A Responsible Citizen Working within both the letter and spirit of legislation and abiding by relevant codes of practice and voluntary standards
We deliver essential customer services and critical business processes at all times
But we know that for all of the good work we have done there are just too many cases in the past when we could have done better, when some of our people acted in their own interests or with a misplaced sense of what was best for customers.
Cost:income ratio (2) What it costs us to generate each unit of income is a key measure of efficiency affecting how we price our services and meet shareholders’ need for profits
We use direct service usage, requirement for market funding and other appropriate drivers to allocate costs accurately to the divisions. Capital is allocated with a focus on sustainable risk-adjusted returns rather than short-term performance prospects. This gives our divisions a realistic view of how their income translates into profits and returns. In 2012, the only Core business that was materially short of earning its cost of capital was Ulster Bank, although a number of our other businesses have some work to do to improve their returns. Core return on equity in 2012 was 9.8%, reflecting protracted economic challenges in the areas in which we operate.
Housing market activity remained subdued. Prices were broadly stable, some indices showing a rise and others a fall. Any price increases seem to have been concentrated in and around London.
Can be detrimental to the business in a number of ways, including an inability to build or sustain customer relationships, low staff morale, regulatory censure or reduced access to funding sources.
We were able to transfer funds via Western Union for customers who were abroad.
In 2012, we built on these foundations, adding five strategic priorities that make it clearer where we should focus our efforts. These priorities put ‘back to basics’ in words that connect with our colleagues.
Our Legal, Secretariat and Group Regulatory Affairs functions help to set the framework within which the Group can deliver sustainable returns. They operate commercially but retain their independence and professional judgement so they can drive a culture of legal and regulatory compliance and good governance to protect the Group's franchise.
Non-Core releases capital back to the Group that can be used to support new Core lending and generate better returns on equity.
Secure Maintaining our financial health whilst meeting our responsibilities to customers, employees and suppliers Keeping our customers’ and employees’ data and assets safe Protecting against fraud and corruption
GBM's corporate banking business has been combined with the international businesses of the GTS arm into a new ‘International Banking’ unit and provides clients with a 'one-stop shop' access to the Group’s debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base.
The Group’s ability to meet its obligations’ including its funding commitments depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise could adversely affect the Group’s financial condition. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government’s credit ratings.
Funded balance sheet (6) 870,392 977,249 1,026,499 Total assets 1,312,295 1,506,867 1,453,576 Loans and advances to customers 500,135 515,606 555,260 Deposits 622,684 611,759 609,483 Owners' equity 68,130 74,819 75,132 Risk asset ratios - Core Tier 1 10.3% 10.6% 10.7% - Tier 1 12.4% 13.0% 12.9% - Total 14.5% 13.8% 14.0%
Non-controlling interests 123 (28) 665 123 (28) 665 Other owners’ dividends (288) — (124) (288) — (124) Loss attributable to ordinary and B shareholders (5,971) (1,997) (1,125) (5,971) (1,997) (1,125)
Own credit adjustments 32.5p (13.9p) (1.6p) Asset Protection Scheme 0.3p 6.2p 10.6p Payment Protection Insurance costs 7.8p 5.8p — Interest Rate Hedging Products redress and related costs 4.9p — — Regulatory fines 3.5p — — Sovereign debt impairment — 10.2p — Interest rate hedge adjustments on impaired available-for-sale sovereign debt — 1.6p — Amortisation of purchased intangible assets 1.2p 1.4p 2.4p Integration and restructuring costs 11.3p 7.6p 7.5p Gain on redemption of own debt (3.2p) (2.3p) (9.5p) Strategic disposals (1.0p) 0.8p (1.4p) Bank levy 1.6p 2.8p — Bonus tax — 0.2p 0.9p Write-down of goodwill and other intangible assets 1.1p 0.1p 0.1p Adjusted earnings/(loss) per ordinary and B share from continuing operations 6.3p (0.8p) 6.1p
Impairment losses Impairment losses fell to £5,279 million from £7,439 million in 2011, with Core impairments falling by £464 million and Non-Core by £1,696 million, mostly in the Ulster Bank and commercial real estate portfolios.
Regulatory fines On 6 February 2013, RBS reached agreement with the Financial Services Authority, the US Department of Justice and the Commodity Futures Trading Commission in relation to the setting of LIBOR and other trading rates, including financial penalties of £381 million. The Group continues to co-operate with other bodies in this regard and expects it will incur some additional financial penalties.
Tax The tax charge was £469 million in 2012, compared with £1,127 million in 2011. The high tax charge in the year reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), the reduction in the carrying value of deferred tax assets in Ireland in view of continuing losses, the reduction in the carrying value of deferred tax assets in Australia following the strategic changes to the Markets and International Banking businesses announced in January 2012 and the effect of the two reductions of 1% in the rate of UK corporation tax enacted in March 2012 and July 2012 on the net deferred tax balance.
A charge of £850 million was booked in relation to Payment Protection Insurance (PPI) claims following the British Bankers’ Association decision, in May 2011, not to appeal the findings of the Judicial Review.
Net fees and commissions fell by 10% largely due to a decline in UK Retail fees, as a result of weaker consumer spending volumes, and in Markets, primarily due to the run-off in the cash equity business.
Staff costs 7,639 8,163 8,956 8,076 8,356 9,379 Premises and equipment 2,198 2,278 2,276 2,232 2,423 2,380 Other administrative expenses - Payment Protection Insurance costs — — — 1,110 850 — - Interest Rate Hedging Products redress and related costs — — — 700 — — - regulatory fines — — — 381 — — - other 3,248 3,395 3,716 3,402 3,586 3,571 Administrative expenses 13,085 13,836 14,948 15,901 15,215 15,330 Depreciation and amortisation 1,534 1,642 1,762 1,802 1,839 2,125 Write-down of goodwill and other intangible assets — — — 124 80 1 Operating expenses 14,619 15,478 16,710 17,827 17,134 17,456
Staff costs as a percentage of total income 30% 29% 27% 45% 34% 35%
Note: (1) Integration costs in 2011 excluded a £2 million charge included within net interest income and a loss of £3 million within other operating income in respect of integration activities.
