NatWest Group plc

Philip R. Hampton - Chairman and Chairman of Group Nominations Committee Ross Maxwell McEwan - Chief Executive Nathan Bostock - Group Finance Director and Executive Director Richard O’Connor - Head of Investor Relations

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division Peter Toeman - HSBC, Research Division Christopher Wheeler - Mediobanca Securities, Research Division Claire Kane - RBC Capital Markets, LLC, Research Division Michael Trippitt - Numis Securities Ltd., Research Division Chintan Joshi - Nomura Securities Co.

Ltd., Research Division Thomas Rayner - Exane BNP Paribas, Research Division Raul Sinha - JP Morgan Chase & Co, Research Division Alastair Ryan - BofA Merrill Lynch, Research Division Michael Helsby - BofA Merrill Lynch, Research Division Huw Van Steenis - Morgan Stanley, Research Division Joseph Dickerson - Jefferies LLC, Research Division Jason Napier - Deutsche Bank AG, Research Division Ian Gordon - Investec Securities (UK), Research Division

[Audio Gap] Analyst presentation at Q3. But there's more to talk about today.

First of all, I'd like to welcome our new top executive team, Ross McEwan and Nathan Bostock. They've been in post now for just a month.

It's been an extremely challenging month for both of them. But they don't need me to tell them that, that's the shape of things to come.

So that's life at RBS. We've also got a new capital framework that we've been discussing extensively with PRA in recent weeks and Nathan will talk about that.

And of course, today, the Treasury has announced the conclusion of their report into the good bank/bad bank merits. The main theme of today, although it is Q3, is actually capital.

The board are very clear with the PRA that we do need to strengthen -- further strengthen our capital position. There are various reasons for that, but they particularly include litigation and conduct costs, which are a feature of our results in Q3 and that of many other banks.

On the good bank /bad bank. The board has discussed this many times actually in recent years and we've always thought it was a great idea in principle, but very difficult to do in practice in the interest of shareholders, at least.

And so we aren't surprised that the Treasury has reached the same conclusion. There is obviously a limit to what can be achieved in the alternative, and that is an internal bad bank restructuring.

Although we, ourselves, have achieved, I think, an enormous amount, probably world-class levels in terms of our own Non-Core rundown in recent years. The key issue, which Nathan will talk about, is the level of acceleration of the -- effectively of the new reconstituted Non-Core or bad bank group of assets.

And although a lot of what we're talking about is strategic in capital in nature this morning, I think it's important to emphasize that Ross and Nathan have only been in post for just 30 days, and Ross will have much more to say on strategy generally by the time we get to the February results. But there's no doubt in the board's mind, indeed all of our minds, about where the value is in this business, in RBS and I think it's quite simply running the business better for both the customers and for shareholders rather than the major corporate financial changes which have been such a dominant feature of recent years.

There's still quite a lot to do in relation to Citizens and another transactions. But we believe, very strongly, that the value in this business -- the shareholder value in this business is basically stored in the operational performance that we need to improve and can improve quite significantly.

Andrew Large's report into our SME lending touches on that today. We commissioned that report.

We decided that it should be made public in this way. Elements of it, as Ross has already described, are uncomfortable for the bank.

Whenever you get an outsider to identify some of your weaknesses, that is always going to be the case. But we do think it's important to confront them and to make sure that what are identified as weaknesses can be turned into opportunities.

And that is where, as I say, I think it's extremely important that Ross and Nathan and the entire team focus their very considerable energies and talents in the months and years to come in basically running a much, much better bank. Thank you very much.

Thanks very much, Philip. Thanks also for joining us this morning.

As Philip said, we'd normally would have an audio for a Q3, but there's a lot t be's said today. When I took on the job, I didn't realize it would be doing so much in so little time.

Today, I just thought I would cover off on a few things as I come into the job, as Philip said, one month in. And these are some of my early priorities that I discussed with the board.

First off was to resolve the good/bad bank issue that had been in place for about 4 months. Very key for me to actually to get this result very quickly and I think we've done that as you've seen today.

The second one was to resolve the capital position of the bank with the PRA. The business has done magnificent work on rebuilding the capital from being broke to being at 9.1 fully loaded.

But our view is we needed to get that up to a higher level to take that one off the table is something that people conversed with us. Nobody talks to us about liquidity now, it's just all around capital and a lot of uncertainties.

So that was the next one. The third one was to reset the relationship with HMT, PRA, UKFI and the Chancellor.

I mean, we needed to get a firm basis of understanding about this business so that we could all go forward and spend 90% of our time on the good part of this business rather than talking about those pieces that really now make up about 10% of the bank. We also wanted to make progress on the debt and it's good to see that, that is progressing well.

Really, that's just a sign to me of a normal bank again when you can pay dividends. And the final one was to sharpen our focus on our customer-focused businesses, and I'm going to give you a good update on that in February when we give our full year results.

So lots of do, but those were the things that were very clear in my mind as priorities that I had discussed with the board. It's very clear that RBS has made a considerable progress over the last 5 years.

If you look through all of the activities that this bank has been involved in, the things that Stephen and the team have tidied up, absolutely remarkable on getting this bank back sound again. It's got a robust balance sheet with a dramatic change in the actual scale and scope of this business, now around 80% of its businesses in the retail and commercial space, which wasn't the case before.

Non-Core process. Well, you've seen in the numbers, down from GBP 257 billion, down to about GBP 39 billion -- GBP 37 billion actually, above -- better than forecast.

The exiting of some of the businesses that we just didn't see as core activities. And then the final one is just the reduction in the reliance on the government and its support.

And again, more news on that today. So I think an amazing 5 years of putting this bank back to being safe and secure again.

If we're going to build a really good bank, I think we've got more work to do and that's what I've signaled to my senior team and to the staff at large that we need to continue to restore the capital strength of this bank. We need to get ourselves into a fully loaded Core Tier 1 ratio of 11% by 2015 and 12% by 2016.

That's what we've said ourselves, and we believe we can do it. We have seen the acceleration to achieve this, so acceleration of the divestments and IPO of Citizens, which was brought forward from 2015 into 2014.

That's a key piece for us in this. And we also need to continue to relentlessly take down the -- or reduce the risks, and hence, the RWAs and other parts of their business, and Nathan will talk to you about that particularly around good and bad bank.

We want to further reduce or de-risk our legacy bad assets. There's just so much value in that and getting our business in far better shape than it is today.

And the creation of the internal bad bank that Nathan will take you through the numbers on is an absolutely key part of that. And then we need to sharpen the focus on our core businesses.

We've got some really good businesses sitting inside this organization and that's where our efforts need to be. Just a brief mention of Citizens because it is crucial to our capital plan.

It's a very good business. It's got good positioning in the U.S., it's the ninth largest by branch distribution, it's the seventh largest by ATM distribution and it's second largest in store franchise.

So it's a very good franchise business. It's positioned for growth and improvement with Bruce now running the business.

But to be quite honest, it's not essential for RBS to have that business. We would like to put that capital back into our core businesses here in the U.K.

We believe we'll get better returns, but also strengthen what is home base for us in the U.K. It also has limited connectivity to the group, so -- and much of the advantages that we have can be maintained by staying -- building relationships with that business, no matter what the ownership structure is.

So an IPO, second half of 2014, and a plan to exit the business fully by the end of 2016 is what we've set our ourselves. We see some advantages in doing so.

