NatWest Group plc

Stephen A. M.

Hester - Group Chief Executive and Executive Director Bruce Van Van Saun - Group Finance Director and Executive Director

Michael Helsby - BofA Merrill Lynch, Research Division Andrew Coombs - Citigroup Inc, Research Division Robert Law - Nomura Securities Co. Ltd., Research Division Rohith Chandra-Rajan - Barclays Capital, Research Division Thomas Rayner - Exane BNP Paribas, Research Division Ian Gordon - Evolution Securities Limited, Research Division Manus Costello - Autonomous Research LLP Jason Napier - Deutsche Bank AG, Research Division Michael Trippitt - Oriel Securities Ltd., Research Division Edward Firth - Macquarie Research Jon Kirk - Redburn Partners LLP, Research Division Chris Manners - Morgan Stanley, Research Division

Good morning, everyone. Thank you very much for joining us for the third quarter call.

As on Bruce Van Saun is with me, and we'll be going through the headlines of what we announced today before we go into your Q&A. I think, by way of introduction, I guess what I would say to you is that in the third quarter, we, I hope, had a very clear focus on what was important, and we believe that we've delivered against that.

It was important to keep our restructuring story on track and to make sure that all the improvements in our businesses and the wind down of Non-Core were behaving appropriately. I think we've done that.

It was rightly important in periods of huge uncertainty around bank capital, around bank liquidity, driven by the outside world that we show a very, very clear blue light or blue sky, between the RBS of 2008 and the RBS of today and across all of the solidity measures, capital liquidity, and so on. I think that we have shown ourselves to be in the better pack of banks in the world, facing into these uncertain times.

And then thirdly, in our ongoing -- in the ongoing profitability of our businesses, we needed to be as resilient as we could. I think that we've shown that we can deliver good ROE, 16% ROE in our Retail & Commercial business x Island, Island improving, and performance across the board that is at least in line with competitors, which was what not once -- was once not the case, although all our businesses are also showing the effects of the environment in which we're operating in.

And then finally, we needed to make sure that we were supporting customers appropriately. We've done that.

And we are to make sure that we are aligned to what changes in the environment are temporary, what changes have longer implications and are clear on the reshaping of RBS it requires as a result. So that's what we've been focusing on.

Hopefully, we have delivered to you clearly data and accomplishments across those metrics. And Bruce can perhaps go into that a little more now.

Okay. Thank you, Stephen.

We continue to make progress on improving our risk profile during the quarter. Our capital funding and liquidity metrics all continued to improve.

Our operating performance declined relative to the second quarter, as market conditions were challenging. While our Retail & Commercial franchises produced stable and solid returns, GBM's third quarter performance reflected the subdued trading environment and a cautious risk appetite.

Non-Core continued to make good progress in the rundown of third party assets, or TPAs. Group operating profit for the third quarter was GBP 267 million, while on a year-to-date basis, it is up GBP 300 million, or 15% to GBP 2.1 billion.

The group's bottom line showed an attributable profit of GBP 1.2 billion, reflecting a GBP 2.4 billion gain on fair value of own debt. Our capital position improved to a robust 11.3%, up 20 basis points on the previous quarter, given our RWA reduction.

Our tangible net asset value also increased by 2p per share on the quarter, driven by the fair value of own debt gain to 52.6p per share. Looking at the major group P&L items.

Group income was down 18% on the prior quarter due to a swing in valuation items in Non-Core and GBP 0.5 billion reduction in GBM revenues. R&C's NIM was relatively stable in Q3, although we are seeing modest construction as higher yielding hedges on current account balance continue to roll off, and as deposit pricing remains highly competitive.

Non-Core NIM dropped significantly from 87 basis points in Q2 to 43 basis points in Q3. This reflects the disposal of higher yielding Non-Core assets, higher funding costs and lower recoveries.

Group NIM declined 13 basis points on the prior quarter mainly due to the drop in Non-Core, which had a group level impact of 6 basis points and an increase in our liquidity pool, which had a group level impact of 3 basis points. Looking at the expense base, we continue to make good progress.

Versus a year ago, expenses are 7% lower and are down 2% versus the prior quarter. The year-on-year decline reflects our progress in reducing Non-Core, while the sequential quarter decline primarily reflects lower GBM compensation accruals.

Now given the economic outlook in a difficult trading environment, we are actively working on further cost initiatives across the group. Impairments were down GBP 730 million, or 32% versus Q2, reflecting a 52% fall in Non-Core.

Core impairments were broadly flat at about 80 basis points of loans and advances. We are seeing broadly stable trends in the corporate book and general improvement across the retail book x Ireland.

Group provision coverage of REILs remained stable at 49%, as REILs grew by less than 1% in the quarter. Analyzing the combined Ulster impairment trend, Q3 '11 impairments halved to GBP 600 million.

Non-Core Ulster's impairment charge benefited from the non-repeat of tertiary land value charges seen in the second quarter, as well as lower charges on the development loan book, as most of this has already been impaired. In Core Ulster, impairments rose by GBP 60 million, as further declines in asset values in the mortgage and corporate books drove higher losses on defaulted assets.

