Earnings Call: Q4 2010

Feb 24, 2011

Well, good morning, ladies and gentlemen, and welcome to RBS' annual results for 2010. The figures are, of course, a big improvement on last year and a dramatic improvement on two years ago. Quite easy to achieve, really, against two years ago. Essentially, our core businesses are all making profits that are reasonable to good, in my view. Our non-core division has been getting on really effectively with the job of reducing the risks and improving the structure of the balance sheet. It is fair to say that we have had a pretty fair wind, I think, compared with what we expected a year ago, both affecting the core businesses and the non-core businesses. But we have also had great efforts from everybody in the business. Led, of course, by Stephen and Bruce. You will hear from them in a moment. But Stephen's top team, and I think one or two new entrants, are also in the front row, taking a little bit of time off from the front line that they normally inhabit. One further comment, very briefly from me. I was talking to the investor relations team just yesterday saying the thing that is missing from normal introductory remarks from a Chairman is a point about the dividend. Our dividend, of course, remains a very large, round number. But I do think that if we continue to make the progress that we are currently making, then it will start to be at least a glimmer on the horizon. I long for that day, and that will mean that we are clearly and definitively back where we should be in capital markets. So I will hand over to Stephen. Thank you, Philip. For some reason, you can see up there, and I cannot see down here what is going on. Let me see whether it works. It is not going to work then. My eyesight doesn't work quite that far. This doesn't work anyway. I'll wing it. Never mind. Forgive me if I have to keep going around like that. Could I actually take my hard copy slides, and then Here you are. Thank you. Well, as Philip mentioned, the essence of what we are saying today, and clearly Bruce will go through the figures in more detail as I know most of you want, is that the RBS strategy is on track. We are, if anything, ahead of where we thought we'd be at this stage of our plan. We beat all our budgets over last year. Maybe that's because they weren't set right, but we did. We think, within that, of course, a headline of moving from GBP 6 billion operating loss to nearly GBP 2 billion operating profit, an attributable loss still, though not in the fourth quarter, but thanks only to the payment or provision of payment on the Asset Protection Scheme. As Philip mentioned, within that, we really have two things going on at the macro level in the bank, the burnishing and improvement of the business that will drive us in the future, our core businesses. We think the customer franchises are strong. I'll talk about these. There is, of course, a real improvement in the balance as retail and commercial comes back, and across the group, our cost and investment programs are aiding that. Then the other thing, reducing risk, terrific progress, both the bank's balance sheet and liquidity as a whole, and in the specific, if you like, risk concentration that we've earmarked and set aside in non-core. Again, in financial terms, although Bruce will be covering this in much more detail, you'll see the metrics of the core business. As Philip said, actually compare business by business reasonably well already with our competitors, but clearly not where we believe they can be and where we want them to be. 7.4 billion of operating profit, a return on equity, albeit it's attributed equity within our total mix, just over our cost of capital, but with a much better balance between the retail and commercial businesses, which are now recovering as the economy improves and as we do things to them, and GBM, which still has a pretty decent ROE. I'll come back to that. The interest margin, you know. Unlike many banks, we've been able to get our costs down, even in core, in addition to the non-core reductions. We've reached our own self-described gold standard of taking in a pound of people's deposits for every pound of loan we're making in the core business, and we're fast approaching that for the group overall. As I said, at the overall level, risk reduction going well in non-core and in our capital strength. I put this strategy slide up not because it's new. It isn't new. It's exactly what you've seen on each occasion that I've stood up. But because I think it's important that we do anchor our discussions on this transformation journey for RBS all the time in the fact that we know how we're trying to play our cards. We believe that if we accomplish our goals, that it will represent something that is both achievable and attractive, has the ingredients of what makes companies, and in our case, banks, attractive, and we're sticking to it. We believe it is achievable. All of that said, across the different dimensions, management disciplines, balance, return, risk, the type of customer-focused business we have. All of that said, we will continue to be pragmatists. We're obviously not blind. There are threats out there in the world. There are occasions when we have to reassess strategy on a micro level and perhaps on a macro level, in the light of whether there be regulatory changes or others. But for the time being, this represents the way we think we can play our cards best and what we think would be a good result for our customers and our shareholders. When we look at the targets that we set out at the beginning of our five-year, if you like, initial phase journey, we think that we have made more than two years' worth of progress towards these targets. You can see in the top of the page that there is a mixture, and it's very important, if you like, to the way that we're managing RBS, that we're looking at inputs as well as outputs. We're looking at the balance between measures, not just simply growth, not just simply profits, but the way we accomplish it. You can see across, I think, all the balance sheet measures, terrific progress in the return measures on the right track. When you move into the individual divisions, the same is true. We have deliberately not changed our 2013 targets at this juncture, with one exception I'll come back to. That's in part because we don't want to, if you like, duck and weave and, by sleight of hand, adjust things. We want to be able to be judged and for you to judge us from what we said in the beginning, in part, because we think that they're also still achievable and appropriate. In part because we think in particular in 2011, hopefully is the finalizing of some of the key external influences, not just the path of the economy, but in terms of regulation, and hopefully, in terms of outcome of the ICB that will influence some of these targets. Therefore, if we have to revisit them in the light of those things, we'll do that in a year's time after the three-year mark of our plan. But for the time being, we think that they're achievable. Let's then, in terms of my slides, divide the remainder of what I'm going to say into these two components, what is happening in our core business, and then what is happening in risk reduction. As we have said, we think that the core results were solid. I suppose that's code for slightly down, but solid and increasingly well-balanced. We think that they compare well for this stage of our journey, business by business, against those we compete. Of course, the key feature is a strong increase in retail and commercial profitability, despite heavy losses still in Ireland. GBM down to the levels that we thought were normal and indeed that we were budgeting for the year in terms of markets being weaker. We've talked about the good cost re-engineering, the loan-to-deposit ratio that we've accomplished. Across pretty much every one of our businesses, the new management teams we put in place in 2009 have now had a year or a year plus under their belts. I think we're increasingly seeing traction from the initiatives that have been put in, which of course, need humans to drive them. I hope that that will carry through and become more visible as each year goes by. This other slide, again, is not new, but I think it is important. The core business of RBS, the business that we're driving forward, we believe is an enduring picture. We're putting in place disciplines that will last for many years, businesses that have the resilience to last and power us for many years, and a business mix that makes sense, as I said, something about which we will be pragmatic and thoughtful, but we believe makes sense. As you can see, there is a real balance here, whether that be two-thirds retail and commercial and one-third investment banking, whether that be two-thirds of our business that have some kind of international flows, influence, spread of business, and one-third in the U.K., or actually 40/60, whether that be the sharing of costs, the synergies that in our ICB submission we put out from these group balances. We think that this makes sense. Actually, last year and this year showed some of the strengths of that balance as different bits of the business carried us more strongly than others, and that's what we're pushing forward unless and until anything happens to make us reconsider that. The key aspects then of our performance start with customers. Every one of our core businesses was selected and is being managed to be based on big customer-driven markets where we have leadership positions, all of which we'd like to do better in nevertheless. Now, of course, almost because of that self-definition, the changes year to year are often going to be small, even though they can take an awful lot of effort to create. That was good on the downside in terms of the resilience we showed in difficult times. But I think that we can see that on a range of measures, each one