Nathan is going to take you through the detail, but there, in my mind, are some real advantages around the establishment of an internal bad bank. First off, why we have done it?

Well, what we have done, we've worked very stringently with the government and HMT and UKFI over the last 4 months to have a good look at what these assets are across our business and which are the ones that we could identify for a faster runoff, which would be advantage. We did explore a range, both internally ourselves, and I know the government did a -- should we take these assets out, should we manage them in a different way.

And the best option at the end of the day was to actually create an internal operation that would remove these assets faster than we had planned to do. There's a range there, about GBP 37 billion to GBP 39 billion, just depends where we end up at the end of this year that will go into this business and are targeting, and I say targeting, is to axe the majority of these assets by the end of 2016.

We admit there will be a ramp and we're not going to put huge pressure on this business that is not value-seeking for our shareholders, but we do have an aspiration of removing the vast majority of these assets by 2016. The reasons why, pretty obvious.

It does increase our capital ratio. It normalizes our credit costs in retail.

Tail risk, reduces the tail risk of this business. We do need to put ourselves, as I said, in a better capital position and this certainly helps.

And it improves our acceleration to profitability and our return on equity for our core businesses. Today, I'm signaling 3 things: one, is we are doing our strategic review of this business, which we'll launch out to everybody in February 2014.

It will be a market customer-led strategy. Think we're looking at all of our parts of our business and saying, how can we focus these far more on the customer to get better returns for the business.

The Core franchise will be centered on the U.K., but we do have a critical international network that we need to work with and I believe there's a lot of value to be had out of doing far better connectivity with these connections. As I said, you'll see the results of that in February '14.

The next one is around our customer service. We need to make this bank a much simpler and easier business for customers to deal with us.

Today, it is not the case. Five weeks to get an agricultural loan answer, it should be 5 days.

Weeks and weeks to get an account, should be a day or less. These are some of the things that we need to focus on.

We are looking at our operations and IT and how that connects with our business. We want to make it simpler for our employees to do business, and we wanted to drive revenue growth out of our core businesses and that's going to be our focus.

It's clear that we do need to address costs and efficiencies of this business. A cost-to-income ratio of 65% is just too high.

It's a legacy of a much, much bigger business that we now no longer have. And that we are targeting a mid-50s cost-to-income ratio.

But we'll be coming out with full detail on that in February. That's all I wanted to say today, and I'm going to hand over to Nathan Bostock who's going to take you through the internal bad bank.

So I'm pretty sure you'll be very interested in those, and then we'll take questions after. Over to you, Nathan.

Thanks very much, indeed, Ross. So good morning, everybody.

And I think really the way I would look at this is what I'm trying to do today is to give you a good understanding about the approach we're going to be taking to risk reduction. We've talked about effectively Citizens -- accelerating Citizens and there are some capital action there.

We've talked about effectively changing our targets to 11% and 12% for the future. So this is really what is the strategic thinking about the risk reduction and the creation of the internal bad bank.

But firstly, I think it's worth having a little reminder around our Non-Core. And the reason for this is also to clearly ensure that people understand ultimately the difference by the end as well as Non-Core versus an internal bad bank.

So all of you will have traveled the journey that we've been on. We've had a very successful, in my opinion, approach to reducing risk.

As you know, we've gone from some GBP 258 billion, down to some GBP 37 billion of assets at Q3. We're ahead of that target and that's been done, in my opinion, in extremely professional way.

And we have all of the teams and the skills to be able to do that. So that's really a sort of a theme set.

But I think it's crucial also to understand what was Non-Core originally. Non-Core originally was very much focused on using 5 criteria to create the asset selection for that particular unit.

And those were a mixture. They weren't just bad assets; they were non-strategic assets.

And indeed, often they were actually high-quality assets, but mispriced. So they've been priced at the height of their margin compression when funding costs were misunderstood and so they created effectively long-maturity assets with a real drag on ROE.

But they were perfectly good assets. But before I do that, I want to really sort of take you through the strategic thinking of what we're doing here and this is very much a strategic approach and thinking forward in terms of where we want to be in 3 years' time and taking account of the future, but acting now.

Because if we act now, by the time we get there, we'll be very well positioned against it. And really, the world has changed very significantly, certainly for U.K.

banks since August, in my opinion. And the reason it has is because under the CR 4 -- CRD IV transition arrangement, basically you were going to transition with capital deductions coming in over a period of time.

That was fine and we were all planning for that. CP5, and I appreciate it's a consultation document, but effectively it comes live on the 1st of January.

It doesn't leave a lot of consultation time for all of us. And so my view of this is we need to work on the principle that majoritively this is going to land in the way it's described.

So what are the areas that, really, it looks at well. Firstly, and this is shown on the right-hand side because this is where a diagram really does help.

On the right-hand side, you'll see what is the new capital stack approach under CRD IV and CP5. Two elements that appear, firstly, there's Pillar 2A.

I'm not really going to talk about that because it is crucial because it's going to uplift capital and there'll be various debates around whether it should be 100% of equity, should pension costs be fully in there and all the rest of it. The real element that I'm going to talk about is the buffer, the stress buffer.

And why? Because if you look at the top right-hand side, you'll see, certainly for the near term, the PRA buffer is going to be crucial for determining the capital ratio of U.K.

banks. And the reason it is, is because on the left-hand side, it's going to take till 2016 before you start building these CRD IV buffers into the calculation and they'll come in 1%, then another 1%, another 1%.

By 2019, you'll be at 4%. So post-'19, if your PRA buffer is above 4%, that's going to be effectively the ceiling that you have to achieve.

Prior to that, though, it's really going to be 100% the PRA buffer that is going to be driving the top level of your capital ratio. The other thing, of course, is now you're going to have to take all the deductions upfront.

So you haven't got that period of time, you're going to have to deal with the deductions starting from January. And then there's another nuance and happens to be correlated.

I don't think it's by chance. Effectively, we have a new stress testing regime that's coming in.

My way of describing it would be it's a CCAR plus, plus. The way will be run is very similar except for, in particular, they're going to bring idiosyncratic stress.

And generally, we use macroeconomic stresses, same across the industry. But with a idiosyncratic, of course, there's a high likelihood that, that is going to be targeted at the particular items that drives stress in your particular organization.

In our case, clearly, we have a number of assets which have higher intensity, and therefore, can drive that stress calculation. So a long explanation, but really important because it's going to drive, effectively, higher capital requirement faster.

And so if you think of the world as being a numerator, a denominator, now think of the third leg which is going to be your stress buffer. And these are going to be crucial for U.K.

banks. So turning to the internal bad bank.

Firstly, what have we done? Well, I raised the Non-core specifically and how we've done the asset selection for that because this is really the first path of the journey into the internal bad bank.

One of the things that happened when we were doing the review with HMT, clearly we've been very, very focused in driving all of the risk reduction in Non-Core and Core businesses. But it enabled us to step back and say, actually can I think of the profile of the assets of this bank linked to the strategic thought process I was just talking about.

And what that said was, well, Non-Core actually isn't all of your higher-intensity assets for the very reason I gave you in the first place. If you actually look at the mix of assets in Non-Core, roughly about GBP 16 billion of them, and this is based at June 13, roughly GBP 16 billion of them figure under their profile I gave you before: money good, lower returning, they're going to be around for a period of time.

