress upwards.

In the investment bank, clearly along with many investment banks, although each has their own business mix and fortunes, our results are down year-on-year from what was always in our view an artificial, an unusual high in 2009.

I think we've consistently said to you that we thought a normal and neutral market year for our investment bank at this stage of its development was about GBP8 billion of revenues. For the year, we hit GBP7.9 billion in this year. Whether that's luck or whatever, you can tell me. But that was broadly in line with our budgets, what we expected.

And I think that within that, what is very important, given the outlook for investment banks, is that the return on equity remains decent, just under 17%. If you add the pieces of our GTS, our cash management business, that depend on the investment bank's clients, it goes higher still.

The cost/income ratio, which I think is going to be very, very important as we move forward into a world where there are pressures on capital and on income, is amongst the best in its industry.

So this is, at least, a solid position, a decent achievement in the markets that we've had, and given the pressures and the tail from the restructuring of RBS that's upon us.

And that we're very cognizant that the investment banking part of our industry has a series of increasingly well-defined but still not fully defined headwinds on cost of funding, on regulatory capital, and potentially in income and margins in some of the businesses also affected by regulatory change.

None of us can know for certain, therefore, exactly how this will work though in the coming years. I think that's a feature of all investment banks, one of the reasons why the balance, two-thirds Retail and Commercial, one-third Investment Banking, we think is advantageous to us.

But nevertheless, our starting point from the results that we've produced in 2010 we think gives us a solid base and a line of sight on what we know today to understand how we can at least get back to the cost of capital pro forma for the reduction in ROE for the different regulatory things that are coming back.

The work to get from our cost of capital to stay above 15% or to go back above 15% ROE, which we believe is important and necessary, still has work to do for all of us, is still in the realm of uncertainties for the industry as a whole, but we think that we have a reasonable position to do that, and a solid and defensible set of advantages in doing it.

And we're not mentioning every single business, but the other two businesses that I bracketed together here, GTS and Wealth, again, I think we're doing much the same things. But it's really worth noting, that these businesses, in addition to their own merits in their own right, they really are additions to the Group base.

They're sharing overheads, they're providing deposits to those of our businesses that are less strong in deposits, they're producing high ROEs as part of the mix, although they're each dependent on other aspects of the business. And so I think we like them not only in their own right, but as glue and strengtheners for the overall balance of RBS.

Let me turn to the risk reduction side of the agenda, and as I mentioned, the one target that we are in fact changing today is the pace of rundown of Non-Core. And that is to say that having beaten our targets in this last year, instead of aiming to reduce to GBP118 billion in 2011, we believe that we can get below GBP100 billion, which has some psychology to it, if nothing else. And that's our aim. The endpoint, of course, remains to get rid of all of it or substantially all of it.

Now, in addition to the good progress that we've made in running this down, as you know, we made terrific progress in EU-mandated disposals last year, and I think those were critical, although one of them has yet to be closed. And clearly the insurance sale is pending, A, the turnaround of that business, and B, getting the right sort of value, which we continue to target for a late 2012 commencement of execution.

Although Bruce will mention this as well, what we're trying to do in the pie charts at the bottom left of this slide, is to show that actually, while there is a mix change as we run down Non-Core, every single bit of Non-Core is down in double-digit percent. Every single portfolio.

The Real Estate overall percentage is increasing, i.e., it's going down less fast than the others. That was always obvious, given the nature of those assets, but it is going down. We're comfortable with the balance of what we're doing, although cognizant that there are plenty of impairment losses and losses in sale ahead of us, as we complete the process in the coming years.

But aside from the risk reduction that is exemplified in the specific concentrations of Non-Core, I think one of the things that we feel is a job really well done, more to do, but where we've made the most progress, is funding liquidity and capital, which is, of course, in a sense the Group balance sheet, not just Core or Non-Core.

And that is to say that we've moved ourselves on these big macro ratios, which were at the heart of much of the banking crisis, weakness of banks, we've moved ourselves from outlier to in the strong pack of the world's banks.

You can see that in the loan to deposit ratio, where as I mentioned, we're already in Core at our gold standard, and even for the Group as a whole, we would be better than all but HSBC in the UK, and many other European and other banks.

When you look at the funding need, our dependence on short-term wholesale funding is dramatically down. That was the thing that ultimately brought us down, and is now pretty much in balance with our liquidity resources.

When you look at those on the balance sheet view of life, we have managed to get a nice fourth quarter increase in capital ratios, 10.7% Core. Of course, some of that is dependent on APS, so we're not under any illusion that that's capital that we have to grow and replace, but we also have the benefit that our RWAs are not static. A whole bunch of them are in Non-Core, and over the coming years, we hope to run them off and sell them off.

The leverage ratio is already better than our targets for 2013, in line with the strong international peer group.

When you take all of these things together, capital, leverage, funding profile, we've moved ourselves from being outliers. We are still outliers in risk concentrations in Real Estate, in risk concentrations in Non-Core, and so there's a reason why we've got plenty of work left to do in terms of risk, but I think that the macro shape of the balance sheet and the key things on which it rests are increasingly in good shape.

As we've mentioned, it remains our goal to exit the asset protection scheme in the second half of 2012. It's not economic to do so before then, because we're committed to a certain amount of fee-paying. Even to do it then will require regulatory approval. But we believe by that stage that the risk transfer that the scheme will be offering us will be negligible, and it will be the right thing to do as well as, in shareholder terms, as well as symbolically important.

So, finalizing what I had to say, and before handing over to Bruce, the RBS Plan targets, expressed in a slightly different way, what we're aiming to do, are not changed, and I believe are the characteristics of a strong, valuable, sustainable bank, and for many years into the future can reward customers and shareholders; whether that be starting with the customer, the kinds of markets we're in, the market positions we occupy in those, the balance of those businesses, the returns that we get from them, the risk profile from those returns, or the management disciplines that go into it.

Clearly all of that we hope will in turn translate into a bank that investors feel comfortable with, in terms of transparency and the way we behave, and one which is increasingly wholly-owned, or well on the path to whole ownership, from the private sector.

