Interim Results - Part 1

8th Aug 2008 07:00



Interim Results 2008

Interim Results 

for the half year ended

30 June 2008

THE ROYAL BANK OF SCOTLAND GROUP plc

CONTENTS			Page
Forward-looking statements			3
Presentation of information			4
2008 First half highlights			5
Results summary - pro forma			6
Results summary - statutory			7
INTERIM MANAGEMENT REPORT
Group Chief Executive's review			8
PRO FORMA RESULTS
Summary consolidated income statement			12
Financial review			13
Description of business			15
Divisional performance			18
	Global Markets		19
	-	Global Banking & Markets	20
	-	Global Transaction Services	23
	Regional Markets		25
	-	UK Retail & Commercial Banking	26
	-	US Retail & Commercial Banking	32
	-	Europe & Middle East Retail & Commercial Banking	34
	-	Asia Retail & Commercial Banking	36
	RBS Insurance		38
	Group Manufacturing		40
	Central items		41
Credit market exposures			42
Average balance sheet			44
Condensed consolidated balance sheet			46
Overview of condensed consolidated balance sheet			47
Notes			49
Analysis of income, expenses and impairment losses			52
Asset quality			53
	Analysis of loans and advances to customers		53
	Risk elements in lending		55
	Debt securities		56
Regulatory ratios			58
Derivatives			60
Market risk			61
Independent review report by the auditors			62
STATUTORY RESULTS			63
Condensed consolidated income statement			64
Financial review			65
Condensed consolidated balance sheet			66
Overview of condensed consolidated balance sheet			67
Condensed consolidated statement of recognised income and expense			69
Condensed consolidated cash flow statement			70
Notes			71

  THE ROYAL BANK OF SCOTLAND GROUP plc

CONTENTS (continued)		Page
Average balance sheet		81
Analysis of income, expenses and impairment losses		82
Asset quality		83
	Analysis of loans and advances to customers	83
	Risk elements in lending	85
Regulatory ratios		86
Derivatives		88
Market risk		89
Fair value - financial instruments		90
Independent review report by the auditors		91
Principal risks and uncertainties		92
Statement of directors' responsibilities		93
ADDITIONAL INFORMATION
Other information		94
Financial calendar		95
Contacts		95
APPENDIX 1  Reconciliations of pro forma to statutory income statements and balance sheets
APPENDIX 2  Credit market and related exposures - additional information

  THE ROYAL BANK OF SCOTLAND GROUP plc

FORWARD-LOOKING STATEMENTS

Certain sections in this document contain 'forward-looking statements' as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words 'expect', 'estimate', 'project', 'anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk ("VaR")', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on such expressions and sections such as 'Group Chief Executive's review' and 'Financial review'.

In particular, this document includes forward-looking statements relating, but not limited, to the Group's potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: the extent and nature of future developments in the credit markets, including the sub-prime market, and their impact on the financial industry in general and the Group in particular; the effect on the Group's capital of write downs in respect of credit market exposures; the Group's ability to achieve revenue benefits and cost savings from the integration of certain of ABN AMRO's businesses and assets; general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing.

The forward-looking statements contained in this document speak only as of the date of this report, and the Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

  THE ROYAL BANK OF SCOTLAND GROUP plc

PRESENTATION OF INFORMATION

Acquisition of ABN AMRO

On 17 October 2007, RFS Holdings B.V. ("RFS Holdings''), a company jointly owned by RBS, Fortis N.V., Fortis SA/NV ("Fortis") and Banco Santander S.A. ("Santander") (together, the "Consortium Banks'') and controlled by RBS, completed the acquisition of ABN AMRO Holding N.V. ("ABN AMRO'').

RFS Holdings is implementing an orderly separation of the business units of ABN AMRO with RBS retaining the following ABN AMRO business units:

• Continuing businesses of Business Unit North America;

• Business Unit Global Clients and wholesale clients in the Netherlands 

(including former Dutch wholesale clients) and Latin America (excluding Brazil);

• Business Unit Asia (excluding Saudi Hollandi); and

• Business Unit Europe (excluding Antonveneta).

Certain other assets will continue to be shared by the Consortium Banks.

Pro forma results 

Pro forma results have been prepared that include only those business units of ABN AMRO that will be retained by RBS and assuming that the acquisition of ABN AMRO was completed on 1 January 2007. The per share data have been calculated on the assumption that the rights issue occurred on 1 January 2007. The financial review and divisional performance in this Company Announcement focus on the pro forma results. The basis of preparation of the pro forma results are detailed on page 49.

Given the significant write-downs on the Group's credit market exposures, and in order to provide a basis for comparison of underlying performance, these write-downs and one-off items are shown separately in the pro forma income statement.

Statutory results

RFS Holdings is jointly owned by the Consortium Banks. It is controlled by RBS and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the RBS Group for the year ended 31 December 2007 and the half year ended 30 June 2008 include the results of ABN AMRO for 76 days and the full six months respectively. The interests of Fortis and Santander in RFS Holdings are included in minority interests.

Restatements 

Divisional results for 2007 have been restated to reflect the new organisational structure announced in February 2008. These changes do not affect the Group's results.

The statutory income statement and cash flow statement for the year ended 31 December 2007 have been restated to reflect the reclassification of Banco Real as a discontinued operation.

  THE ROYAL BANK OF SCOTLAND GROUP plc 

2008 FIRST HALF HIGHLIGHTS 

Pro forma

Pre-tax loss of £691 million after credit market write-downs of £5.9 billion

Underlying profit* of £5.1 billion, down 3% 

Capital ratios ahead of plan on a proportional consolidated basis:

Core Tier 1 - 5.7% 

Tier 1 - 8.6% 

Total - 13.1% 

GBM balance sheet deleveraged by £157 billion since March**

ABN AMRO integration ahead of plan

Adjusted earnings per ordinary share down 10% to 21.3p

Cost:income ratio unchanged at 48.2%

Adjusted net interest margin improved slightly to 2.02%

Statutory

Loss before tax of £692 million

Basic earnings per ordinary share (6.6p)

Core Tier 1 capital ratio 6.7%

Tier 1 capital ratio 9.1%

Total capital ratio 13.2%

*profit before tax, credit market write-downs and one-off items, amortisation of purchased intangibles, integration costs and share of shared assets.

**reduction in third party assets, excluding derivatives

  THE ROYAL BANK OF SCOTLAND GROUP plc

RESULTS SUMMARY - PRO FORMA

	First half		First half				Full year
	2008		2007		Movement		2007
	£m		£m		£m		£m
Total income (1)	16,835		17,076		(241)		33,564
	_______		_______		_____		______
Operating expenses (2)	8,285		8,403		(118)		16,618
	_______		_______		_____		_______
Impairment losses	1,479		936		543		2,104
	_______		______		_____		_______
Underlying profit (3)	5,144		5,322		(178)		10,314
	_______		_______		_____		_______
Credit market write-downs and one-off items	5,113		7		5,106		1,026
	_______		_______		_____		_______
Purchased intangibles amortisation	182		43		139		124
	_______		_______		_____		_______
Integration costs	316		55		261		108
	_______		_______		_____		_______
(Loss)/profit before tax	(691)		5,115		(5,806)		8,962
	_______		_______		_____		_______
Cost:income ratio (4)	48.2%		48.2%				48.4%
	_______		_______				_______
Basic earnings per ordinary share (5)	(4.7p)		22.8p		(27.5p)		42.4p
	_______		_______		_____		_______
Adjusted earnings per ordinary share (5, 6)	21.3p		23.6p		(2.3p)		46.1p
	_______		_______		_____		_______

For basis of preparation of pro forma results see page 49. Reconciliations from statutory to pro forma data are provided in Appendix 1.

(1)	excluding credit market write-downs and one-off items and share of shared assets.
(2)	excluding one-off items, purchased intangibles amortisation, integration costs and share of shared assets.
(3)	profit before tax, credit market write-downs and one-off items, purchased intangibles amortisation, integration costs and share of shared assets.
(4)	the cost:income ratio is based on total income and operating expenses as defined in (1) and (2) above, and after netting operating lease depreciation against rental income.
(5)	earnings per ordinary share are based on the assumption that the rights issue was completed on 1 January 2007.
(6)	adjusted earnings per ordinary share is based on earnings adjusted for credit market write-downs and one-off items, purchased intangibles amortisation, integration costs and share of shared assets.

Sir Fred Goodwin, Group Chief Executive, said:

"The first half of 2008 has been as difficult an operating environment as we have encountered for some time, presenting both general and specific challenges to RBS. The results we have published today demonstrate progress in a number of important areas, and it is all the more unsatisfactory, therefore, that they record a loss as a result of our credit market write-downs. We are determined to ensure that the inherent strengths of the Group's diverse business model are not obscured in this way again."

  THE ROYAL BANK OF SCOTLAND GROUP plc

RESULTS SUMMARY - STATUTORY

	First half		First half				Full year
	2008		2007		Movement		2007
	£m		£m		£m		£m
Total income	13,729		14,690		(961)		30,366
	_______		_______		_____		_______
Operating expenses (1)	10,571		6,396		4,175		13,942
	_______		_______		_____		_______
Impairment losses	1,661		871		790		1,968
	_______		_______		_____		_______
(Loss)/profit before tax	(692)		5,008		(5,700)		9,832
	_______		_______		_____		_______
Basic earnings per ordinary share	(6.6p)		32.3p		(38.9p)		65.6p
	_______		_______		_____		_______

(1)	including purchased intangibles amortisation and integration costs.

  THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE'S REVIEW

The Group's results for the first half of 2008 have been seriously affected by the impact of unprecedented market conditions on a number of our business lines. It has been a chastening experience and reporting a pre-tax loss of £691 million is something I and my colleagues regret very much. This loss is a consequence of previously signalled write-downs on credit market exposures amounting to £5.9 billion. In response to these new market conditions we moved decisively to strengthen our capital position materially. In so doing we are acutely aware that we drew heavily on our shareholders for financial support and we recognise that we must now deliver a level of performance that meets their expectations for the company and restores value to our shares. We are determined to do so, and this is our focus.

This is the first occasion on which we have presented results in the new Group structure announced in February 2008, and our strategic pursuit of earnings diversification is evident in the underlying numbers. The earnings performance of our businesses has been resilient, and we have made considerable progress on the separation and integration of ABN AMRO. Excluding the write-downs and other one-off items, the Group's income totalled £16,835 million, down 1%, and underlying profit declined by 3% to £5,144 million.

Underlying net interest margin improved slightly to 2.02%, as we have begun to take advantage of the increased risk premia available in most markets. Operating expenses have been reduced by 1% to £8,285 million, leaving our cost:income ratio flat at 48.2%.

We have achieved a good performance in UK Retail & Commercial Banking, reinforcing our leading market positions with, for example, 12% growth in personal savings and 10% in mortgage balances. We have generated good growth in our newer markets in Asia, where deposits are up 34%, and in the Gulf, while results from our newly created Global Transaction Services division have reinforced our confidence that this business will provide us with a very strong platform from which to broaden our services to our clients globally. RBS Insurance has also performed well, with contribution recovering strongly as claims fell from the high flood-affected levels recorded in 2007.

Clearly, market conditions have been difficult for our US Retail and Commercial Banking division, despite which we have achieved positive net interest income growth, reflecting a focus on disciplined management of our deposit base, as well as good growth in US commercial lending, up 13%.

Global Banking & Markets has been affected by credit market conditions both through the write-downs incurred on some of its positions and through subdued volumes of activity, for example in securitisation. In our rates, currencies and local markets business, however, we have achieved excellent growth with income up by 87%, and we have significantly enhanced our commodities platform through our joint venture with Sempra. 

Impairments increased to £1,479 million. While we have as yet seen only a modest deterioration in corporate and commercial credit metrics, we are keeping in close contact with our customers and continue to monitor early indicators of credit stress vigilantly. In a selected number of segments that now offer more attractive risk-adjusted returns, we have taken the opportunity to increase lending volumes.

  THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE'S REVIEW (continued)

Write-downs on our credit market portfolio totalled £5,925 million, in line with the estimates we announced in April, offset by an £812 million reduction in the carrying value of own debt held at fair value. We have been actively reducing our credit market portfolio, disposing of a number of holdings at prices that have often been higher than we had estimated in April. We reduced our leveraged finance portfolio from £14.5 billion at the end of 2007 to £10.8 billion at 30 June, and in July sold another £1.25 billion of leveraged loans. While these leveraged disposals have been at better prices than we had assumed in April, we have increased the credit valuation adjustment on our exposures to monoline insurers as credit spreads have widened. 

The credit market write-downs are the subject of detailed additional disclosure which we are publishing today in line with the guidance issued by the Financial Stability Forum and our regulators. These can be found at Appendix 2. 

ABN AMRO integration

The process of separating the ABN AMRO businesses and transferring them to their ultimate owners is proceeding smoothly. Asset Management and Banca Antonveneta passed successfully to their new owners during the first half while the transfer of Banco Real and certain other businesses to Santander concluded last month. We expect to complete the transfer of Private Clients to Fortis in the first half of 2009 and the remainder of the Netherlands activities will follow in the second half of 2009. Most shared assets have already been dealt with, leaving only some small private equity holdings and the Saudi Hollandi stake. 

As announced in February, we have identified additional cost savings and revenue benefits from the integration of ABN AMRO over and above those we originally anticipated. Our forecast is now for integration benefits totalling €2.3 billion annually (£1.6 billion) in 2010, almost four times the underlying profit before tax achieved in 2007 by the businesses we have acquired.

We are currently ahead of schedule in realising those benefits, with the amounts delivered so far running at almost twice what we anticipated at this early stage of the integration process. In the six months to June we have made cost savings ranging from headcount reductions to economies as mundane as cutting the price paid for printer cartridges. Together, these savings have contributed £135 million pre-tax profit to our first half results. In addition, we achieved £57 million of revenue synergies within our enlarged business in the first half, and now have concrete evidence from a stream of new business that we are achieving real gains from our broader footprint and product range. 

The trading environment for credit markets and equities is currently dislocated, but the strategic rationale for the acquisition remains intact. Our global client franchises and complementary product strengths have materially enhanced Global Banking & Markets, while our Global Transaction Services platform has given us the capability to cross-sell a much greater range of cash management and trade finance services to our UK and global clients. We are also pleased with the international retail and commercial businesses we have acquired, while the implementation of our manufacturing model on a global basis presents us with the opportunity to reduce costs significantly.

THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE'S REVIEW (continued)

Capital

From our review of market conditions, we concluded in April that we needed to materially strengthen our capital base, and that to accomplish this we needed to conduct the rights issue which was completed in June.

Our capital plan set a target for our capital ratios to exceed 5.0% for core Tier 1 and 7.5% for Tier 1 by mid-year, on a proportional consolidated basis. In fact, our Core Tier 1 ratio at 30 June stood at 5.7% and we are on course to achieve our target level, in excess of 6%, by the end of the year. Our Tier 1 ratio at 30 June was 8.6%, already in excess of our target minimum. 

Our disposal plans are on track, and we have already announced agreements that contribute £1 billion to capital, including the already-completed sales of Angel Trains and European Consumer Finance and the recently announced agreement to sell our stake in Tesco Personal Finance to our joint venture partner. 

As we entered 2008 we experienced an increase in customer drawings on existing credit lines, which increased in the first quarter. We have, however, taken decisive action to deleverage our business, particularly in GBM, where we have reduced third party assets, excluding derivatives, by £108 billion since the end of 2007. We have concentrated on improving the risk/return profile of our balance sheet while continuing to support our customers. We will continue to make further reductions in leverage during the second half.

The Board believes, as we stated in April, that it is prudent to issue new shares by way of a capitalisation of reserves, instead of paying an interim dividend. We have decided on a capitalisation issue of 1 new ordinary share for every 40 shares held, which is in line with last year's interim dividend. We have established a share-dealing facility that will enable eligible shareholders to sell up to 250 shares, including new shares from the capitalisation issue, free of charge. 

It remains the Board's intention that the 2008 final dividend will be paid in cash.

Risk

Our overall credit portfolio remains resilient, with a slight reduction in impairments in UK Retail & Commercial Banking but an increase in impairments, from a low base, in both GBM and US Retail & Commercial Banking. We are, however, anticipating that the credit environment will become more challenging, and are positioning ourselves accordingly.

We have increased our impairment charge by £543 million to £1,479 million, which on an annualised basis represents 0.46% of loans and advances. For the Group as a whole, non-performing and potential problem loans at 30 June represented 1.47% of loans and advances, very slightly lower than at the end of 2007. Our provision balance at the end of June totalled £5.0 billion, covering 56% of non-performing loans.

Within the UK, we have already seen some increased strains particularly among small business clients, but this has been offset in the first half by a further reduction in personal unsecured losses, as a result of our conservative approach to this segment in recent years. The US has seen somewhat higher delinquencies in its core mortgage and home equity book, but the deterioration in credit quality has been most marked, as we have reported before, in a specific home equity portfolio sourced from other originators. This activity has been shut down and the book is in run-off. The remainder of the Citizens book is of much stronger credit quality, with an average loan to value ratio of 64% on residential property. Commercial credit quality remains stable.

  THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP CHIEF EXECUTIVE'S REVIEW (continued)

Commercial property accounts for 15% of our loan book, and while there have been concerns over conditions in this sector in some countries, our portfolio remains well diversified, both by geography and by type of development, with only 3% of our UK lending advanced at loan to value ratios above 85%. We have for several years maintained strict limits on lending for speculative developments, and in our UK book only 1% of commitments secured on commercial property is for speculative development.

Our UK mortgage portfolio also remains strong, with an average LTV of 66% on new business and of 49% on our entire book. Impairments remain negligible, representing 0.04% of UK mortgage balances. We have never been prominent in the buy-to-let segment, and this category represents, as we stated in June, only 1% of our UK loan book, with an average LTV of 56%. 

 

Outlook

The difficult conditions in the financial markets look set to be compounded by a deteriorating economic outlook, with consensus forecasts pointing to slowing growth in many countries. In recognition of this our main priority, and indeed our main challenge, is to position our businesses to enable them to remain supportive of our customers whilst operating within a risk appetite appropriate to market conditions. 

Whilst the dislocation of global financial markets which began in 2007 makes this task more complex, it also has the effect of increasing the risk premium available on most business lines. We now have many new products and services to offer to our enlarged customer base, and these provide us with opportunities for income growth, whilst the synergies arising from the integration of the newly acquired businesses promise meaningful efficiency gains.

Sir Fred Goodwin

Group Chief Executive

  THE ROYAL BANK OF SCOTLAND GROUP plc

SUMMARY CONSOLIDATED INCOME STATEMENT 

FOR THE HALF YEAR ENDED 30 JUNE 2008 - PRO FORMA (unaudited)

In the income statement set out below, credit market write-downs and one-off items, amortisation of purchased intangible assets, integration costs and share of shared assets are shown separately. In the statutory condensed consolidated income statement on page 64, these items are included in non-interest income and operating expenses, as appropriate.

	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Net interest income	7,564		5,790		12,382
	_______		_______		_______
Non-interest income (excluding insurance net premium income)	6,410		8,238		15,200
Insurance net premium income	2,861		3,048		5,982
	_______		_______		_______
Non-interest income excluding credit market write-downs and one-off items	9,271		11,286		21,182
Credit market write-downs and one-off items (Note 2)	(5,113)		(38)		(1,268)
	_______		_______		_______
Non-interest income	4,158		11,248		19,914
	_______		_______		_______
Total income	11,722		17,038		32,296
Operating expenses excluding one-off items	8,285		8,403		16,618
One-off items (Note 2)	-		(31)		(242)
	_______		_______		_______
Profit before other operating charges	3,437		8,666		15,920
Insurance net claims	1,927		2,415		4,528
	_______		_______		_______
Operating profit before impairment losses	1,510		6,251		11,392
Impairment losses	1,479		936		2,104
	_______		_______		_______
Group operating profit*	31		5,315		9,288
Amortisation of purchased intangible assets	182		43		124
Integration costs	316		55		108
Share of shared assets	224		102		94
	_______		_______		_______
(Loss)/profit before tax	(691)		5,115		8,962
Tax	(303)		1,274		1,709
	_______		_______		_______
(Loss)/profit for the period	(388)		3,841		7,253
Minority interests	148		88		184
Other owners' dividends	225		106		246
	_______		_______		_______
(Loss)/profit attributable to ordinary shareholders	(761)		3,647		6,823
	_______		_______		_______
Basic earnings per ordinary share (Note 4)	(4.7p)		22.8p		42.4p
	_______		_______		_______
Adjusted earnings per ordinary share (Note 4)	21.3p		23.6p		46.1p
	_______		_______		_______

* Profit before tax, purchased intangibles amortisation, integration costs and RBS share of Consortium shared assets.

   THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW 

PRO FORMA RESULTS

Profit

Group operating profit was £31 million compared with a profit £5,315 million in the first half of 2007. Adjusting for credit market write-downs and one-off items, operating profit was £5,144 million. 

Total income

Total income was £16,835 million, excluding credit market write-downs and one-off items.

Net interest income increased by 31% to £7,564 million and represents 45% of total income before  credit market write-downs and one-off items (2007 - 34%). Average loans and advances to customers and average customer deposits grew by 20% and 9% respectively.

Non-interest income was affected by credit market write-downs. Excluding these and one-off items, non-interest income was £9,271 million and represents 55% of total income before credit market write-downs and one-off items (2007 - 66%).

Net interest margin

The Group's net interest margin at 2.09% was up from 1.96% in the first half of 2007.

Operating expenses

Operating expenses, excluding purchased intangibles amortisation and integration costs, fell by 1% to £8,285 million. 

Cost:income ratio

The Group's cost:income ratio at 48.2% was unchanged. 

Net insurance claims

Bancassurance and general insurance claims, after reinsurance, decreased by 20% to £1,927 million. 

Impairment losses

Impairment losses were £1,479 million, compared with £936 million in 2007.

Risk elements in lending and potential problem loans represented 1.47% of gross loans and advances to customers excluding reverse repos at 30 June 2008 (31 December 2007 - 1.49%). 

Provision coverage of risk elements in lending and potential problem loans was 56% (31 December 2007 - 59%). 

Integration

Integration costs were £316 million compared with £55 million in 2007.

Taxation

The effective tax rate for the first half of 2008 was 43.8% compared with 24.9% in the first half of 2007.

Earnings 

Basic earnings per ordinary share decreased from 22.8p to (4.7p). Adjusted earnings per ordinary share fell by 10%, from 23.6p to 21.3p (see Note 4 on page 50).

  THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW (continued)

Capital  Capital ratios on a proportional consolidated basis at 30 June 2008 were 5.7% (Core Tier 1), 8.6% (Tier 1) and 13.1% (Total). 

Profitability

The adjusted after-tax return on ordinary equity, which is based on profit attributable to ordinary shareholders before credit market write-downs and one-off items, purchased intangibles amortisation, integration costs and share of shared assets, and average ordinary equity assuming the rights issue occurred on 1 January 2007, was 12.2% compared with 14.6% in the first half of 2007.

  THE ROYAL BANK OF SCOTLAND GROUP plc

DESCRIPTION OF BUSINESS

On 28 February 2008, the company announced changes to its organisational structure which are aimed at recognising RBS's presence in over 50 countries and facilitating the integration and operation of its expanded footprint. Following the acquisition of ABN AMRO in October 2007, the Group's new organisational structure incorporates those ABN AMRO businesses to be retained by the Group but excludes the ABN AMRO businesses to be acquired by Fortis and Santander. This new organisational structure is expected to give RBS the appropriate framework for managing the enlarged Group in a way that fully capitalises on the enhanced range of attractive growth opportunities now available to it. 

Global Markets is focused on the provision of debt and equity financing, risk management and transaction banking services to large businesses and financial institutions in the United Kingdom and around the world. Its activities have been organised into two divisions, Global Banking & Markets and Global Transaction Services. 

Global Banking & Markets is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The expanded division is organised along four principal business lines: rates, currencies, and commodities; equities; credit markets; and asset and portfolio management.

Rates, Currencies and Commodities provides risk management, sales and trading activities in G11 and non-G11 (Local Markets) currencies/jurisdictions across this broad set of asset classes. Key product offering includes spot FX, local markets trading, short term markets and financing, inflation products, swaps and bonds (G11) and covered bonds, interest rate and currency options and hybrids and prime brokerage and futures. It also includes RBS Sempra Commodities LLP, the commodities-marketing joint venture between RBS and Sempra Energy which was formed on 1 April 2008. 

Equities provides a full range of origination, trading and distribution of cash and derivative products. The business provides a multi product approach operating through a wide range of channels with an emphasis on revenue diversification. Key product offerings include equity origination, core equities sales and trading, equity derivatives (sales & trading) and equity financing and collateral trading.

Credit Markets offers a full range of origination, trading and distribution activities on a global basis for clients across all sectors. Key product offerings include corporate & structured debt capital markets (DCM), financial institutions DCM, leveraged finance, real estate finance, project finance, financial structuring and credit trading. 

Asset and Portfolio Management manages the lending portfolio and other assets of GBM and some third parties, ensuring efficient management of capital, credit and liquidity via portfolio management and global markets treasury. Key fund product offerings include fund of funds structures, multi-manager strategies, private equity & credit funds, other core products are equity finance and asset finance (covering shipping and aviation).

Global Transaction Services ranks among the top five global transaction services providers, offering global payments, cash and liquidity management, as well as trade finance, United Kingdom and international merchant acquiring and commercial card products and services. It includes the Group's corporate money transmission activities in the United Kingdom and the United States.

  THE ROYAL BANK OF SCOTLAND GROUP plc

DESCRIPTION OF BUSINESS (continued)

Regional Markets is organised around the provision of retail and commercial banking to customers in four regions: the United Kingdom, the United States, Europe and the Middle East and Asia. This includes the provision of wealth management services both in the United Kingdom and internationally.

UK Retail & Commercial Banking comprises retail, corporate and commercial banking and wealth management services in the United Kingdom. RBS UK supplies financial services through both the RBS and NatWest brands, offering a full range of banking products and related financial services to the personal, premium and small business (''SMEs'') markets. It serves customers through the largest network of branches and ATMs in the United Kingdom, as well as by telephone and internet. Together, RBS and NatWest hold the joint number one position in personal current accounts and are the UK market leader in SME banking. The division also issues credit and charge cards and other financial products, including through other brands such as MINT and First Active UK.

The UK wealth management arm provides private banking and investment services to clients through Coutts, Adam & Company, RBS International and NatWest Offshore.

In corporate and commercial banking the division is the largest provider of banking, finance and risk management services in the United Kingdom. Through its network of relationship managers across the country, it distributes the full range of RBS Group products and services to companies.

US Retail & Commercial Banking provides financial services through the Citizens and Charter One brands as well as through Kroger Personal Finance, its credit card joint venture with the second-largest US supermarket group.

Citizens is engaged in retail and corporate banking activities through its branch network in 13 states in the United States and through non-branch offices in other states. Citizens was ranked the tenth-largest commercial banking organisation in the United States based on deposits as at 31 March 2008.

Europe & Middle East Retail & Commercial Banking comprises Ulster Bank and the Group's combined retail and commercial businesses in Europe and the Middle East.

Ulster Bank, including First Active, provides a comprehensive range of financial services across the island of Ireland. Its retail banking arm has a network of branches and operates in the personal, commercial and wealth management sectors, while its corporate markets operations provides services in the corporate and institutional markets.

The retail and commercial businesses in Europe and the Middle East offer services in Romania, Russia, Kazakhstan and the United Arab Emirates.

Asia Retail & Commercial Banking holds prominent market positions in India, Pakistan, China and Taiwan as well as presences in Hong Kong, Indonesia, Malaysia and Singapore. It provides financial services across four segments: affluent banking, cards and consumer finance, business banking and international wealth management, which offers private banking and investment services to clients in selected markets through the RBS Coutts brand.

RBS Insurance sells and underwrites retail and SME insurance over the telephone and internet, as well as through brokers and partnerships. Its brands include Direct Line, Churchill and Privilege, which sell general insurance products direct to the customer, as well as Green Flag and NIG. Through its international division, RBS Insurance sells general insurance, mainly motor, in Spain, Germany and Italy. The Intermediary and Broker division sells general insurance products through independent brokers.

  THE ROYAL BANK OF SCOTLAND GROUP plc

DESCRIPTION OF BUSINESS (continued)

Group Manufacturing comprises the Group's worldwide manufacturing operations. It supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. Manufacturing drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group's purchasing power and has become the centre of excellence for managing large-scale and complex change.

The Centre comprises group and corporate functions, such as capital raising, finance, risk management, legal, communications and human resources. The Centre manages the Group's capital resources and Group-wide regulatory projects and provides services to the operating divisions.

  THE ROYAL BANK OF SCOTLAND GROUP plc

DIVISIONAL PERFORMANCE

The profit of each division before credit market write-downs and one-off items, amortisation of purchased intangible assets, integration costs, share of shared assets and after allocation of manufacturing costs where appropriate ("Group operating profit") are shown below. The Group continues to manage costs where they arise, with customer-facing divisions controlling their direct expenses whilst Manufacturing is responsible for shared costs. The Group does not allocate these shared costs between divisions in the day-to-day management of its businesses, and the way in which divisional results are presented reflects this. However, in order to provide a basis for market comparison, the results below also include an allocation of Manufacturing costs to the customer-facing divisions on a basis management considers to be reasonable.

		PRO FORMA
		First half		First half				Full year
		2008		2007		Increase		2007
		£m		£m		%		£m
Global Markets
-	Global Banking & Markets	2,184		2,634		(17)		4,573
-	Global Transaction Services	665		578		15		1,220
Total Global Markets (excluding credit market write-downs and one-off items)		2,849		3,212		(11)		5,793
Regional Markets
-	UK Retail & Commercial Banking	2,117		1,956		8		4,063
-	US Retail & Commercial Banking	368		630		(42)		1,155
-	Europe & Middle East Retail & Commercial Banking	250		222		13		477
-	Asia Retail & Commercial Banking	16		(8)		-		(9)
Total Regional Markets		2,751		2,800		(2)		5,686
RBS Insurance		403		258		56		691
Group Manufacturing		-		-		-		-
Central items (excluding one-off items)		(859)		(948)		9		(1,856)
		_______		_______		_______		_______
Profit before credit market write-downs and one-off items		5,144		5,322		(3)		10,314
Credit market write-downs and one-off items		(5,113)		(7)		-		(1,026)
		_______		_______		_______		_______
Group operating profit		31		5,315		-		9,288
		_______		_______		_______		_______

Risk-weighted assets of each division were as follows:

		Basel II		Basel II		Basel I
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Global Markets
-	Global Banking & Markets	211.9		213.1		191.4
-	Global Transaction Services	17.1		15.6		12.6
Total Global Markets		229.0		228.7		204.0
Regional Markets
-	UK Retail & Commercial Banking	159.4		153.1		179.0
-	US Retail & Commercial Banking	55.4		53.8		57.1
-	Europe & Middle East Retail & Commercial Banking	29.9		30.3		36.7
-	Asia Retail & Commercial Banking	5.3		4.9		3.3
Total Regional Markets		250.0		242.1		276.1
Other		12.7		15.3		9.9
		_______		_______		_______
		491.7		486.1		490.0
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS

	PRO FORMA
	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Net interest income	1,937		1,491		3,071
Non-interest income before credit market write-downs	4,542		5,479		10,027
Credit market write-downs and one-off items	(5,341)		(38)		(1,776)
	_______		_______		_______
Total income	1,138		6,932		11,322
	_______		_______		_______
Direct expenses
- staff costs	1,979		2,400		4,213
- other	779		696		1,394
- operating lease depreciation	125		192		365
	_______		_______		_______
	2,883		3,288		5,972
	_______		______		_______
Contribution before impairment losses	(1,745)		3,644		5,350
Impairment losses	305		17		137
	_______		_______		_______
Contribution	(2,050)		3,627		5,213
Allocation of manufacturing costs	442		422		858
	_______		_______		_______
Operating (loss)/profit	(2,492)		3,205		4,355
	_______		_______		_______
Operating profit before credit market write-downs and one-off items	2,849		3,212		5,793
	_______		_______		_______
	£bn		£bn		£bn
Total third party assets*	781.3		833.1		887.6
Loans and advances**	299.4		229.5		273.1
Customer deposits***	155.4		136.9		163.7
	30 June		1 January		31 December
	2008		2008		2007
	£bn		£bn		£bn
Risk-weighted assets	229.0		228.7		****204.0
	_______		_______		_______

*excluding derivatives mark to market

**excluding reverse repos

***excluding repos 

****on Basel I basis 

   THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS

GLOBAL BANKING & MARKETS

		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income from banking activities		1,497		1,098		2,229
		_______		_______		_______
Net fees and commissions receivable		812		1,178		2,372
Income from trading activities		2,322		2,744		4,407
Other operating income (net of related funding costs)		675		905		1,908
		_______		_______		_______
Non-interest income before credit market write-downs		3,809		4,827		8,687
Credit market write-downs and one-off items		(5,341)		(38)		(1,776)
		_______		_______		_______
Non-interest income		(1,532)		4,789		6,911
		_______		_______		_______
Total income		(35)		5,887		9,140
		_______		_______		_______
Direct expenses
-	staff costs	1,793		2,230		3,856
-	Other	689		618		1,230
-	operating lease depreciation	125		192		365
		_______		_______		_______
		2,607		3,040		5,451
		_______		_______		_______
Contribution before impairment losses		(2,642)		2,847		3,689
Impairment losses		294		9		125
		_______		_______		_______
Contribution		(2,936)		2,838		3,564
Allocation of manufacturing costs		221		211		429
		_______		_______		_______
Operating (loss)/profit		(3,157)		2,627		3,135
		_______		_______		_______
Operating profit before credit market write-downs and one-off items		2,184		2,634		4,573
		_______		_______		_______
Analysis of income by product:
Rates, currencies and commodities		2,935		1,570		3,707
Equities		524		742		1,168
Credit markets		355		1,754		2,720
Asset and portfolio management		1,492		1,859		3,321
		_______		_______		_______
Total income before credit market write-downs and one-off items		5,306		5,925		10,916
Credit market write-downs and one-off items		(5,341)		(38)		(1,776)
		_______		_______		_______
Total income		(35)		5,887		9,140
		_______		_______		_______
		£bn		£bn		£bn
Loans and advances		282.3		214.6		257.3
Reverse repos		188.6		291.2		308.9
Securities		189.7		227.2		239.5
Cash and eligible bills		49.8		15.1		26.9
Other assets		52.4		69.1		38.0
		_______		_______		_______
Total third party assets*		762.8		817.2		870.6
Net derivative assets (after netting)		73.8		51.1		64.1
Customer deposits**		96.5		83.3		106.7

	30 June		1 January		31 December
	2008		2008		2007
	£bn		£bn		£bn
Risk-weighted assets	211.9		213.1		***191.4
	_______		_______		_______

*excluding derivatives mark to market; **excluding repos; ***on Basel I basis 

  THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS

GLOBAL BANKING & MARKETS (continued)

Global Banking & Markets has undertaken an active balance sheet management programme in the first half of 2008, managing down its US mortgage and leveraged finance exposures while at the same time reducing risk and leverage by cutting back total third party assets (excluding derivatives) by £108 billion since the year end. We have achieved excellent trading performances in rates and currencies, and have materially upgraded our commodities capabilities, but credit markets and equities have experienced slower market conditions. Integration benefits are being delivered ahead of plan, with both revenue synergies and cost savings exceeding our initial targets.

Net mark-to-market adjustments of £5,341 million have been taken on credit market exposures during the period, comprising write-downs totalling £5,925 million, in line with the estimates indicated in April, partially offset by a benefit of £584 million from the reduction in the carrying value of own debt carried at fair value. This has resulted in an operating loss for the division of £3,157 million. The write-downs are set out in further detail on page 42 and in Appendix 2. 

Excluding the write-downs on credit market exposures and one-off items, total income declined by 10% to £5,306 million with contribution down 15% to £2,405 million. After allocating a portion of Group Manufacturing costs, operating profit was 17% lower at £2,184 million. 

GBM has produced a very strong performance in rates, currencies and commodities, where its leading positions in interest rate and currency risk management products have enabled it to benefit from market volatility, with total income up 87% to £2,935 million. The establishment of our joint venture with Sempra Commodities has significantly enhanced the Group's commodities activities. 

Equities have seen good growth in capital markets and corporate broking fee income but weaker stock markets have held back results from equity trading and derivatives, leaving income down 29% to £524 million.

Credit markets income excluding the write-downs, has fallen sharply to £355 million, reflecting difficult trading conditions, the reduction in risk positions and the decline in securitisation and leveraged finance volumes across the industry, but we have continued to originate and distribute deals in both these areas. We have also strengthened and rebalanced our business in the US and Europe, growing our corporate client franchise with, for example, significant progress in investment grade corporate bonds and loans in both regions.

 

In asset and portfolio management income totalled £1,492 million, with overall gains lower than in the first half of 2007.

For GBM as a whole net interest income totalled £1,497 million, 36% higher than in the same period of 2007, with strong growth in money markets, increased draw-downs on corporate borrowing facilities and renewals of corporate lending at wider margins.

Non-interest income before credit market write-downs was 21% lower at £3,809 million. 

Fees and commissions declined by 31% to £812 million, largely reflecting the reduced origination volumes in the debt capital markets, notably in US securitisations. 

Income from trading activities fell by 15% to £2,322 million, with weaker income from credit market trading partially offset by good growth in money markets, currencies and commodities.

Other operating income fell to £675 million, with lower gains in the first half of the year.

Direct expenses were reduced by 14% to £2,607 million, with staff costs falling by 20% as a result of lower variable performance-related pay and a reduction in headcount, which has fallen by 11% since the end of 2007, excluding the addition of Sempra.

  THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS

GLOBAL BANKING & MARKETS (continued)

Impairment losses on customer loans and advances increased from a historically low base to £192 million, representing on an annualised basis 0.15 per cent of customer loans and advances. In addition, impairment losses of £102 million were recognised in respect of available-for-sale securities.

Loans and advances increased by 10% since the end of 2007 to £282.3 billion, as GBM continued to extend credit selectively to clients. Customers had increased drawings on existing credit lines in the early part of the year, but by active management of leverage and risk we have reduced total third party assets, excluding derivatives, by 12% since the end of 2007. Reverse repurchase positions have been cut back by 39% to £188.6 billion, while the securities portfolio has also been reduced significantly over the same period, dropping by 21% to £189.7 billion. Holdings of highly liquid cash and bills have increased by £23 billion to £49.8 billion. 

Risk-weighted assets decreased by 1% to £211.9 billion. The integration of Sempra Commodities added £20 billion of RWAs; this has been more than offset by disciplined capital management and increased distribution activity. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS 

GLOBAL TRANSACTION SERVICES

	PRO FORMA
	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Net interest income	440		393		842
Non-interest income	733		652		1,340
	_______		_______		_______
Total income	1,173		1,045		2,182
	_______		_______		_______
Direct expenses
- staff costs	186		170		357
- other	90		78		164
	_______		_______		_______
	276		248		521
	_______		_______		_______
Contribution before impairment losses	897		797		1,661
Impairment losses	11		8		12
	_______		_______		_______
Contribution	886		789		1,649
Allocation of manufacturing costs	221		211		429
	_______		_______		_______
Operating profit	665		578		1,220
	_______		_______		_______
Analysis of income by product:
Cash management	733		665		1,374
Merchant services and cards	328		310		653
Trade finance	112		70		155
	_______		_______		_______
Total income	1,173		1,045		2,182
	_______		_______		_______
	£bn		£bn		£bn
Total third party assets	18.5		15.9		17.0
Loans and advances	17.1		14.9		15.9
Customer deposits	58.9		53.6		57.0
	30 June		1 January		31 December
	2008		2008		2007
	£bn		£bn		£bn
Risk-weighted assets	17.1		15.6		*12.6
	_______		_______		_______

*on Basel I basis 

Global Transaction Services grew income by 12% to £1,173 million and contribution by the same percentage to £886 million in the first half of 2008, demonstrating the strength and enhanced international capability of its cash management and trade finance platform. After allocating a share of Group Manufacturing costs, operating profit grew by 15% to £665 million.

Growth was driven by a strong performance in cash management, where income rose by 10% to £733 million. Average customer deposits were 13% higher, more than offsetting the impact of lower interest rates on income from non-interest bearing balances, and fees for payment services have increased strongly, particularly in the US and internationally. The division has achieved considerable success in winning new international cash management mandates from existing clients on the strength of its enhanced international payments platform. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

GLOBAL MARKETS 

GLOBAL TRANSACTION SERVICES (continued)

Merchant services and commercial cards delivered a 6% increase in income to £328 million, with particularly good growth in Streamline International. Merchant acquiring volumes have increased, with transactions up 23% and stronger growth in debit than credit card transactions. 