We are encouraged by the improving economic stats coming through from Ireland, but it will take some time for those to play through to employment gains and asset value stability. In the third quarter, "below the operating line items" saw a market positive swing from the second quarter.

The widening of the group's CDS spreads drove a large fair value of own debt gain of GBP 2.4 billion in the quarter. The further decline in the value of Greek sovereign bonds triggered an additional GBP 142 million of write-downs on our Greek bond, AFS portfolio.

This portfolio has now been marked at GBP 0.37. It's worth noting that year-to-date, our direct sovereign bond exposure to the periphery Eurozone countries has decreased by GBP 3.2 billion, or 75% to GBP 800 million.

This exposure now represents much less than 1% of our funded balance sheet. The APS charge was only GBP 60 million in the quarter and accumulated APS charge now stands at GBP 2.2 billion.

Taking a quick look at the divisional results. We were pleased that R&C results were broadly stable.

Year-to-date, ROE for R&C, x Ireland, is 17%; with Ireland, it's 11%. And again, we made about GBP 1 billion of profit in the quarter from R&C.

Our U.K. Retail had another good quarter, producing an ROE of 27%.

Income was off 4% on prior quarter, as investment income and transaction fees declined, but this was partly offset by a strong direct-cost performance, down 5% and a 6% decline in impairments. The business remains focused on its funding base, and the third quarter saw further progress.

Customer deposits grew by about GBP 3 billion to GBP 100 billion, which improved the loan-to-deposit ratio to 109%. It's worth noting that our improving online functionality is helping to keep our mobile banking offering ahead of our peers.

We now have 5x more customers than our nearest competitor. U.K.

Retail has recently launched new mobile banking apps across the iPad, the BlackBerry and the Android platforms. U.K.

Corporate has launched a number of initiatives to support our customers including committed overdrafts, specialist bankers for struggling companies and targeted industry funds. The business produced, I'd say, a decent result in a more difficult environment in the third quarter.

Noninterest income was resilient in the quarter and impairments were broadly stable, producing a third quarter ROE in line with its cost of equity. Wealth continues to implement its revised strategy.

In the third quarter of '11, it completed the refocus on target markets, further developed the products suite, continued investment in a market-leading IT platform and completed refreshing of the brand. This quarter's highlights include a strong increase in noninterest income, good cost control and good lending activity.

GTS' new management oversaw a 19% operating profit increase versus Q2, delivering an ROE of 31%, which is up 400 basis points on the prior quarter. The improvement was driven by strong income growth, good cost control and declining impairments despite the top off of an existing single-name impairment.

Despite the early signs of improvement in the Irish economy, Ulster Bank continues to struggle under the wake of high impairments. Nonetheless, on the operating front, Ulster is making progress.

They are simplifying their business structure, aggressively focusing on costs and bolstering deposit-taking programs. Both revenues and expenses improved versus the prior quarter.

Citizens continued its strategy of reenergizing the franchise through new branding, product development and competitive pricing. However, the low rate environment and flat yield curve is a revenue headwind.

PBIL was up 3% on the previous quarter given higher revenues. ROE remained stable at about 6% to 7%.

Insurance delivered a solid performance in the quarter, with a return on regulatory capital of 12%. The business continues its significant program of investment to improve its financial and operating performance, as highlighted at the recent Investor Day.

Programs to improve the cost base and optimize the capital structure continue. Overall, we remain on track.

Turning to GBM, they saw a 29% sequential fall in revenues in the third quarter, which reflects the current difficult market environment and our reduced risk appetite. While this decline is disappointing, our performance is pretty much in the pack of our peer group.

Our currency business was one of our stronger performers, delivering stable income on the second quarter. The mortgage business performance was pretty good, while the credit business performance was more disappointing, reflecting widening credit spreads.

We have adjusted performance-related pay accruals during the quarter. Our year-to-date compensation ratio is 40%, which is on the light side of peer group.

Given the environment, management will remain focused on shrinking the cost base and the use of unsecured funding over the next few months. Turning to Non-Core.

In the third quarter, we saw a continued good progress in TPA and risk-weighted asset reduction. TPAs fell by GBP 8 billion in the quarter, including GBP 4 billion of runoff and GBP 3 billion of disposals, while RWAs fell in line with TPAs.

We believe we are well on track to achieve our full year 2011 target of GBP 96 billion of TPAs. Non-Core's P&L losses increased marginally in the third quarter, as the second quarter significant valuation gains were not repeated.

This decline in revenues was largely offset by the fall in Irish impairments. Let's turn quickly next to the balance sheet.

The excellent progress we've made on funding liquidity on our capital base reflects our laser-like focus on improving the safety and soundness of the bank. Our loan-to-deposit ratio is now 112%, with Core at 95%.

Customer deposits now represent 59% of our funding structure. These metrics put us in good standing relative to peers.

On term debt issuance, year-to-date, we've completed our full year term funding target of GBP 23 billion. Looking into 2012, we will aim to issue around GBP 20 billion, primarily in the secured and private markets.

We will remain opportunistic in our approach to our funding needs based on the prevailing market conditions. We built our liquidity portfolio to GBP 170 billion in the quarter, which is around GBP 30 billion in excess of our short-term wholesale funding.

