Nonetheless the attributable loss, at around £7 billion, was more than three times as large as in 2015. It is hard to present that as a positive outcome for shareholders, though in fact it does reflect the impact of stronger efforts to resolve the bank’s legacy problems. We settled a number of regulatory and legal actions and made a large provision for future costs, we retired the Dividend Access Share and made a large number of disposals of legacy assets. Restructuring costs were also large in the year. As a result, the bank is better placed than it was a year ago, though there are still some sizeable legacy problems to resolve. The Board and I are determined to press ahead with resolution of those issues and to continue with the strategy Ross McEwan first outlined in 2014. We are confident that we have the right management team in place to deliver effectively in both areas.
In 2014 I announced a three phase strategy. We are moving to the final phase of this, after delivering much during the first two phases, which were about building a platform of strength and stripping away unnecessary complexity. Our CET1 ratio has now materially improved to 13.4% from 8.6% at the start of 2014. We have thoroughly reshaped our investment banking business, now rebranded NatWest Markets. We have sold Citizens in the US, completing the largest bank IPO in US history in the process, and also sold our international private banking business. We have ended active operations in 26 countries, decommissioned 30% of our IT systems and applications, and almost halved the number of legal entities. We have also completed the run-down or sale of over three quarters of Capital Resolution legacy and non-core assets. We have reduced our cost base by over £3 billion, exceeding our target for the third consecutive year, with an operating cost reduction of £985 million.
� Ulster Bank RoI adjusted operating profit of £229 million was £35 million lower than 2015 principally reflecting a £28 million reduction in net impairment releases. REIL decreased by £1.3 billion in Q4 2016 largely driven by the sale of a portfolio of distressed loans.
� Private Banking (3) adjusted operating profit of £149 million increased by £36 million, or 32%, compared with 2015 as increased asset volumes drove a £13 million, or 2%, uplift in income and cost efficiencies resulted in a £7 million, or 1%, reduction in adjusted operating expenses. In addition, net impairment losses reduced by £16 million.
PBB provides a simple range of products, including current accounts, loans and mortgages, to meet all core banking needs.
Functions These teams define functional strategy and the financial plan to support the franchises and other functions.
Isle of Man Bank is the ‘community bank’ and the island’s oldest native bank, offering retail, private and business banking services to local customers.
(9) Data is compiled by Entrepreneurial Spark. The data includes all businesses which have been part of the programme since launch in 2012.
Power to the people We continue to play a key role in the transition to a low carbon economy by helping our customers to mitigate their emissions, save energy and reduce costs.
Progress in 2016 RBS has continued to make progress against its strategic objectives of reducing risk and strengthening both the balance sheet and the capital position. Against a backdrop of uncertainty in the wider political and economic environment, risk management played a key role in positioning RBS to prepare for, and respond to developments.
Similarly, activity has been underway to enhance our operational risk management framework to help ensure our businesses maintain a safe and secure environment for our customers. As part of this, during 2016 there was a focus on risk and control assessment, particularly relating to our most material products, processes and services. In addition, there continued to be an emphasis on understanding and managing the risks relating to RBS’s transformation agenda.
Regulatory and legal risks The impacts of past business conduct: Future litigation and conduct charges could be substantial. RBS is involved in a number of investigations, including: ongoing class action litigation, securitisation and mortgagebacked securities related litigation, investigations into foreign exchange trading and rate-setting activities, continuing LIBOR-related litigation and investigations, investigations into the treatment of small and mediumsized business customers in financial difficulty, anti-money laundering, sanctions, mis-selling (including mis-selling of payment protection insurance products). Settlements may result in additional financial penalties, non-monetary penalties or other consequences, which may be material.
Howard was chair of the UK Airports Commission between 2012 and 2015 and is also the author of several books on financial subjects.
Group. He has over 20 years of experience advising the banking sector while at Credit Suisse.
Experience: Previously, Frank served as a nonexecutive director of Crédit Agricole CIB, EDF,
Swiss Bank Corporation (which subsequently merged with UBS), he then held the roles of Head of UK Corporate Finance, Head of European
Worldwide plc and The Gap Inc. Penny spent the majority of her executive career at Coca-Cola where she held a number of leadership positions, latterly as President, Coca-Cola Great Britain and
External appointment(s): Non-executive director and Chairman of the audit committee of BP plc
Premier Banking and UK Retail Banking and was latterly Chief Executive of Liverpool Victoria Group for 10 years.
I am pleased to introduce the corporate governance report. The following report provides an overview of key roles and responsibilities of the Board, and sets out in greater detail how the Board spent its time in 2016. Board effectiveness and performance evaluation are also covered, as well as an overview of how we communicate with shareholders.
Understandably, capital strategy and planning remains a priority for the Board. The Board has continued to provide detailed oversight of litigation and conduct matters, particularly the FCA
Nominations and Governance Committee, adding a governance oversight function and streamlining processes and membership; a range of actions to enhance agenda planning and the Board’s overall operating rhythm; and actions to improve alignment between the Board and executives to ensure a consistent “tone from the top”. These themes were taken forward during 2016 under an action plan, are being appropriately addressed and will be kept under regular review as a matter of good practice.
In 2016, the Board and committee evaluation process was conducted internally by the Chief Governance Officer and Board
Paper quality has improved over recent years. There is scope for further enhancement, by continuing to manage paper length and ensuring an appropriate level of detail is shared with the Board.