Trade finance made good progress, with income up 60% to £112 million. GTS has substantially improved its penetration into the Asia-Pacific market, increasing trade income in the region by 54%, and has expanded its supply chain finance activities with an enhanced product suite. Margins have been expanded to reflect increased pricing for country risk.

Direct expenses rose by 11% to £276 million from the first half of 2007, primarily reflecting investment in the second half of 2007 to expand the business.

Impairment losses were £11 million compared with £8 million in the first half of 2007.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS

	PRO FORMA
	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Net interest income	5,233		4,865		9,954
Non-interest income*	2,805		2,668		5,534
	_______		_______		_______
Total income	8,038		7,533		15,488
	_______		_______		_______
Direct expenses
- staff costs	1,634		1,492		3,089
- other	896		849		1,749
	_______		_______		_______
	2,530		2,341		4,838
	_______		_______		_______
Contribution before impairment losses	5,508		5,192		10,650
Impairment losses	1,211		917		1,964
	_______		_______		_______
Contribution	4,297		4,275		8,686
Allocation of manufacturing costs	1,546		1,475		3,000
	_______		_______		_______
Operating profit	2,751		2,800		5,686
	_______		_______		_______
	£bn		£bn		£bn
Total banking assets	380.6		344.8		363.4
Loans and advances to customers - gross	346.9		309.2		327.7
Customer deposits**	280.6		258.9		275.2
Investment management assets - excluding deposits	45.3		41.3		45.7
	30 June		1 January		31 December
	2008		2008		2007
	£bn		£bn		£bn
Risk-weighted assets	250.0		242.1		***276.1
	_______		_______		_______

* net of insurance claims

** excluding bancassurance

*** on Basel I basis 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING 

		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		3,485		3,275		6,667
		_______		_______		_______
Fees and commissions - banking		1,491		1,440		3,027
Other non-interest income*		476		464		890
		_______		_______		_______
Non-interest income		1,967		1,904		3,917
		_______		_______		_______
Total income		5,452		5,179		10,584
		_______		_______		_______
Direct expenses
- staff costs		973		937		1,928
- other		564		526		1,081
		_______		_______		_______
		1,537		1,463		3,009
		_______		_______		_______
Contribution before impairment losses		3,915		3,716		7,575
Impairment losses		694		706		1,368
		_______		_______		_______
Contribution		3,221		3,010		6,207
Allocation of manufacturing costs		1,104		1,054		2,144
		_______		_______		_______
Operating profit		2,117		1,956		4,063
		_______		_______		_______
		£bn		£bn		£bn
Total banking assets		234.5		209.5		220.7
Loans and advances to customers - gross
-	UK Retail Banking	117.6		108.2		111.1
-	UK Corporate & Commercial Banking	107.0		91.7		98.9
-	UK Wealth	9.0		7.9		8.4
Customer deposits**		191.8		179.1		189.3
AUMs - excluding deposits		25.4		24.1		25.8
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		159.4		153.1		***179.0
		_______		_______		_______

* net of insurance claims; ** excluding bancassurance; *** on Basel I basis 

UK Retail & Commercial Banking produced a good performance in the first half of the year across its businesses. Total income net of insurance claims grew by 5% to £5,452 million and contribution increased by 7% to £3,221 million. After allocating a portion of Group Manufacturing costs, operating profit increased by 8% to £2,117 million.

Retail Banking performed well, with steady income generation and controlled cost growth. We have increased market share in selected segments at attractive margins and with acceptable risk criteria. Commercial Banking delivered controlled growth in customer volumes at expanding risk premia. UK Wealth maintained its strong growth record, demonstrating its ability to continue to make progress in more difficult equity market conditions. 

As anticipated, there has been some increase from historically low impairment losses in the corporate and commercial segment, particularly among smaller businesses. Personal sector credit costs have so far continued to decline, reflecting the cautious approach taken in recent years to the personal unsecured market. We continue to monitor forward-looking credit indicators closely and have tightened scorecards and lending limits where appropriate.

Risk-weighted assets increased to £159.4 billion, up 4% since the start of the year, reflecting growth in lending.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING 

UK Retail Banking		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		2,129		2,059		4,173
		_______		_______		_______
Fees and commissions - banking		1,144		1,118		2,351
Other non-interest income *		133		130		271
		_______		_______		_______
Non-interest income		1,277		1,248		2,622
		_______		_______		_______
Total income		3,406		3,307		6,795
		_______		_______		_______
Direct expenses
-	staff costs	595		604		1,225
-	other	285		259		542
		_______		_______		_______
		880		863		1,767
		_______		_______		_______
Contribution before impairment losses		2,526		2,444		5,028
Impairment losses		556		606		1,184
		_______		_______		_______
Contribution		1,970		1,838		3,844
Allocation of manufacturing costs		883		843		1,715
		_______		_______		_______
Operating profit		1,087		995		2,129
		_______		_______		_______
		£bn		£bn		£bn
Loans and advances to customers - gross
-	mortgages	72.4		66.2		67.3
-	personal	17.7		16.5		17.3
-	cards	7.8		7.3		7.8
-	business	19.7		18.2		18.7
Customer deposits**		96.3		90.9		96.1
AUMs - excluding deposits		6.6		7.0		7.0
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		67.2		65.7		***100.3
		_______		_______		_______

* net of insurance claims

** excluding bancassurance 

*** on Basel I basis 

Retail Banking performed well in the first half of 2008, with income net of claims up 3% to £3,406 million and contribution up 7% to £1,970 million. After allocating a portion of Group Manufacturing costs, operating profit rose by 9% to £1,087 million.

RBS and NatWest continue to lead the other major high street banks in Great Britain for customer satisfaction, demonstrating our strong commitment to service. In the last 12 months we have attracted more than one million new money transmission account customers, helping to retain our joint number one position in the current account market.

Business Banking has continued to grow, cementing the Group's market leadership with a market share of 25%, and 22% in the start-up market.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING (continued)

UK Retail Banking (continued)

Average deposits have increased by 9%, driven by strong performance in personal savings, up 13%, and business deposits, up 9%. Pricing has been managed with a view to enhancing margins despite competitive pressure.

Average loans and advances to customers increased by 5%, with good growth in mortgage and business lending but more limited increases in personal unsecured lending, where average balances were ahead 1%. We continue to concentrate on lending through core banking relationships. Following several years in which we have had a limited appetite for the returns available within the UK mortgage market, we have taken the opportunity during the first half to write good quality mortgages, improving market share at attractive margins. Net mortgage lending market share increased to 17% from less than 2% in 2007, against a share of stock of 6%.

Net interest income increased by 3% to £2,129 million as a result of strong balance sheet growth, partly offset by a reduction in net interest margin, which reflects in part the increasing weight of lower margin secured lending products in the asset mix. While new business asset margins have improved, these will take time to feed through to back book pricing. 

Non-interest income net of claims increased by 2% to £1,277 million, with growth in banking fees offset by a modest reduction in fees on current account and other services. 

Total expenses remain under tight control with a reduction in staff costs as we focus on increased efficiency with further investment in customer-facing staff. Other costs have increased by 10% as a result of investments in selected business lines.

Impairment losses decreased by 8% to £556 million, with a further decline in personal impairments partly offset by an increase in small business delinquencies. Improvements in arrears have been observed across our consumer portfolios as a result of our previous cautious approach. We have taken specific actions in relation to new mortgage business to manage risk, reducing the availability of mortgages at higher loan to value ("LTV") ratios. LTVs on new mortgages written in the first half of the year averaged 66%, with the average LTV on the entire mortgage book at 49% and only 6% of mortgages at LTVs greater than 90%. Impairment losses from mortgages remain very low whilst arrears are broadly in line with the same period in 2007, and are below industry levels. Business banking has experienced an increase in impairment losses from historically low levels as the economy slows.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING 

UK Corporate & Commercial Banking		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		1,079		973		1,988
		_______		_______		_______
Fees and commissions		218		205		424
Other non-interest income		324		315		593
		_______		_______		_______
Non-interest income		542		520		1,017
		_______		_______		_______
Total income		1,621		1,493		3,005
		_______		_______		_______
Direct expenses
-	staff costs	260		228		479
-	other	242		232		473
		_______		_______		_______
		502		460		952
		_______		_______		_______
Contribution before impairment losses		1,119		1,033		2,053
Impairment losses		133		99		180
		_______		_______		_______
Contribution		986		934		1,873
Allocation of manufacturing costs		166		158		322
		_______		_______		_______
Operating profit		820		776		1,551
		_______		_______		_______
		£bn		£bn		£bn
Loans and advances to customers - gross		107.0		91.7		98.9
Customer deposits		67.4		63.4		66.1
		_______		_______		_______
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		84.5		80.5		*72.5
		_______		_______		_______

* on Basel I basis 

The first half of 2008 has seen a solid performance from UK Corporate & Commercial Banking, with total income up 9% to £1,621 million and contribution up 6% to £986 million. After allocating a portion of Group Manufacturing costs, operating profit rose by 6% to £820 million.

Net interest income from banking activities increased by 11% to £1,079 million, with good growth in customer volumes. Average loans and advances rose by 18% driven partly by higher draw-downs of existing facilities, with improved margins on new lending over the previous year. Average customer deposits increased by 8%, despite acute competition in some segments. Net interest margin narrowed, partly driven by increased funding costs. As risk premia have expanded, new business asset margins have improved. However, these will take time to feed through to the portfolio.

Non-interest income increased by 4% to £542 million, reflecting strong growth in sales of interest rate and currency risk management products as well as good growth in lending fees. 

Total expenses rose 8% to £668 million, with a 9% increase in headcount reflecting the completion of last year's 'Another Way of Banking' investment in front-line staff to improve service quality.

 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING 

UK Corporate & Commercial Banking (continued)

Impairment losses totalled £133 million, an increase of 34% on the previous year, largely in the smaller end of the corporate sector. Credit metrics have deteriorated in this segment as the economy has slowed, though there has been little change in the larger corporate sector.  The performance of our commercial property portfolio remains satisfactory, with average LTV ratios on the UK portfolio at 68% and less than 3% of the portfolio with LTVs greater than 85%. In view of economic conditions, a rise from historically low impairment levels is anticipated. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

UK RETAIL & COMMERCIAL BANKING 

UK Wealth		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		277		243		506
		_______		_______		_______
Fees and commissions		129		117		252
Other non-interest income		19		19		26
		_______		_______		_______
Non-interest income		148		136		278
		_______		_______		_______
Total income		425		379		784
		_______		_______		_______
Direct expenses
-	staff costs	118		105		224
-	other	37		35		66
		_______		_______		_______
		155		140		290
		_______		_______		_______
Contribution before impairment losses		270		239		494
Impairment losses		5		1		4
		_______		_______		_______
Contribution		265		238		490
Allocation of manufacturing costs		55		53		107
		_______		_______		_______
Operating profit		210		185		383
		_______		_______		_______
		£bn		£bn		£bn
Loans and advances to customers - gross
-	mortgages	4.9		3.9		4.2
-	personal	3.1		2.8		3.0
-	other	1.0		1.2		1.2
Customer deposits		28.1		24.8		27.1
AUMs - excluding deposits		18.8		17.1		18.8
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		7.7		6.9		*6.2
		_______		_______		_______

* on Basel I basis 

UK Wealth Management delivered strong growth, with total income rising by 12% to £425 million and contribution by 11% to £265 million. After allocating a share of Group Manufacturing costs, operating profit grew by 14% to £210 million.

Wealth Management generates earnings from both private banking and investment services, and this balanced income base enabled the division to maintain strong organic growth. Coutts & Co performed particularly well, with contribution up by 20%. Overall customer numbers increased by 3%. Average loans and advances to customers rose by 11% and average customer deposits by 18%, underpinning a 14% rise in net interest income to £277 million.

Non-interest income grew by 9% to £148 million, reflecting higher fee income and new product sales, particularly in Coutts. Assets under management rose to £18.8 billion at 30 June 2008, up 10% from a year earlier.

Direct expenses rose by 11% to £155 million, reflecting continued investment in the UK. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS

US RETAIL & COMMERCIAL BANKING

	PRO FORMA							PRO FORMA
	First half			First half			Full year	First half		First half		Full year
	2008			2007			2007	2008		2007		2007
	£m			£m			£m	$m		$m		$m
Net interest income	969			960			1,936	1,915		1,891		3,874
Non-interest income	421			401			850	831		790		1,700
	_______			_______			_______	_______		_______		_______
Total income	1,390			1,361			2,786	2,746		2,681		5,574
	_______			_______			_______	_______		_______		_______
Direct expenses
- staff costs	328			309			601	648		609		1,203
- other	168			181			368	332		357		736
	_______			_______			_______	_______		_______		_______
	496			490			969	980		966		1,939
	_______			_______			_______	_______		_______		_______
Contribution before impairment losses	894			871			1,817	1,766		1,715		3,635
Impairment losses - core	196			48			177	388		94		353
Impairment losses - SBO	164			35			164	324		69		329
	_______			_______			_______	_______		_______		_______
Contribution	534			788			1,476	1,054		1,552		2,953
Allocation of manufacturing costs	166			158			321	328		311		642
	_______			_______			_______	_______		_______		_______
Operating profit	368			630			1,155	726		1,241		2,311
	_______			_______			_______	_______		_______		_______
Average exchange rate - US$/£	1.975			1.970			2.001
	_______			_______			_______
Analysis of contribution:
Retail	322				582		1,052	636		1,147		2,108
Commercial	212				206		424	418		405		845
	_______				_______		_______	_______		_______		_______
	534				788		1,476	1,054		1,552		2,953
	_______				_______		_______	_______		_______		_______
								$bn		$bn		$bn
Total assets								160.7		160.1		160.9
Loans and advances to customers - gross
- mortgages								17.9		18.5		19.1
- home equity								35.0		36.2		35.9
- other consumer								21.6		22.7		21.7
- corporate and commercial								39.2		34.6		37.6
Customer deposits								104.8		99.9		105.8
Spot exchange rate - US$/£								1.989		2.006		2.004
								_______		_______		_______
								30 June		1 January		31 December
								2008		2008		2007
								$bn		$bn		$bn
Risk-weighted assets								110.2		107.9		*114.4
								_______		_______		_______

* on Basel I basis 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS

US RETAIL & COMMERCIAL BANKING (continued)

US Retail & Commercial Banking's total income rose by 2% to $2,746 million and costs by 1% to $980 million but contribution declined by 32% to $1,054 million, largely as a result of a substantial increase in impairment losses. After allocating a share of Group Manufacturing costs, operating profit was 41% lower at $726 million. In sterling terms, total income increased by 2% to £1,390 million while contribution fell by 32% to £534 million.

US Retail & Commercial achieved higher net interest income, reflecting a focus on disciplined management of our deposit base without substantially increasing rates. Net interest margin increased slightly to 2.71%. Business volumes were strong in selected segments. Good growth has been achieved in commercial banking, with average corporate loan balances increasing by 16%, while volumes in the consumer business are lower, reflecting reduced consumer demand and the application of tighter pricing and credit criteria for home equity and auto lending.

Non-interest income increased by 5% to $831 million, with good sales of currency and interest rate risk management products to commercial banking and corporate customers. 

Direct expenses were held to $980 million, up 1%, with increased costs from the expansion of the mid-corporate relationship management team absorbed through enhanced efficiency measures in retail operations.

In the core US Retail & Commercial portfolio, impairment losses totalled $388 million, up 50% compared with the second half of 2007. While there has been a decline in some customers' credit scores in line with weakening economic conditions, refreshed FICO scores on consumer real estate-secured lending averaged in excess of 740 at 30 June 2008, with an average LTV ratio of 62% on the Citizens $17.9 billion residential mortgage book and 66% on its $27.3 billion core home equity book. Non-performing loans represented 0.41% of core home equity balances and 0.54% of residential mortgage balances. Citizens does not originate negative amortisation mortgages or option adjustable rate mortgages. The overall commercial loan portfolio continues to perform well, with some increased impairment losses in the $10.2 billion commercial real estate segment, where charge-offs increased to 0.77% of balances in the first half. 

Credit quality has deteriorated more sharply in an externally sourced home equity portfolio (the Serviced By Others (SBO) portfolio).This portfolio, now managed by a separate work-out group and in run-off, has been reduced by $1.6 billion over the last year to $7.7 billion at 30 June. Non-performing SBO loans now represent 1.98% of SBO balances. Impairment losses in relation to the SBO portfolio totalled $324 million in the first half. Closing provision balances totalled $413 million, providing a coverage ratio of 2.7 times NPLs.

We continue to evaluate opportunities to optimise capital allocation by exiting or reducing exposure to lower growth or sub-scale segments, and recently announced an agreement to sell 18 rural branches in the Adirondacks region to Community Bank System.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

EUROPE & MIDDLE EAST RETAIL & COMMERCIAL BANKING 

		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		601		506		1,066
Non-interest income		204		172		372
		_______		_______		_______
Total income		805		678		1,438
		_______		_______		_______
Direct expenses
-	staff costs	205		149		334
-	other	88		82		170
		_______		_______		_______
		293		231		504
		_______		_______		_______
Contribution before impairment losses		512		447		934
Impairment losses		96		67		136
		_______		_______		_______
Contribution		416		380		798
Allocation of manufacturing costs		166		158		321
		_______		_______		_______
Operating profit		250		222		477
		_______		_______		_______
Analysis of contribution:
Ulster Bank		376		347		728
Other Europe and Middle East		40		33		70
		_______		_______		_______
		416		380		798
		_______		_______		_______
		£bn		£bn		£bn
Total assets		58.6		50.2		55.5
Loans and advances to customers - gross
-	mortgages	20.4		16.2		18.3
-	corporate	28.5		21.7		25.3
-	other	2.6		3.9		4.2
Customer deposits		23.4		20.5		22.3
		_______		_______		_______
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		29.9		30.3		*36.7
		_______		_______		_______

* on Basel I basis 

Europe and Middle East Retail & Commercial Banking achieved a 19% rise in total income to £805 million and a 9% increase in contribution to £416 million, though economic growth has slowed markedly in the first half in its major markets in the island of Ireland. After allocating a portion of Group Manufacturing costs, operating profit rose by 13% to £250 million. Results in sterling terms have benefited from the movement in the euro exchange rate; at constant exchange rates income rose by 7% while contribution was 1% lower.

THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS 

EUROPE & MIDDLE EAST RETAIL & COMMERCIAL BANKING (continued) 

Within the core business, Ulster Bank, net interest income increased by 18% to £501 million, with average loans and advances to customers up 26% and average customer deposits up 20%. Ulster Bank has tightened its lending criteria over the past year, withdrawing the Ulster Bank brand from the broker mortgage market and widening new business margins on mortgages and other loan products. Deposit pricing has remained competitive, and the increased cost of funds has fed through into net interest margin more quickly than the progressive repricing of the loan back book.

Non-interest income in Ulster Bank increased by 13% to £143 million driven by continued growth in capital markets fee income, although growth in wealth and bancassurance fees has moderated.

Ulster Bank direct expenses increased by 25% to £210 million, reflecting the largely completed investment programme to expand the branch and business centre footprint in 2007. The investment programme has strengthened Ulster Bank's platform and enabled it to continue to add innovative products and attract new customers across the island of Ireland, with a record 53,000 new current account customers added during the first half.

Impairment losses in the Ulster Bank Group have risen to £57 million, reflecting growth in lending in previous years as well as a slowdown in Irish economic conditions which has affected commercial credit metrics. Ulster's commercial property portfolio remains well diversified, with an average LTV ratio of 67%. The proportion of commercial property commitments secured on speculative developments remains well inside the Group's limit of 3%.

Outside Ireland, E&ME Retail & Commercial has continued to make good progress, with a strong performance in the United Arab Emirates, where we are the market leader in credit cards, having sold 85,000 new cards in the first half of the year. UAE income grew by 38% and contribution by 32%, while Romania also continued to achieve strong growth.

Across Europe and Middle East as a whole, loans and advances at 30 June were 8% higher than at the end of 2007. The sale of the European Consumer Finance businesses in Germany and Austria was completed on 1 July. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS

ASIA RETAIL & COMMERCIAL BANKING 

		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Net interest income		178		124		285
Non-interest income		213		191		395
		_______		_______		_______
Total income		391		315		680
		_______		_______		_______
Direct expenses
-	staff costs	128		97		226
-	other	76		60		130
		_______		_______		_______
		204		157		356
		_______		_______		_______
Contribution before impairment losses		187		158		324
Impairment losses		61		61		119
		_______		_______		_______
Contribution		126		97		205
Allocation of manufacturing costs		110		105		214
		_______		_______		_______
Operating profit/(loss)		16		(8)		(9)
		_______		_______		_______
Analysis of income:
Private banking		144		122		252
Cards and consumer finance		118		92		193
Affluent banking (and general)		103		83		194
Business banking		26		18		41
		_______		_______		_______
		391		315		680
		_______		_______		_______
		£bn		£bn		£bn
Total assets		6.7		5.6		6.9
Loans and advances to customers - gross		4.6		3.8		4.5
AUMs - excluding deposits		19.9		17.2		19.9
Customer deposits		12.7		9.5		10.8
		_______		_______		_______
		30 June		1 January		31 December
		2008		2008		2007
		£bn		£bn		£bn
Risk-weighted assets		5.3		4.9		*3.3
		_______		_______		_______

* on Basel I basis 

Asia Retail & Commercial Banking delivered strong growth, with total income rising 24% to £391 million. Contribution grew by 30% to £126 million.

