:3 R35 Group 2013 Budget Review Global Restructuring Group information Classi?eatinn: Introduction 4-6 Budget Summary 8-14 2013 16 - 29 Outer Years 31 - 34 Efficiency 36 App 1: Divisional 38 App 2: BU’s 39 - 40 Information Classification: Secret 2 This page has been intentionally left blank a: Information Classification: Secret Executive Summary Introduction Budget Summary Business Plan 2013 Outer Years Efficiency App 1: Divisional ■ Focus on capital management and Non Core run off are and remain the top two GRG priorities. ■ The continued focus on capital has delivered £21.6bn RWA equivalent asset management reductions on a CT1 basis YTD through effective case management and data quality initiatives. A further c.£43bn of RWAe reductions pre new cases and regulatory change impacts is forecast over the remainder of the cycle, 20132016. ■ Non Core portfolio runs off £6bn to £28bn by the end of 2013 contributing 32% to the overall Non Core run off in 2013. ■ GRG continues to seek an appropriate return commensurate with risks undertaken. The current upside portfolio includes 2,704 property participations and 299 equity positions with a current value of £0.7bn. ■ A series of realisations is due to reduce the equities portfolio by c.50% over the forecast cycle. Forecast excludes gains/ losses in outer years for SIG & WR. ■ Case management efficiency improves over time, however overall headcount reduces at slower rate due to increase regulatory burden placing additional requirements on central functions and front line staff. ■ GRG is forecast to contribute cumulative recoveries of £1.5bn (2011-2015). Information Classification: Secret App 2: BU’s 4 Value Add Introduction Budget Summary GRG Value add Total income £(m) Efficiency Outer Years 2011 2012 2013 2014 2015 2016 1,321 499 283 235 187 152 610 470 283 235 187 152 1,189 337 120 96 60 38 0.2% 0.3% 0.3% 0.3% 0.4% 0.4% Income excluding one offs £(m) Contribution (£m) 2013 App 1: Divisional App 2: BU’s Efficiency 25 1400 1200 20 PPFA's 2,346 2,704 113 218 22 17 334 299 PPFA's realised Average value of PPFA fee received -£'000 15 800 600 10 Spot FTE Upsides Value/ Volume 1000 Expenses as % of Assets Managed 400 5 200 SIG (equities) positions 267 224 180 141 0 0 *2012 YTD contribution is £335m, its anticipated fair value movements will offset income in balance of year forecast Asset Management RWAe reductions GRG Management action - £(bn) ** 2011 2012 2013 2014 2015 2016 N/A (21.6) (18.7) (11.4) (12.0) (11.8) (6.2) (6.0) (5.8) (5.0) (3.5) 2012 2013 2014 2015 Avg value per Case - £(m) Cases per RM 2016 FTE Impairment Recoveries Non Core run off Value Add * 2011 2012 Sept YTD 2011-2015 cumulative recoveries are £1,458m 700 600 At September YTD 2,084 cases with value of £8.3bn entered GRG and 689 RTS'd with 1,934 exited 11.4 6.6 RWA Value add - £(bn) 9.3 10.7 Capital deduct Value add - £(bn) 1.2 0.9 15.0 14.7 £'m 500 Limit Value add - £(bn) 400 300 200 100 RWAe Value add - £(bn) 0 2011 2012 YTD 2013 2014 2015 Recoveries •Value add-reduction in exposure/ capital calculated as the difference between the entry value and the exit value on RTS/Exit cases. Non Core Core •** 2012 RWAe asset management is YTD Information Classification: Secret 5 Progress Against Targets Introduction Budget Summary 2013 Outer Years Efficiency Sept YTD Strategic Objective KPI's Minimise Losses for the Bank Expected Loss reduction (EL) on RTS & Exit cases Limit reduction on RTS & Exit cases Execute effective asset management and demonstrate value add activity using a variety of tools and techniques RWAe Asset Management Actions Incremental Contribution Number of UK-based small to medium sized businesses restructured Continue to enhance our position at the leading edge of the global business and Syndicates Under Management where RBS acting as lead financial restructuring market Customer focused People focused through retaining and attracting the best talent App 1: Divisional FY 2012 4+8 £0.9bn £6.6bn £21.6bn £290.8m App 2: BU’s FY 2011 £1.2bn £11.4bn n/a £301m n/a £1.2bn 417 cases 