Committee monitors the Group’s governance arrangements to ensure that best corporate governance standards and practices are upheld and considers developments relating to banking reform and analogous issues affecting the Group in the markets where it operates. The Committee makes recommendations to the Board in respect of any consequential amendments to the
Committee, was conducted internally in 2016. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings. Overall the review concluded that the
Throughout 2016 RBS has continued to progress its plan to build a strong, simple, fair bank for customers and shareholders and the Group Audit Committee (GAC) has supported this through the review and consideration of RBS’s financial reports and disclosures. This report also sets out the key areas of focus for the GAC during 2016. I am pleased to confirm that the GAC
Board Risk Committee with the GAC focusing on those aspects impacting financial reporting. The drive to achieve satisfactory controls will benefit from the bank-wide programme to enhance risk culture, with its focus on encouraging a proactive approach to risk and a more open and challenging environment.
RBS’s new auditors in March 2016, having been successful in the tender process run in 2014.
Having considered the above, the Committee recommended the quarterly, interim and full year results announcements and the Annual Report and Accounts to the Board for approval.
Updates to Internal Audit’s charter, to reflect changes in reporting structures and amendments to the Institute of
Jon Bourne has been EY’s lead audit partner for RBS since EY assumed the role of external auditor in March 2016. Jon Bourne attends each meeting of the GAC and reports to the GAC on the external auditor’s observations and conclusions from the year-end audit and half-year review of The Royal Bank of Scotland Group plc, The Royal
• Received oral updates from the Chief Risk Officer and Chief Conduct and Regulatory Affairs Officer on the most current and material risks at each meeting. This enabled the BRC to discuss RBS’s top risks and whether these were being managed effectively; whether RBS was operating within risk appetite; and whether business change was being managed effectively.
• Held an in-depth session on risk reporting in October 2016 which led to additional recommendations for refinements to the form and content of reporting. Management will progress these improvements
• Reviewed RBS’s risk profile relative to credit, market and operational risk, and examined detailed management information (MI) within the Risk Management report in this regard.
Scotland, NatWest and Ulster Bank for customers; • posing and addressing key challenges with management such as the provision of free banking, supporting enterprise and supporting companies or individuals to seek alternative finance when RBS is unable to help; • challenging management’s efforts on meeting the needs of particular customer groups such as high net worth individuals and small and medium sized enterprises; • ongoing commitment to both internal and external stakeholder engagement through face to face sessions and visits to customer facing businesses; • reviewing our progress on environmental targets; and
• reviewing complaint handling and the strategy to identify root cause and resolution.
We have met with over 50 different groups of NGOs, civil society groups, government bodies, consumer groups and investors in this way and the purpose is to listen and understand where RBS
Total remuneration paid to the Chairman and non-executive directors for 2016 104
“the focus is on meaningful, longterm shareholding as the mechanism for achieving alignment with shareholders”
CUSTOMERS e.g. factors aligned with the defined customer strategy, NPS scores
175% of salary for the current Chief Executive (currently £1.75 million) and 200% of salary for the current Chief Financial Officer
Further details on the new remuneration policy and arrangements for the year ahead can be found in the relevant sections of this report.
The new remuneration policy promotes sustainable long-term performance by having a lower maximum LTI award level and performance tests that encourage individuals to operate within risk appetite. The release of shares will extend over an eight year period
The current remuneration policy was approved by shareholders at the 2014 AGM for a period of three years and is therefore due for renewal at the 2017 AGM. During 2016, the Committee took the opportunity to assess how the remuneration policy could best fit with RBS’s culture and pay philosophy for employees.
The Committee also looks to ensure consistency, where possible, between the executive director policy and pay proposals for the broader employee population. This includes less reliance on variable pay and the use of deferral in shares, malus and clawback to ensure that any variable pay that is awarded is aligned with long-term performance.
• We have now trained over 60% of employees at all levels of RBS to tackle unconscious bias, helping to remove bias in our recruitment processes, build more inclusive teams, make well informed decisions and better understand and serve our customers.
• Salary ranges have been updated to reflect the external market and to ensure that people doing the same or similar roles are paid more consistently.
Note: (1) The company believes that delivery in shares is the most appropriate construct for a fixed allowance to executive directors, qualifying as fixed remuneration for regulatory requirements. If regulatory requirements emerge that prohibit allowances being delivered in shares, or deem that such allowances will not qualify as fixed remuneration, then RBS reserves the right to provide the value of the allowance in cash instead in order to comply with the requirements.
Any variable pay awarded will be delivered as a long-term incentive, paid in shares and subject to performance assessment and employment conditions.
An annual employee opinion survey takes place which includes a number of questions on pay and culture. This includes questions on employees’ understanding of how pay is determined and whether employees believe they are paid fairly for the work they do.
Details of the final performance assessment and any use of discretion will be disclosed in the remuneration report for the relevant year.
The Committee will also review financial and operational performance against the business strategy and the risk environment prior to agreeing vesting of awards. In assessing the risk considerations, the Committee will be advised independently by the BRC. If the Committee considers that the vesting outcome calibrated in line with the performance conditions outlined above does not reflect underlying financial results, or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the awards allow for an underpin to be used to reduce vesting or lapse the award.
The assessment of RBS-wide performance measures is detailed on page 73 of the 2015 Annual Report and Accounts.
Chief Financial Officer. Under the proposed new policy, the requirement will be increased to 400% of salary for the Chief Executive and 250% of salary for the Chief Financial Officer, as detailed in the remuneration policy section of this report.
• setting the remuneration framework and principles for employees identified as Material Risk Takers falling within the scope of UK regulatory requirements.
The new executive director remuneration policy and any issues arising under the accountability review process were considered at the majority of meetings. Set out below is a summary of other key activities considered by the Committee.
