NatWest Group PLC (NWG) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. I have to say, morning, mainly gentlemen; not many women in the audience. Just before Stephen and Bruce make their presentations, just let me make a few points.

I think, although it's, in some ways, a chastening year, as Stephen says, it's a year of considerable achievement with our exiting of the APS; repayment of all the liquidity support; resumption of pref dividends; loan-to-deposit ratio of 100%; and the Non-Core business down to GBP57 billion, which probably puts us in the pack of banks in terms of having assets they don't really want to have.

These are all fantastic achievements on restructuring the business. So I think we made excellent progress in all of those areas. And I think that we are now coming to the end of the really material changes that the Bank needed to make in the wake of the financial crisis.

Our objective, as we've said many times, and repeating today, is to get the Bank into a shape in terms of safety, soundness, profitability and income stream to enable the Government to start to sell its shares in a stable business as soon as possible. And if that can be done in 2014, that would be great progress.

It is disappointing that, despite all that progress on the balance sheet and getting the business right, that we do have this very long list, this particular time, of, I think, what you'd mainly call legacy charges. They're not all legacy charges, but I think it's fair to say they are mainly legacy charges.

And whilst I think it would be wrong to say that the conduct risk charges there are all behind us, we hope that 2012 will mark the high-water mark of those sorts of events.

One final thing, if I may. There's been quite a lot of stuff in the newspapers, and other places, just recently about some of the changes that we're announcing today in relation to the asset intensity of the Investment Bank, and in relation to Citizens, and some questions about ownership of those decisions. Is it regulatory push? Is it a controlling shareholder? Or is it the Company?

Obviously, as a bank, in particular, we need to comply with all regulatory requirements. But major decisions in public companies have to sit with the Board. That's, apart from anything else, a simple Companies Act legal matter.

And I can say that the RBS Board has approved all of the steps we're setting out today, taking into account the interests of all of our shareholders. There's no other compromise that we are making.

So, with that, I'll hand over to Stephen.

Thank you, Philip, very much. Thank you very much, everyone, for coming and giving us your time. Normal format; I'll go through highlights of results, some of, if you like, the strategy behind that, and then leave Bruce most of the time to go through the numbers.

As Philip has mentioned, we are extremely conscious that the future for this Company will be bright only if the people to whom you speak, i.e., investors, want to own our shares. They will only want to do that if we do a good job overall as a company and so it's very important to us that the things we do have that end result.

But before getting in, if you like, to conventional presentation of our financial results and our strategy, I do have this slide. I'm sorry, I don't have posters around the room to talk about what we're doing culturally, but we can't escape it.

The banking industry, in addition to putting right risk and physical mistakes, also needs to put right cultural things. We do as much as any other bank; more than many other banks. And, from the very beginning in 2009 of the restructuring phase of RBS, we have been really clear. We need to rebuild this Company as a really good bank.

And that actually starts and finishes with serving customers well. That's the lodestar that the best companies in the world consistently reach. We need to consistently reach that and, along with that, to make sure that we're doing it in the right way. You can see these, if you like, as what we call our purpose, vision and values.

It's not where we started. It's not exactly where we are today. It's where we need to get. And, to use a phrase which isn't here, because the comms guys are scared of me putting it up, but we're calling it thinking outside the Bank.

We need to make sure that our people are thinking of the outside world, thinking of customers, thinking of our impact on everyone in the outside world, and doing it consistently well.

And, whatever else we do financially and in appearing to investors or anyone else, our mission will not be successful if we don't live this more successfully than RBS has in the past, and the banking industry has in the past.

Let me move on.

You will have seen the headlines in what we put out, and so I won't go through these line by line. But I think we feel that in 2012 we accomplished a lot. That's important because we had a lot that we needed to do.

We've still got a lot to do. But we do believe, as Philip said, that we are coming much closer to the end of the restructuring phase of RBS than we have been, and that we can see that light in place and that the business beneath it that will be unveiled is in increasingly solid shape with more work to do.

Safety and soundness are terrific. And, indeed, one of the ironies of today's results is by far the biggest number, nearly GBP5 billion, what put us into loss, is the fact that we are the most improved major bank in the world in terms of credit perceptions in the last year. Which is, if you like, the market's verdict in terms of our fair value and debt charge of the safety and soundness agenda which has been Core to what we've been doing.

You will all see that the operating profits are pretty solid, are restored to a pretty solid level, despite an economy that isn't growing; doubling at the Group level, which is a function of Non-Core losses coming down.

All of our Non-Core targets are being exceeded well; terrific. We are within a year of getting to the place where Non-Core can start taking a back seat, as it were, in the Company, having done its job to close to perfection, I would say.

We have hit key milestones. The Chairman mentioned some of those, beneath all of this.

Our 33 million customers; we're serving them well. We need to serve them better, but we have not been in any way starving our businesses on the way through the deleveraging. The deleveraging has been in Non-Core.

Our UK businesses, as an example, we lent something like GBP75 billion last year; albeit people paid us back a similar amount of money as well.

The financial highlights; again I won't dwell on these. They show, I think, our Core businesses are now in good and solid shape; not growing because the economy isn't growing and our customers aren't growing, but in good and solid shape. Some areas where we need to do work, of course, and the Group showing the weight of charges from cleaning up the Bank, but big progress in that cleanup.

Let me just reflect over, if you like, the four years of the five-year plan; the four years that have now passed. The five-year plan relates only to the restructuring and the rebuilding of the foundations. I hope there will be a 555-year plan thereafter in terms of this Company flourishing.

Safety and soundness; we are almost at the point where we think the job is done. It won't be an on/off switch but you can see the main element left, in terms of the financial envelope of RBS, is to get to 10%-plus Basel III capital ratios.

Obviously, in theory, we have 'til 2019 to do that. We expect to be much closer to the end of 2014 in accomplishing that, and Bruce will talk some more about that later.

But the record is very strong that we have in this area, and I believe we can continue to make it strong, and, of course, some of the initiatives we've announced today will contribute towards that path.

At the same time as the safety and soundness agenda being prosecuted strongly, we needed to get the Core, the ongoing bit of RBS, into shape that, even if economies aren't growing, it produces reliable cash flow right now.

We're still using that cash flow to pay for the cleanup, but it is only a matter of time before it's available for shareholder-friendly usage. And you can see on this chart, if you like, the build our Core profitability. That is despite the shrinkage of the Investment Banking activity.

And so the mix of this Core profitability, at least in share multiple terms, has improved dramatically. And, of course, at 80% retail and commercial and 20% or so markets, I think, is in a positive shareholder value mix position relative to some other big banks in Europe that you cover.

We've tried to make sure that that's built on a foundation of serving customers well. We know we need to do a better job of it, but we're doing a decent job already, and in all of our businesses we have a solid foundation relative to other banks in terms of the Core businesses and how they're performing for their customers.

And, of course, the UK economy, which is important because it's our biggest market, it's important because of our shareholding base, I think we are more than holding our own; remaining by far the biggest lender to UK companies, taking share in mortgages as well.

Let me talk a little bit about conduct. I've talked about it in terms of the reputational goals of the Bank early on, and, as we know, the cleanup from the financial crisis has a financial dimension. It has a reputational dimension that all banks are having to grapple with.

And, as I have said before, my earlier quote is up here, it is a difficult but true statement that too often the banking industry, I think, in the past saw customers as a vehicle for making money rather than the rationale for existence, out of which money comes if you do it well. And that cultural attitude clearly is changing fast.

We have three big bills in this regard that we're reporting on; LIBOR, the SME swaps and PPI. Probably coming down the track is a smaller bill, but still significant, in money laundering; I don't know when.

And on LIBOR, I would say there is still a couple of shoes to drop in bill terms. Once the European Union primarily get round to this with other banks, we'll also see how many other banks are involved one way or another.

But there's no doubt these are wrenching issues for the whole industry, for our Company. They need to be dealt with in the right way. There's no comfortable way to deal with them, and we will do the best we can to put those episodes behind us and gradually get to the point where the conduct cases are ones that are diminishing in scale.

Forward strategy and outlook. As I've said I think that we have done a really good job, which is much closer to the end point than ever before on the safety and soundness agenda.

Gold standard reached already in loan to deposit. HSBC is the only other UK bank that has managed that funding liquidity in terrific shape.

