RBS repaid all its borrowings from the Bank of England Funding for Lending Scheme (FLS) in 2013 but continues to participate fully in the scheme. In the period since launch to 31 December 2013, RBS allocated more than £4.7 billion of new FLS-related lending to business customers, with discounts targeted at SMEs and mid-sized manufacturers. We intend to remain in the scheme throughout 2014 (subject to no further changes in the scheme rules).
We bring the best of ourselves to work and support one another to realise our potential.
We made fundamental, lasting changes to the way we do business by re-writing our code of conduct and policy framework. Our Code was an important milestone in our focus on the customer and our values. Our Code included a new decision making tool – the YES Check. It is a simple guide to help employees check whether they are making the right decision in line with our purpose and values. Mapped back to regulatory principles, the YES Check was another important recognition that the decisions we take everyday impact our customers and our communities.
• We introduced a funds transfer option on our ATMs, which allows customers to move funds between their accounts.
We will do what it takes to reach and maintain a prudent capital position.
UK branch divestment: To meet our ECmandated branch divestment, the Williams & Glyn brand will return to the high street via an IPO over the coming years. To achieve this we signed a deal with a consortium of investors led by Corsair Capital and Centerbridge Partners in September 2013. The business will require separation from RBS and this process is well under way.
announced our intention to remove £9 billion of the worst credit risks from the Ulster Bank balance sheet. Our second step is focused on improving customer experience and shareholder return.
Our bank in Northern Ireland will benefit from a closer integration with our personal and business franchises in the rest of the United Kingdom. There are meaningful synergies in terms of investment, costs and customer experience from doing this. It is essential if we are to provide a more appealing and compelling service to our customers in Northern Ireland under the Ulster Bank brand.
Our customers in the island of Ireland need to know that we are committed to providing them with a great everyday banking service. We will finalise our plans in the coming months – but this is about a change in business strategy not a withdrawal from the market.
Doing the right thing We do the right thing. We take risk seriously and manage it prudently. We prize fairness and diversity and exercise judgement with thought and integrity.
Unemployment fell, from around 7.9% at the start of the year towards 7.0% at its end.
In December, the Federal Reserve took the first formal steps towards tightening monetary policy. It announced that it would reduce the amount of assets purchased under its quantitative easing programme by $10 billion each month, with the programme likely to be ended in the second half of 2014. It maintained its guidance that the Fed Funds Target Rate would remain at 0.25% until the unemployment rate reaches 6.5%.
Loan impairment charges were £8.4 billion during 2013 of which £4.5 billion related to the creation of RCR. Underlying impairment losses fell by £1.4 billion and provisions coverage of risk elements in lending increased to 64%, up from 52% a year ago. The Group continued to reduce risk concentrations, notably in commercial real estate. Exposure to eurozone periphery countries also continued to fall, down by 11% to £53 billion at the end of the year. Of this, 70% related to Ireland. The Group still has significant credit risk exposures in absolute terms with credit risk RWAs at £313 billion, following a 16% reduction in the year.
The Group’s exposure to market risk continued to fall, with average trading VaR declining to £79 million from £97 million. Market risk RWAs at £30 billion are now less than half their end 2010 level of £80 billion.
The Group continues to target a fully loaded Basel III Common Equity Tier 1 ratio of approximately 11% by the end of 2015 and 12% or above by the end of 2016. The timely run-down of RCR and the successful divestment of Citizens Financial Group, in particular, are cornerstones of this capital strategy.
For a full breakdown of our direct environmental impacts, as well as the basis of reporting for the data above, please visit our sustainability pages on rbs.com.
Board and committee activity increased significantly in 2013, with a number of key strategic issues taking centre stage. In late 2013, the Board agreed a number of actions to accelerate the building of our capital strength and enhance our strategic focus on our core UK businesses and international corporate business. This included the outcomes of the Good Bank/Bad Bank review and the subsequent creation of RBS Capital Resolution (RCR). We also launched a full review of our businesses, focused on the needs of our customers, improving our operations and IT systems, and simplifying our organisational and decision-making structures. Over the last five years, we have made substantial progress in restoring our safety and soundness. Building on that important work, the Board felt the timing was right for this review in order to target our future efforts firmly on how we can best serve the needs of our customers, shareholders and wider stakeholders.
External appointment(s): • Non-executive director, chairman of the remuneration committee and member of the audit committee of Anglo American plc and senior independent director with effect from April 2014.
Experience: Previously a director and chairman of the Remuneration Committee of Skandinaviska Enskilda Banken AB and a non-executive director of Home Retail Group plc and chairman of its Remuneration Committee. She spent the majority of her executive career at CocaCola where she held a number of leadership positions, latterly as President, Coca-Cola Great Britain and Ireland. Former non-executive directorships include Vodafone Group plc, Reuters Group PLC, Cable & Wireless Worldwide plc and The Gap Inc.
Experience: Wide-ranging experience of financial services and risk management, including previous responsibility for Aviva’s continental European and International life and long-term savings businesses. He held a number of senior executive positions during his career at Aviva including his role as group finance director until January 2010. Fellow of the Institute and Faculty of Actuaries and Fellow of the Association of Certified Public Accountants.
These are the biographies of Executive Committee members as at the date of the signing of the Annual Report and Accounts.
Roles and responsibilities The Board The Board is the main decision-making forum for the company. It is collectively responsible for the long-term success of the company and is accountable to shareholders for financial and operational performance.
• the preparation and approval of the Group’s annual report and accounts.
Group Secretary Aileen Taylor is the Group Secretary and Head of Corporate Governance. She is responsible for advising the Board on all governance matters and for ensuring that Board procedures are followed. In conjunction with the Chairman and the Group Chief Executive, she is also responsible for ensuring that the Board receive accurate, timely and clear information, particularly on the Group’s performance and matters reserved to the Board; facilitating good information flows between Board members; leading on the implementation of the recommendations from the annual Board Evaluation and developing and maintaining the induction and continuing professional development programme for directors. A key element of the role is to ensure alignment between the Board and Executive Management to ensure the appropriate escalation of issues to the Board. Aileen also leads on all aspects of corporate governance across the Group.
The Board considers each director’s notification separately on the facts and can impose conditions or limitations as part of the authorisation process. Actual and potential conflicts of interest can be authorised by the Board in accordance with the company’s Articles of Association. Details of all conflicts of interest are recorded in a register which is maintained by the Group Secretary and reviewed annually by the Board.
The Group Secretary advises directors of appropriate external training and professional development opportunities and internal training is also provided which is relevant to the business of the Group. Business visits are also arranged as part of the Group Audit Committee and Board Risk Committee schedule (details of which can be found on pages 53 and 60) and all non-executive directors are invited to attend. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors.
The Group Secretary maintains continuing professional development logs. These are reviewed regularly with directors to assist in identifying future training and development opportunities that are specific to the individual director’s requirements.
Information All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Group Secretary. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.
Report of the Group Audit Committee Meetings and visits A total of seven scheduled meetings of the Group Audit Committee were held in 2013, including meetings held immediately before the annual and interim financial statements and the quarterly Interim Management Statements were considered by the Board. The Group Audit Committee also held two ad hoc meetings. Group Audit Committee meetings are attended by relevant executive directors, the Internal and External Auditor and Finance and Risk Management executives. Other executives, subject matter experts and external advisers are also invited to attend, as required, to present and advise on reports commissioned by the Committee. At least twice a year the Group Audit Committee meets privately with the External Auditor. The Committee also meets privately with Internal Audit management.
The Group Audit Committee undertakes an annual evaluation to assess the independence and objectivity of the External Auditor and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The annual evaluation is carried out in two stages. An initial review was carried out in early 2014. In assessing the effectiveness of the Group’s External Auditor, the Group Audit Committee had regard to: • the experience and expertise of the senior members of the engagement team; • the proposed scope of the audit work planned and executed; • the quality of dialogue between the External Auditor, the Committee and senior management; • the clarity, quality and robustness of written reports presented to the Committee setting out the External Auditor’ findings arising from the audit; • the quality of observations provided by the External Auditor on the Group’s systems of internal control; • the views of management on the performance of the External Auditor; and
In particular, the Committee has focussed on market risk, operational risk, credit risk, conduct and regulatory risk and reputational risk. In its consideration of each area of risk, culture has been the priority and the Committee has emphasised the importance of instilling the correct behaviours within the organisation, alongside processes and tools designed with the customer at the fore. It is vital that the business is able to get these things right in order to meet its target of becoming a ‘really great bank’. The Committee is working hard to drive cultural change and increase accountability throughout the organisation.