• Assessment of the performance of LTI awards granted in prior years and performance targets for 2016 awards.
• 2016 preliminary pay elements including bonus pool, deferral and LTI awards.
Annual Report on Remuneration – 2016 AGM For Against Total votes cast Withheld
For the 2016 performance year, RBS has operated a multi-step process which is a control function led assessment to determine performance and therefore the appropriate bonus pool by franchise and function.
The assessments are made across financial, customer and people measures. Risk and conduct assessments at the same franchise or functional level are then undertaken to ensure that performance achieved without the appropriate risk and conduct controls and culture is not inappropriately rewarded.
An accountability review process is operated that allows RBS to respond in instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year. Under the accountability review process, RBS can apply malus and clawback.
(2) Executive directors are not included. The table is based on an exchange rate where applicable of €1.224 to £1 as at 31 December 2016 and amounts disclosed for 2015 have been restated using the same exchange rate so that comparison can be made on a like for like basis.
Oxley Act of 2002, subject to a number of exceptions available to foreign private issuers.
Management's report on RBS’s internal control over financial reporting will be filed with the Securities and Exchange
Chairman to hold meetings with non-executive directors without the executives present and non-executive directors are to meet without the Chairman present at least once a year to appraise the
We monitor our progress against our goals. We gather feedback from our colleagues, and through metrics and key performance indicators to assess our progress and respond accordingly. We do this in tandem with feedback from regulators and industry bodies.
We continue to focus on building an ethnically diverse RBS. Our plan focuses on positive action and includes reciprocal mentoring, targeted development workshops and leadership programmes and ensuring we have a Black, Asian and Minority
The risk factors which could materially affect RBS’s future results are set out on pages 432 to 463. RBS’s regulatory capital resources and significant developments in 2016 and anticipated future developments are detailed on pages 178 to 186. The liquidity and funding section on pages 187 to 198 describes
The tax charge for the year ended 31 December 2016 reflects the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised, a reduction in the carrying value and impact of UK tax rate changes on deferred tax balances, and the release of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations.
New business margins were stable over 2016 whilst margins on existing customers remortgaging have improved. Gross new business lending to small and medium-sized enterprises of £1.6 billion was up 43% compared with 2015. Personal loan gross new lending of £2.3 billion was up 24% supported by the launch of functionality for a customer to apply via the mobile app combined with improvements to customer experience. We have continued to take a cautionary risk approach to personal unsecured lending. As a result, personal unsecured cards and overdrafts balances have decreased by £0.3 billion, or 5%, compared with 2015, and margins have widened.
Adjusted operating expenses reduced by €28 million, or 5%, to €559 million reflecting a combination of progress made on cost saving initiatives, the non recurrence of one off costs in 2015 and one off accrual releases in 2016.
The focus will be on creating deep and lasting relationships and implementing growth initiatives that will create long term sustainable returns. Significant progress has been made in rebuilding the business and it continues to drive forward with its goal of being the leading UK-based private bank and wealth manager, through a focus on supporting our customers and reducing complexity: Continued support of UK customers with balance and AUM
In addition, investment cash balances were included in assets under management for the first time in Q3 2016, excluding this, growth was £2.0 billion.
Operating profit decreased by £17 million to £190 million principally reflecting increased impairment losses and operating expenses. Adjusted operating profit of £195 million was £16 million lower than 2015.
product category for EMEA and the Americas (Source: Coalition Client Analytics Top 500 FI Wallets: G10 Foreign
Total income increased by £4 million to £837 million as the benefit of increased volumes was mainly offset by margin pressure from the impact of the competitive lending environment and a further reduction in interest rates. Net interest margin reduced by 16 basis points to 2.71%.
Net cash outflows from financing activities of £404 million relate primarily to the redemption of subordinated liabilities of £3,480 million and interest paid on subordinated liabilities of £854 million partly offset by the issue of subordinated liabilities of £2,159 million and proceeds of non-controlling interests issued of £2,147 million.
In addition to embedding risk culture behaviours into performance management, in 2016 an objective aligned to RBS’ risk culture target was set for the Executive Committee and made integral to performance reviews.
Reviews and approves the risk appetite framework and risk appetite targets for the Group's strategic risk objectives.
Dividend Access Share payment of £1.2 billion and the impact of the accelerated pension payment of £4.2 billion.
(Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency and the ranking of absorbing losses.
Assesses capital held against both size and inherent riskiness of on and off-balance sheet exposures
RWAs. RWAs are a measure of the Group’s assets and offbalance sheet positions that capture both the size and risks inherent in those positions.
The PRA buffer is a capital buffer that is designed to ensure that the Group can continue to meet minimum requirements (Pillar 1 and Pillar 2A) during a stressed period. The PRA buffer is required to be held if Pillar 1 capital buffers are determined to be insufficient.
In common with capital adequacy ratios, the leverage ratio requirement for the Group consists of a minimum requirement and a leverage ratio buffer. Details of the Group’s leverage ratio requirements are set out below.
• Rebuilding the capital strength remains one of the Group’s core strategic priorities. During 2016, RBS
• Mortgage risk weights changes proposed by the PRA for 31
Stress testing is used widely across the Group; key areas are summarised in the diagram below: Specific areas that involve capital management include: 1) Strategic financial and capital planning: through assessing the impact of sensitivities and scenarios on the capital plan and capital ratios.
The Group also undertakes regular reverse stress testing which examines circumstances that can lead to specific, defined business outcomes such as business failure. Reverse stress testing allows the Group to examine potential vulnerabilities in its business model more fully.