of our businesses is starting to make progress, is solidifying its positions, starting to improve in some of the customer satisfaction, in particular, measures that are lead indicators of the amount of business we do. In many cases, most cases, the base of business, the type of business we're doing is broadening out. Again, thinking across how are our businesses doing, and of course, one of the things that is important to all of you is how credible are the return targets, what kind of value can these businesses produce. We put here, if you like, the three central targets that we established for each of our businesses, return on equity, cost income ratio, loan deposit ratio. Not only to show you that we're making very good progress across all of these, in fact, in lender deposit ratio, we're more or less where we need to be in aggregate, we are where we need to be in aggregate. But also to show if we just simply look at the return on equity, there are only two of our divisions that are not already at their cost of capital. And obviously Ulster Bank is very much a story of impairment. In the case of retail and commercial, I'll come back to that, is a story both of the economy recovering, and of the things we're doing ourselves to improve income and the productivity of our costs. But we think that this should give us encouragement, that we're not on the wrong path in believing that there are strong and credible returns, not just that we can get now, but that we can get in the future from our core businesses. Let me canter quickly through, and I appreciate as normal, these slides are a bit busy, but they're busy, not really so that to confuse you now or so that I'll talk for a long time to each one, but so that you can take them away for reference. Clearly, the star of the show in business terms for us over the last year was the recovery from low levels of our retail profitability. But I think that what we're pleased with is not just that recovery and that profitability, but how we're doing it. So we're doing it first with customer focus. And although early days, that's showing through both in terms of, if you like, customer satisfaction measures, where they are in absolute terms year on year and relative to our competitors. In terms of the balance, our weak suits in our retail franchise from a product standpoint, were deposits and mortgages. Our strong suit was obviously current accounts and loans. Our weak suits are improving, but they are improving in a balanced way. We are doing all of that through a huge amount of investment, which is both cutting costs, which not everyone is accomplishing in the retail markets, and investing in the things that can improve our customer service and drive our revenues as a result that is financially rewarding us, but doing it, I think, in the right way. Our other big U.K. division, obviously UK Corporate, a similar sort of story, though less marked in the year. That is to say that we do obviously have a leading market share in this area. Some of that is in the process of being divested. We are overcoming all of those uncertainty and disruption, which will continue through this year. You can see we are overcoming it not just in the minds of our customers, where they continue to feel on balance that we are doing a good job, both absolute compared to the past and compared to competitors. But we are also developing the business with better balance, without the two key vulnerabilities that put us on the wrong track in UK Corporate in the past, and that was too much real estate, and an unbalanced funding model. We have got a fantastic performance as we are really broadening our relationship with clients, getting the deposits up very close to matching the loans we make, and in a market where it is very difficult to shift the balance, and in a market where our lending commitments from the government, if you like, put some handcuffs on us in terms of shifting the balance. We are managing nevertheless to rebalance with our property concentration gradually going down, and our lending to other customers going up. You can see all that also is improving profitability. We are about at the cost of capital for this business. We need to and believe we can go further. Our U.S. retail and commercial business, again, I think the picture hopefully that you are seeing is there is some consistency of approach for what we are doing in each of our businesses. That is we are starting with the customers, and if you like, shorn back to its 12-state region, which was the key, the refocusing of our Citizens business. In our 12-state region, we are making progress on customer metrics both in corporate and in retail. In asset terms, we need a rebalancing. We have no issue on funding. In fact, we have more deposits than we have loans. So our issue is really how do we do more business with our customers. That is an increase towards the commercial side, but by both growing. Of course, we were in loss last year. We have an important margin rebuild to do. We have done a lot of that, and we also then have more penetration to drive revenues further with impairments coming down to, if you like, continue the ROE progress upwards. In the investment bank, clearly, along with many investment banks, although each have their own business mix and fortunes, our results are down year-on-year from what was always, in our view, an artificial and unusual high in 2009. I think we've consistently said to you that we thought, if you like, a normal and neutral market year for our investment bank at this stage of its development was about GBP 8 billion of revenues. For the year, we hit GBP 7.9 billion in this year. Whether that's luck or whatever, you can tell me. That was broadly in line with, as I say, our budgets, what we expected. I think that within that, what is very important given the outlook for investment banks is that the return on equity remains decent, just under 17%. If you add the pieces of our GTS, our cash management business that depend on the investment bank's clients, it goes higher still. The cost income ratio, which I think is going to be very, very important as we move forward into a world where there are pressures on capital and on income, is amongst the best in its industry. This is at least, I think, a solid position, a decent achievement in the markets that we had, and given the pressures and, if you like, the tail from the restructuring of RBS that's upon us. Now we're very cognizant that the investment banking part of our industry has a series of increasingly well-defined, but still not fully defined, headwinds on cost of funding, on regulatory capital, and potentially in income and margins in some of the businesses also affected by regulatory change. None of us can know for certain, therefore, exactly how this will work through in the coming years. I think that's a feature of all investment banks. One of the reasons why, if you like, the balance, two-thirds retail and commercial, one-third investment banking, we think is advantageous to us. Nevertheless, our starting point from the results that we produced in 2010, we think gives us a solid base and a line of sight on what we know today, to understand how we can at least get back to the cost of capital pro forma for the reduction in ROE for the different regulatory things that are coming back. The work to get from our cost of capital to stay above 15% or to go back above 15% ROE, which we believe is important and necessary, still, if you like, has work to do for all of us, is still in the realm of uncertainties for the industry as a whole. But we think that we have a reasonable position to do that, and a solid and defensible set of advantages in doing it. Of course, we're not mentioning every single business, but the other two businesses that I bracketed together here, GTS and Wealth, again, I think we're doing much the same things, but it's really worth noting that these businesses, in addition to their own merits in their own right, they really are additions to the group base. They're sharing overheads. They're providing deposits to those of our businesses that are less strong in deposits. They're producing high ROEs as part of the mix, although they're each dependent on other aspects of the business. I think we like them not only in their own right, but as, if you like, glue and strengtheners for the overall balance of RBS. Let me turn to the risk reduction side of the agenda. As I mentioned, the one target that we are in fact changing today, is the pace of rundown of non-core. That is to say that having beaten our targets in this last year, instead of aiming to reduce to GBP 118 billion in 2011, we believe that we can get below GBP 100 billion, which has some psychology to it, if nothing else. That's our aim. The endpoint, of course, remains to get rid of all of it or substantially all of it. Now, in addition to the good progress that we've made in running this down, as you know, we made terrific progress in EU-mandated disposals last year. I think those were critical, although one of them has yet to be closed, and clearly the insurance sale is pending, A, the turnaround of that business, and B, getting the right sort of value, which we continue to target for a late 2012 commencement of execution. Although Bruce will mention this as well, what we're trying to do in the, if you like, the pie charts at the bottom left of this slide, is to show that actually, while there is a mixed change as we run down non-core, every single bit of non-core is down in double-digit percents, every single portfolio. The real estate overall percentage is increasing, i.e., it's going down less fast than the others. That was always obvious given the nature of those assets, but it is going down. We're comfortable with the balance of what we're doing, although cognizant that there are plenty of impairment losses and losses on sale ahead of us as we complete