They should really fit in the Core bank. And if Non-Core wasn't here, that's precisely where they would be.

On the other hand, there's a set of assets in the Core bank, generally from our Global Restructuring Group. Some of them coming naturally from the core part of Ulster, so really a different -- sort of a differentiation between Core and Non-Core, well all suffering within the same environment, as we know, basically, Ireland, but also then generally also your higher-risk assets that typically also sit in your defaulted portfolio.

If you do that, that's GBP 17 billion worth of assets. The numbers are pretty coincidental in terms of GBP billion 16 and GBP 17 billion.

So we used filtration, we used a variety of tests to look at forward-expected losses, several of them. The 2 probably that just give you a flavor of it is basically these were assets that were sitting below BB- in terms of asset quality or -- and/or they were above 150% risk weighted, again giving an element of definition around the risk.

What's interesting is if you then look at the bottom part, this says, here's the capital we currently have consumed, tied up in -- against this balance sheet. So just playing the numbers game, 5% of the group assets from funded asset point of view and roughly 20% of the actual capital of the bank consumed in these assets.

So moving onto the next slide. Two other things that are probably important.

First of all, why is this, firstly, GBP 38 billion, GBP 39 billion and not the GBP 45 billion I've talked about. Ross alluded to that.

It's because we started at June, but we worked with the government as well on a thought process that was actually forward-looking. So it was looking out to the 31st of December this year.

Our estimation of the glide path of the assets that we're managing by the end of the year, we will be at around about GBP 38 billion on that original pool of GBP 46 billion. The right-hand side is the most illustrative, though, and probably the most important in trying to understand the number movements that are going to be caused by this.

Because -- although all the information is available that shows you the amount of capital we've got consumed against these assets, it's not the easiest thing in the world to actually see it. And the reason is because, as the chart shows on the right, circa GBP 5 billion, almost 50%, actually sits in capital deducts.

So we think of things here as RWAes, and in fact, that's what you'll see in the IMS. We just sort of grossed them back up to give ourselves as sort of a ready reckoner.

But in reality, you can see, by December, we will still have circa GBP 11 billion of capital tied up against these assets. So what's different?

Well, let me just cover off the left-hand side Ross did originally. Our aim here is to strategically change the speed with which we manage these assets, again linking back to what I showed you in terms of timetable to regulatory change.

So our aim is to be somewhere between 55% and 70% by the end of 2015. That's what I've used for these modeling purposes.

And our target is to have less than 15% left of these assets by the end of 2016. So again, subject to market conditions, all the usual things that you would naturally apply to it.

What's fundamentally different? Have a look at the right-hand side.

This is the best way and simplest way of explaining what we're doing. If you look across the top horizontally where it says, previous plan, what this shows you is really the 2 techniques, the main techniques that we've been using around the management of Non-Core, and indeed, the management of higher-risk assets.

Generally, one, and this is best for extracting capital, we effectively use sort of forced refinancing at maturity. It's, by far, the best way you get 100% back, yes, but you start early and you work hard with your clients effectively for the refinancing.

It doesn't happen in all cases and clearly there'll be some asset sales. But typically in that Non-Core picture, we've actually been looking at assets that stretch out over a very long period of time, years potentially.

So it's not just a 2013, '16 window in terms of outlook. These assets could be 3, 5, 10, 15 years.

And typically, if we're going to use that maturity profile and we're going to use the forced refinancing, then you can see that those things are going to happen over a long period of time. What are we doing in the internal bad bank?

Well, basically, we're going to continue to use the forced refinancing approach for maturity profiles within the period. Again, it's, by far, the best technique for extracting the maximum amount of capital on those assets.

But we're actually going to accelerate the exit of the remaining assets down to the level that we talked about. And so what that's going to do is, effectively, that means those assets that were going to be around longer effectively they're going to have a shortened life.

So that's a strategic change in the way that we manage them. What does that do?

Well, what it does in terms is generate disposal losses, I'll talk about those in a second, but also it changes the period over which you calculate the collateral value for accounting purposes and so that accelerates your impairment charge to being upfront. How might you think of this, and so starting to get really to the numbers.

Well, firstly, if you think about it, what I've said is this is a period of time and you have to think about lifetime impairments. So again, if you're taking an accelerated number, what you're really doing is you're accelerating impairments you expected to take.

So how I do give you a feel for the numbers? Well, first of all, the best way of probably thinking about this is go back to that expected loss/minus provisions.

I'm going to tell you that I think that, that's a pretty realistic type of number. I think it's a pretty realistic type of number for defaulted assets because, actually, our experience is showing it is the changes in capital models and all these types of things are reasonably truing up, yes, these types of things.

And in fact, there's a couple of quotes in the BlackRock Solutions report where actually they support this and I'm very happy to read those out later. But they basically support this logic about the accuracy in their mind of our expected loss forward projections.

So our assets is, we've got roughly, let's call it, the GBP 5 billion tied up in that. We've also got some RWA capital because that's already -- that's sitting there as well.

And so again you can expect that there's an element of that, that will convert into losses. Put those 2 together and you get roughly GBP 5 billion to GBP 6 billion of potential credit costs.

And again, you have to think holistically in term nature in all of these. Roughly 50% to 60% of the impairment that we would be accelerating actually come outside of that sort of '16 outlook period.

How do you get the incremental cost of disposal? Well, Rory here and Derek, they've been engaged in this.

We've moved over about GBP 90-odd billion of assets in Non-Core, so we have a reasonable idea now of the way people think about these things. And generally, there's a clear look-through to the actual credit cost.

So most people have a similar view of how they look at the credit and the risk in the credit. What's different, of course, is the acquirer's weighted average cost of capital versus your own.

And so that's where you generally get this incremental cost occurring. We believe that on these assets under the profile we've talked about, et cetera, et cetera, it's roughly GBP 1.5 billion to GBP 2 billion.

Having said that, there's a couple of offsets against this in terms of that incremental cost because that would clearly be a straight hit to TNAV as well. Firstly, if we didn't do something with these assets, we would actually be holding these assets over the longer term.

So effectively, we would have a funding cost that you can offset effectively against the cost that the acquirer would have. And in our estimations, we reckon that, that's worth, again, circa 50% of that GBP 1.5 billion to GBP 2 billion number.

So that -- although that's the number that appears as disposal lost, you have to start thinking longer term and more holistically to realize that actually if you pass that point in time and kept those assets, there would be a cost to you as well. On top of that, and this is where it sort of really links back to the strategic view I gave you, there's actually going to be a stress cost.

And remember that the selection criteria for these are: they're higher-risk assets, they have a greater propensity to suffer under stress. So again, to try to give you a flavor of the size of the types of numbers that go with this, first of all, I've said, roundabout 20% of our capital is consumed in these assets.

It actually, though, generates between 40% and 50% of our overall stress losses. Now if you want to convert that and say, okay, how reasonable is it to think therefore that in a stress buffer, that's at least 100 basis points of stress buffer.

It may or may not be, could be more, yes, could be less. But it's certainly not unreasonable to be thinking of it in terms of those sorts of magnitudes or even larger.

If it is, then clearly it converts to an actual cost for you as an organization because as you path out further than '16 with those remaining assets -- imagine, it was 1% for those remaining assets, roughly 1/2 the pool -- sorry, 15% -- sorry, going back to the original, you would have had the longer-term picture that I said. So 50% to 60% of your, yes, your impairment.