Liquidity and funding risk arises when RBS is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due.
(2) RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS’s ILAAP. This assessment is performed in accordance with PRA guidance.
Cash and balances at central banks 66,598 2,542 69,140 56,772 59,489 67,790 1,611 69,401 67,294 69,736
Notes: (1) Excludes reverse repo agreements and net of impairment provisions. (2) Excludes repo agreements. (3) Calculated as customer deposits less loans and advances to customers (4) nm = not meaningful
GBP USD EUR Other Total GBP USD EUR Other Total £m £m £m £m £m £m £m £m £m £m
Our colleagues are trained, managed and rewarded to serve customers well and deliver good outcomes. Our people act with integrity and understand the impact of their decisions and behaviours on customer outcomes
The Group Audit Committee is provided with a whistleblowing report on a biannual basis. It details cases by internal reporting categories based on the RBS definition of whistleblowing, which is contained within RBS’s Speak Up policy.
The aggregation of operational risk appetite drives measurement of how effectively RBS is managing its material risks across the core components of the operational risk management framework.
Officer, acts as a sub-committee of the RBS Asset and Liability
Pension stress tests take the form of both stochastic and deterministic stresses over time horizons ranging from instantaneous to five years in duration. They are designed to examine the behaviour of the pension schemes’ assets and liabilities under a range of financial and demographic shocks. The results of the stress tests and their consequential impact on
Natural Resources - The Oil & Gas sector continued to be affected by low oil prices which are predominantly due to oversupply. Exposures to the Oil & Gas sector were further reduced during 2016 and credit quality remained strong with the majority of the portfolio investment grade. The prolonged challenging market conditions did however result in a limited number of customers experiencing financial stress during the year, which resulted in impairments in the sector. For further information, refer to the Key credit portfolios section on page 228.
Risk of Credit Loss - A new framework for managing problem debts in the wholesale portfolio was introduced during the year.
In the overall assessment of credit risk, impairment, provisioning and write-offs are used as key indicators of credit quality.
Southern Europe Spain 79 58 6 671 526 75 326 1,741 2,960 Italy 27 428 52 62 175 67 59 870 2,271 Portugal 6 87 10 26 139 63 1 332 492 Cyprus 12 — — — — 38 — 50 52 Greece 15 1 — 8 — 1 10 35 39
exposure remained outside RBS long term risk appetite. Whilst the number of SNC
Heightened Monitoring as a minimum. For further information, refer to the Wholesale forbearance section.
Contractual margin may be amended to assist the customer’s day-to-day liquidity to help sustain its business as a going concern. This would normally be a short-term solution. RBS would seek a return commensurate to the risk that it is required to take.
• The levels of completed forbearance in 2016 remained stable. Year-on-year comparisons of the level of forbearance within the various sectors may be impacted by individual material cases during a given year.
December 2016 (2015 - £1.4 billion). These exposures are referred to as “in process” and are not included in the tables above. 61% (£0.9 billion) of these “in process” exposures related to non-performing customers and 39% (£0.5 billion)
Credit risk: management basis continued CRE lending exposure by sub-sector based on current exposure net of provisions and after risk transfer* Other
• With the outlook for UK commercial property more uncertain, underwriting standards have been tightened across all commercial property investment portfolios to mitigate potential declines in property values.
Personal customers in financial difficulty are managed through either collections or recoveries functions.
The methodology used for provisioning in respect of forborne loans will differ depending on whether the loans are performing or non-performing and which business is managing them due to local market conditions.
For the latent calculation, an extended emergence period is applied to account for the impact of forbearance within the portfolio. Additionally for portfolios with material forbearance, forborne loans form a separate risk pool and use different PD
Average LTV by weighted value 64% 65% 64% 57% 64% 64%
Of which: buy-to-let 5,645 8,196 2,290 360 105 27 20 14 6 16,663 15 16,678
were on a combination of interest-only and capital and interest. The remainder were capital and interest. 65% by value of the buy-to-let mortgages were on interest-only terms and 3% on a combination of interest only and capital and interest.
• The decrease in portfolio average indexed LTV reflected positive house price index trends over the last 12 months and the impacts of Central Bank of Ireland requirements for new lending.
• Gross new mortgage lending amounted to £470 million in 2016. Lending to owner-occupiers during this period was £300 million (2015 - £175 million) and had an average LTV
• The flow of new forbearance remained low during the year, with exposure totalling £53 million (2015 - £57 million)
UK Bank Commercial Private RBS NatWest Capital items PBB RoI Banking Banking International Markets Resolution W&G & other Total Total £m £m £m £m £m £m £m £m £m £m £m
Notes: (1) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
When simulating potential movements in risk factors, a combination of absolute and relative returns is used, depending on the risk factor.
Market Risk in its second-line-of-defence oversight of the risk arising from trading activities, VaR is also used as one of the components of RBS’s market risk regulatory capital requirements
As with VaR, the SVaR technique produces estimates of the potential change in the market value of a portfolio, over a specified time horizon, at a given confidence level. SVaR is a
The RNIV framework is used to identify and quantify market risks that are inadequately captured by the internal VaR and SVaR
RBS undertakes daily market risk stress testing to identify vulnerabilities and potential losses in excess of or not captured in
The aggregation approach taken for general and specific risks is as follows: • General risks are aggregated at the simulation level, adding
at the year end was 3.2 months (2015 - 3.2 months). The horizon is determined based on issuer liquidity, position concentration, product type and maturity.
For general information on the independent model validation carried out by Model Risk Management (MRM), which applies also to market risk models (including VaR models), refer to page 169. Additional details relating to pricing and market risk models are presented below.