Now while this is costly, we believe it's appropriate to be cautious, given Eurozone market stresses. The group capital position remained robust in the quarter, increasing 20 basis points to 11.3%.

This reflects the continued steady deleveraging taking place in Non-Core. Looking to the end of this year and the advent of CRD 3, we expect the impact to be about GBP 20 billion versus the previous guidance of GBP 25 billion to GBP 30 billion due to successful risk reduction and mitigation.

So to sum up, in an environment that we expect to remain challenged for the near term, we will continue to focus on maintaining a strong balance sheet, with robust capital funding and liquidity metrics. We will also push even harder on our cost base.

We believe this will give us a solid foundation to further the recovery of RBS. With that, I'd like to hand it back to Stephen.

Bruce, thank you very much. Let's go straight into any questions you may have.

I just had a couple of questions for you. The first one was on the net interest margin, on what you think the outlook is there.

Obviously, you built the liquidity buffer and that cost a little bit. Are you going to wind that liquidity buffer down a little bit so that we can get maybe a stable net interest margin, or do you think that's going to continue to fall as your hedges roll off?

And the second one was just on the cost base in GBM, I mean, it didn't look like there was a significant reduction in the cost base in the quarter versus the revenues down 29%. I mean, if we try and think of the cost income ratio, where -- maybe a couple of years out, how should we try and think about the shape of that, what you're aiming for?

You want me to take the first one, you take the second one? Or it's fine, I can take both if you want.

Well, first off on the NIM, I think that the outlook at this point would be stabilizing in the mid-180s, although we'll have to see whether market stresses resume. I would like to use some of that build in the liquidity buffer to pay for some of the redeeming debt that we have coming up in the next 2 quarters.

So again, we target 150 in the liq buffer. Some of that build is an anticipation of some of these maturities, but again, I think it makes sense in this environment to air on the side of caution.

We will continue to see some rolling off impact from the hedges on the current accounts to the extent we can. We're looking to continue to price the front book and reprice the back book a bit to offset that.

So at this point, I'm comfortable with at least, through the fourth quarter, tracking to kind of roughly where we are now.

On the cost side of GBM, I mean the -- I think it is the case, obviously, that when you get down to these levels of revenues, shifting expenses down become more of a structural issue than a bonus issue. We didn't accrue additional bonuses in the quarter but obviously, we've got a true-up at the year end whether we need to take some away from prior quarter accruals.

In terms of the long-term cost income ratio, I'm afraid we don't have a piece of guidance to give you. I think it remains our clear perspective that businesses that we run need to cover that cost of capital.

And if they don't, we need to keep restructuring them. But there's so much going on in terms of the dynamics, both the regulation and the funding and the revenue lines that I think it's harder to be more prescriptive than that at the moment.

Okay. So basically, you're thinking about some sort of restructuring and -- as we do get revenue rebounds?

No. It's clear that we will be reducing the size of GBM, both in terms of its consumption capital and it's consumption of unsecured also funding, and the costs.

But I don't have a sort of a new dimension to give you today.

If I could just dig into 3 points in the revenues actually. One with regards to the margins at Ulster and also in the U.S.

Second, GBM and also about Non-Core. So firstly, on the margin, I mean, at Ulster, you're seeing a nettable uptick from loan repricing whereas traditionally we've obviously seen higher funding costs coming through then.

Just interested to hear your thoughts on how further -- how much further you're going to have to go? In the U.S., in contrast looking the opposite trends, you obviously had some very positive momentum.

You've been talking about moving closer to peers, but it seems to have stabilizes. So interested to your thoughts there.

On GBM, I'm interested on the rates business, particularly, you've mentioned a GBP 200 million hit there, some counter-party exposure risk management, so perhaps you could just provide a bit more color on exactly what that is. Likewise, with the credit business, a bit more color on how much of those -- that drop is due to the mortgage activities and how much due to the main credit flow business.

And then finally, on the Non-Core, you point to accelerating the disposal ahead of the Basel III coming in, and your previous guidance has been GBP 250 million of losses per quarter. So is that in line with your previous guidance?

Are you now pointing to that being slightly higher potentially going forward?

Okay. I've got that as 4-parter.

I'll try and tick them off part-by-part. First off, on the margin in Ulster, I think there was a blip in the second quarter, which actually compressed it, and so we're, I think, back at levels that are more reflective of where we'd expect to be going forward.

We have worked very hard to try and price on the loan side and be very disciplined on the deposit side. So we're making a bit of headway there.

Probably, on driving pre-provision profit improvement going forward, the main action will be on the expense base, so we continue to look hard there on how to rationalize the footprint in the expense base. On the U.S., I'd say, there were a few one-offs in the numbers this quarter.

We had higher MSR impairment, we had some OTTI impairments on a little slice of our investment portfolio. And that really caused the dip and halted the forward progress of the business.

If you exclude that, I think, we're still making good progress in terms of cross selling, getting bigger share of wallet from the clients, the NIM is pretty stable and we're seeing a bit of loan growth on the commercial side, which is what we've been hoping for, and the cost discipline remains pretty good. So again, I think we're stabilize and certainly, looking forward to an improving trend as we go into 2012 there.

On the GBM business, there's a few things under the covers there. I'd say that the business that was the most challenged in the quarter was the credit business, with spreads widening.