The division operates in 8 countries in Asia: China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Singapore and Taiwan, across 4 core business segments: affluent banking, cards & consumer finance, business banking and private banking. 

In affluent banking, we have achieved good growth across the region, despite falling equity markets and worsening investor sentiment. Client numbers have increased by 13% and assets under management have grown by 27%. China, in particular, has seen strong structured deposit and investment sales, and assets under management have doubled in the last 12 months.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGIONAL MARKETS

ASIA RETAIL & COMMERCIAL BANKING (continued)

The current economic backdrop has led us to review our forward-looking credit metrics and to tighten our consumer lending policies. Despite this, cards and consumer finance reported revenue growth of 28% and a 25% consumer net receivables increase.

Business banking has seen strong growth across most regions with revenue increasing by 44%, having performed particularly well in the Indian and Chinese markets.

RBS Coutts' offering of private banking and investment services continued to deliver good organic income growth in the first half of 2008. Asia has seen good levels of client acquisition, though with lower average ticket sizes. Good growth in banking volumes led to a rise of 51% in net interest income, offsetting weaker sales of equity-related investment products. Non-interest income grew by 8%, largely driven by strong dealing profits, despite a downturn in investor sentiment.

Total expenses rose by 20% to £314 million, reflecting continued investment throughout the region. Despite the highly competitive market, RBS Coutts Asia has recruited additional experienced private bankers. Total divisional headcount increased by 10%.

Impairment losses, at £61 million, were in line with the previous year. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

RBS INSURANCE

		PRO FORMA
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Earned premiums		2,757		2,815		5,607
Reinsurers' share		(116)		(110)		(220)
		_______		_______		_______
Insurance premium income		2,641		2,705		5,387
Net fees and commissions		(202)		(201)		(465)
Other income		347		339		734
		_______		_______		_______
Total income		2,786		2,843		5,656
		_______		_______		_______
Direct expenses
-	staff costs	155		147		297
-	other	255		203		444
		_______		_______		_______
		410		350		741
		_______		_______		_______
Gross claims		1,916		2,164		4,091
Reinsurers' share		(53)		(34)		(81)
		_______		_______		_______
Net claims		1,863		2,130		4,010
		_______		_______		_______
Contribution		513		363		905
Allocation of manufacturing costs		110		105		214
		_______		_______		_______
Operating profit		403		258		691
		_______		_______		_______
In-force policies (thousands)
-	Own-brand motor	6,762		6,829		6,713
-	Own-brand non-motor (home, rescue, pet, HR24)	5,484		3,757		3,752
-	Partnerships & broker (motor, home, rescue, SMEs, pet, HR24)	9,035		9,588		9,302
General insurance reserves - total (£m)		8,142		8,223		8,192
		_______		_______		_______

RBS Insurance made good progress in the first half of 2008, with contribution recovering strongly to £513 million, an increase of 41%. Excluding the £125 million impact of the June 2007 floods, contribution grew by 5%. Total income was slightly lower at £2,786 million, reflecting a strategy of discontinuing less profitable partnership contracts while focusing on growth in our own-brand businesses.  

Own-brand businesses increased income by 3% and contribution by 17%. In the UK motor market we have increased premium rates to offset claims inflation and continued to target lower risk drivers, with price increases concentrated in higher risk categories in order to improve profitability. During the first half we deployed selected brands on a limited number of aggregator web sites. Our international businesses in Spain, Italy and Germany performed well, with income up 25% and contribution growth doubling. All three countries achieved strong increases in contribution. Over the last six months own-brand motor policy numbers have again begun to increase to 6.8 million.   

In own-brand non-motor insurance we have continued to achieve good sales through RBS and NatWest, where home insurance policies in force have increased by 23% since December. Overall in-force policies have grown by 46% to 5.5 million, benefiting from the addition of rescue cover to RBS and NatWest current account packages. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

RBS INSURANCE (continued)

Results from our partnerships and broker business confirmed the Group's strategy of refocusing on the more profitable opportunities in this segment, in which we provide underwriting and processing services to third parties. We did not renew a number of rescue contracts and also pulled back from some less profitable segments of the broker market. As a result partnership and broker in-force policies have fallen by 6% over the last year with a corresponding 8% reduction in income. Contribution, however, grew by 99%, or by 18% excluding the impact of the 2007 floods. 

For RBS Insurance as a whole, insurance premium income, net of fees and commissions, was 3% lower at £2,439 million, reflecting 4% growth in our own brands offset by an 11% decline in the partnerships and broker segment. Other income rose by 2% to £347 million, reflecting increased investment income. 

Direct expenses grew by 17% to £410 million, as a result of accelerated marketing investment in our own brands, including the launch of our new commercial insurance offering, Direct Line for Business, which has made a strong start. Cost growth has also been significantly affected by increased industry levies and an increase in profit sharing payments from the 2007 level, which was depressed by flood claims. Excluding these elements costs were only 1% higher. 

Net claims fell by 13% to £1,863 million, benefiting from more benign weather conditions. Excluding the impact of the 2007 floods, net claims costs reduced by 6%, helped by continuing improvements in risk selection.

The UK combined operating ratio for 2008, including manufacturing costs but excluding floods, improved from 95.8% to 94.6%.

  THE ROYAL BANK OF SCOTLAND GROUP plc

GROUP MANUFACTURING

	PRO FORMA
	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Staff costs	555		524		1,075
Other costs	1,653		1,584		3,212
	_______		_______		_______
Total manufacturing costs	2,208		2,108		4,287
Allocated to divisions	(2,208)		(2,108)		(4,287)
	_______		_______		_______
	-		-		-
	_______		_______		_______
Analysis of manufacturing costs:
Group Technology	676		665		1,373
Group Property	813		740		1,519
Customer Support and other operations	719		703		1,395
	_______		_______		_______
Total manufacturing costs	2,208		2,108		4,287
	_______		_______		_______

Group Manufacturing costs have increased by 5% to £2,208 million in the first half of 2008. At constant exchange rates, costs rose by 2% from the first half of 2007 and were broadly in line with the second half of 2007. 

Growth in business volumes has been absorbed through improvements in productivity. We have maintained high levels of customer satisfaction while continuing to invest in the further development of our business. Staff costs increased by 6% while other costs rose by 4%, with efficiencies offsetting the effects of inflation and increased business volumes. At constant exchange rates, staff costs rose by 3% and other costs by 1%. 

Group Technology costs rose by 2% to £676 million with increases in business demand balanced by savings delivered across the business.

Group Property costs rose by 10% reflecting continuing investment to support the strong growth of our business. These investments included the opening of a new Global Markets office in Tokyo and further development of our UK Corporate and Commercial Banking and Ulster Bank branch networks, as well as ongoing investment in cash centre security.

Customer Support and other operations costs increased by 2% as further improvements in productivity enabled us to continue to absorb significant increases in service volumes and global inflationary pressure. At the same time we maintained our focus on service quality, and our UK-based telephony centres continued to record market-leading customer satisfaction scores. Ongoing investment in process re-engineering across our operational centres under the 'Work-Out' banner continues to deliver efficiency gains.

  THE ROYAL BANK OF SCOTLAND GROUP plc

CENTRAL ITEMS

	PRO FORMA
	First half		First half		Full year
	2008		2007		2007
	£m		£m		£m
Funding costs	419		447		1,203
Departmental and other corporate costs	330		395		438
	_______		_______		_______
	749		842		1,641
Allocation of manufacturing costs	110		106		215
	_______		_______		_______
Total central items*	859		948		1,856
	_______		_______		_______

*excluding one-off items (see Note 2 on page 49)

Central costs were down 11% to £749 million. 

Funding costs were lower at £419 million, reflecting the benefit of the rights issue, the proceeds from which were received on 9 June 2008, changes in funding mix, gain on hedges partially offset by volatility attributable to derivatives, which do not qualify for hedge accounting.

Departmental and other corporate costs, down 16% to £330 million, have benefited from the amortisation of fair value adjustments to financial instruments, partially offset by wage awards. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

CREDIT MARKET EXPOSURES

The write-downs before tax included in the Group's results for the six months ended 30 June 2008 are as follows.

	30 June 2008				31 December 2007
	Net  exposure (1)	Write-downs before tax	Average price		Net exposure	Average price
	£m	£m	%		£m	%
Asset-backed CDOs
High grade	1,608	990	52		2,581	84
Mezzanine	361	902	20		1,253	70
	1,969	1,892	40		3,834	79
Monoline exposures	2,398	2,120	n/a		2,547	n/a
US residential mortgages
Sub-prime (2)	257	276	35		1,292	72
Alt-A	803	750	39		2,233	83
Other non-agency	843	18	86		794	94
	1,903	1,044	59		4,319	81
US commercial mortgages	1,478	94	87		1,809	97
Leveraged finance (3)	10,789	863	92		14,506	96
CLOs	1,051	113	84		1,386	93
		_______
		6,126
CDS hedging		(201)
		_______
Total net of CDS hedging		5,925
		_______

Notes:

(1) Net of hedges and write-downs.

(2) Includes investment grade, non-investment grade and residuals.

(3) Includes commitments to lend.

THE ROYAL BANK OF SCOTLAND GROUP plc 

CREDIT MARKET EXPOSURES (continued)

In April the Group estimated for capital planning purposes that it might need to make additional write-downs totalling £5.9 billion in respect of its credit market exposures. Write-downs taken in the first half have totalled £5,925 million, with an increase in the credit valuation adjustment on exposure to monolines, compared with the April estimates, but lower write-downs on leveraged finance holdings. Holdings and valuations of super-senior tranches of collateralised debt obligations remain in line with those estimated in April. 

Lower valuations of underlying assets have led to an increase in the Group's monoline exposures, partially offset by additional hedges purchased with other counterparties. While the Group's April estimates already assumed a further weakening in the market value of monoline credit, the extent of this weakening has been greater than anticipated at the time. This, together with the increase in exposure, has led to an additional credit valuation adjustment of £2.1 billion, more than originally estimated. The value of the total credit valuation adjustment and hedges is now greater than the Group's CDO and RMBS-related monoline exposure. Of the Group's £2.4 billion net exposure to monolines, £2.3 billion related to counterparties still rated as investment grade, including £1.2 billion in relation to AAA- and AA-rated insurers.

The Group has reduced its trading inventory of US residential mortgages by £1.5 billion, selling off tranches of sub-prime and Alt-A mortgages at better prices than those estimated in April. Holdings of other non-agency debt have increased slightly, but commercial mortgage inventory has also been sold down, again with realised prices above April estimates. 

The Group's portfolio of leveraged loans has been reduced from £14.5 billion at the end of 2007 to £10.8 billion at 30 June, principally through the sale of a number of holdings. Realised prices have been greater than those estimated in April. During July an additional £1.25 billion of leveraged loans were sold, also at prices in line with the June valuations.

Further information on the Group's credit market exposures is provided in Appendix 2.

  THE ROYAL BANK OF SCOTLAND GROUP plc 

AVERAGE BALANCE SHEET - PRO FORMA

		First half 2008						First half 2007
		Average						Average
		balance		Interest		Rate		balance		Interest		Rate
		£m		£m		%		£m		£m		%
Assets
Treasury and other eligible bills		215		3		2.79		687		16		4.66
Loans and advances to banks		51,316		1,126		4.39		51,332		1,163		4.53
Loans and advances to customers		583,292		17,477		5.99		484,632		15,147		6.25
Debt securities		71,216		1,883		5.29		49,302		1,202		4.88
		_______		______				_______		______
Interest-earning assets - banking business		706,039		20,489		5.80		585,953		17,528		5.98
				______						______
Trading business		477,634						414,403
Non-interest-earning assets		644,029						390,478
		________						________
Total assets		1,827,702						1,390,834
		________						________
Liabilities
Deposits by banks		135,507		3,008		4.44		135,019		3,226		4.78
Customer accounts		393,490		7,180		3.65		360,851		7,012		3.89
Debt securities in issue		195,590		4,326		4.42		138,249		3,155		4.56
Subordinated liabilities		32,085		871		5.43		26,722		750		5.61
Internal funding of trading business		(112,856)		(2,273)		4.03		(104,180)		(2,344)		4.50
		_______		______				_______		______
Interest-bearing liabilities - banking business		643,816		13,112		4.07		556,661		11,799		4.24
				______						______
Trading business		510,554						438,015
Non-interest-bearing liabilities
-	demand deposits	31,477						30,145
-	other liabilities	588,468						322,571
Shareholders' equity		53,387						43,442
		________						________
Total liabilities		1,827,702						1,390,834
		________						________

Notes:

1.	Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
2.	Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance assets and liabilities, in view of their distinct nature. As a result, interest income has been adjusted by £45 million (2007 - £37 million).
3.	Changes in the fair value of interest-bearing financial instruments designated as at fair value through profit or loss are recorded in other operating income in the consolidated income statement. In the average balance sheet shown above, interest includes interest income and interest expense related to these instruments of £146 million (2007 - £151 million) and £378 million (2007 - £249 million) respectively and the average balances have been adjusted accordingly.

  THE ROYAL BANK OF SCOTLAND GROUP plc

AVERAGE YIELDS, SPREADS AND MARGINS - PRO FORMA

	First half		First half
	2008		2007
Yields, spreads and margins of the banking business:	%		%
Gross yield on interest-earning assets of banking business	5.80		5.98
Cost of interest-bearing liabilities of banking business	(4.07)		(4.24)
	_______		_______
Interest spread of banking business	1.73		1.74
Benefit from interest-free funds	0.36		0.22
	_______		_______
Net interest margin of banking business	2.09		1.96
	_______		_______

 

AVERAGE INTEREST RATES

		First half		First half
		2008		2007
Average rate		%		%
The Group's base rate		5.19		5.31
London inter-bank three month offered rates:
-	Sterling	5.81		5.65
-	Eurodollar	3.02		5.36
-	Euro	4.67		3.94

  THE ROYAL BANK OF SCOTLAND GROUP plc

CONDENSED CONSOLIDATED BALANCE SHEET

AT 30 JUNE 2008 - PRO FORMA (unaudited)

	30 June		31 December
	2008		2007
	£m		£m
Assets
Cash and balances at central banks	35,205		14,240
Treasury and other eligible bills	42,693		18,229
Loans and advances to banks	151,151		211,000
Net loans and advances to customers	604,104		558,769
Reverse repurchase agreements and stock borrowing	85,960		142,116
Loans and advances to customers	690,064		700,885
Debt securities	200,266		222,572
Equity shares	32,881		46,704
Settlement balances	27,606		16,533
Derivatives	482,747		335,154
Intangible assets	27,534		26,811
Property, plant and equipment	14,642		16,914
Prepayments, accrued income and other assets	17,780		18,366
Assets of disposal groups	3,265		395
	________		________
	1,725,834		1,627,803
Consortium share of shared assets	4,871		27,327
	________		________
Total assets	1,730,705		1,655,130
	________		________
Liabilities
Deposits by banks	257,489		303,486
Net customer accounts	443,291		436,989
Repurchase agreements and stock lending	92,375		120,062
Customer accounts	535,666		557,051
Debt securities in issue	234,355		220,697
Settlement balances and short positions	84,073		89,829
Derivatives	475,614		330,822
Accruals, deferred income and other liabilities	26,241		27,958
Deferred taxation	1,598		3,822
Insurance liabilities	7,532		7,650
Subordinated liabilities	33,411		28,053
Liabilities of disposal groups	2,410		6
	________		_______
	1,658,389		1,569,374
Consortium share of shared assets	4,871		27,327
	________		_______
Total liabilities	1,663,260		1,596,701
Equity:
Minority interests	5,808		5,391
Owners' equity*	61,637		53,038
Total equity	67,445		58,429
	________		________
Total liabilities and equity	1,730,705		1,655,130
	________		________
*Owners' equity attributable to:
Ordinary shareholders	53,283		44,684
Other equity owners	8,354		8,354
	_______		_______
	61,637		53,038
	_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET - PRO FORMA

Total assets of £1,730.7 billion at 30 June 2008 were up £75.6 billion, 5%, compared with 31 December 2007.

Cash and balances at central banks were up £21.0 billion to £35.2 billion reflecting increased placings with the Bank of England and the Dutch National Bank.

Treasury and other eligible bills increased by £24.5 billion to £42.7 billion, due to higher trading activity and liquidity management. 

Loans and advances to banks decreased by £59.8 billion, 28%, to £151.2 billion. Reverse repurchase agreements and stock borrowing ("reverse repos") decreased by £66.7 billion, 38% to £107.8 billion, but were partly offset by growth in bank placings of £6.9 billion, 19%, to £43.4 billion.

Loans and advances to customers were down £10.8 billion, 2%, to £690.1 billion. Reverse repos decreased by 40%, £56.2 billion to £86.0 billion. Excluding reverse repos, lending rose by £45.4 billion, 8% to £604.1 billion reflecting organic growth, net of £3.1 billion of loans and advances of disposal groups.

Debt securities decreased by £22.3 billion, 10%, to £200.3 billion and equity shares decreased by £13.8 billion, 30%, to £32.9 billion principally due to reduced holdings in Global Banking & Markets.

Settlement balances rose by £11.1 billion, 67% to £27.6 billion as a result of increased customer activity in Global Banking & Markets.

Movements in the value of derivatives, assets and liabilities, primarily reflect changes in interest and exchange rates, together with growth in trading volumes.

Intangible assets increased £0.7 billion, 3% to £27.5 billion, reflecting £0.2 billion goodwill relating to the Sempra joint venture and £0.5 billion due to exchange rate movements.

Property, plant and equipment decreased by £2.3 billion, 13% to £14.6 billion largely due to the disposal of Angel Trains.

Prepayments, accrued income and other assets were down £0.6 billion, 3% to £17.8 billion.

Assets and liabilities of disposal groups increased largely due to the recently announced proposed disposals of Tesco Personal Finance and the European Consumer Finance businesses in Germany and Austria (which completed on 1 July).

Deposits by banks declined by £46.0 billion, 15% to £257.5 billion. This reflected decreased repurchase agreements and stock lending ("repos"), down £49.7 billion, 31% to £112.2 billion, partly offset by higher inter-bank deposits, up £3.7 billion, 3% at £145.3 billion.

Customer accounts were down £21.4 billion, 4% at £535.7 billion. Within this, repos decreased £27.7 billion, 23% to £92.4 billion. Excluding repos, deposits rose by £6.3 billion, 1%, to £443.3 billion. 

Debt securities in issue increased by £13.7 billion, 6%, to £234.4 billion.

Settlement balances and short positions were down £5.8 billion, 6%, to £84.1 billion.

Accruals, deferred income and other liabilities were down £1.7 billion, 6%, at £26.3 billion.

Deferred taxation liabilities decreased by £2.2 billion, 58% to £1.6 billion due in part to the sale of Angel Trains.

  THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET - PRO FORMA (continued)

Subordinated liabilities rose £5.4 billion, 19% to £33.4 billion reflecting the issue of £1.7 billion dated loan capital, the allocation of £3.4 billion ABN AMRO subordinated liabilities from consortium shared assets and the effect of exchange rates, £0.4 billion and £0.1 billion redemptions of dated loan capital.

Equity minority interests increased by £0.4 billion, 8% to £5.8 billion. The £0.8 billion equity raised as part of the Sempra joint venture was partially offset by a reduction in the market value of the investment in Bank of China attributable to minority shareholders. 