CET1 capital ratio to exchange rates is monitored monthly and reported to the ALCo at least quarterly.
Investments, acquisitions or disposals of a strategic nature are referred to RBS’s Acquisitions and Disposals Committee (ADCo).
These two approaches provide different yet complementary views of the impact of interest rate risk on the balance sheet at a point in time. The scenarios employed in the NII sensitivity approach incorporate business assumptions and simulated modifications in customer behaviour as interest rates change. In contrast, the VaR approach assumes static underlying positions and therefore does not provide a dynamic measurement of interest rate risk. In addition, while the NII sensitivity calculations are measured to a 12-month horizon and thus provide a shorter-term view of the risks on the balance sheet, the
VaR approach can identify risks not captured in the sensitivity analysis, in particular the impact of duration and repricing risk on earnings beyond 12 months.
• The largest change in net interest income sensitivity in 2016 related to the negative impact of a 0.25% fall in interest rates from the base case. Sensitivity increased from £96 million to £236 million, primarily due to lower customer deposit interest rates. When interest rates are already at very low levels, it is assumed that further interest rate cuts will not be passed through to customer depositors and, therefore, net interest income falls.
Debt securities 72.5 24.5 48.0 82.5 35.9 46.6 Interest rate, credit spreads
We have audited the financial statements (see table below) of The Royal Bank of Scotland Group plc (the Parent Company) and its subsidiaries (together, the “Group”) for the year ended 31 December 2016. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31
In preparation for our first year audit of the 31 December 2016 financial statements, we performed a number of transitional procedures.
In July 2015 we held an initial two day event attended by the audit partners and senior staff responsible for auditing the main business, functions and overseas subsidiaries of the Group. This provided an opportunity for the entire team to prepare themselves for the audit and start to consider the audit team structure, the alignment of our audit approach and the deployment of audit analytic tools. Following this event we issued instructions to our audit teams for the first 90 days of transition covering the review of predecessor auditor’s working papers and the identification and assessment of risks, judgements and potential audit and accounting issues.
We tested the design and operating effectiveness of key controls to identify loss events and assess and determine the extent to which impairments should be recognised considering the potential for management override of controls. These include: • Manual and automated monitoring of loans with higher risk of default.
• Governance over the impairment process, including assessment of suitability of models and assumptions.
For modelled provisions, we tested the inputs and used our credit risk specialists to test the assumptions and calculations.
We assessed the appropriateness and presentation of disclosures with relevant accounting standards.
• For individually assessed impairments we did not identify material differences of judgement in respect of the provision and we were satisfied with the completeness of the identification of loss events.
On initial recognition, financial assets are classified into held-tomaturity investments; held-for-trading; designated as at fair value through profit or loss; loans and receivables; or available-for-sale financial assets. Regular way purchases of financial assets classified as loans and receivables are recognised on the settlement date; all other regular way transactions in financial assets are recognised on the trade date.
Held-for-trading - a financial asset is classified as held-for-trading if it is acquired principally for sale in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-fortrading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Income from trading activities includes gains and losses on held-for-trading financial assets as they arise.
Amortised cost - all other financial liabilities are measured at amortised cost using the effective interest method (see
As set out in Note 20 on the accounts, at 31 December 2016 the
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and temporary differences. Deferred tax assets are recognised in respect of unused tax losses and other temporary differences to the extent that it is probable that there will be future taxable profits against which the losses and other temporary differences can be utilised. The Group has considered their carrying value as at 31 December 2016 and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets. These estimates are based on forecast performance and take into account the Group’s plans to implement the UK ring-fencing regime and the resultant transfers between members of the Group.
A default shall be considered to have occurred with regard to a particular financial asset when either or both of the following have taken place: - RBS considers that the customer is unlikely to pay its credit obligations without recourse by the institution to actions such as realising security; - the customer is past due more than 90 days.
IAS 40 ‘Investment Property’ was amended in December 2016 to clarify that transfers into or out of the investment property classification may only occur on a change of use or the property ceasing to meet the definition of an investment property. The effective date is 1 January 2018.
Changes in the fair value of investment properties (11) 2 (25)
There were no people employed in discontinued operations at 31 December 2016 (2015 - nil; 2014 - 17,400).
Options are exercisable within six months of vesting; 8.1 million options were exercisable at 31 December 2016 (2015 - 1.0 million; 2014 - 1.9 million). The weighted average share price at the date of exercise of options was £1.78 (2015 - £3.54; 2014 - £3.65). At 31
Effect of changes in actuarial demographic assumptions 112 112 48 48
Effect of changes in actuarial financial assumptions 8,803 8,803 9,565 9,565
In June 2016, the triennial funding valuation of the Main scheme as at 31 December 2015 was agreed. Using the actuarial assumptions set out in the table below (which are different to the assumptions used to calculate the IAS 19 defined benefit obligation) the pension liabilities calculated at 31 December 2015 totalled £37 billion and the deficit was £5.8 billion, subsequently reduced by the £4.2 billion cash payment in March 2016. Investment returns over the next 10 year period are forecast to absorb the £1.6 billion balance of the deficit. The average cost of the future service of current members has increased from 27% to 35% of basic salary before contributions from those members; it includes the expenses of running the scheme.
Earnings per ordinary share have been calculated based on the following: £m £m £m
Values between and beyond available data points are obtained by interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk. The principal inputs to these valuation techniques are as follows: • Bond prices - quoted prices are generally available for government bonds, certain corporate securities and some mortgage-related products.