the process in the coming years. But aside from the risk reduction that is, if you like, exemplified in the specific concentrations of non-core, I think one of the things that we feel is a job really well done, more to do but where we've made the most progress, is funding liquidity and capital, which is, of course, in a sense the group balance sheet, not just core or non-core. That is to say that we've moved ourselves on these big macro, if you like, ratios, which were at the heart of much of the banking crisis and the weakness of banks. We've moved ourselves from outlier to in the strong pack of the world's banks. You can see that in the loan-to-deposit ratio, where, as I mentioned, we're already in core at our gold standard. Even for the group as a whole, we would be better than all but HSBC in the U.K. and many other European and other banks. When you look at the funding need, our dependence on short-term wholesale funding is dramatically down. That was the thing that ultimately brought us down and is now pretty much in balance with our liquidity resources. When you look at those on the, if you like, on the other, the balance sheet view of life, we have managed to, I think, get a nice fourth quarter increase in capital ratios, 10.7% core. Of course, some of that is dependent on APS, so we're not, if you like, under any illusion that that's capital that we have to grow and replace. But we also have the benefit that our RWAs are not static. A whole bunch of them are in non-core, and over the coming years, we hope to run them off and sell them off. The leverage ratio is already better than our targets for 2013, in line with the strong international peer group. As I say, when I think when you take all of these things together, capital, leverage, funding profile, we've moved ourselves from being outliers. We are still outliers in risk concentrations in real estate, in risk concentrations in non-core. So there's a reason why we've got plenty of work left to do in terms of risk. But I think that the macro shape of the balance sheet and the key things on which it rests are increasingly in good shape. As we've mentioned, it remains our goal to exit the Asset Protection Scheme, in the second half of 2012. It's not economic to do so before then because we're committed to a certain amount of fee paying. Even to do it then will require regulatory approval. But we believe by that stage that the risk transfer that the scheme will be offering us will be negligible, and it will be the right thing to do, in shareholder terms, as well as symbolically important. Finalizing what I had to say and before handing over to Bruce, the RBS plan targets expressed in a slightly different way, what we're aiming to do are not changed and I believe are the characteristics of a strong, valuable, sustainable bank that for many years into the future can reward customers and shareholders whether that be starting with the customer, the kinds of markets we're in, the market positions we occupy in those, the balance of those businesses, the returns that we get from them, the risk profile from those returns, or the management disciplines that go into it. Clearly, all of that we hope will in turn translate to a bank that investors feel comfortable with in terms of transparency, and the way we behave, and one which is increasingly wholly owned or well on the path to whole ownership from the private sector. Finally, outlook. It would be uncharacteristic of me not to give you an honest balance here. But I'll do it back to front. We do think that RBS will continue to make progress. We do believe in 2011 and in the subsequent years that our efforts to strengthen core will keep going and we'll make progress there and our efforts to reduce risk will also keep going and we'll make progress there and overall that will be consistent with the path that we've set out. We're also conscious that by doing that, in addition to producing the results, we produce extra resilience, and there are times that we're going to need that resilience. There have been times in the last year when things went wrong in our own businesses that might be worse results in Ireland and insurance than we were anticipating. It might be the issues that we're in, if you like, trading markets and around the Eurozone. There will be issues that arise in 2011. They may be economic issues in path of impairments. They may be issues from the path of interest rates, although generally, interest rates going up, provided it's not done, if you like, in an extreme way, we think is positive for banks. The impairment issues, probably Ireland is our biggest wildcard. Bruce will talk some more about that in the real estate area, but they seem set to be in the right direction, although there's a possibility, clearly, of volatility. Then it would be wrong to say that we can't get negative impacts from regulation. It's clear that being in banking is becoming more costly, both in terms of cost of funding, structure of balance sheets, and capital. It's not clear exactly where that will end and the impact on return on equity and the other key metrics for banks. We think that it's still consistent with our targets, but there's a possibility for shocks there. The Independent Commission on Banking clearly has, if you look at its terms of reference, a well-balanced set of terms of reference, both on competition, on stability, and on competitiveness of U.K. financial services on the contribution to the economy of U.K. financial services and on the contribution to the exchequer, including, of course, the value of RBS shares implicitly in that. But I think it is clearly at this stage unclear whether the Banking Commission will validate the path of international reform or seek to go further in a way that harms some of those objectives. I mentioned the path to full privatization. We have absolutely no information. You don't have, of course, the choice of when, whether, and how to sell our shares is entirely that for the government through UKFI. Our working assumption is before the ICB results are known, digested, any actions taken as a consequence, any share sales would be unlikely. But nevertheless, it is our job to try and prepare the company such that investors want to own those shares away from the government. We do think that it would be a win-win when that process can commence, and we think actually it will enhance our attraction to investors to know that. We're trying to do our piece as we go through 2011 and get closer to the time when these things can come onto the radar screen. With that, let me hand over to Bruce. Thank you. Thank you, Stephen, and good morning, everyone. I plan to run through the financial highlights for the group, for core and non-core. Then I'll also talk about the progress that we've made in improving the risk profile on both the left side and the right side of our balance sheet. I'll then offer a few concluding remarks before turning it back to Philip to conduct the Q&A. Starting off with the consolidated group financial highlights. For the full year, note that revenues were up 10%, paced by net interest income growth and lower non-core trading losses. Our expenses were down 4% as we delivered impressive operating leverage, and impairment losses fell by 33%, reflecting economic improvement as well as our risk mitigation initiatives. This resulted in an GBP 8 billion improvement in our operating profit. What I'll refer to as below the line items swung the other way. I'll give you some more on that later. But the attributable loss still narrowed by GBP 2.5 billion. I should point out that if you add back the after-tax cost of the APS charge, we were break even for the full year. Note that we were break even in Q4 on a reported basis. Our funded balance sheet has shrunk by about GBP 60 billion, paced by GBM and non-core in Q4 and non-core for the full year. Core Tier 1 was a strong 10.7% at year-end as we brought risk-weighted assets down in Q4. Our TNAV was about flat for the year. Breaking down the P&L, our net interest income was up 5% relative to 2009. There's two things going on here with offsetting impact, which fortunately net out to be positive. The first, our NIM, was up 14% to 2.01% for the year and stabilized at 2.05% in the second half. Asset repricing in the retail and commercial franchises has powered this expansion, offsetting the drags from improving our liquidity and funding position, as well as margin compression on deposits. At the same time, earning assets have dropped by 8%, paced by non-core deleveraging. This is part of the cost of improving our risk profile and making the bank safer. With respect to non-interest income, core revenue was down 12% as GBM returned to a more trend line revenue performance compared to the exceptional levels in 2009. However, non-core had a GBP 5 billion swing from a loss in 2009 to positive in 2010 as trading performance improved dramatically, reflecting both tightening credit spreads as well as our de-risking of the complex trading books. The net impact was an increase in non-interest income for the group of 15%. Expenses fell by 4% over the course of the year as our GBP 2.5 billion cost program delivered GBP 1 billion in incremental savings in 2010. This was partially offset by expenses related to our significant investment program, GBP 6 billion of change management over five years, which is designed to strengthen our core franchises. The impairment trend has been favorable in 2010. Non-core is down 41% versus 2009, and core is down 19%. The one business counter to trend has been Ulster Bank, where we took GBP 3.9 billion of impairments in 2010 versus GBP 2 billion in 2009. We expect impairments in Ireland to remain high through the first half before likely starting to gently fall. For the group overall, we see continued good signs in the lower caseload moving into our workout group. While non-performing loans or REILs have increased over the year, this is largely due to property. Excluding property, REILs are 8% lower than the year ago quarter. Turning to the so-called below the operating profit line items. We've been seeing huge volatility in the fair value of owned debt on a quarterly basis, but for the full year, the swing was only GBP 300 million as our spreads widened modestly. 