Although much still has to be done, it is pleasing that the efforts to build a sustainable and responsible business have been recognised through independent and external measures such as inclusion in the Dow Jones Sustainability World Index with our highest score to date in 2013. We have also been included in the FTSE4Good Index Series which measures the performance of companies that meet globally recognised corporate responsibility standards (see pages 31 to 33 for more information on these external commitments).
• Performance related pay is linked to a combination of performance measures covering financial and non-financial metrics.
There is an understandable public focus on the highest paid specialist talent at RBS. However, as a Committee, we are equally concerned about pay for staff at all levels. We provide oversight and guidance on all RBS remuneration arrangements. In 2014 we are directing a greater proportion of our salary budget to our lower paid employees. We continue to pay our permanent employees in the UK at or above the “Living Wage” benchmarks (National and London) and intend to apply for full accreditation.
• Total compensation, both on an overall and per employee level, has been reduced for 2013.
The vesting level of the award could vary between 0% and 100% dependent on the achievement of performance conditions. Between 20% - 25% will vest at threshold for each performance measure.
• Clawback - An accountability review process is operated that allows the Committee 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. As a result, clawback can be applied to reduce or lapse any unvested awards as well as reducing any current year’s variable pay. The Committee will also consider its approach to the operation of post vesting clawback in light of emerging market practice and regulatory requirements. Further details can be found on page 89.
In accordance with the provisions of the UK Corporate Governance Code, all directors of the company stand for annual election or re-election by shareholders at the company’s Annual General Meetings.
Bruce Van Saun As announced on 27 January 2014, no bonus award will be payable to executive directors or members of the 2013 Executive Committee in respect of 2013 performance.
Historic Group Chief Executive pay over same period 2009 2010 2011 2012 2013(1)
Remuneration paid to all employees (1) 6,371 7,231 (12%) Distributions to holders of ordinary shares — — — Distributions to holders of preference shares 398 301 32% Taxation and other charges recognised in the income statement: - Social security and other payments (2) 486 562 (14%)
Implementation of remuneration policy in 2014 The information below sets out how RBS intends to implement the policy in 2014.
2014 Annual objectives for the Group Chief Executive and Group Finance Director The executive directors’ annual objectives, as set out below, are approved by the Committee and reflect the Group’s key strategic priorities. The Board Risk Committee has approved the risk and control issues. Note that, as described in the Remuneration Policy section of the report, no annual bonus awards will be payable to executive directors. Nevertheless, the Committee believes that annual objectives are an important part of driving the business strategy and meeting agreed targets.
• Values & Engagement - embed and role model the Group’s values, setting the tone from the top, and building the pride and engagement of our people.
The terms of reference of the Group Performance and Remuneration Committee are available on www.rbs.com and these are reviewed at least annually by the Committee and approved by the Board.
Statement of Shareholding Voting The table below sets out the voting by shareholders on the advisory resolution to approve the Directors’ 2012 Remuneration Report at the AGM held in May 2013.
Note: (1) The following groups of employees have been identified as meeting the PRA’s criteria for Code Staff: - Members of the Board and Executive and Management Committees - Staff performing a Significant Influence Function within RBS - Employees who have approval authorities such that their decision-making could have a material impact on the income statement - Employees who are responsible for a business or businesses whose performance could have a material impact on the income statement; and - Key control function roles
Risk is taken into account in the performance assessment through a thorough risk analysis carried out by the Group’s risk management function to a pre-agreed framework. Performance assessments may be adjusted in situations where risk performance is outside risk appetite or strategic plans. Financial and non-financial performance factors (including risk) are taken into account in developing a final variable pay proposal. This decision also allows for considerations of market competitiveness and franchise protection.
Variable remuneration (cash) 0.2 0.2 Deferred remuneration (bonds) 2.4 2.6 Deferred remuneration (shares) 31.1 51.7
In October 2011, the Group completed the transfer of a substantial part of the UK activities of RBS N.V. to the Royal Bank. Substantially all of the Netherlands and EMEA businesses were transferred to the Royal Bank in September 2012. Russia, Korea and the North American businesses were transferred to the Royal Bank in 2013. Certain assets of RBS N.V. continue to be shared by the Consortium Members.
Directors’ indemnities In terms of section 236 of the Companies Act 2006 (the “Companies Act”), Qualifying Third Party Indemnity Provisions have been issued by the company to directors, members of the Group’s Executive and Management Committees, PRA/FCA Approved Persons and certain directors and/or officers of the Group’s subsidiaries.
Philip Hampton Ross McEwan Nathan Bostock Chairman Group Chief Executive Group Finance Director
Nathan Bostock Sandy Crombie Alison Davis Tony Di Iorio Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes Philip Scott
Organisational structure The Group’s activities during 2013 were organised on a divisional basis as follows: UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through a number of channels including: the RBS and NatWest network of branches and ATMs in the United Kingdom, telephony, online and mobile. UK Retail is committed to serving customers well, making banking easier and convenient whilst ensuring that we do business in an open, honest and sustainable manner.
Within other operating income, Non-Core recorded a loss of £334 million excluding rental income, primarily related to fair value adjustments associated with investment properties.
Non-interest income Non-interest income increased to £8,776 million from £6,539 million in 2012. This included a loss on own credit adjustments of £120 million (2012 - £4,649 million), net gain on redemption of own debt of £175 million (2012 - £454 million) and movements in the fair value of the Asset Protection Scheme resulting in a £44 million charge in 2012. Excluding these items, non-interest income was down 19% compared with 2012.
Risk elements in lending represented 9.5% of gross loans and advances to customers excluding reverse repos at 31 December 2013 (2012 – 9.1%).
Non-interest income Non-interest income decreased to £6,539 million from £12,348 million in 2011. This included movements in the fair value of the Asset Protection Scheme resulting in a £44 million charge (2011 - £906 million), net gain on redemption of own debt of £454 million (2011 - £255 million) and a loss on own credit adjustments of £4,649 million (2011 - £1,914 million gain). Excluding these items, non-interest income was down 3% compared with 2011.
Average balance sheet and related interest Managed 2013 Managed 2012* Average Average balance Interest Rate balance Interest Rate
Total interest-earning assets - banking business (1,3,5) 543,881 16,706 3.07 594,062 18,538 3.12 - trading business (10) 216,211 240,131 Interest-earning assets 760,092 834,193 Non-interest-earning assets 467,274 596,179 Total assets 1,227,366 1,430,372
The increase in other operating income predominantly reflected lower accounting charges for own credit adjustments partially offset by losses on disposal and value adjustments in Non-Core. In addition, the disposal of RBS Aviation Capital in June 2012 resulted in a £392 million reduction in operating lease income.
Direct costs increased by 7% due to higher FSCS levy and other regulatory charges and conduct-related provisions of £63 million. This was partly offset by lower staff costs due to a reduction in headcount of 2,300. Indirect costs increased by 3%, largely due to investment in technology.
Private sector education, health, social work, recreational and community services 1.6% 0.4% 1.3%
As part of the division’s concerted effort to support its SME customers, UK Corporate has been proactively reviewing the business needs of SME customers to understand if they could benefit from the offer of additional facilities. In 2013, over 12,000 customers were identified for additional funding under UK Corporate’s 'Statements of Appetite' initiative. The initiative resulted in approximately £6 billion of new funding being offered to customers.
Total costs were down 3% due to tight control over direct discretionary expenditure combined with lower indirect costs as a result of operational savings, partially offset by increased investment expenditure.
Of which: Ongoing businesses 279 602 773 Run-off businesses — (8) (18)
Notes: (1) Pertaining to the creation of RCR and related strategy. (2) Divisional return on equity is based on divisional operating loss after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions).
Performance ratios Return on equity (3) 5.0% 9.6% 5.9% Cost:income ratio 79% 66% 79%
Risk-weighted assets were £31 billion lower, driven by disposals and runoff.
Net cash outflows from financing activities of £1,741 million relate primarily to interest on subordinated liabilities of £714 million, repayment of subordinated liabilities of £627 million and redemption of noncontrolling interests of £382 million.