Substantially all forecast receivable hedged cash flows occur within 5 years (2015 - 10 years) and substantially all forecast payable cash flows occur within 10 years (2015 – 20 years); the income statement is impacted over the same periods.
Currency translation and other adjustments (100) 13 (2) (4) 1 15 (77)
RBS has a provision of £64 million for its liability in respect of the sale of Interest Rate Hedging Products (IRHP), having an incurred costs of £1.5 billion. The Review is now materially complete (99.4%) with only a small number of claims for additional losses
RBS established a provision of £400 million in November 2016 in respect of the FCA review of RBS’s treatment of SME customers, relating to the automatic refund of complex fees for SME customers that were in GRG between 2008 and 2013, additional redress costs arising from a new complaints process, and the associated operational costs. Background information in relation to the FCA
mortgage-backed securities (RMBS). As announced on 26 January, an additional charge of £3.1 billion was taken in the fourth quarter of 2016 in connection with these matters. Detailed descriptions of RBS’s legal proceedings and discussion of the associated uncertainties are given in Note 31.
Overseas tax losses carried forward - Ulster Bank Ireland DAC 249 210
In periods from 1 April 2015, the Finance Act 2015 limits the offset of losses carried forward by UK banks to 50% of profits. In periods from 1 April 2016, the Finance Act 2016 further limits the offset of losses carried forward by UK banks to 25% of profits.
Based on RBS’s strategic plan, the losses on which a deferred tax asset has been recognised will be substantially utilised against future taxable profits by the end of 2023.
US$25 million floating rate notes (partial redemption) Tier 2 6 —
Gains on cash flow hedging, net of tax 28 — — 28
In September 2016 and September 2015, the company redeemed in whole the Series R and T, and Series M , N, P and
RBS will meet a customer's specified obligations to third party if the customer fails to do so. The maximum amount that RBS
RBS recognises a provision for a liability in relation to these
31 Memorandum items continued Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened)
on its claims against Nomura and RBS Securities Inc., finding, as relevant to RBS, that the offering documents for four Nomuraissued RMBS for which RBS Securities Inc. served as an underwriter, relating to US$1.4 billion in original principal balance, contained materially misleading statements about the mortgage loans that backed the securitisations, in violation of the Securities
Property Alliance Group (PAG) v The Royal Bank of Scotland plc was the leading case before the English High Court involving both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was approximately £33 million and the trial ended in October 2016. On 21 December 2016 the Court dismissed all of PAG’s claims. The decision (subject to any appeal by PAG) may have significance to other similar LIBORrelated cases currently pending in the English courts, some of which involve substantial amounts. The case of Wall v RBS plc, which concerns similar allegations to those in PAG, is currently scheduled to go to trial October 2017. The sum claimed is between £400 million and £700 million.
Iranian banks so that the Iranian nexus to the transactions would not be detected. Since commencing this matter, the plaintiffs have amended the complaint twice. The second amended complaint is subject to a motion to dismiss that defendants filed
District of Illinois against RBS N.V., the other financial institutions named as defendants to the first complaint and Deutsche Bank.
Court for the Eastern District of New York and intends to move to dismiss the complaint.
Federal Reserve and agreed to pay a penalty of US$395 million to the DOJ to resolve the investigations.
UK small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS’s Global Restructuring Group or within similar units within RBS’s Corporate Banking Division that were focused on customers in financial difficulties. In the period 2008 to 2013 RBS
On 6 May 2015, the Competition & Markets Authority (CMA), announced that it had closed the investigations into domestic interchange fees on the grounds of administrative priorities.
The Financial Ombudsman Service (FOS) has confirmed on its website that unfair relationship provisions in the Consumer Credit
31 Memorandum items continued On 2 February 2017 the CMA published the Retail Banking
Pursuant to the US Dollar Processing Order, the authorities requested a second annual review to be conducted by an independent consultant. The second review was conducted by the independent consultant and reports were submitted to the authorities on 30 September 2016. In line with the first review, and following examination of a significant number of sanctions alerts, the independent consultant did not identify any reportable issues. In addition, pursuant to requirements of the US Dollar
Net cash inflow/(outflow) from financing 2,236 2,169 314 (3,606) (3,047) (1,321)
Less than More than Total Less than More than Total £m £m £m £m £m £m
Entity name Activity(1) Address Notes Lombard North Central PLC BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Venture Finance Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
RBSSAF (10) Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Royal Bank Ventures Investments Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
W. & G. Industrial Leasing Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Norway Nordisk Renting AS BF C/O Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161 Norway, Oslo
z o.o. BF Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
Sweden Limstagården KB BF C/O Nordisk Renting AB, Box 14044, SE-104 40 Sweden, Stockholm
Sweden Nordisk Renting Kapital AB BF C/O Nordisk Renting AB, Box 14044, SE-104 40 Sweden, Stockholm
Sweden SFK Kommunfastigheter AB BF C/O Nordisk Renting AB, Box 14044, SE-104 40 Sweden, Stockholm
United States NatWest Group Holdings Corp BF 2711 Centerville Road Suite 400, Wilmington, Delaware, 19808 United States Random Properties Acquisition Corp. I INV 2711 Centerville Road Suite 400, Wilmington, Delaware, 19808 United States Random Properties Acquisition Corp. II INV 2711 Centerville Road Suite 400, Wilmington, Delaware, 19808 United States Random Properties Acquisition Corp. III INV 2711 Centerville Road Suite 400, Wilmington, Delaware, 19808
BF FC 0 Wilmington Trust SP Services (London) Ltd, Third Floor, 1 Kings Arms Yard, London, EC2R 7AF England