If you actually look at that, the way of thinking about it is that, that's a, let's call it, GBP 5 million, that 16 point. How much is GBP 5 billion of capital going to cost you, say, GBP 500 million effectively in terms of its opportunity cost to take it and reuse it into Core businesses that clearly should be in the right growth phase at that point in time.

And it would have declined, so it would have gone down as the asset profile went down. But if you just cumulatively add those things up, you play it against the 100 basis points or so, you can easily see that you will negate, yes, the remaining 50% of the GBP 1.5 billion to GBP 2 billion.

So on that logic, we believe, overall, this is broadly economically neutral, possibly slightly positively. However, of course, the way the numbers will be described will be quite different and I will come back to that in a minute.

And the only reason for that is the various timings and the fact that you're now trying to look at lifetime type of cash flows and thought process versus a financial outlook period. Right-hand side also gives us a fantastic situation in terms of what does it really do for us if we actually going through and execute.

Well, it's not just that we've -- we're doing strategic management against our stress buffer. What it also does for us is effectively it's ROE accretive, and again, I'll drop down and show you some of the numbers in a minute.

Our nonperforming loan ratio is, as you all know, are well out of sync with our peers. It will take us down from the circa 9% to 10% down into the sort of, call it, the 3% there or thereabouts, but it will certainly put us very much in line with them.

Clearly, our volatility of future stress massively declined. A conversation I've had with the PRA, they're very happy to actually say we fundamentally agree with you in terms of materiality.

We can't give you absolute numbers because of course life isn't as simple as that, but we certainly will agree with you about the materiality. And the other thing is it simplifies us, fundamentally simplifies the ability to understand the earnings of the overall bank and take away some of the complexity.

So now sort of a if we're looking at it and thinking crikey, I understand the sort of big picture long term, what would it actually look like to sort of click the camera at different points along this journey. We'll the first one is 2013.

So that's the first big question. And so we talk about accelerating impairments.

Indeed, that is what we're doing. We're accelerating between GBP 4 billion and GBP 4.5 billion of impairments.

Again, remember, I said these are in fact there so these aren't unknown impairments. They're unknown in financial outlook period, but not as an entirety.

The good news and good news from a capital perspective is that the EL minus P is very good. And the EL minus P basically means that in that first instance you'd have around about a 10 basis point hit.

There are some subtlety as to why that is, but it's basically just to do with parts of the organization and sort of attracting as an element of it. Anyway, basically, again, neutral.

'14 to '16, you see a set of things. You'll see impairments on the performing assets.

So if you look above, what it says is, I've got my performing asset at 60%, I've got my nonperforming, which are 40%. It's those that the change of strategy creates the upfront impairments for, not for your performing, that doesn't change.

You're still using IFRS for those. You haven't changed the outlook on them.

You haven't got an exit view on those that materializes in cash flow terms. So then you got your disposal cost.

You'll see that coming through in the years. And then naturally, you've also got the general economics of those assets.

You've got income, you've got the funding costs, you got the operational costs, et cetera, and we believe that, that's also a roundabout GBP 1.5 billion over the period. By the end of it, by 2016, you're releasing a roundabout GBP 2 billion of capital.

2017 onwards, you get the various things I described in terms of the nonperforming loans, et cetera. And of course, the impairments that you would have been incurring then for a long period of time, those actually have gone.

So sort of summing it all up before we come to questions. And I've tried to, again, look at this in terms of short term and medium term.

I've used the term medium term because there's a slight difference at TNAV and the Core Tier 1 ratio between 2016 and the eventual number, so I'll explain that, versus just pure 2016. So the numbers at the bottom really reflect pure 2016.

So risk-weighted assets will be down by about GBP 60 billion. So now this is managing the denominator as well.

Capital deductions will obviously have decreased by the GBP 5 billion. Return on tangible equity will go up between 90 and 120 basis points, that's on the remaining group.

Stressed impairment will be down between 40% and 50%. I realize time will move forward and different economic situations, all the rest of it, but just from a pure today of view.

And our nonperforming loans, which is clearly again a critical one that says, you are a simplified bank and you look normal. Those will be down in the territory of Others.

On the top 2, TNAV and the Core equity Tier 1 ratio have, indeed, given the 2016 number. But for the very logic that I described previously, those things actually will then trend toward each other over time.

So if you think about, you take the TNAV hits upfront. By 2016, it's roughly GBP 1.5 billion to GBP 2 billion.

But if you look at that overall, holistic picture that I said, that will then trend back down to basically a 0-type impact, if not slightly positive, but it will only happen over time. You'll get the reverse impact on the Core equity Tier 1 that you've released.

However, you will have released GBP 2 billion actually at the 2016 point in time. That's probably where I was going to stop, and we'll take questions.

Thank you very much Nathan. Thanks, Ross.

Let's move over to questions. Just one little thing, which I wouldn't normally say, but I will say this time.

I think it's evident from Nathan's presentation that he, in particular, Ross too, has spent a huge amount of time on this particular capital exercise in recent weeks. So whilst you can ask any questions like, I think you'll more likely to get a better answer in relation to capital and planning and so on rather than the Q3 results.

But I will say we're open to any questions. We do have, I believe around 300 people on the phone.

So I'll move to them and indeed, there may be questions coming through on the webcast. But let's start, first of all, with the room.

Who's going to shoot first?

This is Chira Barua from Bernstein. [Audio Gap]

Because it'll be based on long-dated macroeconomic assumptions. Should we look at it like a pension volatility stuff?

And third is what kind of macroeconomic assumptions, especially around Ireland and U.K. CRE, do you have implied for, say, 2015, '16 in those numbers?

So I guess on the tax one, it's always good to start with tax, isn't it? So on the tax one, we have worked through the tax position and of that GBP 4 billion to GBP 4.5 billion of impairments, about GBP 2.7 billion of it relates to Ireland.

That's really where we haven't got an ability to use an effective tax shield. And so we've taken a conservative view in our numbers and we haven't assumed a tax benefit on any of it.

In terms of the volatility, again, in all of these numbers and it links almost to this macroeconomic one as well, we sort of used multiple different profiles. So I haven't picked any particular one and assumed that there's a particular one out at a point in time.

I've tried to use this across a variety of ones. And in fact, again, BlackRock themselves say that actually they think our stress testing approach is actually conservative.

So I can tell you that I believe I've taken a reasonably sort of conservative set of different scenarios, but I can't give you any particular one.

Okay. Why don't we go straight behind there.

Peter Toeman from HSBC. I was expecting to hear something about the investment bank in today's announcement.

And I want -- maybe this is awaiting strategic review. But am I right in thinking that the investment bank will still be 20% of the group's capital in RWA terms and perhaps generate a profit of about GBP 1 billion of PBT?

Or how is that -- is that guidance going to change?

Do you want to take the guidance then I'll talk about the...

Yes, I mean, there's no change to the guidance. I would think of it in terms of the RWAs that you know including those elements that are in the sort of the passive rates, yes, deduction element.

And I think the way I would look at is actually they've done incredibly well. They've actually hit their targets already.

We've also got our IMM waiver approval so again that's another item to put in the case and shut the lid.

