Earnings Call: Q4 2014

Feb 26, 2015

Are we ready? Good morning, everybody, and welcome to our full year results for 2014. I think it's been a good year overall for operating profits, helped by benign credit conditions and some fairly noticeable write-backs. But also another year of significant special charges, both for conduct issues, obviously an industry feature at the moment, and the cost of changing this business, on a fairly radical basis. The biggest of these is a GBP 4 billion charge, to write down the value of Citizens in the U.S., closer to the level at which we did the partial IPO last September. This is effectively goodwill, and a genuine legacy issue. Sometimes that word is used a bit casually, but I think this is a genuine legacy issue, given the business was acquired many years ago, largely in the '90s and the noughties, certainly pre-crisis. It follows a GBP 4.4 billion charge for Citizens goodwill in the year to December 2008. So altogether, GBP 8.5 billion of Citizens goodwill. It's a perfectly good bank, but we obviously paid too much for it. But 2014 has been a really important year for change, and a huge amount has been achieved by Ross and his team in the year. The business has been significantly reshaped into three main divisions. And the reshaping, I think, has worked really well. We've had much more drive and focus, gone into reducing our costs and improving our efficiency. We launched the Citizens IPO, the largest bank IPO ever in the U.S., last September. Our capital strength has materially improved through the accelerated rundown of our higher risk assets, through the RCR division. Now, the eventual full disposal of Citizens and the RCR runoff will give the bank the capital strength to deal decisively with the long-term poor returns in our wholesale business. When I say long term, we've lost really money all century in our wholesale activities on a net basis. We believe these poor returns are structural and also exacerbated by the U.K.'s ring-fencing legislation, which is very restrictive. Getting the returns in our wholesale business to where they need to be and getting the main litigation and conduct issues behind us appear now to be the final pieces that will put the business into a shape when the government can start to sell its shares, which I think will be a very good thing for the bank, and I firmly believe for shareholders generally. Now, Ross and Ewen are a newish team here. They both got stuck in really well, really early. It's our new All Blacks team, if I can put it like that. We'll start with the big forwards, and then move on to the pacy backs later. Ross, over to you. Thank you, Philip, and thanks for joining us. It is probably appropriate to talk about the All Blacks with the Rugby World Cup coming up this year. As you know, they do really well between Rugby World Cups, and then we struggle with the year of it. Look, today, delighted to have you here. I am really encouraged by the progress that we have made in 2014 on behalf of our investors. We delivered against every commitment we made at the start of last year. As you will see, it has actually given us really good confidence. It is important that we think that there is a clear net capital benefit to our investors if we accelerate the strategy, and that we will arrive much quickly at our destination of a business that will produce a 12-plus percent return on equity from a lower franchise risk, and that is most importantly trusted by our customers. You may recall that this time last year, I outlined our long-term ambition for this bank, and that was to be the number one for customer service, for trust, and for advocacy, and set out our initial steps that we would take. Today, you will see the progress we have made. You will also hear why the progress means we can go further and faster and on several fronts. We are going to do a radical reshape of our CIB business. We are going to have a higher Core Tier 1 capital target. We are going to accelerate the divestment of Citizens and RCR. We are going to take out further costs, and an ongoing effort to create a much, much simpler bank. We think that these actions will bring significant capital benefits, which we intend to distribute above a Core Tier 1 ratio of 13%. The emerging RBS you will hear about today will be capable of delivering strong returns from a lower risk model. The opportunity to go further and faster is built on the work that we have put in over 2014. Over the last 12 months, our ability to execute has been clear. I would like to thank my executive team, who are pretty much all here today, for the amazing job that they have done in delivering our results in 2014. For each of the targets we announced, we have done what we said we would do, and in some cases, we have gone further. On capital, we have exceeded our 11% target that we set for the end of this year, 2015. We hit it at the end of 2014. On costs, we said we would take out GBP 1 billion. We have taken out GBP 1.1 billion. We have gone at every part of our business to examine where the costs are. We have still got a lot of work to do. Just to give you an example, in our property portfolio in London, 15% down already after one year. Elsewhere, the number of change programs that we are running in this business is down by one half. We are spending the money, but we are spending it on less so that we get a better result out of it. The big thing is that we are focusing on what makes a big difference to our customers. We are offering our customers a more resilient and reliable service. Our mirror bank, which is one key improvement introduced this year, it now ensures that customers can still access the vital services they need, even if we are experiencing difficulties with our systems. There are not too many banks that can do that. We are getting much, much simpler. Take manual processing of payments last year. In the year of 2013, we did 8 million manual payments. Last year, we were down below 3 million. We are making it much easier using technology to actually make this a simpler bank. Our product sets are getting simpler too. Our savings products, for example, just as one example, has gone from 35 products now down to 5. These are just a few of the examples that we have supported the delivery of our targets, and today we add the final piece of the jigsaw with our plan for the next stage of our strategy. Before I turn to that, I think it is worthwhile just acknowledging some of the milestones we have passed this year. Let us have a look at some of these. We are supported by improving conditions in the marketplace. RCR has exceeded our expectations, running down risk-weighted assets by over 50%. An amazing job by a great team. We achieved the largest bank IPO in U.S. history with Citizens, with the partial deconsolidation targeted in 2015 