NatWest Group plc

Sir Philip Hampton - Chairman Ross McEwan - Chief Executive Ewen Stevenson - CFO

Tom Rayner - Exane BNP Paribas Martin Leitgeb - Goldman Sachs Andrew Coombs - Citigroup Raul Sinha - JPMorgan Cazenove Ian Gordon - Investec Claire Kane - RBC David Lock - Deutsche Bank Joseph Dickerson – Jefferies

All right. Good morning ladies and gentlemen.

Let's start. Welcome to our half year results.

We have a small attributable loss in the half year, but I think essentially we are breakeven at the bottom line. But we have had further improvements in our capital position, both achieved and expected now with the virtual -- near exit from Citizens, with the latest sale this week.

There is a recurring theme of good profits from our operating businesses, being overshadowed by conduct charges, and restructuring we have taken [indiscernible] in the half and I will say something briefly, if I may, about conduct charges. They are now north of £10 billion with more to come in this bank.

And the industry as a whole, and this bank, have got frankly a poor track record in predicting this. We have consistently undercalled [ph] they exploded, I think, after LIBOR, and arguably the flow of money from banks to public treasuries has been very helpful in welcoming those treasuries.

We have [indiscernible] as well as we can and currently believe that a forthcoming settlement on asset-backed securities in the U.S. is by some distance, likely to be, the most material of them.

Partly because it has been -- not because it has been material in many other banks. And that has been the case for a couple of years.

So we have a lot of issues, a lot of disclosures, but the asset-backed litigation issue looks like it could be the most significant. But the real business of running a bank that can deliver good sustainable returns from doing the right things with its customers, and focused in areas of competitive strength.

After all, that's what we are really about over any period of time. I think we are well on the way to getting there, as you will hear shortly from Ross and Ewen.

And in that context, we welcome frankly with some relief, the U.K. Government's decision to look to sell shares at their convenience, and we have always believed that this would be very much in the interest of this bank for the government to begin its exit process.

So let me now, with those remarks, hand over to Ross. Ross, if I may say so, has been a fantastic addition to the team here at RBS, and I think is building an ever more effective team amongst its top people, and he is in charge of today's line up.

So I will hand over.

Thank you very much Philip, and good morning to everyone. Today, I will give you an overview of our progress and then Ewen will take you through a lot more detail from the accounts.

As I said at the top of the year that, we are determined to go through further and faster on the strategy, and today you will see that in our results. While we still have a lot of substantial work to do, to rebuild this bank and to make it the bank that we want it to be, I do feel that we are making good progress against the strategy and the targets that we have set ourselves.

The bank we are building is delivering better returns, and the businesses we are leaving behind are running down at a lot faster pace than we had probably anticipated. We are also working quickly and prudently through the outstanding conduct and litigation issues that Philip talked about, but we all know, that the remainding drag on our resources is both financial and on our people.

You will see from the results that we are posting today, this is the bank moving forward on its plan. It’s a plan to build a stronger, simpler and fairer bank for both customers and shareholders, and we are focusing squarely on our core strengths here in the U.K.

and in the Republic of Ireland. We are determined to win our customer's trust and build a bank that delivers sustainable returns from a lower risk profile.

Sot let's get into the results; today, you will see that we are going further and faster on delivering our plan. Our capital ratio is up, our costs are down, returns in the Go-forward bank are improving, restructuring is continuing at a pace and we are reducing complexity further and simplifying the bank for customers and our employees alike.

We are now more clearly categorizing the nature of our businesses. 50 of those we classify as Invest to Grow businesses; these are the strongest, with the potential to deliver the biggest returns.

Secondly, the businesses we are repositioning for returns, these businesses need more work to clear the hurdles that we have set for them and to make their full contribution to this bank. And lastly the areas we earmarked as close or run-off, this is chiefly our Exit Bank, and you will hopefully be very familiar with these areas, but Ewen is going to go into these into lot more detail, a bit later.

The in-state is a lower risk business, with strong returns and delivering against its plan. Our sense that we are midway through at this point.

On the financial highlights, let me step you through today's results. You can clearly see the pace of the progress of the first six months of the year against the targets for 2015.

The results show that the growing strengths of our underlying customer businesses with an attributable profit of £293 million for the quarter, up from a loss of £446 million in Q1. The adjusted operating profit of £1.8 billion for the quarter is up 11% on Q1.

However, that does move to an attributable loss of £153 million for the full six months. And just to be clear on this, I and Ewen won't rest until we get this bank into making profits and hitting the bottom line.

The one-off restructuring costs remain high throughout the second quarter, with £1.5 billion of restructuring, conduct and litigation costs. But I would emphasize that the higher costs are down to last [ph] delivering on our plans further and faster than before.

CIB for example has seen good progress, with adjusted costs down 20% compared to H1 2014. We have also seen a £22 billion or 6% reduction in RWIs up to £326 billion, which is also reflected in our improved common equity Tier-1 ratio of 12.3%.

This is the clearest indication of our financial stability. Impairment releases are £141 million for the second quarter, as bad debt charges continue to remain very low.

And our total net asset value for the quarter is 380 pence, slightly down from where it was in the first quarter, as attributable profit was offset by cash flow, hedging and currency movements. Finally, our leverage ratio was up from where it was full year 2014 from 4.2% to 4.6%.

The overall picture is one of the lower operating costs, stronger growth and returns in our Go-forward bank, and these are very encouraging signs that our strategy is working, and is clear that the strengths of our go forward bank are emerging every month we see it. I now want to spend a little time and speak more to our strategy.

You have seen this slide before, this is our blueprint for success. At RBS, we want to keep things simple, because complexity is distracting and it is incredibly costly.

At the foot of the blueprint are our 2015 goals, so let's go through what we have done against each one of them. Importantly, our 2015 goal is to build on the excellent progress we made in 2014, and each year out, we are on track to deliver.

Strength and sustainability, we are continuing to reduce risk, and now have had six straight quarters of capital ratio increases. I have already mentioned a few of the points you see up on the screen that we are having.