Owners' equity increased by £8.6 billion, 16% to £61.6 billion. Proceeds of £12.0 billion from the rights issue, net of £0.2 billion expenses, together with exchange rate movements of £0.7 billion were partially offset by the attributable loss for the period of £0.6 billion, a £0.9 billion decrease in available-for-sale reserves, net of tax, reflecting £0.3 billion in the Group's share in the investment in Bank of China and £0.6 billion in other securities, the majority of which related to ABN AMRO, and the payment of the 2007 final ordinary dividend of £2.3 billion and other dividends of £0.2 billion. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES TO PRO FORMA RESULTS

1.	Basis of preparation
	The pro forma financial information shows the underlying performance of the Group including the results of the ABN AMRO businesses to be retained by RBS. This information is being provided to give a better understanding of what the results of the operations might have looked like had the acquisition of ABN AMRO as well as the transfers of businesses to the other Consortium Banks occurred on 1 January 2007.  Group operating profit on a pro forma basis:  Excludes ABN AMRO pre and post acquisition credit market write-downs and the impact of the LaSalle sale; RBS share of ABN AMRO's shared assets; amortisation of purchase accounting adjustments in 2007 amortisation of  purchased intangible assets  integration costs; and Includes the cost of funding the ABN AMRO acquisition within Central items. Whilst part of the acquisition consideration was funded by the issue of preference shares, the pro forma results for 2007 assume that the cash element of the consideration was debt funded. The results for the first half of 2008 reflect the actual amounts of interest and dividends on preference shares. In the presentation of the pro forma income statement credit market write-downs and goodwill payments in respect of current account administration fees, the gains on sale of Southern Water and certain other assets have been shown in aggregate in income and expenses as appropriate.
2.	Credit market write-downs and one-off items
		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
	Global Banking & Markets:
	Credit market write-downs	(5,925)		(86)		(2,387)
	Gain on sale of Southern Water	-		79		712
	Fair value of own debt	584		-		237
	Centre:
	Fair value of own debt	228		-		152
	Gains on property sales and leasebacks	-		-		302
	Goodwill payments in respect of current account administration fees	-		-		(119)
	Other one-off items	-		-		77
		_______		_______		_______
		(5,113)		(7)		(1,026)
		_______		_______		_______
	Income	(5,113)		(38)		(1,268)
	Costs	-		31		242
		_______		_______		_______
		(5,113)		(7)		(1,026)
		_______		_______		_______

   THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES TO PRO FORMA RESULTS (continued)

3.	Loan impairment provisions
	Operating profit is stated after charging loan impairment losses of £1,406 million (first half 2007 - £916 million; full year 2007 - £2,082 million). The balance sheet loan impairment provisions increased in the half year ended 30 June 2008 from £4,945 million to £5,006 million, and the movements thereon were:
			First half				First half				Full year
			2008				2007				2007
			£m				£m				£m
	At 1 January		4,945				4,501				4,501
	Currency translation and other adjustments		55				(4)				56
	Acquisitions		-				36				118
	Disposals		(40)				-				-
	Transfer of assets relating to disposal groups		(147)				-				-
	Amounts written-off		(1,261)				(919)				(1,914)
	Recoveries of amounts previously written-off		138				146				275
	Charge to the income statement		1,406				916				2,082
	Unwind of discount		(90)				(87)				(173)
			_______				_______				_______
			5,006				4,589				4,945
			_______				_______				_______
	The provision at 30 June 2008 includes £3 million (31 December 2007 - £3 million; 30 June 2007 - £2 million) in respect of loans and advances to banks.
4.	Earnings per share
	Earnings per share have been calculated assuming that the 6.1 billion ordinary shares issued following the rights issue of 11 new ordinary shares for every 18 held were issued on 1 January 2007. Earnings for 2007 have not been adjusted to reflect any income from the net proceeds of the rights issue of £12 billion received on 9 June 2008; earnings for the first half of 2008 include income earned from the date of receipt of the proceeds.
		First half				First half				Full year
		2008				2007				2007
		£m				£m				£m
	Earnings
	(Loss)/profit attributable to ordinary shareholders	(761)				3,647				6,823
		_______				_______				_______
		Number of shares - millions
	Weighted average number of ordinary shares
	In issue during the period	16,128				16,008				16,103
		_______				_______				_______
	Basic earnings per share	(4.7p)				22.8p				42.4p
	Credit market write-downs and one-off items	22.9p				(0.1p)				2.4p
	Intangibles amortisation	0.8p				0.2p				0.6p
	Integration costs	1.4p				0.2p				0.5p
	Share of shared assets	0.9p				0.5p				0.2p
		_______				_______				_______
	Adjusted earnings per share	21.3p				23.6p				46.1p
		_______				_______				_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES TO PRO FORMA RESULTS (continued)

5.	Analysis of repurchase agreements
		30 June		31 December
		2008		2007
		£m		£m
	Reverse repurchase agreements and stock borrowing
	Loans and advances to banks	107,767		174,444
	Loans and advances to customers	85,960		142,116
		_______		_______
	Repurchase agreements and stock lending
	Deposits by banks	112,212		161,862
	Customer accounts	92,375		120,062
		_______		_______
6.	Auditor's review
	The pro forma results have been reviewed by the Group's auditors, Deloitte & Touche LLP, and their review report is set out on page 62.

  THE ROYAL BANK OF SCOTLAND GROUP plc

ANALYSIS OF INCOME, EXPENSES AND IMPAIRMENT LOSSES - PRO FORMA

		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Fees and commissions receivable		4,470		4,315		9,171
Fees and commissions payable
-	banking	(1,111)		(715)		(1,681)
-	insurance related	(202)		(201)		(466)
		_______		_______		_______
Net fees and commissions		3,157		3,399		7,024
		_______		_______		___,___
Foreign exchange		953		691		1,389
Interest rate		1,436		1,126		2,230
Credit		(578)		820		295
Other		552		571		894
		_______		_______		_______
Income from trading activities		2,363		3,208		4,808
		_______		_______		_______
Rental income and other asset-based activities		1,447		1,184		2,601
Other income
-	principal investments	(289)		183		263
-	net realised gains on available-for-sale securities	12		15		120
-	dividend income	49		35		116
-	profit on sale of property, plant and equipment	85		92		128
-	other	(414)		122		140
		_______		_______		_______
Other operating income		890		1,631		3,368
		_______		_______		_______
Non-interest income (excluding insurance premiums)		6,410		8,238		15,200
		_______		_______		_______
Insurance net premium income		2,861		3,048		5,982
		_______		_______		_______
Total non-interest income		9,271		11,286		21,182
		_______		_______		_______
Staff costs
-	wages, salaries and other staff costs	3,890		4,229		8,139
-	social security costs	272		238		532
-	pension costs	280		278		674
Premises and equipment		1,010		872		1,809
Other		2,031		1,953		3,767
		_______		_______		_______
Administrative expenses		7,483		7,570		14,921
Depreciation and amortisation		802		833		1,697
		_______		_______		_______
Operating expenses		8,285		8,403		16,618
		_______		_______		_______
General insurance		1,863		2,130		4,010
Bancassurance		64		285		518
		_______		_______		_______
Insurance net claims		1,927		2,415		4,528
		_______		_______		_______
Loan impairment losses		1,406		916		2,082
Impairment of available-for-sale securities		73		20		22
		_______		_______		_______
Impairment losses		1,479		936		2,104
		_______		_______		_______

Note: the data above exclude credit market write-downs and one-off items, amortisation of purchased intangibles, integration costs and share of Consortium shared assets.

  THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - PRO FORMA

Analysis of loans and advances to customers - pro forma
The following table analyses loans and advances to customers (excluding reverse repurchase agreements and stock borrowing) by industry and geography.
	30 June		31 December
	2008		2007
	£m		£m
UK Domestic
Central and local government	3,381		3,135
Finance	17,940		15,269
Individuals - home	79,114		73,834
Individuals - other	27,264		28,123
Other commercial and industrial comprising:
-  Manufacturing	14,078		13,452
- Construction	10,565		10,202
- Service industries and business activities	58,938		53,965
- Agriculture, forestry and fishing	2,969		2,473
- Property	50,301		50,051
Finance leases and instalment credit	15,964		15,632
Interest accruals	1,749		2,116
	_______		_______
	282,263		268,252
	_______		_______
UK International
Central and local government	1,255		1,593
Finance	23,541		21,200
Individuals - other	476		561
Other commercial and industrial comprising:
- Manufacturing	7,757		7,631
- Construction	2,645		2,161
- Service industries and business activities	23,562		20,434
- Agriculture, forestry and fishing	124		97
- Property	18,231		13,664
Interest accruals	31		79
	_______		_______
	77,622		67,420
	_______		_______
Overseas
Europe
Central and local government	2,709		1,560
Finance	13,379		15,893
Individuals - home	17,893		16,434
Individuals - other	4,642		6,522
Other commercial and industrial comprising:
- Manufacturing	15,158		11,522
- Construction	4,674		3,864
- Service industries and business activities	44,084		30,434
- Agriculture, forestry and fishing	1,297		1,843
- Property	16,108		13,281
Finance leases and instalment credit	1,705		1,620
Interest accruals	799		1,056
	_______		_______
	122,448		104,029
	_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - PRO FORMA (continued)

	30 June		31 December
	2008		2007
	£m		£m
US
Central and local government	346		386
Finance	12,016		14,446
Individuals - home	26,544		27,882
Individuals - other	10,691		10,879
Other commercial and industrial comprising:
- Manufacturing	8,529		7,311
- Construction	673		793
- Service industries and business activities	18,973		16,462
- Agriculture, forestry and fishing	24		20
- Property	4,731		6,456
Finance leases and instalment credit	2,308		2,228
Interest accruals	383		584
	_______		_______
	85,218		87,447
	_______		_______
Rest of World
Central and local government	4,942		2,270
Finance	13,968		11,879
Individuals - home	723		1,073
Individuals - other	2,853		3,326
Other commercial and industrial comprising:
- Manufacturing	5,001		5,057
- Construction	231		716
- Service industries and business activities	10,674		9,237
- Agriculture, forestry and fishing	104		308
- Property	2,800		2,455
Finance leases and instalment credit	34		18
Interest accruals	226		224
	_______		_______
	41,556		36,563
	_______		_______
Loans and advances to customers - gross	609,107		563,711
Loan impairment provisions	(5,003)		(4,942)
	_______		_______
Total loans and advances to customers	604,104		558,769
	_______		_______

THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - PRO FORMA (continued)

Risk elements in lending - pro forma 

The Group's loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the Securities and Exchange Commission ('SEC') in the US. The following table shows the estimated amount of loans which would be reported using the SEC's classifications. The figures are stated before deducting the value of security held or related provisions. 

		30 June		31 December
		2008		2007
		£m		£m
Loans accounted for on a non-accrual basis (2):
-	Domestic	5,940		5,599
-	Foreign	2,148		2,350
		_______		_______
		8,088		7,949
		_______		_______
Accruing loans which are contractually overdue 90 days or more as to principal or interest (3):
-	Domestic	642		217
-	Foreign	102		85
		_______		_______
		744		302
		_______		_______
Total risk elements in lending		8,832		8,251
		_______		_______
Potential problem loans (4):
-	Domestic	139		63
-	Foreign	2		68
		_______		_______
		141		131
		_______		_______
Closing provisions for impairment as a % of total risk elements in  lending and potential problem loans		56%		59%
		_______		_______
Risk elements in lending as a % of gross lending to customers  excluding reverse repos		1.45%		1.46%
		_______		_______
Risk elements in lending and potential problem loans as a % of  gross lending to customers excluding reverse repos		1.47%		1.49%
		_______		_______

Notes:

(1)	For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
(2)	All loans against which an impairment provision is held are reported in the non-accrual category.
(3)	Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities.
(4)	Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.

  THE ROYAL BANK OF SCOTLAND GROUP plc

DEBT SECURITIES

30 June 2008			Held- for- trading	Available  for sale	Designated at fair value	Loans and receivables	Total
			£m	£m	£m	£m	£m
Central and local government
	UK		7,687	1,092	2,102	-	10,881
	US		6,285	63	502	-	6,850
	Other		27,470	4,064	400	-	31,934
			41,442	5,219	3,004	-	49,665
Bank and building society			8,056	9,596	11	-	17,663
Mortgage and other asset-backed securities
	Residential mortgages
		US federal agencies	268	3,942	-	-	4,210
		US government sponsored entities	18,892	7,206	-	-	26,098
		Other prime	12,006	14,817	-	-	26,823
		Non-conforming	1,810	1,466	-	-	3,276
		Sub-prime	2,943	131	4	20	3,098
			35,919	27,562	4	20	63,505
	Commercial mortgages
		US federal agencies	496	698	-	-	1,194
		US government sponsored entities	7	-	-	-	7
		Other	3,367	932	155	912	5,366
			3,870	1,630	155	912	6,567
	CDOs/CLOs		9,762	1,832	3	3	11,600
	Other asset-backed securities		9,004	5,347	139	85	14,575
			58,555	36,371	301	1,020	96,247
Corporate			19,341	9,104	1,743	-	30,188
Other			2,742	3,310	429	22	6,503
			130,136	63,600	5,488	1,042	200,266

ABN AMRO's available-for-sale treasury portfolio was allocated to the Group in 2008; it was reflected in shared assets at 31 December 2007.

Further details of the Group's holdings of mortgage and other asset-backed securities are given in Appendix 2. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

DEBT SECURITIES (continued)

31 December 2007			Held- for- trading	Available  for sale	Designated at fair value	Loans and receivables	Total
			£m	£m	£m	£m	£m
Central and local government
	UK		9,223	1,022	2,243	-	12,488
	US		11,389	927	397	-	12,713
	Other		40,010	9,764	6	-	49,780
			60,622	11,713	2,646	-	74,981
Bank and building society			6,508	11,397	154	-	18,059
Mortgage and other asset-backed securities
	Residential mortgages
		US federal agencies	1,402	4,536	-	-	5,938
		US government sponsored entities	18,422	5,830	-	-	24,252
		Other prime	10,047	1,610	-	-	11,657
		Non-conforming	2,987	1,279	-	-	4,266
		Sub-prime	5,383	150	5	-	5,538
			38,241	13,405	5	-	51,651
	Commercial mortgages		3,488	1,367	194	626	5,675
	CDOs/CLOs		12,119	1,829	16	2	13,966
	Other asset-backed securities		8,609	2,081	185	-	10,875
			62,457	18,682	400	628	82,167
Corporate			35,709	3,825	2,109	-	41,643
Other			2,426	2,834	396	66	5,722
			167,722	48,451	5,705	694	222,572

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGULATORY RATIOS - PROPORTIONAL CONSOLIDATED BASIS 

	Basel II			Basel I
	30 June		31 December
	2008			2007
	£m			£m
Capital base
Core Tier 1 capital: ordinary shareholders' funds and  minority interests less intangibles	27,956			19,596
Preference shares and tax deductible securities	16,200			14,704
Less deductions from Tier 1 capital	(1,640)			n/a
	_______			_______
Tier 1 capital	42,516			34,300
Tier 2 capital	25,966			29,250
Tier 3 capital	215			200
	_______			_______
	68,697			63,750
Less: Supervisory deductions	(4,157)			(8,202)
	_______			_______
Total regulatory capital	64,540			55,548
	_______			_______
Risk-weighted assets
Credit and counterparty risk	422,100
Market risk	32,500
Operational risk	37,100
	_______
	491,700
	_______
Banking book				445,800
Trading book				44,200
				_______
				490,000
				_______
Risk asset ratio
Core Tier 1	5.7%			4.0%
Tier 1	8.6%			7.0%
Total	13.1%			11.3%
	_______			_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGULATORY RATIOS - PROPORTIONAL CONSOLIDATED BASIS (continued)

	Basel II			Basel I
	30 June		31 December
	2008			2007
	£m			£m
Composition of capital
Tier 1
Shareholders' equity and minority interests	65,022			55,314
Innovative Tier 1 securities and preference shares  Included in subordinated liabilities	6,034			4,582
Goodwill and other intangible assets	(27,534)			(26,811)
Goodwill - discontinued businesses	(47)			-
Regulatory and other adjustments	681			1,215
Less deductions from Tier 1 capital	(1,640)			n/a
	_______			_______
Total Tier 1 capital	42,516			34,300
	_______			_______
Tier 2
Unrealised gains in available-for-sale equity securities in  shareholders' equity and minority interests	2,423			3,115
Collective impairment losses, net of taxes	326			2,582
Qualifying subordinated liabilities	25,431			23,238
Minority and other interests in Tier 2 capital	300			315
Less deductions from Tier 2 capital	(2,514)			n/a
	_______			_______
Total Tier 2 capital	25,966			29,250
	_______			_______
Tier 3	215			200
	_______			_______
Supervisory deductions
Unconsolidated investments	4,119			4,296
Other deductions	38			3,906
	_______			_______
	4,157			8,202
	_______			_______
Total regulatory capital	64,540			55,548
	_______			_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

DERIVATIVES - PRO FORMA

	Assets		Liabilities
As at 30 June 2008	£m		£m
Exchange rate contracts
Spot, forwards and futures	23,656		26,685
Currency swaps	25,963		20,967
Options purchased	16,292		-
Options written	-		16,345
Interest rate contracts
Interest rate swaps	293,931		293,130
Options purchased	37,630		-
Options written	-		37,553
Futures and forwards	2,048		2,076
Credit derivatives	62,754		56,164
Equity and commodity contracts	20,473		22,694
	_______		_______
	482,747		475,614
	_______		_______

The Group enters into master netting agreements in respect of its derivatives activities. These arrangements, which give the Group a legal right to set-off derivative assets and liabilities with the same counterparty, do not result in a net presentation in the Group's balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously as well as a legally enforceable right to set off. They are however effective in reducing the Group's credit exposure from derivative assets. The Group has executed master netting agreement with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets. The extent of netting under such agreements amounted to £406 billion at 30 June 2008. Furthermore, the Group holds substantial collateral against this net derivative asset exposure.

  THE ROYAL BANK OF SCOTLAND GROUP plc

MARKET RISK - PRO FORMA 

The Group manages the market risk in its trading and treasury portfolios through its market risk management framework. This expresses limits based on, but not limited to: value-at-risk (VaR); stress testing and scenario analysis; and position and sensitivity analyses. VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at given confidence levels. The table below sets out the VaR, at a 95% confidence level and a one-day time horizon, for the Group's trading and treasury portfolios. The VaR for the Group's trading portfolios includes idiosyncratic risk and is segregated by type of market risk exposure.

	Average	Period end	Maximum	Minimum
	£m	£m	£m	£m
Trading VaR
Interest rate	17.3	16.0	23.8	11.4
Credit spread	62.4	62.0	90.4	42.5
Currency	3.4	3.4	5.4	1.2
Equity	13.2	12.6	19.4	7.9
Commodity	6.6	16.3	17.8	-
Diversification effects		(33.0)
		_______
30 June 2008	62.0	77.3	89.3	44.0
	_______	_______	_______	_______
31 December 2007	21.6*	45.7	50.1*	13.2*
	_______	_______	_______	_______
Treasury VaR
30 June 2008	5.8	5.9	7.6	5.0
	_______	_______	_______	_______
31 December 2007	3.7*	5.5	6.4*	1.3*
	_______	_______	_______	_______

* ABN AMRO positions prior to its acquisition by the Group are not included.

The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include:

	Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations.
	VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
	VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile.

The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Controls are in place to limit the Group's intra-day exposure, such as the calculation of VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated. The Group undertakes stress testing to identify the potential for losses in excess of the VaR.

The Group's treasury activities include its money market business and the management of internal funds flow within the Group's businesses. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

INDEPENDENT REVIEW REPORT TO THE ROYAL BANK OF SCOTLAND GROUP plc

We have been engaged by The Royal Bank of Scotland Group plc ('the company') to review the pro forma financial information in the half yearly financial report for the six months ended 30 June 2007, the twelve months ended 31 December 2007 and the six months ended 30 June 2008 which comprises the pro forma summary consolidated income statement on page 12, the pro forma divisional performance disclosures on pages 18 to 41, the pro forma condensed consolidated balance sheet on page 46, the related notes on pro forma results on pages 49 to 51 and the reconciliations of pro forma to statutory income statements and balance sheets (together "the pro forma financial information").

This report is made solely to the company in accordance with the International Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the pro forma financial information in accordance with the basis of preparation described in note 1 on page 49 of the half-yearly financial report.

Our responsibility

Our responsibility is to express to the company a conclusion on the pro forma financial information in the half-yearly financial report based on our review.

Scope of Review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review we are not aware of any material modifications that should be made to the pro forma financial information for the six months ended 30 June 2007, twelve months ended 31 December 2007 or six months ended 30 June 2008.

Deloitte & Touche LLP

Chartered Accountants and Registered Auditor

7 August 2008

Edinburgh, UK

THE ROYAL BANK OF SCOTLAND GROUP plc

STATUTORY RESULTS 

The results presented on pages 64 to 94 inclusive are on a statutory basis and include the results of ABN AMRO. The interests of Fortis and Santander in RFS Holdings are included in minority interests.