Comprising: Loan impairment losses 5,315 7,241 9,144 5,315 7,241 9,144 Securities - sovereign debt impairment — — — — 1,099 — - interest rate hedge adjustments on impaired available-for-sale sovereign debt — — — — 169 — - other (36) 198 112 (36) 198 91 Charge to income statement 5,279 7,439 9,256 5,279 8,707 9,235
2011 compared with 2010 - statutory Impairment losses decreased by 6% compared with 2010, driven largely by a £1,569 million reduction in Non-Core loan impairments, despite continuing challenges in Ulster Bank and corporate real estate portfolios. This was partially offset by impairments taken on the Group’s availablefor -sale bond portfolio, as a result of the decline in the value of Greek sovereign bonds.
Notes: (1) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions). (2) Includes businesses outlined for disposal: gross loans and advances to customers £7.6 billion (2011 - £7.3 billion; 2010 - £6.8 billion), risk elements in lending £0.5 billion (2011 and 2010 - £0.5 billion) and customer deposits £8.5 billion (2011 - £8.8 billion; 2010 - £9.0 billion). (3) Provision coverage percentage represents loan impairment provisions as a percentage of risk elements in lending.
Clients in the UK also benefited from the launch of the Coutts Mobile service in October, offering clients greater choice and flexibility in the way they manage their banking needs electronically.
The challenging macroeconomic environment across the island of Ireland had a significant impact on Ulster Bank’s financial performance for 2012. There were some emerging signs of improvement in the Republic of Ireland economy during Q4 2012, most notably in the availability of institutional funding, some stabilisation of residential property prices and continued economic growth, albeit modest.
Ulster Bank continued 2012 compared with 2011 Operating loss increased by £56 million primarily reflecting a reduction in income driven by lower interest earning asset volumes.
2011 compared with 2010 Operating profit before impairment losses decreased by £78 million in 2011 with lower income partially mitigated by cost savings. Impairment losses of £1,384 million increased by 19% from 2010 resulting in an operating loss of £984 million, 44% higher than 2010.
Core Customer Commitments were implemented in Consumer Banking’s branch network at the end of last year. Early indications show progress towards the Commitments’ aim to enhance customer experience: At the end of 2012, 77% of customers surveyed externally were
‘completely satisfied’ or ‘very satisfied’, compared with the peer average of 71%.
Net interest income was up £48 million ($39 million), or 3%, driven by targeted commercial loan growth, deposit pricing discipline and lower funding costs. This was partially offset by consumer loan run-off and lower asset yields reflecting prevailing economic conditions.
Of which: Ongoing businesses 1,564 943 2,743 Run-off businesses (55) (44) (19)
2012 compared with 2011 Operating profit of £441 million was £13 million, or 3% lower than 2011 as an improved technical result was more than offset by £22 million lower investment income.
Total income of £3,474 million was £333 million, or 9% lower than prior year due to flow through of lower written premiums, increased commissions payable relating to business previously reported within NonCore, the cessation of Tesco Personal Finance tariff income and lower supply chain income.
Impairment losses fell by £1,557 million despite ongoing challenges in the real estate and Ulster Bank portfolios, reflecting improvements in other asset classes.
Third party assets declined by £44 billion (32%) reflecting disposals of £22 billion and run-off of £22 billion.
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 Group’s risk appetite is set and owned by the Group Board. It identifies and establishes the level and type of risks that RBS is able and willing to take in order to: meet its strategic objectives - the Group’s Strategic Plan is built on the core foundations of serving its customers well, building a sustainable risk profile and creating long-term value for its shareholders; and meet its wider obligations to stakeholders - a bank that is safe and sound and puts serving customers at the heart of its thinking should also perform well for its owners, employees, regulators and communities.
Delivering a sustainable and conservative risk profile Risk appetite starts with the tone from the top (i.e. the strategic goals and risk philosophy set by the Group Board) and is cascaded through key targets, limits and risk tolerances that influence decision making from enterprise-wide to transactional level.
The Group Risk Committee acts on material and/or enterprise-wide risk and control matters across the Group. It is an oversight committee which reviews and challenges risks and limits across the functional areas and plays a key role exercising and demonstrating effective risk oversight across the Group. It reviews risks and issues on both a thematic and specific basis and focuses on forward-looking, emerging risks. It considers the overall risk profile across the Group and identifies any key issues for escalation to the Executive Risk Forum. It operates under delegated authority from the Executive Risk Forum.
Group Finance Director Key Group Finance function heads Key Group Risk function heads
Members of the Board Risk Committee and Group Audit Committee also have the right to attend.
Stress testing* Stress testing describes the evaluation of a bank’s financial position under severe but plausible stress scenarios. Stress testing also refers to the broader framework under which these tests are developed, evaluated and used within the Group’s decision-making process in the context of the wider economic environment.
The Group’s insurance risk resides principally in its majority owned subsidiary, Direct Line Insurance Group plc (DLG), which is listed on the London Stock Exchange. DLG ensures that it prices its policies and invests its resources appropriately to minimise the risk of potential loss. The risks are mitigated by agreeing policies and minimum standards that are regularly reviewed. The controls are supplemented by reviews by external experts.
Market risk The risk arising from fluctuations in interest rates, foreign currency, credit spreads, equity prices, commodity prices and riskrelated factors such as market volatilities.
The Group’s market risk policy statements set out its qualitative tolerance for market risk. They define the governance, responsibilities and requirements for the identification, measurement, analysis, management and communication of market risk arising from the Group’s trading and non-trading investment activities.
Financial cost and reputational damage in respect of penalties for non-compliance/breach of regulations.
During 2012, the Group continued to de-risk its balance sheet and to shrink its more volatile Markets business. The Group has further enhanced its scenario modelling to better understand potential threats to earnings, and to develop appropriate contingency plans.
Capital allocation* Capital resources are allocated to the Group’s businesses based on key performance parameters agreed by the Group Board in the annual strategic planning process. Principal among these is a profitability metric, which assesses the effective use of the capital allocated to the business. Projected and actual return on equity is assessed against target returns set by the Group Board. The allocations also reflect strategic priorities, the intensity of regulatory capital use and the usage of other key Group resources such as balance sheet funding and liquidity.
Pillar 3* The Group publishes its Pillar 3 disclosures on its website, providing a range of additional information relating to Basel II and risk and capital management across the Group. The disclosures focus on capital resources and adequacy and discuss a range of credit risk measures and management methods (such as credit risk mitigation, counterparty credit risk and provisions) and their associated RWAs under the various Basel II approaches. Detailed disclosures are also made on equity exposures, securitisations, operational risk, market risk and interest rate risk in the banking book.