We have also made great progress in RBS Capital Resolution, with only £8.4 billion of funded assets remaining. And as you saw earlier this week, we continue to reduce our stake in Citizens Financial Group, and we have also announced our intention to launch an inaugural 81 Insurance shortly, which Ewen will expand on.

When it comes to customer experience, NatWest Personal and Business, RBS Business and Ulster Bank have all seen a significant improvement in the net promoter scores over the year. We are determined to win back the trust of our customers, so I welcome these improvements that are just starting to show through.

On simplifying the bank, we have cut costs by over £700 million for the first half of this year compared with the first half last year. That's up top of £1.1 billion cuts we made in 2014, it also means that we are on track to take another £800 million out for this year.

And we are supporting growth, in our Personal and Business Banking and our Commercial in the U.K., these are our core customer segments. We are seeing a 43% increase in mortgage applications year-on-year.

On employee engagement, when it comes to our employees, the people who make it happen, we have started a comprehensive program to improve our engagement scores to get them within 8% of Global Financial Services norm. And I will report back, when we have got the results later on in this year.

We are also becoming a lot simpler. As you just heard from me, we are on track to meet our cost reduction target for the year.

Tackling costs will be an ongoing constant goal for us, given our starting point. And as I have already outlined, you can see, we are delivering.

Our aim of reducing the cost to income ratio to below 50%, it has not changed. Stripping out the complexity and becoming simpler is key to delivering our cost to income ratios.

By the end of the year, you will have reduced our property portfolio down by 16% from where it was just a year ago, and a number of costly programs that we run in this bank will down 18% compared to last year. We are simplifying our front and back book product sets to the benefit of both customers and to our employees, and our company structure is getting much simpler, reducing the number of companies in the groups by 135 already this year, with many-many more to go.

All of these examples demonstrate how we are taking costs out of this business, and making it much simpler. This is a bank, that's becoming smarter in the way it operates.

Our strategy to transform the bank is in three phases; phase one was successfully completed last year and its focus was on derisking the bank, starting to reduce the costs by building a capital position and simplifying the organization. And I think you will agree, we did a pretty good job on it.

We are currently in phase 2 and no schedule. We are giving further clarity between the Go-forward and exit businesses, accelerating the transformation of their Go-Forward bank and addressing other material remaining issues within our control.

Ewen and I have been clear about the Conduct and restructuring issues we face, and we are dealing with this as prudently as we possibly can. These will continue to be a challenge for us, over the next six to 12 months.

This clarity is also allowing to focus much more clearly on the Go-forward businesses, and to be clearer and more transparent with you about where the future of this bank really lies and to build towards the third phase of our strategy. Phase 3, we will focus on RBS becoming a market leader.

A bank servicing customers better than any other bank in the U.K. and achieving attractive balanced and sustainable returns.

I want to emphasize how our strategy and the phase of it, you can see on the slide are designed with the aim of creating a business which supports long term shareholder value. We focused on markets where we are the strongest.

We are building on businesses, and in many case that are already healthy, and closely controlling costs throughout each of these businesses. We are on track to achieve a common equity Tier-1 ratio of 13% next year, and our current expectation is to approach the PRA for approval to pay us surplus capital above 13%.

Ewen will articulate the timing and what we have to do to give investors back any surplus. We are investing over £1 billion per year in the Go-forward bank.

This investment is already starting to show. Improving our Go-forward business means improving what we do for our customers.

We are becoming clearer. We are the only bank or building society to have the fairbanking 5* mark across our entire instant access adult savings range.

We are improving the customer experience. We have just recently launched the reward account offering, 3% cash back on [indiscernible] to a small number of customers, as an initial stage and a full launch scheduled for later this year.

This is an important competitive development in the U.K. current account market.

We are leading the way on innovation and collaboration, through Apple Pay, through Touch ID and through RNIB approved cards. These amongst other improvements have led to our NatWest Mobile Banking app becoming joint number one in market according to our customers through Net Promoter Score; and we are easy to deal with.

The time it takes to open a personal current account has been halved to 30 minutes, and we have rationalized our front and back book set by up to 50% excluding on non-personal lending, and we are also supporting small businesses and the community. We have partnered with Entrepreneurial Spark to support enterprise, and we have created and launched a 2.5 million skills and opportunity fund to support local communities across the country.

And we are improving the experience of working here at RBS. We are rolling out training to 7,500 of our leaders across the bank to improve ourselves and our service culture for RBS.

I'd like to take a moment just to highlight the improvements we have made, particularly in our Mortgage business, a key area of growth for us that we called out some time ago. We significantly increased a number of mortgage advisors, and we are transforming our proposition to make it easier for our customers to do business with us.

This isn't only an investment and capability or capacity, its an investment also in service delivery. We are more focused on our strongest product with a simplified range.

We have introduced new ways for our customers to talk to us, making it simpler to apply and looking at every step of the mortgage process. This will ensure our customers get the best experience possible.

Our customers are already responding to these changes with complaints being down, Net Promoter Scores up in both franchises, and we are attracting more customers and growing the market. These are encouraging signs and an important market for RBS.

You can see here that the mortgage applications are up 42% from the first quarter and our market share is increasing. These are positive trends in a growing but competitive marketplace.

Our gross lending is also up by 43%. I have been very clear about our intention to be number one for customer service, trust and advocacy, is based on a simple logic; look after your customers better and they will do more business with you.

And that simple logic is starting to be delivered, the results from our customers, even from our improvements you will see here in our applications and our market share and our growing gross new lending. Before I hand over to Ewen to go through the numbers in detail, I want to leave you with a message I started off with.

We are in a stronger capital position and our capital ratio is up. Our costs are down, our returns are improving, and our customers are feeling the benefit of our strategy.

I will now hand over to Ewen to take you through the numbers.

Thanks Ross. So in phase 2 of our plan, there is three things we are currently focused no; building value in the go forward bank through improving customer service, enhancing growth and increasing returns.