  THE ROYAL BANK OF SCOTLAND GROUP plc

CONDENSED CONSOLIDATED INCOME STATEMENT 

FOR THE HALF YEAR ENDED 30 JUNE 2008 (unaudited) 

In the income statement below, credit market write-downs and one-off items, amortisation of purchased intangible assets and integration costs are included in non-interest income and operating expenses, as appropriate.

		First half		First half		Full year
		2008		2007		2007
						(Audited)
		£m		£m		£m
Interest receivable		24,080		13,458		32,252
Interest payable		15,498		8,075		20,183
		_______		_______		_______
Net interest income		8,582		5,383		12,069
		_______		_______		_______
Fees and commissions receivable		4,917		3,588		8,278
Fees and commissions payable		(1,188)		(916)		(2,193)
(Loss)/income from trading activities		(3,373)		1,875		1,292
Other operating income (excluding insurance premium income)		1,635		1,712		4,833
Insurance premium income		3,308		3,193		6,376
Reinsurers' share		(152)		(145)		(289)
		_______		_______		_______
Non-interest income		5,147		9,307		18,297
		_______		_______		_______
Total income		13,729		14,690		30,366
		_______		_______		_______
Staff costs		5,523		3,494		7,338
Premises and equipment		1,218		748		1,703
Other administrative expenses		2,420		1,319		2,969
Depreciation and amortisation		1,410		835		1,932
		_______		_______		_______
Operating expenses*		10,571		6,396		13,942
		_______		_______		_______
Profit before other operating charges and impairment losses		3,158		8,294		16,424
Insurance claims		2,264		2,468		4,742
Reinsurers' share		(75)		(53)		(118)
Impairment losses		1,661		871		1,968
		_______		_______		_______
Operating (loss)/profit before tax		(692)		5,008		9,832
Tax (credit)/charge		(333)		1,272		2,044
		_______		_______		_______
(Loss)/profit from continuing operations		(359)		3,736		7,788
Profit/(loss) from discontinued operations, net of tax		234		-		(76)
		_______		_______		_______
(Loss)/profit for the period		(125)		3,736		7,712
Minority interests		452		75		163
Other owners' dividends		225		106		246
		_______		_______		_______
(Loss)/profit attributable to ordinary shareholders		(802)		3,555		7,303
		_______		_______		_______
Basic earnings per ordinary share (Note 5)		(6.6p)		32.3p		65.6p
		_______		_______		_______
Diluted earnings per ordinary share (Note 5)		(6.6p)		32.0p		65.0p
		_______		_______		_______
*Operating expenses include:		£m		£m		£m
Integration costs:
-	Administrative expenses	302		26		48
-	Depreciation and amortisation	14		29		60
		_______		_______		_______
		316		55		108
Amortisation of purchased intangible assets		182		43		262
		_______		_______		_______
		498		98		370
		_______		_______		_______

THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL REVIEW 

Profit

Loss before tax was £692 million compared with a profit of £5,008 million in the first half of 2007. The results have been adversely affected by credit market write-downs of £5,925 million.

Total income

Total income was down 7% to £13,729 million, principally due to the credit market write-downs.

Net interest income increased to £8,582 million and represents 63% of total income (2007 - 37%). 

Non-interest income decreased to £5,147 million principally due to the credit market write-downs of £5,925 million offset by a movement in the fair value of own debt of £812 million, and represents 37% of total income (2007 - 63%).

Operating expenses

Operating expenses rose to £10,571 million. Integration costs were £316 million compared with £55 million in 2007.

Net insurance claims

Bancassurance and general insurance claims, after reinsurance, decreased by 9% to £2,189 million. 

Impairment losses

Impairment losses were £1,661 million, compared with £871 million in 2007.

Risk elements in lending and potential problem loans represented 1.44% of gross loans and advances to customers excluding reverse repos at 30 June 2008 (31 December 2007 - 1.64%). 

Provision coverage of risk elements in lending and potential problem loans was 57% (31 December 2007 - 56%). 

Taxation

The effective tax rate for the first half of 2008 was 48.1% compared with 25.4% in the first half of 2007.

Earnings 

Basic earnings per ordinary share decreased from 32.3p to (6.6p).

Capital  Capital ratios at 30 June 2008 were 6.7% (Core Tier 1), 9.1% (Tier 1) and 13.2% (Total). 

Rights issue

In June 2008, the company completed the £12 billion rights issue announced in April 2008. As a result, on 9 June 2008, the company issued 6.1 billion new ordinary shares of 25p each.

Capitalisation issue 

As announced in April 2008, the company will be issuing new ordinary shares of 25p each in the company instead of paying an interim dividend in cash.

  THE ROYAL BANK OF SCOTLAND GROUP plc

CONDENSED CONSOLIDATED BALANCE SHEET

AT 30 JUNE 2008 (unaudited)

	30 June		31 December		30 June
	2008		2007		2007
			(Audited)
	£m		£m		£m
Assets
Cash and balances at central banks	35,580		17,866		4,080
Treasury and other eligible bills	50,730		18,229		8,014
Loans and advances to banks	152,292		219,460		92,037
Net loans and advances to customers	721,894		686,893		423,728
Reverse repurchase agreements and stock borrowing	85,973		142,357		79,469
Loans and advances to customers	807,867		829,250		503,197
Debt securities	207,009		276,427		142,324
Equity shares	37,689		53,026		13,193
Settlement balances	27,624		16,589		21,372
Derivatives	483,281		337,410		183,313
Intangible assets	43,471		48,492		18,868
Property, plant and equipment	16,172		18,750		18,185
Prepayments, accrued income and other assets	23,493		19,066		6,683
Assets of disposal groups	63,537		45,954		-
	________		________		_________
Total assets	1,948,745		1,900,519		1,011,266
	________		________		_________
Liabilities
Deposits by banks	245,184		312,633		139,415
Net customer accounts	551,247		547,449		337,614
Repurchase agreements and stock lending	92,375		134,916		81,703
Customer accounts	643,622		682,365		419,317
Debt securities in issue	274,719		273,615		95,519
Settlement balances and short positions	84,083		91,021		71,969
Derivatives	475,731		332,060		183,461
Accruals, deferred income and other liabilities	24,104		34,520		17,698
Deferred taxation	3,573		5,510		2,721
Insurance liabilities	9,596		10,162		7,629
Subordinated liabilities	39,661		37,979		27,079
Liabilities of disposal groups	44,779		29,228		-
	________		________		_______
Total liabilities	1,845,052		1,809,093		964,808
Equity:
Minority interests	42,056		38,388		4,914
Owners' equity*
Called up share capital	4,064		2,530		2,391
Reserves	57,573		50,508		39,153
Total equity	103,693		91,426		46,458
	________		________		_________
Total liabilities and equity	1,948,745		1,900,519		1,011,266
	________		________		_________
*Owners' equity attributable to:
Ordinary shareholders	53,283		44,684		37,403
Other equity owners	8,354		8,354		4,141
	_______		_______		_______
	61,637		53,038		41,544
	_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET

Total assets of £1,948.7 billion at 30 June 2008 were up £48.2 billion, 3%, compared with 31 December 2007.

Cash and balances at central banks were up £17.7 billion to £35.6 billion reflecting increased placings with the Bank of England and the Dutch National Bank.

Treasury and other eligible bills increased by £32.5 billion to £50.7 billion, due to higher trading activity and liquidity management. 

Loans and advances to banks decreased by £67.2 billion, 31%, to £152.3 billion or £63.5 billion, 29% following the transfer of £3.7 billion to assets of disposal groups. Reverse repurchase agreements and stock borrowing ("reverse repos") were down by £68.2 billion, 39% to £107.8 billion. Excluding reverse repos, bank placings increased by £4.7 billion, 12%, to £44.5 billion.

 Loans and advances to customers were down £21.4 billion, 3%, to £807.9 billion but up £2.0 billion after the transfer of £23.4 billion to disposal groups. Within this, reverse repos decreased by 40%, £56.4 billion to £86.0 billion. Excluding reverse repos, lending rose by £58.4 billion, 9% to £721.9 billion reflecting organic growth.

Debt securities decreased by £69.4 billion, 25%, to £207.0 billion and equity shares decreased by £15.3 billion, 29%, to £37.7, billion principally due to lower holdings in Global Banking & Markets and the transfer of £4.8 billion to assets of disposal groups.

Settlement balances rose by £11.0 billion, 67% to £27.6 billion as a result of increased customer activity in Global Banking & Markets.

Movements in the value of derivatives, assets and liabilities, primarily reflect changes in interest and exchange rates, together with growth in trading volumes.

Intangible assets declined by £5.0 billion, 10% to £43.5 billion, reflecting the disposals of the Asset Management business of ABN AMRO and Banca Antonveneta and the classification of Banco Real and other businesses of ABN AMRO acquired by Santander to assets of disposal groups, partially offset by exchange rate movements and goodwill of £0.2 billion arising on the Sempra joint venture.

Property, plant and equipment decreased by £2.6 billion, 14% to £16.2 billion largely due to the disposal of Angel Trains.

Prepayments, accrued income and other assets were up £4.4 billion, 23% to £23.5 billion.

Assets and liabilities of disposal groups increased due to the classification of Banco Real and other businesses of ABN AMRO acquired by Santander as discontinued operations and the recently announced proposed disposals of Tesco Personal Finance and the European Consumer Finance business in Germany and Austria, partially offset by completion of the sale of the former Asset Management business of ABN AMRO to Fortis and of Banca Antonveneta to Monte dei Paschi di Sienna.

Deposits by banks declined by £67.4 billion, 22% to £245.2 billion or £54.1 billion, 18% after the transfer of £13.3 billion to liabilities of disposal groups. This reflected decreased repurchase agreements and stock lending ("repos"), down £50.8 billion, 31% to £112.2 billion combined with lower inter-bank deposits, down £3.3 billion, 2% to £133.0 billion.

Customer accounts were down £38.7 billion, 6% to £643.6 billion or £17.4 billion, 3% net of the transfer of £21.3 billion to disposal groups. Within this, repos decreased £42.5 billion, 32% to £92.4 billion. Excluding repos , deposits rose by £25.1 billion, 5%, to £551.2 billion.

Settlement balances and short positions were down £6.9 billion, 8%, to £84.1 billion. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

OVERVIEW OF CONDENSED CONSOLIDATED BALANCE SHEET (continued)

Accruals, deferred income and other liabilities decreased £10.4 billion, 30%, to £24.1 billion.

Deferred taxation liabilities decreased by £1.9 billion, 35% to £3.6 billion due in part to the sale of Angel Trains.

Subordinated liabilities were up £1.7 billion, 4% to £39.7 billion. The issue of £1.7 billion dated loan capital and the effect of exchange rate and other adjustments, £0.9 billion, were partially offset by the redemption of £0.4 billion of dated loan capital and the transfer of £0.5 billion to liabilities of disposal groups.

Equity minority interests increased by £3.7 billion, 10% to £42.1 billion, primarily due to the effect of exchange rate movements of £2.9 billion of which £2.7 billion related to the Fortis and Santander investments in RFS Holdings, and the £0.8 billion equity raised as part of the Sempra joint venture. A reduction in the market value of the investment in Bank of China attributable to minority shareholders was largely offset by attributable profits.

Owners' equity increased by £8.6 billion, 16% to £61.6 billion. Proceeds of £12.0 billion from the rights issue, net of £0.2 billion expenses, together with exchange rate movements of £0.7 billion were partially offset by the attributable loss for the period of £0.6 billion, a £0.9 billion decrease in available-for-sale reserves, net of tax, reflecting £0.3 billion in the Group's share in the investment in Bank of China and £0.6 billion in other securities, the majority of which related to ABN AMRO, and the payment of the 2007 final ordinary dividend of £2.3 billion and other dividends of £0.2 billion. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

CONDENSED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

FOR THE HALF YEAR ENDED 30 JUNE 2008 (unaudited)

		First half		First half		Full year
		2008		2007		2007
						(Audited)
		£m		£m		£m
Net movements in reserves:
	Available-for-sale	(1,796)		(825)		(1,289)
	Cash flow hedges	326		(125)		(564)
	Currency translation	3,509		(199)		2,210
Actuarial gains on defined benefit plans		-		-		2,189
Tax on items recognised direct in equity		423		180		(170)
		_______		_______		_______
Net income/(expense) recognised direct in equity		2,462		(969)		2,376
(Loss)/profit for the period		(125)		3,736		7,712
		_______		_______		_______
Total recognised income and expense for the period		2,337		2,767		10,088
		_______		_______		_______
Attributable to:
Equity shareholders		(901)		3,020		8,610
Minority interests		3,238		(253)		1,478
		_______		_______		_______
		2,337		2,767		10,088
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc 

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

FOR THE HALF YEAR ENDED 30 JUNE 2008 (unaudited) 

	First half		First half		Full year
	2008		2007		2007
					(Audited)
	£m		£m		£m
Operating activities
Operating (loss)/profit before tax	(692)		5,008		9,832
Operating profit before tax on discontinued activities	463		-		68
Adjustments for:
Depreciation and amortisation	1,410		835		1,932
Interest on subordinated liabilities	1,144		725		1,518
Charge for defined benefit pension schemes	244		234		489
Cash contribution to defined benefit pension schemes	(379)		(239)		(599)
Elimination of non-cash items on discontinued activities	374		-		62
Elimination of foreign exchange differences and  other non-cash items	(13,381)		(2,474)		(13,517)
	_______		_______		_______
Net cash inflow from trading activities	(10,817)		4,089		(215)
Changes in operating assets and liabilities	(32,572)		3,627		28,261
	_______		_______		_______
Net cash flows from operating activities before tax	(43,389)		7,716		28,046
Income taxes paid	(1,327)		(1,022)		(2,442)
	_______		_______		_______
Net cash flows from operating activities	(44,716)		6,694		25,604
	_______		_______		_______
Investing activities
Sale and maturity of securities	64,726		9,410		63,007
Purchase of securities	(37,494)		(8,210)		(61,020)
Sale of property, plant and equipment	1,217		2,009		5,786
Purchase of property, plant and equipment	(2,855)		(2,086)		(5,080)
Net investment in business interests and intangible assets	(1,602)		(278)		13,306
Proceeds on disposal of discontinued activities	7,963		-		-
	_______		_______		_______
Net cash flows from investing activities	31,955		845		15,999
	_______		_______		_______
Financing activities
Issue of ordinary shares	12,006		-		77
Issue of other equity interests	-		460		3,600
Issue of paid up equity	-		-		1,073
Issue of subordinated liabilities	2,061		1,009		1,018
Proceeds of minority interests issued	810		-		31,095
Redemption of minority interests	(243)		(33)		(545)
Shares purchased by employee trusts	(16)		(50)		(65)
Shares issued under employee share schemes	1		52		79
Repayment of subordinated liabilities	(408)		(877)		(1,708)
Dividends paid	(2,637)		(2,252)		(3,411)
Interest paid on subordinated liabilities	(1,234)		(684)		(1,522)
	_______		_______		_______
Net cash flows from financing activities	10,340		(2,375)		29,691
	_______		_______		_______
Effects of exchange rate changes on cash and cash equivalents	7,501		(356)		6,010
	_______		_______		_______
Net increase in cash and cash equivalents	5,080		4,808		77,304
Cash and cash equivalents at beginning of period	148,955		71,651		71,651
	_______		_______		_______
Cash and cash equivalents at end of period	154,035		76,459		148,955
	_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS

1.	Accounting policies
	The annual accounts of the Group are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together "IFRS") as adopted by the European Union ("EU"). It also complies with IFRS as issued by the IASB. There have been no significant changes to the Group's principal accounting policies as set out on pages 124 to 131 of the 2007 Report and Accounts. The Group adopted IFRS 8 'Operating Segments' with effect from 1 January 2008. These interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting'.
2.	Restatements
	The income statement and related notes and the cash flow statement for the year ended 31 December 2007 have been restated to reflect the reclassification of Banco Real as a discontinued operation.
3.	Loan impairment provisions
	Operating (loss)/profit is stated after charging loan impairment losses of £1,588 million (first half 2007 - £851 million; full year 2007 - £1,946 million). The balance sheet loan impairment provisions decreased in the half year ended 30 June 2008 from £6,441 million to £5,958 million, and the movements thereon were:
		First half			First half					Full year
		2008			2007					2007
										(Audited)
		£m			£m					£m
	At beginning of period	6,441			3,935					3,935
	Currency translation and other adjustments	192			(6)					137
	Acquisition of subsidiaries	-			7					2,210
	Disposals	(40)			-					-
	Transfers relating to discontinued operations and disposal groups	(970)			-					-
	Net increase in provisions of discontinued operations	-			-					46
	Amounts written-off	(1,333)			(768)					(2,011)
	Recoveries of amounts previously written-off	171			126					342
	Charge to the income statement	1,588			851					1,946
	Unwind of discount	(91)			(83)					(164)
		_______			_______					_______
	At end of period	5,958			4,062					6,441
		_______			_______					_______
	The provision at 30 June 2008 includes £3 million (31 December 2007 - £3 million; 30 June 2007 - £2 million) in respect of loans and advances to banks.
4.	Taxation
	The charge for taxation comprises:
			First half				First half				Full year
			2008				2007				2007
											(Audited)
			£m				£m				£m
	Tax on profit before credit market write-downs and one-off items, intangibles amortisation, integration costs and shared assets		1,299				1,323				2,489
	Tax on credit market write-downs and one-off items, intangibles amortisation, integration costs and shared assets		(1,632)				(51)				(445)
			_______				_______				_______
			(333)				1,272				2,044
			_______				_______				_______
	Overseas tax included above		350				547				500
			_______				_______				_______

THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

4.	Taxation (continued)
	The charge for taxation represents 48.1% (first half 2007 - 25.4%; full year 2007 - 20.8%) of (loss)/profit before tax. It differs from the tax charge computed by applying the standard UK corporation tax rate of 28.5% as follows:
		First half				First half				Full year
		2008				2007				2007
										(Audited)
		£m				£m				£m
	(Loss)/profit before tax	(692)				5,008				9,832
		_______				_______				_______
	Expected tax (credit)/charge at 28.5% (2007 - 30%)	(197)				1,502				2,950
	Non-deductible items	156				67				263
	Non-taxable items	(225)				(79)				(595)
	Foreign profits taxed at other rates	(52)				25				(25)
	Reduction in deferred tax liability following change in the rate of UK Corporation Tax	-				(157)				(189)
	Other	47				(5)				7
	Adjustments in respect of prior periods	(62)				(81)				(367)
		_______				_______				_______
	Actual tax (credit)/charge	(333)				1,272				2,044
		_______				_______				_______
5.	Earnings per share
	Earnings per share have been calculated based on the following:
		First half			First half				Full year
		2008			2007				2007
									(Audited)
		£m			£m				£m
	Earnings
	(Loss)/profit attributable to ordinary shareholders	(802)			3,555				7,303
	Add back finance cost on dilutive convertible securities	-			31				60
		_______			_______				_______
	Diluted earnings attributable to ordinary shareholders	(802)			3,586				7,363
		_______			_______				_______
		Number of shares - millions
	Weighted average number of ordinary shares*
	In issue during the period	12,197			11,001				11,135
	Effect of dilutive share options and convertible securities	-			189				193
		_______			_______				_______
	Diluted weighted average number of ordinary shares in issue during the period	12,197			11,190				11,328
		_______			_______				_______
	Basic earnings per share*	(6.6p)			32.3p				65.6p
	Credit market write-downs and one-off items	30.3p			(0.2p)				3.5p
	Intangibles amortisation (net of minority interest share)	1.1p			0.3p				0.9p
	Integration costs	1.9p			0.4p				0.7p
	Share of shared assets	1.2p			0.7p				0.3p
		_______			_______				_______
	Adjusted earnings per share*	27.9p			33.5p				71.0p
		_______			_______				_______
	Diluted earnings per share*	(6.6p)			32.0p				65.0p
		_______			_______				_______
	Adjusted diluted earnings per share*	27.9p			33.2p				70.4p
		_______			_______				_______

*prior period data have been restated for the bonus element of the rights issue completed in June 2008.