Obviously that also means that, whilst we have the last bits of rebuilding our capital ratios, we are much less vulnerable to market volatility in the meantime, because we don't need to be out there funding ourselves in wholesale markets.

And the funded balance sheet, as everyone knows, is a scale of reduction that no other bank has accomplished.

And the business alignment, again, I think that we have done by far the biggest bits of the change in scale and scope that was required of our business, and a lot of the divestments and so on.

And in Government support terms, although the most eye-catching bit will be our share ownership, actually, in financial terms, the GBP200 billion of liquidity that public authorities around the world advanced us at the height of the crisis, the GBP300 billion of toxic assets that were insured in APS, those are out, no claims, no one's suffering, Government's getting paid back, are a big measure of the way that we have, I think, begun to stand on our own two feet.

What's left to do? Well, of course, in shareholder terms we need to make sure that the Core profitability is up to snuff.

That means a number of our businesses retaining the profits that they've already got at above the cost of capital. It means some of our businesses getting to that level. And some of that will require economic recovery, as we see, for example, in Ireland. I'm hopeful that this will be a year of turn in Ireland. Bruce will talk about that some more. So we need to do those two things.

All banks need their customers to want to grow, in order for them to grow. So, in the meantime, until the outside world delivers us a growing economy, we need to work very hard in the detail of our businesses, and are doing, to make sure that they're capable of making good money in flat economic times from serving customers well; and then, in better economic times, being able to take advantage of that.

And, of course, most importantly, even if we build, protect and have a high quality top line of profit, we need to get through the period where we're using that profit to pay for legacy exposures. And we can see the path to doing that, I think.

In business alignment, it's all is around serving customers well. We have a bit more work to do in Non-Core. We have a bit more work to do on divestments. Not so significant in shareholder terms, the branch divestments, but we have to do it. The remaining shares in Direct Line Group as well.

We have been, I suppose, somewhat in the news in recent weeks and months for our piece of the governmental and FPC and regulator concerns around bank capital. In our case, also shareholder issues of one sort or another.

And, as Philip has mentioned, we believe that we've reached an accommodation which is consistent with the concerns of those very important stakeholders, but also consistent with the future of this Company, in its ability to serve customers well and produce something that shareholders will want to own.

That has two primary components. A further reduction in the capital employed in our Markets business, which will be one of the tools to get the remaining momentum into our capital ratios that we will execute.

I would say that, because of the multipliers involved, although, clearly, our Markets profits will be lower if we're deploying less capital in them, and we'll have some hard to work to do in terms of expenses and other things, I think that the net shareholder impact of the business mix changes should not be a negative.

And, certainly, we are very clear that, as a bank distinguished, in particular, by its corporate footprint around the world, we need to have credibility in the Markets business to serve our customers well. Despite the wrenching issues around LIBOR and so on, we have terrific people in this area who do a good job. And we're grateful for that.

The second element of the accommodation related to the Citizens IPO. In two years' time, we will prepare Citizens for a partial IPO in the US in two years' time. There's no great precision to that number, and, of course, it's subject to market conditions and so on and so forth.

And I think you can think of that in a few different ways.

From an FPC concern standpoint, think of it as contingent capital. It's our emergency ripcord. It's a way of getting capital; making that asset more liquid if we need it. I don't think we will need it for that reason in two years' time, but it is a way of bolstering contingent capital thought of in that way and, therefore, responds to that need of, if you like, the authorities.

From our point of view, I hope that it will respond to a more positive thing. And that is to be able to showcase the value that we believe we will have restored in that business.

You will have seen that every year in the past four, we've increased the profits in that business. They're still not at a level we need them to be.

But a combination of profits increasing, the market environment getting better, us retaining the profits that are being made, rather than just having them in the Bank earning treasuries; a combination of those three things is making this whole process a positive one for our shareholders.

And I think that, in roughly two years' time, that's roughly the time it takes to prepare these things properly, the business should be capable of that sort of appeal.

It's a similar thought process to Santander's, if they ever get round to floating part of their UK business. And I think will enable the business to, if you like, anchor its staff, in terms of share ownership, anchoring the local community, have a currency in the United States for use in addition to showcasing value for our purposes.

So I think that this is a move that both is responsive, in a contingent sense, to the regulator concerns, and responsive to a healthy strong business and good shareholder case. And that's what we will try to accomplish.

Bruce, as I said, will talk more about our forecast capital ratios. But it certainly is our intention to hit both global standards on capital G-SIFI, which is 8.5%, and the Vickers' standards of 10% many years ahead of when we are required by those regulations to do so.

Clearly, whatever we do on the Group and its profitability and its stability, and the business mix that sits behind that, the equity story will hang off those things, but will hang off some other things.

Philip has made the first point, I think, clearly, in his remarks. We do need the Government to clear away the dividend blocker, or Dividend Access Shares, as it's otherwise called. There's no need to do that until we're in a position to pay dividends and profits, and in capital terms. So personally, I think it's unlikely to be 2013 business. I hope it's 2014 business.

Clearly, once that's cleared away, we will want to articulate a dividend policy as quickly as possible. And, indeed, we'll want to start paying dividends as quickly as possible.

And I think, as those will be our contribution to the case for privatization, which then will lie in the Government's hands, partly in the hands also of the stock market and the economy, and how that's doing, but that's how we see that playing out.

Our targets haven't changed. Of course, for so long as the economy remains weak and slow, the return on capital, and cost income bits of that, will be slower to achieve than we would have otherwise wished. Although, as we have talked about, we're, nevertheless, making very good progress in achieving all of the other ratios. And we do believe that our business is capable, in normal times, of hitting all of these targets.

Now, I won't go through the detail of this. We do believe that the RBS that will be left after the restructuring is a company that has the ability to be a high-performing company. Yes, in mature markets, yes, with relatively modest growth rates, but one on which people can depend for dividends, for cash flow, for service to its customers, and with some coherence.

We're not there yet. We've got some important things to do. We can trip up, of course. And people are right to put a discount on that achievement until it's achieved, but that's certainly what we think is possible.

So, in conclusion from my bit of this, I do think that the toughest work in recovering RBS is behind us. I'm very conscious that that doesn't mean to say it's all behind us.

I think 2013 will be tough economically. In conduct terms, we've still got important things to do in capital. And, of course, the external environment, whether in regulatory terms or political terms or whatever, will, no doubt, remain quarrelsome and intense and so on and so forth.

So we are under no illusions as to yet being in the state that we want to be, or in an environment that we want to be in. But I think we do take encouragement from what's behind us.

And we're very clear, the end game for RBS is not about privatization; it's not about cleaning up the balance sheet. The end game is that this Bank is acknowledged by all who depend on it as being a really good bank.

Bruce?

Thank you, Stephen. And good morning, everyone. I'm going to walk you through our financial highlights, challenges and opportunities. So let me start off with our Group performance.

Over the recovery plan period to date, we've delivered a meaningful improvement in our operating results.

Since 2008, there's been a GBP12 billion positive swing in Group operating profit, with increasing traction in 2012, as our Non-Core losses shrink. The GBP12 billion swing is driven by a roughly GBP9 billion decline in Non-Core losses, and a GBP3 billion increase in our Core profits.

Looking into the detail of the 2012 Group P&L, 2012 revenues were down GBP1.9 billion, or 7%, versus prior year; with Core revenues down 4%, and Non-Core declining by almost GBP1 billion.

Offsetting this, however, were lower expenses, which were down by GBP900 million, or 6%; claims, which were down GBP0.5 billion, or 18%, reflecting tighter underwriting standards and better claims management at Direct Line; and impairments, which were down nearly 30%, or GBP2.2 billion, as NPL trends moderate.

The net result is that operating profit nearly doubled, year over year, to GBP3.5 billion.

The below the line items charge, excluding OCA, was GBP4.1 billion; a decrease of GBP400 million on the year. While including OCA, the charge was GBP8.8 billion.

At the pre-tax line, we reported a loss of GBP5.3 billion; largely due to the OCA charge and a goodwill write-down.

Our funded balance sheet declined by 11%, or over GBP100 billion, to GBP870 billion. The asset reduction was driven by Non-Core, Markets and the International Bank.