now, both vital for our capital rebuild. We successfully exited our U.S. asset-backed product business. Our Ulster review has been completed, along with the decisive action on Coutts International, where businesses do not perform, and we do not see a path for them in the medium term. There is no place for those businesses in RBS. We have reached agreements on the retirement of the DASS and paid the first installment of $320 million out of this year accounts. I think this adds up to a pretty major achievement from this organization this year. Ewen is going to go through the financial details in detail, but the overall picture for 2014 was, I think, one of a good underlying progress in our core businesses. Although this is masked by our attributable loss of $3.5 billion. That can be put down to a number of big charges, as Philip said, including restructuring, conduct and litigation, and sizable write-downs following the IPO of Citizens. At the operating level, you can see that the costs have fallen faster than the income has fallen. Impairments have seen a big turnaround, and there has been a big swing in our operating profit to $3.5 billion this year. I think that is the best since 2010. Nonetheless, we will not be satisfied until we see positive operating performance being reflected on our bottom line, and we are actively working through the items that remain in the way of achieving that. At the bottom of the slide, you will also see that the balance sheet is cleaner and getting far more robust. Risk-weighted assets down, Core Tier 1 capital ratio well and truly up, and our leverage ratio better as well. Expanding now on what lies behind that underlying improvement, it is worth just taking a closer look at two of the big franchises which sit at the heart of this business, and which will play a much bigger part going forward for RBS. In both personal and business banking and in commercial franchises, you will see that the positive jaws over 2014 were 7% and 4% respectively. It is encouraging, but in reality, we are just getting going with these businesses and putting them into the shape that we think they are capable of delivering even more. These are the early fruits of some of the changes we are making to simplify this bank and improve our customers' offers. Both of these, we intend to go a lot further on in 2015 and 2016. We have just started. We need to improve this business for customers. It can be easy to overlook the extent that we are actually doing to improve the customer service in this organization. This slide, I think, depicts the journey we are on as we move away from what are really important, which is branches, but moving to what we call points of presence, where customers touch us or we can touch them in so many, many more ways. As well as a burgeoning digital platform, we have added over 1,500 self-service points by the end of 2015. A huge expansion of the access across the post office network that we did not have just 12 months ago. This is an example of the investment we are putting into this bank just to make it easier for customers to deal with us. We have got great positions in this marketplace, and we need to be using them much more than we have in the past. As well as transforming how and where our customers can bank with us, we have also begun to challenge some of the things which they just find so frustrating about this bank. That includes shorter account opening times, ending teaser rates on credit cards where you trap them in debt, quicker lending decisions, simpler product ranges. Getting our fees and charges onto one single page of an A4 rather than a 120-page terms and conditions that no one ever reads. I know what can be achieved through delivering operational and customer excellence. Over time, we will serve customers better, and we will do it more cheaply. In doing that, those results then fall to the bottom line, which means a much better result for our shareholders. Just focusing on the growth in our U.K. franchise, there is a number of areas in our core business where our progress is starting to show through. You can see the growth this year in our mortgage book. Liz and the team have done an amazing job of retraining 500 now mortgage operators. Along with developing and improving our product set, it has allowed us to target further growth in the coming years. In our U.K. commercial franchise, which for the first time has seen income growth in five years. We are really in those market leading positions with the investment we are making in parts of this bank. We will see improvements in our service. We have had good real economy, which is what this bank should all be about. The capital and risk appetite is in place to support this balanced growth across the different customer segments, and we also know where the opportunity. That is through setting our ambition of becoming number one for customer. As you can last year had an effect on how our personal customers rate us, especially. I think our willingness to openly publish the stats that we have in our accounts this year just show how serious we are to this commitment. Moving on to our Wholesale Bank now. Like all banks, we know that the market has been waiting for answers on this part of our business, and today we're setting out our plan. There are two aspects of this. Firstly, we need to tackle CIB's historic cost base and resize it to suit the business it is to become. At the moment, CIB carries the cost of a past ambition to be a global investment bank, with much of that cost fixed and embedded in our systems and structures, which were created years and years ago. Moreover, the regulatory and capital cost to the bank of doing business in this part of the industry has risen in parallel to these costs also being increased. The result is a business that has no hope of holding its head above water until we remove the cost burden that sits on this business, and this requires us to re-platform large parts of this business. Secondly, we have to reconfigure the front office to align with our strategy. In the past six months, we have been reviewing every product, every market, and every business line. We did not go into this review of how we could make this a less bad part of our bank. We set out to find the right mix of business that would actually deliver value for customers and for you as shareholders and aligns to our strategic intent. But more importantly, make this a great business for our people that they can again be proud of it. The result of this plan is to refocus CIB, substantially reducing it in size, but also in its risk profile. We intend to reduce the risk-weighted assets in the business by another two-thirds by 2019, and by GBP 25 billion this year. We intend to further reduce third-party assets by around 70% by 2019. And our country footprint as