There's a comment I was going to make just on the markets. It's performing better against RWAs already against a plan that was pushed -- put forward some time ago, reasonably good quarter.

Still long way to go for them. And as you know, the revenue comes down quicker than the expenses and Peter and [indiscernible] are working very hard on the expense side of that business to get its ROE back up.

So a good progress.

Why don't we come right on the front here.

Chris Wheeler from Mediobanca. A couple of questions, if I may.

The first one is just can you, perhaps, talk about whether there's been any -- there's going to be any major change in the way you actually run the new internal bad bank compared to the old Non-Core business? Because it seems to me there's some new disciplines you're going want to employee in this unit, perhaps, to actually successfully go through the acceleration that you're laying down.

That's the first question. The second one, which is I know slightly tricky for you, but on Citizens, I mean, clearly, you're very keen to go down the IPO route.

But it's not difficult to see that has a lot more risk with its late sale, just in terms of timing, what happens in the market and in terms of valuation, particularly given your issue with excess capital, which I think you're going to struggle to get out given the current environment. So can you just confirm that, obviously, you will be doing a twin-track [ph] approach.

I assume you will in terms of saying if the bid comes, that you would consider it certainly as opposed to just being absolutely committed to the IPO route.

First off on Citizens, we are planning to take it down the IPO route, just as we did with Direct Line Group. I think we showed absolute value and creation out of that.

If somebody does a preemptive on the thing, they can come and talk. But our view is very focused 100% on the IPO route as the best value.

And we have done examination of all those who are likely and the likes, but I think the IPO is probably the best value creation.

In terms of the -- and it's a very good question. In terms of the disciplines.

No, we have all of the disciplines actually that we need. Again, this is about the sort of strategic mindset of how you're looking to manage them rather than the skill set of the people.

We've been employing all of these types of techniques and thought processes as we've gone, but we've now made the fundamental change across the asset pool as a whole.

Yes, the lady there. Just right in the middle, 5 down, 6 down.

It's Claire Kane from Royal Bank of Canada. Just a quick question on Slide 15.

You talk about the lifetime losses, GBP 5 billion to GBP 6 billion, and you say that the decision -- the accounts allows you to take upfront losses. Can I ask why you don't take more impairments now given you expect to record losses on disposal going forward?

And is that decision perhaps due to the capital deduction impact, and that you only want a near-term deduction from your core Tier 1 ratio of 10 basis points at this time.

Sorry, probably I haven't necessarily fully explained it full enough. The impairments that we're accelerating are the impairments that you would be taking over the life on these assets.

The accounting -- it's not an accounting change, it's just that when you actually have to value them, you value a set of cash flows. Instead of expecting these cash flows over a number of different years right the way out, you're actually going to have to truncate them and therefore, that effectively accelerates the impairments through to now.

But it's really just a cash flow representation of the outcome. So that's why when you do the disposal losses, it's roughly -- those are roughly neutral, yes, except for the incremental cost, yes, i.e.

the differential between you and the person buying it. So actually, you're not deferring necessarily what you would think is a pure value, you're deferring really on the fact that the person buying it has to make a return on the asset.

And they're caring a different weighted average cost of capital. So they're going to build that into price they offer you.

The impairment takes it actually to the realizable value that you would see in the market.

We'll give you a test on that later.

Why don't you just move it to the side?

It's Mike Trippitt at Numis. I have two questions, just following up on that one.

I'm just interested to understand the criteria around the sort of scale of the assets that are being transferred over. And was that actually driven in a way by the impairment loss that you could withstand on day 1 versus your expected loss deductions?

And the second question is just, I don't know, you've mentioned in the release you're at an advanced stage on the DAS discussions with Treasury. And can you give any kind of guidance, I suppose, in terms of are we still just looking at a onetime payment for exit from that?

Or are there more sort of interesting solutions. And I think the current Treasury estimate is GBP 1.5 billion as the DAS exit.

Is that -- can you update us on that?

I'll take the latter one. We are in pretty advanced discussions, so I won't make any more comments on that.

But it will come to shareholders who will have to vote on it. But at this stage, advanced stages.

So we're confident about that.

It's another related party transaction. It's got to be agreed effectively by the minority in due course.

And no correlation to the -- in terms of the number. Again, just providing background, when we did this, we looked across the bank as a whole and in terms of the profile of the assets and the impact that they have.

We actually took the, I'd say, the whole balance sheet as it was. We used various filters, so think about it, sort of putting stuff into a hopper, and actually that came down to a roundabout GBP 100 billion that we then, again, started looking at in more detail with more different tests.

By the time we actually came down to it, this was the actual asset pool size that made sense against the criteria of what we were trying to do, which is to manage both the, let's call it, the stress loss, but also just a natural high risk that these assets had. Because the other bit of it as well, you have to think of it, if you just that did it on pure sort of asset quality-type elements, obviously, you'd also -- potentially, you could have some pools of retail assets in there.

We haven't -- we focus this in the broader -- in the broader wholesale and, I'll call it, SME-type arena. But we've also cut it off, so that we're in a position where we've retained our clear natural ability to build our franchise in the B and C, in the SME market.

So again, number of different filters that we put there, but it wasn't driven by EL minus P.

Can I -- sorry, just, I'll say, cheeky follow-up. On -- have you -- it may be in the detail, but have you given any pro formas on the gross leverage impact of this?

I don't think we have -- no, we haven't. Yes, we haven't.

No, I mean, we will -- certainly by the year end, we'll be giving full information in multiple different ways for people, to help. But sorry, not at this moment.

Why don't we go near the middle here.

Chintan Joshi from Nomura. I'll kick off with a soft one for Ross with the detail questions.

You mentioned in your early priorities, resetting relationships with regulators. I mean, what elements do you need resetting?

And how does your approach -- how will your approach differ from your predecessors?

I think we just got to start with the realization that the government owns 81% of the shares of this business, and we need to be having good firm conversations with them about their views, but also, we've got to run this bank. And I think what we've had over the last 4 months has been very constructive conversations with a wide-ranging group from HMT through to the PRA as well, which I think if HT [ph] brought us into this position of being very comfortable with what we're putting forward today.

Those relationships have been strained. And my aim is, certainly being in my first month, is to get the parties together to have good conversations about the future of this bank.

So how do investors get comfort that politicians won't be calling anymore shots at the bank?

The politicians haven't been calling the shots on this bank. The issue for us is we just start to need to have a good conversation and understand the strategy for this bank going forward.

It's going to be quite different to what it has been for the last 5 years. The last 5 years has been putting it into a safe and secure position.

We now need to actually grow a bank again and get rid of the distractions. I mean, this senior team, unfortunately, has had to deal with a lot of distractions.

The moves we're making here for me are saying, "That's 10% over the side. Let's get on with 90%.

" And I think that's going to be good for everybody.

Starting point, if I may add is company law is -- under company law, the duty of the Board of Directors is to act in the interest of the company and shareholders, taken as a whole. Those are our legal duties, and we're very careful to discharge them in that way.

Of course there's practical reality here, we have 1 gigantic shareholder who put in a huge amount of money to rescue the business, and we need to take their views on board very carefully. And there are some areas, particularly the composition of the board, where they have a direct legal locus [ph] themselves.

They can decide if they want us or if they want us to go pretty much at any time. So there's no doubt that these are complex relationships to manage.