Risk-weighted assets Credit risk - non-counterparty 291,100 323,200 344,300 385,900 513,200
Risk and balance sheet management 175 Risk governance 183 Risk appetite 192 Capital management 209 Liquidity and funding risk 227 Credit risk 268 Balance sheet analysis 318 Market risk 341 Country risk 354 Other risks
Presentation of information Except as otherwise indicated by an asterisk (*), information in the Risk and balance sheet management section (pages 174 to 364) is within the scope of the Independent auditor’s report. Disclosures in this section include disposal groups in relevant exposures unless otherwise indicated. Refer to pages 172 and 173 for the Analysis of balance sheet pre and post disposal groups.
Divisions mirror the Group risk management structure: divisional executive committees are responsible for setting and managing their exposures in line with their risk appetite and within Group constraints. The divisional risk committees oversee risk exposures arising from divisional business activities and focus on ensuring that the associated risks are adequately monitored and controlled. The divisional CROs provide independent oversight of this process, with support from the Group Chief Risk Officer and Group risk function heads as appropriate. Additional challenge and oversight is provided by Group risk function heads on an ongoing basis and by divisional risk and audit committees on a periodic review basis. For a summary of the main risk types faced by the Group and how it manages each of them, refer to pages 187 to 191.
The Group’s main sources of earnings are interest income from lending and deposits and fee income from transactional and other services. Given the low interest rate environment in both the UK and the US, its net interest margin, that is, the difference between the interest it earns from lending and the interest it pays on deposits, has been under pressure. In order to offset this pressure, the Group is working to reduce costs and increase non-interest income.
Financial strength and resilience are at the heart of the Group’s strategic plan. The Group has defined this level of robustness as that which is capable of achieving and sustaining a standalone credit rating (i.e. without government support) that is in line with those of its strongest international peers.
The framework is supported by a programme of communication, engagement and training rolled out across the Group to embed a wide understanding of the purpose and value of an effective risk appetite.
• Sensitivity analysis - provides ‘ready reckoners’ around changes in key variables. It provides a high-level view on questions such as ‘what if gross domestic product worsened by a further 1%’, identifying certain tipping points where the Group’s risk profile moves outside appetite.
Risk appetite* continued Culture, values and remuneration Objectives for risk culture Risk culture plays a key role in the Group’s ambition to build “a really good bank”. A strong risk culture is a key part of ensuring risk appetite is effectively embedded across the Group. The link between risk appetite and strategic objectives encourages people at all levels of the business to think about risk, how they identify it and how they manage it. It incorporates the quantitative and qualitative aspects of risk and uses both absolute and relative risk measures.
It has the potential to cause the Group to fail to meet regulatory liquidity requirements, become unable to support normal banking activity or at worst cease to be a going concern. Adverse impact on customer and investor confidence in the Group and the wider financial system is also possible.
The risk that the conduct of the Group and its staff towards its customers, or within the markets in which it operates, leads to reputational damage and/or financial loss.
The management of regulatory (as well as conduct) risk is overseen by the Conduct and Regulatory Affairs function.
The Group responded to business risk challenges by focusing on the management of net interest margin in order to sustain and grow revenues. In addition, it introduced cost management programmes to deliver substantial savings.
Refer to the Strategic risk section on pages 363 and 364 for further information.
The Group is well advanced in its preparations to comply with the new requirements. Given the phasing of both capital requirements and target levels, in advance of needing to comply with the fully loaded end state requirements, the Group will have the opportunity to continue to generate additional capital from earnings and take management actions to mitigate the impact of CRD IV.
(4) Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.
• Exposure measure calculated using the final CRR text as well as the
Key points • The Group’s estimated leverage ratios, under both the CRR and
• The PRA Policy Statement PS7/13 requires an acceleration of the
Notes: (1) International Banking facilities are primarily undrawn facilities to large multinational corporations, many of which are domiciled in the UK. (2) Based on a 10% credit conversion factor.
Risk-weighted assets The table below analyses the movement in credit risk RWAs by key drivers during the year.
At 1 January 2013 36.9 5.7 42.6 45.8 88.4 Business and market movements (9.0) (1.8) (10.8) (4.0) (14.8)
The table below analyses RWA movements by division during the year.
Liquidity and funding risk 210 Definition 210 Overview 210 Liquidity risk 210 - Policy, framework and governance 211 - Regulatory oversight 211 - Measurement and monitoring 212 - Stress testing and contingency planning 213 - Liquidity reserves 214 - Liquidity portfolio 215 - Net stable funding ratio 216 Funding risk 216 - Funding sources 216 - Analysis 216 - Funding sources 217 - Wholesale funding 218 - Total funding by currency 218 - Notes issued 219 - Deposits and repos 219 - Firm financing 220 - Divisional loan:deposit ratios and funding surplus 220 - Maturity analysis 223 - Encumbrance 226 - Summary of assets available as collateral (on and off-balance sheet)
• Funding concentrations - Additional outflows recognised against concentration of providers of wholesale secured financing.
The Group categorises its liquidity portfolio, including its locally managed liquidity portfolios, into primary and secondary liquid assets.
As set out below the Group’s asset and liability types broadly match. Customer deposits provide more funding than customer loans absorb; repurchase agreements are largely covered by reverse repurchase agreements; interbank lending and funding largely match each other and this gap has narrowed over the past five years; and derivative assets are largely matched against derivative liabilities.
Credit risk Definition Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts.
The Group is exposed to credit risk from off-balance sheet products such as trade finance activities and guarantees.
As a result of the reviews carried out in 2013, the Group further reduced its risk appetite in the corporate sectors of commercial real estate and retail. For further details on sector-specific strategies, exposure reduction and key credit risks, refer to pages 252 to 267.
Credit risk models The Group uses credit risk models in the credit approval process, ongoing credit risk management, monitoring and reporting and portfolio analytics. These may be divided into three categories: Probability of default (PD) PD models assess the probability of a customer failing its credit obligations over a one year period.
Loss given default (LGD) LGD models estimate the amount that cannot be recovered in the event of customer default. When estimating LGD, the Group’s models assess both borrower and facility characteristics, as well as various credit risk mitigants. The cost of collections and a time discount factor for the delay in cash recovery are also incorporated.
• The Group’s exposure to the shipping sector (including shipping related infrastructure) declined by 18% in 2013 as a result of scheduled loan amortisation, secondary sales and prepayments. Out of the total exposure of £11.4 billion, £8.6 billion related to asset-backed exposure to ocean-going vessels of which dry bulk accounted for 35% of the exposure, tankers 34%, container ships 15%, gas 10% and other vessels 6%. Conditions remained poor across the major shipping market segments in 2013, as charter rates and vessel values remained depressed. The majority of the Group’s exposure is extended against security in vessels of recent construction, with less than 4% of the lending secured on vessels aged over 15 years. A key protection for the Group is the minimum security covenant. The overall loan-to-value (LTV) on the portfolio at 31 December 2013 was 76%, split 70% for Core and 97% for NonCore portfolio respectively. Within the Core portfolio, 13% of exposure had LTVs greater than 100%.
The table below analyses commercial real estate (Core and Non-Core) lending by loan-to-value ratio, which represents loan value before provisions relative to the value of the property financed.
• Insolvency - Where there is no suitable forbearance option or the business is no longer regarded as sustainable, insolvency will be considered. Insolvency may be the only option that ensures that the assets of the business are properly and efficiently distributed to relevant creditors.
Covenant-only concessions 16 30 — Forgiveness of all or part of the outstanding debt 9 21 33 Variation in margin 2 6 12
There are instances when loans subject to forbearance are transferred from the non-performing book to the performing book. In UK Retail, when arrears are capitalised, a loan is transferred to the performing book once the borrower has met the revised payment terms for at least six months and is expected to continue to do so. In addition, a small portfolio of loans past due 90 days are managed by UK Retail’s collections function. Loans in this portfolio may also be transferred to the performing book if the customer makes payments that reduce arrears below 90 days.
Balance Provision Balance Provision Balance Provision Balance Provision balances (1) £m £m £m £m £m £m £m £m %
• The mix of forbearance treatments in Ulster Bank changed with an increase in longer-term solutions. A total of 28% of forbearance loans were subject to a permanent arrangement at 31 December 2013 (2012 - 15%). Capitalisations represented 17% and term extensions represented 11% of the forbearance portfolio at 31 December 2013, increasing from 6% and 9% respectively.