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

6.	Segmental analysis
	Total revenue		External		Inter  segment		Total
			£m		£m		£m
	Half year ended 30 June 2008
	Global Markets
	-	Global Banking & Markets	6,898		5,378		12,276
	-	Global Transaction Services	1,439		41		1,480
	Regional Markets
	-	UK Retail & Commercial Banking	9,409		1,896		11,305
	-	US Retail & Commercial Banking	2,322		-		2,322
	-	Europe & Middle East Retail & Commercial Banking	1,633		128		1,761
	-	Asia Retail & Commercial Banking	429		182		611
	RBS Insurance		3,098		14		3,112
	Group Manufacturing		21		-		21
	Central items		538		5,271		5,809
	Share of shared assets		193		117		310
	RFS minority interest		4,587		417		5,004
	Elimination of intra-group transactions		-		(13,444)		(13,444)
			_______		_______		_______
			30,567		-		30,567
			_______		_______		_______
	Half year ended 30 June 2007
	Global Markets
	-	Global Banking & Markets	6,621		4,267		10,888
	-	Global Transaction Services	1,003		36		1,039
	Regional Markets
	-	UK Retail & Commercial Banking	8,858		1,727		10,585
	-	US Retail & Commercial Banking	2,619		-		2,619
	-	Europe & Middle East Retail & Commercial Banking	1,277		43		1,320
	-	Asia Retail & Commercial Banking	130		158		288
	RBS Insurance		3,150		45		3,195
	Group Manufacturing		27		-		27
	Central items		141		4,611		4,752
	Elimination of intra-group transactions		-		(10,887)		(10,887)
			_______		_______		_______
			23,826		-		23,826
			_______		_______		_______
	Year ended 31 December 2007
	Global Markets
	-	Global Banking & Markets	13,743		9,544		23,287
	-	Global Transaction Services	2,552		77		2,629
	Regional Markets
	-	UK Retail & Commercial Banking	18,218		3,820		22,038
	-	US Retail & Commercial Banking	5,189		-		5,189
	-	Europe & Middle East Retail & Commercial Banking	2,937		197		3,134
	-	Asia Retail & Commercial Banking	565		330		895
	RBS Insurance		6,333		89		6,422
	Group Manufacturing		43		1		44
	Central items		1,653		9,972		11,625
	Share of shared assets		264		-		264
	RFS minority interest		1,534		(255)		1,279
	Elimination of intra-group transactions		-		(23,775)		(23,775)
			_______		_______		_______
			53,031		-		53,031
			_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

6.	Segmental analysis (continued)
				First half		First half		Full year
				2008		2007		2007
								(Audited)
	Operating (loss)/profit before tax			£m		£m		£m
	Global Markets
	-	Global Banking & Markets		(2,936)		2,196		3,632
	-	Global Transaction Services		886		585		1,308
	Total Global Markets			(2,050)		2,781		4,940
	Regional Markets
	-	UK Retail & Commercial Banking		3,221		3,010		6,207
	-	US Retail & Commercial Banking		534		788		1,476
	-	Europe & Middle East Retail & Commercial Banking		416		363		765
	-	Asia Retail & Commercial Banking		126		43		96
	Total Regional Markets			4,297		4,204		8,544
	RBS Insurance			513		363		905
	Group Manufacturing			(2,208)		(1,748)		(3,714)
	Central items			(521)		(494)		(563)
	Share of shared assets			(224)		-		(73)
	RFS minority interest			(1)		-		163
				_______		_______		_______
				(194)		5,106		10,202
	Amortisation of purchased intangible assets			(182)		(43)		(262)
	Integration costs			(316)		(55)		(108)
				_______		_______		_______
				(692)		5,008		9,832
				_______		_______		_______
				30 June		31 December
				2008		2007
						(Audited)
	Total assets			£m		£m
	Global Markets
	-		Global Banking & Markets	1,249,386		1,210,977
	-		Global Transaction Services	21,166		19,385
	Total Global Markets			1,270,552		1,230,362
	Regional Markets
	-		UK Retail & Commercial Banking	245,845		232,456
	-		US Retail & Commercial Banking	79,825		79,449
	-		Europe & Middle East Retail & Commercial Banking	59,185		56,087
	-		Asia Retail & Commercial Banking	7,444		7,663
	Total Regional Markets			392,299		375,655
	RBS Insurance			12,728		12,459
	Group Manufacturing			5,961		5,650
	Central items			44,294		3,677
	Share of shared assets			4,871		27,327
	RFS minority interest			218,040		245,389
				_________		_________
				1,948,745		1,900,519
				________		_________
	On 28 February 2008, the company announced changes to its organisational structure which are aimed at recognising the Group's presence in over 50 countries and facilitating the integration and operation of its expanded footprint. Following the acquisition of ABN AMRO in October 2007, the Group's new organisational structure incorporates those ABN AMRO businesses to be retained by the Group but excludes the ABN AMRO businesses to be acquired by Fortis and Santander. This new organisational structure is expected to give the Group the appropriate framework for managing the enlarged Group in a way that fully capitalises on the enhanced range of attractive growth opportunities now available to it.

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

7.	Dividends and capitalisation issue
	During the period a dividend of 23.1p per ordinary share (2006 - 22.1p) in respect of the final dividend for 2007 was paid to ordinary shareholders, making the dividend 33.2p per ordinary share for 2007 as a whole.  As indicated in the prospectus issued in connection with the rights issue, the Board believes that it would be prudent to issue new ordinary shares to shareholders instead of paying the 2008 interim dividend in cash. Shareholders on the register of members on 12 September 2008 will be entitled to a capitalisation issue of 1 new ordinary share for every 40 shares held resulting in an issue of 404 million new shares. The issue represents approximately the same aggregate amount as the cash dividend paid for the interim period ended 30 June 2007, based on the closing share price of 233p per share on 7 August 2008. Further information on the capitalisation issue and a free share dealing facility for shareholders are set out on page 94. As stated in the prospectus for the Group's rights issue, the Board's current intention is that the final dividend for the year ending 31 December 2008 will be paid in cash.
8.	Analysis of assets and liabilities of disposal groups
		30 June		31 December
		2008		2007
		£m		£m
	Assets of disposal groups
	Cash and balances at central banks	3,952		-
	Loans and advances to banks	6,943		-
	Loans and advances to customers	27,704		-
	Debt securities and equity shares	7,364		-
	Intangible assets	4,082		-
	Property, plant and equipment	526		395
	Other assets	3,804		-
		_______		_______
	Discontinued operations and other disposal groups	54,375		395
	Assets acquired exclusively with a view to disposal	9,162		45,559
		_______		_______
		63,537		45,954
		_______		_______
	Liabilities of disposal groups
	Deposits by banks	4,216		-
	Customer accounts	28,042		-
	Debt securities in issue	1,115		-
	Subordinated liabilities	976		-
	Other liabilities	6,193		-
		_______		_______
	Discontinued operations and other disposal groups	40,542		-
	Liabilities acquired exclusively with a view to disposal	4,237		29,228
		_______		_______
		44,779		29,228
		_______		_______
	Assets and liabilities of disposal groups at 30 June 2008 primarily reflect the classification of Banco Real and other businesses of ABN AMRO acquired by Santander as discontinued operations, together with the assets and liabilities of Tesco Personal Finance, which, subject to regulatory approvals, are expected to be disposed of in the second half of 2008, and the ECF businesses in Germany and Austria, which were sold on 1 July 2008.  Assets and liabilities acquired exclusively with a view to disposal at 31 December 2007 comprised ABN AMRO business units, including Banca Antonveneta, Asset Management and Private Equity. The Asset Management business was sold to Fortis on 3 April 2008 and Banca Antonveneta was sold to Monte dei Paschi di Sienna on 30 May 2008.

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

9.	Analysis of repurchase agreements
		30 June		31 December		30 June
		2008		2007		2007
				(Audited)
		£m		£m		£m
	Reverse repurchase agreements and stock borrowing
	Loans and advances to banks	107,767		175,941		64,697
	Loans and advances to customers	85,973		142,357		79,469
		_______		_______		_______
	Repurchase agreements and stock lending
	Deposits by banks	112,212		163,038		81,335
	Customer accounts	92,375		134,916		81,703
		_______		_______		_______

10.	Analysis of consolidated equity
		First half		First half		Full year
		2008		2007		2007
						(Audited)
		£m		£m		£m
	Called-up share capital
	At beginning of period	2,530		815		815
	Bonus issue of ordinary shares	-		1,576		1,576
	Rights issue	1,531		-		-
	Shares issued during the period	3		-		139
		_______		_______		_______
	At end of period	4,064		2,391		2,530
		_______		_______		_______
	Paid-in equity
	At beginning of period	1,073		-		-
	Securities issued during the period	-		-		1,073
		_______		_______		_______
	At end of period	1,073		-		1,073
		_______		_______		_______
	Share premium account
	At beginning of period	17,322		12,482		12,482
	Bonus issue of ordinary shares	-		(1,576)		(1,576)
	Rights issue, net of expenses of £246 million	10,469		-		-
	Shares issued during the period	46		460		6,257
	Redemption of preference shares classified as debt	-		159		159
		_______		_______		_______
	At end of period	27,837		11,525		17,322
		_______		_______		_______
	Merger reserve
	At beginning and end of period	10,881		10,881		10,881
		_______		_______		_______
	Available-for-sale reserves (see note 11 below)
	At beginning of period	1,032		1,528		1,528
	Currency translation adjustments	-		17		-
	Unrealised losses in the period	(1,322)		(376)		(191)
	Realised losses/(gains) in the period	60		(117)		(513)
	Taxation	343		204		208
		_______		_______		_______
	At end of period	113		1,256		1,032
		_______		_______		_______
	Cash flow hedging reserve
	At beginning of period	(555)		(149)		(149)
	Amount recognised in equity during the period	(297)		(26)		(460)
	Amount transferred from equity to earnings in the period	174		(99)		(138)
	Taxation	36		24		192
		_______		_______		_______
	At end of period	(642)		(250)		(555)
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

10.	Analysis of consolidated equity (continued)
		First half		First half		Full year
		2008		2007		2007
						(Audited)
		£m		£m		£m
	Foreign exchange reserve
	At beginning of period	(426)		(872)		(872)
	Retranslation of net assets, net of related hedges	571		(220)		376
	Taxation	111		-		70
		_______		_______		_______
	At end of period	256		(1,092)		(426)
		_______		_______		_______
	Capital redemption reserve
	At beginning and end of period	170		170		170
		_______		_______		_______
	Retained earnings
	At beginning of period	21,072		15,487		15,487
	(Loss)/profit attributable to ordinary shareholders and other equity owners.	(577)		3,661		7,549
	Ordinary dividends paid	(2,312)		(2,091)		(3,044)
	Equity preference dividends paid	(188)		(106)		(246)
	Paid-in equity dividends paid, net of tax	(27)		-		-
	Redemption of preference shares classified as debt	-		(159)		(159)
	Actuarial (losses)/gains recognised in retirement benefit schemes, net of tax	-		(48)		1,517
	Net cost of shares bought and used to satisfy share-based payments	(16)		(38)		(40)
	Share-based payments, net of tax	16		32		8
		_______		_______		_______
	At end of period	17,968		16,738		21,072
		_______		_______		_______
	Own shares held
	At beginning of period	(61)		(115)		(115)
	Shares purchased during the period	(39)		(50)		(65)
	Shares issued under employee share schemes	17		90		119
		_______		_______		_______
	At end of period	(83)		(75)		(61)
		_______		_______		_______
	Owners' equity at end of period	61,637		41,544		53,038
		_______		_______		_______
	Minority interests
	At beginning of period	38,388		5,263		5,263
	Currency translation adjustments and other movements	2,938		4		1,834
	Acquisition of ABN AMRO	-		-		32,245
	Profit attributable to minority interests	452		75		163
	Dividends paid	(137)		(55)		(121)
	Losses on available-for-sale securities, net of tax	(487)		(332)		(564)
	Movements in cash flow hedging reserves, net of tax	335		-		26
	Actuarial gains recognised in retirement benefit schemes,  net of tax	-		-		19
	Equity raised	810		-		76
	Equity withdrawn and disposals	(243)		(41)		(553)
		_______		_______		_______
	At end of period	42,056		4,914		38,388
		_______		_______		_______
	Total equity at end of period	103,693		46,458		91,426
		_______		_______		_______

THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

11.	Available-for-sale reserves
	Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs and subsequently measured at fair value with changes in fair value reported in shareholders' equity until disposal, at which stage the cumulative gain or loss is recognised in profit or loss. When there is objective evidence that an available-for-sale financial asset is impaired, any decline in its fair value below original cost is removed from equity and recognised in profit or loss. During the first half of 2008 unrealised losses on available-for-sale financial assets of £1,322 million were recognised directly in equity. Available-for-sale reserves at 30 June 2008 amounted to £113 million (31 December 2007 - £1,032 million). This balance comprises an unrecognised gain of £862 million (after tax) on the Group's interest in the Bank of China offset by net unrecognised losses after tax of £749 million on the Group's other portfolios of available-for-sale financial assets a majority of which are held by ABN AMRO. In the first half of 2008, the Group recognised impairment losses of £73 million on its available-for-sale financial assets. As discussed above, impairment losses are recognised when there is objective evidence of impairment. The Group reviews its portfolios of available-for-sale financial assets regularly for such evidence which includes: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and it becoming probable that the issuer will enter bankruptcy or other financial reorganisation. However, the disappearance of an active market because an entity's financial instruments are no longer publicly traded is not evidence of impairment. Furthermore, a downgrade of an entity's credit rating is not, of itself, evidence of impairment, although it may be evidence of impairment when considered with other available information. A decline in the fair value of a financial asset below its cost or amortised cost is not necessarily evidence of impairment. Determining whether objective evidence of impairment exists requires the exercise of management judgment. The unrecognised losses in the Group's available for sale portfolios reflect current market disruption and the underlying securities remain unimpaired.
12.	Analysis of contingent liabilities and commitments
		30 June		31 December		30 June
		2008		2007		2007
				(Audited)
		£m		£m		£m
	Contingent liabilities
	Guarantees and assets pledged as collateral security	45,579		46,441		10,996
	Other contingent liabilities	16,998		15,479		9,633
		_______		_______		_______
		62,577		61,920		20,629
		_______		_______		_______
	Commitments
	Undrawn formal standby facilities, credit lines and other commitments to lend	331,262		332,811		261,280
	Other commitments	6,907		5,368		2,932
		_______		_______		_______
		338,169		338,179		264,212
		_______		_______		_______
	Total contingent liabilities and commitments	400,746		400,099		284,841
		_______		_______		_______
	Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any material loss will arise from these transactions.

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

13.	Litigation
	Proceedings, including consolidated class actions on behalf of former Enron securities holders, have been brought in the United States against a large number of defendants, including the Group, following the collapse of Enron. The claims against the Group could be significant; the class plaintiff's position is that each defendant is responsible for an entire aggregate damage amount less settlements - they have not quantified claimed damages against the Group in particular. The Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. Recent Supreme Court and Fifth Circuit decisions provide further support for the Group's position. The Group is unable reliably to estimate the liability, if any, that might arise or its effect on the Group's consolidated net assets, its operating results or cash flows in any particular period.  On 27 July 2007, following agreement between the Office of Fair Trading ('OFT'), the Financial Services Authority and all the major UK banks (including the Group), the OFT issued proceedings in a test case against those banks to determine the legal status and enforceability of certain charges relating to unarranged overdrafts. Following a hearing of preliminary issues in January 2008, the High Court concluded that charges relating to unarranged overdrafts are capable of being assessed for fairness. That decision is subject to an appeal that is likely to be heard towards the end of 2008. A second phase of the preliminary issues hearing was heard by the High Court in July 2008 and the Court's decision is awaited. The Group maintains that its charges are fair and enforceable and is defending its position vigorously. It cannot, however, at this stage predict with any certainty the outcome of the test case, which will involve a number of further hearings and possible appeals. The Group is unable reliably to estimate the liability, if any, that may arise or its effect on the Group's consolidated net assets, operating results or cash flows in any particular period. Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of these other claims and proceedings will have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.
14.	Regulatory enquiries and investigations
	In the normal course of business the Group and its subsidiaries co-operate with regulatory authorities in various jurisdictions in their enquiries or investigations into alleged or possible breaches of regulations. As previously disclosed by ABN AMRO, the United States Department of Justice has been conducting a criminal investigation into ABN AMRO's dollar clearing activities, Office of Foreign Assets Control compliance procedures and other Bank Secrecy Act compliance matters. ABN AMRO has cooperated and continues to cooperate fully with the investigation. Prior to the acquisition by the Group, ABN AMRO had reached an agreement in principle with the Department of Justice that would resolve all presently known aspects of the ongoing investigation by way of a Deferred Prosecution Agreement in return for a settlement payment by ABN AMRO of US$500 million (which amount was accrued by ABN AMRO in its interim financial statements for the six months ended 30 June 2007). Negotiations are continuing to enable a written agreement to be concluded. Certain of the Group's subsidiaries have received requests for information from various US governmental agencies and self regulatory organisations including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to sub-prime mortgages. In particular, during March 2008 RBS was advised by the SEC that it had commenced a non public, formal investigation relating to RBS's US sub-prime securities exposure and US residential mortgage exposures. The Group and its subsidiaries are cooperating with these various requests for information and investigations.

  THE ROYAL BANK OF SCOTLAND GROUP plc

NOTES ON STATUTORY RESULTS (continued)

15.	Related party transactions
	Related party transactions in the half year ended 30 June 2008 were similar in nature to those for the year ended 31 December 2007 and were not material. Full details of the Group's related party transactions for the year ended 31 December 2007 are included in the Group's 2007 Annual Report and Accounts.
16.	Auditor's review
	The interim results have been reviewed by the Group's auditors, Deloitte & Touche LLP, and their review report is set out on page 91.
17.	Date of approval
	This announcement was approved by the Board of directors on 7 August 2008.
18.	Filings with the US Securities and Exchange Commission (SEC)
	The Group's interim results will be filed with the SEC in a report on Form 6-K.