we sell off operations in about 25 countries. This is a big shift from 51 countries we were in in 2009, down to about 13 or 14 countries over the next few years. Under a new management team led by Rory Cullinan, the approach for CIB going forward will be to manage for value and build on the many strengths we do have. Just like this stage to thank Donald Workman for the work he's done. I think he regretted the call I made to him 12 months ago saying, "Could you help me out?" But the work that he's done on the strategy of this business over the 12 months, that's actually given us the opportunity to step forward as we are doing now. We've been decisive on what is not sustainable, but the challenge is not to throw the baby out with the proverbial bathwater. We know that in the U.K. and Western Europe, we have some of the greatest franchise and market positions that there are in corporate institutional banking. We're well-placed to excel at risk management, debt financing, transaction services in these markets, supported by a more focused international capability and trading desks in the U.K., in U.S., and in Asia. As an example of our expertise in supporting the U.K.'s largest businesses, take the work we've been doing with Manchester Airport Group. Our long-standing relationship with MAG saw us supporting over GBP 1.5 billion acquisition of Stansted in 2013, as well as two bond issuances, which raised a total of GBP 810 million so that they could refinance the acquisition debt and invest in new facilities at airports. Our expertise, our people, and the quality of our relationships with some of these very large businesses, that is what this business is built on and will continue to be built on. With any business the scale of CIB, there are questions that still need to be answered, but nothing that will change the course and the direction we've set for this business over the next few years. The end result will be a business with RWAs between GBP 35 billion and GBP 40 billion, strong market positions in areas where we are capable of creating value. This slide is actually, in effect, a straightforward distillation of our plan. It shows two planks. The work we will do between now and 2019, which can be summarized firstly as reducing our risk profile, which is at the top, and improving customer experience. We are very clear these are not separate tasks with separate ends. They are two sides of the same coin. You can see that the milestones are on there, the overall risk weight exit by 2017. I've made the point that we are creating a full-scale retail and commercial bank with its own IT platform, capable of going into the market as a very effective competitor with good prospects of growth and no dependency. steps to simplify this bank and sharpen our customer offer. Take current account opening, for example, where account opening returns out of it. Come 2019, we intend to be a smaller bank with lower costs and a more effective customer delivery. In short, good service in core markets that deliver sustainable returns, minus the distractions that currently either weaken our performance or destabilize our risk profile, or both. We think that it is the right franchise profile. It's the right risk profile for this bank. Importantly, I think it should also set out a model that will also be ring-fence ready. How will we look come 2019? Right across our franchises, we now have clear sight of the future that will set us apart from other U.K. banks. As I said last year, we will be substantially U.K. focused and by far the biggest part of our business, around 85% of our risk-weighted assets, will be in our retail and commercial operations. As I've explained today, we already have extremely strong positions in both these areas, which have endured through the years since the crisis. We now need to justify them by bringing operational and customer experience and excellence to bear. Corporate and institutional bank will build on our strengths. It will be a smaller part of RBS with clear parameters, but one we think that can be made attractive for customers, staff, and for our shareholders. Overall, it is a model that sets up to deliver sustainable returns, again, as I say, with lower risk profile. That's the longer-term view, but we'll get there in steps, just as we did in 2014. We are today setting out what we the opportunity to see are they doing as they said they would. First one is reducing our risk-weighted assets below GBP 300 billion. Again, this will not be any fudging, no foreign exchange advantages. You saw that we did not take those this year. We will also be focusing on growing our lending in line with GDP. Make a contribution to this great organization, and that they can get satisfaction out of working in this place because they deserve it after six or seven years of hard work. This needs to be a much better place for our people. As I hand over to Ewen Stevenson, let me just summarize what we have been through this morning. Firstly, this business is in much better shape than it was a year ago. Our ambition to be number one for customer remains at the forefront of everything we do, and everything I have set out in this is aligned to that goal. The proven ability to execute in 2014 means we can now accelerate our strategy by building on our strengths in core markets while taking decisive action on the areas where returns are not going to be sustainable. We have set new targets to keep us on track in 2015. For shareholders, we have announced our intention to redistribute capital. Finally, let me repeat our destination. We are confident that the plans we have outlined for this bank, that it will deliver a 12% or better return, and from a lower risk profile for the franchises than the one we have today. I am now delighted to hand over to Ewen Stevenson for his first annual results. It is a delight to work with Ewen. He is turning in to be an exceptional CFO after only nine months. We are now in your very capable hands, Ewen. With that big buildup, thanks, Ross. Nine months in, this probably is the last time that I can stand up here and give you my initial impressions. In summary, as I say to people, the good bits are actually much better than I expected. The bad bits, they are a bit worse. In many ways, that makes my job, makes Ross's job much, much easier. We really do know how quickly where to spend our time and where to add value to the bank. As we execute against our plan over the next few years, you will see us progress towards a much leaner, much stronger bank. We should be able to generate very attractive returns over the longer term with much lower earnings volatility and the potential for very high capital distributions back to shareholders. At the center of that business, we've got a fantastic U.K. and Irish banking group with some really great customer