Latent loss provisions In the performing portfolio, latent loss provisions are held against losses incurred but not identified before the balance sheet date. Latent loss provisions reflect PDs and LGDs as well as emergence periods. The emergence period is defined as the period between the occurrence of the impairment event and a loan being identified and reported as impaired.
For performing counterparties, credit metrics are an integral part of the latent provision methodology and therefore the impact of covenant concessions will be reflected in the latent provision. For non-performing loans, covenant concessions will be considered in the overall provision adequacy for these loans.
Credit risk continued Key loan portfolios* continued The table below analyses commercial real estate (Core and Non-Core) lending by loan-to-value ratio, which represents loan value before provisions relative to the value of the property financed.
Ulster Bank is a significant contributor to Non-Core commercial real estate lending. For further information refer to the section on Ulster Bank Group (Core and Non-Core).
The table below shows LTVs for the Group’s residential mortgage portfolio split between performing (AQ1-AQ9) and non-performing (AQ10), with the average LTV calculated on a weighted value basis. Loan balances are shown as at the end of the year whereas property values are calculated using property index movements since the last formal valuation.
Key points UK Retail • The UK Retail mortgage portfolio was £99.3 billion at 31 December 2013, an increase of 0.3% from 31 December 2012. The mortgages included £9.1 billion (2012 - £7.9 billion) of residential buy-to-let lending.
• Based on the Halifax Price Index at September 2013, the portfolioaverage indexed LTV by volume was 54.1% (2012 - 58.1%) and 62.0% by weighted value of debt outstanding (2012 - 66.8%). The ratio of total outstanding balances to total indexed property valuations was 45.1% (2012 - 48.5%).
• The assets included £2.2 billion (12%) of residential buy-to-let loans.
(2012 - 74%); the volume of new business remained very low. The maximum LTV available to Ulster Bank customers was 90% with the exception of a specific Northern Ireland scheme which permits LTVs of up to 95% (although Ulster Bank’s exposure is capped at 85% LTV).
RBS Citizens cards (2) 903 3.9 916 3.8 936 5.1 RBS Citizens auto loans (2) 5,080 0.1 5,289 0.1 4,856 0.2
RBS Citizens • RBS Citizens credit card portfolio is comprised of good quality consumer loans originated in-footprint through the RBS Citizen’s branch network and totalled £945 million at 31 December 2013 (2012 - £948 million). The product portfolio credit quality continued to improve with credit scores for new originations throughout 2013 higher than the portfolio average.
Credit risk continued Key loan portfolios* continued The tables below analyse the Group’s retail mortgage and HELOC portfolios between interest only mortgages (excluding mixed repayment mortgages) and other mortgage loans. Interest only
• Of the total corporate impairment charge recorded during the second half of 2013 of £3.9 billion, £3.4 billion related to all loans that will be transferred to RCR, of which £2.9 billion related to commercial real estate loans and £0.5 billion related to corporate loans.
Cash and balances at central banks 82.7 — 82.7 — — — — — — 82.7 Reverse repos 117.2 (40.7) 76.5 (11.4) — (65.0) — — — 0.1 Lending 423.6 (3.4) 420.2 (32.3) (1.6) (2.7) (145.4) (60.0) (3.9) 174.3 Debt securities 113.6 — 113.6 — — — — — (1.3) 112.3 Equity shares 8.8 — 8.8 — — — — — — 8.8 Derivatives 553.7 (265.7) 288.0 (242.8) (24.3) (6.0) — — (7.3) 7.6 Settlement balances 8.2 (2.7) 5.5 (0.3) — — — — — 5.2 Total 1,307.8 (312.5) 995.3 (286.8) (25.9) (73.7) (145.4) (60.0) (12.5) 391.0 Short positions (28.0) — (28.0) — — — — — — (28.0)
US Central and local government — 151 22,084 — 23 500 22,758 (17) 22,741 Financial institutions - banks 5,024 1,342 468 349 116,935 14,066 138,184 (115,459) 22,725 - other (2) 22,807 4,257 25,483 210 13,397 2,086 68,240 (14,720) 53,520 Personal - mortgages — 21,929 — — — — 21,929 — 21,929 - unsecured — 8,748 — — — — 8,748 — 8,748 Property — 3,343 8 26 34 — 3,411 — 3,411 Construction — 388 3 2 9 — 402 — 402 Manufacturing — 6,021 156 15 265 — 6,457 (215) 6,242 Finance leases and instalment credit — 2,471 — — — — 2,471 — 2,471 Retail, wholesale and repairs — 4,905 58 1 66 — 5,030 (52) 4,978 Transport and storage — 1,928 37 — 855 — 2,820 (800) 2,020 Health, education and leisure — 2,848 170 — 73 — 3,091 (70) 3,021 Hotels and restaurants — 490 23 — — — 513 — 513 Utilities — 966 100 15 273 — 1,354 (251) 1,103 Other 4 5,317 674 324 1,094 — 7,413 (277) 7,136 Total gross of provisions 27,835 65,104 49,264 942 133,024 16,652 292,821 (131,861) 160,960 Provisions — (916) — — — — (916) n/a (916)
Balance sheet analysis continued Financial assets continued Loans and advances Banks (1) Customers Settlement Cash and Derivative Derivative balances and balances at Reverse cash Reverse cash other financial Contingent central banks repos collateral Other Total repos collateral Other Total assets Derivatives Commitments liabilities Total 2013 £m £m £m £m £m £m £m £m £m £m £m £m £m £m
2012 Held-for-trading 7,692 17,349 27,195 2,243 21,876 2,015 78,370 18,619 Designated as at fair value — — 123 86 610 54 873 516 Available-for-sale 9,774 19,046 16,155 8,861 23,890 3,167 80,893 30,743 Loans and receivables 5 — — 365 3,728 390 4,488 3,707 Long positions 17,471 36,395 43,473 11,555 50,104 5,626 164,624 53,585
The following tables summarise the gross and net exposures and carrying values of these securities by the location of the underlying assets at 31 December 2013, 2012 and 2011 and by IFRS measurement classification of held-for-trading (HFT), designated at fair value (DFV), available-for-sale (AFS) and loans and receivables (LAR). Gross exposures represent the principal amounts relating to ABS. Government sponsored or similar RMBS comprises securities that are: (a) guaranteed or effectively guaranteed by the US government, by way of its support for US federal agencies and government sponsored enterprises or (b) guaranteed by the Dutch government. Net exposures represent the carrying value after taking account of protection purchased from monoline insurers and other counterparties, but exclude the effect of counterparty credit valuation adjustments. The hedge provides credit protection of both principal and interest cash flows in the event of default by the counterparty. The value of this protection is based on the underlying instrument being protected.
Of which in Non-Core — 42 288 164 — 18 331 569 — 458 1,870
Notes: (1) Credit hedging in the banking book principally relates to portfolio management in Non-Core. (2) Credit derivative product companies.
Note: (1) Pertaining to the creation of RCR and the related change of strategy.
Key points • The Group loan impairment charge for the year increased by 58%
REIL resulting in an 12% increase in the provision coverage ratio to 64% from 52% at December 2012 while the REIL as a percentage of total loans increased to 9.4% from 9.1% at 31 December 2012.*
• Ulster Bank REIL at £8.5 billion increased by 12% compared with 31
Accruing loans past due 90 days or more - UK 1,709 253 1,962 1,759 248 2,007 1,430 508 1,938 - overseas 236 23 259 456 178 634 364 34 398 1,945 276 2,221 2,215 426 2,641 1,794 542 2,336 Total REIL 20,378 19,014 39,392 19,766 21,374 41,140 18,387 24,007 42,394
2013 2012 2011 UK US Other (1) Total UK US Other (1) Total UK US Other (1) Total £m £m £m £m £m £m £m £m £m £m £m £m
Non-traded market risk The majority of the Group’s non-traded market risk exposure arises from retail and commercial banking activities in all divisions from assets and liabilities that are not classified as held for trading.
The Group’s management of non-traded market risk is largely organised in line with the following three key categories: non-traded interest rate risk (NTIRR); non-traded foreign exchange risk; and non-traded equity risk.