Capital management: Capital resources continued Reconciliation between accounting equity and regulatory capital* The table below provides a reconciliation of shareholders’ equity per accounting balance sheet to the regulatory capital.
The Group’s pro forma Core Tier 1 ratio on a fully loaded basis at 31 December 2012, based on its interpretation of the rules and assuming they were applied today, is estimated at 7.7%(1). The pro forma capital ratio reflects the Group’s interpretation of the draft July 2011 CRD IV rules and how these rules are expected to be updated for subsequent EU and Basel pronouncements.
Liquidity risk 139 Policy, framework and governance 139 Stress testing 141 Contingency planning 142 Liquidity reserves 142 Regulatory oversight 142
Safety and soundness of the balance sheet is one of the central pillars of the Group’s restructuring strategy. Effective management of liquidity risk is central to the safety and soundness agenda. The Group’s experiences in 2008 have heavily influenced both the Group’s and other stakeholders’ approach to this area.
Retail & Commercial deposits grew by £8 billion to £401 billion, with particularly strong growth in UK Retail following successful savings campaigns. Wholesale deposits were allowed to run-off, declining by £11 billion to leave Group deposits £3 billion lower at £434 billion.
The Group’s loan:deposit ratio improved from 108% in 2011 to reach management’s medium-term target of 100% at 31 December 2012, with lending fully funded by customer deposits and a corresponding reduction in more volatile short-term wholesale funding.
Liquidity risk The Group has in place a comprehensive set of policies to manage liquidity risk that reflects internal risk appetite, best market practice and complies with prevailing regulatory strictures. These policies have been comprehensively updated since 2008 reflecting: the Group’s experiences in 2008 and 2009; the Group’s restructuring plan and revised risk appetite and framework; regulatory developments and enhancements; ongoing instability in global financial markets; and more conservative expectations from the Group’s various stakeholders.
Less than 1 year — 5,478 13,019 1,038 761 20,296 2,351 22,647 18 1-3 years — 385 20,267 2,948 540 24,140 7,252 31,392 26 3-5 years — 1 13,374 2,380 — 15,755 756 16,511 14 More than 5 years — 5 19,943 3,773 10,680 34,401 16,943 51,344 42 — 5,869 66,603 10,139 11,981 94,592 27,302 121,894 100
2012 2011 2010 ASF(1) ASF(1) ASF(1) Weighting £bn £bn £bn £bn £bn £bn %
not currently encumbered. In this category, the Group has in place an enablement programme which seeks to identify assets which are capable of being encumbered and to identify the actions to facilitate such encumbrance whilst not impacting customer relationships or servicing.
+ 100 basis points shift in yield curves (29) 472 119 27 589 100 basis points shift in yield curves (20) (257) (29) (11) (317)
In 2012, the Group recorded a loss through other comprehensive income of £0.9 billion due to the strengthening of sterling against the US dollar and euro.
The Group has a material exposure to Spanish AFS debt securities issued by banks and other financial institutions of £4.8 billion at 31 December, predominately comprised of covered bonds backed by mortgages. Whilst the exposure was reduced by £1.6 billion during 2012, largely as a result of sales, the portfolio continues to be subject to heightened scrutiny, including undertaking stress analysis.
Credit approval authority is discharged by way of a framework of individual delegated authorities, which requires at least two individuals to approve each credit decision, one from the business and one from the credit risk management function. Both parties must hold sufficient delegated authority. While both parties are accountable for the quality of each decision taken, the credit risk management approver holds ultimate sanctioning authority. The level of authority granted to individuals is dependent on their experience and expertise, with only a small number of senior executives holding the highest authority provided under the framework.
The foundation is the Group Credit Policy Standard, which, as part of the Group Policy Framework (GPF) (refer to page 115), sets out the rules the Group’s businesses must follow to ensure that credit risks are identified and effectively managed through the credit lifecycle. During 2012, a major revision of the Group’s key credit policies was completed ensuring that the Group’s control environment is appropriately aligned to the risk appetite that the Group Board has approved, and provides a sound basis for the Group’s independent audit and assurance activities across the credit risk function.
Model changes affect year-on-year comparisons of risk measures in certain disclosures. Where meaningful, the Group in its commentary has differentiated between instances where movements in risk measures reflect the impact of model changes, and those that reflect movements in the size of underlying credit portfolios or their credit quality. However, it is not practicable to quantify the impact of model updates on individual asset quality bands.
Loans may be renegotiated more than once, generally where a temporary concession has been granted and circumstances warrant another temporary or permanent revision of the loan’s terms. Where renegotiation is no longer viable, the Group will consider other options such as the enforcement of security and or insolvency proceedings.
December 2012 were £17.7 billion, of which £9.3 billion relates to arrangements completed during 2011.
Any one of the above types of renegotiation may result in the value of the outstanding debt exceeding the present value of the estimated future cash flows from the renegotiated loan resulting in the recognition of an impairment loss. Renegotiations that include forgiveness of all or part of the outstanding debt account for the majority of such cases.
Types of retail forbearance A number of forbearance options are utilised by the Group’s retail businesses. These include, but are not limited to, payment concessions, capitalisations of arrears over the remaining term of the mortgage, extension to the mortgage term and temporary conversions to interest only.
Notes: (1) Excludes commercial real estate lending in Wealth as these loans are generally supported by personal guarantees in addition to collateral. This portfolio, which totalled £1.4 billion at 31 December 2012 (2011 - £1.3 billion) continues to perform in line with expectations and requires minimal provisions. (2) ROI: Republic of Ireland; NI: Northern Ireland; RoW: rest of world.
(2) Other performing loans of £6.6 billion (2011 - £9.2 billion) include general corporate lending, typically unsecured, to commercial real estate companies, and major UK housebuilders. The credit quality of these exposures is consistent with that of the performing portfolio overall. Other non-performing loans of £1.9 billion (2011 - £2.5 billion) are subject to the Group’s standard provisioning policies.
Notes: (1) Includes residential mortgages and home equity loans and lines (refer to page 188 for a breakdown of balances). (2) Where no indexed LTV is held. (3) Average LTV weighted by value is arrived at by calculating the LTV on each individual mortgage and applying a weighting based on the value of each mortgage. (4) Excludes mortgage lending in Wealth. This portfolio totalled £8.8 billion (2011 - £8.3 billion; 2010 - £7.8 billion) and continues to perform in line with expectations with minimal provision of £248 million.