franchises. But as a counterweight to those clear strengths, as we sit today, other parts of our business are not performing to our satisfaction. You can readily see that through our 2014 results, and it underpins today's sets of strategic announcements. On 2014, we're very pleased with the progress we've made this year. That's despite reporting a GBP 3.5 billion attributable loss. As Ross said, that included a GBP 4 billion fair value adjustment for Citizens and the first GBP 320 million payment for the dividend access share. While income fell by 6%, we made very good progress on improving our net interest margin, up 22 basis points during the year. As we promised to do, we've materially reduced our cost base down GBP 1.1 billion or 9% during the year. As a result, our cost-income ratio fell to 87% from 95% in 2013. We were helped by some pretty exceptional levels of loan loss recoveries from both RCR and Ulster Bank, with overall net recoveries of some 1.2 billion. Our results were also impacted by a number of one-offs. I've highlighted the Citizens fair value adjustment. As a result of this charge, we've now written down Citizens Value to 0.95 times tangible book value. That's a realization value we view as conservative. The stock is currently trading at 1.1 times tangible. On litigation and conduct charges, these remain at both an elevated, and frankly, unacceptable level, with a further 1.2 billion of charges in the fourth quarter. These include a further GBP 320 million or $500 million of reserves for ongoing FX investigations by various U.S. authorities, a GBP 400 million additional PPI provision. We saw higher claims experience in the fourth quarter than we had anticipated. We took an incremental GBP 85 million net provision for interest rate hedging of U.K. related tax loss carry forwards last quarter. We also recognized a reduction in tax loss carry forwards of GBP 699 million in relation to our U.S. broker dealer. Our core balance 387p. While down 1p on the quarter, it was up 24p or well capitalized at 8.6%. We now feel comfortably on track to achieve our new core equity tier 1 target of 13% during next year. Underpinning this was an actively managed sharp fall in RWAs, primarily in RCR and CIB, with overall RWAs down some 73 billion or 17% during the year. Our leverage ratio improved by 30 basis points during the quarter to 4.2%, and it's up 80 basis points during the year. On U.K. personal and business banking, they had a very, very strong year financially. Operating profits were up to GBP 1.45 billion, which is up 77% on 2013. Income was up 4%, operating costs down 3%, so the business had extremely strong operating jaws. NIM improved by a further 12 basis points with further deposit repricing, and impairments at 21 basis points remain well below pre-crisis levels. The ROE for 2004 improved materially to 19.4%. From a balance sheet perspective, new lending growth was up sharply, with new mortgage volumes up 37% year on year. Our mortgage flow share at 10% remains comfortably ahead of our stock share at eight. On Ulster Bank, it saw a return to operating profit the first time since 2008, which supports our decision to retain the business. On revenues, a 39 basis point improvement in net interest margin was offset primarily by the non-repeat of significant hedging gains on the mortgage book that we saw the previous year. ROE of 16.1% was heavily flattered by the strong recovery in the Irish House Price Index during last year, which together with an improved collection process, drove net impairment write-backs of some GBP 365 million. On the balance sheet, RWAs fell sharply by 16%, reflecting improved credit metrics and a reduction in the loan book. Commercial banking returned to growth in 2014 and made very good progress again in improving its core returns. Operating profits rising by more than GBP 750 million last year. Revenue growth of 2%, operating costs were down 2%, again, good jaws, with the cost income ratio falling from 63% to 57%. Impairments remained at very low levels with few sizable single name write-offs during the year. On the back of this, our 12.6% in 2014. On the balance sheet, gross lending increased for the first time by a percent for a while, an active program to manage down certain parts of that portfolio 2014. Private banking's ROE was 7.8% for the year. We've provided some financials in the company announcement on the International Private Bank business. In 2004, you'll see that on GBP 230 million of revenues, the International Private Bank making an operating loss of GBP 27 million. If you back that out of the rest of Coutts, the illustrative ROE for the remaining business was 18%. On our Corporate and Institutional Bank, it was another weak quarter with operating losses of some GBP 643 million. This resulted in an annual loss of GBP 892 million last year. Income in the fourth quarter was down 34% on the same quarter in 2013. This was driven by both a weak quarter for our rates franchise and moreover, the impact of a GBP 40 billion reduction or 27% reduction in RWAs from the end of 2013. GBP 15 billion of this RWA reduction was as a result of us running down our U.S. asset-backed franchise. That rundown is now largely complete. CIB also achieved a material reduction in operating expenses over the last year. Operating expenses were down 22% and FTEs were down 20% year-on-year. But despite the strong reduction in RWAs and operating expenses, returns in the franchise are unacceptable and have underpinned the urgency for today's announcement. RCR made extremely strong progress in running down its various portfolios during 2014. Funded assets were down 48%, RWA equivalents down 58%, which was well ahead of our initial expectations. The prices achieved from asset realizations were comfortably ahead of plan. As a result, we made an operating profit for the year of GBP 988 million in RCR. Based on this very strong progress we've achieved, we now expect to reach the 85% reduction in funded assets by the end of 2015, a year earlier than we had planned. Looking forward to this year, relative to the very strong financial performance we had last year, we do expect 2015 to be a more challenging year for us financially. Good progress in improving the efficiency and productivity of our core U.K. and Irish franchises. In U.K. PBB and CPB, we expect to continue to see the impact on our NIM of the progressive rolling off of our five-year hedge program without the offsetting benefit that we saw last year of an improvement in our liability spreads. Given today's announcement for CIB, we expect CIB's revenues to decline faster this year than the reduction in operating costs. However, overall, we are committing to achieving a further GBP 800 million operating cost reduction in our underlying expense base. We don't expect to see