The Group Chief Risk Officer (CRO) delegates responsibility for day-today control of market risk to the traded and non-traded market risk functions. Responsibility for controlling market risk in divisions is delegated to divisional market risk functions, the heads of which are accountable to divisional CROs, who in turn are accountable to the Group CRO.
Valuation and independent price verification Traders are responsible for marking-to-market their trading book positions daily, ensuring that assets and liabilities in the trading book are measured at their fair value. Any profits or losses on the revaluation of positions are recognised daily.
A new model is typically introduced when an existing model is no longer fit for purpose or a new product requires a new methodology or model to quantify the risk appropriately. Amendments are usually made when a weakness is identified during use of a model or following analysis either by the model developers in the divisions or by GRA.
Market risk continued Risk management continued These committees comprise representatives of the major stakeholders in the valuation process - trading, finance, market risk, model development and model review functions.
This is complemented by the Group’s New Product Risk Assessment process, which requires market risk teams to assess and quantify market risk associated with all proposed new products.
• When the Group uses ten-day risk factor changes in the calculation of the regulatory VaR, the ten-day periods overlap, which can introduce an autocorrelation bias in the 99% confidence level VaR statistic. The analysis performed has shown the bias to be small and acceptable for a ten-day period.
Note: (1) The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
• The Group’s period-end and average credit spread VaR declined in 2013 compared with 2012. This decline was driven by an ongoing reduction in inventory as part of Group-wide efforts to reduce RWAs ahead of CRD IV implementation. Risk reduction during the first half of the year was aided by the flow business reducing the complexity of its trading operations. In the second half of the year, the VaR decrease was driven by a reduction in the asset-backed securities inventory.
• Identify risks not adequately captured in VaR, and ensure that such risks are addressed via the RNIV framework (see page 328).
The multivariate behaviour of positions is modelled via the relevant reference entities using a single-factor model (Gaussian Copula), which allows a more efficient calculation of the charge using numerical integration.
Risk not in VaR (RNIV) 286 433 179 218 429 390
• The foreign currency position risk requirement increased, reflecting accelerated impairments on euro denominated assets in RBS Capital Resolution (RCR).
• The two risk factors above incorporate the duration risk arising from the reinvestment of maturing swaps hedging the Group’s net free reserves (or net exposure to equity and other low fixed-rate or noninterest -bearing liability balances including, but not limited to, current accounts).
UK Retail 306 359 UK Corporate 206 214 International Banking 73 83 Total product hedges 585 656
Drawn notional Fair value CDOs (1) CLOs (2) MBS (3) Other ABS (4) Total CDOs (1) CLOs (2) MBS (3) Other ABS (4) Total 2013 £m £m £m £m £m £m £m £m £m £m 2012 1-2 years — — — 80 80 — — — 74 74 2-3 years — — 27 82 109 — — 24 76 100 4-5 years — — 95 — 95 — — 86 — 86 5-10 years — 310 92 — 402 — 295 44 — 339 >10 years 289 279 380 398 1,346 116 256 253 254 879 289 589 594 560 2,032 116 551 407 404 1,478 2011 1-2 years — — — 27 27 — — — 22 22 2-3 years — — 10 196 206 — — 9 182 191 4-5 years — 37 37 95 169 — 34 30 88 152 5-10 years 32 503 270 268 1,073 30 455 184 229 898 >10 years 2,180 442 464 593 3,679 766 371 291 347 1,775 2,212 982 781 1,179 5,154 796 860 514 868 3,038
In Japan, an economic reform strategy combined with large monetary stimulus contributed to currency depreciation, a reduction in deflationary expectations and strong growth in the first half of the year. However, momentum slowed in the second half of the year.
It arises from possible economic or political events in each country to which the Group has exposure, and from unfavourable conditions affecting daily operations in a country.
The scope of this country exposure concept is broader than the scope of the credit risk assets concept used in the Credit risk section, as the latter does not include debt securities or securities financing transactions.
In addition and as memorandum items, the tables show derivatives gross of netting, and SFT gross of netting and collateral intrinsic to the transaction.
Other countries Japan 2,073 — 694 96 460 52 3,375 3,779 8,677 2,443 191 18,465 403 18,868 (365) 15,425 12,678 China 9 178 1,309 16 976 32 2,520 427 170 421 3 3,541 1,526 5,067 (62) 426 4,029 India — 275 553 35 3,017 127 4,007 703 827 217 — 5,754 1,281 7,035 (105) 554 72 Russia — 36 970 8 901 60 1,975 78 108 176 — 2,337 368 2,705 (343) 177 18 South Korea — 5 814 2 573 3 1,397 280 565 250 145 2,637 624 3,261 (22) 776 340 Turkey 215 193 252 455 1,106 16 2,237 349 12 91 — 2,689 456 3,145 10 107 139 Brazil — — 688 131 228 4 1,051 19 771 256 — 2,097 384 2,481 164 297 —
LAR debt AFS debt securities Total debt Net Balance balance Total Gross Lending REIL Provisions securities reserves Long Short securities Derivatives SFT sheet sheet exposure Derivatives SFT 2013 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
The Compliance Management Team: a sub-committee of the Conduct Risk Committee, it has the authority to act on conduct risk matters such as: risk appetite; risk management strategy and framework; and risk profile and policy.
Regulatory Affairs, covering all elements of the Group’s conduct risk policies, including AML, STF and ABC; and
It arises from day-today operations and is relevant to every aspect of the Group’s business.
Although the operational risk tools encompass all stages of the risk cycle, they can be broadly categorised as follows: Identification and assessment Risk assessments are used to identify and assess material operational risks and key controls across all business areas. To provide a consistent categorisation of risks and controls across the Group and to support identification of risk concentrations, all risks and controls are mapped to the Group-wide risk taxonomy and the control catalogue.
CEC outcomes are reported to the Board, the Group Audit Committee and the Board Risk Committee, and shared with external auditors.
The Group purchases insurance to provide the business with financial protection against specific losses and to comply with statutory or contractual requirements, providing protection against financial loss once a risk has crystallised.
This is reflected in the Political, Legislative and Regulatory Environment Policy Standard, which requires that all likely changes in official policy, legislation, regulation or other requirements must be identified, and assessed for potential impact, using an internal classification system.
Sources of risk Business risk exists at all levels of the organisation and is generated at the transaction level. It is affected by other risks the Group faces, which could contribute to any adverse changes in the Group's revenues or costs. They include funding risk, volatility in the cost of funding, nontraded interest rate risk, inflation risk, operational risk, strategic risk, regulatory risk, conduct risk and reputational risk.
Governance structure The Group Board has ultimate responsibility for business risk through the achievement of the Group’s business plan. The primary responsibility for divisional financial performance rests with the divisional CEO supported by divisional ExCo and functions.
366 Independent auditor’s report 370 Consolidated income statement 371 Consolidated statement of comprehensive income 372 Consolidated balance sheet 373 Consolidated statement of changes in equity 376 Consolidated cash flow statement 377 Accounting policies 391 Notes on the consolidated accounts 391 1 Net interest income 392 2 Non-interest income 393 3 Operating expenses 398 4 Pensions 403 5 Auditor’s remuneration 404 6 Tax 405 7 Profit attributable to preference shareholders and paid-in equity holders 405 8 Ordinary dividends 405 9 Earnings per ordinary and equivalent B share 406 10 Financial instruments - classification 412 11 Financial instruments - valuation 433 12 Financial instruments - maturity analysis 436 13 Financial assets - impairments 438 14 Derivatives 440 15 Debt securities 442 16 Equity shares 443 17 Intangible assets 446 18 Property, plant and equipment 447 19 Prepayments, accrued income and other assets 448 20 Discontinued operations and assets and liabilities of disposal groups 451 21 Short positions 451 22 Accruals, deferred income and other liabilities 453 23 Deferred tax 454 24 Subordinated liabilities 461 25 Non-controlling interests 461 26 Share capital 464 27 Other equity 465 28 Leases 467 29 Structured entities 469 30 Asset transfers 470 31 Capital resources 472 32 Memorandum items 483 33 Net cash (outflow)/inflow from operating activities 484 34 Analysis of the net investment in business interests and intangible assets 484 35 Interest received and paid 484 36 Analysis of changes in financing during the year 485 37 Analysis of cash and cash equivalents 486 38 Segmental analysis 494 39 Directors’ and key management remuneration 494 40 Transactions with directors and key management 495 41 Related parties 496 42 Post balance sheet events 497 Parent company financial statements and notes
The valuation of the Group’s financial instruments, held at fair value, is based on a combination of market data and financial models which often require a considerable number of inputs. Many of these inputs are obtained from readily available data for liquid markets. Where such observable data are not readily available, such as in the case of level 3 assets, then estimates need to be developed which can involve significant judgement.