729 cases c. £102bn in 150 syndicates c. £155bn in 186 syndicates Open complaints as a % of total cases 1.70% Resolved Complaints as % of total cases 0.30% Cases returned to satisfactory Gross Turnover (12 month rolling) £3.3bn 11.5% <20% £4.9bn 10% Total staff ( incl. external secondees) 1,321 1,230 1,256 22% 36% 10.8% (29.3% excluding Scaeffler & Samsonite income) 3:2 3:2 3:2 Cost : Income <2% 0.30% Maintaining our licence to operate GIA CE/MCA rating Information Classification: Secret 0.70% 6 This page has been intentionally left blank a: Information Classification: Secret Executive Summary Introduction Budget Summary 2013 Financials Outer Years Financials 2013 Outer Years Efficiency App 1: Divisional ■ The portfolio is forecast to have peaked in 2011, falling by £7bn to £60bn of managed assets and c.12, 000 cases by the end of 2012. This is forecast to reduce further to c.£29bn and c.7,000 cases over the forecast cycle as cases are worked through and exit GRG. ■ Non Core portfolio is expected to reduce £6bn by the end of 2013 to £28bn including sell down of West Register Germany assets. ■ GRG Ireland (GRGI) portfolio reduces £0.7bn to £17.4bn. ■ Capital remains broadly flat in 2013 at £81bn RWA equivalent on a CT1 basis, as c.£10bn of regulatory headwinds offset asset management actions. ■ Given the current economic climate, profit before impairment losses will be subdued at £120m, down £217m YoY. ■ On a like for like basis, staff costs are down by £6m due to a reduction in average staff costs as exits within the regions are offset by recruitment in GRGI to manage the portfolio. On a headline basis costs are flat YoY, however 2012 was flattered by a one off legal and professional recovery in the US of £5m. ■ Average headcount increases by 12 FTE (2013 average 1,226) driven by growth in GRGI to support increased portfolio size, partially offset by reductions due to APS and other regional reductions. Headcount peaks in Q1 2013 and thereafter running down in line with the portfolio. ■ The number of GRG cases under management are expected to fall by 2,342 to 2016 compared to 2013, with the portfolio shrinking to £29bn, as GRG works through the cases and the economic climate improves. ■ Capital runs down to £68bn RWAe equivalents on a CT1 basis by end of 2016 as portfolio runs off. ■ Forecast excludes FV gains and realisations for SIG/ WR in the outer years which contributes to a declining PBIL. ■ Headcount reduces 36% by 2016 compared to 2013, reflecting the above, coupled with the portfolio being more focused around SME’s in the outer years. The resulting annual cost base reduces by 30%, or £48m by end 2016. Information Classification: Secret App 2: BU’s 8 Portfolio Introduction Budget Summary 2013 70 60 SIG App 1: Divisional App 2: BU’s 14,000 Rainbow divestment end 2013 £1.7bn and 1500 cases WR Citizens Efficiency Outer Years 12,000 50 10,000 40 8,000 30 6,000 20 4,000 10 2,000 GRGI EM EA APAC America RER UK Case Count 2011 2012 2013 2014 2015 2016 ■ Portfolio runs off by £30bn, 51% to £29bn by end of 2016, with case volumes reducing by 4,489, 38% to 7,415. ■ GRGI currently is and remains the largest proportion of the portfolio at 30%, increasing to 45% at end 2016. Information Classification: Secret 9 Key Financials Introduction Budget Summary RWAe - £(bn) RWAe - GRG Asset Management reductions £(bn) (YTD) Portfolio - £(bn) Portfolio - #'s Contribution £(m) Headcount incl external secondees Non Core reduction - £(bn) GRGI portfolio - £(bn) 2013 Outer Years Efficiency App 1: Divisional 2012 2013 2014 2015 2016 81.9 81.3 77.4 72.3 68.1 (21.6) (14.9) (8.9) (9.4) (9.8) 59.9 50.5 43.0 35.6 29.5 11,904 9,757 8,998 8,166 7,415 337.0 120.4 96.2 60.3 37.6 1,339 1,182 1,039 890 757 (6.2) (6.0) (5.8) (5.0) (3.5) 18.1 17.4 15.9 14.2 13.2 App 2: BU’s ■ Capital is static in 2013 due to regulatory change impacts of c.