I think that was the Achilles' heel for most of the investment banks within the counter-party hit that was referenced in the write-up. Clearly, given where spreads went, you're trying to hedge some of that and so there's a cost to that.

I should point out at the same point, our own derivatives spreads went out and so we had roughly an offsetting credit in the quarter as well. So if you look at the dip, a good element was that in the credit business, rates was a bit off.

Mortgages, I thought for the size of book, we have held in pretty well. The last question you had was on Non-Core.

And I think there, as you saw in the fourth quarter of last year, we tried to get a jump on the next year and build our pipeline. So we're very active right now, notwithstanding market conditions.

It's been reported that we have the aircraft-leasing business in the market. And so there's things that we're doing so that we get a good start in 2012.

That could lead us to have higher disposal losses in Q4, if we get that all in hand. But I think, again, that's largely timing in terms of a pulling forward transactions, so we have a good read on what to expect in 2012.

I just want to follow up on one point, it's GBM costs. Clearly, your comments in terms of the direction of travel are very clear and obviously, you're ahead of your peers in terms of taking remedial action.

Just to try and scale the actions you've already gotten through. And are you able to give me a rough number for the number of employees formally placed at risk already and subject to consultation ahead of potential redundancy [ph]?

To be honest, I don't -- I won't because I'm not entirely sure whether I'm allowed to or not. But the already at is not far away from what you have read in the newspapers.

Just a couple, hopefully, fairly quick ones, actually. Just one on the GBM revenues, and apologies, if you've sort of touched on this to a degree already.

And just in terms of the portfolio management performance in the quarter, I guess surprisingly positive, and I think, in the commentary you talked about derivatives market gains. I'm just wondering if you could quantify that.

And then secondly, on Ulster and Core, the main area of NPL deterioration, in a relatively robust performance, seems to be the CRE investment book. So I'm just wondering if you have any comments around that, where the NPL ratios increase to 27% in the quarter but the coverage has fallen.

So then to what degree that's a result of anticipated provisioning you took in, in the second quarter?

Okay. So the first question was on the GBM revenues.

And there, I indicated in the prior question that there's, roughly, an offsetting impact on the derivative side that is reflected in that portfolio line. So call that around a GBP 250 million credit.

And then the counter-party exposure debit in GBM was around GBP 210 million. So the net of that is fairly much a wash, in terms of is that a true reflection of GBM’s performance in the quarter.

On Ulster Bank, I think the -- could you just repeat that, again, for me?

Yes, I was just looking at the investment Commercial Real Estate portfolio within the Core business, which seems to be the main driver of new NPLs in the quarter, about GBP 0.4 billion up, I think. Just -- but coverage has fallen.

And so I was just trying to understand one, your expectation in terms of NPL trends going forward; and two, where the cover has fallen because you've built the reserves against that book earlier in the year.

Yes, well, really, the move is 2 big cases that moved from watch list to NPLs. We largely have had that provided for already.

So I don't think there's a big underlying trend there. I guess, overall, we are, I think, in a mode where we'll have elevated impairments in each of those books in Core until we see the improvement in the economy kind of move through employment and then, ultimately stabilizing asset value.

So we called out that we thought the second half, overall, impairments in Ulster would be lower, lead by Non-Core. Their commercial real estate book is largely already nonperforming and provided for.

But in Core, for the time being, I think we have to look at an elevated scenario.

Yes, Tom Rayner here. I noticed the return on equity target has been pushed back rather than reduced.

I just wonder if you could comment on whether you think there will be any further restructuring required to sort of hit 15% beyond what you've described already in GBM and, obviously, the Non-Core run-off. I noticed that revenue trends in the Core business, when you strip out GBM, are pretty flat.

So I just wonder if you could comment on what else might need to be done and what impact that might have.

Well, I guess my language was maybe too subtle. What we've -- effectively, we have reset the target to cost of equity, or in excess of cost of equity.

Now obviously, there are some of our businesses that will do a fair amount in excess of cost of equity, but effectively, we're trying to reduce the 15% as well as to push it out in time. And I think that, that -- the pushing out in time has to do with the economic outlook, and the reduction has to do with the ICB.

And so those will be the ways that I would think about it. In terms of INR actions, we expect to have completed the actions that were envisaged in our plan by 2013, by the end of 2013 in order to have businesses that are capable of those kind of returns.

But whether they are then making those kind of returns, we doubt because we expect that in a slower growth economic environment, it's going to be hard for us to grow income in the way we'd expect it. So ultimately, we think the businesses will get there.

But in the near term, they won't have the income growth that we had thought. There will be some offset on the cost line as we have said, but not enough.

I don't think it was your language, Steve. I think, if I may not reading your release, probably, so apologies for that.

I think that is pretty clear. The second thing I was just going to ask about was on APS, and whether or not market conditions, as they are, is likely to have any impact on your views on when you might wish to exit the Asset Protection Scheme.

It hasn't -- it certainly hasn't had at the moment. At the moment, all our stress tests show that we don't draw on the insurance even in the stressed environment, and therefore, it's not clear to us why we would want to pay GBP 500 million a year, past the point when we need to for something we won't draw on.

