Segment performance Q4 2016 compared with Q3 2016 ● Adjusted operating profit of €44 million was €37 million lower than Q3 2016. Adjusted operating expenses increased by €31 million driven by an impairment of intangible assets and a reduction in costs recharged to other business segments. In addition, non-interest income reduced by €12 million principally reflecting an interim adjustment to the pricing of FX transactions between Ulster Bank RoI and NatWest Markets pending completion of a detailed pricing review. ● Litigation and conduct costs increased €93 million primarily reflecting a further provision in respect of remediation and programme costs associated with an industry wide examination of tracker mortgages. ● The recent sale of a portfolio of loans contributed to a €0.5 billion reduction in net loans and advances and a €1.5 billion reduction in risk elements in lending. ● Risk weighted assets decreased by €3.6 billion in the quarter to €21.1 billion largely reflecting the sale of a portfolio of loans combined with enhancements to mortgage models and an improvement in the macro economic environment. Q4 2016 compared with Q4 2015 ● Adjusted operating profit of €44 million was €28 million higher than Q4 2015 primarily driven by increased net impairment releases. ● Net interest margin increased by 14 basis points to 1.59% primarily driven by one-off movements in income recognised on non performing loans in both Q4 2015 and Q4 2016. Commercial Banking 2016 compared with 2015 ● Operating profit was £742 million compared with £1,264 million in 2015 and included a £423 million litigation and conduct charge, principally relating to a provision in respect of the FCA review of RBS’s treatment of SMEs. Adjusted operating profit of £1,273 million was £111 million, or 8%, lower than 2015, mainly reflecting increased impairments, partially offset by increased income. (1) ● Total income increased by £161 million to £3,415 million. Excluding the impact of transfers , income increased by £21 million, or 1%, reflecting higher asset and deposit volumes. Net interest margin fell by 12 basis points to 1.76% driven by asset margin pressure in a competitive market and low rate environment. ● Adjusted operating expenses of £1,936 million were £135 million higher than 2015. Excluding business transfers, adjusted operating expenses increased by £51 million reflecting a £25 million intangible asset write-down and increased investment spend. ● Net impairment losses increased by £137 million to £206 million primarily reflecting a single name charge taken in respect of the oil and gas portfolio. ● Net loans and advances of £100.1 billion increased by £8.8 billion, or 10%, compared with 2015 reflecting increased borrowing across a number of sectors. ● RWAs were £78.5 billion, an increase of £6.2 billion compared with 2015 reflecting asset growth partially offset by reduced RWA intensity. Note: (1) The business transfers included impact of: total income of £218 million (2015 - £79 million; Q4 2016 - £48 million; Q4 2015 - £51 million; Q3 2016 - £58 million); operating expenses of £109 million (2015 - £25 million; Q4 2016 - £29 million; Q4 2015 - £19 million; Q3 2016 - £28 million); impairment losses of £50 million (2015 - £1 million recoveries; Q4 2016 - nil; Q4 2015 - nil; Q3 2016 - £7 million recoveries) net loans and advances to customers of £6.2 billion (31 December 2015 - £5.0 billion; 30 September 2016 - £6.7 billion); customer deposits of £0.4 billion (31 December 2015 - nil; 30 September 2016 - £0.6 billion); and RWAs of £9.3 billion (31 December 2015 - £8.4 billion; 30 September 2016 - £7.4 billion). 41 RBS – Annual results 2016