2009 saw some chunky items, such as a big liability management gain, and a gain on pension curtailment, and 2010 had the GBP 1.55 billion hit on APS. These items swung by GBP 6.6 billion year-over-year, erasing a big portion of that GBP 8 billion improvement in operating profit. Note that for the quarter, these items were a bit less of a drag, driven by the gain on our GMS disposal. Breaking out our core performance, we were pleased with the progress in our R&C businesses, which nearly offset the fall in GBM revenues given their exceptional year in 2009. Note the good cost control as well as the lower impairment losses, which helped the bottom line. In Q4, our pre-impairment profit or PBIL was up 3%, led by net interest income growth and lower claims. Impairments increased by GBP 150 million, primarily from provision strengthening against the Ulster mortgage book. By division, as Stephen indicated, the big star was UK Retail, who performed well across all P&L drivers. This included higher net interest income due to higher NIM and balances, lower costs, as well as lower impairments. UK Corporate saw a 30% improvement in operating profit, largely due to significant NII growth from asset repricing, as well as an 18% drop in impairments. Deposits also grew strongly, up 14% year-over-year. Wealth has fought margin compression over 2010, but it appears to have bottomed out, with Q4 showing an 18% rise in sequential operating profit and good deposit growth. GTS was up 12% for the year, reflecting net interest income growth and good expense management. Note we've shown you the impact of the GMS business disposal on GTS underlying results in appendix two of our results document. Continuing on, Ulster Bank's losses more than doubled to GBP 761 million, as impairments rose by 79% to GBP 1.2 billion. The economic situation in Ireland remains challenging, and we're diligently managing our exposures. As I mentioned, we took a GBP 100 million latent charge against the residential book in Q4, but otherwise, results were stable. Note that the Ulster PBIL is up 42% year-over-year, led by an aggressive cost program. The Citizens business had a nice turnaround in 2010, with the bottom line improving by $647 million. We've been able to grow net interest margin, and we've been able to control our expenses to achieve a 38% improvement in PBIL. Impairments have also fallen with the improving U.S. economy. GBM had a resilient year in the face of a challenging external environment, with revenues close to our $8 billion per annum target and a 16.6% ROE. We continue to tightly manage risk, the balance sheet and expenses, and to execute our highly focused strategy. Q4 performance relative to Q3 was slightly better than peers adjusting for business mix. For the year, GBM's compensation ratio was 34%. Total compensation declined over $200 million relative to last year, which reflects the return to more normalized top-line results. Lastly, our insurance business performed poorly in 2010 with a GBP 300 million loss, but we are encouraged by recent trends in underlying performance. The second half was a modest loss, but adjusted for prior year issues and unusual weather, we are now run rating at a profit of GBP 270 million to GBP 300 million per annum. Our new management team is now fully in place. They have a sound turnaround plan, and they're executing well against that. Non-core losses declined by GBP 9 billion in 2010, significantly benefiting our overall performance. This was a combination of better trading results as well as lower impairments. Both of these benefited from a better external environment, as well as our risk mitigation initiatives. Third-party assets, or TPAs, dropped 31% over 2010. It's 37% if you take into account the GBP 12 billion of signed but pending deals at year-end. In Q4, we ended up with GBP 600 million of higher losses than Q3, reflecting some real estate write-downs, some changes to accounting assumptions, as well as disposals. Impairments in non-core are down dramatically year-on-year, but it is interesting to see the underlying components. Commercial real estate is the main area where we still see highly elevated impairments. 85% of second-half impairments were CRE related. Other areas are actually showing favorable trends, including some recoveries. The non-core rundown has made excellent progress. We have made strong reductions across each asset class, and we are tracking within our target parameters for the program. We are more than halfway towards our ending TPA target of about GBP 30 billion in 2013. The pipeline looks good for 2011. Much of the progress in 2012 and 2013, however, and the associated costs, will depend on the recovery of the broader commercial real estate market in the U.K. The non-core rundown in 2010 on the top of this slide was a blend of natural runoff and disposals. That said, this clearly was a big year for disposals, aided by an improved economic environment as well as low interest rates. For Q4, on the bottom of the slide, the story was largely disposals. We closed several of our retail and commercial country exits. We closed significant aspects of the Sempra JV divestiture and several portfolio sales of largely corporate assets. Let me now move on to focus on some of the balance sheet improvements that we have made in 2010. On funding and liquidity, what a difference a year makes. We have dramatically brought down our level of wholesale funding. We have turned out a good percentage of that. We have grown our deposits, we have reduced our funding gap, and we have improved the quality of our liquidity reserves. We are now ahead of the strategic plan on each of these measures, but we are not complacent. The world is still unsettled and we have continued work to do. The keys to much of the improvement to date have been our success in de-leveraging through non-core rundown and our ability to issue term debt in a variety of shapes and sizes. We expect this will continue to underpin our plans over the rest of the plan period. Our 2011 issuance plan calls for GBP 20 billion of issuance, compared with GBP 38 billion in 2010, where we got a little bit ahead of the curve. We expect our issuance to be balanced across both public and private, secured and unsecured, and geographical dimensions. We factored replacement of the maturing CGS debt into our plans and would expect to have that fully repaid by mid-2012. Net RWAs increased modestly over the year by 5% as regulatory factors and less APS benefit slightly offset the benefits of the non-core rundown. Our core Tier 1 ratio remains robust at 10.7%. We feel we are positioned well to absorb looming regulatory changes and still support our businesses. We have updated our estimates on the impacts of CRD III and CRD IV on our capital ratios based on the calculations and clarifications that came from the Basel Committee. Bottom line, this is pretty much in line with where we thought. While the overall impact is manageable, there is a fair amount of work to do in GBM around mitigation, as well as a need to assess product strategies given adjusted capital intensity. APS has been in the news a bit, and we just want to make sure we are clear on our position here. One of the issues, clearly, is the timeline for exit of the APS program. We currently receive a 1.2% benefit in our core Tier 1 ratio from the scheme, and we get further benefit in various stress scenarios. Nonetheless, as we de-risk and we recover, we'd clearly like to exit the program. Our baseline planning scenario is to exit once our fees are fully amortized in late 2012. This will, of course, be subject to regulatory approval. We continue to stay very focused on reducing our risk exposures. Good progress has been made across all major measures, whether it's country, sector, or single name loan exposures. We've also trimmed some lower rated exposures within our government portfolio. While we've done a lot to improve, changing our portfolio takes time and we have further work to do. Note that there's lots of good data on the risk story in our full results document. Something else that's been in the news a lot lately is Ireland, so it makes sense to do a deep dive on Ireland. Our exposure there clearly merits close inspection. We've tried to be very transparent and granular on this slide in showing our loan exposures and the coverage ratios in both core and non-core. We've suffered our biggest losses to date on the non-core CRE development lending book, and 75% of that book is now REIL. Given the weak Irish economy, another area we've been watching is our residential mortgage exposure in core with REILs up modestly versus the 6.5% at the end of Q3. Overall, we feel comfortable with our provision coverage for each of these books. We do anticipate further REIL increases, and therefore, provisions will remain elevated. There's some encouraging underlying trends in the economy, and we're hopeful that impairments will start to trend down in the second half of the year. We do remain committed to the Irish market, which should be attractive in the medium term once the current economic situation is sorted. In spite of major headwinds in 2010, our operating results pre-impairment have continued to be quite favorable, with expenses down, PBIL up, and deposits stable. Another laggard in 2010 has been our insurance business, which fortunately seems to be turning around on an underlying basis. Our new management team has focused on improving really all aspects of the business, pricing and underwriting, claims processing, and