So that's -- you never know what's going to happen but that's our working assumption, that's where the logic sits to us.

I just have a quick question on the Non-Core. I think in the past, you've guided us to somewhere around a 10% cost of realization, if you like, in terms of the capital release against ongoing P&L costs.

But if I look over the last 4 or 5 quarters, you've probably only done that once. I mean, are we now, in this sort of new world, having to say, suggest that actually it is going to be absorbed capital running off this book.

Is that the sort of new picture we should look at going forward or is it something sort of reasonably temporary in the last couple of quarters?

No, you're right. I mean, we do think the cost will go up, not -- I mean, obviously, the external world is more difficult, but we're also into the more difficult assets.

So and the other thing to say is that these are broad blends, so there are a whole series of things that don't appear as assets, but that use our RWAs. And so for example, one of the big success that we haven't really talked about in Non-Core this year was getting rid of our entire correlation book, which has made tens of, actually, hundreds of billions of derivative exposure, which didn't show up as TPAs, that cost money.

It saved RWAs and in particular, will save RWAs on the Basel III. And so they -- and so in a sense, when we give a blend, it's not just asset by asset, it also reflects some of these other positions we've got to get out of that are not on the asset side but do have risk.

I guess I would also chime in though, that we have capitalized the business in our management accounting with a 12% capitalization rate. And so if you look at the expected losses from here, relative to that amount of capitalization and then the increase potentially springing with CRD 4 on the assets that we hold in Non-Core, it still should be capital accretive to wind down Non-Core.

I mean, that's our operating assumption still.

So it would be capital accretive against the 12% target?

Yes.

Okay, great. And so just one other very small point of clarification.

Just back to GBM on the portfolio management income, I guess one of your peers attracted quite a bit of attention earlier this week with, I guess, helping themselves to some hedge gains. Is this broadly the same, as you understand?

I mean, is it broadly what you've done within GBM?

Not at all, not at all. I think the peer -- and you know better than I, because I didn't listen to the call, but that is effectively tied to hedging their capital or -- and their equity position.

They had a bunch of gilts, they sold them, they took a realized gain and they allocated that back to the divisions as net interest income. That -- we didn't do any of that.

If we sell any of our securities portfolio, that would stay in other income in the group center and not be allocated to the businesses. So this is still -- this is really within trading.

You have positions, both that are exposed to counter-parties and then your own credit, and when spreads widen, you make money on the own side when spreads widen and you lose money when spreads widen on your counter-parties. And so I think that's, generally, all just reported in trading results within investment banking results.

It's the same concept as fair value of own debt applied to derivatives. Well, in our case, we have, if you like, people who owe us money on derivatives, where when the spreads widen, we have to put up provisions and people we owe money to, where when our spreads widen, we have a credit the other way around.

It's like we have the books in 2 different places. But it's the same concept as fair value of own debt except in derivatives, it goes both ways, which is why as Bruce has said, the 2 items roughly offset each other.

Two quick questions, actually. Just back to the comments on liquidity.

I understand, Bruce, what you said, you've built up the profit partly in anticipation of some debt maturities. But sort of putting that aside, given current market conditions, would you want the liquidity buffer to go any higher, or have you built it any higher going into the fourth quarter?

And just sort of flipping over to the other side of the balance sheet, I appreciate this is a very tough market for turn issuance, but would you be in a position to start to pre-fund next year, at this stage, do you think?

Well, look, I think what we did in the quarter was actually 2 things. One was increase the size of liquidity portfolio but at the same time, we decreased the amount of short-term wholesale funding.

And the way we did that was through Non-Core rundown, and we had GBM shrink their balance sheet. So that provided the cash, the cash is sitting in the central bank, so that spread widened.

I think that's obviously, clearly, a good thing in this environment. So even if we use some of that cash to meet maturing debt in the next couple of quarters, we still are focused on driving down that unsecured wholesale funding number to the extent we can.

So in Stephen's comments about the investment bank, we're looking to shrink the balance sheet where we can, and that, again, makes us more robust and improves that liquidity and funding metric. Sorry, what was the second part?

Just on issuance ahead of next year.

Yes, look, we'll be opportunistic. I think the market's kind of moved in fits and starts.

They opened for a little while and then they close, and so that's how we've been accessing the market all along. So rest assured, we have collateralized offerings set to go.

When the markets open, we'll be out trying to do that.

I think if I could just make the broader point, which I suspect you know anyway, but I think we are in a pretty good spot. Obviously, the continuing rundown of Non-Core reduces our funding needs, anything extra we do in the investment bank will reduce our funding needs, although it's not, per se, for that reason.

And we have gotten past the hump of paying back all of the government support and SLS and CGS and all sorts of things, which is either all paid back or already in the short-term funding figures. And so that gives up the ability to go the whole of next year with no unsecured term funding if we want to, just to within an amount of secured funding if markets stay difficult.

And so in that sense, we work very hard, and obviously at some P&L costs to be able to ride out continued difficulties in the Eurozone, if that's what happens.

Okay. And a very quick follow up, I apologize if it is in the disclosure.

What do you think your cost of equity is at the moment?

Well, I don't get too hung up on it, to tell you the truth, because it all depends of what period you want to take market bolts and pieces and so on, and so forth. I'm inclined to use 12%, for what of a better number, but I'm not going to die in a ditch over the number [ph].