Nobody would ever design a business with this ownership structure. We all know the reasons why we're here with this particular ownership structure.

But we recognize -- Ross recognizes, in particular, it's very important to make these relationships work.

Okay. A couple of details on, perhaps for Nathan.

If I think about your old plan versus your new plan, the old plan allowed you to spread losses over time and we've seen instances in the past, for example, RMB as well. Given time and recovery, you can get out with profits.

So I wanted to understand the new mix of the internal bad bank. Is it those kind of assets where fair value sits so much below book value that we need not worry about recovery after you've taken these impairments?

Or is there any scope in a short term horizon that you could still have something coming back to shareholders after having taken the losses upfront?

Well, again, this is based on the risk of the assets and the performance under stress. So again, when we're looking at different assets, you actually do also have to consider where is the asset today in terms of its value.

So we've looked at each of them. If we think that something remains a high risk asset, then it will be in there.

If something actually doesn't fit, in terms of our expectations of expected loss because it's already at a level where we feel it's a good value, then it won't necessarily fall under the same criteria. In other words, when you stress it, you actually don't end up with a significant loss.

This has been driven from an overall move from here, expectation of losses.

Okay. And final one is on Slide 14, you give us GBP 2 billion release of capital on the fully loaded Basel III number and you give us the GBP 1.5 billion cost, so I assume GBP 0.5 billion annualized.

What is that GBP 2 billion really? Where is it coming from?

Is it [indiscernible] years? And on costs, should we expect that GBP 0.5 billion reduction at the -- I mean, by what point should we assume that cost reduction?

Sure yes. This is -- so firstly -- sorry, this is -- the costs are -- the costs in relation to the actual running of the -- of this operation, so there will be a mixture, as I say, of income funding cost, et cetera and also the operational nature of it.

So those, again, will reflect what we do to manage these assets over time, manage the size of the unit that we're using. So again, it won't have a -- it won't be constant across the period.

If you think of the GBP 2 billion, the easiest way probably of thinking of the GBP 2 billion is to go back to the sort of original GBP 11 billion that you've got tied up, and then sort of build the spec that gets you to the GBP 2 billion. And the spec that gets you to the GBP 2 billion comes from the GBP 4 billion to GBP 4.5 billion of impairments upfront.

The sort of GBP 1 billion of impairments that you incur over time. The incremental cost to dispose, the GBP 1.5 billion to GBP 2 billion and then these other costs.

Take all of those, add them up, take them from the GBP 11 billion, and you'll get approximately the GBP 2 billion.

That's the upfront capital accretion assumption...

No, that's the one that will come out at the end of '16. Yes, the upfront one is actually a very small 10 basis point hit, which is the differential between the impairments you're taking upfront and the EL minus P changing, the offset.

That's why, as I say, it's actually a very sensible thing from a risk perspective in a capital point of view.

Thank you. Can we have both barrels [ph] back there.

There are 2 gentlemen with, obviously, very, very good questions.

Super, super questions. I'm Tom Rayner, Exane BNP Paribas.

First one please, Nathan, just a bit more color on the assets transferred out of Core into Non-Core. I'm just trying to get a sense of what the impairments on those assets would have been if they'd stayed in Core, just trying to reconcile back to what the incremental cost of the accelerated rundown really is.

And I guess, supplementary to that, if the incremental costs are in the sort of GBP 1 billion, GBP 2 billion, GBP 3 billion sort of area, how is that actually better for shareholders than just having the capital tied up, unproductively even for a little bit longer? So I'm just trying to understand that issue a bit better, and I have a second question on the new sort of capital targets, please.

Can you just go back -- sorry, I was thinking of the answers -- the first one.

The impairments on the assets, which were in Core, which is now being switched in...

Yes, let me just do that one, then we'll do the second. Yes, if you look at it, I say, I think again, we haven't broken out all of the guidance on this yet, and we will do by the year end.

We have put the assets that are being transferred. There is a sort of more detailed schedule in the IMS near the front of it, which will explain that for you.

I said roughly 50% to 60% of the impairments are out past 3 years. And if you look at the split of the '13 -'16 period, it's roughly 2/3 Non-Core, 1/3 Core.

So hopefully, that covers that one. Sorry, the second one again?

That was the supplementary. The first one actually is how is that better that the shareholders than the original sort of take, take a longer time.

I understand you're point on the stress test maybe. But...

Well, as I said, I think -- and again, and this is our calculations and, of course, there's a number of different assumptions built into them. But we believe that broadly from a shareholder value point of view, this is broadly neutral or slightly positive.

That's in a pure just shareholder value point of view. But the other benefit that this brings in terms of basically the clarity and simplification of the organization, I see this as a vowed [ph] strategic change that delivers capital strength, it delivers risk reduction and it drives massive simplification.

Put those together and, say it is against a broadly neutral shareholder value, this to me has to be the right strategic decision.

Okay. Just on the sort of new 12% or higher capital ratio target, you're talking about the PRA consultation.

Can I ask you firstly, what sort of assumptions are you making in terms of a sort of voluntary buffer over and above the minimum level, whatever level this sort of in-force distribution restrictions cut-in? I'm just interested in what you think is appropriate for banks to build in over and above whatever the PRA says is the minimum.

And just on the dividend access share, I hear what you're saying about discussions, but I'm not sure that meeting that sort of 12%-plus is going to leave any room for dividend payments, anyway. So are those discussions really of any relevance?

Is there a possibility of paying dividends, I guess, in the next few years is my question.

I'll cover the first and end bit because they're linked. Actually, we said we'll target a circa 12% at the end of '16.

But what we've also said is that we would expect that it will increase beyond there. And one of the reasons, again, that it will is because, obviously, we're only really starting to get the final part of the Citizens IPO coming through at that point in time.

So our targeted is circa 12%. We would expect it to go above that post 12%.

That clearly then helps, from your point of view, in terms of the question about capacity. In terms of buffer, that really has to be an individual company choice.

Clearly, you're going to want to operate with what you think is a sensible buffer, not to fall below your target ratio. And clearly, given that the regulators these days have a variety of techniques now to intervene in the management of the organization, my view would be we've got to run a sensible buffer.

Just on the DAS, we've been thinking about the timing, which relates to the dividend pay. So when do we take and have the DAS removed.

Whilst we're not going to giving you any indication of sort of when we're assuming dividends, we have had negotiations regarding the DAS, thinking that it's going to be in sort of an extended period of time before dividends are taken, so we don't consume capital in that time. But as I said, the negotiations are well and truly at a concluding stage, and we'll be able to announce those, I think, sooner rather than later.

Just before -- if you pass it directly behind. But in the meantime, can I ask the operator, is there anybody on the phone who wants to ask a question?

Can I have 2 areas of question, please. The first one is, how much of your capital buffer within the 12% that you're talking about here is down to litigation risk?

I think the Chairman mentioned that in his opening comments.

So again, what I've done in this -- I'm not going to give any specific number, but what I have done is my belief on this is that you're going to set your target. What you should be doing is modeling multiple scenarios that actually allow you to have a high degree of confidence that you will actually be at those.

And so in the scenarios, I've actually modeled a variety of outcome.

Okay. But is it fair to assume that you've assumed a certain higher amount of buffer?