£10bn RWA equivalents on a CT1 basis. ■ Portfolio runs down 51%, and volumes 38% as mix moves towards smaller value higher volume CBD cases and GRGI is a increasing proportion of the book. ■ Contribution excludes FV gains for SIG and WR in outer years. Information Classification: Secret 10 Environment & Lead Indicators Introduction Budget Summary 2013 Outer Years 2012 Indicator Portfolio Capital Customers Efficiency 1. Macro-economic environment 2. Effective case management 3. Non Core run down 1. Macro economic environment 2. Effective case management 3. Regulatory change 1. Complaint levels 2. Resolved complaints 3. Returned to satisfactory cases Information Classification: Secret App 1: Divisional 2013 App 2: BU’s Outer Years 11 Key Priorities: Non Core run down Introduction Budget Summary 2013 Efficiency Outer Years App 1: Divisional 50 App 2: BU’s 4,500 4,000 40 3,500 3,000 30 £(bn) 2,500 2,000 20 1,500 1,000 10 500 - - 2011 2012 2013 P o rtfo lio 2014 2015 2016 Cases - # 's ■ Current portfolio of £34bn runs down to £28bn at the end of 2013, and £14bn by end of 2016. ■ SIG (equities) remains a small part of the GRG Non Core portfolio currently valued at £0.4bn, a series of realisations, primarily in the outer years reduce this to £0.2bn at the end of 2016. ■ CRD IV implementation drives c.£8bn RWAe uplifts on a CT1 basis. ■ Slotting changes set maximum loss on defaulted cases to 50%. The effect is likely to be c. £7bn RWAe benefit on Non Core GRG book. Information Classification: Secret 12 Key Priorities: GRGI Immdumian Bum 2m 3 om. my: AW 1: Dwuiannl Am: 2: Bu: a soy. '5 m. a 34w21:11 2012 20m mu 2m 2m _Pumuh . Gmwfiin Develop nn use! management medal man will an 1: ng m. mlmgemem nun: 1mm msmmeu, when maxim um: value Isms mmenhnn GRGI uking Mikes: mm, mm. debt mduclianlnv 2m and tub" mm mm." mm mm and in mm Mun cm. 13: cayiul mg mum at 3| ally to yank elvly in 2m: and .mmunn by and mm: m: to a yep-mam, and delznuge. Imp mum: chug" a pevcemlgem mun pm. . Increase in mm mm mm" mm later yuan mm a .Inw mnmy. Covey-lg: ruins an new mm mm 62mm maimed a new cuvemge a comma mum." lhehcx mm mu onus my: mg :1 mm recessionary wind to am. 13 RBS Group Infomuflon um Key Priorities: Impairments Introduction Budget Summary 2013 Outer Years 2012 FY 9+3 £'m Efficiency App 1: Divisional App 2: BU’s 2013 FY 2014 FY 2015 FY 2016 FY £'m £'m £'m £'m MIB Core 124 130 124 128 129 Corporate 324 281 245 243 252 Commercial 271 300 188 170 165 Total CBD 595 581 433 414 417 GRGI Core 461 315 51 43 49 MIB 833 217 211 117 92 UKCC 290 64 83 54 38 Citizens 179 61 84 75 64 GRGI 887 729 280 186 24 18 (87) (72) (52) (3) 2,207 984 587 380 216 Latent & Other Total Non Core Definition: GRG only managed assets ■ C.55% reduction in Non Core impairments in 2013, primarily due to reductions in MIB legacy assets. ■ CBD impairments remain flat in 2013 with declines in Corporate offset by case inflow on Commercial cases. Information Classification: Secret 14 This page has been intentionally left blank a: Information Classification: Secret FY13 Discussion Points Introduction Budget Summary 2013 Outer Years Efficiency App 1: Divisional App 2: BU’s ■ Capital Regulatory headwinds impede asset management progress ■ CRD 4 ■ Slotting (incl GRGI) ■ West Register (WR) capital treatment requiring minimum total capital threshold of 25% and classification as a connected counterparty. ■ Credit model changes for Large Corporates ■ £200m challenge ■ Economic outlook and case inflow contribute to higher than plan end of 2013 assets of £50.5bn. ■ FSA past business review into sale of swaps to SME customers. ■ Non Core disposal plans include WR Germany sell down of £1.0bn and GRGI deleverage of £1.1bn. ■ IFRS 10 – new accounting standard due Jan 2013 covering new definition of control in considering whether to consolidate entities including structures. ■ IGL’s WR Property ■ Delayed Rainbow disposal – c.