Just a quick question on the RBS insurance business. Am I being too optimistic by suggesting that the business has turned a corner now because you've had, I think, a pickup in gross-written premium and the operating profit is, I guess, slightly down on the second quarter.

But I understand that the second quarter is generally a seasonally quite strong quarter. So we're now running at about GBP 500 million annualized PBT in that business.

Is that a reasonable aspiration going forward, is the first question. And then just secondly, on going back to the Non-Core business, I know this is difficult, but if there's any guidance you can give us on the outlook for income in that business, given how volatile it's been, it will be very helpful.

Sure. On the very first question, on insurance, we're very heartened to see that the new management team is executing the turnaround strategy well, and I think we've had 3 good quarters, so far, year-to-date, and we're building momentum, I think for more.

That's obviously necessary if we're going to have the potential landscape [ph] to, hopefully, take public assuming that the markets are back open in the second half of next year. So I would say, yes, we're heartened.

We think we've got a handle on the issues in the business that needed to be fixed. There's clearly some headwinds in terms of the low rates on investment income that we'll have to work hard to offset.

But I do think the run rate, certainly, will print over GBP 400 million this year on our way, hopefully, to GBP 500 million next year. And that should, I think, create a valuable business that the market will be receptive to.

On Non-Core, again, what was -- could you just repeat that?

Just looking for a better guidance on the income line, really.

Yes, the income has bounced around a bit. In the second quarter, there was really an anomaly there because we had some recoveries, and we held equity.

So sometimes, when we do workouts, we end up taking back stock, and then we sell the stock. And instead of that showing as a recovery and running through the impairments line, that ran through income and really, boosted income to levels that we called out at that time, and said look, the impairment number is higher because of Ireland, but the income is at an unsustainable level.

If you collapse that, that's probably the way to think of that. So I think most of the year, we've been trying to get the PBIL to be at least flat to slightly positive, and then the impairment loss on disposal, any below-the-line disposal losses would be the net cost to us of the business.

And I think that's probably still the right framework to think about the business.

Okay. And sorry, just to go back to the insurance business again, could you just give us a couple of minutes on the underlying premium rates and claims cycle, sir, please?

Well, I think we're still in a hardening cycle in terms of the premiums, although that's come off quite a bit. So the major increases that you saw the last 2 years is ebbing, but I don't think we've gone and flipped to softening at this point.

And claims?

Claims are behaving themselves, so we have put a whole new claims process in place. We're working off a new system, new procedures.

Our underwriting has been tightened dramatically, and claims are coming in right around where we would expect them to be. So we're quite pleased.

I think that's a key driver to an improved performance in the business.

I just had 2 brief questions. The first was, net interest margin in U.K.

Retail has shifted down 10 basis points in the quarter, that by historic standards is a fairly big number. I wonder whether within the context of saying you expect group NIM to be about GBP 185 million sort of flat from here.

Is this volatility coming from the hedge, the allocation of liquidity buffer costs, or is it underlying business? And then the second question, Stephen mentioned that you didn't accrue bonuses in GBM in the third quarter, I think.

I just wanted to confirm whether that meant that this was -- whether there was some kind of a write-back, or whether we should view the costs in the third quarter as being the fixed cost base of the division as it stands at present.

Why don't I take the first one then. On U.K.

Retail, the NIM performance is a combination of things, actually. So the low rate environment and the hedges rolling off -- we have a 5-year tractor who's going to have an impact, it's modest but it chips away, that's one thing.

We've been ambitious in terms of our deposit growth targets, and to attract the incremental deposit in the competitive market, can be costly. So that's probably been another thing.

And then I'd say, the third thing is just a bit of a subtle mix shift. And so most of the new business that we're writing is in mortgages and secured areas and less on the personal unsecured as we hone our risk appetite.

So I think those are really what's driving the retail NIM down a bit. I don't think it's alarming.

I think it's still at a pretty high level. And if it continues to drift a bit lower, I think that's certainly reasonable, given the environment.

We'll certainly be looking to improve the asset pricing where we can on the front book and on the back book, where we have opportunities to try and arrest that to the greatest extent possible. Did you want to take the GBM?

Yes, on your cost on GBM, I guess, in a sort of a very narrow sense, yes, that would be a -- if you like the minimum fixed cost of the division. Clearly, the things that changed from that are one, when we reduce heads, which we expect to reduce the costs along with the ancillary costs that people have; and secondly, an element of the compensation is prior-year bonuses that have spread through deferrals into future years.

So obviously, if the average bonus pool goes up or goes down, there's a leading or lagging effect in terms of the spreading of those deferrals. And so if bonuses go down, then so the so-called fixed cost will come down on a lagged basis as prior-year bonus deferrals work out of the system.

But there will be all of those things happening next year.

And just to come back on the first, if I might briefly, the sequential revenues reported sort of for personal advances from mortgages, and cards are all down between 1% and 6% on books that are, at least, in aggregate, flat. Does that sort of give us a sense as to what the hedge means in the background?

I mean, should those be up? You were sort of saying mix might be the contributor, but I wouldn't have expected advances to be down.