the same significant in CR. On litigation and conduct charges, we can foresee the potential for substantial charges in 2015, principally driven by. Restructuring charges are expected to be considerably higher in 2015, and this reflects the very heavy change agenda we have going across the bank. The CIB restructuring we announced. As I said in my introduction, we're working towards a much leaner, less volatile, higher returning business. The core banking group across PBB, CPB, and the core go-forward bits of CIB represent around half of our RWAs at the end of 2014. We really like this collection of businesses. We're committed to growing them where the risk-adjusted returns make sense to do so. Ross set out earlier our U.K. growth aspirations. We've got a clear goal to grow our overall core loan portfolios at or above nominal GDP. For the other half of our RWAs, we expect to make further material progress in reducing the runoff of parts of CIB that are not core to our future franchise. Today, we announced the sale of a large book of U.S. and Canadian loan book and associated commitments. This will release around GBP 5 billion of our basis point improvement to our Core Tier 1, and represents about 20% of our targeted 25 billion reduction in RW. Fully exited by the end of 2017. We're making very good progress in the sales process for the International Private Bank about just over half of our existing shareholding of 70%. We're continuing to focus on exiting other holdings we acquired pre-crisis. Even in what we describe as the core go-forward business, we've material pools of legacy assets that we intend to more actively manage for value. We believe the end result of this restructuring delivers a very attractive mix of a strong core bank with compelling distributions. I think you've all been very open over recent quarters about your views on the performance of our CIB franchise. Ross and I have not sought to disagree with you, and today's sets of announcements recognizes this. Similar to what you've seen us do with Ulster Bank and private banking, we've been forensically analyzing CIB since the summer to say, where do we have competitive advantage? Where can we sustainably drive cost of capital plus returns over the longer term? Where we could not satisfy ourselves with this core requirement, we've taken the right decision to exit or wind down these portfolios and businesses. In the U.K., for large corporates, we're number one or two in most product segments. From these strengths, we've built strong specialist businesses across Western Europe in areas like energy and infrastructure, driven from the expertise we've built building in our markets franchise, which anchors our business globally in the U.S. and Asia as well. Simply put, we're going to take CIB back to its core customer and product strengths, where we think we can compete. We'll exit around two-thirds of our countries, about 25. All of APAC, bar a market sales office in Japan, a small distribution and trading hub in Singapore, and our back and middle office operations in India. All of our Central and Eastern Europe, Middle East, and African offices, bar our support functions in Poland, and most of our U.S. franchise, bar our small distribution and trading hub. Our product offering will reduce by over half. Our number of desks in our market business will reduce by over half. We expect the restructuring of CIB will cost an incremental GBP 2.5 billion-GBP 3.5 billion pre-tax, covering both restructuring and asset disposal costs. A year ago, when Ross reset the strategy of the bank, we could not have stood here and made today's announcement. Our Core Tier 1 ratio at 8.6%, was at 8.6%, and we ran an overly stressed bank. We also did not have the operational or management bandwidth to manage this. As we sit today, I think we have justifiable confidence in our ability to now execute this plan, given both a much stronger balance sheet position coupled with the strategic progress we made last year. As we've managed down CIB and RCR during 2014, we've continued to build very strong execution skills in managing legacy runoff books. One thing I've come to appreciate since joining RBS is that given our legacy, we've got exceptional experience in winding down portfolios across a broad spectrum of asset classes and geographies. That core expertise built up since the formation of non-core division in 2009, continues to reside and be further developed in the bank. To take one example, our U.S. asset-backed experience, we started reducing that business past our last year results announcement a year ago. Since then, our CIB team has done a frankly excellent job in reducing the RWAs in the U.S. asset-backed franchise by some 79% with no material portfolio losses. Earlier, I mentioned the significant pools of various legacy asset pools and investments that continue to sit across various parts of the go-forward bank. I highlight some of these on the slide. Many of these pools of investments we consider to be money good, but in most cases, the returns are poor, making them unattractive to hold longer term. We do intend to give you more detail and color on these pools in the coming quarters. As you think about the long-term sustainable return potential for the bank we're trying to build, I think it's important to think about the drag that these legacy portfolios will have, both on our reported growth and our returns. Our plans to issue AT1 over the coming quarters, we're disclosing today for the first time our Pillar 2A capital buffer based on a Pillar 2A charge of 2%, a capital conservation restructuring overlaid with our core bank transformation buffers. We felt it appropriate and right to run. Importantly, we're not changing the target 2016. What RWA rules and the overall stress portfolio. We're just to exist on when we may be able to distribute. Customers, overall one ratio last year. We've delivered on costs. Customers, employees, and shareholders. We're committing to take underlying operating costs down to execute this restructuring plan. Lastly, once our Core Tier 1 target of 13% is achieved, and once we've achieved- What you think the real underlying profitability is. Then in terms of the right-hand slide of the slide, what sort of capital impact do you think it will have getting the exit group down from half the group's RWAs to, I guess, to zero over time, please? Thank you. Yeah. So as you look at slide 28, I put the slide together, so I do think it's a helpful way to think about our business. Even in the go-forward business, I think it's important we provide a disclosure elsewhere. We've told you what we think our end state CIB go forward, RWAs are 35 billion-40 billion. So you should And we do recognize that an element of that is a higher returning franchise dragged down by a lower returning set of legacy