Accelerating the rundown of the Exit Bank, while still protecting value, and progressively working through a list of other issues. I think across all three fronts, we have made steady progress during Q2.

You have seen the slide before at our full year results, hits the smoke between what we describe as our Go-Forward bank and our Exit Bank. Our Go-Forward bank has a really strong set of customer franchises positioned across the spectrum.

Ross talked about earlier, the continued progress we are making towards being the number one for customer service, trust and advocacy, financially, we are also making good progress during the quarter. On returns, they are continuing to improve from already healthy levels.

14% normalized return on equity for Q1, and that's after backing out about £200 million for IFRS volatility gains and prior to conduct and litigation charges; and that's up from a like-for-like 13% return in Q1. On growth, the annualized first half growth across U.K.

Personal and Business Banking and Commercial was 2% on an annualized basis. So we are quietly pleased with this value dynamic.

Improving customer service, solid growth and volumes and increasing returns. Net interest income was up slightly on the last quarter.

This reflected some growth in average interest earning assets up to £1 billion in the quarter, offsetting a modest decline in the net interest margin. The total net interest margin was down three basis points in the quarter, versus a six basis point decline in Q1.

This was primarily due to a continuing switch from standard variable rate to fixed rate mortgages, and higher liquid balances. The margin in U.K.

Personal and Business Banking was down three basis points, reflecting both mix and SVR switching. This compares to a 13 basis point decline in Q1.

The margin in Commercial and Private banking was broadly stable, while corporate and institutional banking and RCR continue to see volatility, as assets run off. On a pro forma basis for Q2 and assuming the full exit of Citizens, the bank's net interest margin would have been some 10 basis points lower to 2.13%.

On costs, we think we are building a good and disciplined track record. We are determined to position ourselves as a lower cost provider, while not sacrificing on customer service.

We have reduced operating costs, as you know by £1.1 billion last year, and as we are committed to do, we are on track to deliver another £800 million of cost savings this year. Our Q2 costs were 12% lower than the previous quarter in 2014, and 22% lower than the equivalent quarter in Q2 2013.

But to achieve our longer term cost aspirations, we need to keep making substantive further progress over the next three years. Citizens, Williams and Glynn and operating lease expenses, we are targeting reducing our operating costs by at least a further £2 billion from this half's run rate.

The corporate and institutional banking restructuring will be a big part of this, as will automation, optimizing our location strategy, both on-shore and offshore and process reengineering, as we become a simpler and smarter bank. And as we continue to move further and faster with our restructuring, we do expect that our restructuring costs will remain at elevated levels through the remainder of this year and into next.

We said at the start of the year, that we'd spend in the order of £5 billion of restructuring costs over 2015 to 2019. That remains our best estimate at this point.

Just under £2 billion of this relates to the exit of Williams and Glynn and preparing for ring fencing. We recognize that this delivers no value to shareholders, but this spend is not optional.

But for the remainder, just over £3 billion, we believe that spending this to deliver at least £2 billion of operating cost savings, represents a very good return on investment. On the reduced bank levy and additional corporate tax surcharge, we expect the net impact of these measures will be to increase our tax charge over time.

In the medium term, we expect a normalized tax rate of 27%, before trending lower towards the end of our 2019 plan. We expect the bank levy this year to be around £280 million, falling to around £150 million by 2019.

Stepping through the various reported segments for U.K. Personal and Business Banking, we had another good quarter and better than Q1.

Operating profits were £667 million, that's up 92% on Q1, and the ROE was 32%. Growth was much stronger, with mortgage origination volume stepping materially, and the second quarter share of applications was even higher, up well for origination volumes into Q3.

Margin pressure slowed relative to Q1, relative to a more modest three basis points and we expect these trends to continue into the second half. With the benefit of good growth and mortgage volumes being moderated by further greater pressure on the net interest margin.

We also expect further income headwinds from the ongoing impact of the reduction and interchange fees. With a 52% cost income ratio in Q2, after adjusting for conduct and litigation costs, we see room for material efficiency improvement, as we progressed on our core bank transformation.

With Ulster Bank, returns continue to benefit from the ongoing macroeconomic recovery in Ireland, triggering further write-backs in the quarter of some £52 million. Operating profit was £80 million, up 57% on Q1, and the ROE was 10%.

There was a material strengthening of sterling versus the Euro last year, which does impact Q2 on Q2 comparisons. The cost income ratio at 84% is unacceptably high.

We believe, we should be able to materially reduce those over the next two years. We also expect returns to improve with Ulster 3-D accelerated reduction in the drag, from the tracking mortgage portfolio.

We have reduced the size of the tracking portfolio to £9.4 billion by the end of the first half, and its ROI density also improved, resulting in an accelerated reduction in the capital allocated to this portfolio. With Commercial Banking, we believe this franchise provides us with a powerful differentiator versus peers, the number one commercial bank in the U.K., with strong market shares across the country.

It balances out our business mix, ensuring we are not reliant on a single asset class to sustain our returns and growth. In Q2, Commercial Banking had operating profits of £400 million.

You should note that Commercial Banking benefited from the transfer on the 1st of May from around £2.1 billion in loans and £13 million in operating profit from corporate institutional banking during Q2. This is the start of repositioning for ring fencing.

It’s the transfer of the U.K. large corporate relationships, into what will become the ring fenced bank, and it will be followed later this year, with a transfer of all of our western European large corporate relationships.

For H1 comparisons, you will also need to adjust for the transfer of RBSI, our Channel Island's business from private banking to commercial banking at the start of the year. On private banking, it had another weak quarter, with an operating loss of £78 million.

This was as a result of operating losses and restructuring charges associated with the international operations. Backing that out for the commercial domestic franchise, we see material productivity improvements, both on revenues and costs in the coming years.

With corporate and institutional banking, we have had a heavy focus since our February announcement on stabilizing the Go-Forward business. In this context, we are satisfied with the revenue performance and progress for the business overall, despite a somewhat weaker revenue quarter for the rate franchise.