£1.7bn and 1500 cases remain in portfolio. ■ Asset Management model – GRGI WR Information Classification: Secret 16 Risks Opportunities immumion Bin-192i 541me am owe. my: an. army Am) I: Dw'manll My 2: aux mm Qgganunn e- we pm. Is an the .ie ramming aimeuiwim n: no gum>>. in hm LIK um Eumzone .. in me mm Gm mull 60mm". amnesia me lndude- mnomic Izcnvely ca mug in gnu/aiming". GRGI delwenge GBP1 .1 Dn In 2m. in cumnl envimnml. mu mu rel vans ip managev cauau requlre .mai henmum our bank mime <FY13 Financial Summary Introduction Budget Summary 2013 WR losses in 2012: Pegasus – (£81.8) write down due to fair value losses Priority Sites - (£12m) FV Write down 2012 2013 245,431 (101,644) 75,787 279,840 499,413 22,020 24,000 23,193 213,715 282,929 -91.0% -123.6% -69.4% -23.6% -43.3% Staff Expenses Other Expenses Total Expenses 140,451 21,991 162,442 134,893 27,629 162,522 -4.0% 25.6% 0 Operating Profit 336,971 120,406 -64.3% Spot Balance Sheet (£bn) Debt Portfolio West Register SIG Total Portfolio 55.5 3.8 0.6 59.9 46.8 3.1 0.6 50.5 -15.7% -17.0% -5.8% -15.7% RWA RWAe Provisions 51.6 81.9 14.7 51.2 81.3 13.8 -0.7% -0.7% -6.0% 33% 16 0.3% 0.6% 11,904 57% 16 0.3% 0.2% 9,757 1,339 1,234 1,182 1,090 SIG Realised Gain West Register Property GRG Interest Other Total Income of debt of £23.7m and monthly MTM drip fee Efficiency Outer Years 2013 vs 2012 (% ) Headline Profit & Loss (£m) Schaeffler- Q1 MTM release due to syndication Total Headcount Total Headcount excl external secondees 2013 vs 2012 ■ Information Classification: Secret ■ ■ ■ RWAe is likely to only marginally decrease in 2013 with regulatory changes and case inflow offsetting asset management impacts. Portfolio reductions in 2013 are primarily due to Non Core reductions. New case inflow offsets reductions in Core businesses. Case inflow migrates towards smaller value, higher volume cases primarily from CBD. 2012 income figures includes, Samsonite (vast majority has been sold) and Schaeffler (disposal). 2013 expenses are flat on 2012, however 2012 included legal cost accrual releases of £5m. 2013 vs 4+8 ■ ■ ■ ■ -11.7% -11.7% App 2: BU’s Commentary: ■ Performance Metrics Cost income ratio Cases per RM (excl Divestment) Expenses as % of total assets PBIL % of Assets Managed Case Volumes App 1: Divisional ■ The GRG portfolio remains broadly in line with 4+8 expectations over the 5 year horizon. Portfolio run off in 2012/ 13 is slower than anticipated at the 4+8 due to deterioration in the economic environment but recovers in the outer years. Case inflow reflects a migration to lower value, high volume cases vs the 4+8. CBD is now 20% of the portfolio and anticipated to increase to 24% by 2016 Non Core run off has slowed to a 20% reduction in 2013 vs 23% in the 4+8. SIG continues to forecast steady realisations resulting in a c.50% reduction in portfolio over the forecast cycle. 18 Expenses Budget Summary Introduction 2013 Efficiency Outer Years App 1: Divisional App 2: BU’s Expenses £’m 1 9 2 7 163 162 FY 12 Headcount Avg Cost per FTE Wage Award Legal & Prof FY 2013 ■ Average headcount YoY increases from 1214 to 1226 with growth in GRGI partially offset by reductions for APS and Divestment exits, and other small regional reductions. ■ Excluding the impact of wage award average staff cost has fallen £6.9k per FTE reflecting the change in mix of headcount as GRGI becomes an increasing proportion of the book. ■ Wage award set to 2% globally with the exception of high inflation countries in APAC. ■ Legal and Professional costs in 2012 reflect a large non recurring recovery in the US, £5m and in 2013 , GRGI has increased legal cost of £1.4m compared to 2012. ■ Minimal provision for redundancy included in 2013 – c.£600k. Information Classification: Secret 19 Headcount Budget Summary Introduction 2013 Efficiency Outer Years Average App 1: Divisional App 2: BU’s 3 FTE 25 77 44 1,226 1,214 2012 UK & Regions GRGI SIG/WR Functions FY 13 ■ Headcount decreases 157, (12%) from1,339 to 1,182 on a spot basis at the end of 2013. ■ Average headcount increases marginally YoY from 1214 to 1226, with growth in GRGI partially offset by reductions for APS and Divestment exits, and other small regional reductions. ■ Headcount in UK and other regions has fallen in line with portfolio reductions. ■ GRGI has seen an average increase in headcount of 77, reflecting the growth of this portfolio. Case