the size of the expense base, with a goal towards getting back to a 15%-20% ROE performance. We are focusing on less risky drivers in the motor business, and as a result, we will take some top-line contraction, but we should benefit from much better performance on claims. Making certain adjustments to second half claims, which we show here on the top right. We're probably in high single-digit ROE territory currently. That's better, but there's clearly more to go in 2011 and 2012. To sum up, we're pleased with the progress we've made so far. Our core retail and commercial businesses are recovering well. They're gaining strength, while GBM has remained resilient in spite of numerous external challenges. Our non-core and our EU disposals have progressed well, substantially improving our risk position and making us less complex. Our balance sheet looks much better than it did across all key measures, be they liquidity, funding, or capital. Good so far, but still lots to do. With that, let me turn it back to Philip to conduct the Q&A. Thank you very much, Bruce. I hope you found there were two very comprehensive presentations. I am sure there are no questions. But if there are, perhaps you could give your name, rank, and serial number before you kick off. Why don't we go right to the middle at the back? Yes, good morning. It is Ian Gordon from Exane BNP Paribas. If I could have two or maybe two and a half questions, please. Firstly, on the U.S. business, you talked in your remarks about the falling retail balances, falling deposits, high unemployment, and the double dip in the U.S. housing market. I guess other than the distant dream of rising U.S. rates, could you just provide a little bit more color on the actions you are taking to get the business fit for purpose or allegedly fit for sale? Then in GBM, I note your forward-looking guidance of around GBP 8 billion for 2011 revenues, and your guidance has been rather good here in recent periods. Just going back to the Q3 call, I thought Bruce made some interesting comments around your product build-out in GBM. Should we be thinking here about some offsetting impacts from RWA management, or is GBP 8 billion maybe a big, round number not worthy of too much detailed analysis? Then finally, just a point of clarification, you have reiterated your intention to exit APS in late 2012. Should we think about a cancellation of the contingent subscription around the same time, or could, or should that happen earlier? Thanks. On the U.S. business, we certainly will benefit from a cyclical recovery. We have an asset-sensitive balance sheet, so higher rates will benefit us. Improving real estate markets also will further benefit impairments. You're right to say that a big part of the walk from where we are in mid-single-digit ROEs back up to double-digit ROEs comes from that cyclical recovery. In addition, though, there's a new management team in place. They do have a very concrete plan to run each of the businesses, both the retail business, consumer business, and commercial business, better. We're investing in MIS to learn more about our customers, to do more cross-selling to our customers. We've benchmarked ourselves against best-in-class institutions in the U.S., and we have programs in place to basically do the blocking and tackling better and generate more organic growth. I think it's a combination of both the cyclical recovery plus some of those more mundane, but equally important blocking and tackling initiatives. Second one, do you want me to keep going, or you want to take GBM? On GBM, I think that in the short run, probably the big, round number is the most constructive answer we can give you for if you like in 2011, although there'll be lots of volatility within that, as is the nature of the beast. January and February have started stronger as they traditionally do. But I think it would lead us still to be in that kind of ZIP code. As you observed, our plans for taking the business forward do contain a balance. Part of it is about strengthening the things we're already good at. Part of it is about restructuring those things in order to mitigate some of the regulatory headwinds, the ways in which inventory is held, the ways in which risk is held. There's a lot of technology investment, which is relevant both to that and to the cost of delivery of, if you like, our core products to our customers. Then there remains part of the plan to strengthen some of the areas that are, if you like, contiguous to where we're strong and allow them to make decent returns and to fit out what we're doing. Emerging markets would be one of the examples. Bits of our credit business would be another example, although clearly some of that is already very strong. The equities business would be a third. But I think those kind of build-outs are unlikely to move the dial dramatically in 2011. We would be looking in the same kind of ZIP code, markets permitting. On continuing capital, I guess. We will make decisions all the time on shareholder value compared to the risk profile in the FSA stress test. If I was a betting person, I would say that we will prioritize getting out of APS before we prioritize getting out of contingent capital. I think that's the right shareholder order of priority. My guess is that the contingent capital would, if you like, be an item for another day. Of course, the other thing that we will watch very closely is the growth of what I will call the private contingent capital market, which I believe will grow successfully, and the regulatory picture as it relates to the value of that versus the value of holding straight equity. Because clearly, one of the things that all banks will have to do is optimize that balance once it becomes clear what balance is required. Good. Why don't we come over here, right to the end. Is it me? There are two ends, so we will come to you. Okay. Hi there. It is Arne Wilson from Goldman Sachs. Two questions. The first one, maybe to you, Philip. Just intrigued by your comment on dividends. I was just wondering, if you achieve your targets, say already by 2012, or at least you are back to good profitability, would you consider paying a dividend even against Stephen Hester's wishes for some reason the B shares had not converted into ordinary shares? That is my first question. Second, just a couple of questions on below the line items. First of all, if you can update us on your expectation of the U.K. bank levy. Secondly, could you give us an idea of what type of restructuring charges you are expecting to take for 2011 and 2012, and if you can confirm that you are not expecting to take any in 2013? Finally, just if you can give an update on preference share dividend and other below the line items, coupon payments that will reappear sometime in 2012 and 2013. Thank you. Yeah. On the dividend, I think the words I used was, it may become a glimmer on the horizon. So I am looking anxiously at the horizon, but it is certainly premature to start it now. And obviously, we have got a lot of ground to cover in terms of conversion of B shares and all that sort of stuff before it really becomes a reality. But our progress has outstripped our expectations. And if we continue to do that, maybe some of the thoughts here will be accelerated. But it is certainly not for now and for this year. Bruce, do you want to do the second point? On the bank levy, we had some guidance in the document today that GBP 350 million to GBP 400 million was, if you took the snapshot of the balance sheet at year-end, we would be in that territory. Obviously, we continue to work to reduce some of the drivers of that, so hopefully that is the high water mark for that tax. That is a rough ballpark for what it would be in 2011. I think the restructuring charges, we would expect them to stay reasonably elevated, maybe down a tad in 2011. We are still going through a significant change, and that is in business services, GBM, U.K. Retail. So there will continue to be, I think, a high level of restructuring charges in 2011 before those start to tail off a bit. There are likely to continue to be some in 2012. Then lastly, on the preference share dividends in 2012. At this point, if we continue on the trajectory that we are on, we would anticipate turning back on those coupons because obviously, if we are going to pay a common dividend, we have to have those coupons turned back on. The EU stop ends in May of 2012, and we would be basically through all of those coupons by about November of 2012, and then we would be in a position to consider if we wanted to reinstitute a common dividend. Sorry, can I just clarify then? So in 2013, roughly, what are you expecting for the coupon payments to be? Because I know you have exchanged quite a few of them. We have not given guidance on that. It would be quite a bit lower than it ran when we had them all outstanding. We can maybe take that one offline and give you some color on that. And if we could just advance a little bit on this row here. Sorry, if you'd just come forward. Over here. Thank you. Thank you. It's Mike Trippitt at Oriel Securities. Two questions, one on the non-core. If you could just talk a bit more about the fourth quarter. Two aspects, one was the accounting adjustments on the monolines. Is that effectively a one-off accounting adjustment? If you take that and the fair value of the write-downs, do they apply to assets which are still on the balance sheet at the end of the year, or are they in any way associated with crystallizing losses on the runoff? The first question on the accounting adjustments, those are on very complex trades. Periodically, we'll look at certain assumptions we have underlying those trades, including the estimated life of those positions. They surround complex asset-backed securities and mortgage-backed securities. I think in general, we're very prudent in terms of how we look at those positions, but