  THE ROYAL BANK OF SCOTLAND GROUP plc

AVERAGE BALANCE SHEET - STATUTORY 

		First half 2008						First half 2007
		Average						Average
		balance		Interest		Rate		balance		Interest		Rate
		£m		£m		%		£m		£m		%
Assets
Interest-earning assets - banking business		860,295		24,271		5.64		439,165		13,646		6.21
				______						______
Trading business		477,634						261,200
Non-interest-earning assets		748,100						241,667
		________						_______
Total assets		2,086,029						942,032
		________						_______
Liabilities
Interest-bearing liabilities - banking business		803,324		15,876		3.95		392,264		8,324		4.24
				______						______
Trading business		510,554						263,086
Non-interest-bearing liabilities
-	demand deposits	34,828						30,145
-	other liabilities	683,936						215,860
Shareholders' equity		53,387						40,677
		________						_______
Total liabilities		2,086,029						942,032
		________						_______

AVERAGE YIELDS, SPREADS AND MARGINS - STATUTORY

	First half		First half
	2008		2007
	%		%
Yields, spreads and margins of the banking business:
Gross yield on interest-earning assets of banking business	5.64		6.21
Cost of interest-bearing liabilities of banking business	(3.95)		(4.24)
	_______		_______
Interest spread of banking business	1.69		1.97
Benefit from interest-free funds	0.26		0.45
	_______		_______
Net interest margin of banking business	1.95		2.42
	_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

ANALYSIS OF INCOME, EXPENSES AND IMPAIRMENT LOSSES - STATUTORY 

		First half		First half		Full year
		2008		2007		2007
		£m		£m		£m
Fees and commissions receivable		4,917		3,588		8,278
Fees and commissions payable
-	banking	(986)		(715)		(1,727)
-	insurance related	(202)		(201)		(466)
		_______		_______		_______
Net fees and commissions		3,729		2,672		6,085
		_______		_______		_______
Foreign exchange		906		424		1,085
Interest rate		1,447		922		1,414
Credit		(6,273)		421		(1,446)
Other		547		108		239
		_______		_______		_______
(Loss)/income from trading activities		(3,373)		1,875		1,292
		_______		_______		_______
Rental income and other asset-based activities		1,447		1,184		2,601
Other income
-	principal investments	(289)		288		1,213
-	net realised gains on available-for-sale securities	106		15		293
-	dividend income	51		35		116
-	profit on sale of property, plant and equipment	87		92		430
-	other	233		98		180
		_______		_______		_______
Other operating income		1,635		1,712		4,833
		_______		_______		_______
Non-interest income (excluding insurance premiums)		1,991		6,259		12,210
		_______		_______		_______
Insurance net premium income		3,156		3,048		6,087
		______		_______		_______
Total non-interest income		5,147		9,307		18,297
		_______		_______		_______
Staff costs
-	wages, salaries and other staff costs	4,829		3,029		6,295
-	social security costs	355		196		471
-	Pension costs	339		269		572
Premises and equipment		1,218		748		1,703
Other		2,420		1,319		2,969
		_______		_______		_______
Administrative expenses		9,161		5,561		12,010
Depreciation and amortisation		1,410		835		1,932
		_______		_______		_______
Operating expenses		10,571		6,396		13,942
		_______		_______		_______
General insurance		1,863		2,130		4,010
Bancassurance		326		285		614
		_______		_______		_______
Insurance net claims		2,189		2,415		4,624
		_______		_______		_______
Loan impairment losses		1,588		851		1,946
Impairment of available-for-sale securities		73		20		22
		_______		_______		_______
Impairment losses		1,661		871		1,968
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - STATUTORY 

Analysis of loans and advances to customers - statutory
The following table analyses loans and advances to customers (excluding reverse repurchase agreements and stock borrowing) by industry and geography.
		30 June		31 December		30 June
		2008		2007		2007
		£m		£m		£m
UK Domestic
Central and local government		3,381		3,135		3,806
Finance		18,130		15,531		9,374
Individuals - home		79,114		73,916		71,148
Individuals - other		27,272		28,186		27,763
Other commercial and industrial comprising:
-	Manufacturing	14,092		13,452		11,410
-	Construction	10,565		10,202		9,155
-	Service industries and business activities	59,079		53,965		46,453
-	Agriculture, forestry and fishing	2,969		2,473		2,472
-	Property	50,336		50,051		42,933
Finance leases and instalment credit		15,964		15,632		14,529
Interest accruals		1,762		2,116		1,381
		_______		_______		_______
		282,664		268,659		240,424
		_______		_______		_______
UK International
Central and local government		1,255		1,593		1,202
Finance		23,541		21,200		16,483
Individuals - other		476		561		614
Other commercial and industrial comprising:
-	Manufacturing	7,757		7,631		5,345
-	Construction	2,645		2,161		1,741
-	Service industries and business activities	23,562		20,434		16,818
-	Agriculture, forestry and fishing	124		97		72
-	Property	18,231		13,664		11,880
Interest accruals		31		79		68
		_______		_______		_______
		77,622		67,420		54,223
		_______		_______		_______
Overseas
Europe
Central and local government		2,920		2,371		376
Finance		25,550		21,329		3,305
Individuals - home		85,210		81,557		13,859
Individuals - other		13,009		16,292		3,989
Other commercial and industrial comprising:
-	Manufacturing	18,296		15,159		5,437
-	Construction	5,232		4,779		3,117
-	Service industries and business activities	60,865		46,502		11,246
-	Agriculture, forestry and fishing	4,824		4,650		532
-	Property	18,709		15,768		9,512
Finance leases and instalment credit		2,104		1,620		1,413
Interest accruals		1,483		1,969		231
		_______		_______		_______
		238,202		211,996		53,017
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - STATUTORY (continued)

		30 June		31 December		30 June
		2008		2007		2007
		£m		£m		£m
US
Central and local government		346		386		299
Finance		12,045		14,446		4,768
Individuals - home		26,544		27,882		30,590
Individuals - other		10,691		10,879		11,321
Other commercial and industrial comprising:
-	Manufacturing	8,651		7,399		4,571
-	Construction	673		793		802
-	Service industries and business activities	19,141		16,474		11,185
-	Agriculture, forestry and fishing	24		20		21
-	Property	4,731		6,456		4,861
Finance leases and instalment credit		2,308		2,228		2,135
Interest accruals		383		945		406
		_______		_______		_______
		85,537		87,908		70,959
		_______		_______		_______
Rest of World
Central and local government		4,943		2,592		3
Finance		15,027		11,967		2,704
Individuals - home		743		1,740		340
Individuals - other		3,363		12,261		928
Other commercial and industrial comprising:
-	Manufacturing	5,412		8,078		165
-	Construction	233		825		123
-	Service industries and business activities	10,927		14,449		2,795
-	Agriculture, forestry and fishing	107		1,941		12
-	Property	2,805		2,898		2,041
Finance leases and instalment credit		34		18		15
Interest accruals		230		579		39
		_______		_______		_______
		43,824		57,348		9,165
		_______		_______		_______
Loans and advances to customers - gross		727,849		693,331		427,788
Loan impairment provisions		(5,955)		(6,438)		(4,060)
		_______		_______		_______
Total loans and advances to customers		721,894		686,893		423,728
		_______		_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

ASSET QUALITY - STATUTORY (continued)

Risk elements in lending - statutory 

The Group's loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the Securities and Exchange Commission ('SEC') in the US. The following table shows the estimated amount of loans which would be reported using the SEC's classifications. The figures are stated before deducting the value of security held or related provisions. 

		30 June		31 December		30 June
		2008		2007		2007
		£m		£m		£m
Loans accounted for on a non-accrual basis (2):
-	Domestic	5,940		5,599		5,560
-	Foreign	3,627		4,763		819
		_______		_______		_______
		9,567		10,362		6,379
		_______		_______		_______
Accruing loans which are contractually overdue 90 days or more as to principal or interest (3):
-	Domestic	642		217		32
-	Foreign	116		152		38
		_______		_______		_______
		758		369		70
		_______		_______		_______
Total risk elements in lending		10,325		10,731		6,449
		_______		_______		_______
Potential problem loans (4):
-	Domestic	139		63		29
-	Foreign	2		608		1
		_______		_______		_______
		141		671		30
		_______		_______		_______
Closing provisions for impairment as a % of total risk elements in lending and potential problem loans		57%		56%		63%
		_______		_______		_______
Risk elements in lending as a % of gross lending to customers excluding reverse repos		1.42%		1.55%		1.51%
		_______		_______		_______
Risk elements in lending and potential problem loans as a % of gross lending to customers excluding reverse repos		1.44%		1.64%		1.51%
		_______		_______		_______

(1)	For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
(2)	All loans against which an impairment provision is held are reported in the non-accrual category.
(3)	Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities.
(4)	Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible.

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGULATORY RATIOS - STATUTORY 

	Basel II			Basel I		Basel I
	30 June		31 December			30 June
	2008			2007		2007
	£m			£m		£m
Capital base
Core Tier 1 capital: ordinary shareholders' funds and minority interests less intangibles	43,445			27,324		20,985
Preference shares and tax deductible securities	16,982			17,040		10,166
Less deductions from Tier 1 capital	(1,932)			n/a		n/a
	_______			_______		_______
Tier 1 capital	58,495			44,364		31,151
Tier 2 capital	30,335			33,693		26,955
Tier 3 capital	215			200		-
	_______			_______		_______
	89,045			78,257		58,106
Less: Supervisory deductions	(4,157)			(10,283)		(5,803)
	_______			_______		_______
Total regulatory capital	84,888			67,974		52,303
	_______			_______		_______
Risk-weighted assets
Credit and counterparty risk	574,100
Market risk	32,500
Operational risk	37,100
	_______
	643,700
	_______
Banking book				564,800		396,100
Trading book				44,200		23,600
				_______		_______
				609,000		419,700
				_______		_______
Risk asset ratio
Core Tier 1	6.7%			4.5%		5.0%
Tier 1	9.1%			7.3%		7.4%
Total	13.2%			11.2%		12.5%
	_______			_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

REGULATORY RATIOS - STATUTORY (continued)

	Basel II			Basel I		Basel I
	30 June		31 December			30 June
	2008			2007		2007
	£m			£m		£m
Composition of capital
Tier 1
Shareholders' equity and minority interests	101,270			88,311		43,110
Innovative Tier 1 securities and preference shares included in subordinated liabilities	6,814			6,919		4,264
Goodwill and other intangible assets	(43,471)			(48,492)		(18,868)
Goodwill - discontinued businesses	(4,230)			(3,232)		-
Regulatory and other adjustments	44			858		2,645
Less deductions from Tier 1 capital	(1,932)			n/a		n/a
	_______			_______		_______
Total Tier 1 capital	58,495			44,364		31,151
	_______			_______		_______
Tier 2
Unrealised gains in available-for-sale equity securities in shareholders' equity and minority interests	2,423			3,115		3,348
Collective impairment losses, net of taxes	326			2,582		2,374
Qualifying subordinated liabilities	30,092			27,681		20,663
Minority and other interests in Tier 2 capital	300			315		570
Less from Tier 2 capital	(2,806)			n/a		n/a
	_______			_______		_______
Total Tier 2 capital	30,335			33,693		26,955
	_______			_______		_______
Tier 3	215			200		-
	_______			_______		_______
Supervisory deductions
Unconsolidated investments	4,119			4,297		4,147
Other deductions	38			5,986		1,656
	_______			_______		_______
	4,157			10,283		5,803
	_______			_______		_______
Total regulatory capital	84,888			67,974		52,303
	_______			_______		_______

  THE ROYAL BANK OF SCOTLAND GROUP plc

DERIVATIVES - STATUTORY

	Assets		Liabilities
As at 30 June 2008	£m		£m
Exchange rate contracts
Spot, forwards and futures	23,656		26,685
Currency swaps	26,422		20,993
Options purchased	16,292		-
Options written	-		16,345
Interest rate contracts
Interest rate swaps	294,000		293,215
Options purchased	37,630		-
Options written	-		37,553
Futures and forwards	2,048		2,076
Credit derivatives	62,760		56,170
Equity and commodity contracts	20,473		22,694
	_______		_______
	483,281		475,731
	_______		_______

The Group enters into master netting agreements in respect of its derivatives activities. These arrangements, which give the Group a legal right to set-off derivative assets and liabilities with the same counterparty, do not result in a net presentation in the Group's balance sheet for which IFRS requires an intention to settle net or to realise the asset and settle the liability simultaneously as well as a legally enforceable right to set off. They are however effective in reducing the Group's credit exposure from derivative assets. The Group has executed master netting agreement with the majority of its derivative counterparties resulting in a significant reduction in its net exposure to derivative assets. The extent of netting under such agreements amounted to £406 billion at 30 June 2008. Furthermore the Group holds substantial collateral against this net derivative asset exposure.

  THE ROYAL BANK OF SCOTLAND GROUP plc

MARKET RISK - STATUTORY

The Group manages the market risk in its trading and treasury portfolios through its market risk management framework. This expresses limits based on, but not limited to: value-at-risk (VaR); stress testing and scenario analysis; and position and sensitivity analyses. VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at given confidence levels. The table below sets out the VaR, at a 95% confidence level and a one-day time horizon, for the Group's trading and treasury portfolios. The VaR for the Group's trading portfolios includes idiosyncratic risk and is segregated by type of market risk exposure.

	Average	Period end	Maximum	Minimum
	£m	£m	£m	£m
Trading VaR
Interest rate	17.3	16.0	23.8	11.4
Credit spread	62.4	62.0	90.4	42.5
Currency	3.4	3.4	5.4	1.2
Equity	13.2	12.6	19.4	7.9
Commodity	6.6	16.3	17.8	-
Diversification effects		(33.0)
		_______
30 June 2008	62.0	77.3	89.3	44.0
	_______	_______	_______	_______
31 December 2007	21.6	45.7	50.1	13.2
	_______	_______	_______	_______
30 June 2007	16.1	16.7	19.0	13.2
	_______	_______	_______	_______
Treasury VaR
30 June 2008	5.8	5.9	7.6	5.0
	_______	_______	_______	_______
31 December 2007	3.7	5.5	6.4	1.3
	_______	_______	_______	_______
30 June 2007	2.8	3.4	3.9	1.3
	_______	_______	_______	_______

The Group's VaR should be interpreted in light of the limitations of the methodologies used. These limitations include:

	Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations.
	VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
	VaR using a 95% confidence level does not reflect the extent of potential losses beyond that percentile.

The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Controls are in place to limit the Group's intra-day exposure, such as the calculation of VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated. The Group undertakes stress testing to identify the potential for losses in excess of the VaR.

The Group's treasury activities include its money market business and the management of internal funds flow within the Group's businesses. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

FAIR VALUE - FINANCIAL INSTRUMENTS - STATUTORY

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of management estimation, the extent of which depends on the instrument's complexity and the availability of market-based data. Where such data are not observable, they are estimated by management. The table below shows financial instruments carried at fair value at 30 June 2008 in the Group's financial statements, by valuation method.

	30 June 2008				31 December 2007
	Assets		Liabilities		Assets		Liabilities
	£bn		£bn		£bn		£bn
Quoted prices in active markets	126.5		51.9		159.4		65.7
Valuation techniques
- based on observable market data	741.2		642.0		669.4		510.4
- incorporating information other than observable data	28.3		6.1		32.7		15.3
	_______		_______		_______		_______
	896.0		700.0		861.5		591.4
	_______		_______		_______		_______

Financial assets and liabilities valued based on information other than observable market data are set out below.

	30 June 2008				31 December 2007
	Assets		Liabilities		Assets		Liabilities
	£bn		£bn		£bn		£bn
Syndicated loans	3.8		-		4.6		-
Commercial mortgages	1.3		-		2.2		-
Super senior tranches of asset-backed CDOs	2.0		-		3.8		-
Other debt securities	13.0		-		8.8		-
Exotic derivatives	4.8		2.3		5.2		4.4
Other portfolios	3.4		3.8		8.1		10.9
	_______		_______		_______		_______
	28.3		6.1		32.7		15.3
	_______		_______		_______		_______

No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.

  THE ROYAL BANK OF SCOTLAND GROUP plc

INDEPENDENT REVIEW REPORT TO THE ROYAL BANK OF SCOTLAND GROUP plc

We have been engaged by The Royal Bank of Scotland Group plc ('the company') to review the condensed statutory financial statements in the half-yearly financial report for the six months ended 30 June 2008 which comprises the condensed consolidated income statement, the condensed consolidated balance sheet, the condensed consolidated statement of recognised income and expense, the condensed consolidated cash flow statement and related notes 1 to 18 (the "condensed statutory financial statements").  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed statutory financial statements.

This report is made solely to the company in accordance with the International Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdoms' Financial Services Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed statutory financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed statutory financial statements in the half-yearly financial report based on our review.

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed statutory financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Deloitte & Touche LLP

Chartered Accountants and Registered Auditor

7 August 2008

Edinburgh, UK

  THE ROYAL BANK OF SCOTLAND GROUP plc

PRINCIPAL RISKS AND UNCERTAINTIES 

The principal risks and uncertainties for the Group in the second half of 2008 are:

Credit risk 

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of the Group's businesses. The global economy slowed during the first half of 2008 and the outlook for the UK economy has deteriorated as growth reduced sharply and house prices fell. In the US, the labour market has deteriorated and real estate prices continued to fall. As a result, the Group may see adverse changes in the credit quality of its borrowers and counterparties in the second half of 2008 with increasing delinquencies and defaults leading to higher impairment charges.

In 2007 and the first half of 2008, the Group recorded significant write-downs on its credit market positions. The Group continues to have exposure to these markets and as market conditions change the fair value of the Group's instruments could fall further. Furthermore, recent market volatility and illiquidity has made it difficult to value certain of the Group's financial instruments. Valuations in future periods, reflecting prevailing market conditions, may result in significant changes in the fair values of these instruments.

Liquidity risk

Liquidity risk is the risk that the Group will be unable to meet its obligations as they fall due. Credit markets continue to experience a severe reduction in liquidity in the aftermath of events in the US sub-prime residential mortgage market. The Group's liquidity management focuses on maintaining a diverse and appropriate funding strategy for its assets, in controlling the mis-match of maturities and from carefully monitoring its undrawn commitments and contingent liabilities. Further tightening of credit markets could affect the Group's earnings in the second half of 2008.

Market risk

The most significant market risks the Group faces are interest rate, foreign exchange and bond and equity price risks. Changes in interest rate levels, yield curves and spreads in the second half of 2008 may affect the interest rate margin realised between lending and borrowing costs. Changes in currency rates, particularly in the sterling-dollar and sterling-euro exchange rates, affect the value of assets and liabilities denominated in foreign currencies and affect earnings reported by the Group's non-UK subsidiaries, mainly ABN AMRO, Citizens, RBS Greenwich Capital and Ulster Bank, and may affect income from foreign exchange dealing. The performance of financial markets during the second half of 2008 may cause reductions in the value of the Group's investment and trading portfolios.

Integration risk

The restructuring of ABN AMRO is complex involving substantial reorganisation of ABN AMRO's operations and legal structure. The restructuring plan is being implemented and significant elements have been completed within the planned timescales and the integration of the Group's businesses is underway. However, risks remain that the Group may not realise all the anticipated benefits of the acquisition.

Regulatory risk

The Group is subject to financial services laws, regulations, administrative actions and policies in each location in which it operates. Changes during the second half of 2008 in the regulatory and supervisory framework, in particular in the UK and US, could materially affect the Group's business.

Litigation

The outcome of existing and future legal actions, claims against and by the Group and arbitrations could affect the financial performance of the Group in the second half of 2008. 

  THE ROYAL BANK OF SCOTLAND GROUP plc

STATEMENT OF DIRECTORS' RESPONSIBILITIES

We, the directors listed below, confirm that to the best of our knowledge:

the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Sir Tom McKillop Sir Fred Goodwin Guy Whittaker

Chairman Group Chief Executive Group Finance Director

Board of directors

 

Chairman Non-executive directors

Sir Tom McKillop Colin Buchan

Jim Currie

Executive directors Lawrence Fish

Sir Fred Goodwin Bill Friedrich

Johnny Cameron Archie Hunter

Mark Fisher Charles 'Bud' Koch

Gordon Pell Janis Kong

Guy Whittaker Joe MacHale

Sir Steve Robson

Bob Scott

Peter Sutherland

 

 

  THE ROYAL BANK OF SCOTLAND GROUP plc

OTHER INFORMATION

	30 June		31 December		30 June
	2008		2007		2007
Ordinary share price	£2.15		£4.44		£6.33
Number of ordinary shares in issue	16,142m		10,006m		9,456m
Market capitalisation	£34.7bn		£44.4bn		£59.9bn
Net asset value per ordinary share	£3.27		£4.47		£3.96
Employee numbers in continuing operations
(full time equivalents rounded to the nearest hundred)
Global Banking & Markets	21,300		22,700
Global Transaction Services	4,000		4,100
UK Retail & Commercial Banking	47,100		46,100
US Retail & Commercial Banking	18,100		18,000
Europe & Middle East Retail & Commercial Banking	8,000		8,000
Asia Retail & Commercial Banking	9,000		8,600
RBS Insurance	17,100		17,300
Group Manufacturing	42,500		42,000
Centre	4,000		4,600
	_______		_______
	171,100		171,400
Integration	1,000		-
Share of shared assets	1,000		1,200
RFS minority interest	54,700		53,800
	_______		_______
Group total	227,800		226,400
	_______		_______

Capitalisation issue and share dealing facility 

Shareholders on the company's register of members as at the close of business on 12 September 2008 (the capitalisation issue "record date") will be entitled to a capitalisation issue of 1 new ordinary share ("new shares") for every  40 ordinary shares held  resulting in an issue of  404 million new shares. The issue represents approximately the same aggregate amount as the cash dividend paid for the interim period ended 30 June 2007, based on the closing share price of 233p per share on 7 August 2008. Conditional on the admission to the Daily Official List of the UK Listing Authority and to trading on the London Stock Exchange and Euronext Amsterdam, it is expected that dealings in the new shares will commence on 15 September 2008 on the London Stock Exchange and Euronext. The ex-capitalisation date for ADRs is to be announced by NYSE. 

The company has arranged a free share dealing facility that will enable eligible shareholders who hold their shares in certificated form to sell up to 250 ordinary shares, including new shares from the capitalisation issue. Fuller details of the dealing service will be sent to eligible shareholders on 19 September 2008 and the dealing facility will be available until the end of November 2008.

Statutory results

Financial information contained in this document does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 ("the Act"). The statutory accounts for the year ended 31 December 2007 have been filed with the Registrar of Companies and have been reported on by the auditors under section 235 of the Act. The report of the auditors was unqualified and did not contain a statement under section 237(2) or (3) of the Act.

  THE ROYAL BANK OF SCOTLAND GROUP plc

FINANCIAL CALENDAR 

2008 capitalisation issue record date	12 September 2008
2008 ex-capitalisation date - LSE and Euronext	15 September 2008
2008 annual results announcement	26 February 2009
2008 final dividend payment	June 2009
2009 interim results announcement	August 2009

CONTACTS

Sir Fred Goodwin	Group Chief Executive	020 7672 0008
		0131 523 2203
Guy Whittaker	Group Finance Director	020 7672 0003
		0131 523 2028
Richard O'Connor	Head of Investor Relations	020 7672 1758
For media enquiries:
Andrew McLaughlin	Group Director, Communications	0131 626 3868
		07786 111689
Carolyn McAdam	Group Head of Media Relations	020 7672 0660
		07796 274968

7 August 2008

ENDIR FKFKDNBKKOFK

---

Related Shares:

RBS.L