United States RBS Capital LP II BF NC 1209 Orange Street, Wilmington, Delaware, 19801 (10) United States RBS Capital Trust B BF NC 100, Suite 102, White Clay Center, Newark, New Castle County,
United States RBS Capital Trust C BF NC 100, Suite 102, White Clay Center, Newark, New Castle County, Delaware 19711
Cayman Islands NatWest (Deansgate) Investments Ltd FC 100 Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005
Norway Airside Properties ASP Norway AS FC 100 C/O Visma Services, Lyskaer 3 CD, Herlev, Denmark
Sweden Nordisk Renting Facilities Management AB FC 100 C/O Nordisk Renting AB, Box 14044, SE-104 40 Sweden, Stockholm
United Kingdom Adam & Company (Nominees) Ltd FC 100 25 St. Andrew Square, Edinburgh, EH2 1AF Scotland United Kingdom Blydenstein Nominees Ltd FC 100 250 Bishopsgate, London, EC2M 4AA, England United Kingdom British Overseas Bank Nominees Ltd FC 100 135 Bishopsgate, London, EC2M 3UR, England
United Kingdom Williams & Glyn Ltd FC 100 135 Bishopsgate, London, EC2M 3UR England United Kingdom Williams & Glyn’s Bank Ltd FC 100 1 Princes Street, London, EC2R 8PB England United Kingdom Williams & Glyn’s Trust Company Ltd FC 100 1 Princes Street, London, EC2R 8PB England
Return on average total assets (2) (0.8%) (0.2%) (0.3%) (0.7%) (0.4%)
Within but within After 2016 £m £m £m £m £m £m £m £m
Finance leases and instalment credit 4,930 5,045 1,992 11,967 11,134 10,933 10,524 10,532
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 302 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 307. The following table shows the movements in loan impairment provisions.
Note: (1) Includes nil written-off in respect of loans and advances to banks (2015 - £33 million; 2014 - £8 million; 2013 - £40 million).
The table below shows loans granted forbearance during the year. These loans are unimpaired: either the loan was performing before and after the granting of forbearance or the loan was non-performing before but subsequently transferred to the performing book. Loans with impairment provisions subject to forbearance continue to be reported as impaired loans.
The State Aid Commitment Deeds also provide that if the EC
Sale of RBS England & Wales and NatWest Scotland branch based business (“Williams & Glyn”)
Settlements, resolutions and outcomes in relation to ongoing legal or regulatory actions may result in material financial fines or penalties, non-monetary penalties, restrictions upon or revocation of regulatory permissions and licences and other collateral consequences and may prejudice both contractual and legal rights otherwise available to the Group. The costs of resolving these legal and regulatory actions could individually or in aggregate prove to be substantial and monetary penalties and other outcomes could be materially in excess of provisions, if any, made by the Group. New provisions or increases in existing provisions relating to existing or future legal or regulatory actions may be substantial and may have a material adverse effect on the Group’s financial condition and results of operations as well as its reputation. The outcome of on-going claims against the
State Aid approval was received from the European Commission in connection with the financial assistance provided to the Group by the UK Government in 2008. In connection with the receipt of such financial assistance, and as a condition for State Aid approval, the Group entered into a state aid commitment deed with HM Treasury (as amended from time to time, the “State Aid
business banking capabilities; (ii) funding for eligible challenger banks to help them incentivise UK SME customers to switch their accounts from RBS to eligible challenger banks by paying in the form of “dowries”; (iii) the Group granting business customers of eligible challenger banks access to its branch network for cash and cheque handling, to support the incentivised switching programme; and (iv) the funding of an independent financial services innovation fund to invest in and help support the growth of existing businesses providing or developing innovative financial services or products for UK SMEs. In connection with this package of alternative measures, the Group has taken a £750 million provision in 2016. However, actual costs associated with the implementation of such measures may be materially higher as a result of unforeseen complexities and factors outside of the Group’s control.
• The implementation of the UK ring-fencing regime will significantly impact the management of the Group’s treasury operations, including internal and external funding arrangements. The changes required may adversely impact the assessment made by credit rating agencies, creditors and other stakeholders of the credit strength of the different entities on a standalone basis and may heighten the cost of capital and funding for the Group and its subsidiaries. The ability of bank entities outside the RFB to meet funding and capital prudential requirements will be dependent on obtaining an adequate credit rating. Reliance on intragroup exemptions in relation to the calculation of risk-weighted assets and large exposures may not be possible between the RFB and other Group entities and may result in riskweighted assets inflation. Intragroup distributions (including payments of dividends) between RFB and other Group entities (with the exception of distributions to the Group parent company) will also be prohibited.
As a result, there can be no certainty that the implementation of the Group’s transformation programme will prove to be a successful strategy, that the Group will meet its targets and expectations during the restructuring period or that the restructured Group will be a viable, competitive, customerfocused or profitable bank.
Any failure in the Group’s cybersecurity policies, procedures or capabilities, or cyber-related crime, could lead to the Group suffering reputational damage and a loss of customers, regulatory investigations or sanctions being imposed and could have a material adverse effect on the Group’s results of operations, financial condition or prospects.
(PRA buffer), changes in the minimum levels of capital or liquidity required by legislation or by the regulatory authorities or the calibration of capital or leverage buffers applicable to the Group, including countercyclical buffers, increases in risk-weighted assets or in the risk weighting of existing asset classes, or an increase in the Group’s view of any management buffer it needs, taking account of, for example, the capital levels or capital targets of the Group’s peer banks and criteria set by the credit rating agencies.