Finally, outlook. It would be uncharacteristic of me not to give you an honest balance here. But I'll do it back to front. We do think that RBS will continue to make progress. We do believe, in 2011 and in the subsequent years, that our efforts to strengthen Core will keep going, and we'll make progress there; and our efforts to reduce risk will also keep going, and we'll make progress there. And overall, that that will be consistent with the path that we've set out.

We're also conscious that by doing that, in addition to producing the results, we produce extra resilience, and there are times that we're going to need that resilience. There've been times in the last year when things went wrong in our own businesses that might be worse results, in Ireland, in insurance, than we were anticipating. It might be the issues that were in trading markets and around the eurozone.

There will be issues that arise in 2011. They may be economic issues in path of impairments. They may be issues from the path of interest rates, although generally interest rates going up, provided it's not done in an extreme way, we think is positive for banks.

The impairment issues, probably Ireland is our biggest wild card. Bruce will talk some more about that in the Real Estate area. But they seem set to be in the right direction, although there's a possibility, clearly, of volatility.

And then it would be wrong to say that we can't get negative impacts from regulation, and it's clear that being in banking is becoming more costly, both in terms of cost of funding, structure of balance sheets and capital. It's not clear exactly where that will end, and the impact of return on equity and the other key matrices for banks.

We think that it's still consistent with our targets, but there's a possibility for shocks there, and the Independent Banking Commission clearly has, if you look at its terms of reference, a well-balanced set of terms of reference, both on competition, on stability, and on competitiveness of UK financial services, on the contribution to the economy of UK financial services, and on the contribution to the Exchequer, including, of course, the value of RBS shares implicitly in that.

But I think it is clearly, at this stage, unclear whether the Banking Commission will validate the path of international reform or seek to go further in a way that harms some of those objectives.

I mentioned the path to full privatization. We have absolutely no information that you don't have. Of course, the choice of when, whether, and how to sell our shares is entirely that for the Government, through UKFI. And our working assumption is before the IBC results are known or digested, any actions taken as a consequence, any share sales would be unlikely.

But nevertheless, it is our job to try and prepare the Company such that investors want to own those shares away from the Government. We do think that it would be a win/win when that process can commence, and we think actually it will enhance our attraction to investors to know that. And so we're trying to do our piece as we go through 2011 and get close to the time when these things can come on to the radar screen.

So with that, let me hand over to Bruce.

Thank you, Stephen, and good morning everyone. I plan to run through the financial highlights for the Group for Core and Non-Core. And then I'll also talk about the progress that we've made in improving the risk profile on both the left side and the right side of our balance sheet. I'll then offer a few concluding remarks, before turning it back to Philip to conduct the Q&A.

Starting off with the consolidated Group financial highlights. For the full year, note that revenues were up 10%, paced by net interest income growth and lower Non-Core trading losses.

Our expenses were down 4% as we delivered impressive operating leverage. And impairment losses fell by 33%, reflecting economic improvement as well as our risk mitigation initiatives. This resulted in an GBP8 billion improvement in our operating profit.

What I'll refer to as below the line items swung the other way; I'll give you some more on that later. But the attributable loss still narrowed by GBP2.5 billion. I should point out that if you add back the after-tax cost of the APS charge, we were break-even for the full year, and note that we were break-even in Q4 on a reported basis.

Our funded balance sheet has shrunk by about GBP60 billion, paced by GBM and Non-Core in Q4, and Non-Core for the full year. Core Tier 1 was a strong 10.7% at year-end, as we brought risk-weighted assets down in Q4. And our T NAV was about flat for the year.

So breaking down the P&L, our net interest income was up 5% relative to 2009. Now there's two things going on here with offsetting impact, which fortunately net out to be positive.

The first, our NIM, was up 14% to 2.01% for the year, and stabilized at 2.05% in the second half. Asset repricing in the Retail and Commercial franchises has powered this expansion, offsetting the drags from improving our liquidity and funding position, as well as margin compression on deposits. At the same time, earning assets have dropped by 8%, paced by Non-Core deleveraging. This is part of the cost of improving our risk profile and making the bank safer.

With respect to non-interest income, Core revenue was down 12%, as GBM returned to a more trend-line revenue performance compared to the exceptional levels in '09. However, Non-Core had a GBP5 billion swing from a loss in '09 to positive in 2010, as trading performance improved dramatically, reflecting both tightening credit spreads, as well as our de-risking of the complex trading books. The net impact was an increase in non-interest income for the Group of 15%.

Expenses fell by 4% over the course of the year, as our GBP2.5 billion cost program delivered GBP1 billion in incremental savings in 2010. This was partially offset by expenses related to our significant investment program, GBP6 billion of change management over five years, which is designed to strengthen our Core franchises.

The impairment trend has been favorable in 2010. Non-Core is down 41% versus '09, and Core is down 19%. The one business counter to trend has been Ulster Bank, where we took GBP3.9 billion of impairments in 2010, versus GBP2 billion in 2009. We expect impairments in Ireland to remain high through the first half, before likely starting to gently fall.

For the Group overall, we see continued good signs in the lower caseload moving into our workout group. And while non-performing loans, or REILs, have increased over the year, this is largely due to property. Excluding property, REILs are 8% lower than the year ago quarter.

Now turning to the so-called below the operating profit line items. We've been seeing huge volatility in the fair value of own debt on a quarterly basis, but for the full year, the swing was only GBP300 million, as our spreads widened modestly. 2009 saw some chunky items, such as a big liability management gain and a gain on pension curtailment. And 2010 had the GBP1.55 billion hit on APS.

So these items swung by GBP6.6 billion year over year, erasing a big portion of that GBP8 billion improvement in operating profit. Note that for the quarter, these items were a bit less of a drag, driven by the gain on our GMS disposal.

Breaking out our core performance, we were pleased with the progress in our R&C businesses, which nearly offset the anticipated fall in GBM revenues, given their exceptional year in 2009. Note the good cost control as well as the lower impairment losses, which helped the bottom line.