Revenues for the Go-Forward business were £310 million in Q2, down 28% on the seasonally higher Q1. Assuming normal seasonal trends, we expect the go forward corporate and institutional bank will generate revenues in the region of £1.3 billion.

This reflects the transfer of U.K. GTS and U.K.

and Western European large corporate relationships into commercial banking. So on top of the £1.3 billion is about £400 million of additional revenue benefit, which will be reflected into commercial banking over time.

Backing out the impact of conduct and restructuring charges, the Go-Forward business was broadly breakeven in Q2. As we highlighted in February, we expect the turnaround back to cost of capital returns for this franchise, and will be in the order of three to four years.

It will require a replatforming of a substantial part of CIB's IT infrastructure. In order to operate the franchise of a materially lower cost structure.

ROAs were down to £43 billion by the end of the quarter. Of the £35 billion to £40 billion of RWAs that we announced in February as being the steady state RWAs for this business, we now expect that number to be approximately £30 billion.

The remainder of the RWAs would have been transferred across into commercial banking. Turning to our Exit Bank, we continue to make excellent progress in reducing the scale and scope of the Exit Bank.

On Citizens, you all have seen that we just completed the sell-down of a further significant stake, exiting 17.4% of Citizens on Tuesday. Pro forma for the exercise of the over allotment option and a small directed buyback in the next few days, we will hold now 20.9%.

We have previously advised that we expect a deconsolidation of Citizens, at or below a 35% shareholding. This remains true for accounting deconsolidation, and this will now have been triggered by a Tuesday sell-down.

However, for regulatory capital purposes, the PRA has informed us that due to certain negative protection rights that we have retained with Citizens about a 20% shareholding, we will not get proportional deconsolidation. So in Q3, for accounting purposes, we will deconsolidate Citizens and account for the disposal.

This will include an accounting profit totaling £1.1 billion, including a recycling of £0.9 billion of FX and other reserves through the income statement. Given most of this is reserve recycling, only around £200 million of this will benefit core capital.

Pro forma for a full exit out of Citizens, ex operational risk, RWAs and the Exit Bank at the end of Q2 would been some £65 billion lowers, or £84 billion of remaining RWAs. This would have reduced the Exit Bank from around half of our RWAs at the start of the year, to under a third at the end of Q2 on a pro forma basis.

And overall for RWAs for the bank, including the pro forma benefit of Citizens at the end of Q2, would have been some £262 billion or well below our year end target of £300 billion. On CIB Capital Resolution, we have mad an excellent start in running off various asset pools, and I will come back to progress on the next slide.

On RCR, funded assets reduced by another £2.7 billion during the quarter, and are now at £8.4 billion. In order to exit RCR, we need to reduce funded assets to at or below £5.7 billion, and based on current sales processes, we expect to comfortably meet our accelerated time table to run off RCR by the end of this year.

At the end of the year, we then plan to fold the residual stub of RCR into CIB Capital Resolution from a management perspective. Financially, RCR continues to benefit from favorable markets for asset reductions, resulting in an operating profit of £176 million in Q2 and £357 million in the first half.

And for the first half, RCR achieved an average disposable price of 1.06 times book value. On Williams and Glynn, you will note in appendix IV in our interim report, we have put in some incremental financial disclosure.

This represents William and Glynn under our ownership. You should have seen that as a standalone bank, that its cost structure will be materially higher, and therefore returns lower.

We are working hard towards a planned separation in just over a year's time, and then an IPO at the end of 2016. We have also strengthened the management team in the recent months with a new CEO and new CFO who will be in place shortly.

The sale of our international private bank to UBP was announced in March. It remains on track to progressively close from Q4 of this year, through to first half of next.

So overall with the Exit Bank, we are comfortably ahead of plan, and we now expect to have the great majority of our RWAs allocated to the Go-Forward bank by the end of next year. On CIB Capital Resolution, we have made an excellent start with winding it down.

In part, we are benefiting from the rapid reduction in RCR. We have managed to shift a number of the senior RCR team across to lead the CIB Capital Resolution wind down.

From starting RWAs of £64 billion, we have already reduced these by some £19 billion or 29% in recent months, and we have reduced TPAs by some £33 billion over the same period. In the Americas, we have signed sales for over two-thirds of our corporate loan book and associated commitments, that were targeted for rundown or sale.

And we expect to be substantially out of our American wind down portfolio by the end of this year. In APAC, we have already announced sales of substantially all of our Australian and Hong Kong businesses.

We have commenced sales processes for China, India and Malaysia. With our GTS platform, we have notified over 30,000 customers of our intention to exit, and we have reached agreement with BNP Paribas to offer those customers a strong alternative GTS partner, and therefore helping minimize customer disruption.

On the back of these portfolio disposals, we also booked combined losses and sale of £113 million in Q2. Overall, comfortably ahead of plan at this time in terms of the Corporate and Institutional Bank Capital Resolution wind down, and we are also in line with our earlier loss estimates that we announced in February, as part of the £2.5 billion to £3.5 billion of combined additional CIB restructuring and asset disposal costs.

The third topic I wanted to focus was, what I describe is our other issues. These broadly fall into three buckets.

Firstly, addressing legacy litigation and conduct issues. This includes a range of issues, a number of which are noted on this slide.

We have sought this quarter to give you some additional disclosure in our results, note 16. This should help refine your views on the potential cost of settlements across a few of these issues.

Given recent publicity, I did want to spend a few minutes discussing our exposure to various U.S. and RMBS litigation and regulatory investigations.

We are not currently in settlement discussions for our various U.S. RMBS exposures, and hence why we have not taken any material incremental revisions this quarter.

But as you think about potential liabilities, we face claims across three broad categories. Firstly, various litigation claims, totaling some £45 billion in gross principal balances, which -- where we may incur settlement costs or liabilities.

FHFA claims are a big part of this £32 billion, but not the only part. There are £13 billion in gross principal balances of other civil litigation claims that we are subject to.