RBS Citizens' auto loan portfolio totalled £5.4 billion at 31 December 2012 (2011 - £4.8 billion). The auto loan business originates secured loans through a closely managed network of dealerships mainly located in the bank’s footprint. The portfolio continues to possess strong credit risk fundamentals. The business purchased a £608 million auto loan portfolio from a large financial institution in the first quarter of 2012 that possessed a comparable credit and collateral profile. The acquired portfolio continues to outperform its delinquency and loss forecast. The portfolio's quarterly annualised loss performance in the third quarter of 2012 was 0.18% and continues to perform favourable against industry.
Non-Core The impairment charge for the year was £976 million, a decrease of £1,357 million (2011 - £2,333 million; 2010 - £2,682 million), with the commercial real estate sector accounting for £899 million (92%) of the total 2012 impairment charge.
UK Corporate lending decreased by £3.8 billion, reflecting a combination of customer deleveraging with low business confidence and portfolio derisking, particularly in commercial real estate, which fell by £3.5 billion.
US Government (2) — 177 14 191 22,936 — 9 1 23,137 — 23,137 Financial institutions - banks (3) 7,289 671 40 711 1,245 443 111,240 29,426 150,354 (108,060) 42,294 - other (4) 17,368 8,993 341 9,334 29,885 560 54,639 3,510 115,296 (60,556) 54,740 Personal - mortgages — 20,311 2,926 23,237 — — — — 23,237 — 23,237 - unsecured — 7,505 936 8,441 — — — — 8,441 — 8,441 Property — 2,413 1,370 3,783 26 23 38 — 3,870 — 3,870 Construction — 412 45 457 21 3 11 — 492 — 492 Manufacturing — 6,782 42 6,824 101 12 452 — 7,389 — 7,389 Finance leases (5) — 2,471 — 2,471 17 — — — 2,488 — 2,488 Retail, wholesale and repairs — 4,975 98 5,073 52 — 63 — 5,188 — 5,188 Transport and storage — 1,832 937 2,769 26 1 1,084 — 3,880 — 3,880 Health, education and leisure — 2,946 88 3,034 74 4 93 — 3,205 — 3,205 Hotels and restaurants — 627 57 684 93 3 1 — 781 — 781 Utilities — 1,033 28 1,061 243 16 322 — 1,642 — 1,642 Other 29 5,135 439 5,574 695 103 1,436 — 7,837 — 7,837 Total gross of provisions 24,686 66,283 7,361 73,644 55,414 1,168 169,388 32,937 357,237 (168,616) 188,621 Provisions — (787) (516) (1,303) — — — — (1,303) n/a (1,303)
Loans and advances to customers: Lower internal ratings due to model changes resulted in balances shifting from AQ1 to lower bands. The decrease in AQ5 and AQ6 balances is in line with the overall balance sheet reduction.
Key points AAA rated debt securities decreased as France and Austria were downgraded to AA+ in the first half of 2012 and also reflected the Group’s reduced holdings of UK government bonds. Additionally, certain Spanish covered bonds were downgraded in the first half of 2012.
Gross exposure to monolines 561 1,888 4,023 Hedges with financial institutions (12) (71) (71) Credit valuation adjustment (192) (1,198) (2,443) Net exposure to monolines 357 619 1,509
AAA 43 43 — — — A to AA- 619 612 7 7 — Non-investment grade 16,254 15,841 413 173 240 Unrated 4,073 3,939 134 134 — 20,989 20,435 554 314 240
AAA 213 212 1 — 1 BBB- to A- 644 629 15 4 11 Non-investment grade 20,066 19,050 1,016 401 615 Unrated 4,165 3,953 212 85 127 25,088 23,844 1,244 490 754
Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Non-Core
Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Non-Core continued
Impairment provisions flow statement The movement in loan impairment provisions by division is shown in the table below.
Recoveries of amounts previously written-off 96 18 — 9 2 85 210 1 — 211 130 — 341 Charged to income statement - continuing operations 529 836 46 111 1,364 83 2,969 25 1 2,995 2,320 — 5,315 - discontinued operations — — — — — — — — — — — 4 4 Unwind of discount (2) (88) (56) (3) (4) (79) — (230) — — (230) (246) — (476)
AFS reserves The table below analyses available-for-sale debt securities and related reserves, gross of tax.
The Group’s VaR should be interpreted in light of the limitations of the methodology used, as follows: Historical simulation VaR may not provide the best estimate of future market movements. It can only provide a forecast of portfolio losses based on events that occurred in the two-year time series. Therefore, events that are more severe than those in the historical data series are not represented.
Risks not in VaR (RNIV) - The RNIV framework has been developed to quantify those market risks not adequately captured by VaR and SVaR methodologies. The RNIV approach is used for market risks that fall within the scope of VaR, but which are insufficiently captured by the model methodology, for example due to the lack of sufficient historical data. These risks are therefore assessed outside the VaR model.
The average and period end interest rate VaR for 2012 were higher than for 2011 due to pre-hedging and positioning activity ahead of government bond auctions and syndications, combined with an increase in exposure to “safe haven” assets in December 2012, as the US “Fiscal Cliff” negotiations continued without resolution.
Key points The average and period end total and credit spread VaR were lower in 2012, due to reduced volatility in the market data time series, position reductions and a decrease in the size of the collateral portfolio. The reduction in collateral was driven by the restructuring of certain Dutch residential mortgage-backed securities during the first half of 2012, enabling their eligibility as European Central Bank collateral. This allowed the disposal of additional collateral purchased during the corresponding period in 2011.
Note: (1) The average, maximum and minimum are based on the monthly Pillar 1 model based capital requirements.
Off-balance sheet - Comprises letters of credit, guarantees, other contingent obligations and committed undrawn facilities.
Due to their bespoke nature, exposures relating to credit derivative product companies and related hedges have not been included, as they cannot be meaningfully attributed to a particular country or a reference entity. Nth-to-default basket swaps have also been excluded as they cannot be meaningfully attributed to a particular reference entity. Exposures to CDPCs are disclosed on page 223.
China - Lending exposure and off-balance sheet exposure to banks decreased by £0.4 billion and £0.8 billion respectively, as a result of a slowdown in economic growth, changes in local regulations and risk/return considerations. Derivatives exposure to public sector entities increased by £0.7 billion, reflecting fluctuations in short-term hedging by bank clients.