Where these deficiencies affected specific applications within our audit scope we extended our control testing to provide assurance over both compensating controls and the completeness and accuracy of management information used in key controls. In addition and where appropriate we extended the scope of our substantive procedures over the year-end balance sheet.
Respective responsibilities of directors and auditor As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Premises and equipment (2,348) (2,232) (2,423) Other administrative expenses (7,244) (5,593) (4,436) Depreciation and amortisation (1,410) (1,802) (1,839) Write-down of goodwill and other intangible assets (1,403) (124) (80)
Loss for the year (8,477) (5,890) (2,123) Items that do not qualify for reclassification Actuarial gains/(losses) on defined benefit plans 4 446 (2,158) (375)
Other comprehensive (loss)/income after tax (1,712) (1,207) 1,343 Total comprehensive loss for the year (10,189) (7,097) (780)
Transfer to retained earnings — (59) — Recycled to profit or loss on disposal of businesses (2) (110) — —
1. Presentation of accounts The accounts are prepared on a going concern basis (see the Report of the directors, page 96) and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS). The EU has not adopted the complete text of IAS 39 ‘Financial Instruments: Recognition and Measurement’; it has relaxed some of the standard's hedging requirements. The Group has not taken advantage of this relaxation: its financial statements are prepared in accordance with IFRS as issued by the IASB.
Other operating income Operating lease and other rental income 484 876 1,307 Changes in the fair value of own debt designated as at fair value through profit or loss attributable to own credit risk (3) - debt securities in issue (49) (2,531) 1,259
Variable compensation awards The following tables analyse the Group and Markets variable compensation awards for 2013 (1).
Expected return on plan assets (1) 4.7 4.5 5.0 4.5 4.4 5.2 Rate of increase in salaries 1.8 1.8 1.8 1.8 1.7 2.0 Rate of increase in pensions in payment 3.1 2.8 3.0 2.9 2.6 2.9 *Restated
Ordinary shares of the company with a fair value of £4 million (2012 - £4 million; 2011 - £3 million) are held by the Group's Main scheme which also holds other financial instruments issued by the Group with a value of £416 million (2012 - £610 million; 2011 - £424 million).
History of defined benefit schemes £m £m £m £m £m £m £m £m £m £m
The analysis of auditor’s remuneration is as follows: Fees payable for the audit of the Group’s annual accounts 4.0 4.0 Fees payable to the auditor and its associates for other services to the Group - the audit of the company’s subsidiaries 22.1 24.4 - audit-related assurance services (1) 3.8 4.6 Total audit and audit-related assurance services fees 29.9 33.0
Held-for- through profit Hedging Available- Loans and instruments Finance assets/ trading or loss derivatives for-sale receivables (amortised cost) leases liabilities Total 2012 £m £m £m £m £m £m £m £m £m
Intangible assets 13,545 13,545 Property, plant and equipment 9,784 9,784 Deferred tax 3,443 3,443 Prepayments, accrued income and other assets — — — — 7,820 7,820 Assets of disposal groups 14,013 14,013
Valuation issue, adjustments and reserves are reported to Markets, NonCore and Group audit committees. Key judgmental issues are described in the reports submitted to these Audit Committees.
Market risk metrics such as value-at-risk (VaR) and stressed value-at-risk (SVaR) cover financial instruments in Markets and Non-Core. The Group has a framework to quantify those market risks not adequately captured by standard market risk framework such as VaR and SVaR - Risks not in VaR. Refer to pages 323 to 329 for details.
• Reduction in exposure due to market moves together with the impact of methodology refinements contributed to the decrease in FVA. This was partially offset by additional funding related reserves and uncollateralised derivatives in Q4 2013.
Potential future positive exposures arising from vanilla products (including interest rate and foreign exchange derivatives) are modelled using the Group's core counterparty risk systems. The majority of the Group's CVA held in relation to other counterparties arises on these vanilla products together with exposures to counterparties which are considered to be close to default. The exposures arising from all other product types are modelled and assessed separately. The potential future positive exposure to each counterparty is the aggregate of the exposures arising on the underlying product types.
As permitted by IFRS 13, netting is applied on a portfolio basis to reflect the value at which the Group believes it could exit the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes. For example, netting is applied where long and short risk in two different maturity buckets can be closed out in a single market transaction at less cost than by way of two separate transactions (calendar netting). This reflects the fact that to close down the portfolio, the net risk can be settled rather than each long and short trade individually.
Loans and advances to banks Reverse repos — 25.8 — 25.8 — 33.4 — 33.4 — 34.7 — 34.7 Derivative collateral — 9.6 — 9.6 — 12.8 — 12.8 — 19.7 — 19.7 Other — 0.1 0.3 0.4 — 0.1 0.4 0.5 — 0.2 0.4 0.6 — 35.5 0.3 35.8 — 46.3 0.4 46.7 — 54.6 0.4 55.0 Loans and advances to customers Reverse repos — 49.9 — 49.9 — 70.0 — 70.0 — 53.6 — 53.6 Derivative collateral — 18.0 — 18.0 — 22.5 — 22.5 — 22.0 — 22.0 Other — 1.0 0.2 1.2 — 1.9 0.6 2.5 — 3.4 0.4 3.8 — 68.9 0.2 69.1 — 94.4 0.6 95.0 — 79.0 0.4 79.4 Debt securities UK government 13.2 — — 13.2 15.6 0.1 — 15.7 22.4 — — 22.4 US government 18.2 5.6 — 23.8 31.0 5.4 — 36.4 35.5 5.0 — 40.5 Other government 25.2 7.9 0.1 33.2 34.4 8.9 — 43.3 53.9 8.7 — 62.6 Corporate — 1.8 0.3 2.1 — 2.2 0.1 2.3 — 5.0 0.5 5.5 Financial institutions 1.4 34.4 1.7 37.5 2.6 48.0 4.7 55.3 3.0 61.6 7.4 72.0 58.0 49.7 2.1 109.8 83.6 64.6 4.8 153.0 114.8 80.3 7.9 203.0 Of which ABS RMBS (1) — 27.4 0.3 27.7 — 38.5 0.9 39.4 — 48.2 0.6 48.8 CMBS (2) — 3.7 — 3.7 — 3.7 — 3.7 — 2.1 0.1 2.2 CDO (3) — — 0.4 0.4 — 0.2 0.5 0.7 — 0.2 1.7 1.9 CLO (4) — 0.5 0.7 1.2 — 0.6 2.4 3.0 — 1.5 3.7 5.2 Other — 1.6 0.3 1.9 — 2.1 0.4 2.5 — 3.1 0.9 4.0
(11) The Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
If an input fails the observability or quality tests then the instrument is considered to be in level 3 unless the input can be shown to have an insignificant effect on the overall valuation of the product.
11 Financial instruments - valuation continued 2012 2012 2011 2011 Carrying value Fair value Carrying value Fair value £bn £bn £bn £bn
For certain portfolios where there are very few or no recent transactions, such as Ulster Bank’s portfolio of lifetime tracker mortgages, a bespoke approach is used based on available market data.
The Group enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of the Group's interest rate hedges relate to the management of the Group's non-trading interest rate risk. The Group manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges and qualifying for hedge accounting. The majority of the Group's fair value hedges involve interest rate swaps hedging the interest rate risk in recognised financial assets and financial liabilities. Cash flow hedges relate to exposures to the variability in future interest payments and receipts on forecast transactions and on recognised financial assets and financial liabilities. The Group hedges its net investments in foreign operations with currency borrowings and forward foreign exchange contracts.
