TEXT-Fitch: RBS results in line with expectations, no rating impact

Aug 6 - Fitch Ratings says that The Royal Bank of Scotland Group plc's
(RBSG) Q2 performance was generally in line with the agency's expectations. The
latest results have no rating implications.

RBSG's Q212 results continue to reflect the impact of its balance sheet
restructuring, which involves the reduction of non-core assets and re-shaping
the balance sheet. The bank reduced its non-core funded assets by another
GBP11bn compared to Q1 to GBP72bn at the end of Q2. In line with its strategy,
the group also continued to build up liquidity and to reduce its reliance on
short-term wholesale funding.

Fitch views the group's restructuring/deleveraging plan as largely achievable
but reducing the remaining non-core portfolio to GBP60bn-GBP65bn by year-end in
line with targets, remains pivotal. The risks associated with the plan are not
negligible, given that the remaining positions are less liquid and more
concentrated, particularly the commercial real estate portfolio of Ulster Bank
in Ireland. Furthermore, the timing of further deleveraging remains dependent on
market conditions, during general macroeconomic and market uncertainty and the
continuing eurozone crisis.

RBSG reported group operating profit of GBP1.8bn in H112 (of which GBP650m was
generated in Q212), slightly less than the same period last year. Like its
peers, the group was affected by low client activity in the weak capital market
environment. The Markets division reported Q212 operating profit of GBP251m,
down from GBP824m in Q112 and GBP327m in Q211.

Although the income generated from markets and investment banking is expected to
fall over time, in line with the announced re-organisation, earnings volatility
will also reduce over time, which Fitch views positively.

Core performance in other business divisions held up well, despite the
de-risking and de-leveraging process, the build-up of liquidity, the generally
weak demand for credit and uncertainties in the eurozone, particularly in
Ireland and Spain. Weaker income generation was partially offset by the bank's
cost saving programme and broadly stable loan impairment charges compared to
Q112. Loan impairment charges were 41% lower than for Q211, principally
reflecting substantial provisioning at Ulster undertaken in Q211. Expenses in
Q212 included GBP125m provisions for expected costs in relation to a
technological failure in June 2012 as well as a GBP50m provision against
possible interest rate hedging products. Fitch expects both of these provisions
to be supplemented over the coming quarters.

Slightly lower core operating results were partially offset by lower operating
losses in its non-core business (H112: loss of GBP1.35bn compared to a loss of
GBP1.96bn in H111) thus softening the fall in group operating profits year on
year.

Net results were affected by significant non-operating and exceptional items
which turned RBSG's operating profits for H112 into net losses. Fair-value
changes to own debt and the impact of the derivatives against the Asset
Protection Scheme caused significant income volatility. The negative adjustment
to its own credit spread in H112 reached almost GBP3bn compared to GBP236m in
H111. However, both these changes are non-cash, normally reversible, and treated
as non-operating items by Fitch. RBSG strengthened its provision against PPI
claims by a further GBP135m in Q212, after booking GBP125m in Q112 and GBP850m
in 2011.

RBS's core Tier 1 capital ratio improved by 30 basis points quarter-over-quarter
to 11.1% at end-June 2012. However, in light of its credit exposures, Fitch,
deems the group's capitalisation to be just adequate for its rating level. Fitch
believes that a return to sustainable profitability and internal capital
generation would be necessary for RBSG to be in a position to respond to ever
increasing regulatory capital requirements, particularly from growth in its core
retail and commercial business, incremental CRD IV capital requirements, and
potential industry wide requirements from the FSA.

Additional information is available on www.fitchratings.com.