portfolios. But I don't think we're going to sit here today and forecast that for you. In terms of the right-hand side of the page, look, I view a number of these assets as relatively money good. I think Citizens is a money-good asset. It's trading at 1.1 times tangible. We have it on our books at 0.95. I think RCR in terms of its performance is increasingly looking like a money-good asset. We made GBP 1 billion profit out of that business last year. International Private Bank, I think we're pretty confident we're going to get out of that at an attractive valuation. I think Williams & Glyn, you're all perfectly capable of forming your own views on valuation. The only thing I would say on that is HSBC here. As a standalone bank, it will have much higher operating costs. CIB Legacy. So that's about GBP 9 billion of capital release, less the cost of doing it. So we do think out of that restructuring, you'll still see material capital release as well. Sorry. That is better. Thank you. Just to come back on that, obviously you would not be doing this if you did not think it was value creating, strategic thing to do for shareholders. When you are coming to that conclusion, are you factoring in a reduced sort of risk discount into your thinking? Because obviously there is quite a lot of earnings are going to go. There are big restructuring charges to get you there. You end up with a cleaner, more profitable business. How much of the sort of the risk premium coming down is in your thinking when you conclude that this is in the interest of shareholders overall? I think that will be upside of coming to a view as to Second sub-part to the capital question is, you are obviously taking your minimum stack higher, but at the same time, you are talking about shrinking your balance sheet by 50%. This will take maybe three to four years at least, but your G-SIB buffer is not going to stay at 1.5 for that projection, in my view, at least in 2019. So, why do you think you need 13% Core Tier 1? And could you maybe tell us how that 2.5% informs your thinking in terms of the buffer? Yeah, look, you will appreciate, obviously, we cannot tell you a lot about Pillar 2A. We have already had to get PRA permission to give you the number that we have got today, so there is probably not a lot of incremental Look, we would be very happy if we did not become a G-SIB at some point. We certainly do not have aspirations to need to be one. But equally, I would note that the PRA has indicated the G-SIB buffers may be as high as three but then get hit with the G-SIB regime. So, look, I think the 13%, frankly, if we had stuck at 12% significant bank transformation here and running with a slightly larger management buffer during that period of CIB go forward, as you highlight in your remarks, clearly, RWAs are going to be lower. Presumably, the revenues will be lower. I was wondering if you had an idea in your mind of what that might be. When you are thinking about the costs that you need to get down to. You have mentioned an extra GBP 800 million. Where that GBP 800 million is coming from? Is it off that go-to? A bit more help around that would be helpful. Also, you talked third-party assets. What is a loan book in this business? GBP 200 million of bad debt, which is not a normal level. What is a normalized bad debt charge for this business? I have a separate question on capital. I think give it to Yan or- Of CIB. We said 35 billion-40 billion of RWAs. We obviously have a view on what I talked about, it does not include Citizens, it does not include Williams & Glyn on this page. That there will be another takeout next year and the year after- Yeah. -to get to those targets. Yeah. We have said that we expect, we are effectively now saying that our cost income target is below 50% for the business, right? If you just took the GBP 12 billion that is on that slide for the go-forward business, you triangulate down to a lower cost structure than we have achieved it. We were previously signaling in terms of the GBP 8 billion we were targeting last year. Your question on impairments, look, we were previously giving you guidance when I joined of 40-60 basis points. I think that was premised on what a very long run average had been pre-crisis. I think as we sit today in this interest rate environment for the foreseeable future, and even if we look at the forward yield curves, we really do not see impairments getting back to that sort of level. So, we think. One next year. Given the RWA reduction in your starting point, you might have thought that might have been this year. So I am just wondering what is in 2015? Attached to that, given one. Look, our cap rolls by. The considerations in those assets being in the exit bucket. I mean, they sort of go forward and the exits are similar levels of income, similar levels of op cost, but clearly slightly more capital intensive in the exit group. So I am just sort of trying to understand more around what is driving that decision. Secondly, on the go forward, when we go from sort of 46 down to 35, can you give any help around sort of income attached to those final risk assets? So I am trying to get an idea of the scale, the incomes, if. To do with the underlying assets. It was to do with the businesses. Our core corporate U.K. loan book will be part of go forward. It really wasn't driven by these specific asset classes that we want to exit. It was driven by what businesses we like and where can we get return on them. Anything else, Mike? Do you want to just pass to Mike, Lawson? In terms of forecasting, look, I'm not going to do your job for you in terms of forecasting future revenues, but across the capital return. Work your way back up from there, I think. Morning, it's Rohith Chandra-Rajan from Barclays. Just wondering about the ultimate scale suggest it's about 250 billion of RWAs as the steady state or the start point, if you like, which seems to imply a 40% plus growth. Assets, and is that how we should think about the The heavy cost will be the first year, and that is what we are planning for. But as you said, it does depend when we dispose of some of these assets on the sale or rundown. On the growth parts, we do expect good growth out of our personal and business banking. We are expecting to see and planning for good growth both in our mortgage business. We do expect the RWA level to go up. In the second half of this year, growth in our commercial business as well. Assets coming off. We do want to grow in that business and we are structuring up to do so. Our core two franchises are where you will see the growth. Okay, and that sort of 10% annual pay. The loan loss ratio actually below your previous 40-60 guidance based on what you are seeing at the moment. That is less than GBP 1.5 billion extra on the impairments. You are still talking about a 