load for RM’s has risen by increased volumes and additional regulation (eg CCMA-Code on treating residential mortgage arrears and CPC II Code on treating SME arrears). ■ Functional headcount decreased due to exit of APS (-17), operations(-14) and LDC(-7) partially offset by Strategic(+8), Risk(+5) and SDU(+4). Information Classification: Secret 20 FY13 Portfolio Introduction Budget Summary 2013 Efficiency Outer Years App 2: BU’s Top 10 2013 Disposals and Repays: West Register (Germany exits) Centeni Parkdene Opal Bami Group Grove Cube Properties Arora Family Trust Pendragon Cheyne Real Estate Portfolio Value 2 £’bn 13 App 1: Divisional 9 £672m £590m £194m £189m £173m £123m £119m £96m £95m £93m Non Core Non Core Non Core Core Non Core Non Core Non Core Non Core Non Core Non Core 2 5 8 4 11 1 3 67 60 51 FY 11 New Cases Write-off Repaid/ Exit RTS Other 1 FY12 New Cases Write-off Repaid/ Exit RTS Other FY13 ■ Asset management actions in 2012 were broadly offset by new case inflow. Case inflow is expected to slow in 2013 and overall portfolio will reduce by 16% FY 2013, and 25% excluding impact of new cases and Rainbow Divestment. ■ 2013 Debt inflow is anticipated to be primarily within the UK (£3.1bn), RER (£1.1bn) and EMEA (£1.2)bn. ■ Rainbow Divestment exit (£1.7bn) included in December 2013. Information Classification: Secret 21 FY13 Portfolio (Division) Introduction Budget Summary 2013 Efficiency Outer Years App 1: Divisional App 2: BU’s Portfolio Value £’bn 0.3 1.1 0.3 0.7 6.2 2.7 1.0 0.1 0.4 6.0 67 60 51 FY 11 CBD MIB Citizens Ulster Non Core FY12 CBD MIB Citizens Ulster Non Core ■ Portfolio run off is driven by Non Core exits and repayments. Non Core run down is at £6bn and continues strongly in 2013 due to significant portfolio reductions in EMEA (£1.6bn) and RER (£2bn). ■ Debt outflow in CBD is primarily due to inclusion of Rainbow in Dec 2013 (£1.7bn). ■ Excluding Non Core GRG, portfolio run off in 2013 is expected to be £11bn pre new cases. Information Classification: Secret FY13 22 FY13 Portfolio – Debt inflow Budget Summary Introduction 2013 Efficiency Outer Years App 1: Divisional App 2: BU’s Utilisation by MGS Grade 60,000 ■ At Sept YTD total Group exposure in MGS 20 – 24 was £31.7bn of which £11.4bn is currently in GRG. ■ Of the remaining £20.3bn, £12.6bn are possible inflows to GRG. ■ CBD has largest proportion of book in MSG 20 – 24 (41%). Utilisation (£m) 50,000 40,000 30,000 20,000 10,000 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 MGS Grade GRG Division Group MGS 20-24 by Division GRG (£bn) Potential Inflows to GRG (£bn) Total (£bn) MIB 1.7 1.6 3.3 CBD 4.6 2.7 7.4 GRGI 1.6 3.0 4.7 Citizens 0.6 1.6 2.2 8,000 Non Core 2.8 3.6 6.4 7,000 Total 11.4 12.6 24.0 Utilisation (£m) 6,000 5,000 4,000 3,000 ■ Budget inflows from YTD Sept 2012 to 2013 are c.11.6bn. ■ 2013 forecast includes £8bn of inflows into GRG. 2,000 1,000 MIB CBD Ulster Citizens Non Core Division Group (excl GRG) GRG Information Classification: Secret 23 FY12 Capital – Total RWAe CT1 basis (net of provisions) Budget Summary Introduction 2013 Efficiency Outer Years App 1: Divisional Dec 2011 Total RWA (credit £bn) 88.8 GRG Asset Management (16.5) P. Ace (5.1) Isobel (1.6) RTS (5.8) Write-offs (4.4) Provisions (2.9) EAD Movements (1.8) LGD & PD increase 10.0 Other 0.04 New cases YTD Sep 18.8 September 2012 Total RWA (£bn) 79.5 GRG Asset Management £21.6bn Portfolio Value £’bn 95 0.1 90 1.6 1.6 5.1 85 Total RWA £bn 80 5.8 75 70 App 2: BU’s - 3.5 18.8 4.4 88.8 65 79.5 7.8 2.9 60 10.0 5.1 55 1.8 60.7 0.04 50 Dec-11 SIG & WR Iso bel P . Ace RTS Exit Write Off Repay Information Classification: Secret LGD & P D EAD Reductio n M o vements Other LGD & P D Increase Pro visio ns Sep 12 pre New Cases New cases Sep-12 24 FY13 Capital – Total RWAe CT1 basis (net of provisions) Budget Summary Introduction 2013 Efficiency Outer Years App 1: Divisional GRG Asset Management £14.9bn Portfolio Value £’bn 3 .9 App 2: BU’s 2012 Total RWAe (credit £bn) 81.9 GRG Asset Management (14.9) RTS (3.8) Write-offs (3.9) Provisions 3.9 Regulatory Headwinds 9.9 New cases 9.0 2013 Total RWAe (£bn) 81.3 3 .8 £10bn of regulatory headwinds 5. 