Core Tier 1 is robust, at 10.3%. That's up 60 basis points this year, despite the loss and regulatory uplift of over GBP40 billion.

Tangible book value per share is 446p, down from 500p on the year; primarily, again, reflecting the OCA charge.

Our Group NIM remained broadly stable. R&C, which delivers 96% of the Group's net interest income, had their NIM decline slightly, as lower funding costs were more than offset by lower benefits from current account hedging.

Markets' NIM increased, as their smaller balance sheet drove lower costs of funding and liquidity.

Non-Core's margin continues to decline, as higher yielding assets roll off.

Core's asset yields were broadly stable in 2012, while the Group's cost of liabilities has been trending favorably, due to deposit pricing initiatives.

Strong expense control is the key feature of our recovery plan. In the last five years, the Group's expenses have been managed down by 18%. In fact, Group expenses are down in absolute terms every year of the strategic plan. In 2012, our costs were down 6% year over year.

The original cost-saving program ambition of GBP2.5 billion has been exceeded by GBP1.1 billion, as benefits now total GBP3.6 billion. Disposals and restructuring have delivered a further GBP2.1 billion in savings.

However, inflation and our targeted investment program have raised costs by about GBP2.6 billion over the period.

Now, we're not done. We are developing plans to further reduce our costs, targeting an impact on 2014. This cost effort will be centered on five key areas, which you can see listed here on the slide.

This work is getting harder as we've picked the low-hanging fruit. However, we've scoped these out and we should have more to report at the half year.

Group impairment trends remain favorable, as we saw a GBP2.2 billion decline in 2012 versus last year. Core impairments were down nearly GBP0.5 billion on 2011, while Non-Core saw a GBP1.7 billion decline, largely due to the Ulster Bank portfolio.

In Q4 impairments ticked up, driven primarily by top-ups to legacy positions in Ulster Non-Core. Core impairments were flat on the prior quarter.

REILs were down over GBP1 billion versus a year ago.

The Group has continued to strengthen its provisioning levels, as yearend Group provisioning coverage of 52% was up 300 basis points on a year ago.

Ulster Core and Non-Core impairments were down GBP1.4 billion on the year; almost all of that in Non-Core.

Though still high, the impairment ratio as a percentage of loans has declined by almost 300 basis points this year.

Note that Ulster provisioning levels have improved by 400 basis points in 2012, and NPLs are beginning to flatten on a constant currency basis.

Now let's look at the so-called below the line items in more detail.

2012 saw a total charge of GBP8.8 billion, significantly higher than last year. Leading the way was the GBP4.6 billion charge for own credit adjustment. And, as Stephen mentioned, worth remembering is that this charge indicates the debt market's recognition of our balance sheet progress.

At year end the net OCA left on the balance sheet is now just a small debit of GBP29 million.

Excluding OCA, the below the line items tallied GBP4.1 billion, which is a GBP400 million decrease from 2011. The biggest items were for conduct-related redress, restructuring costs and a charge for Direct Line Group goodwill impairment. DLG is now carried at the yearend price of 216p per share.

During Q4 we raised the PPI provision by GBP450 million to GBP2.2 billion. At year end, we had paid out 59% of that amount.

On LIBOR, we had agreed a resolution with US and UK regulators, and we took a Q4 charge of nearly GBP400 million.

On swap redress, we've taken a provision of GBP700 million, based on work in our pilot study and reflecting the FCA's framework.

As we move into 2013 we expect the below the line items to decrease on lower restructuring and conduct costs.

Now let's turn to our Core performance. Core operating profit was up 5% year on year; reasonably good, given the subdued revenue environment. To deliver this result we tightly managed costs, and impairments declined.

The Core operating profit has averaged GBP7 billion over the first four years of our recovery plan, as R&C profit growth has offset the impact of our smaller markets business.

Core ROE for the year was 10%; that's 13% ex-Ulster Bank.

Core divisional performance was led by a rebound in Markets which delivered GBP600 million in higher profit and a 10% ROE; and, also, the US Retail and Commercial business, which had a GBP200 million higher profit on the back of lower impairments, and a 9% ROE.

The UK businesses generated good returns, though earnings were crimped a bit by low rates and a subdued economy.

Also noteworthy is that Ulster loss remains stable on the year, and also on the quarter.

For Q4, our operating profit was up 7% in Retail and Commercial, relative to Q3, while overall Core profit was down 7% on Q3 due to the seasonality in markets.

It's worth a deeper look at the progress we're making in several of our businesses.

First, with Markets, we've made good progress on restructuring the business.

Expenses are down 15% from 2010, with 4,500 fewer heads in the business. RWAs have been reduced by almost GBP20 billion to GBP101 billion, despite significant regulatory uplifts. We continue to work hard to mitigate the coming CRD IV impacts, particularly around counterparty credit models.

As Stephen indicated earlier, we will target further reduction in the business to GBP80 billion RWA target by the end of 2014. This will necessarily mean lower balance sheet usage and a smaller expense base to offset the impacts on revenue.

We believe that we will be able to do this while maintaining the strength of our key franchises and serving our customers well. We'll provide further details of this plan at our half-year results.

Note that Markets is an integrated part of the RBS Group, delivering important products to our R&C franchises.

In 2012 we had the baseline resilient ROE of 10%, as I mentioned. But if you add the contributions to divisional returns back, Markets return would be boosted to 13% for 2012.

Looking at it the other way, Markets boosted International Banking's ROE by 4% and UK Corporate's by 2%, and Markets also positively affected Wealth and Ulster returns.

Markets is closely connected to our UK corporate customer base, and here you can see across four key products, including FX and syndicated lending, Markets has the number 1 market position as well as excellent client penetration rates.

Finally, comparing Market profit margins to peers, our business ranked a respectable third place.

Another franchise worth a closer look is Citizens, which continues to make solid progress in improving its profitability. Citizens has an attractive footprint and good scale, as seen by the top-left graphic.

The challenge has been to generate better returns, which has been hampered somewhat by the sluggish US economy and low rate environment.

That said, we've made steady improvement in profitability, with returns getting closer to our cost of equity. Loan volumes have been showing promising signs, with corporate and commercial balance growth of 21% since 2010.

We announced today, as Stephen mentioned, that we'll be taking steps towards a partial IPO of Citizens in a couple of years' time. This acknowledges the progress that's been made and will provide sufficient runway to get the asset ready for listing at an attractive valuation.

Our ambition for Ulster Bank is for a top tier bank in Ireland with an acceptable level of return. After the cleanup process, the balance sheet will be self-funded with a solid one-to-one loan-to-deposit ratio.

Core's business model, asset portfolio and risk appetite will all be attractive, while Non-Core assets will be methodically worked out over time.

We foresee Core ROE approaching 10% by 2016, with a cost-to-income ratio target of 50%, assuming a favorable economic trajectory. We're investing now in improved systems and products to help drive us to these targets.

We remain highly focused on our customers in Ireland. In the Retail bank we have 175 years of history as a foundation. On the Corporate side we offer a local presence combined with global expertise.

Non-Core had another excellent year. Third-party assets were down GBP36 billion, or 40%, to GBP57 billion at the end of the year. Of the GBP36 billion in asset reduction, GBP18 billion came from asset sales and GBP16 billion came from runoff.

In the fourth quarter alone TPAs were reduced by GBP8 billion.

As we enter the final year of the active runoff of Non-Core, we remain confident in achieving our target of GBP40 billion. We're targeting about GBP8 billion of asset sales, which is well below the average of the first four plan years of GBP21 billion. This asset reduction was achieved well within our loss tolerances.

Non-Core's operating loss was GBP1.3 billion lower in 2012 than in 2011, at GBP2.9 billion. The improved performance was driven by a GBP1.7 billion reduction in impairments and a 27% fall in cost that helped partially offset the GBP1 billion fall in revenues.

The revenue decline reflects the lower asset base and associated frictional disposal costs.

The 2012 drop in impairments was driven by the Irish portfolio, as the book was heavily provided for in 2011. Note, we did take a modest top-up in Q4 in order to be prudent.

Looking forward to 2013, we expect the P&L loss to continue to decline. Lower impairment charges are expected to be partially offset by higher disposal losses.

Looking beyond 2013, we expect that the Non-Core rump to consist largely of longer term Corporate assets and CRE exposures.