Because it looks like you're arguing your PRA buffer is above the summation of the capital on duration [ph] and your G-SIFI [ph] buffer and some of that is down to litigation risk. Is that a right conclusion?

No. I would say again, my target is 12%.

I've tried to illustrate why one would want to run at certain levels rather than try and insinuate the 12% equals our ratio. And again, my view is that if you're going to do sensible capital planning and you're going to have a reasonably high degree of confidence, then it's true that litigation conduct and clearly reg change are 3 things that you ought to be doing a variety of sort of modeling for.

Okay. And the second one was just around Citizens again.

And firstly, I just had a point of clarification on Slide 15, where you outlined the improvement in your return on tangible equity as a result, I think, purely of the IBB of 90 to 120 bps. Can I just clarify that this does not include the dilutive impact of full disposal of Citizens?

That's correct, this is just the IBB.

So yes, so my number, most of this positive is more than offset by the negative from Citizens. And related to that, I was wondering if I can ask Ross -- just I'm really struggling to understand your decision to make no changes to your Markets division, which is a single-digit ROE business and dispose fully the Citizens business, which is a double-digit ROE business, to improve your capital.

Just if could outline your thoughts on what we should expect in terms of group shape going forward.

First off, the business is in major transition today against the plan that was set 12 months ago, and they're performing against that plan. So it's the first thing we're looking at.

Secondly, all of our businesses are under review for the February strategic review, which looks at all parts of our business from a customer perspective. So nobody escapes that one, including Markets.

So we won't be coming out with any other announcements on that until the February time, as we work through each part of our business. So that's the reason why -- I mean, why go through major shocks to the business again and again.

This team needs to actually get time to actually deliver the strategy, which -- and they're doing a very good job against it. And all business is reviewed in February.

Okay. Can I ask the operator, any more on the phone, and then we'll come back to the room.

Okay, thank you.

It's Alastair Ryan with Bank of America Merrill Lynch. I'm just trying to reconcile Slides 11 and 13 because it's quite rare that you do get companies saying that their old strategy was to optimize cash recoveries on the portfolio.

I mean, is the change driven by the fact that you'd have needed a 120 basis point higher capital number, if you hadn't done this and you just couldn't get to it without these changes. So actually we're pivoting back.

We're not pivoting back from, in effect, the pressure from an individual shareholder, pivoting back from where the regulators got to on the way that it's changed, the way it looks at concentration risk and [indiscernible] your thoughts and so on.

Yes. No, I mean, my point here is I think the landscape for U.K.

banks is changing. And it's changing because stress and higher risk assets and the consequences of those under stressed conditions based off the fact that you didn't have an idiosyncratic stress, clearly, is going to mean that those things are going to look very -- even more capital consumptive in a go-forward position.

And if you are not taking forward action now, over a 2-, 3-, 4-year period, then by the time you get there, it will be too late.

I think it also shows is why I put forward one of the early priorities was to resolve our capital position with the PRA because lots of change is going on from a regulator perspective, and we needed to understand those, as we're looking at the full capital position of this bank.

But it is also one of the things that the board was most focused on, what are the shareholder value implications of this accelerated rundown. And we specifically confirmed with the PRA, that the judgments that Nathan is making assumptions, that Nathan is making on the stress buffers, are shared by them.

But just to clarify then, so the TNAV and the earnings impact of doing this are really secondary to the hard constraint that you face, which is there just wasn't enough capital in the bank under the new rules to run it as it was being run before? Is that...

One of the biggest issues to me coming in was to -- how do we strengthen our capital position, so we just don't talk about it again. Liquidity is not an issue.

We don't talk about it. Capital in the banking industry is a major issue, and we need to resolve that.

And from that, we built our plan going forward. So that's the starting point.

I mean, at the end of the day as well, once you get past that and when you get to that point in time, why would you want to be holding lots of capital tied up in these effectively defaulted and low ROE earning assets? You want to put it to work.

Just -- why don't you just move it along?

It's Michael Helsby from Bank of America Merrill Lynch. Just to come back on what you just said there, Nathan, why would you want to hold a lot of capital?

I mean, essentially what you're telling us is that you're blowing up GBP 9 billion of GBP 11 billion, anyway. So you're giving away that future upside that may or may not have been there.

So I don't really understand the point that you're making. But that's not the question.

So 3 questions, if I can. The first question is just on the GBP 1.5 billion of costs, so I understand it correctly.

Is that -- so that's after revenue, i.e. that's a pre-provision number?

The second question is just to go back to this Markets point. So I think just looking at the Treasury, what they've announced today, they're talking about a further significant shrinking of markets.

So they're almost preempting your February strategy. Are they talking about the old plan?

Or are they exactly preempting what you're saying in February? And if you could tell us how Greenwich -- because that's a U.S., obviously, a big part of Markets, profitable part, how that sits maybe within Citizens, whether there's an opportunity to bundle that together.

And then -- and finally, just to wrap back to litigation, if you could tell us what reserves you've got currently on the balance sheet for things like FHFA, where it's been very high profile and the press loves it recently and -- over things like EU LIBOR settlements or over things that are clearly out there.

I'll start with Markets, again. Let's be quite clear, it is being reduced now, and that was the plan for that business.

All other reviews of that business will be done -- we review every part of that business in February. So no other changes to our strategy around our Markets strategy than as you know about today.

And any changes, we will announce in February, but it will be across the entire business that we look at. We're also looking at the connectivity of all of our businesses and how can we get them far more connected than they are today.

It's a bank that's, quite rightly, had to run in silos. We need to think about how could this run for the betterment of customers and doing more business.

Yes, I think it's also true that the change in the Markets balance sheet is currently underway. It's not done.

So...

[indiscernible] whether it's incremental to...

And in terms of provisioning, we're following an IFRS approach, clearly, on it. And to the extent that we have a clear line of sight of, let's call it, settlement or anything like that, then we've already put those through the accounts, and we've talked about those.

In terms of the broader litigation, I think we've got no change to the guidance we gave previously, which is we're at a very early stage of discovery. And we believe that there are elements of our situation that are different to others.

And just Greenwich, is there a chance to bundle that back into Citizens? Or is that something that you just never considered to do?

It's part of the review for February.

Good. Okay, we have 1 webcast question.

Okay, so I'll come over there -- which is, "Can you please share your thoughts on the upcoming ABS stress test and how you expect RBS to perform? And can you please give an update on the CRE exposure in the Core bank and expectation for loan losses going forward?"

Well, again, I think on the stress test, last time under the EBA one, we performed, certainly, adequately. I think again, with the risk reduction that we've done and indeed the way that the EBA carried out their stress approach previously was penal for anybody who had, for instance, a large trading business that had incurred losses, and you had gradually, shall we say, made that much better.

Because you, unfortunately, had to take the whole of that previous experience into the stress test. You couldn't actually look at the position you're in today and move it forward.

So my belief is clearly, we've come a long way since the last test. We're carrying out even further action.

So my view is that, from our perspective, we should be fine under that. And so the other one?

CRE exposure in the Core bank and expectation for losses -- loan losses going forward.

I don't have it here. Those are -- yes, I don't have the guidance on that.

We'll come back to you on that, if we may. Okay let's go over here then.

I'm Huw Van Steenis, Morgan Stanley. Thanks for your clarity around the Non-Core bank.

I'm interested, Ross and Nathan, in your visions for the Core business 3 or 4 years out. I appreciate you can't give us the results of the strategic review now.