50% cost income ratio, so at least GBP 1.5 billion off the cost there, broadly speaking. Back to Rohit's point, it looks like you are going to see some revenue growth in the non-CIB businesses. I guess given that you are saying a couple of percent off that 13-11. Why are you not targeting something higher? Well, we are still some ways away from getting to 12, I guess, is the quick answer. But in terms of all that maths. Growth, because we come up to your own views, Robin. Just one technical point, and maybe I am reading too much into this, but on slide 14, you list the DASS repayment as being split over 2016 to 2017. There is a small tail into 2017 there. You talk about hitting a 13% Core Tier 1 ratio during 2016. So in terms of timeframe for restarting dividends, should we be thinking 2016 or should we be thinking post the end of that DASS repayment in 2017? Well, the dividend just technically cannot happen until we've repaid the DASS payment. Yeah. That was Okay. Thank you. Fine, pass it along again. Thank you. It is Arturo de Frías from Santander. Two questions, please, and sorry for being predictable, but one will be on slide 28 also. When I look at the go forward business, I see extremely profitable retail bank with high 20s ROE. A very good commercial banking franchises. Not making much. Together, they have a 13%. They generate a 13% ROE, which is more or less what you would be that you envision that you favor of retail. GBP 2 billion of it. Position we had in a corporate bank in the U.K. and Europe, which we are number one player in many parts of this business, and we believe we can get a profit. It is not going to be that easy a task because we do have to a lot of replatforming. We do believe it will cover its cost of capital, it will contribute to other parts of the bank, but we are not going to be subsidizing businesses either. The cost that they have to bear have to be fully loaded onto the businesses as for the services they get provided with. I think our view is we can get this business up with a lot of hard work over the next three years to getting us that 8%-10% return that will be contributory, but it also feeds into particularly our commercial bank. That is why we have held on to these very strong positions that we have got in Europe. We have held on to the position we are taking in the U.S. because a lot of our corporate customers want to do U.S. denominations in Europe and an Asian hub as well. I am less worried about the overall. We have given you an indicator it will be 12+. I think if you got us to a 12+ return on equity, you would be absolutely delighted, just like I would be. It will be. Can you see that? Yeah. On the we are going to targeting single point of entry. I think one of the other consequences that you'll see is, because we're going to have to go out and raise a lot of senior bail-in debt, that we're going to have to think about adjusting our loan to deposit ratio. Rather than targeting 100, we'll probably shift that to something like 105 to 110 because of this surplus senior funding that we're going to have in the group. Okay. Sorry, a quick follow on my ROE. The other one was a question about retail ROEs perhaps coming down because of higher risk weightings. Is that something that you? Yeah, I think they will be higher risk weighted as it's loaded onto. You'd also see it carrying more capital going forward. I think the other part of the dynamic there is the market Competition and Markets Authority look into this aspect, and we'll see what they conclude when they publish. Why don't you just move it along? Thanks. Good morning. It is James Irvine here from Soc Gen. I just wanted to follow on from your loan to deposit target, because you are currently at 95. I guess that goes lower as RCR disappears, it goes lower as CIB shrinks, it goes lower as Citizens comes out of the numbers. You are talking about 105. Clearly you are talking about asset growth of, I guess, 4%-5% or so. But it still suggests that you are not looking to grow deposit balances in the ongoing business at all. Is it So living growth. The reason we have put this into the accounts this year, we have seen quite an uplift in the complaints coming through into FOS around packaged accounts. So we have taken that into account and been quite open about that. We have taken some quite strong mitigating moves in there as well that we hope will stem off some of these complaints. But that is the trend we are seeing, therefore, we should reflect that through into the accounts. Okay, we have got a question from the web, from Robin Down of HSBC. What do you think the impact of the fundamental review of the trading book will be on the go-forward CIB RWAs, Ian? Yeah, certainly when we were doing our work around CIB, there were a few future events that we were bearing in mind. One was ICB. One was the fact that we do expect RWA inflation in terms of some of the reviews going on, both in terms of the review of the trading book, things like operational risk, et cetera. We are not going to sit here today and forecast what the impact may be, but we certainly have views, and they were factored into our thinking in coming up with today's announcement. Okay. Any other questions? We have teed up a lot of work for you to do on your models, so I am sure you want to get back soon. Yes. Good morning, Martin Leitgeb from Goldman. Just two questions, and first one, to come back to your grow ambition and your comments made earlier. Now that you got more capital being released in investment bank going forward, does that change your grow ambition in the domestic market, in particular in retail? Or is that basically your ambition is to grow the mortgage book and to gain market share, so it is relatively unchanged to your targets from last year? And maybe in that regard, how should we think in terms of net interest margin in the domestic retail market going forward? I was wondering if you could provide some guidance, maybe for 2015. And the second question is mainly a clarification with regards to the exit cost and restructuring cost for the additional IB cuts. If you could provide maybe a split into restructuring cost and asset disposal cost, or is this roughly half-half the way to think about. Thank you. I thought I heard about eight questions rather than two. But anyway. Just on the personal and business banking, we have raised our expectation and aspirations, particularly around the mortgage business, as the team in there have rebuilt our mortgage capacity at the front of our business. We now have over 500, I think it is 525 mortgage advisors. We have 200 mortgage advisors on the phone now. Those numbers are considerably higher than what they were just 12 months ago, now that they are fully trained. We have seen good growth this year, and we do expect with the capability we have