Our approach from 2014 onward will be to move to a more passive management of these assets, whilst still providing good disclosure to the market.

Core divisions will manage their legacy assets, while our experts in Global Restructuring Group will continue to actively manage down problem assets.

The rump will include good quality credit assets of around GBP20 billion that run off by 2016. The balance will be made up of stressed assets and long maturity, lower yielding assets.

For the next section, we'll switch our focus to the balance sheet and risk. The scale and the risk profile of the Group has been transformed for the first four years of our recovery plan.

Scanning a few metrics, the Group's funded balance sheet has declined by nearly GBP700 billion, or 44%.

At the worst point we had 503 Corporate exposures above our risk appetite; this now stands at 135.

We had CRE growth exposure of GBP110 billion. Today that's decreased to GBP63 billion; well on the way to our target of GBP50 billion.

Finally, daily revenue P&L volatility in Markets has been significantly managed down, with the 2012 levels 68% lower than at the worst point.

So while there's still some more work to do, the progress has been dramatic.

The Group has also re-engineered its business mix to be less exposed to investment banking volatility. This should be rewarded through time, through both improved credit ratings and equity valuation.

Markets' TPAs are down 43% since 2008, and RWAs are down by 33%. As mentioned earlier, we plan further shrinkage from here.

Now, critical to this execution has been our ability to preserve our offering to our UK and Global Corporate franchises.

Revisiting our balance sheet metrics, dramatic progress is once again evident.

We've now met our Group loan-to-deposit ratio target of 100% one year early. Customer deposits now represent 74% of funding, versus 66% last year and only 51% at the worst point.

Our key funding and liquidity metrics have all improved. Our short-term wholesale funding requirement declined to just GBP42 billion, compared to around GBP300 billion at the worst point.

The liquidity pool remains robust, increasing in the last quarter to 350% of short-term wholesale funding, and just about covering our total wholesale funding.

Our liquidity coverage ratio is already compliant with the recent Basel framework; more than six years ahead of schedule. And we're also compliant with the net stable funding ratio; again, well ahead of schedule.

One of our challenges, though, continues to be the buildup of liquidity. We'd like nothing better than to see an uptick in loan growth.

The Group continues to maintain a strong capital position with a 2012 core Tier 1 ratio of 10.3%.

The exit from the APS scheme in the fourth quarter was a significant milestone, which reflects our improved capital strength. The CT 1 ratio increased by 60 basis points year over year, ex the APS.

The key driver was deleveraging and de-risking, which led to a GBP90 billion gross RWA reduction. Regulatory RWA uplifts were around GBP40 billion. Thus, RWAs were down around GBP50 billion on a net basis.

This RWA story will continue to play out similarly over 2013, as we work hard to shrink and de-risk, in order to mitigate further regulatory uplift.

The market has moved on to focus on fully-loaded Basel III capital ratios, so it is worth providing some detail.

We estimate our 2012 FLB3 CT1 ratio, that's a mouthful, at 7.7%. This ratio is projected to improve in 2013 to around 9%, due to further RWA mitigation and further rundown of Markets and Non-Core RWAs.

Of our capital deductions, note that we believe our expected loss calculation is on the prudent end and our DTAs offer stored value.

For 2014, we project an even stronger FLB3 CT1, as we return to profitability.

Next, let's look at some of our future challenges.

We clearly take note of the FPC industry concerns, and we're working hard to ensure we're in the right place on these matters.

On RWA intensity, we've been through a program with the FSA that increases RWA intensity. Combined with Basel changes, we believe that the end result is a capital framework that reflects the underlying risks that we're taking.

On provisioning, we have steadily built our provision coverage ratio to achieve strong coverage ratio of REILs; certainly ahead or in line with peers.

We've taken a prudent view in our yearend accounts of an incremental GBP250 million management overlay in our latent provisioning; primarily related to commercial real estate assets in the UK and in Ireland.

Our expected loss calculation, as I mentioned, provides further protection, using conservative, stress, LGD assumptions.

On conduct-related matters, we accrued GBP1.55 billion in Q4. We anticipate some further costs in 2013, though we expect a more manageable level.

With respect to capital more broadly, we believe we're on a trajectory to achieve and sustain a robust capital framework. We've set our medium-term core Tier 1 ratio target of 10%-plus. This exceeds both the G-SIFI and the ICB ring-fenced bank requirement.

With respect to our total capital ratio, we target a buffer on top of core Tier 1 of greater than 5%; made up of Tier 1 and Tier 2 debt. At the end of this year, that buffer was 4.2%.

To achieve our aim, we require further issuance in 2013 and '14. Note that there'll be around GBP4 billion of maturities and amortization over the same period.

Our preference remains for straight LT2 instruments, though we are carefully considering the merits of a CoCo feature.

The current Government contingent capital facility, with a 5% CT1 trigger, is providing less value to the Group. This terminates at the end of 2014, unless we can negotiate something earlier.

There's been much speculation as to the status of the EC-mandated branch disposal process. Key points to note are that, A, the business continues to perform well, with a 2012 ROE of 16% and an 84% LDR.

Next, there's an encouraging level of interest in the business, although execution will be challenging. We're fully engaged in completing the separation of the business, including establishing a standalone technology platform.

It is likely we'll need an extension to the EC timeline in due course. And there's several ways we can go, in terms of the transaction. But the baseline case is the creation of a standalone bank.

Okay. Let me wrap up.

With respect to outlook, we offer you the following. Group NIM should be stable, but gradually up over 2013, given reductions in wholesale funding costs and expensive deposit funding. Lower hedge income will provide a partial offset.

A wildcard, though, is avoiding the buildup of liquidity if loan growth fails to materialize. We project 3% growth outside of the runoff books.

On operating expenses, costs will remain tightly controlled. And you should expect absolute cost reduction at the Group level again this year.

We expect further improvements in impairment levels over the next two years which, again, will be led by Non-Core.

Markets' performance is, as ever, market-dependent. So far, Q1's performance is running in line with our expectations; behind Q1 a year ago, but ahead of Q4.

And we remain confident of hitting the GBP40 billion Non-Core TPA target. And we do expect our P&L loss will decline again.

To sum up, we feel good about what we've accomplished over 2012 and, more broadly, over the first four years of our recovery plan.

As Stephen indicated, 2013 is another year focused on risk reduction and paving the road for a brighter future.

In 2014, we would like to start a new chapter as a clean, normal bank, where we can build capital organically, start to grow the balance sheet and engage in capital management strategies which are positive for our shareholders. It's been a long, hard road but we are getting there.

With that, I'll turn it back to Philip for the Q&A.

Thank you, Stephen. Thank you, Bruce. I always think after such a comprehensive presentation there can't possibly be any questions, but we know you better.

I have two questions. First, on dividends. The 10% target for 2014, is that how we should think about dividends?

So the question is, if paying a reasonable payout, say, 25%, 30%, gets you below 10%, would you do that? Or it's just all to about 10%?

I think we can't answer the question yet, because the -- if you like, the two gating -- the three gating points are, number one, we've got to produce some profits to pay a dividend out of; number two, the Government has got to find a way to remove the dividend blocker; and number three, the regulator has got to approve the dividend [stream].

So I hope that, during the course of 2014, we can address all three items and at least be in a position to articulate a dividend policy.

That dividend policy will be to start paying dividends as soon as we can, but there are a number of things that aren't under our control in that process. And so I think to be more precise than that is impossible at the moment.

Just to confirm that 10% is excluding the FPC review and the DAC?

Our capital targets of greater than 10% are the targets, regardless of what lies beneath them. The timing of reaching them is obviously the function of thousands of moving parts. And what the dividend blocker will cost to remove, I don't know.

So there's some fuzziness around it, which is why we're saying dividend policy articulation in 2014. If we have a little window to stick something in as a smidgen towards the end, obviously we'll do that if we can. But I don't think we can, today, be that confident to promise that.

And the second question was on margins. I was a bit surprised to see both asset yields and liability costs trending up in Q4 versus Q3, given the trends that we've seen in the market.

I was just wondering how we think about margins from your -- particularly around mortgage rates. Do -- your fixed mortgages are around 3% at the moment, even lower from some banks, whereas I see ours are at 4%. How do we think about that situation? Is there a chance that SVRs come down on the back of that? Or we see asset yields coming down on the back of that?