Secondly, the U.S. Department of Justice investigation which is ongoing, and which we believe is likely to result in material settlement costs.

And thirdly, we are subject to various ongoing investigations to several State Attorney's General, that we anticipate could result in incremental regulatory fines, or penalties on top of any settlement with the Department of Justice. We are not going to guide you to any specific number of range, but we believe this side and the expanded disclosure that we have got on note 16, are a good summary of our various exposures.

Its also difficult to predict at this point, how the various claims and investigations will be resolved or in what timeframe. The second bucket of issues that we are addressing can be broadly grouped into the topic of improving and restoring our capital resilience.

Rebuilding our core capital ratio and commencing the issue of TLAC, reducing the stress characteristics across various asset pools, and managing our defined benefit pension risk. You all have seen today that we have announced our intention to launch our $81 bill [ph] in the next few days.

This is part of our intention to raise at least £2 billion of 81 this year, and another important milestone for us as a bank. On our core capital ratio, we have delivered, I think material progress over the last 18 months.

Our core Tier-1 ratio has improved by some 370 basis points from 8.6% at the end of 2013 to 12.3% at the end of last quarter. If we were today, to pro forma for the full exit of Citizens at the end of Q2, we would have had a core Tier-1 ratio of some 15.3% at that point.

On reducing risk, risk elements and lending have been reduced by over 50% since the end of 2013 from over £39 billion to under £19 billion at the end of the second quarter. We are also rapidly normalizing our NPL ratios, with risk elements in lending to gross loans having being reduced from 9.4% at the end of 2013, to 4.8% over the last 18 months.

All of this improvement in capital resilience, makes us increasingly confident about our ability to return to capital distributions. I would repeat what Ross and I have been consistently messaging over recent quarters.

We expect to achieve our 13% core Tier-1 ratio during 2016, and that's after deducting the cost of various conduct and litigation issues, including U.S. RMBS and after making the final £1.18 billion dividend access payment.

We then intend to return excess capital back to shareholders in the form of either dividends or buyback, once we have PRA approval to do so. Realistically though, we need to achieve the various milestones that we set out last quarter.

These including, demonstrating sustained profitability, improved stress test results and resolving our major conduct and litigation issues. As a result, we do not expect, in our central planning scenario, to be in a position to return to capital distributions until first quarter 2017 at the earliest.

The final set of issues that we are spending time on is, what I would describe as future proofing the bank. These include an increasing amount of work now underway on ring fencing.

For example, the transfer of U.K. large corporate lending relationships that we made in Q2.

We do think that our ring fence solution, a broader ring fence bank, with two small non-ring fence banks for both corporate and institutional banking, and RBSI, our Channel Islands business positions us well to accommodate the complexity imposed by ring fencing in the coming years. So in conclusion, and before I hand back to Ross, we are focused on doing three things well at the moment; building value in the Go-Forward bank, through a focus on improving customer service, enhancing growth and achieving higher returns.

Secondly, accelerating the rundown on the exit bank, while preserving value. And thirdly, working diligently through our list of other issues.

We are pleased with the progress across all three fronts this quarter, I think the small attributable profit we made in Q2 masks a lot of really good progress, both in rebuilding our Go-Forward bank, towards being the best bank for customers here in Britain, and accelerating out of the Exit Bank for value. So with that, I will hand back to Ross for a few quick summary comments.

Thanks very much Ewen. I just wanted to close by revisiting the slide that I talked to you about in February of this year.

You see from the results that we are posting today, this is a bank moving forward on its plan. It’s a plan to build a stronger, simpler and fairer bank for both customers and for shareholders.

We are focusing squarely on our core strength here in the U.K., and in the Republic of Ireland. We are determined to win our customer's trust to build a strong bank that delivers attractive, balanced and sustainable returns from a lower risk profile.

This is a bank that is delivering on its plan, and readying itself for the future. And with that, we are open for questions.

Thank you very much. Its Tom Rayner from Exane BNP Paribas.

I might have three actually, the first one on the central [indiscernible], and Ewen I think you said Q1 is good an assumption as any, we presume that revenue was zero on a sort of an ongoing basis. Clearly, it’s a lot higher than that in Q2.

So I was just wondering if you could just reiterate that as your best guidance for that line? Second question, just on the distribution sort of not until the first quarter 2017, does that rule out the announcement of a dividend in 2016 to be paid in Q1, or is that being too precise?

I am interested in what should the caveat, you think, are the most important? Is it the passing the [0:43:33] litigation, because that's what it sounds as if it might be the reason you're pushing out that guidance?

And then just finally, the work you're doing so far in IFRS 9, I wondered if you could give us any feel for how material we think that issue might be for yourselves and the industry? Thank you.

On the central items, look I think the answer is, the best guidance is zero. Of that £300 million odd that I think is in the Go-Forward bank in Q2, there is over £200 million of IFRS volatility gains for example.

So when I mentioned that normalized return of 14%, I'd already backed out a couple of percent of excess return for that. On distributions, I think you're trying to be too precise on that, in terms of -- it sort of links into the caveat's question.

So if you think about the things that we need to demonstrate, I think its right that we need to demonstrate sustained profitability at the moment. We think we have got a very Go-Forward bank, and then every quarter we are continuing to report very substantive restructuring charges and substantive conduct and litigation charges.

So we have to travel through a period, which we think will be through over that period of seeing the bulk of our restructuring charges through to P&L. Realistically, the bulk of that should be over the next 12 months or so.

On conduct and litigation, I don't think we view that probably as the -- it’s the biggest hurdle. The ones I mentioned.

We will be disappointed I think if we were sitting here in a year's time, and hadn't managed to bottom out a lot of those conduct and litigation issues, particularly, U.S. RMBS.

I think you also have to sort of bear in mind, the annual stress testing cycle, which is effectively a 11-month lookback in terms of the performance and capital resilience of the bank. So stress test results this year will be out in November, effectively looking back to the end of 2014.

