Royal Bank of Scotland : RBS 2016 AGM

I will begin with some remarks on governance and strategy, and will then invite our Chief Executive, Ross McEwan, to talk about the progress the business has made in the last twelve months.

First, I wish to thank my predecessor, Philip Hampton, who stepped down last August after seven years in the chair. He led the Board and the Group through a very difficult period, and we are all grateful to him for the calm and careful way he did so.

In the rest of the Boardroom, after a lot of change in recent years, a period of stability has been helpful. I pay particular tribute to Sandy Crombie, the Senior Independent Director, who has helped me enormously in my induction to RBS, and indeed to the Edinburgh community. As a result, the chairmanship transition has proceeded smoothly.

Turning to strategy, that remains largely unchanged from last year. I can reaffirm the Board's commitment to refocusing the bank on its core retail and commercial franchises in the UK and Ireland. Our overseas presence has been significantly reduced, and is now largely justified by its relevance to our clients in the British Isles. We aim to build a strong and stable bank, with a core tier one capital ratio of at least 13 per cent, and a fair bank that meets customers' needs effectively.

In our results for 2015 I believe that the underlying performance over the year shows the strength - and further potential - of our core businesses, albeit issues like our conduct legacy and restructuring have taken their toll on our bottom line. So while adjusted operating profit for the year totalled £4.4 billion, we recorded a full year attributable loss of nearly £2 billion.

Our First Quarter results released last Friday underscored the strength of those core franchises and future quarters will I believe continue to show not only their value, but continued progress as we move towards our goals for 2020.

Ross will explain the progress we have made with customer facing franchises, but I would like to draw your attention to some of the major strategic developments during the year.

In October 2015 we completed the sale of Citizens Bank in the United States, at what we believe was a satisfactory price for the shareholders. We wish Citizens Bank every success as an independent entity.

We have made excellent progress too in running down our non-strategic assets during the year. Risk-weighted Assets in Capital Resolution fell from £95 billion to £50 billion during 2015. We have also completed the sale of our subsidiary in Russia, and our Luxembourg-based fund management business. In total, by the end of this restructuring process we will be focused on 13 countries.

We also succeeded in reducing the size and scope of our investment bank, whose past low profitability, in terms of return on equity, was depressing our overall returns. I note that a number of other European banks have concluded that, in very difficult markets, they also need to downsize their investment banking operations. We are pleased that we began that process rather earlier than some others, which helped to dispose of assets at prices which would be difficult to replicate today.

Against that generally positive background it is disappointing to note that the share price, as at last night's close, was 38 per cent lower than at last year's AGM. I am sure all shareholders are well aware of this, but it is important to recognise that during the same period UK bank stocks on average are down 30 per cent, and European bank stocks are also down by an average of 35 per cent. That reflects the fact that current financial conditions are difficult for all banks. When official interest rates are so low net interest margin tends to contract. And investors have been influenced by the view that in a generally softer environment for global GDP, rates seem likely to remain lower for longer.

But while there are broad market reasons for the stock's performance, neither the Board nor management sit back and accept that decline as inevitable. We know that our future lies in our own hands to a large extent, and the prospects for your company and your investment will be heavily influenced by the way we address the challenges we face.

Clearly one of the idiosyncratic features of RBS is the large government shareholding, following the bank's rescue in 2008. On that front there have been two positive developments. The sale of the first tranche of 630 million government owned shares last August was an important way point on the road to recovery. And in March this year our capital position was strong enough to allow us to repay the Dividend Access Share, another return of £1.2 billion to the tax payer.

Further returns of capital depend on our ability to resolve a number of outstanding issues which are particular to RBS.

Although last year the bank resolved a number of litigation and investigation issues, we have others still to address. The most significant of them now is the investigation, by various US regulators, both federal and state, of potential liabilities surrounding the sale of mortgage backed securities. These cases date back to 2007 and before, but we have not yet been able to reach a conclusion. We are keen to resolve these issues, but the timing is not under our control.

There are of course other cases of significance, notably the shareholder action related to the 2008 rights issue, and the Financial Conduct Authority's review of the Global Restructuring Group. I cannot forecast when the former will conclude, while on the latter the FCA have said they plan to publish their conclusions as soon as possible.

There are also two important structural issues to address: the separation of the Williams and Glyn business, and the creation of a ring-fenced bank following the legislation implementing the recommendations of the Independent Commission on Banking.

The European Commission mandated the full separation and divestment of Williams and Glyn by the end of 2017, as one of the conditions of the State Aid we received. As we reported last Thursday this is a very complex process, that involves standing up a full service retail and commercial bank that works seamlessly for around 2 million customers on day one. The closer we get to delivering this, the more clarity we have on the risks and we now see a significant risk that the separation and divestment will not be fully achieved by the end of 2017. That said, we remain committed to our state aid obligation and are exploring alternative means for achieving that.

At the same time, along with other UK banks we must achieve ring-fencing by 1 January 2019. Our planning is well under way, but again it is a complex and costly IT challenge.

When we have completed all the sales of non-core businesses, and restructured the bank on the lines I have set out, around 90 per cent of our income will be generated from clients in the UK. So our fortunes are heavily influenced by the evolution of the UK economy. Recently, we have seen signs of a slowdown in investment and in retail sales. Overall growth continues, but seems likely to be a little slower than was expected last year.

The EU referendum is generating additional uncertainty. We are not one of those financial institutions whose core business depends critically on unfettered access to the EU markets, though our Irish and Western European businesses are significant. But if a vote to leave the EU leads to a slowdown in growth, as the Treasury, Bank of England and most other economic forecasters suggest, that would be an unwelcome headwind for your company. So, as a prudent business we are preparing as best we can for various potential scenarios. However, our primary responsibility is to serve and support our customers, which we will continue to do, whichever way the UK electorate ultimately votes.

I conclude by thanking you, the shareholders, for your patience and support as we continue to rebuild RBS. Our aim is to restore it to a position in which the citizens of Scotland, and the whole of the UK, can take pride in the support it gives to individuals, businesses and the economy in general.

We know there is a lot more work to do before we can say that job is done. But I can assure you that I and the rest of the Board are fully committed to the role we play in overseeing management's delivery of a refocused, profitable and socially responsible bank.

I would now like to invite Ross McEwan to report on the progress being made by individual business within the Group's portfolio.