In Q4, our pre-impairment profit, or PBIL, was up 3%, led by net interest income growth and lower claims. Impairments increased by GBP150 million, primarily from provision strengthening against the Ulster mortgage book.

By division, as Stephen indicated, the big star was UK Retail, who performed well across all P&L drivers. This included higher net interest income due to higher NIM and balances, lower costs, as well as lower impairments.

UK Corporate saw a 30% increase in operating profit, largely due to significant NII growth from asset repricing, as well as an 18% drop in impairments. Deposits also grew strongly, up 14% year over year.

Wealth has fought margin compression over 2010, but it appears to have bottomed out, with Q4 showing an 18% rise in sequential operating profit and good deposit growth.

GTS was up 12% for the year, reflecting net interest income growth and good expense management. Note we've shown you the impact of the GMS business disposal on the GTS underlying results in Appendix II of our results document.

Continuing on, Ulster Bank's losses more than doubled, to GBP761 million, as impairments rose by 79% to GBP1.2 billion. The economic situation in Ireland remains challenging, and we're diligently managing our exposures. As I mentioned, we took a GBP100 million latent charge against the residential book in Q4, but otherwise, results were stable. Note that the Ulster PBIL is up 42% year over year, led by an aggressive cost program.

The Citizens business had a nice turnaround in 2010, with the bottom line improving by $647 million. We've been able to grow net interest margin. We've been able to control our expenses to achieve a 38% improvement in PBIL. Impairments have also fallen with the improving US economy.

GBM has a resilient year in the face of a challenging external environment, with revenues close to our GBP8 billion per annum target, and a 16.6% ROE. We continue to manage risk, the balance sheet and expenses, and to execute our highly focused strategy.

Q4 performance relative to Q3 was slightly better than peers, adjusting for business mix. For the year, GBM's compensation ratio was 34%. Total compensation declined over GBP200 million relative to last year, which reflects the return to more normalized top line results.

Lastly, our Insurance business performed poorly in 2010, with a GBP300 million loss. But we are encouraged by recent trends in underlying performance. The second half was a modest loss, but adjusted for prior year issues and unusual weather, we are now run-rating at a profit of GBP270 million to GBP300 million per annum. Our new management team is now fully in place. They have a sound turnaround plan, and they're executing well against that.

Non-Core losses declined by GBP9 billion in 2010, significantly benefiting our overall performance. This was a combination of better trading results as well as lower impairments. Both of these benefited from a better external environment as well as our risk mitigation initiatives.

Third party assets or TPAs dropped 31% over 2010. It's 37% if you take into account the GBP12 billion of signed but pending deals at year-end.

In Q4, we ended up with GBP600 million of higher losses than Q3, reflecting some Real Estate write-downs, some changes to accounting assumptions, as well as disposals.

Impairments in Non-Core are down dramatically year on year, but it's interesting to see the underlying components. Commercial Real Estate is the main area where we still see highly elevated impairments. 85% of second half impairments were CRE related. Other areas are actually showing favorable trends, including some recoveries.

The Non-Core rundown has made excellent progress. We've made strong reductions across each asset class and we are tracking within our target parameters for the program. We are more than halfway towards our ending TPA target of about GBP30 billion in 2013.

The pipeline looks good for 2011. Much of the progress in 2012 and 2013, however, and the associated costs will depend on the recovery of the broader commercial real estate market in the UK.

The Non-Core rundown in 2010 on the top of this slide was a blend of natural run-off and disposals. That said, this clearly was a big year for disposals aided by an improved economic environment as well as low interest rates.

For Q4, on the bottom of the slide, the story was largely disposals. We closed several of our Retail and Commercial country exits. We closed significant aspects of the Sempra JV divestiture and several portfolio sales of largely corporate assets.

Let me now move on to focus on some of the balance sheet improvements that we've made in 2010. On funding and liquidity, what a difference a year makes. We've dramatically brought down our level of wholesale funding; we've termed out a good percentage of that. We've grown our deposits. We've reduced our funding gap and we've improved the quality of our liquidity reserves.

We are now ahead of the strategic plan on each of these measures but we're not complacent. The world is still unsettled and we have continued work to do.

The keys to much of the improvement to date have been our success in deleveraging through Non-Core rundown and our ability to issue term debt in a variety of shapes and sizes. We expect this will continue to underpin our plans over the rest of the plan period.

Our 2011 issuance plan calls for GBP20 billion of issuance compared with GBP38 billion in 2010, where we got a little bit ahead of the curve. We expect our issuance to be balanced across both public and private, secured and unsecured and geographical dimensions.

We factored replacement of the maturing CGS debt into our plans and would expect to have that fully repaid by mid 2012.

Net RWAs increased modestly over the year, by 5% as regulatory factors and less APS benefit slightly offset the benefits of the Non-Core rundown. Our Core Tier 1 ratio remains robust at 10.7%. We feel we are positioned well to absorb looming regulatory changes and still support our businesses.

We've updated our estimates on the impacts of CRD3 and CRD4 on our capital ratios, based on the calculations and clarifications that came from the Basel group. Bottom line, this is pretty much in line with where we thought, but while the overall impact is manageable, there's a fair amount of work to do in GBM around mitigation, as well as the need to assess product strategies given adjusted capital intensity.

APS has been in the news a bit and we just want to make sure we're clear on our position here. One of the issues clearly is the timeline for exit of the APS program.

We currently receive a 1.2% benefit in our Core Tier 1 ratio from the scheme and we get further benefit in various stress scenarios. But nonetheless, as we derisk and we recover, we'd clearly like to exit the program. Our baseline planning scenario is to exit once our fees are fully amortized in late 2012. This will, of course, be subject to regulatory approval.

We continue to stay very focused on reducing our risk exposures. Good progress has been made across all major measures, whether it's country, sector or single name loan exposures. We've also trimmed some lower rated exposures within our Government portfolio.

And while we've done a lot to improve, changing our portfolio takes time and we have further work to do. Note that there's lots of good data on the risk story in our full results document.