We're calling for broadly stable interest projection next year, or through this year, I should say. Asset yields, I think, have been reasonably stable.

What we're trying to work on is lowering our cost of non-interest bearing liabilities. That will partly offset continued erosion in the current account hedges.

And so I think the dynamic to that, as the year goes by, could be net positive. So the NIM could expand as the year goes by, fairly slightly. And what I pointed out is the wild card is how much loan growth do we get. Obviously, loans have a better yield than cash building up on the balance sheet. So we'll have to see how that plays out.

So bottom line, asset yields should be stable, is what you expect?

I think so, yes.

Did you want to add something on dividends, Bruce, or are you --?

No, I think (inaudible).

It's Raul Sinha from JPMorgan. If I can have two questions, please. Firstly, Bruce, could you talk about your cost plan? You've already exceeded your GBP2.5 billion cost reduction target by GBP1.1 billion. Where do you think you could top out at over the next two years in terms of an overall cost number? That would be really helpful.

And then, secondly, on the Markets GBP30 billion incremental reduction that you've guided today, which part of the Markets business is this coming from? Is this coming out of your working capital within the Markets business? Or this the fixed capital that supports the Markets operations? So we can get some idea about how much impact there would be to the revenue and the cost line.

Okay. Again, just with -- the first one was what?

The first one was on the costs, the GBP3.6 billion cost savings.

The costs are going to be affected by a number of things. So again, Direct Line Group will be sold off and deconsolidated. The branch business will ultimately be sold off and deconsolidated. So, again, the Group continues to shrink both at a top line and then those cost impacts.

On the underlying cost basis, we will be taking more cost out of Markets as we work towards that GBP80 billion plan. We don't have all the details of that, but that's a figure. You're taking RWAs down another GBP25 billion. It's going to have a revenue impact to get to an ROE that works. You have to take costs down a fairly meaningful amount. So that's part of the challenge that we have to work through.

Around the rest of the Group, we've been very disciplined on cost, but I do think there's more to squeeze. In this environment, we have to really be ambitious and keep working on that. So I said I'm giving myself a little wiggle room. We're going to work through those things and put a number out there at the half year, but again, I'm not satisfied at GBP3.6 billion; I think we can keep pushing that number higher.

The second one was on Markets RWA. Is that a particular part of the Markets business or is that across --?

Again, that's -- I think we have a broad view as to that that's a reasonable number of where we'd maintain our position in our key franchises. But then the details about the best way to do that, are there any product line exits, are there any geography exits, obviously, those would have a related impact on our International Banking business and have to be considered carefully together.

We've got Peter and [Sunil] and John Owen, a bunch of folks really, working hard on this. And, again, we'll be having discussions on that with the Board probably around a March-April timeframe and be able to put all the details of that forth at the half-year results.

Look, as I said, I think we have to be honest. This is business we're putting a lot of pressure on. I think it's true of other businesses like it in the market and there must be some risk to our returns through this process.

I think when you look at it at a shareholder aspect, even if the returns show some slippage, i.e., we're unable to cut costs as fast as revenues, I think it's possible to make a shareholder case for this based on some of the parts and multipliers and the quality of earnings, and so that's our underpin.

But I do think we have some risk in this process. We'll execute it as well as we can and all I can say is I think the business has done a really terrific job in the last four years of going through dramatic change and producing profits all the way along for us.

Yes, and in particular, the numbers that we've shown today for them to have a 10% ROE in a period where they've already taken a good whack at RWAs and dropped a whole bunch of people and narrowed the product focus, to still be competitive and show the FIC results that are in line with peers for the year is quite a testimony to the management team.

And will you reinvest the capital back into Retail & Commercial?

No, it's reinvested in a higher Basel core Tier 1 ratio. I wish it were invested in something profitable.

It's Tom Rayner from Exane BNP Paribas. Maybe just sticking on that last point, Stephen, I don't want to give the wrong impression with this question, because I think the restructuring that you guys have done has been pretty amazing in some ways. But if the FPC really needs more contingent capital, surely raising that rather than agreeing to IPO a US business would make more sense.

And on the Markets, it wasn't that long ago we all sat through that presentation, and I thought it was a very credible sort of presentation, of what the optimal size of that business would be and taking all of the revenue and capital into account and yet we're now talking about another 20% or 30% downsizing.

And I guess my question is, if you're a potential institutional shareholder, how can you be sure that the decisions are being made for economic rather than political reasons?

Tom, we tried to -- both the Chairman and I tried to address that up front and, of course, all companies are subject to a series of pressures and not just ordinary shareholder pressures.

We are subject to some particular pressures. We have to have an accommodation with regulators, all banks do, and they're more muscular today than they have been in the past. And the Chancellor himself, our majority shareholder, has described how he is being muscular in the majority shareholder's wishes. And you can't run a company ignoring your majority shareholder; that would be stupid.

What we believe we are doing, have done and can do, we believe, is steer a sensible path through the needs of our customers, which come first, the other stakeholders we have, and have a company that can be appealing to all shareholders at the end of it.

All companies have to pick a path through these things. We have more boulders on that path than many, but we think that we're picking a sensible path through it and so I think that's the best answer that we can give to you.

Philip, I don't know if you have anything --?

Well, we'd rather be where we're going than where we are. We think it's a better place to be.

It's Michael Helsby from Merrill Lynch. I'd just like to follow up on that, just to make a few things clear, if we can.

Clearly, the FPC highlighted the three things that you put up on your slide and you mentioned that the Citizens IPO, the reduction in risk weighted assets was certainly steered by some of the comments that they've made.

Should we read it as being contingent, i.e., to give them more confidence about your capital path and your capital plan? Or should we read it as the comments that they've made, there's a deficit, i.e., your capital ratios are overstated? Because I think that's what people are really worried about.

No, I understand. The first and most important thing is we can't speak for the FSA and we can't speak for the -- and they can't speak for the FPC, and the FPC will meet in March and no one can know what they will or won't say about the industry. I don't think they are able to say things about individual banks and so every bank will have been in close discussions with the FSA and no banks will know what the FPC will or won't conclude.

At no stage have the FSA given us a specific target; i.e., the FSA did not say, here is a capital gap, please fill it. And, indeed, the FSA has been just as interested in the risks in our balance sheet, how they're provided.

Bruce has indicated increasing RWA intensity that we've been doing, some extra thumb on the scale and provisioning and so on.

So a lot of the dialog has been to get people comfortable with how our RWAs are reported, how we're provisioning for loans, how we're provisioning for conduct cases, in addition to the naked ratios and the fallback positions regarding those.

So we were never given a target. I have no idea if we give them a target, whether this exceeds the target or doesn't exceed the target. That hasn't been the nature of the process, but it has been a very thorough process.

We think the regulator believes we've engaged constructively and appropriately, but the regulator themselves are not the FPC and, obviously, that's a still a hurdle for everyone yet to come.

Can I just have a separate question on loan growth actually, because --?

Just on that point I do think we should say it, we did say it, but I think we believe our capital position is more than adequate for the business that we're running. And we believe in our forward projections that we can continue to de-lever and we can deliver very strong capital ratios. So even without those extra two actions on Markets and Citizens. But, in the end, we've chosen to take these additional actions.

And then just finally, you mentioned, I think, 3% loan growth to Group level, that's what you're penciling in. Could you give us a little --?

Ex the run-off books. So that would not be including Non-Core or the UK Commercial real estate run down.

Could you give us a little bit more color in terms of where you're seeing that and maybe a bit of color in terms of how you're seeing the trends that are the real grass roots level. I know the Bank of England credit survey suggested that corporate credit demand felt like it was picking up, so just talk a little bit about what you're seeing?

I'll start, and you finish. So just broadly a couple of pockets where we expect probably the most loan growth; the mortgage area and UK Retail feels like we'll have a good year in terms of growth there.

Also in the US, in the Corporate and Commercial space, we've had good loan growth last year and we think that should continue, even though competition has increased from other banks, but we still think we'll see some growth there.

You might want to talk about UK Corporate, Stephen.

Yes, just a small thing on mortgages. I think our first quarter will be soft because one of the things we did in December was take most of our mortgage advisors off the road for retraining pursuant to the new FSA standards. And so I suspect we'll have a soft first quarter, but, hopefully, a decent and positive year as a whole.