So we think we need to go through this year's stress test round, another stress test round, which means we should be able to start to engage with the PRA I think in late 2016. So when I talked about Q1 2017, I was talking about dividend or buybacks in Q1 2017.

So it was just on IFRS 9, I don't know if its too early?

On IFRS 9, it is too early at this point. I think, we do expect there to be a one-off increase in balance sheet provisions at the time of the introduction of IFRS 9.

Its too early for us to give you a decent quantification of that. We also don't know yet the impact on capital, because there the expected loss charge and what the offset is, if provisions increase, does the expected loss charge then go away, as a capital deduct.

But as and when, we are able to talk about that and give you some guidance, we will.

Thank you very much.

Yes sir. Good morning.

Martin Leitgeb on Goldman. Just a follow-up on litigation and one on legacy IP.

With regards to litigation in terms of how you think about the outstanding litigation issues, both in terms of potential quantum and timing, has there been any material change in how you think about these over the last two quarters? And secondly, on the rundown of the legacy IB, you are now at £20 billion, that is a target of £25 billion.

And if I understand your comments right with regards to the U.S. loan sales, you are essentially now already close to £25 billion, once those close.

How do we think about this rundown into 2015 and 2016? Will this pace, this very fast pace you had in the first half 2015 be maintained, and we have a relatively small balance left with the end of 2016, which is potentially derivatives?

Or how should we best think about this? Thank you.

Maybe I can take the second one, and Ross you can --?

On the rundown of CIB capital resolution, you're right. Its not the full 20, because there was a transfer out of CIB of about £2 billion of IWAs into commercial.

But in terms of that £25 billion reduction target, I think you should have seen that we are relatively comfortable with achieving it this year. I'd be disappointed if we only [ph] achieved it.

In terms of the rundown of capital resolution, I think overall, it would be our expectation I think that we would have made substantive progress by the end of 2016. Not just similar to RCR, there is assets in there that are quite long tailed in nature.

So it will get down at some point to a stub of assets that will take a long period of time to manage out. But I'd be disappointed if we hadn't got through the bulk of the rundown of the next two years.

I think its fair to say that the team worked incredibly well on getting the assets out, at a pace faster than we thought. We have seen that in the first half.

I think we are about £19 billion RWAs down against the target of £25 billion. So markets being okay.

We will exceed that this year. So we have got good markets for selling into and we are taking advantage of it.

On the litigation, set out this year with sort of three things in mind, [indiscernible] conduct and litigation. One was around tidying up the FX issues that we were dealing with.

Second one was the GIG, which has been a plague on reputation. That's what the FCA is still at the moment, and still a bit of time to go through there, but that's one we would like to have, at least the answer to this here.

And the third one was RMBS. We have been watching all other cases come through.

Our time is coming. Just looking at -- but we still just don't have an indication of what those numbers are, until we get into conversations.

But again, would like to have those conversations if its appropriate starting this year. So we can give a much better guidance to yourselves, to the rest of the market.

I think specifically in relation to your question, we haven't changed our provisions now for some time. But our expectation of costs are higher than the provision.

We just don't have a basis to identify a different number.

Correct.

Thank you.

Morning. Its Andrew Coombs from Citi.

A couple of number related questions, then one bigger picture question. First number of questions on the commercial bank; the other non-NII has jumped quite a bit quarter-on-quarter £69 million to £104 million; and in the text you referenced gains on equity disposals as the reason for that.

How could you elaborate and just how sustainable that is? My second question would be on the £9 billion of RWAs that have been transferred from CIB to the Commercial Bank.

You talked about £400 million of attached revenues, what's the attached costs and impairments to that? I am trying to get an idea if that's the drag on the 13% Go-Forward CPB, or benefit or some idea.

And then a final question, border question, there is obviously a lot of focus on litigation, and particularly the U.S. MBS case outstanding.

How much of a headwind do you think the uncertainty is around that litigation, as to starting the timeframe of the government exit? Do you think you need to be further along in the discussions?

Do you have a better idea of the quantum of that, before you think you could proceed with that government placing?

So on the first question, I think you should have seen that equity disposal rates went off, and therefore not sustainable. On the costs and returns out of the £400 million of incremental revenues, we are still in the process of working through those numbers at the moment; because as you have seen, one of the reasons we are not able to give you and we will work towards over the next couple of quarters, giving you a much better understanding of the full cost breakdown between capital resolution and CIB going forward.

But because we are in the middle of that restructuring at the moment, we can't give you precise estimates of what the costs are against that £400 million.

Just on the headwinds, particularly around litigation and contact issues and the government sale. Its in the hands of the governments to take their timing on when they do the sale.

I think those parties that I suspect they will be talking to, will have their own views on what these costs will be and will have to factor them into their own pricing numbers. We have just been as clear as we possibly can with the knowns that we know, to make sure that everybody is aware of those numbers and you've got pretty full [indiscernible] fuller disclosure.

This time over, we found that there was quite a bit of confusion when we talked about RMBS, what did that mean? And people sort of went to Freddie and Fannie and that was it -- but there are some other cases that we knew about, but we just wanted everybody to know that.

So I think its in the hands of parties that the government talks to.

Our disclosures are targeted of having a fair orderly market, in which trading can sensibly take place, if there is an answer to your general question just related to the --

Hi morning everybody. Its Raul from JP Morgan Cazenove.

If I could have two questions here Ross please. First one is, a general one on your mortgage growth strategy; because I get the point that the bank is hiring a lot of mortgage advisors, an area where it hasn't been focused in the past, and there clearly needs to be more growth going forward.

But if you look at the numbers and the margin on this product area, in the last couple of quarters, your balances have gone up by roughly £2 billion, but your income is broadly flat, slyly, and if you look year-on-year, clearly, you make less income now than you use to make in the previous quarter of last year, on a higher balance basis. So we are not quite 2007 yet, but the margin on mortgages is falling very rapidly, and do you think it still makes sense for the bank to continue to grow this area, especially if you can maybe talk about the ROE as how you look at it, would be interesting?