2012 Held-for-trading 7,692 17,349 27,165 2,243 21,876 2,015 78,340 18,619 Designated as at fair value through profit or loss — — 123 86 610 54 873 516 Available-for-sale 7,950 19,040 15,995 7,227 23,294 231 73,737 30,184 Loans and receivables 5 — — 365 3,728 390 4,488 3,707 15,647 36,389 43,283 9,921 49,508 2,690 157,438 53,026
Central and local governments - UK - - 1,559 2.0 4,105 3.3 2,286 3.5 7,950 3.1 - US 139 2.4 10,633 2.3 6,022 2.4 2,246 2.5 19,040 2.3 - other 3,346 0.6 5,849 3.0 5,273 3.0 1,527 3.4 15,995 2.6 Banks 1,764 1.6 3,294 2.8 1,685 1.2 484 1.6 7,227 2.1 Other financial institutions 741 3.0 5,289 2.5 4,378 3.0 12,886 1.4 23,294 2.0 Corporate 25 2.5 140 2.4 66 1.2 - - 231 2.0 6,015 1.2 26,764 2.5 21,529 2.7 19,429 2.0 73,737 2.3
The Group's goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash-generating unit (CGU) to which goodwill has been allocated with its carrying value.
The recoverable amounts for all CGUs at 30 September 2013 were based on the value in use test, using management's latest five-year forecasts. The long-term growth rates have been based on respective country nominal GDP growth rates. The risk discount rates are based on observable market long-term government bond yields and average industry betas adjusted for an appropriate risk premium.
Sterling 214 — 630 464 — 994 2,302 US dollar 611 664 2,388 3,722 177 4,409 11,971 Euro 1,478 — 3,035 3,814 397 806 9,530 Other 48 425 790 1,381 — 326 2,970 2,351 1,089 6,843 9,381 574 6,535 26,773
24 Subordinated liabilities continued Notes: (1) On-lent to The Royal Bank of Scotland plc on a subordinated basis (2) Subordinated notes issued to limited partnerships that have in turn issued partnership preferred securities to trusts that have issued trust preferred securities to investors. On maturity of the notes, the partnerships are required to reinvest in eligible capital instruments issued by the group. Prior to the implementation of IFRS 10, the limited partnerships and the trusts were consolidated, and the trust preferred securities included within subordinated liabilities.
Cumulative preference shares of £1 £0.5 million 11% and £0.4 million 5.5% (not callable) Upper Tier 2 1 1 1
National Westminster Bank Plc Non-cumulative preference shares of £1 Series A £140 million 9% (not callable) Tier 1 143 145 145
* Restated 26 Share capital Allotted, called up and fully paid Issued 1 January during 31 December 2013 the year 2013 £m £m £m
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest, less goodwill amortisation charged under previous GAAP, and the premium arising on shares issued to acquire Aonach Mor Limited, less amounts realised through subsequent share redemptions by Aonach Mor Limited. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act.
Minimum rentals payable under non-cancellable leases (1) - within 1 year 348 399 468 - after 1 year but within 5 years 1,143 1,253 1,453 - after 5 years 2,144 2,286 2,714 3,635 3,938 4,635 Property, plant and equipment Contracts to buy assets to be leased under operating leases (2) — — 2,607 Other capital expenditure 38 37 35 38 37 2,642
32 Memorandum items continued Litigation, investigations and reviews Arising out of their normal business operations, the Group and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action in the United Kingdom, the United States and other jurisdictions.
With respect to the ADR claims, a consolidated amended complaint asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the Securities Act was filed in November 2011 on behalf of all persons who purchased or otherwise acquired the Group's American Depositary Receipts (ADRs) from issuance through 20 January 2009. In September 2012, the Court dismissed the ADR claims with prejudice. On 5 August 2013, the Court denied the plaintiffs’ motions for reconsideration and for leave to re-plead their case. The plaintiffs have appealed the dismissal of this case to the Second Circuit Court of Appeals, and that appeal is in the process of being briefed by the parties.
London Interbank Offered Rate (LIBOR) Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Technology incident in June 2012 On 19 June 2012, the Group was affected by a technology incident, as a result of which the processing of certain customer accounts and payments were subject to considerable delay. The cause of the incident has been investigated by independent external counsel with the assistance of third party advisors. The Group agreed to reimburse customers for any loss suffered as a result of the incident and the Group made a provision of £175 million in 2012.
32 Memorandum items continued In addition to the redress exercise that is being overseen by the FCA, the Group is also dealing with a large number of active claims by customers who are eligible to be considered under the FCA redress programme as well as customers who are outside of such scope due to their sophistication. The Group is encouraging those customers that are eligible, to seek redress under the redress scheme overseen by the FCA. To the extent that claims are brought, the Group believes it has strong grounds for defending these claims.
Additionally, in May 2010, the OFT announced its review of barriers to entry. The review concerned retail banking and banking for small and medium size enterprises (SMEs) (up to £25 million turnover). The OFT published its report in November 2010. It advised that it expected its review to be relevant to the ICB, the FSA, HM Treasury and the Department for Business, Innovation and Skills and to the devolved governments in the UK. The OFT did not indicate whether it would undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch networks and brands. At this stage, it is not possible to estimate the effect of the OFT’s report and recommendations regarding barriers to entry upon the Group.
• a Bank Secrecy Act/anti-money laundering compliance programme for the RBS plc and RBS N.V. branches in the U.S. (the U.S. Branches) on a consolidated basis,
Sixty days after approval of the programme, the Group is to complete a global OFAC risk assessment and submit it to the Reserve Bank and the FCA. The Group also agreed in the Order to hire an independent consultant (subject to approval by the Reserve Bank and the FCA) to conduct an annual OFAC compliance review involving a review of compliance policies and their implementation and an appropriate riskfocused sampling of U.S. dollar payments. The Order further requires the Group to submit quarterly written progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the Order.
Bank of England £0.6bn £0.4bn £0.4bn US Federal Reserve US$1.2bn US$1.2bn US$1.2bn De Nederlandsche Bank €0.2bn €0.4bn €1.0bn
Loans and advances to banks 4,730 19,844 24,574 6,382 17,684 24,066 2,694 15,674 18,368 Loans and advances to customers 150 3 153 — 1,266 1,266 1,341 2,715 4,056 Debt securities 26 1,491 1,517 26 1,496 1,522 65 1,503 1,568 Derivatives 33 131 164 296 215 511 918 584 1,502
Comprising: Loans and advances to banks 1,345 997 1,883 16 Directors’ and key management remuneration Directors’ remuneration is disclosed in Note 39 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
Financial summary The Group's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years are presented below.
Notes: (1) Includes profit on strategic disposals of £161 million (2012 - £113 million profit; 2011 - £25 million loss; 2010 - £171 million profit; 2009 - £82 million loss). (2) Includes gain on redemption of own debt of £175 million (2012 - £454 million; 2011 - £255 million; 2010 - £553 million; 2009 - £3,790 million). (3) Includes own credit adjustments of £120 million loss (2012 - £4,649 million loss; 2011 - £1,914 million gain; 2010 - £242 million gain; 2009 - £97 million loss). (4) Includes Payment Protection Insurance costs of £900 million (2012 - £1,110 million; 2011 - £850 million), Interest Rate Hedging Products redress and related costs of £550 million (2012 - £700 million) and regulatory and legal actions of £2,394 million (2012 - £381 million). (5) Includes integration and restructuring costs of £656 million (2012 - £1,415 million; 2011 - £1,021 million; 2010 - £1,012 million; 2009 - £1,276 million). (6) Includes amortisation of purchased intangible assets of £153 million (2012 - £177 million; 2011 - £222 million; 2010 - £369 million; 2009 - £272 million). (7) Includes write-down of goodwill of £1,059 million (2012 - £18 million; 2011 - £80 million; 2010 - £1 million; 2009 - £296 million). (8) Includes gains on pensions curtailment of £2,148 million in 2009. (9) Includes write-down of other intangible assets of £344 million (2012 - £106 million). (10) Includes sovereign debt impairment of £1,099 million and related interest rate hedge adjustments of £169 million in 2011.
