Q313 results investor presentation Philip Hampton, Chairman Ross McEwan, Group Chief Executive Nathan Bostock, Group Finance Director 1 st November 2013
Agenda Introduction Philip Hampton Strategic update Ross McEwan Internal Bad Bank (“IBB”) explained Nathan Bostock Appendix I. Q313 results explained Appendix II. Sir Andrew Large SME review
Philip Hampton, Chairman Introduction
Strategic update Ross McEwan, Group Chief Executive
My early priorities Resolve Good Bank / Bad Bank Resolve capital position with the PRA Reset relationship with HMT, PRA, UKFI and the Chancellor Make progress on the Dividend Access Share Sharpen our focus on customer business – update in Feb’14 alongside FY13 results Long-term priority: Making RBS a great bank for customers and all stakeholders 1
RBS has made tremendous progress � ≤ 100% Group loan:deposit ratio achieved � Funding and liquidity metrics transformed Robust Balance � Requirement for future wholesale funding limited Sheet � Funded balance sheet halved, now at £806bn from £1.6trn � Business mix shifted to c.80% Retail & Commercial, with UK focus � Non-Core process complete in 2013, consistently exceeded targets Dramatic � WorldPay, Sempra sales completed change in scale � Direct Line exit on track and scope � Rainbow exit progressing – pre-IPO investment agreed � Special Liquidity Scheme facility fully repaid � Credit Guarantee Scheme funding fully repaid Reduced � Asset Protection Scheme exited without claims reliance on the Government � In discussions with HMT on exiting the Dividend Access Share and simplifying the capital structure 2
Building a great bank for customers � Continue to strengthen capital base – target fully loaded Core Tier 1 ratio of c.11% by end 2015 and 12% and beyond by end 2016 � Accelerate Citizens divestiture – significant capital accretion Restoring expected capital strength � Relentless focus on reducing risk and hence RWA and stress loss intensity � Accelerated de-risking = stronger capital = better, safer bank Further de-risk � More predictable earnings legacy bad � Creation of an Internal Bad Bank (“RBS Capital Resolution”) with assets a clear run-off plan � Full strategic review of ongoing businesses, expect update at FY13 results Sharpen our � Rebuild earnings via revenue initiatives focus on core � franchises Review of cost base underway � Initial target mid-50s cost:income ratio 3
Citizens A good business with significant …but not essential for RBS forward potential… strategy Citizens is not fundamental to UK Significant scale in national context � R&C business 9 th largest branch distribution � Limited connectivity with Group � 7 th largest ATM distribution � RBS is not the right long-term owner � 2 nd largest in-store franchise � IPO will accelerate to H2 next year � Positioned for success and financial Plan to exit the business fully by the improvement � end of 2016 Repositioning of major business lines � and profitability improvement Significant capital benefit expected � underway 4
Establishment of an Internal Bad Bank (‘IBB’) What we’ve done Why � Worked with HMT and their advisors � Increase capital ratios to identify high risk and capital intensive assets from across the Group � Normalise credit costs and Explored a range of external and � reduce tail risk internal options for the management of this portfolio Identified an internal solution as best � � Reduce regulatory stress capital for all stakeholders. IBB to be requirements / stress loss buffer established in Jan 14 with estimated £37-39bn of assets Target exit majority of IBB assets by � � Accelerate improvement in end-2016 profitability 5
Sharpen our focus on core franchises � Launch of full review into ongoing businesses � Focus on market-leading customer franchises Strategic � Core franchises centred on the UK, but critical to improve the link Review to our international network to remain distinctive � Expect update at FY13 results � Making RBS simple and easy to do business with � Benefiting customers with appropriate operations and IT systems Customer � service Making life simpler for employees � Driving revenue growth � Focus on improving performance and effectiveness of the bank Cost & � Moving cost:income ratio – initial target mid-50s efficiency � New plan for cost reduction to be announced at FY13 results 6