G-SIBs and ring-fenced institutions to be calibrated at 35% of the relevant firm’s capital G-SIB Buffer or systemic risk buffer and which is being phased in from 2016 (currently set at 0.175% from 1 January 2017) and (iii) a countercyclical leverage ratio buffer for all firms subject to the minimum leverage ratio requirements which is calibrated at 35% of a firm’s countercyclical capital buffer. Further changes may be made to the current leverage ratio framework as a result of future regulatory reforms, including
Any of these factors, including restructuring costs, impairment charges and a reduction in the carrying value of RBSG
In November 2015, the FSB published a final term sheet setting out its total loss-absorbing capacity (TLAC) standards for G-SIBs.
Commission published in November 2016 a comprehensive set of proposals, seeking to make certain amendments to the existing MREL framework. In particular, the proposals make a number of amendments to the MREL requirements under the
Compliance with these and other future changes to capital adequacy and loss-absorbency requirements in the EU and the
The NSFR would be expressed as a percentage and set at a minimum level of 100%, which indicates that an institution holds sufficient stable funding to meet its funding needs during a oneyear period under both normal and stressed conditions. If an institution’s NSFR were to fall below the 100% level, the institution would be required to take the measures laid down in the CRD IV Regulation for a timely restoration to the minimum level. Competent authorities would assess the reasons for noncompliance with the NSFR requirement before deciding on any potential supervisory measures. These proposals are currently being considered and negotiated among the European
Commission, the European Parliament and the Council and, in light of the UK’s decision to leave the EU, there is considerable uncertainty as to the extent to which such rules will apply to the
Developments relating to current economic conditions, including those discussed above, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. Any such developments may also adversely impact the financial position of the Group’s pension schemes, which may result in the Group being required to make additional contributions. See “The Group is subject to pension risks and may be required to make additional contributions to cover pension funding deficits as a result of degraded economic conditions or as a result of the restructuring of its pension schemes in relation to the implementation of the UK ring-fencing regime”.
residential property sector. In the UK commercial real estate market, activity slowed during the second half of 2016 following the EU Referendum. There is a risk of further adjustment given the reliance of the UK commercial real estate market in recent years on inflows of foreign capital and, in some segments, stretched property valuations. As a result, a fall in house prices, particularly in London and the South East of the UK, would be likely to lead to higher impairment and negative capital impact as loss given default rate increases. In addition, reduced affordability of residential and commercial property in the UK, for example, as a result of higher interest rates or increased unemployment, could also lead to higher impairments on loans held by the Group being recognised.
SME market and larger commercial and corporate entities; • increased regulatory scrutiny with respect to mortgage lending, including through the implementation of the UK
Markets in Financial Instruments Directive and Regulation in the EU and the Dodd Frank Wall Street Reform Consumer
Group’s capital planning and resilience through the period to 2019 and provided the Main Scheme pension trustee with more flexibility over its investment strategy. This payment has resulted in a reduction in prevailing Pillar 2A add-on. However, subsequent contributions required in connection with the 2018 triennial valuation may adversely impact the Group’s capital position. The Group’s expectations as to the impact on its capital position of this payment in the near and medium term and of the accounting impact under its revised accounting policy are based on a number of assumptions and estimates, including with respect to the beneficial impact on its Pillar 2A requirements and confirmation of such impact by the PRA and the timing thereof, any of which may prove to be inaccurate (including with respect to the calculation of the CET1 ratio impact on future periods), including as a result of factors outside of the Group’s control
The accounting policies deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, include goodwill, provisions for liabilities, deferred tax, loan impairment provisions, fair value of financial instruments, which are discussed in detail in “Critical accounting policies and key sources of estimation uncertainty” on pages 190, 308 and 310. IFRS Standards and Interpretations that have been issued by the International Accounting Standards
There can be no certainty that the Group’s investment in its IT
The Group operates in markets that are subject to intense scrutiny by the competition authorities and its business and results of operations could be materially affected by competition rulings and other government measures.
The CMA is working with HM Treasury and other regulators to implement these remedies which are likely to impose additional compliance requirements on the Group and could, in aggregate, adversely impact the Group’s competitive position, product offering and revenues.
As a result of the commercial and regulatory environment in which it operates, the Group may be unable to attract or retain senior management (including members of the board)
Certain of the Group’s directors as well as members of its executive committee and certain other senior managers and employees are also subject to the new responsibility regime introduced under the Banking Reform Act 2013 which introduces clearer accountability rules for those within the new regime. The senior managers’ regime and certification regime took effect on 7
In addition, the PRA has adopted a new framework requiring financial institutions to ensure the continuity of critical shared services (provided by entities within the group or external providers) to facilitate recovery action, orderly resolution and post-resolution restructuring, which will apply from 1 January
bail-in power currently in force in the UK and applicable to the
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired.
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Important factors that could affect the actual outcome of the forward-looking statements
Discontinued operation - a component of RBS that either has been disposed of or is classified as held for sale. A discontinued operation is either: a separate major line of business or geographical area of operations or part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or a subsidiary acquired exclusively with a view to resale.
Individual liquidity guidance (ILG) - guidance from the PRA on a firm's required quantity of liquidity resources and funding profile.
Maximum distributable amount (MDA) - a restriction on distributions which may be made by a bank which does not meet the combined buffer requirements as set out in the PRA
PRA Rule Book - contains provisions made by the PRA that apply to PRA authorised firms. Within ‘Banking and Investment
Residential mortgage - a loan to purchase a residential property where the property forms collateral for the loan. The borrower gives the lender a lien against the property and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a home loan.