Loans and advances 494,793 564,086 598,916 655,778 820,146 Debt securities and equity shares 122,410 172,670 224,263 239,678 286,782 Derivatives and settlement balances 293,630 447,644 537,389 438,682 453,487 Other assets 117,045 127,895 146,299 119,438 136,071 Total assets 1,027,878 1,312,295 1,506,867 1,453,576 1,696,486
Ratio of earnings to combined fixed charges and preference share dividends (5) - including interest on deposits (0.34) 0.28 0.85 0.95 0.72 - excluding interest on deposits (4.51) (2.99) (0.37) 0.50 (0.47) Ratio of earnings to fixed charges only (5) - including interest on deposits (0.36) 0.29 0.85 0.97 0.77 - excluding interest on deposits (6.04) (3.81) (0.37) 0.58 (0.71)
The Group operates in markets that are highly competitive and its business and results of operations may be adversely affected The competitive landscape for banks and other financial institutions in the UK, the US and throughout the rest of Europe is subject to rapid change and recent regulatory and legal changes are likely to result in new market participants and changed competitive dynamics in certain key areas, such as in retail banking in the UK. The competitive landscape in the UK will be particularly influenced by the UK government’s implementation of the recommendations on competition included in the final report of the Independent Commission on Banking (ICB), including ring-fencing and other customer protection measures addressed in the Banking Reform Act 2013 which became law in the United Kingdom on 18 December 2013 and will be implemented through secondary legislation due to be completed by May 2015. In order to compete effectively, certain financial institutions may seek to consolidate their businesses or assets with other parties. This consolidation, in combination with the introduction of new entrants into the markets in which the Group operates is likely to increase competitive pressures on the Group.
Areas in which, and examples of where, governmental policies, regulatory and accounting changes and increased public and regulatory scrutiny could have an adverse impact (some of which could be material) on the Group include those set out above as well as the following: • the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies; • requirements to separate retail banking from investment banking; • restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank; • restructuring certain of the Group’s non-retail banking activities in jurisdictions outside the UK in order to satisfy local capital, liquidity and other prudential requirements; • the design and potential implementation of government mandated recovery, resolution or insolvency regimes; • the imposition of government imposed requirements and/or related fines and sanctions with respect to lending to the UK SME market and larger commercial and corporate entities and residential mortgage lending; • requirements to operate in a way that prioritises objectives other than shareholder value creation; • changes to financial reporting standards (including accounting standards), corporate governance requirements, corporate structures and conduct of business rules; • the imposition of restrictions on the Group’s ability to compensate its senior management and other employees; • regulations relating to, and enforcement of, anti-bribery, anti-money laundering, anti-terrorism or other similar sanctions regimes; • rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets; • other requirements or policies affecting the Group’s profitability, such as the imposition of onerous compliance obligations, further restrictions on business growth, product offering, capital, liquidity or pricing; • the introduction of, and changes to, taxes, levies or fees applicable to the Group’s operations (such as the imposition of a financial transaction tax and changes in tax rates that reduce the value of deferred tax assets); and
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory laws, rules or regulations by key regulators in different jurisdictions, may have a material adverse effect on the Group’s business, financial condition and results of operations. In addition, uncertainty and lack of international regulatory coordination as enhanced supervisory standards are developed and implemented may adversely affect the Group’s ability to engage in effective business, capital and risk management planning.
The Group may suffer losses due to employee misconduct The Group’s businesses are exposed to risk from potential noncompliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm to the Group. In recent years, a number of multinational financial institutions, including the Group, have suffered material losses due to the actions of employees. It is not always possible to deter employee misconduct and the precautions the Group takes to prevent and detect this activity may not always be effective.
By month Jan 2014 High 25.42 24.93 21.23 22.68 22.52 22.11 23.69 21.88 23.15 24.96 99.50 106.56 Low 24.93 24.23 19.89 20.86 20.68 20.39 21.85 20.06 21.68 24.17 97.25 105.04 Dec 2013 High 25.24 24.74 20.24 21.59 21.45 21.19 22.70 20.85 22.46 24.68 97.50 105.16 Low 24.81 23.83 19.22 20.52 20.30 20.05 21.46 19.70 21.33 23.83 95.50 104.30 Nov 2013 High 25.14 24.85 20.25 21.88 21.75 21.40 22.95 21.18 22.49 24.76 97.25 104.76 Low 24.70 24.41 19.65 21.46 21.30 21.04 22.48 20.62 22.00 24.25 95.25 104.10 Oct 2013 High 24.91 24.82 20.00 21.35 21.26 20.78 22.46 20.65 22.00 24.07 96.00 104.00 Low 24.32 24.16 19.13 20.23 20.07 19.88 21.16 19.88 20.72 23.05 92.50 102.20 Sep 2013 High 24.95 24.70 20.08 21.13 21.06 20.70 22.06 20.34 21.55 23.60 95.00 102.80 Low 24.35 23.81 18.80 20.10 20.06 19.71 21.23 19.60 20.72 22.64 90.25 98.36 Aug 2013 High 24.81 24.13 19.31 20.48 20.44 20.20 21.44 20.04 20.96 23.47 90.50 99.30 Low 24.21 23.64 18.46 19.83 19.70 19.48 20.82 19.66 20.27 22.77 89.00 95.92
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011 and ended on 1 April 2013.
Estate and gift tax Subject to the discussion of the Estate Tax Treaty in the following paragraph, ordinary shares, ordinary ADSs or preference ADSs beneficially owned by an individual may be subject to UK inheritance tax (subject to exemptions and reliefs) on the death of the individual or in certain circumstances, if such shares or ADSs are the subject of a gift (including a transfer at less than market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. Ordinary shares, ordinary ADSs or preference ADSs held by the trustees of a settlement may also be subject to UK inheritance tax. Special rules apply to such settlements.
ABCP Asset Backed Commercial Paper AFS Available-for-sale APR All Price Risk AQ Asset Quality AT1 Additional Tier 1 BCBS Basel Committee on Banking Supervision CCR Counterparty Credit Risk CD Certificate of deposit CDO Collateralised Debt Obligation CDPC Credit Derivative Product Company CDS Credit Default Swap CEM Counterparty Exposure Management CET1 Common Equity Tier 1 CGU Cash Generating Unit CLO Collateralised Loan Obligation CMBS Commercial Mortgage-backed Securities CP Commercial Paper CQA Credit Quality Assurance CRA Credit Risk Assets CRD Capital Requirements Directive CRE Commercial Real Estate CRG Capital Resolution Group CRM Credit Risk Mitigation CRO Chief Risk Officer CRR Capital Requirements Regulation CVA Credit Valuation Adjustment DFV Designated as at Fair Value through profit or loss DTA Deferred Tax Asset EAD Exposure At Default EC European Commission ECB European Central Bank EDTF Enhanced Disclosure Task Force EL Expected Loss EMEA Europe, the Middle East and Africa ERF Executive Risk Forum ESOP Executive Share Option Plan EU European Union FCA Financial Conduct Authority FI Financial Institution FLB3 Fully Loaded Basel III FPC Financial Policy Committee FSA Financial Services Authority FSCS Financial Services Compensation Scheme FSMA Financial Services and Markets Act 2000 FVTPL Fair Value Through Profit or Loss GAC Group Audit Committee GALCO Group Asset and Liability Management Committee GCCO Group Chief Credit Officer GCoR Global Country Risk GCR Group Credit Risk GRC Group Risk Committee GDP Gross Domestic Product GPF Group Policy Framework
Central counterparty (CCP) - an intermediary between a buyer and a seller (generally a clearing house).
Common Equity Tier 1 capital - the highest quality form of regulatory capital under Basel III comprising common shares issued and related share premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified regulatory adjustments.
Constant currency - reported results for the current reporting period are compared to results for comparative periods retranslated at exchange rates for the current period.
Debt securities in issue - unsubordinated debt securities issued by the Group. They include commercial paper, certificates of deposit, bonds and medium-term notes.
International Accounting Standards Board (IASB) - the independent standard-setting body of the IFRS Foundation. Its members are responsible for the development and publication of International Financial Reporting Standards (IFRSs) and for approving Interpretations of IFRS as developed by the IFRS Interpretations Committee.
Level 2 - level 2 fair value measurements use inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
The Enhanced Disclosure Taskforce (EDTF), established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012. The report suggests improvements to address the quality, comparability and transparency of risk disclosures in areas of risk governance, capital adequacy, liquidity and funding, credit risk and market risk.
Business divestments Business review 105 Notes on the consolidated accounts 448
Group Performance and Remuneration Committee Directors’ remuneration report 69 Letter from the Chair of the Group Performance and Remuneration Committee 66