8 9 .0 3 .9 9 .0 8 1. 9 12 . 1 2 .8 0 .7 8 1. 3 7. 1 2 .0 72 . 3 6 2 .5 Y/ E 2012 Pr ovision RTS Exit Wr it e of f Repay Ot her Y/ E 13 pr e Model Slot t ing excl Slot t ing Reg Change Change Ulst er Ulst er Information Classification: Secret CRDIV Y/ E 13 pr e New Cases Y/ E 2013 New Cases 25 2013 Headwinds Introduction Budget Summary 2013 Outer Years Estimated Impact (CT1 RWAe) Timing CRD IV +£20.0bn gross of mitigants +£11.1bn net of mitigants (M&IB Reg spot figures) 01/07/2013 (Fast assumption) Slotting UK: +£4.4bn UB: -£10.2bn Q4 2012 / 2013 [?] Efficiency App 1: Divisional App 2: BU’s Comments Possibility of corporate exemption Largest positions being assessed with possible options considered Q4 2012 – c.+£1.5bn; 2013 - +£2.9bn CT1 benefit but offset by Pillar 2 capital add-on. Awaits CBI sign off. Internal Model Changes [+£2bn] [H1 2013] Large Corporate LGD, Large Corporate PD, EAD and Risk Rating model changes Timings to be confirmed West Register Capital Treatment No CT1 impact (+£0.6bn total capital increase) July 2012 Moving from 8% to 25% capital required under Pillar 2 Future Capital Deduct mitigation (CP12) [Q4 2012] Discussed and verbally agreed with FSA Technical – to remove SIG from being classified as Connected Clients resulting in exclusion from IGLs £1.3bn of lending to be re-allocated [Up to -£5bn?] [H1 2013?] Alternative methodology of BEEL being considered Expect to present findings to FSA November / December SIG Capital Treatment LGD on Defaulted Loans Information Classification: Secret 26 FY13 Capital Actions Introduction Capital Work Stream Capital Data Quality Capital MI Capital Tools & Education Capital Planning / Forecasting Derivatives Regulatory Headwinds & Mitigating Actions Budget Summary 2013 Outer Years Description Efficiency App 1: Divisional App 2: BU’s Status Accuracy and Efficiency drive – eg Unlinked securities, excess limits, erroneous LGDs etc Focus in June being continued into H2 Improve Capital MI Continuing improvement and development in H2 – bridges, DQ Capital tools built and rolled-out to aid decision making Training completed for c.500 RMs, credit sanctioners and support staff in H1 Capital analysis now required for all connections >£5m (discretion of Credit Sanctioner <£5m) At the GRG-wide and donor divisional level Focus on system remediation and training Further 130 trained to date in H2, focused on BRG, UB, West Register and operations/finance GRG-wide RWAe forecasts developed Looking to improve granularity at divisional and large deal level Name by name review for current and CRD IV capital mitigation Reviewing largest CRD IV positions Key areas: CRD IV, Slotting, Ancillary Services Ensuring assessment and mitigating plans are in place to address key areas Information Classification: Secret Mitigation plan for largest positions being prepared 27 FY13 Impairment Introduction Budget Summary 2013 Q1 12 Actual £'m MIB Core Outer Years Q2 12 Actual £'m Q3 12 Actual £'m Q4 12 Forecast £'m App 1: Divisional 2012 FY Rolling Forecast £'m App 2: BU’s FY 2012 9+3 Forecast £'m Stressed Loss Forecast £'m 37 46 Corporate Individual Collective Latent PD90 31 48 (1) (4) (12) 55 50 (1) 0 6 Commercial Individual Collective Latent PD90 77 71 12 4 (10) 51 61 16 (5) (21) Total CBD 108 107 GRGI Core 128 88 CBD Individual Collective Latent PD90 90 82 29 (2) (18) 46 63 (4) (0) (12) MIB 118 292 169 398 976 179 833 1,880 GRGI 261 178 192 255 886 887 2,491 Total Non Core 469 516 392 738 2,114 2,207 4,903 Information Classification: Secret 6 Efficiency 85 150 124 1,150 120 107 (0) (3) 16 101 308 324 69 51 18 (4) 4 41 238 271 189 142 546 595 1,293 163 82 461 461 1,199 30 21 10 86 252 290 532 18 (2) 28 FY13 Stressed Loss Introduction Budget Summary Current portfolio includes: £14bn of utilisation with no provision and no stressed loss. And: £11bn of utilisation with stressed loss but no provision. 