Corporate Lending exposure fell by £1.1 billion during 2012, driven by exchange rate movements and write-offs. Commercial real estate lending amounted to £10.4 billion at 31 December 2012, down £0.5 billion from 31 December 2011 amid continuing adverse market conditions. The commercial real estate lending exposure was nearly all in UBG (£7.7 billion of this in Non-Core) and included REIL of £8.0 billion which were 55% covered by provisions.
December 2012, a slight reduction from 31 December 2011. The remaining lending portfolio primarily consisted of the following sectors: commercial real estate (44%), construction (26%) and other services (12%).
France - The Group reduced its long and short HFT positions in
Enhancements made during 2012 include single-source extraction and publication of operational risk data across the Group, such as operational risk events and losses. This has resulted in consistent and higher quality information for the purposes of oversight, challenge and operational risk management.
The regulatory environment remained highly challenging during 2012, as policymakers and regulators continued to strengthen regulation and supervision in response to the events of 2007/2008 and subsequent economic and financial stress.
US regulatory developments In the US, activity continued to be dominated by rulemaking following the 2010 Dodd-Frank Act.
The Board The Board has dealt with a very full agenda and key priorities during 2012 have been conduct risk and culture, the changing regulatory architecture and regulatory investigations. It is recognised that a real change is required in the culture of the banking industry and the Board is committed to driving the required change and setting the appropriate “tone from the top”. The Board is fully engaged in the work to improve standards of behaviour within the RBS Group. We have also continued to drive the delivery of the Group’s Strategic Plan and ensure the Group has sufficient capital and funding to make it safer and stronger for the long term. During 2013, the Board is expected to continue to focus on capital, funding and risk as well as delivery of the Strategic Plan.
As mentioned in my earlier letter to shareholders, events like the IT incident in the summer of 2012 and investigations into LIBOR and Markets controls have significantly increased the workload of the Board during the year. The Board has demonstrated strong engagement and leadership in dealing with these matters, and Board committees have also taken a very prominent role, assuming responsibility for specific issues. For example, the Group Audit Committee has assisted in the management of the intense regulatory agenda, the remediation of control issues in Markets and International Banking and the review of LIBOR, the Board Risk Committee has undertaken a review of the circumstances surrounding the IT incident and the Group Performance and Remuneration Committee has had an increased focus on accountability matters and stakeholder engagement. The Group Sustainability Committee has expanded its remit, as described below. As a result, the time commitment required from our non-executive directors is extremely onerous and I am grateful for their support.
The remit of the Group Remuneration Committee was reviewed during the year in light of the Group’s Purpose, Vision and Values programme. Whilst the Committee already takes into account wider issues relating to people in making decisions about pay, it was agreed to give the Committee an expanded oversight role of performance in the round and the name of the Committee was changed to the Group Performance and Remuneration Committee to reflect this. The Group Sustainability Committee has also been given an enhanced role including sustainability and reputation issues related to customer and citizenship activities; overseeing delivery of the Purpose, Vision and Values cultural and behavioural change; and overseeing the sustainability aspects of the people agenda.
In leading the Board, I need to ensure that directors develop a good understanding of the Group’s business and can support the executive team in delivering the Group’s Strategic Plan. Directors’ knowledge is enhanced through site visits, in-depth board presentations and, for new directors, their induction programme. I actively encourage a culture and environment in the boardroom that facilitates debate and where nonexecutive directors are able to provide constructive challenge to management.
Stephen Hester (age 52) Date of appointment: appointed to the Board on 1 October 2008 and to the position of Group Chief Executive on 21 November 2008
The terms of reference of the undernoted committees, together with the Group Nominations Committee and Group Sustainability Committee, are available on the Group’s website www.rbs.com and copies are available on request from RBS Secretariat.
Performance evaluation process IDDAS Limited undertook a formal and rigorous evaluation by: using a detailed framework of questions which was used to structure individual meetings held with each director; discussing the outcomes and recommendations with the Chairman; and; recommending the outcomes and areas for improvement to the
The Group understands the importance of diversity and recognises the importance of women having greater representation at key decision making points in organisations. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board. One of the challenges the Group faces in the promotion of gender diversity is identifying suitably qualified female Board candidates. Where appropriate, the Group has engaged specialist search consultants to assist in the search for suitable candidates. However, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board.
Succession planning The Group Nominations Committee considers succession planning on an ongoing basis and succession planning for the Board was considered at all Group Nominations Committee meetings during the year. The Board considered talent and succession planning for the Group Chief Executive and members of the Executive Committee specifically at meetings in June and October 2012, including a review of talent pools and development opportunities for potential successors. The Board continues to monitor succession planning taking into account business requirements and industry developments.
Membership has been reviewed in line with the increased scope of the Committee and now consists of independent non-executive directors and is chaired by the Senior Independent Director. All key business areas are represented at Committee meetings and the Group Chairman is also invited to attend. The frequency of meetings will also increase from quarterly to six times per annum, in addition to more regular stakeholder engagement sessions. For more information on the Group’s approach to sustainability see pages 33 to 35. Further details of the Group’s sustainability policies are available on the Group’s website www.rbs.com/sustainability and in the Annual Sustainability Report.
Committee considered the assumptions that had been set in valuing the fund and the sensitivities on those assumptions; carrying value of the Group’s goodwill and other intangible assets; the background to and the judgements that had been made by management in assessing the recoverability of the Group’s deferred tax assets; adequacy of the Group’s provision held for the mis-selling of payment protection insurance and interest rate hedging products. The Group has established a provision which represents the Group’s best estimate of the redress that will be payable by the Group. The Committee challenged management’s judgements and is satisfied that the level of provision is appropriate; the Group’s provisions made for outstanding litigation and regulatory investigations and the extent to which reliable estimates could be made for the purposes of the accounts; the Group’s provision for redress and other costs following the
Deloitte LLP has been the company’s auditors since March 2000. There are no contractual obligations restricting the company's choice of External Auditors. A revised version of the UK Corporate Governance Code was issued by the Financial Reporting Council in September 2012 which provides that companies should put the external audit contract out to tender at least every ten years. The Group Audit Committee has considered the requirements and will consider each year whether there are any circumstances or events such that the contract for the audit of the Group should be put out to tender. Furthermore, unless the Committee determines otherwise, the audit contract will be put out to tender every ten years as will any new appointment following the resignation of the incumbent auditors.