Something else that's been in the news a lot lately is Ireland, so it makes sense to do a deep dive on Ireland. Our exposure there clearly merits close inspection.

We've tried to be very transparent and granular on this slide in showing our loan exposures and the coverage ratios in both Core and Non-Core. We've suffered our biggest losses to date on the Non-Core CRE development lending book. 75% of that book is now REIL.

Given the weak Irish economy, another area we've been watching is our residential mortgage exposure in Core, with REILs up modestly versus the 6.5% at the end of Q3.

Overall, we feel comfortable with our provision coverage for each of these books. We do anticipate further REIL increases and therefore, provisions will remain elevated. But there's some encouraging underlying trends in the economy and we're hopeful that impairments will start to trend down in the second half of the year.

We do remain committed to the Irish market, which should be attractive in the medium term, once the current economic situation is sorted. In spite of major headwinds in 2010, our operating results, pre-impairment, have continued to be quite favorable, with expenses down, PBIL up and deposits stable.

Another laggard in 2010 has been our Insurance business, which fortunately seems to be turning around on an underlying basis. Our new management team has focused on improving really all aspects of the business; pricing and underwriting, claims processing and the size of the expense base, with a goal towards getting back to a 15% to 20% ROE performance.

We are focusing on less risky drivers in the Motor business and, as a result, we will take some top line contraction but we should benefit from much better performance on claims.

Making certain adjustments to second half claims, which we show here on the top right, we're probably in high single digit ROE territory currently. That's better but there's clearly more to go in 2011 and 2012.

So to sum up, we're pleased with the progress we've made so far. Our Core Retail and Commercial businesses are recovering well; they're gaining strength, while GBM has remained resilient in spite of numerous external challenges.

Our Non-Core and our EU disposals have progressed well, substantially improving our risk position and making us less complex. And our balance sheet looks much better than it did across all key measures, be they liquidity, funding or capital. So, good so far, but still lots to do.

With that, let me turn it back to Philip to conduct the Q&A.

Thank you very much, Bruce. I hope you found they were two very comprehensive presentations. I'm sure there are no questions but if there are, perhaps you could give your name, rank and serial number before you kick off.

If I could have two or maybe two and a half questions please. Firstly, on the US business, you talked in your remarks about the falling retail balances, falling deposits, high unemployment and the double dip in the US housing market. I guess other than the distant dream of rising US rates, could you just provide a little bit more color on the actions you're taking to get the business fit for purpose or allegedly fit for sale?

Then in GBM, I note your forward-looking guidance of around GBP8 billion for 2011 revenues and your guidance has been rather good here in recent periods. Just going back to the Q3 call, I thought Bruce made some interesting comments around your product build-out in GBM. So should we be thinking here about some offsetting impacts from RWA management? Or is GBP8 billion maybe a big round number not worthy of too much detailed analysis?

And then finally, just a point of clarification. You've reiterated your intention to exit APS in late 2012. Should we think about a cancellation of the continuing subscription around the same time? Or could or should that happen earlier? Thanks.

On the US business, we certainly will benefit from a cyclical recovery. We have an asset sensitive balance sheet, so higher rates will benefit us. Improving real estate markets also will further benefit impairments. So you're right to say that a big part of the walk from where we are in mid single digit ROEs back up to double digit ROEs comes from that cyclical recovery.

In addition, though, there's a new management team in place. They do have a very concrete plan to run each of the businesses, both the Retail business, Consumer business and Commercial business better.

We're investing in MIS to learn more about our customers, to do more cross-selling to our customers. We've benchmarked ourselves against best in class institutions in the US and we have programs in place to basically do the blocking and tackling better and generate more organic growth.

So I think it's a combination of both the cyclical recovery, plus some of those more mundane but equally important blocking and tackling initiatives.

Second one, do you want me to keep going or do you want to take GBM?

On GBM, I think that in the short run, probably the big round number is the most constructive answer we can give you at 2011 although there'll be lots of volatility within that as is the nature of the beast. January and February have started stronger as they traditionally do but I think it would lead us still to be in that kind of zip code.

As you observed, our plans for taking the business forward do contain a balance. Part of it is about strengthening the things we're already good at. Part of it is about restructuring those things in order to mitigate some of the regulatory headwinds; the ways in which inventory is held, the ways in which risk is held. There's a lot of technology investment which is relevant both to that and to the cost of delivery of our Core market shares, our Core products to our customers.

And then there remains part of the plan to strengthen some of the areas that are contiguous to where we're strong and allow them to make decent returns and to fill out what we're doing.

Emerging markets would be one of the examples. Bits of our Credit business would be another example, though clearly, some of that is already very strong and the Equities business would be third. But I think those kind of build-outs are unlikely to move the dial dramatically in 2011 and so we would be looking in the same kind of zip code, markets permitting.

Contingent capital?

Yes, on contingent capital, I guess we'll make decisions all the time on shareholder value compared to the risk profile and the FSA stress test. If I was a betting person, I would say that we will prioritize getting out of APS before we prioritize getting out of contingent capital. I think that's the right shareholder order of priority and so, my guess is that the contingent capital would be an item for another day.

And, of course, the other thing that we will watch very closely is the growth of what I'll call the private contingent capital market, which I believe will grow successfully and the regulatory picture as it relates to the value of that versus the value of holding straight equity. Because clearly, one of the things that all banks will have to do is optimize that balance once it becomes clear what balance is required.

Two questions. The first one maybe to you, Philip. Just intrigued by your comments on dividends. I was just wondering, if you achieve your targets, say, already by 2012, or at least you're back to good profitability, would you consider paying a dividend even against Stephen Hester's wishes. For some reason the B shares haven't converted into ordinary shares. My first question.

Second, just a couple of questions on below the line items. First of all if you can update us on your expectation of the UK bank levy.

Secondly, just could you give us an idea of what type of restructuring charges you're expecting to take for 2011 and '12, and if you can confirm that you're not expecting to take any in 2013?

And finally, just if you can give an update on preference share dividend and other below the line items, coupon payments, that will reappear some time in 2012 and 2013. Thank you.