2013 Outer Years Efficiency App 1: Divisional App 2: BU’s Provisions balance 25% Utilisation Value w ith no stressed loss or provision 62% Stressed Loss balance 13% Division MIB CBD Non Core GRGI Citizens Grand Total Provisions balance £'m 837 1,137 10,991 1,320 14,286 Stressed Loss Utilisation Value with balance no stressed loss or £'m provision £'m 1,030 4,619 1,283 9,876 4,001 15,980 910 2,895 1,114 7,223 34,485 Total Utlisation £'m 6,486 12,297 30,972 5,125 1,114 55,994 NB: Portfolio shown is September 12 YTD and excludes SIG & WR. Information Classification: Secret 29 This page has been intentionally left blank a: Information Classification: Secret Outer Years Financial Summary Introduction Budget Summary 2013 Outer Years Efficiency 2013 2014 2015 2016 CAGR% 13-16 SIG Realised Gain West Register Property GRG Interest Other Total Income 22,020 24,000 23,193 213,715 282,929 19,510 24,000 19,021 172,822 235,352 14,217 12000 14,785 145,795 186,797 11,161 6000 12,485 122,164 151,809 -20% -37% -19% -17% -19% Staff Expenses Other Expenses Total Expenses 134,893 27,629 162,522 116,445 22,733 139,178 104,528 21,928 126,456 94,124 20,053 114,177 -11% -10% -11% Operating Profit 120,406 96,174 60,341 37,632 -32% Spot Balance Sheet (£bn) Debt Portfolio West Register SIG Total 46.8 3.1 0.6 50.5 39.9 2.6 0.5 43.0 33.8 1.4 0.4 35.5 28.4 0.7 0.3 29.4 -15% -39% -20% -16% RWA RWAe Provisions 51.2 81.3 13.8 48.7 77.4 12.2 45.5 72.3 10.5 42.9 68.1 9.0 -6% -6% -13% Performance Metrics Cost income ratio Cases per RM (excl Divestment) Expenses as % of total assets PBIL % of Assets Managed Case Volumes 57% 16.0 0.3% 0.2% 9,757 59% 16.7 0.3% 0.2% 8,998 68% 17.9 0.4% 0.1% 8,166 75% 19.7 0.4% 0.1% 7,415 9% 7% 6% -23% -9% Total Headcount Total Headcount excl external secondees 1,182 1,090 1,039 968 890 836 757 716 -14% -13% Headline Profit & Loss (£m) App 1: Divisional Commentary: Outer Years ■ ■ ■ ■ ■ Information Classification: Secret App 2: BU’s RWAe is likely to follow the trend of the portfolio and only marginally decrease in 2013-2016 due to regulatory changes. Portfolio reductions in the outer years are primarily due to Non Core and MIB reductions with CBD, and GRGI forming a larger part of the portfolio. The case inflow continues to migrates towards smaller value, higher volume cases. CBD is anticipated to increase to 24% by 2016 from current 20%. Headcount reduction slows down in outer years as central functions proportion increases due to regulatory constraint. This will have a negative impact on the operating profit with slower expenses reductions. Provisions will decline in a slower pace then the portfolio as the provision figure for GRGI is forecasted to peak in 2013. The provision figure for other areas will decline from Y/E 2012. Outer years vs 4+8 ■ The GRG portfolio remains broadly in line with 4+8 expectations over the 5 year horizon. 31 Outer Years Portfolio Budget Summary Introduction 2013 Outer Years Efficiency App 1: Divisional App 2: BU’s Portfolio Value 5 £’bn 13 17 8 3 51 29 FY 13 New Cases Write off Exit / Repaid RTS Other FY 16 ■ The regions with the fastest run off is EMEA and America’s. ■ The value of new cases will continue to decline in line with the overall portfolio run off. ■ The value of Write off’s will peak in 2013 and then will continue to decline in line with the overall portfolio. The increasing focus on capital and the Basel 3 implementations may see an increase of write off’s in the outer years. ■ The number of RTS cases will increase in 2014, mainly due to the improvement in the Eurozone. UK and America will also show large RTS movements. Information Classification: Secret 32 Outer Years Portfolio Mix Budget Summary Introduction 2013 Efficiency Outer Years App 1: Divisional Value (£bn) Volume (£bn) 100% 100% 80% 56% 57% 61% 80% 48% 49% 53% 60% 40% 60% 9% 7% 2% 20% 2% 2% 2% 2% 12% 18% 20% 18% 21% 23% 24% 14% 2011 2012 2013 2014 2015 2016 2% 37% 37% 36% 37% 10% 11% 12% 13% 16% 18% 15% 40% 2% 2% 18% 2% 2% 45% 43% 36% 20% 34% 32% 30% 0% CB D M IB Citizens Ulster 2011 Non Co re 2012 CB D M IB 2013 2014 Citizens 2015 Ulster 2016 No n Core 