The External Auditors were selected following a competitive tender. They were appointed based on their firm-wide capability, the quality and relevant expertise of the team, and the competitive fee levels.
I report to you following another challenging twelve months for the Board Risk Committee. The already demanding schedule of the Committee was intensified in the period by a number of significant issues, most notably the IT incident that occurred in June 2012. The Board Risk Committee has undertaken, on behalf of the Board, to review the cause, consequence and subsequent management of the IT incident which had such unacceptable consequences for many of our customers. As a priority, the Committee has overseen remediation and has sought to ensure appropriate redress for customers. It will continue carefully to oversee management of residual technology risks and will ensure communication with our regulators and stakeholders on conclusion of the internal and external investigations of the incident, as appropriate.
Authority is delegated to the Board Risk Committee by the Board and the Committee will report and make recommendations to the Board as required. The terms of reference of the Board Risk Committee are available on the Group’s website www.rbs.com and these are considered annually by the Board Risk Committee and approved by the Board.
• To approve the RBS Risk Management annual operational plan with reference to the appropriateness of the scope and timing of proposed coverage in relation to risk.
Capital and Liquidity The Committee reviewed the capital and liquidity position of the Group regularly in light of external conditions. The difficulties being experienced in Europe and the US necessitated a continued focus on market and sovereign risk over the course of 2012 and a number of additional reports in this regard were considered over the course of the year. The Committee made recommendations to the Board in relation to the Individual Liquidity Adequacy Assessment, the Individual Capital Adequacy Assessment and the Contingency Funding Plan, required by the FSA.
Reviews annual performance objectives and also long-term incentive plans performance objectives and provides advice on divisional/individual risk performance.
Those contracts normally include standard clauses covering remuneration arrangements and discretionary incentive schemes, the performance review process, the company's normal disciplinary procedure, and terms for dismissal in the event of failure to perform or in situations involving actions in breach of the Group's policies and standards.
The Group Chief Executive continues to be widely acknowledged internally and externally as having provided strong leadership to the Group in extraordinary circumstances. People Plans in place with continual improvement on talent bench strength. Key replacement appointments made to Management Committee. Female executive representation increased to 19%. The Group’s ‘Your Feedback 2012’ survey results were stable on leadership and employee engagement in a challenging context. The Group’s purpose, vision and values will support improvements in employee engagement.
Most targets have been met or exceeded. Strong performance on capital, leverage and funding measures, risk appetite embedded.
Penny Hughes (Chair) 9/9 Sandy Crombie 9/9 Alison Davis 9/9 John McFarlane (1) 2/2 Art Ryan (2) 4/5
As well as receiving advice from PwC during 2012, the Committee took account at meetings of the views of the Group Chairman, Group Chief Executive, Group Finance Director, Group Human Resources Director, Group Head of Reward, Group Secretary and the Group Chief Risk Officer.
Statement of Shareholding Voting The table below sets out the voting by the Group’s shareholders on the resolutions to approve the report and accounts and remuneration policy at the AGM held in May 2012, including votes for / against / withheld.
(3) The award was granted in March 2010 and relates to an allocation of shares in respect of annual incentives for the 2009 performance year. (4) The award granted on 9 March 2012 relates to an allocation of shares under the Share Bank arrangements for annual incentives in respect of the 2011 performance year. The award is due to vest in two equal tranches in March 2013 and March 2014 and any vested shares are subject to a further six month retention post-vesting.
The Group Audit Committee complies with the provisions of the NYSE corporate governance listing standards that relate to the composition, responsibilities and operation of audit committees. In March 2012, the company submitted its required annual written affirmation to the NYSE confirming its full compliance with those and other applicable provisions. More detailed information about the Group Audit Committee and its work during 2012 is set out in the Group Audit Committee report on pages 309 to 315.
On 1 April 2010, the businesses acquired by the Dutch State were transferred to ABN AMRO Group N.V., itself owned by the Dutch State. In connection with the transfer ABN AMRO Holding N.V. was renamed RBS Holdings N.V. and its banking subsidiary was renamed The Royal Bank of Scotland N.V. (“RBS N.V.”). Certain assets of RBS N.V. continue to be shared by the Consortium Members.
Sustainability is therefore not just about the many responsibilities and obligations that the Group has in a legal sense, but is about broad issues that need to be addressed to ensure that the Group is a healthy and respected business operating on a sustainable basis.
Loss from continuing operations (5,634) (2,317) (857) (Loss)/profit from discontinued operations, net of tax - Direct Line Group 20 (184) 301 (176)
Loss attributable to: Non-controlling interests (123) 28 (665) Preference shareholders 7 273 — 105 Paid-in equity holders 7 15 — 19 Ordinary and B shareholders (5,971) (1,997) (1,125)
The accompanying notes on pages 373 to 474, the accounting policies on pages 360 to 371 and the audited sections of the Business review: Risk and balance sheet management on pages 107 to 293 form an integral part of these financial statements.
Accounting policies 1. Presentation of accounts The accounts are prepared on a going concern basis (see the Report of the directors, page 347) 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.
Financial assets carried at amortised cost - if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. For collateralised loans and receivables, estimated future cash flows include cash flows that may result from foreclosure less the costs of obtaining and selling the collateral, whether or not foreclosure is probable.
Deferred tax The Group makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £3,443 million were recognised as at 31 December 2012 (2011 - £3,878 million; 2010 - £6,373 million).
IFRS 9 makes major changes to the framework for the classification and measurement of financial instruments and will have a significant effect on the Group's financial statements. The Group is assessing the effect of IFRS 9 which will depend on the results of IASB's reconsideration of IFRS 9’s classification and measurement requirements and the outcome of the other phases in the development of IFRS 9.
Swaps are part of the management of the inflation and interest rate sensitivity of the Main scheme liabilities. They have been executed at prevailing market rates and within standard market bid/offer spreads. The majority of swaps are with The Royal Bank of Scotland plc and National Westminster Bank Plc (the “banks”). At 31 December 2012, the gross notional value of the swaps was £28,541 million (2011 - £22,918 million; 2010 - £12,352 million) and had a net positive fair value of £370 million (2011 - £431 million; 2010 - £236 million) to the scheme.