On the dividend, I think the words I used were, it may become a glimmer on the horizon. So I'm looking anxiously at the horizon, but it's certainly premature to start it now. And obviously we've got a lot of ground to cover in terms of conversion of B shares and all that sort of stuff before it really becomes a reality.

But our progress has outstripped our expectations, and if we continue to do that, maybe some of the thoughts here will be accelerated. But it's certainly not for now, for this year.

Bruce, do you want to do the second point?

On the bank levy, we had some guidance in the document today that GBP350 million to GBP400 million was -- if you took a snapshot of the balance sheet at year-end, it would be in that territory.

Obviously we continue to work to reduce some of the drivers of that, and so hopefully that's the high water mark for that tax. But that's a rough ballpark for what it would be in 2011.

I think the restructuring charges, we would expect them to stay reasonably elevated, maybe down a tad, in 2011, but we're still going through significant change; and that's in Business Services, GBM, UK Retail. So there will continue to be, I think, a high level of restructuring charges in 2011 before those start to tail off a bit. But there are likely to continue to be some in 2012.

And then lastly, on the preference share dividends in 2012. At this point, if we continue on the trajectory that we're on, we would anticipate turning back on those coupons. Because obviously if we're going to pay a common dividend, we have to have those coupons turned back on.

The EU stop ends in May of 2012, and we would be basically through all of those coupons by about November of 2012, and then we would be in a position to consider, if we wanted, to reinstitute a common dividend.

Can I just clarify then? So in 2013, roughly what are you expecting for the coupon payments to be, because I know you've exchanged quite a few of them?

We haven't given guidance on that. It would be quite a bit lower than it ran when we had them all outstanding. But we can maybe take that one offline and give you some color on that.

Two questions. One on the Non-Core; if you could just talk a bit more about the fourth quarter. Two aspects; one was the accounting adjustments on the monolines. Is that effectively a one-off accounting adjustment?

And if you take that and the fair value of the write-downs, do they apply to assets which are still on the balance sheet at the end of the year, or are they in any way associated with crystallizing losses on the run-off?

The first question, on the accounting adjustments, those are on very complex trades, and periodically we'll look at certain assumptions we have underlying those trades, including the estimated life of those positions. They surround complex asset-backed securities and mortgage-backed securities.

I think in general we're very prudent in terms of how we look at those positions, but we've made additional extension of life assumptions on some of those positions, and we took about GBP160 million charge, which I would say is additional prudence. I would certainly consider than a one-off.

We've gone through the book; we've brought BlackRock in to actually model all those positions, and they're very consistent with where we have those positions marked.

On the fair value write-downs, there's some year-end marks relating to some Real Estate positions which are held in partnerships, which come through late in the year. We try and estimate those. So I think there was a bit of catch-up related to that aspect more than having those related to some of those disposals.

There was about, overall, above the line in Non-Core results, around GBP260 million of disposal losses in the quarter. There was about another GBP220 million which was over in the below the line items, netting off against that GMS gain. So the total disposal cost was around GBP500 million in the quarter, which we had flagged on the third quarter guidance.

And just to follow, I was just thinking about the trade-off in your mind about accelerating the Non-Core. Should we think about this as increased disposal costs in 2011, but offset by obviously a lower overall Group funding cost as those assets run down? Would it be reasonable to assume disposal costs increase?

I think we take that as we go. I think we've been very disciplined in terms of balancing off the need to reduce risk, and also preserve shareholder value. So right now the GBP12 billion of deals we've signed, all of the associated costs with those disposals were recorded in the fourth quarter. So that's part of that GBP500 million that's been reflected.

We still have about GBP30 billion of total run-down beyond that, so if you start at GBP126 billion and our target is GBP196 billion, there's about GBP30 billion to go. About 60% of that is incremental disposals, and 40% of that is natural run-off. Natural run-off has no costs associated with it. We'll have to see how it plays out in terms of the costs associated with those additional disposals of what's in the pipeline to hit those targets.

But again, we're balancing, overall, getting to the number at the end, with not pushing on a string and waiting for markets to value assets appropriately where they think that's fair value to trade them.

Raul Sinha, Nomura. I can't help being worried about your Irish impairments, despite the additional disclosure you've given. So, if you could give us some guidance on how big your provisions might be, going forward, that would be really useful.

Just looking at your -- just considering, for example, the Commercial Real Estate book, and looking at the development part of that across Core and Non-Core in Ulster, it looks to be about GBP10 billion in size. You've got GBP2.8 billion provisions on that, which implies a haircut of 28%.

If you look at what [NAMA] is talking about, that looks to be in the range of 60% haircuts. Even the most conservative lender in Ireland, it's about 44% of a haircut. And somewhere between those two numbers would imply that you need roughly GBP3 billion of provisions more. Would you be able to help us with some guidance around what we might expect?

I think the chart on slide 38 of the slides that I went through lays out pretty effectively what those coverage ratios are. That development book, at GBP6.3 billion in Non-Core, has 44% provision coverage, which is pretty consistent with where the market is. The market's probably mid 40%s to mid 50%s.

We indicated that we think REILs in that book are at 75%. That will continue to go up, so we'll continue to provide heavily against that through 2011. I would anticipate though, as some point, everything that's going REIL has gone REIL, and you've got your provision to a level you're comfortable with.

Again, these are secured properties. The ones that had very thin security, that had maybe just land, are written down very heavily. But then there's other ones that are fairly well advanced, and either close to having tenants or -- those would be less impaired.

So I think we're in the pack, and I think we're comfortable with where we're provided at this point.

I thought the coverage ratios of mid 40%s or 50% is actually across the whole book rather than just the Commercial Real Estate book.

No, these are the percentages right here. So you can see those little boxes on the top lay out exactly what the coverage ratio is by asset class.

And you have to remember, one thing is that if you make comparisons with other banks, you have to go apples to apples, and not apples to pears, because we do have a very sizeable residential mortgage book here, which is GBP22 billion of our GBP50 billion-odd. And that book only has 7% REILs. And so you would not expect to have the kind of provision coverage against that book as you would against Corporate or Commercial Real Estate.