Internal Bad Bank (“IBB”) explained Nathan Bostock, Group Finance Director
Non-Core has beaten its asset reduction targets Non-Core has achieved its plan… Third Party Assets (TPA), excl. derivatives, £bn -221 Non-Core has delivered its plan three � Run-off 258 months early £107bn 201 TPA reduction of £89,000 every minute � Disposals since January 2009 £91bn 138 The majority of reduction has come from � Impairments 94 £22bn negotiating repayments from customers 57 FY13 37 Every asset class has been reduced � 40 c.35 Forecast Original Forecast Revised 2008 09 10 11 12 Q3’13 …however, de-risking of legacy assets and capital needs to go further Despite progress to date, RBS has much higher NPLs than peers � Impacts negatively Pillar 2 / stress capital requirements � High concentrations of unproductive capital � 7
Industry regulatory capital requirements are increasing Under CRD IV the treatment of PRA Buffer (CET1) capital deductions for Expected CRDIV Capital Potentially Loss minus Provision will move Conservation PRA buffer Buffer (CET1) assessment significant from 50% CET1 to 100% CET1 (includes Pillar 2B) increase in Systemic buffers (CET1) CET1 CP 5/13 consultation was requirements for Macroprudential Tools (CET1) published by PRA in August 2013 (Countercyclical buffer and sector capital UK banks requirements) with two key proposed changes Pillar 2A - Inclusion of Pillar 2A and (CET1) Pillar 2B Stress Buffer in Pillar 1 (CET1, AT1 and T2) PRA proposed CET1 requirements implementation Consequences - Acceleration of 100% � Absolute capital levels will need to be higher deduction from CET1 to 1 earlier 1 January 2014 2 � High risk-weighted assets have major impact Final proposal due December as they will exacerbate the absolute capital 2013 required and the stress impact Bank of England announced in 3 � Inclusion of PRA Stress Buffers and firm- September 2013 the introduction New Bank of specific stress tests will make stress a key of extensive stress testing regime England stress driver of bank target CET ratios similar to US CCAR – including regime firm specific tests and greater public disclosure The IBB significantly mitigates impact of 2 & 3 8
The Group funded balance sheet was reviewed in detail to identify assets with high capital intensity or which performed poorly in stress scenarios TPA (H1 2013) Third Party Assets (TPA) 1 , excl. derivatives, £bn Commercial Real Estate Corporate & Asset Finance Markets Retail/SME & Other 45 c16 c17 c46 ■ IBB is c5% of Group funded assets and c20% of capital requirement Non-Core Internal Return to Core Transfer Bad Bank from Core ■ These assets are Capital Requirement (H1 2013) 2 the disproportionate drivers of the £bn Group’s capital c6 c13 intensity and 8 c1 performance in stress scenarios Non-Core Internal Return to Core Transfer Bad Bank from Core 1 Net of provisions. 2 RWAs plus capital (Expected Loss and Securitisation) deductions. 9
Material component of IBB’s capital are Expected Loss minus Provisions deductions TPA (H1 2013) Capital Requirement (forecast at IBB inception, Jan 14) TPA, excl. derivatives, £bn £bn c46 RWA 1 Cap Deduct 2 45 ■ Internal analysis c11 suggests this pool of 7-9 assets could 37-39 contribute a material c5 c7 component of the forecast PRA Stress c3 Buffer c6 ■ Of the Capital c4 Deductions, c£3bn relates to Ulster Bank defaulted IBB Non-Core Forecast Forecast Non-Core IBB assets June June H2 run- 2013 2013 2013 down The previous strategy to work out assets over a longer period to maximise cash recoveries is no longer the optimal plan given increasing industry regulatory capital requirements 1 Based on 10% of RWAs. 2 Capital deductions – excess of Expected Loss over Provisions and Securitisation deductions. 10
We will accelerate run-down of IBB assets – a major change in strategy for defaulted assets Third Party Assets (TPA), excl. derivatives, £bn Managed Sales run-off Run-down will consist of run- Realisation of off and sales Realise assets assets and Previous through the cycle 55-70% release of plan to optimise cash reduction capital at recoveries maturity Acceleration Realisation of � Brings forward assets and release of impairments 0-15% IBB capital at � Generates maturity disposal losses (2014-16) IBB First 2 FY2015 2016 FY 2016 TPAs at years run-down inception run-down 11
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