Fair value of plan assets 22,441 21,111 19,110 16,603 14,804 26,370 25,086 22,816 27,925 25,756 Present value of defined benefit obligations 25,648 22,955 21,092 18,675 15,594 30,110 27,137 24,999 30,830 27,752 Net deficit 3,207 1,844 1,982 2,072 790 3,740 2,051 2,183 2,905 1,996
Preference shareholders Non-cumulative preference shares of US$0.01 153 — 105 Non-cumulative preference shares of €0.01 115 — — Non-cumulative preference shares of £1 5 — —
These initial classifications are challenged by GPU and are subject to senior management review. Particular attention is paid during the review processes upon instruments crossing from one level to another, new instrument classes or products, instruments that are generating significant profit and loss and instruments where valuation uncertainty is high.
Collateral held under a credit support agreement is factored into the CVA calculation. In such cases where the Group holds collateral against counterparty exposures, CVA is held to the extent that residual risk remains.
Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information taking into account consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 P&L arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence.
For CLOs originated and still held by the Group, the fair value is determined using a correlation model based on a Monte Carlo simulation framework. The main model inputs are credit spreads and recovery rates of the underlying assets and their correlation. A credit curve is assigned to each underlying asset based on prices from third party dealer quotes and cash flow profiles, sourced from an industry standard model. Losses are calculated taking into account the attachment and detachment point of the exposure. Where the correlation inputs to this model are not observable, CLOs are classified as level 3.
The bespoke portfolio tranches are synthetic tranches referenced to a bespoke portfolio of corporate names on which the Group purchases credit protection. Bespoke portfolio tranches are valued using Gaussian Copula, a standard method which uses observable market inputs (credit spreads, index tranche prices and recovery rates) to generate an output price for the tranche by way of a mapping methodology. In essence this method takes the expected loss of the tranche expressed as a fraction of the expected loss of the whole underlying portfolio and calculates which detachment point on the liquid index, and hence which correlation level, coincides with this expected loss fraction. Where the inputs to this valuation technique are observable in the market, bespoke tranches are considered to be level 2 assets. Where inputs are not observable, bespoke tranches are considered to be level 3 assets. However, all transactions executed with a CDPC counterparty are considered level 3 as the valuation adjustment applied to these exposures is a significant component of these valuations.
Funding valuation adjustments The discount rates applied to derivative cash-flows in determining fair value reflect any underlying collateral agreements. Collateralised derivatives are generally discounted at the relevant OIS rates whilst uncollateralised derivatives are discounted with reference to funding levels. Whilst the discount rates applied reference certain inputs which are not based on observable market data, these inputs are not considered to have a significant effect on the valuation of the individual trades. The classification of derivatives is not determined by the observability of the discount rates applied, and any related sensitivity does not form part of the level 3 sensitivities presented.
Rental income from investment properties was £267 million (2011 - £270 million; 2010 - £279 million). Direct operating expenses of investment properties were £125 million (2011 - £110 million; 2010 - £64 million).
Prepayments 904 1,123 1,529 Accrued income 526 672 1,186 Deferred expenses 57 502 568 Pension schemes in net surplus (see Note 4) 144 188 105 Other assets 6,189 8,491 9,188 7,820 10,976 12,576
(a) (Loss)/profit from discontinued operations, net of tax 2012 2011 2010 £m £m £m
Net cash flows from operating activities (839) (246) 2,988 Net cash flows from investing activities 1,724 (87) 855 Net cash flows from financing activities (775) (115) (243) Net increase/(decrease) in cash and cash equivalents 108 (454) 3,600
Assets of disposal groups Cash and balances at central banks — 18 18 127 184 Loans and advances to banks 2,036 76 2,112 87 651 Loans and advances to customers 881 982 1,863 19,405 5,013 Debt securities and equity shares 7,156 35 7,191 5 20 Derivatives 12 3 15 439 5,148 Intangible assets 750 — 750 15 — Settlement balances — — — 14 555 Property, plant and equipment 222 1 223 4,749 18 Other assets 1,640 26 1,666 456 704 Discontinued operations and other disposal groups 12,697 1,141 13,838 25,297 12,293 Assets acquired exclusively with a view to disposal — 175 175 153 191 12,697 1,316 14,013 25,450 12,484
At 31 December 2011, disposal groups comprised the RBS Aviation Capital business which was sold in the second half of 2012 and the RBS England and Wales and NatWest Scotland branch-based businesses, along with certain SME and corporate activities across the UK (‘UK branch-based businesses’). In October 2012 Santander announced its withdrawal from the sale agreed in August 2010. Although the Group continues to explore disposal options, sale within 12 months is no longer highly probable; accordingly at 31 December 2012 the assets and liabilities of this UK branch-based business ceased to be classified as a disposal group. No adjustment was required to the carrying value of these assets and liabilities on reclassification. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, comparatives have not been restated.