But if you run the slide rule, what are the kind of targets or aspirations for ROE and for loan growth in the U.K. that you're hoping for as you start the review, maybe be it 2017, 2018.

What's your vision of the bank that far out?

Well, these are the core parts of our franchise. 70-plus percent of our revenues come out of the retail bank and our big corporate bank.

They've got to be the big parts of our strategy going forward, and they will be. We need to be producing far better return on equity on our Core businesses.

I mean, we've got our retail bank that's got a very high return on equity. But even then, if you take out the conduct issues, and things that are coming through, pulls it down dramatically.

And the same in our corporate bank, we're pulling apart every part of our business and looking at what is it they're doing today and what is it capable of as part of our February review. We need to do better on our return on equity.

It's a key driver for me and the team. But also we need to start growing these franchises.

We're just starting to see some growth in the retail bank, probably coming through now, which is good to see. We need to be going on or slightly above market.

Let's not blow this thing up again. But on or slightly above market because of our capability not because we're pricing or we're doings stupid things on credit.

Those are the drivers for me. But those are our Core franchises.

Okay. We're starting to thin out a bit.

Should we go over there?

It's Joe Dickerson from Jefferies. I have a quick question on Citizens.

And I just want to confirm, to the extent that this bank could be floated at a premium to book value, would you be able to realize a gain at such time? Number one.

And then number two, Chris had asked a question about the excess capital in that division and what you plan to do with that, if you could perhaps elaborate on that, that would be helpful.

Well, in terms of -- yes, in terms of the amount of capital that is currently tied up in Citizens, yes, we recognize that the level in there is -- it's higher than it appears. And therefore, it's operating with excess capital.

And we're holding various discussions with the relevant parties to see what we can do about it.

I suppose the first part of my question was more about the trading multiple of the business. If you look at, say -- I believe you carry Citizens at its book value.

The comps trade roughly 1.3 to 1.5x tangible book. So if you were to float it, say, a multiple of 1.2x, would you be able to write up that gain at the first part of the IPO?

Do you want to take that to Richard.

In terms of how we structured the transaction, just really depends on how we do it [ph]. So we'll be going from that [indiscernible]

So it might be yes or it might be no, depending on the price. But obviously, the capital planning around Citizens will form a key part of the IPO progression.

That's really the issue. That's underway.

Again, on Citizens, just following up on Raul's question earlier about the ROE impact of Citizens. So obviously, depending on the price to which you sell, I guess Citizens adds probably 200 basis points or so to the group core Tier 1 ratio.

So in terms of your capital targets, the 12% and 12%-plus, does that include any redeployments of the capital that's freed up through the Citizen's disposal? And I have a second one just on the discussions with the government around the capital structure.

Well, no, it doesn't assume a redeployment of that capital. What was the -- sorry...

I mean, the B shares, are there other elements of [indiscernible] Along with the DAS comment, there's also a comment about discussions on simplification of the capital structure. Just wondering if you're able to give any more detail on that in terms of what's going on over time.

No, other than to say, we are trying to simplify and normalize it as much as possible in the one discussion.

Back in the middle.

It's Jason Napier from Deutsche. Two, please.

The first, you, Nathan, spoke about CCAR plus, plus, Obviously that's something that we have to look forward to next year. And I just wonder in that regard, whether you have any line of sight at all on what the hurdles are or indeed, what your capital requirement would be under the CP today, assuming it landed with the asset mix you have?

Obviously, the announcement today is there's very significant change in outlook for charges in the next quarter. You'll need to, again, need to explain that, I guess, more broadly, when the write-offs come through.

I just want to know whether you are going to publish what you think your CT1 requirement would be under the CP. You're the only bank that's talking confidently about it landing in much of this shape.

So I wonder whether you could give us a sense as to what's at stake here.

No. I mean, we don't have a specific line of sight of the outcome of where the PRA will position themselves.

But I can say that they're fully behind what we're doing. And we had very constructive conversations about it.

Perhaps, put another way then, the 12% that you're hoping to hit in a number of year's time, are we right in interpreting that as a CP, plus a buffer number, assuming you've derisked in a way that you envisioned in your plan?

I think the way you should think of it is that our target is to be circa 12% at 2016.

Second question for Ross. This week we've seen a large European bank face a very significant increase in capital requirements around operational risk.

Given your heritage in the retail business and the IT failure last year and the fact that you flag It as one of the things you're reviewing, I just wonder whether you had any thoughts about Core platform replacements and the investment that the firm might need over the next few years in that area?

We are looking at that as part of our February review. I know it sounds like everything is going to February, but that's big part of the business of how do we connect our IT with our customer businesses.

There's a lot of things going on, on the business at the moment to remediate from the IT failure that happened, what, 15, 16 months ago. A lot of that is not just for resilience but also to give us some more capability and capacity inside those systems.

Most businesses' Core systems are pretty sound for a long period of time, just like ours. But it's what you put on top of them that's more important, and that's where we've been concentrating our efforts, and I think will show benefits over the next 2 to 3 years.

I'm not a great proponent of replacing a Core system in the bank. And you have to have lots of courage, more than capital to do it, having done one at CBA.

So I think we're better off spending our money elsewhere and fixing up some of the applications that are connecting. I mean, it's far too complicated business, which then puts risk into it.

This is your second bite.

Yes, sorry. No, I just want to tie together a couple of things, the answers that you've said.

It's Michael Helsby from Bank of America Merrill Lynch. I'm just interested, Nathan and Ross, on the Citizens piece and the FHFA piece because there's talk of surplus capital that's clearly there.

Can you just clarify if the FHFA potential liability, is that -- does that sit with the Royal Bank of Scotland group? Or is that in any way linked to Citizens?

I think that would matter for an IPO.

It's not linked to Citizens. It sits with RBS.

Okay, should we go into the middle? And then this is the last one, I'm told.

It's Ian Gordon from Investec. You'll be glad to know they're 2 very soft and easy questions.

And I just like just a little bit of comment on the large report and what near-term scale and pace of change we should expect to see in balance sheet for -- given the still challenging macro backdrop to that. And then in retail, you've already talked about your 2017, 2018 vision.

Understood, you referenced that in Q3, we've got GBP 0.5 billion of customer loan growth, but unsecured products are still shrinking. Again, just a little bit of context in terms of the near-term scale and pace of change, also referencing mix and what that does to your near-term margin expectations.

I'll start with the retail piece. I see reasonably good growth in the home lending market.

It's starting to -- you're starting to see the economy start pushing some of that through. Our problem has been we haven't had enough capability in the organization to actually take up enough of that growth.

We've just started to see it come through now. So certainly in the home mortgage market, we see growth.

The lending review was, again, just to reemphasize, this was instigated by Chris and his team, to which to say, how do we become a really good bank for SME lenders, which has given us some very good focus on some of the things we need to do. Some of them have already been trained, some of them are not.

So we'll take that report and we'll build a plan up, and it's a key part of our business going forward, and that's what we should be focusing on. Both that and the retail bank lending, home lending and also lending into the SME market are core growth markets for our revenue in the future, but we do need to get them right.

Well, thanks, everybody for coming, particularly at such short notice. And I think if we can make this progress in 30 days, imagine what we're going to get in February, it's going to be terrific.

Thank you, all, very much.