On UK business loan growth, I guess the thing to look at, frankly, is GDP. For the averages, if GDP isn't growing, then people don't want to take on more debt. Some companies do and some don't.

So last year we lent something like GBP60 billion to UK businesses and a similar amount paid us back. So our net lending was pretty close to zero ex the runoff and real estate book that has been talked about.

At the moment, Q1, the pattern is the same. If economic strength and confidence grows, then, first of all, companies need to see their order books grow. When they see the order books grow, they think, okay, let's have a new machine tool or some more inventory or whatever.

And so there's never been an economic cycle where lending growth didn't lag economic recovery and business recovery, and that's the indicator I would look at if I were you.

Okay, thank you.

It's Cormac Leech from Liberum Capital. Quite interested in your liquidity portfolio; GBP147 billion at the end of the year, unchanged from the third quarter and that's despite a lot of noise in Basel and, I think, Bank of England and so on about banks potentially holding too much liquidity.

So frankly I was a bit surprised you didn't run it down a bit. Is that pressure from debt investors or what's going on there?

Okay. I referred to that a bit. So, as we de-lever, we keep getting more cash in the door. The logical thing we'd like to do is put it out the door in more loans, and there's not a lot of loan demand.

So then we have to say, well, the right side of the balance sheet is stable and the left side of the balance sheet is coming down. What do we drive off in terms of the right side of the balance sheet as that cash comes in the door?

What we have done is driven down short-term wholesale funding. So it started at GBP300 billion; it's down to GBP42 billion. Probably half of that is a roll down of term debt that's now under a year of maturity and there's really not much you can do with that.

And then there's other amounts of short-term wholesale funding, which are tied to the business strategies, which makes sense.

So we're getting down to the nub of short-term wholesale funding. There's probably a bit more we can do.

Then you say, okay, we could -- then we have to look at long-term debt. In the first quarter we did so far this year in January a small LME, which we retired about GBP2 billion of long-term debt. The problem is we're a victim of our own successes. Our spreads have come in, the prices on that debt have moved well above par. So if we buy in debt at 120%, say, of par we have a day one loss; we make the interest back over a period of time.

As we're trying to manage the capital position, there's a certain appetite that you have for taking day one losses that pay back, hopefully, within the year, which is why we started this one early in January.

But, again, we don't have an unlimited ability to go out and retire term debt. So then the only other thing to look at is then deposits and so in some cases there's deposits that are not as stable low-cost franchise deposits; they're hot money-type deposits. You try to drive those off next.

We were also captive to hitting our loan-to-deposit ratio targets, so we didn't want to go too fast and too abruptly on that score either.

So those are the tensions and things that we have to balance as the year goes by. We're going to get cash continuing to come in and, of course, de-leveraging further. Markets is going to shrink further. And then what do we do with the money? We have to go to those buckets and those buckets are starting to get tougher.

That's very helpful. And in terms of the long-term shape of the business, two years or three years out when you get above your 10% Basel III equity Tier 1, so investors have nothing to question on the capital side and, therefore, presumably relax on the liquidity side, what do you see as the normalized run rate, say, percentage of short-term wholesale funding? You're currently at 3.5 times versus your own target of 1.5 times.

I think we can bring it down in a maybe [120 to130] once loan demand picks up and that short-term wholesale funding can maybe be [40] or something like that. So you could run it at 3 times and still hit all of your other metrics.

It's a crude formula, but we have other metrics, the [ILA], the FSA has a series of three-month metric, two-week outflow metric, [GAAP(2)] metric. But I think you could certainly, if you got that number down another GBP30 billion, you'd still be able to comply with those metrics.

Maybe just a final follow up. From the outside in it's quite difficult to understand what the delta on your PBT might be if you did that. So, simplistically, say it's currently earning, I don't know, a yield of maybe 50 basis points and you put that money to work in low LTV mortgages, presumably you can get 2%, 2.5%. So what might the delta pickup --?

Delta might be 2%, I guess. Roughly, I would say take 2% of that.

Okay, helpful. Thanks.

But obviously it would use more capital because liquidity does -- it's low risk weighted assets and if you stick it in loans it's higher, so that's not a straight ROE add up.

Sure, thanks.

Peter Toeman from HSBC. The Citizens IPO you described as a source of contingent capital. You then referred to the CoCo from HM Treasury, which, of course, is a source of contingent capital. That might be terminated in 2014. So should we regard those two transactions as canceling each other out? Or should we say --

No, I think the HMT contingent capital is essentially worthless, given its trigger point and its maturity. So that's just -- that's not any part of this.

The Citizens, as I say, there were two reason for the Citizens. Part of it was FPC-type discussions, and part of it is what we think is right for the business and for shareholders in terms of showcasing value in terms of giving liquidity to the assets and in terms of allowing the asset, if you like, deeper footprint in the United States market.

So we see -- try to kill more than one bird with the same stone.

It's worthless to us (multiple speakers) it's expensive.

So you won't have to replace that in any way. Or your thinking is that the FPC won't require you to replace that contingent, that GBP8 billion of contingent capital.

I don't -- there hasn't been a focus on the Government contingent capital because everyone knows it runs out in '14. And I don't think anyone believes either we have a need, or the Government has an inclination, to extend capital support for RBS. So that has not been a feature of any of the discussions.

The FPC, I do think, has some keenness on contingent capital and that's why Bruce said we remain open on the subject of contingent capital in a conventional sense, in a CoCo sense, and we have to see how that develops and we certainly remain open to that issue.

So I think that's a sort of separate issue. Maybe I used slightly the wrong phrase for Citizens as to how to think about it, but I was just trying to describe to you --

But the LT2 issuance that I referenced is GBP4 billion of maturities and we want to build up the buffer a little bit, so we'd probably have to issue GBP5 billion, say, over the next three years.

That's the underlying host instrument, and then the question is would you put a CoCo feature on that or not? It depends on market conditions and the price, etc., and what kind of pressure you're getting from the regulator, etc., but those are things for us to consider.

Rohith Chandra-Rajan, Barclays. If I could follow up, actually, just on Citizens. So Core Citizens made a 9% ROE this year. Just wondering where you think that can go to in the current rate environment. Provisions look actually maybe a little bit on the low side versus normalized at the moment, so just wondering what you can do in terms of continued business, changing the business mix or cost efficiency.

If you look at the trajectory over the last four years, we've come from a loss all the way up to, I guess it was 4%, 6%, 7%, 9%. It's going to get harder from here.

A lot of that move was, as you were right to point out, on falling cost of credit, so provisioning has been favorable there. And, at this point, we might be able to sustain that level through this year, but it might actually move up a little bit because, as a percentage of loans and advances, I think it's down about 20 bps, which is quite low on a through-the-cycle basis.

We are certainly working through organic plans to improve pre-provision profit. One of the things has been to shift the business mix away from just more of a mortgage bank with a big home equity portfolio, to build out the Commercial operation.

We've seen 21% loan growth over the last three years on the Corporate side, and so that portfolio we used to have, maybe, one-third of the assets in Corporate space, and that's up to almost one-half at this point. And so we think that's going to help.

And then we can do more cross selling of various products and services into those Corporate customers.

We also are looking to have better profiles of our Retail customers and get a bigger share of wallet.

So there's things on the revenue side, as well as, again, on the expense side.

People look at the efficiency ratio at Citizens and they say it's high, but is it a revenue problem or a cost problem?

It's probably more of a revenue problem, I would say, because if you look at the expense base, as a percentage of assets or other measures, it looks actually below the median. But, having said that, we still would look for opportunities to take more out of expenses.

So I think longwinded way of saying there's some improvement that we can do, but it's going to get harder from here because we won't get any more boost from credit. We have to get it on the pre-provision profit line. So can we push 9% up to 10%? Can then we push 10% to 11%? Instead of coming in chunks of 200 basis points, I think it's going to be smaller augments from here.

I think, along with that, from an IPO standpoint, the passage of time not only will help us probably, as Bruce says, now inch up the profit.

Clearly, once the US economy starts growing better, there'll be those kind of gains. We're not relying on those, but those will come at point or another. But also the efficiency of the rest of what's happened in Citizens we can improve, so the remaining bits of Non-Core in Citizens over the next two years can be largely eliminated.