we've made additional extension of life assumptions on some of those positions. We took about 160 million GBP charge, which I would say is additional prudence. That I would certainly consider that a one-off. We've gone through the book. We've brought BlackRock in to actually model all those positions, and they're very consistent with where we have those positions marked. On the fair value write-downs, there's some year-end marks relating to some real estate positions, which are held in partnerships which kind of come through late in the year. We try and estimate those. So I think there was a bit of catch-up related to that aspect more than having those related to some of those disposals. There was about overall above the line in non-core results, around 260 million GBP of disposal losses in the quarter. There was about another 220 million GBP, which was over in the below-the-line items netting off against that GMS gain. So the total disposal cost was around 500 million GBP in the quarter, which we had flagged on the third quarter guidance. Just to follow up, I was just thinking about the sort of trade-off in your mind about accelerating the non-core. Should we sort of think about this as increased disposal costs in 2011, but offset by obviously, a lower overall group funding cost as those assets run down? Would it be reasonable to assume disposal costs increase? Well, I think we take that as we go. I think we've been very disciplined in terms of balancing off the need to reduce risk and also preserve shareholder value. So right now, the 12 billion of deals we've signed, all of the associated costs with those disposals were recorded in the fourth quarter. So that's part of that GBP 500 million that's been reflected. We still have about 30 billion of total rundown beyond that. So if you start at 126 and our target is 196, there's about 30 billion to go. About 60% of that is incremental disposals, and 40% of that is natural runoff. Natural runoff has no cost associated with it. We'll have to see how it plays out in terms of the cost associated with those additional disposals of what's in the pipeline to hit those targets. But again, we're balancing overall getting to the number at the end, with not pushing on a string and waiting for markets to value assets appropriately where they think that's fair value to trade them. Good. Let's come back into the middle, just right in front of me here. Morning, it's Raul Sinha from Nomura here. I can't help being worried about your Irish impairments, despite the additional disclosure you've given. If you could give us some guidance on how big your provisions might be going forward, that would be really useful. Just considering, for example, the commercial real estate book and looking at the development part of that across core and non-core and Ulster, it looks to be about GBP 10 billion in size. You've got GBP 2.8 billion provisions on that, which implies, let's say, a haircut of 28%. If you look at what NAMA is talking about, that looks to be in the range of 60% haircuts. Even the most conservative lender in Ireland is about 44% of a haircut. Somewhere between those two numbers would imply that you need roughly GBP 3 billion of provisions more. Would you be able to help us with some guidance around what we might expect? Well, I think the chart on slide 38 of the slides that I went through lays out pretty effectively what those coverage ratios are. That development book at GBP 6.3 billion in non-core has 44% provision coverage, which is pretty consistent with where the market is. Market's probably mid-40s to mid-50s. We indicated that we think REILs in that book are at 75%. That will continue to go up, so we'll continue to provide heavily against that through 2011. I would anticipate, though, at some point, everything that's going REIL has gone REIL, and you've got your provision to a level you're comfortable with. Again, these are secured properties. The ones that had very thin security that had maybe just land are written down very heavily. Then there's other ones that are fairly well advanced and either close to having tenants or those would be less impaired. I think we're in the pack, and I think we're comfortable with where we're provided at this point. I thought the coverage ratios of mid-40s or 50% is actually across the whole book rather than just the commercial real estate book. No, these are the percentages right here. You can see those little boxes on the top lay out exactly what the coverage ratio is by asset class. You have to remember one thing is, if you make comparisons with other banks, you have to go apples to apples and not apples to pears, because we do have a very sizable residential mortgage book here, which is GBP 22 billion of our GBP 50-odd billion. That book only has 7% REILs. You would not expect to have the kind of provision coverage against that book as you would against corporate or commercial real estate. Good. Okay. Actually, if you could just pass the mic behind you, that's probably the simplest thing. Thank you. Thank you. It's Michael Helsby from Bank of America Merrill Lynch. I've got two questions. Firstly, if I look at slide 4, one of the targets that looks to have changed is it looks like you've gone from a retail and commercial ROE of 15%-20%. I think also you've moved to a 9% equity allocation. I was just wondering, is 9%, do you think that's consistent with where you think the regulator will finally pop out? Also, is that consistent with what you think you need to get to your AA rated credit rating? The second question is on loan to deposit ratio. I think you've done a phenomenal job in the U.K. getting the loan to deposit ratio down. I think if I add in Wealth, it looks like you're about 100% loan to deposit ratio now in the U.K. I think the question is really, are you now in a position where you think that can stabilize? I think one of your big competitors looks like it might be trying to emulate what you've done. Can you take the foot off the gas in terms of deposit gathering? Thanks. Just taking your different questions, just on the last one first. I think that we, in the aggregate, don't need an improvement in the core loan-to-deposit ratio anymore, although we obviously do want non-core to run down to get the group down. There are still some improvements in individual businesses. But what we really want is for there to be growth in the economies we serve, so that we can both make more loans, extend more services that produce fee income, and match that with further deposit growth. It's clear that an element of, if you like, getting to where we wanted to do, the large element has happened. But what we would really like is something that produces some income growth for us whilst doing all the things on expenses, and clearly, that's path dependent a little bit in economic terms. There still are. We're still not quite at targets for U.K. Retail, not quite at targets for U.K. Corporate, but you're right, we've made very good inroads. In terms of the allocation of capital and where the regulation debate is going, we don't know. You have, on the one hand, the big U.S. comps trying to say that 7% is where they need to be in core Tier 1 ratios and so on and so forth. You have people debating ranges well up north from that. Then I think you can have a range of arguments about retail and commercial versus investment banking. Clearly, most people have got their guns trained on the investment banking side in terms of capital support. Also, if retail and commercial is the focus of, obviously, great public sensitivity about not being allowed to go down, about being protected and so on and so forth, it's going to have to have the right capital structure. So we don't know the answer. We just didn't want to be accused of, if you like, overcooking our ROE numbers by keeping things low when clearly our Group core Tier 1 ratio is a fair amount in excess of these. Even though a lot of that should apply to the risk of non-core, it was really just to say, "Well, look, this is still a picture that's got to unfold, but let's keep on the cautious side of life, and even for those more stable businesses, let's nudge it up slightly." But where it's going to end up, there's a denominator and a numerator that's moving, and I don't think we have better information than you do. In terms of the rating, I guess that also, I think, is very sensitive. But in a funny sense, it's not just sensitive to capital issues and to ongoing earnings and franchising issues, which all bank ratings are sensitive to, but also the whole sets of debates around mechanisms in which losses can be attributed, bail-ins, all these kind of things. I think what we feel we need to do is make sure that the different dimensions of our business, whether that be franchise, whether that be earnings, whether that be leverage and so on, compare favorably with the best people against whom we compete. Obviously, in a sense, what the rating agencies make of that then becomes out of our hands. But the issue for rating for us is really a competitive tool, that if people are to deal with us either as counterparties or putting their life savings with us or whatever, they mustn't feel insecure in dealing with us. Our issue is really about relative financial strength rather than an absolute number, which I think will still move around as the rating agencies grapple with, on the one hand, much safer banks from the regulatory and capital and balance sheet reform that's happening, and on the other hand, if you like, a new set of moving parts in terms of how the capital structure might operate in a crisis. Thanks. Can I just come back onto the point you raised on loan growth? I know that clearly, I think all the U.K. banks have had a big challenge from the de-leveraging in the corporate sector, but that looks like it's now coming towards an end. With the targets that you've been set, do you