Two questions. Firstly, if I look at slide 4, one of the targets that looks to have changed is -- it looks like you've gone from a Retail and Commercial ROE of 15% to 20%. And I think also you've moved to a 9% equity allocation.

So I was just wondering, is 9% -- do you think that's consistent with where you think the regulator will finally pop out? And also is that consistent with what you think you need to get to your AA rated credit rating?

And second question is on loan to deposit ratio. I think you've done a phenomenal job in the UK, getting the loan to deposit ratio down. I think if I add in Wealth, it looks like you're about 100% loan to deposit ratio now in the UK.

I think the question is really, are you now in a position where you think that can stabilize? I think one of your big competitors looks like it might be trying to emulate what you've done, so can you take the foot off the gas in terms of deposit gathering? Thanks.

Just taking your different questions, just on the last one first. I think that we, in the aggregate, don't need an improvement in the Core loan to deposit ratio any more, although we obviously do want Non-Core to run down to get the Group down.

There are still some improvements in individual businesses, but what we really want is for there to be growth in the economies we serve so that we can both make more loans, extend more services that produce fee income, and match that with further deposit growth.

And so it's clear that an element of getting to where we wanted to do, a large element has happened, but what we would really like is something that produces some income growth for us whilst doing all the things [we're] on expenses. And clearly that's path dependent a little bit, in economic terms.

We're still not quite at targets for UK Retail; not quite at targets for UK Corporate, but you're right, we've made very good inroads.

In terms of the allocation of capital, and where the regulatory debate is going, we don't know. You have on the one hand the big US comps trying to say that 7% is well on the way to where they need to be in Core Tier 1 ratios, and so on and so forth. You have people debating ranges well up north from that.

And then I think you could have a range of arguments about Retail and Commercial versus Investment Banking. Clearly most people have got their guns trained on the Investment Banking side in terms of capital support.

But also if Retail and Commercial is the focus of obviously great public sensitivity about not being allowed to go down, about being protective, it's going to have to have the right capital structure.

So, we don't know the answer. We just didn't want to be accused of overcooking our ROE numbers by keeping things low when clearly our Group Core Tier 1 ratio is a fair amount in excess of these. And even though a lot of that should apply to the risk of Non-Core, it was really just to say, this is still a picture that's got to unfold, but let's keep on the cautious side of life. And even for those more stable businesses, let's nudge it up slightly.

But where it's going to end up, there's a denominator and a numerator that's moving, and I don't think we have better information than you do.

In terms of the rating, I guess that also, I think, is very sensitive. But in a funny sense it's not just sensitive to capital issues and to ongoing earnings and franchising issues, which all bank ratings are sensitive to, but also the whole sets of debates around mechanisms in which losses can be attributed, bail-ins, all these kind of things.

And so I think what we feel we need to do is make sure that the different dimensions of our business, whether that be franchise, whether that be earnings, whether that be leverage, and so on, compare favorably with the best people against whom we compete.

And obviously, in a sense, what the rating agencies make of that, then becomes out of our hands, but the issue for rating for us, is really a competitive tool. That if people are to deal with us, either as counterparties, or putting their life savings with us, or whatever, they mustn't feel insecure in dealing with us.

So our issue is really about relative financial strength rather than an absolute number, which I think will still move around as the rating agencies grapple with, on the one hand, much safer banks, from the regulatory and capital and balance sheet reform that's happening. And on the other hand, a new set of moving parts, in terms of how the capital structure might operate at crisis.

Can I just come back onto the point you raised on loan growth? I know the, clearly, I think all the UK banks have had a big challenge from the deleveraging in the corporate sector. But that looks like it's now coming towards an end.

With the targets that you've been set, do you think we should expect loan growth to turn positive in 2011, in the corporate book? And Bruce, I was wondering if you could give us any guide, just touching on your revenue point about the sensitivity to the Group margin for interest rate rises? That would be kind.

In terms of the corporate book, we actually, in our release, and I forgive you for not having got to that page yet, give the fourth quarter data; and as you can see in the fourth quarter, there still is a net repayment.

So in other words, the most recent trends are, although gross lending is outperforming the targets, there still is a net deleveraging going on, and so that's the extant trend.

Obviously, if that trend reverses, no-one would be happier than us, and we're certainly available in there with the resources to support it, but that's where we are today.

On the asset sensitivity, we do have a table and a Company announcement that shows 100 basis point rise, by a shock, would increase our net interest income by GBP0.25 billion. And so that number was higher last year.

One of the reasons it was higher was because we took in a lot of capital from the Government, really late in the year, around Christmas, and we had it invested in cash, in effect.

And so, as we put that money to work and swapped it out the curve, that created more base net interest income. It's one of the reasons our net interest income was up so nicely last year. But it's muted some of that asset sensitivity.

I do think, in our planning scenario for this year, we're still looking for a couple of modest increases in UK rates, in the second half of the year, and nothing in the US. Obviously if that accelerates and there's another one, that could be favorable to our outlook, given the asset sensitivity.

A couple please. One on GBM, and one on the UK Retail and Corporate businesses.

Just on GBM, the 16.6% ROE that you disclosed, just wondering about the Basel 3 implications, so the GBP88 billion to GBP100 billion RWA inflation. How that's allocated between Core and Non-Core, what the impact would be on GBM ROE, notwithstanding any mitigation effects that you may be putting in place.

We break out that split between GBM and Non-Core at about 60/40, GBM/Non-Core. So the GBP140 billion-ish number of RWAs in GBM, would increase to about GBP200 billion. So that 16.6% pro forma comes down to about 12%.

If you overlay that, I think in terms of our overall mitigation, obviously rundown is a big part of it, in Non-Core. In GBM there'll be some modest rundown.

There's model work that we have to do, so one of the ways to mitigate the counterparty increase, is to move from standardized models to advanced models, and we have that process underway. Those obviously would have to be signed off by the FSA, but we're making good progress there.

And then we'd also look potentially to hedge some of our counterparty exposures; once the full rules are clear and our models are in place, there may be opportunities to trim further on that.

