RBS 2010 Annual Report Download - page 62

2009 compared with 2008 - pro forma
Operating loss
Group operating loss, excluding fair value of own debt, amortisation of
purchased intangible assets, write-down of goodwill and other intangible
assets, integration and restructuring costs, gain on redemption of own
debt, strategic disposals, gains on pensions curtailment and bonus tax
was £6,090 million, compared with a loss of £8,170 million in 2008. The
reduction in the loss is primarily a result of a substantial increase in non-
interest income partially offset by a significant increase in impairment
losses and lower net interest income.
After fair value of own debt, amortisation of purchased intangible assets,
write-down of goodwill and other intangible assets, integration and
restructuring costs, gain on redemption of own debt, strategic disposals,
gains on pensions curtailment and bonus tax, the Group recorded a loss
before tax of £2,291 million, compared with a loss before tax of £25,207
million in 2008.
After tax, non-controlling interests and preference share and other
dividends, the loss attributable to ordinary and B shareholders was
£3,607 million, compared with an attributable loss of £24,306 million in
2008.
Total income
Total income, excluding the gain on redemption of own debt and strategic
disposals, increased by 53% to £29,567 million, primarily reflecting a
significant reduction in credit and other market losses. Increased market
volatility and strong customer demand in a positive trading environment
also contributed to this improvement. While income was down marginally
in UK Corporate and held steady in Retail & Commercial and RBS
Insurance, a significant improvement occurred in Global Banking &
Markets, reflecting the reduced credit and other market losses and a
more buoyant trading market during the year compared with 2008.
Net interest income
Net interest income fell by 14% to £13,567 million, with average loans
and advances to customers down 4% and average customer deposits
down 7%. Group net interest margin fell from 2.08% to 1.76% largely
reflecting the pressure on liability margins, given rates on many deposit
products already at floors in the low interest rate environment, and strong
competition, particularly for longer-term deposits and the build up of the
Group's liquidity portfolio.
Non-interest income
Non-interest income increased to £16,000 million from £3,603 million in
2008, largely reflecting the sharp improvement in income from trading
activities, as improved asset valuations led to lower credit market losses
and GBM benefited from the restructuring of its business to focus on core
customer franchises. However, fees and commissions fell as a result of
the withdrawal of the single premium payment protection insurance
product and the restructuring of UK current account overdraft fees.
Operating expenses
Total operating expenses, excluding amortisation of purchased intangible
assets, write-down of goodwill and other intangible assets, integration
and restructuring costs, gains on pensions curtailment and bonus tax,
increased by 7% to £17,401 million, largely resulting from increased staff
costs. Staff costs were up 14% with most of the movement relating to
adverse movements in foreign exchange rates and some salary inflation.
Changes in incentive compensation, primarily in Global Banking &
Markets, represented most of the remaining change. The Group
cost:income ratio improved to 69%, compared with 105% in 2008.
Impairment losses
Impairment losses increased to £13,899 million from £7,432 million in
2008, with Core bank impairments rising by £2,182 million and Non-Core
by £4,285 million. Signs that impairments might be plateauing appear to
have been borne out in the latter part of the year, and there are
indications that the pace of downwards credit rating migration for
corporates is slowing. Nonetheless, the financial circumstances of many
consumers and businesses remain fragile, and rising refinancing costs,
whether as a result of monetary tightening or of increased regulatory
capital requirements, could expose some customers to further difficulty.
Impairments represented 2.3% of gross loans and advances, excluding
reverse repos, in 2009 compared with 0.9% in 2008.
Risk elements in lending and potential problem loans at 31 December
2009 represented 6.2% of loans and advances, excluding reverse repos,
compared with 2.7% a year earlier. Provision coverage was 43%,
compared with 50% at 31 December 2008 as a consequence of the
growth in risk elements in lending being concentrated in secured,
property-related loans. These loans require relatively lower provisions in
view of their collateralised nature.
Non-operating items
Integration and restructuring costs decreased, primarily as ABN AMRO
integration activity neared completion, partly offset by restructuring
activity following the conclusion of the strategic review.
In 2009 the Group recorded a gain of £3,790 million on a liability
management exercise to redeem a number of Tier 1 and upper Tier 2
securities. In addition, the overall gain on strategic disposals, £132
million, primarily relates to gains on the sale of Bank of China and Linea
Directa partially offset by losses arising from the sale of the Retail and
Commercial Asian businesses and Latin America asset portfolio.
Pension curtailment gains of £2,148 million were recognised during the
fourth quarter of 2009 arising from changes to prospective pension
benefits in the defined benefit scheme and certain other subsidiary
schemes. A charge related to the UK Government's bonus tax proposals
of £208 million was reflected in 2009 with a further £160 million deferred
until 2010 and 2011.
Tax
The Group recorded a tax credit of £339 million in 2009, compared with a
tax credit of £1,280 million in 2008.
Earnings
Basic loss per ordinary and B share from continuing operations improved
from 146.2p to a loss of 6.3p. Adjusted loss per ordinary and B share
improved from 43.1p to a loss of 13.2p per share. The number of ordinary
shares in issue increased to 56,366 million at 31 December 2009,
compared with 39,456 million in issue at 31 December 2008, reflecting
the placing and open offer in April 2009. The Group also issued 51 billion
Bshares to Her Majesty's Treasury in December 2009.
RBS Group 201060
Business review continued