think we should expect loan growth to turn positive in 2011 in the corporate book? Bruce, I was wondering if you could give us any guide, just touching on your revenue point, about the sensitivity to the group margin for interest rate rises. That'd be kind. In terms of the corporate book, we actually in our release, and I forgive you for not having gotten to that page yet, give the fourth quarter data. As you can see, in the fourth quarter, there still is a net repayment. In other words, the most recent trends are although gross lending is outperforming the targets, there still is a net de-leveraging going on. That's the extant trend. Obviously, if that trend reverses, no one would be happier than us, and we're certainly available in there with the resources to support it. But that's where we are today. Bruce, to you. On the asset sensitivity, we do have a table in the company announcement that shows 100 basis point rise by a shock would increase our net interest income by a quarter of a billion. That number was higher last year. One of the reasons it was higher is because we took in a lot of capital from the government really late in the year around Christmas, and we had it invested in cash, in effect. As we put that money to work and swapped it out the curve, that created more base net interest income. It's one of the reasons our net interest income was up so nicely last year, but it's muted some of that asset sensitivity. I do think in our planning scenario for this year, we're still looking for a couple of modest increases in U.K. rates in the second half of the year and nothing in the U.S. Obviously, if that accelerates and there's another one, that could be favorable to our outlook given the asset sensitivity. Good. Can we come down here? You may be able to move the mic along. That's great. Thanks. Thanks. Morning. Rohith Chandra-Rajan from Barclays Capital. A couple, please. One on GBM, and one on the U.K. Retail and Corporate businesses. Just on GBM, the 16.6% ROE that you disclosed. Just wondering about the Basel III implications. The 88 billion-100 billion RWA inflation, how that's allocated between core and non-core, what the impact would be on GBM ROE, notwithstanding any mitigation effects that you may be putting in place. Okay. Sure. We break out that split between GBM and non-core at about 60/40, GBM non-core. The 140-ish number of RWAs in GBM would increase to about 200. That 16.6 pro forma comes down to about 12%, if you overlay that. I think in terms of our overall mitigation, obviously rundown is a big part of it in non-core. In GBM, there'll be some modest rundown. There's model work that we have to do. One of the ways to mitigate the counterparty increase is to move from standardized models to advanced models, and we have that process underway. Those obviously would have to be signed off by the FSA, but we're making good progress there. And then we'd also look potentially to hedge some of our counterparty exposures. Once the full rules are clear and our models are in place, there may be opportunities to trim further on that. At this point, we're not calling out a significant revenue impact. There could be some revenue impacts, particularly from the hedging, but I think those would be manageable. What you're really left with is how do you walk back to the targeted ROE of 15%, which I think all investment banks have to grapple with. And that's something that we'll be looking at what the post-regulatory change ROEs for each of the desks and each of the activities that we have are, and how do we rejigger and adjust the business model to bring it back to the 15%. We have time on our side to do that. We have smart people in the group, as do all investment banks. We do have confidence that over time, we can figure out how to sustain an attractive ROE in the business. Of the 140 billion GBP RWAs, can you tell us how much is currently standardized versus advanced? I don't know if I have that on the top of my head. Do you, John? We can take that offline and give you that. We'll come back. Then a quick question on U.K. Retail and Commercial. Really just on the margin progression. U.K. Corporate kind of was flattish in the fourth quarter. Retail saw continued progression, but also a big increase in the deposit base in the fourth quarter. Very helpful from a funding perspective. Just wondering what that means as we move into this year in terms of margin progression for those businesses. Look, in retail, as we've said, the driver of the net interest income progression this year was asset repricing. We've pretty much spent most of that, so we're about 90% through on our asset repricing. With respect to the liability side, we've had, I think, also borne most of the brunt of repricing and hedges rolling off. But what we're waiting for now, obviously, is an increase in rates, and that could give us an opportunity to further improve that NIM. The NIM overall, at slightly over 4%, is getting to levels that if you look at the five-year high for retail's NII, it was probably about 420. So I'd caution that trees don't grow to the sky here, but I do think there's a little bit further room once rates start to rise for the NIM and retail to go further. As Stephen indicated, what will drive NII, I think, ultimately, is going to be deposit balance growth and then continued asset growth that goes with that. Thank you. Good. I think we're starting to thin out a little bit. We'll take a couple more. Go to Good morning, everyone. Good morning, everyone. It's Chris Manners from Morgan Stanley with a couple of questions. Firstly, I was just having a look at slide 28 and the rundown of the non-core assets. It strikes me that the rundown of the third-party funded assets, GBP 63 billion, was very good, but the pace of the rundown of the risk-weighted assets, only shedding 17, was a little bit slower. I was just trying to work out, when do we see that big down step in risk-weighted assets in non-core, particularly because you've got CRD III coming in at the end of 2011. The second question was just on your exposure to Irish financials. I see that you reported around a GBP 3 billion exposure to Irish financials. If we include the central bank in your lending book, I was just trying to work out if there's debt that you hold of Irish banks as well that could be a potential concern. Thanks. Yes, please. Yeah, you want? Yeah. So on the non-core, you're correct. The TPAs have come down faster than RWAs. Some of that RWA relates to regulatory changes. We have a situation, particularly in some of the GBM structured credit product and exotic trading book, where the measurement of RWA intensity relative to underlying economics sometimes gaps out. One of our challenges here over time is to figure out how to effectively collapse that difference with what we think the underlying economics are. That could be risk mitigation trades, i.e., capital relief trades, or an early disposition of some of those positions. So that's really the principal thing that's causing that gapping. As you say, the CRD IV will further exacerbate that a little bit. So that's been the principal cause for that difference. Your second question was on Irish financials. I think most of the exposure that we have in Irish financials would be through GBM and through counterparty arrangements where we feel comfortable with any secured lending arrangements we have there. I don't know, John, if you want to add to that. Yeah. Good. Any more questions? Lots more. Lots more. We have so many. Will all come up from the underground. Okay, let's go over to the extreme right-wing arguments that we have over there. Thanks. It's Manus Costello from Autonomous. I just wanted to follow on from Ian's question about the U.S. One of the key strategic reasons you've always had for maintaining Citizens within the group is because it improves the funding mix of the group, and yet now we're looking at a net stable funding ratio of over 100% and improving. I just wondered how you see Citizens fitting into the group now, given that one of those key strategic priorities seems to be fading. Well, I think that the balance that Citizens gives to the group remains an important attribute, whether that be in terms of funding, whether that be in terms of geography, or whether that be in terms of our retail and commercial balance versus our investment banking balance, and the additional synergies we can get from that. So balance continues to be a reason. However, what we've always also said about every single one of our businesses, the argument is no different for Citizens than the others, is that each of our businesses has got to be attractive in its own right to shareholders, in addition to being additive through synergies and through balance. Now, clearly, as Bruce has pointed out, we've made more than a $600 million earnings turnaround in the last year in that business. We're back in the black, but we're not at an acceptable ROE for the long run. We think that the business has the capability to do better. We think that that's the most valuable thing that we can do for shareholders, is to move it better. If we are right and be able to make it very valuable in its own right, in addition to valuable as part of the mix, then the same argumentation would go as would go for our other businesses. Okay. Let's take another one over there. Yeah. Thanks. It's Ed Firth from Macquarie. Could I just ask you, going back to the non-core, I think at the beginning you gave us some estimate as to what you thought the total cost of the non-core runoff was going to be in broad terms. Could you just give us some idea in terms of your planning assumptions now, what you think the total costs are going to be for running down the remaining assets? I guess a subsequent or a related question, is there an interest rate sensitivity to that? I mean, if we enter a rising rate environment, would you expect costs of the