100% 100% 41% 44% 42% 42% 44% 44% 80% 60% 60% 33% 33% 32% 32% 31% 31% 23% 26% 27% 29% 31% 42% 39% 38% 38% 36% 2012 2013 2014 2015 10% 40% 40% 45% 43% 45% 45% 46% 48% 54% 20% 20% 0% 8% 12% 11% 11% 12% 6% 2% 2% 12% 12% 33% 34% 16% 14% 13% 11% 0% 80% App 2: BU’s 6% 6% 5% 5% 5% 5% 2011 2012 2013 2014 2015 2016 Small co rp Large Co rp Real estate Information Classification: Secret 0% 2011 Small corp Large Co rp 2016 Real estate 33 Outer Years Capital Introduction Budget Summary 2013 Efficiency Outer Years App 1: Divisional GRG Asset Management £28bn 12 Portfolio Value 21 £’bn App 2: BU’s 2013 Total RWAe (credit £bn) 81 GRG Asset Management (28) RTS (12) Write-offs (7) Other (3) Provisions 21 New cases 16 2016 Total RWAe (£bn) 68 6 - 7 22 81 16 68 3 Y/E 2013 Provision RTS Exit Write off Repay Other New Cases Y/E 2016 ■ GRG asset management delivers c.£28bn of RWAe reductions from end of 2013 to 2016. ■ Regulatory changes slow the decline of RWAe vs the assets run off. ■ Repays and exits increase 2015-2016 primarily US & UK and write off’s decline from their peak in 2013. Information Classification: Secret 34 This page has been intentionally left blank a: Information Classification: Secret Efficiency Introduction Budget Summary 2013 2012 Efficiency Outer Years 2013 2014 2015 2016 1,339 1,182 1,039 890 757 Average FTE (excl external secondees) 1,214 1,226 1,009 864 743 Average Costs per FTE - £'k 133.8 132.6 137.9 146.4 153.7 Average Staff Costs per FTE - £'k 115.7 110.0 115.4 121.0 126.7 11.0 10.2 10.6 11.4 12.4 Cases per RM 16.7 16.0 16.7 17.9 19.7 Cases per RM (excl Divestment) 15.8 16.0 16.7 17.9 19.7 Central functions as % of total FTE 14% 13% 14% 15% 17% PBIL % of Assets managed 0.6% 0.2% 0.2% 0.2% 0.1% Expenses as % of Assets managed 0.3% 0.3% 0.3% 0.4% 0.4% 78 76 74 72 73 0.6 0.4 0.4 0.4 0.4 Cases per FTE (excluding Central Functions) App 2: BU’s ■ Divestment exit and increasing proportion of central functions drive increasing average staff costs from 2013. ■ Non staff costs form an increasing part of the cost base in outer years, rising from 14% to 18% by 2016, primarily due to legal and professional fees in GRGI as the portfolio runs down slower than the overall book. ■ Central functions proportion of headcount increases in outer years where headcount reductions are slower in functions where drivers are not fully proportional to portfolio size. Increased regulatory burden and mandatory projects prevent central functions declining in line with portfolio. Resources FTE App 1: Divisional Case Management Return Value per RM (£m) Income per RM (£m) Information Classification: Secret 36 Appendix This page has been intentionally left blank a: Information Classification: Secret Divisional Allocations Introduction Budget Summary UK excl Bonus Bonus Overseas GRGI Citizens Total Excl Citizens & GRGI Allocated Costs UK excl Bonus Bonus Overseas Total Budget 2,013 65,560 27,823 13,480 40,429 15,230 162,522 106,863 2013 Outer Years Efficiency Divisional Allocation (August 2012) MIB CBD Non Core Total 6.1% 55.8% 38.1% 100.0% 19.0% 29.0% 52.0% 100.0% 38.8% 0.8% 60.4% 100.0% N/A N/A N/A N/A N/A N/A MIB 3,999 5,286 5,230 14,516 CBD 36,582 8,069 108 44,759 Non Core 24,978 14,468 8,142 47,588 Total 65,559 27,823 13,480 106,863 App 1: Divisional App 2: BU’s Divisional Allocation (March 11) MIB CBD Non Core Total 5.0% 53.0% 42.0% 100.0% 19.0% 29.0% 52.0% 100.0% 34.0% 0.0% 66.0% 100.0% N/A N/A N/A N/A N/A N/A MIB 3,278 5,286 4,583 13,148 CBD Non Core 34,747 27,535 8,069 14,468 0 8,897 42,815 50,900 Total 65,560 27,823 13,480 106,863 ■ A weaker economic environment has resulted in a larger than anticipated portfolio in 2013. ■ The Non Core portfolio has reduced significantly faster than the overall portfolio due to the Non Core rundown plans and new case inflows from other Divisions. ■ New business volumes and overall portfolio mix has migrated towards smaller value/ higher volume cases. ■ Run off of the overseas book has been faster than progress in the UK. 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