Yes, I think it's mostly the hedge and then it's a bit of competitive factor, but Richard could give you more details on that later, Jason.

I'd like to explore 2 areas, if I may, please. On Non-Core and then the margin.

Firstly, in Non-Core, Bruce, can I just ask you to clarify the helpful answer you gave earlier about the budgeted maximum loss given the capitalization in Non-Core? If I use Basel III RWAs in Non-Core, of about GBP 165 billion, capitalizing that implies under or up to GBP 20 billion of pre- or post-tax remaining exit cost out of Non-Core, is that roughly the kind of ceiling that you're indicating?

No. I think we've been fairly clear on the guidance of impairments going forward.

And where we haven't filled in all the blanks is on disposal losses. But we had said GBP 20 billion to GBP 30 billion were the tramlines for disposal losses.

I think we're probably at GBP 17 million or so at this point. The run rate's come down, particularly, now that Ireland is pretty impaired.

So what it hinges on really is what happens to PBIL and what happens to disposal costs. If you compare that to capitalization of 12%, of what we have on the balance sheet today, of GBP 105 billion, and yes there will be some uptick from CRD 4, which we're working hard to try and mitigate.

I think we can ultimately keep the exit costs certainly within that capitalization. That's all I said.

And I wasn't giving you a forecast as to here's a new guidance as to what it's going to cost to get rid of Non-Core. I was just simply saying I think sort of...

Well within.

It will be well within those numbers.

So that's fine. I'm just trying to clarify what is well within?

So what's the number of capitalization you have against Non-Core? 12% of GBP 105 billion or...

Robert, I think we're in danger of going off on a red herring, because I don't think this was where what Bruce was sort of trying to -- he wasn't trying to give a piece of guidance. He was -- so it's a sort of helpful buildup.

As we said, I think the way to think about Non-Core is to the extent possible, keeping income PIBL flat. There will be quarters where it doesn't go flat either if we have recoveries or if we have particular disposal losses.

Impairments, we expect to come down year-by-year. And then the issue will be in terms of the asset reduction, how much is achieved by runoff, it's been roughly 40% to 50%, how much by sale; and the bits by sale, how much do we lose when we sell something.

And I think it is coming to the point where we may be losing -- we may be selling things around $0.90 on $1 when we sell them, not in every case, but in average. And so then it's just down the pace of how much we sell in each year, and those are the things we have to manage.

Okay. And I can use that as -- that was my next question, is the scale of losses you plan to incur in Q4.

Well, in Q4, as we've signaled, we are trying to do some particular things that will be RWA rather than asset-intensive in terms of their effect or in terms of their relief. And so we've given you what the assets target is for the end of the quarter.

We're not going to give you an RWA because we're still doing stuff, but there will be some costs of getting the RWAs down faster but...

That's building the pipeline into next year.

And so that's why we think you'll see a jump in fourth quarter that which is going to be reflective of the run rate, but will be reflective of particularly things we're trying to do for the year end capital ratios.

How do we think about that?

Well, last year, if you go back and look at what we did, we built a very significant pipeline and we probably had a jump of say, GBP 0.5 billion in order of magnitude, in order to achieve that. And so again, it's a moving target because you don't know what you're actually going to get done.

But again, it's not -- it's entirely feasible, if we get done what we're trying to get done that we could have something in that postal code, from our standpoint, we're not managing Non-Core. It doesn't really factor into your view of our earnings.

It's more about how do we work off that portfolio and how do we do it in a capital-friendly way. And so as the timing accelerates from 2012 into the fourth quarter of 2011, so be it.

It will be clearly capital accretive. Anything we do will release more RWAs than it costs.

Then the second area I just wanted to explore was further on the margin, and you've guided that you think you might stabilize in the GBP 184 million level. And I wonder could you just summarize some of the issues on that, particularly, what's happening with the repricing of wholesale funding?

And also, some help on what's happening to average interest net in assets, because is the decline in that likely to accelerate from the kind of run rates we see here of, I think, sort of 5% year-on-year, because of the use of the liquidity portfolio?

Well, again, I think we have -- the cross currents are well identified in terms of the R&C, which has 85% of our net interest income. And so there we have the lower rates tractoring through, and it will have an impact on the NIM to some extent trying to offset that to the extent we can with pricing initiatives, particularly on the asset side.

So that's going to be the story on R&C. At the group's center, there's a few moving parts, and so the buildup in liquidity is costly.

If we use that liquidity to pay down maturing term debt, which is planned, that can be mildly positive as a use of funds. We do have wider spreads, we suffered that last quarter, how that plays out into the fourth quarter remains to be seen.

But again, that's -- those are the kind of big dynamics. Non-Core and GBM have always been a bit of wildcards.

Non-Core, I think where it is now, is probably not going to be any worse. You just have the earning asset reduction taking place and affecting the overall level of NII, but probably, not having as big an impact on the NIM.

And GBM bounces around a bit, but in terms of its relative size and impact on the group calculation, it's not that significant.

I have 3 quick ones, please. Firstly, your provisioning, your impairment in the Core business was flat or very, very slightly up in this quarter versus Q2.