We then have some capital management, or capital structure, issues to work through with the regulator that will allow more of the Core ROE to come to the bottom line.

And I think, when you put all of that together, you should have a company that will be competitive with some of the other regional banks in terms of where it could trade.

Whether those trading multiples expand still further from where they are today, would be, I think, one of the functions of the external environment, as we said.

The last point, I should mention, Stephen, jogged my memory, though. They've also had a relatively asset-sensitive position on the balance sheet. So higher rates also, when that comes, will be a little turbo charge and boost to the ROE.

Okay, that's great. Just on the other area of restructuring, the GBP80 billion -- so the GBP100-odd billion to GBP80 billion RWAs in the Markets business, what additional reduction in third party assets does that relate to?

I would guess it's [25%] to [35%] maybe; something like that.

Let's be clear, the reduction is actually more than you've just stated because, in the middle, we'll have CRD IV. So we're having to go from CRD III, GBP100-something billion, to CRD IV, GBP80 billion.

So, as I say, this is not a shaking for the Company as a whole, because Markets is now just 20% of the total, but it's an important and challenging job of work for our Markets business.

Which links to my final short question. So thanks very much for the additional Basel III disclosures; really helpful. Just wondering if you could split it between -- the deductions in the RWAs between Core and Non-Core.

I'm sorry, the deductions?

So the additional Basel III disclosure, if you're able to split the impacts on both deductions and RWAs between Core and Non-Core.

I don't have that on the top of my head. You can come back to Richard later in the day.

Okay, thanks.

It's Manus Costello from Autonomous. I also wanted to follow up on that interesting and useful Basel III slide, because I just wanted a clarification for how you've calculated your 7.7%. Because if I read the impressively dense footnotes on that slide, it looks to me like you've taken the current capital position, but the RWAs you've given is our post-management action and assuming that all models are approved.

So my question would be, what would the 7.7% be if you didn't have those? What would your old RWA number be because most of your peers tend to give it on a spot basis rather than upfront (multiple speakers)?

No, I don't think that's right. We look very carefully at how other people are presenting their numbers and I think we're doing that on a consistent basis.

We have -- in the models that we assume will be approved upon implementation, we're way down the track on those things. We were preparing those models for approval actually at December 31, '13, were CRD IV to come into place on January 1 of this year. So it's just really going through the final stages of having full model approval on those.

So in terms of the management actions that you assume, you don't assume the additional Markets reduction that you've announced today. But do you assume the Markets reductions that you announced in January last year?

In getting to the 9% and getting to the 10%, those actions, that's how we're getting there. So it's not in the 7.7%. But in going to 9%, we certainly have further Non-Core deleveraging, we have the Markets shrink of the first program that we announced last January is in those numbers.

I think the kind of management actions that are in, are not shrinkage of business; it's adjusting of books for the new calculation of CRD IV. So certain things that are managed in one way will have to be managed in another way. So there are important management actions, without which there are unintended consequences.

But then, on top of that, are what are called real shrink actions, which are, as Bruce said, are in the forecast for the increasing capital ratio.

It's Mike Trippitt at Numis Securities. Two questions. Just following up on your capital planning, particularly looking forward at the Citizens partial IPO, I just wondered what your thoughts are on the risk of stranded capital in the US, particularly when you -- with the Turillo proposals on creating a intermediate holding company structure?

Do you think that there is a risk that you end up with a regulatory turf war between the PRA, or whatever they're going to be called now, and the US regulators?

Yes, there's a risk. We've got stranded capital there today, and part of the two-year timetable is to allow us to negotiate an accommodation with the Federal Reserve to make it a sensible capitalization strategy.

I think that actually having a quoted stock there will make the US regulators more comfortable because they will perceive it as a second source of capital in emergency, i.e., the public markets rather than just having a foreign parent to call upon.

So I hope that we will find that the regulators see it as a positive development in our capital discussions in the same way that, in the fourth quarter of last year, we did the first since the crisis Tier II issuance out of Citizens in order to, not because we needed it, but to demonstrate to the US regulators that Citizens has sources of capital which, in turn, should allow us to have a more sensible.

So these are things, you're right, that have to be worked through for us, and all other banks, but we're thinking that is work-throughable.

On the Turillo proposal for the holding company, obviously that's in a comment period. The comment period has been extended another month 'til the end of April.

I think, on a relative basis, we're in reasonable position there having Citizens today. If you combine what we do in the US with Citizens, we're in a reasonable position.

I think one of the broader things that the US has to grapple with is, are they going to apply bank standards to broker dealers? So today, for example, the foreign broker dealers doing business in the US, when you do a leverage calculation, they're able to back out the amount of reverse repro they have invested in treasuries from the leverage calculation, because it's a very safe asset.

The current proposal that Turillo put out doesn't do that, which would cause a potentially shrinkage of balance sheets for the foreign broker dealers, which has a second order consequence of hurting liquidity in the government market. And the last time I checked, the US is still going to borrow a lot of money for a long time and that's not a good thing.

So those are the kind of comments that are going to go back in to say, be careful of unintended consequences. If you do things like this you may just find people shrink and pack up and not provide as much liquidity to that market place.

I think the other thing is really on the liquidity test for the banks. So that's why you need a deposit base, if they are very strict on the liquidity side. And I think you may see some weakening on the liquidity side, otherwise you might see people like Deutsche Bank and Barclays have to go out and buy a thrift just to meet the liquidity standards.

So I think there's still a lot to play out on that, but I do think there is the potential for some issues to arise. But, again, having Citizens, we're in reasonably good shape on a relative basis.

Thanks. Just a second question. I just want to clarify the comment about the Government finding -- addressing the dividend block. Do you mean the terms of the DAC?

Yes, that's what I call the dividend block; otherwise nicely called the dividend access share.

Yes, sure, but isn't that immovable? You've either got -- either the share's got to trade at a certain level or you've got to buy (multiple speakers)?

Or we have to reach an accommodation, or they have to reach an accommodation with us. We have to reach it with them and the EU has to agree it. (multiple speakers) potential for some sort of buyback.

Yes. There's a potential to pay them some money to eliminate the DAS and have the B shares convert back into A shares, and then we get back to a nice clean capital structure.

So I think that day is coming down the road when it's closer to when it looks like we can put a dividend in place. And I think they're as much an interested party in that because it will reflect positively on share price, which they have a lot of stock to sell. So, again, that will be an interesting negotiation.

And the payment will reflect the fact that these Bs have been available as being part of your capital structure. Is that how it works?

There isn't a formula, so it will be by negotiation.

Yes.

Just two questions, the umpteenth question on capital and risk weighted assets. Sandy Chen from Cenkos Securities. Looking at the risk weighted asset movements from 2012, there were about GBP37 billion of Market movements. I assume that that was spreads coming back in and bringing down the level of RWAs.

And then GBP44 billion of model-related uplift in terms of RWAs, and another forecast GBP10 billion to GBP12 billion under fully-loaded Basel III.

So longwinded way of saying that, how do you get from the 7.7% of fully-loaded Basel III core Tier 1 end of 2012 to, say, an expected 9% core Tier 1 (multiple speakers)?

You may have to cross a number of dimensions. Clearly the growth RWA number's going to come down as Non-Core shrinks and Markets shrinks. So there's an element of that.

I think, as we work off legacy credit assets, the gap between our EL and our provision, that number will come down as well. There are some other things in counter party credit and other things that we'll be mitigating over the course of the year that also will contribute.

So it's really across the balance sheet. We're not projecting to make a huge amount of profit next year, so we really have to work the balance sheet to go from the 7.7% up to the 9%.

Once we get to 2014, we'd expect to start making money again. A lot of that ride from 9% to 10% would come on the back of profit. And then using up DTA.

So one of the things people look at the 7.7% and say, oh that's a little light. But you have to recognize we think there's two important elements of that. We are in a work in process, so we are running down Non-Core and we're not done. So note that, A.

And then B, some of the deductions the EL, we think, were on a conservative footing. Maybe we can take less conservatism down the road. We'll have to see, but we certainly have a shrinking portfolio of legacy assets that should help that number in an absolute sense.