At this point, we're not calling out a significant revenue impact. There could be some revenue impacts, particularly from the hedging, but I think those would be manageable. And so what you're really left with is, how do you walk back to the targeted ROE of 15%, which I think all investment banks have to grapple with. And that's something that we'll be looking at.

What the post-regulatory change ROEs for each of the desks, and each of the activities that we have, are, and how do we re-jigger and adjust the business model, to bring it back to the 15%.

We have time on our side to do that, we have smart people in the Group, as do all investment banks, and so we do have confidence, that over time, we can figure out how to sustain an attractive ROE in the business.

And of the GBP140 billion, RWAs, can you tell us how much is currently standardized versus advanced?

I don't know if I have that from the top of my head, do you John? We can take that offline.

Quick question on Retail and Commercial, really just on their -- on the margin progression. So UK Corporate was flattish in the fourth quarter, Retail saw continued progression, but also a big increase in the deposit base in the fourth quarter.

Very helpful from a funding perspective, just wondering what that means as we move into this year, in terms of margin progression, for those businesses.

Look, in Retail, as we've said, the driver of the net interest income progression this year, was asset re-pricing. We've pretty much spent most of that, so we're about 90% through on our asset re-pricing.

With respect to the liability side, we've had -- I think also borne most of the brunt of re-pricing and hedges rolling off. But what we're waiting for now obviously, is an increase in rates, and that could give us an opportunity to further improve that NIM.

The NIM overall, at slightly over 4%, is getting to levels that, if you look at the five-year high for Retail's NII, it was probably about 420, so I'd caution that trees don't grow to the sky here, but I do think there's a little bit further room, once rates start to rise, for the NIM in Retail, to go further.

As Stephen indicated, what will drive NII, I think, ultimately, is going to be deposit balance growth, and then continued asset growth that goes with that.

A couple of questions. Firstly, I was just having a look at slide 28, and the rundown of the Non-Core assets. It strikes me that the rundown of the third party funded assets, GBP63 billion, was very good, but the pace of the rundown of the risk-weighted assets only shedding GBP17 billion, was a little bit slower.

I was just trying to work out when do we see that big downstep in risk-weighted assets, in Non-Core, particularly because you've got CRD3 coming in at the end of 2011?

And the second question was just on your exposure to Irish financials. I see that you reported around a GBP3 billion exposure to Irish financials, if we include the Central Bank, in your lending book. I was just trying to work out if there's debt you hold of Irish banks as well, that could be a potential concern. Thanks.

So on the Non-Core, you're correct, the TPAs have come down faster than RWAs. Some of that RWA relates to regulatory changes, and so we have a situation, particularly in some of the GBM structured credit product and exotic trading book, where the measurement of RWA intensity, relative to underlying economics, sometimes gaps out.

And so one of our challenges here, over time, is to figure out how to effectively collapse that difference, with what we think the underlying economics are. And that could be risk mitigation trades, i.e., capital relief trades, or an early disposition of some of those positions.

So that's really the principle thing that's causing that gapping. And as you say, the CRD4 will further exacerbate that a little bit. So that's been the principle cause for that difference.

Your second question was on Irish financials. I think most of the exposure that we have in Irish financials would be through GBM, and through counterparty arrangements, where we feel comfortable with any secured lending arrangements we have there. I don't know, John, if you want to add to that.

I just wanted to follow on from Ian's question about the US. One of the key strategic reasons you've always had for maintaining Citizens within the Group is because it improves the funding mix of the Group.

And yet now we're looking at a net stable funding ratio of over 100%, and improving. I just wondered how you see Citizens fitting into the Group now, given that one of those key strategic priorities seems to be fading.

Well, I think that the balance that Citizens gives to the Group remains an important attribute, whether that be in terms of funding, or whether that be in terms of geography, or whether that be in terms of our Retail and Commercial balance versus our Investment Banking balance. And the additional synergies we can get from that.

So balance continues to a reason. However, what we've always also said about every single one of our businesses, the argument is no different for Citizens than the others, is that each of our businesses has got to be attractive in its own right, to shareholders. In addition to being additive through synergies, and through balance.

Now clearly, as Bruce has pointed out, we've made more than $600 million earnings turnaround in the last year, in that business. We're back in the black, but we're not at an acceptable ROE for the long run. And we think that the business has the capability to do better.

We think that that's the most valuable thing that we can do for shareholders, is to move it better. And if we are right, in being able to make it very valuable in its own right, in addition to valuable as part of the mix, then the same argumentation would go as would go for our other businesses.

Could I just ask you, going back to the Non-Core? I think at the beginning you gave us some estimate as to what you thought the total cost of the Non-Core run off was going to be in broad terms.

Could you just give us some sort of idea in terms of your planning assumptions now, at what you think the total costs are going to be for running down the remaining assets?

And I guess the subsequent or related question, is there an interest rate sensitivity to that? If we're into a rising rate environment, would you expect costs of the Non-Core run-off to increase or decrease?

Well, I think where we have given guidance is the range of impairments that we would likely anticipate over the period 2009 to 2013.

We posted that early on in the recovery, as a rough GBP20 billion to GBP30 billion in total of cost. And I think we, at this point, have incurred about 75% of that and are on, certainly, a down path. And our current view would be that we'd end up, hopefully, barring unforeseen changes in economic conditions, to be on the left side of those goal posts.

We haven't commented specifically on the frictional cost of disposals, and I gave an answer earlier that obviously we take that as we go, and manage that in terms of the balance between hitting the end target and then also preserving shareholder funds.

And we have, to some extent. Commercial Real Estate was always the asset class that was going to go towards the end. You may have noticed in the charts, that we've done a good job of reducing Non-Core Commercial Real Estate. It's actually down in the high 30s, adjusting for the transfer in of the Ulster portfolio, midyear. And so we've made some good progress.

But again, there'll be more of that late cycle, in '12 and '13, and effectively what the strength of the economy is, and where interest rates are, will have an impact on whether there's much and how much frictional cost exists in liquidating that tail of that portfolio.

