RBS 2012 Annual Report Download - page 74

72
Business review continued
UK Corporate continued
2012 compared with 2011
With economic factors continuing to suppress business confidence, 2012
saw lower income and operating profit. Nonetheless, the business
delivered a return on equity of 14.5%, slightly below the prior year and
comfortably ahead of the cost of capital.
Operating profit decreased by 7%, with income down 3% and increased
impairments, up 6%, partially offset by a 3% decrease in costs.
Net interest income was 4% lower, reflecting a 3% fall in lending volumes
as loan repayments outstripped new lending, deposit margin
compression due to strong competition and the continuation of low yields
on current accounts. This was partially offset by improved asset margins
and a 1% increase in deposit volumes.
Non-interest income was broadly in line with 2011, with stable income
from transaction services, asset finance, Markets revenue share and
other lending fees.
Total costs were down 3% due to tight control over direct discretionary
expenditure combined with lower indirect costs as a result of operational
savings, partially offset by increased investment expenditure.
Core lending balances were up £200 million, excluding the property,
housebuilding and construction sectors. The loan:deposit ratio decreased
by 400 basis points, principally reflecting deposit growth and portfolio de-
risking, particularly in commercial real estate. The Group took part in a
number of Government initiatives, seeking responsibly to stimulate
additional credit demand in the face of continued customer deleveraging
and low business confidence levels.
Impairments increased by 6% with lower specific provisions, mainly in the
SME business, more than offset by reduced levels of latent provision
releases across the division (£44 million in 2012 versus £226 million in
2011). Impairments as a percentage of loans and advances edged up
modestly to 80 basis points.
Risk-weighted assets increased by 9% as regulatory changes to capital
models during H2 2012 totalling £15 billion (primarily the implementation
of the market-wide slotting approach on real estate and increases to
default risk weights in other models) were partly offset by a fall in funded
assets.
Not reflected in operating results was UK Corporate’s £350 million share
of the provision for interest rate swap redress which relates to prior
periods, mainly pre-2008.
2011 compared with 2010
Operating profit increased by 2% to £1,924 million, as higher income was
partially offset by higher impairments and an increase in expenses.
Net interest income increased by 3%. Net interest margin improved 17
basis points with benefits from re-pricing the lending portfolio and the
revision to income deferral assumptions in Q1 2011 partially offset by
increased funding costs together with continued pressure on deposit
margins. A 1% increase in deposit balances supported an improvement
in the loan:deposit ratio to 86%.
Non-interest income decreased by 1% as a result of lower Markets cross-
sales and fee income, partially offset by increased Invoice Finance and
Lombard income.
Excluding the £29 million OFT penalty in 2010, total costs increased by
2%, largely reflecting increased investment in the business and higher
costs of managing the non-performing book.
Impairments of £793 million were 3% higher due to increased specific
impairments and collectively assessed provisions, partially offset by lower
latent loss provisions.