And then the second question is more Williams and Glynn, if you can talk to us about what's going well there, what isn't going well, and the dependency on any competition, sort of inquiry, because obviously that seems to be an area of focus as well?

Well first off, we do like the mortgage-backed. I mean, we have been quite weak in this market.

We have been growing over a number of years, but still quite weak for the size of the bank we are and for the customer base we have. We believe that with the right capability and service delivery, we can grow this safely.

We are not going to be growing this market like we did in the Irish market, back before we collapsed, and there is no way that's going to happen. So within the risk tolerance that Les and his team are very well aware of and have to stay within that.

I think you've seen, if we hadn't started growing the balances, the profitability of this business would have come down any way, because the margins are coming down, as people from standard variable across to fixed. Of any banks, we have probably got the lowest now standard variable book, as a percentage of the total book.

There are still some banks with 50% of their book on standard variable, which to me says, this is a great hunting ground for RBS to go after, because they are paying too much. And that's what we have been concentrating on with our customer base, actually identifying customers that actually have a standard variable rate, that we can approach to do a better deal for them.

What's key in these markets, costs have to come down in delivering mortgages. That's another thing we are working on, is our service delivery and how we operate in that market.

So I think we are seeing more volume. Yes, its going to be lower margin, because people are transferring from standard to fixed, that's going to continue.

Yeah, I think we are a long-long way from 2007, in terms of margins. I mean, the returns we are getting on the front book are still very attractive and are still --

If you look at mortgage margin and ROE then --

ROEs we are getting on the front book. Its still very attractive and we are still putting the business on.

Its very good ROE. And countries around the world that have much than the margin, are still making good ROEs on, but it does come back to efficiency.

The other problem in this market, is we just didn't have enough people qualified to do it, and it had never been in the DNA of RBS or even NatWest, because we didn't come from a building society. Now you're seeing us getting very good at this, and I think people are enjoying the experience.

They are having, as it seems, this [indiscernible]. Williams and Glynn, this is a big task.

I mean, I don't think anybody has ever taken a bank from within inside a bank and recreated -- it has got thousand plus systems and applications, having to take out a bank and stand it up. So no one said this was going to be easy, and its not -- I mean, if you set out to have a look at this, you wouldn't do this to yourself on purpose.

So we are doing it. As Ewen said, we don't have options.

It is a tough task. We have got 4000 plus staff, just working on taking it out.

It will be tight, but our view is we will get it out by the end of next year, ready for an IPO. We have done a pretty good job on this to have got a banking license, and that's something that we are working on, and it needs to be an organization that can show itself to be sustainable as it comes out and over the long term.

We are working very hard on it. Well its going well.

The entire organization is focused on it. We'd say probably, even 12-18 months ago, that was not the case.

It is one of our top priorities, because without this coming out, we are restricted at what we can do under the RBS brand and we are restricted with what we can do with the flexibility of this organization. So [indiscernible].

And the CMA interest in that? I mean, is that something you consider a risk factor?

Look, we have heard good conversation with CMA. We have -- financials, we have actually said to them, look, take these numbers, but there is more coming, as we get more acquainted with this business as Ewen said.

As you look at it, there is a unit inside the bank that's highly profitable. But the issue for us is to put the cost structure we have against it, that's what we have been building, and those numbers still changed.

So that's why we are not clearing them out to you today, because we are just not convinced that they are the right numbers yet. It’s a pretty complex business.

I mean, we are standing everything up, treasury, systems, bonds, absolutely everything to get a license.

We have a question on the line from Mr. Joshi from Nomura, what are your views on the buy-to-let market?

Do you think its contractive and would you look to increase market share? If yes, to what level?

Well I think the buy to let market is an attractive market for us done well and done within the risk parameters again. We have recently examined this market and what type of business we want.

And again, the risk parameters of this business, risk appetite statements are quite clear about what we'd want and what we don't want. I think this will actually become a more important market in the mortgage area over the next, probably five years.

In the sense, as house prices come up, some houses get out of the reach of many people who want to live in certain areas, and the investors need to come into those markets. I also see, as people take the -- choose to take some money out of their pension funds, maybe well be investing in this area as well.

So I do think that we do need to be there, but we do need to stay within good risk perimeters and not blow ourselves up on this market. But I think it’s a good attractive market.

Margins are okay. Returns are pretty good and stay within your risk parameters.

Don't get tempted to go outside them.

Good morning. Ian Gordon from Investec.

Could I just come back to the capital return story? It feels like, at the past quarter you spent a lot of time with investors reiterating the guidance you gave one quarter ago, namely that you expected your CET-1 to get to 13% in 2016, and with respect to [indiscernible] pretty unlikely then, and given the progress you have made in the last 48 hours, it feels exceedingly unlikely now, even after taking your account off the quarterly commentary you've given us in note 16 on conduct.

So just in case I missed it, have you dropped that guidance in terms of time scale or number, especially in the light of the very helpful performance disclosures you have given us, in terms of A, the focus you've made, and B, the mathematical effect of what you plan to do in the next five months with TFG?

I don't think we have adjusted the target. We always said that our target was to get to a 13% Tier-1 ratio.

We expect to get there during 2016 and we expect to get there after we set all conduct and delegation, and pay the debts. I think you're right, that the dynamic around Citizens is probably different from that original guidance.

But in terms of the real guidance, I think the real guidance today is, don't expect us to be making a capital distribution until first quarter of 2017. Irrespective of where our core tier-1 ratio is during 2016.

And why is that, I think the principal rate for us would be demonstrating good stress test results at the back end of next year, as being the key determiner of the viability and your return to capital distributions. I mean, you would have seen, at the end of last year, we were a stress bank.

We think we have moved a lot of stress, but we still have progress to do.

Its Claire Kane from Royal Bank of Canada. I have two questions, on is a follow-up please on the mortgage pricing?