Two quick questions, both related to your guidance on interest rates, on the impact of higher interest rates, you have mentioned GBP250 million. Should I assume that that's Group and if that's Group, could the impact on Retail, UK Retail, follow similar proportions?

And then the second one is, what about the net impact, i.e., after potential increasing impairments, would you expect any increase in impairments because of rising rates? I guess your answer is going to be not much if rates are moderate, but I would be interested in hearing from you what can be the gain between higher revenues and higher impairments in a higher rates environment? Thank you.

First off, the GBP250 million is a, it is a Group number, so it's a composite of different asset sensitivity at the different operating units. The unit that has the greatest asset sensitivity is Citizens, always has been Citizens, and so just given the composition of the balance sheet, the loan to deposit ratio, the investment securities they have on their book, their position to benefit from an increase in rates.

UK Retail would also, would probably be second on that pecking order, so clearly there'll be a benefit in UK Retail. I think it drops off from there, so most businesses have some benefit but it's not that significant.

And then in Group Treasury we have some offsetting positions to try and manage the overall asset sensitivity, which would work against the center, if you will, and from an accounting standpoint. So that's how it would play out.

I think our view is that there'll be a ramp scenario than a shock scenario is the likely forward path of interest rates. Given a ramp scenario, you're right to point out, I don't think there's a significant impact on borrowers' ability to repay because they're able to make adjustments and absorb those modest increases as they come.

And hopefully then their incomes are going up if they're individuals, or their cash flow is going up if they're corporates. So at this point we're not calling out an impact on impairments from the projected path of rates, which is likely to be gradual.

A couple if I might. Just on the UK Corporate, I notice there was a pickup in impairments and you refer to a number of small/largish items in the impairment line. I wonder if you could just elaborate on that and give us an idea of whether you expect that to continue.

My second question is on cost and that is that you're still a little way above the target of 50% cost to income ratio and I know you're through the GBP2.5 billion program, and in fact you've exceeded that. I just wondered whether you have in mind another program for cost reductions across the Group? Thank you.

Sure. So on UK Corporate, there's nothing alarming in the Q4 number. I think there really is just a couple of one-offs and so when you get into a portfolio that has a bespoke credit profile, you can have a lump together in a quarter and then have an absence.

So Q3 was probably a little on the light side and UK Corporate in Q4 was a little on the heavy side, but if you look at the whole second half, it's following a glide path that appears intact. And I would say, going into this year, we would still expect a gentle fall in impairments in UK Corporate, and so that's our call there.

On costs, we have actually increased the target of the GBP2.5 billion to about GBP3 billion, and so we continue to work on ways to become more efficient. Ron Teerlink here in Business Services is leading a lot of the charge on that.

But I think in an environment where growth is expected to be sluggish, interest rates are likely to stay low and only come up gradually, I think to continue some earnings momentum, we do have to continually review the cost base and we're going to crack on with that again in 2011.

Just a question, I don't want to let a Royal Bank results go past without mention of Commercial Real Estate. I'm wondering if you can just give a brief outlook on where you see that going, because you mentioned that on the rundown of Non-Core, for example, it's one of the areas that has been a bit slower to come off.

And then linked to that, in terms of the new target you've given on the faster Non-Core rundown, which areas, which specific assets do you expect to come off faster? Thank you.

On Commercial Real Estate I think that our views would be similar to those that we've expressed in the past, which is, with the exception of the Irish wild card where of course a lot pain has been taken, I think our judgment is that the Commercial Real Estate market is not likely to have now big step changes.

And what you're likely to have is a market which slowly, over quite a number of years, works itself through. Each year you make a bit of progress but you're also rolling over loans and doing forgiveness and so on because there's not a whole lot of point repossessing things if the asset market underlying it is not going to reward you for dumping those assets.

So I think that this is going to be a slow burn, not slower than I thought a year ago, but a slow burn. And as Bruce has indicated, it's our biggest remaining risk concentration, although a lot of that lies in Ireland but even outside Ireland.

And I think that it will be not only the source of continuing impairments, gradually going down but continuing, but again, as Bruce indicated, both in '11, '12 and '13, disposal losses to the extent that we dispose of some those, I think that's the case. But it does feel to us that the underlying market, while not radically strengthening, is at least going in a flat positive way on both sides of the Atlantic and in Europe.

And on the second part of the question, we have a couple of wheels on slide 30 which shows the size of the reduction by asset class. And if you look at that you'll see that the Corporate, the Markets and the Retail were the three parts of the wheel that moved down most aggressively last year and I think I would expect that to continue.

So that's where there's interest in the assets and the Commercial Real Estate and the SME, which is a very small book, have moved down as well with over 30% reduction from assistance since commencement. But I would expect those to lag a little bit relative to the things that we have been able to move.

On your slide on GBM you talk about the capacity to rebuild the returns in the event of regulatory changes and I suppose we're all thinking about Basel 2.5 and Basel 3.

But realistically, the Independent Banking Commission could impose subsidiarization on GBM. You could find that you could only fund it from its own balance sheet and not rely on the balance sheet of the parent. I wondered just if you could give us some rough guidance on the extent to which those particular costs might be recoverable from reengineering the P&L of GBM.

I think that the, there is no doubt that subsidiarization in any form will be bad for banks and probably won't make them any safer either. But there is just an incredibly wide menu of nuances as to from not very bad to quite bad in terms of destruction of funding synergies, creation of capital, inefficiencies, and I think it's just way too soon to know where that pans out.

If you are reading between the tea leaves, you might think that the focus was more on -- subsidiarization was more on protection of the most retail end and small business end of life than isolation of the investment bank. So that might give some clues as to wherein it lies, but honestly we don't know.

But as I said in my outlook in the statement, I think these regulatory issues are very real and one needs to be really very cautious about them until we can have some clarity in terms of the impacts it can have. But I don't think we're -- particularly on us, but on any one.

Any more? I think we're probably done. I think your questions if I may say so, matched our rate of progress, very impressive. It's good to see you know us so well, so thank you very much. We'll see you next time.