I know that there were a few one-offs in GTS and in the U.S., but I wondered if you could give us an indication of whether or not you think the underlying trend in impairment in Core is still down in Q4 and into next year, because I think most people are expecting a fall off in Core impairment next year. Secondly, on your sovereign exposures, I saw that you reduced your Italian sovereign exposure quite substantially.

I just wondered how you did that, is it like there was an increase in short positions? I just wondered if that was a cash position or if you bought CDS protection, or exactly how you managed down the Italian position so aggressively.

And lastly, briefly, could you give us a comment on your intention with regards to turning on coupons on sub-debt next year, please?

Sure. First thing, on the impairment trend.

I think we've always been -- I think, calling for gently falling impairments is the word that we put in quotes. And so you've seen that, I think, broadly but the counters to that, really, Ireland has not behaved as we had hoped on the Core side.

And I guess, Manus, it makes it hard to call the overall core with Ireland still, I'd say, a bit of a wildcard. If you just put that to the side then for the moment and do a quick round up, I think the U.K.

Retail impairment picture is solid. And I think if we look at U.K.

corporate, we get hit with some lumpiness, but that the problem credits [ph] in the migration into workout is still gently down. So I would expect to see things still elevated but not misbehaving in U.K.

corporate. GTS, we've had a one-off, which is highly unusual for that business, which shouldn't repeat next year when you look out to next year, so you'd have a chance for a pretty good size pickup in GTS.

And the U.S., I think the trends there are also positive and that would continue into 2012, barring something unforeseen in the economy. So I think putting Ireland to the side, you'd say the gentle fall is still an appropriate picture.

But I should also point out GBM is a bit of a wildcard, they can have recoveries as they did this quarter, and they can get hit with the occasional scud missile in any given quarter. So I'd kind of keep that one to the side for the moment as well.

On the Italian position, it really was hedging up the position and putting on a cash trade, cash short there to affect that reduction. And then what was your last point?

Just any statement on coupon.

Something on the coupon? I think it's early to say.

Obviously, in our recovery, we're trying to be a normal bank again. And so as part of that, we need to be paying our coupons and paying a cash dividend and all the things that would certainly evidence that we've made it to the final phases of recovery.

I think at this point, we'll just have to see where we are if the world looks pear-shaped because of horrible Eurozone outcomes. That may give you one answer.

And if the world starts to feel a bit better, that would give you another answer. So I'd probably have more to say on that when we get to the results meeting.

I've just got a couple of questions. Firstly, clearly, the revenue outlook is a hell of a lot tougher, and you mentioned in your comments about potential cost initiatives.

I was wondering if you could give us any type of ballpark figure at this stage, what level of cost savings you think you could draw out. And also just on costs, if you could quantify the deferral element in the GBM cost line in Q3, that would be very helpful.

And then just on second question is, I think, it's really interesting across the board, and when we look across the sector, that the Eurozone isn't just impacting sentiment, it's having a real impact in the P&L from trading, from NIM and clearly, in activity levels. I was just wondering when you all set around in your board meetings, do you sort of try and wrap all of that together in terms of quantifying what level of drag that is having on the P&L at the moment?

And if you do, I was wondering if you could share some sort of ballpark numbers with us.

I guess, on the first one, your quick question on cost initiatives, you probably recall, Michael, that we had an overall program of GBP 2.5 billion that was set roughly 3 years ago that we now have ratcheted that up a bit to GBP 3 billion. That program, it does not fall straight through the bottom line, obviously, because we have to make investment in making our core franchises stronger and we're using some of those savings to fund that.

And we have normal inflation and other things that we're offsetting. But I think we made excellent progress on that, and we're probably one of the few banks you can look at on the 3-year trend and have actually shown a decline in absolute expenses.

Having said that, I think we have to up the ante, given that the revenue headwinds that we face -- we're going through our budget process now. We've given some rough targets out to the businesses and I think we'll be in a position to give you more guidance on that in the annual results meeting.

But rest assured, we're certainly working hard at it, and I think there's more that can be done there. With respect to your second question on GBM, the deferred element in the quarter was about GBP 50 million, year-to-date, it's about GBP 170 million.

And so clearly, carrying that through is one of the reasons that the expense base becomes sticky this year. So anyway, that's the number.

On the Eurozone impacts, Stephen, I don't know if you want to comment on it broadly.

Well, I think the simple answer is we don't sit around in our board meeting doing anything other than drinking coffee and chatting, but we don't have a number when we do that. But the way, I think, I would express it is the Eurozone obviously hits most directly on the liquidity line and on the Investment Banking revenue line.

But frankly, I think, we were having disappointing growth outcomes in any event across mature economies before the Eurozone intensified, you're seeing that in the U.S. and the U.K.

And so if you like the broader damage to Retail & Commercial revenue growth, I think is got quite a lot to do with things that were happening in other countries in any event. And it simply remains the case that banks mirror the economies that they serve, and if those economies don't grow very much, then it's hard to get income growth.

Very good. Well, thank you very much for participating and listening.

I hope we have managed to answer your questions. You know where to find us if you have any more, and as you know, there is exclusive -- extensive disclosure in the IMS and also in some summary slides, if any of you haven't caught up with those yet, that are on our website.

So we look forward to speaking to you again in February, and thank you very much for attending. Bye-bye.