Interim Report - 12 of 28

Brazil, reflecting both a reduction in the trading book and a fall in average interest rates, partly offset by lower net interest income in CMB and in Balance Sheet Management in GB&M. The decrease in CMB was driven by Business Banking in Brazil, as a result of lower spreads, and a reduction in average lending balances. The latter was the result of more restrictive origination criteria which included reducing credit limits where appropriate. Net interest income in GB&M also fell as the proceeds from maturing investments were reinvested by Balance Sheet Management at lower prevailing rates.

Net fee incomeincreased by 10%, due in part to higher current account fees in Brazil. The sale of the non-life insurance business in Argentina also contributed to the rise, as sales commissions payable to third party distribution channels were no longer incurred.

Net trading income decreased by US$159m, primarily in Brazil due to a decline in net interest income on trading activities as average trading assets fell. In addition, the comparable period in 2012 benefited from higher Rates trading revenue as a result of downward yield curve movements.

Net income from financial instruments designated at fair value decreased by US$176m, notably in Brazil, mainly in the unit-linked pensions business as a result of significantly lower net investment income due to market movements. To the extent that this was attributed to policyholders there was a corresponding movement in Net insurance claims incurred and movement in liabilities to policyholders.

Gains less losses from financial investments fell by 42% due to lower gains on disposals of available-for-sale government debt securities in Balance Sheet Management.

Net earned insurance premiums decreased by 26%, driven by lower sales of unit-linked pension products in Brazil. Premiums also fell in Argentina as a consequence of the sale of the non-life insurance business in the first half of 2012. The reduction
of net earned insurance premiums resulted in a corresponding decrease of Net insurance claims incurred and movement in liabilities to policyholders.

Other operating income decreased by US$22m, driven by a significant reduction in the PVIF asset due to an increase in lapse rates and interest rates movements. This was partly offset by net gains in the current period and the non-recurrence of net losses in the first half of 2012 on the sale or reclassification to 'held for sale' of non-strategic businesses.

LICs increased by US$365m, driven by higher collective provisions in RBWM and CMB and higher individually assessed provisions. This included charges mainly relating to impairment model changes and assumption revisions in Brazil for restructured loans in portfolios in RBWM and Business Banking in CMB (see page 114), although this was offset in part by an improvement in the quality of the portfolio following the modification of credit strategies in previous periods to mitigate rising delinquency rates. Collective impairments also rose in RBWM in Mexico, reflecting the non-recurrence of a provision release in the first half of 2012, higher lending balances and a revision to the assumptions used in our collective assessment models in the first half of 2013. In addition, individually assessed provisions increased, in particular on exposures to homebuilders in CMB due to a change in the public housing policy together with a specific exposure in GB&M, both in Mexico.

Operating expenses decreased by US$62m as a consequence of business disposals, coupled with continued efforts to exercise strict cost control and progress our organisational effectiveness programmes. This was partly offset by the effect of inflationary pressures, union-agreed salary increases in Brazil and Argentina, and higher compliance and risk costs from the implementation of Global Standards and portfolio repositioning, notably in Mexico.