So could you please talk us through the slowdown you have had in the margin compression? Perhaps tell us how, if the churn of the SBR book has slowed, or if you are seeing some bit of pricing improve slightly from last quarter?

And then my second question, perhaps a bit early, but I just wondered if you had any comments yet on the new Pillar 2 framework that came out yesterday from the PRA, and how in general you are hoping to manage down your Pillar 2 capital buffer requirements?

Just on your first question, certainly in the first quarter, there was acceleration in fixed, which created quite a drag on our NIM. Looking at Mr.

Les Matheson, I have to get a feel for the next quarter, has that thing [indiscernible] better or has it stayed the same? I mean, we have got a smaller notebook of standard variable rates.

So the rate of movement for us would be less than I suspect in similar other parties on that one, and I will pass to Ewen on Pillar 2.

I was in board meetings all day, and yesterday even. So I haven't yet caught up on the news, but I am sure within 24 hours, I will have your good answer on that.

I think whatever they announced, I would stick with a previous guidance, and when we have run all of our analysis on -- where we think the PRA is going to go, we think the 13% core Tier-1 target gives us appropriate buffers, both above NDA triggers, and where we think Pillar 2A is likely to go for us.

Hi its David Lock from Deutsche. Just a couple on Ulster Bank please.

Firstly, when you look at risk weighted assets, your risk weighted asset intensity still is very high versus the rest of the market. I just wonder if you could give any color on whether think that could come down over the coming years, particularly as you roll off that track book?

And then secondly, you made a comment about the cost income ratio being too high. Is this strategy about getting it down, is that mainly a cost kind of dynamic, or are you trying to reprice any of the mortgages you have there, or move the track of mortgages on to a higher rate?

On RWA intensity or density, we do think that that will come down over time. I think you have to remember, that we are under PRA-RWA rules, not CBI-RWA rules, and there is a difference, that's why the Irish banks have lower mortgage density relative to us for their RWAs.

But the reason why its so high in Ireland is, because of the track on mortgage book. If you look at our U.K./Irish mortgages, the ROA density is still north of 18%.

So that will take some time to come down, but it will slowly come down, I think, both as the track book comes down and house prices continue to look great. In Ireland, I think there is very little capacity to actually reprices those mortgages.

I think it is mainly a cost reduction story for us.

And that's going to come through us working well with the Ulster Bank team to actually eliminate whatever costs and you know the old saying of -- many restaurants, one back kitchen. And that's what we've claimed to do.

We have started to align some of the systems, much better than what we have had. So that we can do some of these things just one -- five times across the organization.

That process has started, it will take some time.

Its too costly.

Liz and the team know that. That's what they are working on.

They are going to get the costs down. It’s a smaller bank than it was five years ago.

The balance sheet is much smaller and it needs to realign itself.

Okay. I think we are coming to the end.

There is a question online, why is your performance in U.K. Personal and Unsecured Lending so weak?

Both loans and credit card balances are falling? It seems surprising you have positive impairments from both areas?

Thanks.

That's a very good question. I will put that into Liz's review next time around.

There is certainly pressure on the margin in this business, and there is some parts of this margin we have chosen not to fully participate in. It was surprising in some of the areas here, I think is getting to a point, where we are not going to talk about this on-board.

We are just not getting a return on equity. Therefore why put your capital forward?

And we are being sensible on those areas. In the credit card side, actually our balances haven't been falling, they have actually been quietly growing, even though we haven't been playing the zero balance transfer, which I think, as you know my views on that, we just need to be growing that business much more sensibly, long term other than short term players.

So the credit card business has been okay with growth, but its sending the personal loans that we have chosen to actually not participate parts of that market. We just don't see the returns on it.

And again, nice piece of discipline by Liz and the team on there.

Hi, its Joe Dickerson from Jefferies. I have two questions if I may; the first is, as you run off legacy funding, does the benefit from that funding show up in the corporate center?

Is that allocated out to the business segments? And then the second is on the FHFA litigation in the U.S.

There was a recent case and ruling from Judge Cote in New York, and so I was wondering if your expectation on the FHFA settlement, is that the settlement would be paid gross or net of the securities; because in that case, there was a requirement for the parties to actually buy back the securities, and we see these numbers of like £13 billion in the press, and that seems to be overstate, because that means buying back securities. And it seems as if you have got about $9.1 billion of securities left out of the $32 billion of UPB?

Thanks.

So we do philosophically, try and charge everything out to the franchises. So as the benefit of those legacy funding costs come out, that will be allocated to the various franchises.

We are trying not to keep any costs at the center, to try and get you through the returns for the businesses. On the FHFA litigation, Judge Cote is probably the most extreme judge of FHFA settlements.

Its not our expectation that we are going to have to settle gross. I think when you look at FHFA, there has been plenty of people settled now.

I think there is a reasonable range of estimates that exists in the market, as to where those settlement costs have been, relative to the gross exposure. Our views would not be inconsistent with those market fees.

Thanks.

You want a second bite?

Thank you. Tom Rayner again.

So to come back to you and your response to Ian's and Gordon's question. Just so completely clear; because we are talking about 2016, obviously Citizens should be fully sold some time around the end of the year.

So the pro forma number we are talking about today is over 15%. So what you're saying is that you're thinking about 2016 because of the stress test impact and that its backward-looking nature, not because there is a danger that litigation could be so large in that year, that it knocks the capital ratio back from where it should be, north of 15 to closer to 13.

I just wanted to be 100% of what the message is? Thank you.

Well so DES [ph] 1.2 billion. So if you pro forma for Citizens Exit, that's about just under 50 basis points.

I think I will be a brave man to estimate what our final litigation and contract costs are. But what I am trying to say is, stick to the 13, because that's the benchmark that we are going to use to return excess capital back to shareholders.

We don't want to hold anything more than that. But I am just being transparent and realistic in telling you, we don't expect.

If we were to begin that capital distribution back to shareholders until first quarter 2017.

Okay. Any more really important questions?

Had a good one. Thank you very much.

Thank you.