put out there and the work that we are doing on our systems and processes, that we should actually continue to grow that book. That is the aspiration. There, I think in the commercial side. Sorry, on the NIM there. There is pressure on NIM in the mortgage book because a lot of people are rolling out of standard variable, and they are going into fixed, and the margin is a lot slimmer there. I do not think we are leading the charge on pulling rates down there, but we do want to be competitive in that marketplace as long as the rates still leave us making money. I think good growth, and we should expect to see that going forward for the next couple of years. On the commercial side, Alison and her team are doing a lot of work on working with our relationship managers to bring their skill levels up and their expertise. We are starting to see some good work in that mid-market with our customers there that we are, I think, a lot more focused and back on the front foot more than we have been in probably many, many years. Again, not seeing the book decline. I think the margin should not be as contracted as much as it will in the mortgage book, but there will be some pressure because it is a reasonably competitive marketplace. Expect some NIM contraction in those businesses, but I do not think it will be extreme. Yeah. There will also be some pressure on the liability side, too, I think, because I think we feel we have done a lot on liability spreads in 2014, and we do not really see that continuing into 2015. We are going to continue to see the impact of five-year rolling hedges roll off. We do see some pressure on the liability side, too, and that is why when we talk on slide 27 about some headwinds, it is those sorts of headwinds. But I would have to say that this interest rate environment is a fantastic interest rate environment to sell portfolios of loans and to sell fixed income securities. So even if our core bank is not benefiting from this interest rate environment, our sort of legacy bank is certainly benefiting. On exit costs, look, I mean, we would rather not do the split. I am not sure it makes any difference to the modeling, frankly, because we will have to spend, we think, GBP 2.5 billion-GBP 3.5 billion to exit. Good. One or two more questions. Okay. Peter Toeman from HSBC. Is interchange, loss of interchange revenues on cards, is that going to be significant? And the cost of the U.K. ring fence, is that encapsulated within the restructuring charge numbers you have given us? And if so, could you perhaps give us some sort of intimation of where the costs will lie and the extent to which some are maybe fixed sunk costs and others ongoing costs? First off, on interchange, yes, they are reasonably significant for a business, or Leigh's business. I think this year, Leigh is GBP 70 million reduction in income out of the interchange, and that will flow through the following year with, I think, an additional probably about 40. So the overall effect will be about GBP 110 million of loss of income. That does need to be made up in other parts. But that is coming through over this year and the following year. The other question? Yeah, look, on ICB costs, I think we told the market in Q3 that we thought it was going to cost us GBP 750 million to GBP 1 billion. That we thought that cost was included in the previous GBP 5 billion of restructuring charge estimate we had out to 2017. I think, as we sit today, we would be at the lower end of that range. It is not an insignificant cost, but it is certainly manageable. So the incremental GBP 2.5 billion to GBP 3.5 billion we have talked today is genuinely incremental. The other thing, I think, for this business, because of the experience we have had over the last seven years, we are actually quite good. There is a core competency of moving parts of the business around which ICB will need. And moving portfolios, changing company structures around. And we have had a lot of experience at it, so I think we have got a core competency there. Good. Any more? One up here. We'll just take one more. Okay. Right at the back. Right at the back? Oh, you need the mic. Need the mic. Right. Hi, thank you. It's Joe Dickerson from Jefferies. Your liquidity book went up to GBP 151 billion in Q4. That was an increase. I presume that book is going to go up as you restructure the CIB. Could you quantify the drag on income from that book? In other words, what is the negative carry, if any, associated with that book, and why, as you grow loans in the U.K., won't that benefit the margin as you redeploy part of that excess liquidity? And then also, on the same Thanks. Yeah, look, the liquidity book is really two liquidity books. There's a certain amount of that money is parked with the Bank of England. As you saw last quarter, net interest margins for PBB and CPB didn't move much, but there was a significant shift in- This slide 28 has been an absolute hit. We probably Ewen, would have had this whole question and answer session wrapped up about 45 minutes ago without it. So well done. Well done. And it's also meant that the CEO can take a nice quiet part in this session. So we'll reproduce that slide again going forward, and we'll leave Ewen up here. Look, thanks very much for joining us. Last year, we set out a strategy for a much stronger, simpler and fairer bank, and a bank that was very focused on customers and centered in the U.K. And I think what you're seeing from these results is the progress that we've made. Our underlying profit is up, our capital is up, and our costs are down, and we've taken some pretty big steps on trying to rebuild the trust that we have lost with our customers over many years on a number of things that we're doing with customers now. And we're actually really pleased with what's happening there. There are challenges on the horizon. We've talked about some of those today. 2015 will be a big one for us in the sense of restructuring of CIB. We've got our opposition. Today, you see a bank on track, and we've delivered against plan, and we're two months into this year. And we need to now focus very firmly on 2015. I'd also like to take the opportunity. This will be, I think, Philip, the last pleasure you'll have on an annual basis of doing one of these. We might catch you on a quarterly in the annual results, but it's great having Philip with us, and he's been an absolute support to me going forward for the last year in the job. I'd just like to thank him as well for being a great Chairman. Thank you very much, Ross. Thank you all for joining. As you see, I think, the bank is in much better shape than it was a few years ago. More importantly, it's in much better shape than it was one year ago, and that's absolutely down to Ross. I think an increasingly more effective team. So well done. Thank you. Thank you.