And the other thing is DTAs. So DTAs are deducted but they're actually a store of value. We won't be paying those cash taxes down the road and so something that deducts from that ratio actually helps us in two ways. It will eliminate and, therefore, the ratio will go up naturally. But then we'll also have a better after-tax cash flow because we won't be paying taxes.

Okay. And then the follow-up question. Related to pulling the Citizens ripcord at some point if necessary, to be, I guess, cheeky, and not to -- well Cenkos is far too small to be pitching for the business, but has a share demerger of UK Retail and Commercial banking been considered?

Well, I tell you what, when you see a good market, you'll probably be able to see us sell our branch business. You'll be able to see Lloyds sell their branch business. You'll be able to see Santander do a flotation and then you'll know there's a great market for these things.

Right now I haven't seen that great market. But what we are doing, first and foremost, is not financial engineering; it's trying to build a really good business. I hope we'll be alive to financial engineering whenever that adds value but, in my experience, most of the time what adds value is just making the business better.

It's Andrew Coombs from Citigroup. I have two questions, please. Just firstly I wanted to return to the Markets business, in particular Greenwich Capital. It's clearly a high-return business. It's still almost $180 billion of assets, nearly $70 billion of RWAs. And, seemingly, has less interconnectivity with the rest of your Group compared to perhaps the rest of the Markets business.

So I guess my question is, has Greenwich Capital come up in discussion with the FBC or with your larger shareholder? And what do you see as a future for that business.

I think this is the wrong -- there is no investment banking business that I know of that doesn't technically have a broker dealer in the US, because you have to for US regulation. But that doesn't mean -- we also have broker deals in Hong Kong and Japan. There are all sorts of different regulatory legal structures. The businesses run blind to those.

We don't have a business called Greenwich Capital. We have a legal entity that's a broker dealer and we also have -- operate out of the branch in the United States. So I think it's wrong to think of these things as separate chunks. Once upon a time there was; there isn't today.

But we are, of course, alive to all the dimensions of our business. I don't really think of it in legal entity terms. And we think about all of the ways to create value.

But what I do know is that if you want to be in the rates business to tell your customers, oh we can do your sterling business and we can't do anything in euro and dollars, would be a pretty short conversation, and our Corporate business would end up looking like Lloyds and Santander, not like the one that we have today.

And so these are interrelated, although we have to balance the issues and release capital in the way we talked about.

Just a second question. I wanted to address the number of media reports lately discussing potential resurrection of the Government policy to offer a share handout to the general public. I'm just wondering what you think is the likely reality of that emerging, and any logistical obstacles to do that.

I think the logistical obstacles are colossal clearly.

I think some wag wrote an article about the AGM being held in the O2 or Wembley Stadium or something and transmitted to all the other football stadiums all over the country. If the Government were to decide on this plan, we would have to probably fall into line and help them to deliver it. But I suspect they won't. That's my guess.

Thank you.

Do you have anything to say?

I don't have a view. The sooner we are privatized the better for the tax payer and the better for us. So the method is less important that the goal, I think.

Here, here.

It's Jason Napier from Deutsche. Two, please, if I might. This week one of your US competitors put a number to the impact of regulatory change on Markets revenues, and it works out at 10%, 11% of FIC and rates as the most affected business, losing using about one-fifth of the top line.

I appreciate you're not ready to share the detail on the risk weighted asset reduction and the new plan for Markets, but I just wonder, on a business as was basis, whether you had a sense as to what proportion of the top line in Markets was at risk from post-trade clearing and transparency of that sort of nature.

We don't have a number, but you're absolutely right, the investment banking business, the trading business, not ours, but as an industry, is under ROE pressure, and that pressure has got some years left to unfold, and everyone is trying to figure out how to deal with it.

If you look at it another way, you're taking more than 20% of RWAs out of the business. They're saying 10% of top line goes away. You clearly don't want people thinking this was an editor's story, so at least part of what you're doing is in reaction to regulatory change. That's a reasonable --

Yes, it's very clear. We strategically felt that our Company would be more valuable if it had a different business balance, and that was a top-down view, but it was also a bottom-up view.

And the investment banking business everywhere has been hit by regulatory change and by market trends; no one's paying commissions or anything like that in them.

In the UK there is special pressure coming up around ring fencing, and so that's why it is both something that our majority shareholder wanted, but it is something that in all shareholders' interests we think was right to reshape the Company from a shareholder value standpoint, because, in a ring-fenced world, the scale of Investment Bank that we had before would not be viable, in my opinion. And if it was viable, it wouldn't be the best shareholder outcome.

Obviously every different bank has got to deal with their own situations, but we are hopeful that we can have an Investment Bank that is strong, vibrant, serves our customers well, but within the context of the Group, that we have a Group that has the best shareholder value balance, and coherent to its type and geography of business, and that's what we're aiming at.

Of course, the regulatory sands shift, and the market sands shift, and so that's why the precision of landing point, I've said for some years now, is not yet visible.

But when Markets' activities were 60% of the capital employed of this Company, it would be a drama what the result of those uncertainties was. When you're talking about 20% of the capital of the Company, then you could afford to have, if you like, some uncertainties, without it being ruinous from a shareholder value.

And that's why I think at the moment there's all sorts of noise of restructuring and so on around us and everyone else, but when people concentrate on business mixes and business models in calmer different times, that we will find that our change in business mix is something that allows the sum to be worth something that's attractive to shareholders.

And the other point I would add is we need to achieve stability. We've had an awful lot of change in our business, dramatic change. We don't want to come back to you in a year or two years' time and say it's going to be different again. So this should be it.

Can I just follow up with one more question, just one? Thank you.

And I'm sorry if I'm being unusually dense here, but in -- I appreciate that we don't know what the FPC will say until they've met and decided what to say, but in your prepared comments where you said that RBS had reached an accommodation with authorities and there are steps that are coming out of that that look like Citizens and Markets and so on, does -- is that to imply that, having been through the process of looking at the three issues, that the IPO and the Markets' reduction has effectively the blessing of the FSA this month, or the FPC?

To the FPC, once it becomes the PRA -- when you say reach an accommodation, what does that actually mean in practice?

It really is not my place to speak for the FSA, and I think -- I don't want to get into hot water for doing so. As I said, I don't think anyone can speak for the FPC. (laughter)

We have worked very closely with the regulator on the regulator's concerns. We believe that our plans address the regulator's concerns. We believe we're not being irresponsible in saying that. But do we have a certificate of evidence? No.

That's clear, thank you.

It's Ed Firth from Macquarie. I'm just trying to square your comments with the fact that you say you want to stimulate loan demand, but you expect asset pricing to remain static this year. Surely traditionally the way to stimulate loan demand is to reduce asset pricing?

Let me explain this to you a little bit, because actually the funding-for-lending scheme, which is out there, and which we're an enthusiastic and prominent participant, is an experiment, and we'll see how goes, because funding the mainstream, in essence, reduces loan pricing.

So our loan pricing has come down as a result of that; everyone's has. But the cost of funds came down, which is why the margin was overall manageable.

Although the funding-for-lending scheme, I think is an important tool, so far our observation is that it has brought forward refinancing, as opposed to strong incremental loan demand.

And the simple way of thinking about this is most businesses have internal rate of return hurdles for new capital projects of double digit somewhere; 10%, 15%, 20%. Our average interest rate to small businesses is under 4%, and to business as a whole is a lot lower.

So the price elasticity of demand, for business lending anyway, is very low when interest rates are this low. And the much more important factor in demand for lending is confidence, and use of the money, and confidence that people can pay it back and so on and so forth.

There is a bit more price sensitivity in the mortgage market, because people think much more in terms of mortgage payments as a percentage of take-home pay, although even there the FSA requires us, in making any mortgage lending, to assume interest rates will pop back up to higher levels, so in who we can lend to there are limits to what we can do.

But that's why we are a bit more optimistic about mortgage demand than we are about business demand in the immediate term, because there's a bit more price elasticity there.

But either way, what we need, if you like, is growth and that needs competitiveness and so on and so forth. And it is never in economic cycles that loan growth front runs the recovery of economic confidence and other growth. And you've seen that in the US and other markets.

Okay, thank you all very much. Stephen and I will now go back to a day with the media talking about bonuses. Thank you. (laughter)