non-core runoff to increase or decrease? Well, I think where we have given guidance is the range of impairments that we would likely anticipate over the period 2009 to 2013. We posted that early on in the recovery as a rough GBP 20 billion to GBP 30 billion in total cost. I think we, at this point, have incurred about 75% of that and are certainly on a down path. Our current view would be that we'd end up, hopefully, barring unforeseen changes in economic conditions, to be on the left side of those goalposts. We haven't commented specifically on the frictional cost of disposals. I gave an answer earlier that obviously we take that as we go and manage that in terms of the balance between hitting the end target and also preserving shareholder funds. We have, to some extent, commercial real estate was always the asset class that was going to go towards the end. You may have noticed in the charts that we've done a good job of reducing non-core commercial real estate. It's actually down in the high 30s, adjusting for the transfer in of the Ulster portfolio mid-year. We've made some good progress. But again, there'll be more of that late cycle in 2012 and 2013. Effectively, what the strength of the economy is and where interest rates are will have an impact on whether there's much and how much frictional cost exists in liquidating that tail of that portfolio. Good. We go right to the very extreme right-wing over there. Thank you very much. It's Arturo De Frias from Evolution. Two quick questions, both related to your guidance on interest rates, on the impact of higher interest rates. You have mentioned GBP 250 million. Should I assume that that's group, and if that's group, could the impact on retail, U.K. Retail, follow similar proportions? Then the second one is, what about the net impact, after potential increase in impairments? Would you expect any increase in impairments because of rise in rates? I guess your answer is going to be not much if rates are moderate, but I would be interested in hearing from you what can be the gain between higher revenues and higher impairments in a higher rates environment. Thank you. Sure. First off, the 250, it is a group number, so it's a composite of different asset sensitivity at the different operating units. The unit that has the greatest asset sensitivity is Citizens, always has been Citizens, and so just given the composition of their balance sheet, the loan-to-deposit ratio, the investment securities they have on their book, they're positioned to benefit from an increase in rates. U.K. Retail would probably be second on that pecking order. So clearly there'd be a benefit in U.K. Retail. I think it drops off from there. Most businesses have some benefit, but it's not that significant. Then in group treasury, we have some offsetting positions to try and manage the overall asset sensitivity, which would work against the center, if you will, and from an accounting standpoint. So that's how it would play out. I think, our view is that there'll be a ramp scenario rather than a shock scenario, is the likely forward path of interest rates. Given a ramp scenario, you're right to point out, I don't think there's a significant impact on borrowers' ability to repay, because they're able to make adjustments and absorb those modest increases as they come. Hopefully then their incomes are going up if they're individuals or their cash flow is going up if they're corporates. At this point we're not calling out an impact on impairments from the projected path of rates, which is likely to be gradual. Good. Okay. These are very high-quality questions. Whilst they are high quality, we will continue. Go ahead. You are raising the bar. I am waiting for the low quality one to come, absolutely. Thank you. Good morning. It is Leigh Goodwin from Citi. Yes, no pressure for the extreme right wing. Actually, a couple though, if I might. Just on the U.K. Corporate, I noticed there was a pickup in impairments, and you referred to a number of small, largish items in the impairment line. I wonder if you could just elaborate on that and give us an idea of whether you expect that to continue. My second question is on costs, and that is that you are still a little way above the target of 50% cost-to-income ratio. I know you are through the GBP 2.5 billion program, and in fact you have exceeded that. I just wonder whether you have in mind another program for cost reductions across the group. Thank you. Sure. You want me to take it? Okay. On UK Corporate, there's nothing alarming in the Q4 number. I think there really is just a couple of one-offs. When you get into a portfolio that has a bespoke credit profile, you can have them lumped together in a quarter and then have an absence. Q3 was probably a little on the light side in UK Corporate, and Q4 was a little on the heavy side. But if you look at the whole second half, it's following a glide path that appears intact. I would say going into this year, we would still expect a gentle fall in impairments in UK Corporate. That's our call there. On costs, we have actually increased the target of the 2.5 to about GBP 3 billion. We continue to work on ways to become more efficient. Ron Teerlink here in Business Services is leading a lot of the charge on that. But I think in an environment where growth is expected to be sluggish, interest rates are likely to stay low and only come up gradually, I think to continue some earnings momentum, we do have to continually review the cost base, and we're going to crack on with that again in 2011. Thank you. Any question on cost, by the way, is a high-quality question. That's taken for granted. Good. Okay. Let's Thank you. Good morning. It's Steve Hayne from Morgan Stanley. Just a question, I don't want to let a Royal Bank results go past without mention of commercial real estate. I'm wondering if you can just give a brief outlook on where you see that going, because you mentioned that on the rundown of non-core, for example, is one of the areas that it's been a bit slower to come off. Linked to that, in terms of the new target you've given on the faster non-core rundown, which areas, which specific assets do you expect to come off faster? Thank you. Well, on commercial real estate, I think that- Our views would be similar to those that we've expressed in the past, which is with the exception, if you like, of the Irish wildcard, where, of course, a lot of the pain has been taken. I think our judgment is that the commercial real estate market is not likely to have now big step changes. What you're likely to have is, if you like, a market which slowly, over quite a number of years, works itself through. Each year you make a bit of progress, but you're also rolling over loans and doing forgiveness and so on because there ain't a whole lot of point repossessing things if the asset market underlying it is not going to reward you for dumping those assets. I think that this is going to be a slow burn. Not slower than I thought a year ago, but a slow burn. As Bruce has indicated, it's our biggest remaining risk concentration, although a lot of that lies in Ireland, but even outside Ireland. I think that it will be not only the source of continuing impairments, gradually going down, but continuing. But again, as Bruce indicated, both in 2011, 2012, and 2013, disposal losses to the extent that we dispose of some of those. I think that's the case. But it does feel to us that the underlying market, while not radically strengthening, is at least going in a sort of flat to positive way on both sides of the Atlantic and in Europe. On the second part of your question, we have a couple of wheels on slide 30, which shows the size of the reduction by asset class. If you look at that, you'll see that the corporate, the markets, and the retail were the three parts of the wheel that moved down most aggressively last year. I think I would expect that to continue. So that's where there's interest in the assets and the commercial real estate and the SME, which is a very small book, have moved down as well, with over 30% reduction since commencement. But I would expect those to lag a little bit relative to the things that we have been able to move. Okay. We need brilliant questions now. Challenge is yours. Thank you. I thought I was going to die of old age, actually. On your slide on GBM, you talk about the capacity to rebuild returns in the event of regulatory changes. I suppose we're all thinking about Basel 2.5 and Basel III, but realistically, the Independent Commission on Banking could impose subsidiarization on GBM. You could find that you could only fund it from its own balance sheet and not rely on the balance sheet of the parent. I wonder if you could give us some rough guidance, the extent to which those particular costs might be recoverable from re-engineering the P&L of GBM. Well, I think that there is no doubt that subsidiarization, in any form, will be bad for banks and probably won't make them any safer either. But there is just an incredibly wide menu of nuance as to, from not very bad to quite bad in terms of destruction of funding synergies, creation of capital inefficiencies. I think it's just way too soon to know where that pans out. If you were reading between the tea leaves, you might think that, if you like, the focus was more on subsidiarization, was more on protection of the most retail end and small business end of life than isolation of the investment bank. So, that might give some clues as to where in it lies, but honestly, we don't know. But as I said in my outlook statement, I think these regulatory issues are very real, and one needs to be really very cautious about them until we can have some clarity in terms of the impacts they can have. But I don't think particularly on us, but on anyone. Any more? I think we're probably done. Well, I think your questions, if I may say so, matched our rate of progress.