Notes on the consolidated accounts continued 22 Accruals, deferred income and other liabilities 2012 2011 2010 £m £m £m
Notes in circulation 1,684 1,683 1,793 Current tax 527 700 723 Accruals 3,579 4,941 6,773 Deferred income 875 3,481 4,766 Provisions for liabilities and charges (see table below) 3,147 1,311 624 Other liabilities (1) 4,989 11,009 8,410 14,801 23,125 23,089
Take up rate +/-5 +/-300 Uphold rate +/-5 +/-35 Average redress +/-5 +/-35
The Royal Bank of Scotland plc €1,000 million 6% subordinated notes 2013 Lower Tier 2 869 921 989 US$50 million floating rate subordinated notes 2013 Lower Tier 2 36 37 38 €500 million 6% subordinated notes 2013 Lower Tier 2 415 426 439 £150 million 10.5% subordinated bonds 2013 (2) Lower Tier 2 164 171 177 AUD397 million (2011 and 2010 - AUD590 million) 6% subordinated notes 2014 (callable quarterly from October 2009) (3) Lower Tier 2 257 392 391 AUD265 million (2011 and 2010 - AUD410 million) floating rate subordinated notes 2014 (callable quarterly from October 2009) (3) Lower Tier 2 171 272 272 CAD217 million (2011 and 2010 - CAD700 million) 4.25% subordinated notes 2015 (callable quarterly from March 2010) Lower Tier 2 135 444 452 £250 million 9.625% subordinated bonds 2015 Lower Tier 2 289 297 303 US$322 million (2011 and 2010 - US$750 million) floating rate Bermudian callable subordinated notes 2015 (callable quarterly from September 2010) (3) Lower Tier 2 199 485 483 €750 million floating rate subordinated notes 2015 Lower Tier 2 688 709 725 CHF400 million 2.375% subordinated notes 2015 Lower Tier 2 287 295 287 CHF100 million 2.375% subordinated notes 2015 Lower Tier 2 84 88 83 CHF200 million 2.375% subordinated notes 2015 Lower Tier 2 134 136 136 US$229 million (2011 and 2010 - US$500 million) floating rate subordinated notes 2016 (callable quarterly from October 2011) (3) Lower Tier 2 142 324 322 US$686 million (2011 and 2010 - US$1,500 million) floating rate subordinated notes 2016 (callable quarterly from April 2011) (3) Lower Tier 2 425 971 967 €227 million (2011 and 2010 - €500 million) 4.5% subordinated notes 2016 (callable quarterly from January 2011) (3) Lower Tier 2 185 420 450 CHF34 million (2011 and 2010 - CHF200 million) 2.75% subordinated notes 2017 (callable quarterly from December 2012) (3) Lower Tier 2 23 138 138 €100 million floating rate subordinated notes 2017 Lower Tier 2 82 84 86 €102 million (2011 and 2010 - €500 million) floating rate subordinated notes 2017 (callable quarterly from January 2012) (3) Lower Tier 2 84 419 432 €750 million 4.35% subordinated notes 2017 Lower Tier 2 721 723 721 AUD50 (2011 and 2010 - AUD450 million) 6.5% subordinated notes 2017 (callable quarterly from February 2012) (3) Lower Tier 2 32 303 302 AUD90 million (2011 and 2010 - AUD450 million) floating rate subordinated notes 2017 (callable quarterly from February 2012) (3) Lower Tier 2 58 298 295 US$450 million (2011 and 2010 - US$1,500 million) floating rate subordinated callable step-up notes 2017 (callable quarterly from August 2012) (3) Lower Tier 2 279 971 966 €2,000 million 6.93% subordinated notes 2018 Lower Tier 2 2,033 2,023 1,999 US$125.6 million floating rate subordinated notes 2020 Lower Tier 2 78 81 81 €1,000 million 4.625% subordinated notes 2021 (callable quarterly from September 2016) Lower Tier 2 938 948 949 €300 million CMS linked floating rate subordinated notes 2022 Lower Tier 2 272 271 280 €144.4 million floating rate subordinated notes 2023 Lower Tier 2 224 157 153 AUD883 million 13.125% subordinated notes 2022 (issued March 2012) callable March 2017 Lower Tier 2 585 — —
CHF124 million 9.375% subordinated notes 2022 (issued March 2012) callable March 2017 Lower Tier 2 90 — —
Charter One Financial, Inc. US$400 million 6.375% subordinated notes 2012 (redeemed January 2012) — 261 265 US$350 million 4.150% subordinated notes 2022 (issued September 2012) Ineligible 217 — —
B shares and dividend access share In December 2009, the company entered into an acquisition and contingent capital agreement with HM Treasury. HM Treasury agreed to acquire at 50p per share 51 billion B shares with a nominal value of 1p each and a dividend access share with a nominal value of 1p; these shares were issued to HM Treasury on 22 December 2009. Net proceeds were £25.1 billion.
HM Treasury has agreed not to convert its B shares into ordinary shares to the extent that its holding of ordinary shares following the conversion would represent more than 75% of the company's issued ordinary share capital.
After 2 years but within 5 years After 5 years Total
These interests predominantly relate to mortgage-backed securities which were re-securitised. Retained interests are generally not held to maturity and are typically sold after settlement of the securitisation. Retained interests may be subordinated to other investors' interests. Third party investors and securitisation trusts have no recourse to the Group's other assets for failure of debtors to perform on the securitised loans or securities, effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust. The value of retained interest varies and is subject to credit, interest rate, prepayment, and other risks of the transferred assets. In the ordinary course of business, the Group does not provide any other financial support to the securitisation trusts other than holding these retained interests. At 31 December 2012, securitised assets were £0.4 billion (2011 - £0.6 billion; 2010 - £2.3 billion); retained interest at fair value £61 million (2011 - £72 million; 2010 - £286 million); subordinated assets £1 million (2011 - £3 million; 2010 - £4 million); and related liabilities £1 million (2011 - £3 million; 2010 - £4 million).
Trustee and other fiduciary activities In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of £476 million (2011 - £502 million; 2010 - £629 million) from these activities.
The Group has accrued £119 million for its share of estimated FSCS levies for the 2012/13 and 2013/14 scheme years.
Other investigations On 27 July 2011, the Group agreed with the Board of Governors of the Federal Reserve System, the New York State Banking Department, the Connecticut Department of Banking, and the Illinois Department of Financial and Professional Regulation to enter into a consent Cease and Desist Order (the Order) to address deficiencies related to governance, risk management and compliance systems and controls in RBS plc and RBS N.V. branches. In the Order, the Group agreed to create the following written plans or programmes: a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of the Group’s U.S. operations on an enterprise-wide and business line basis, an enterprise-wide risk management programme for the Group’s
Note: (1) Included within Direct Line Group discontinued operations are the managed basis divisional results of Direct Line Group (DLG), certain DLG related activities in Central items; and related one-off and other items including write-down of goodwill, integration and restructuring costs and strategic disposals. Refer to Note 20 for further information.
UK Retail 117,411 109,307 — 114,469 103,748 — 111,793 97,164 — UK Corporate 110,158 129,618 345 114,237 129,231 712 116,999 126,270 381 Wealth 21,486 39,445 51 21,718 39,061 65 21,073 37,054 63 International Banking 53,091 52,582 24 69,987 68,086 18 77,937 67,893 22 Ulster Bank 30,754 28,745 4 34,810 27,782 45 40,081 34,481 101 US Retail & Commercial 72,548 63,096 308 75,791 67,329 271 72,418 68,474 197 Markets 714,303 694,747 366 826,947 835,711 1,553 746,168 757,974 852 Direct Line Group 12,697 9,267 275 12,912 8,077 99 12,555 8,195 50 Central items 115,591 104,609 991 130,466 133,048 960 99,728 140,070 632 Core 1,248,039 1,231,416 2,364 1,401,337 1,412,073 3,723 1,298,752 1,337,575 2,298 Non-Core 63,418 9,859 169 104,726 18,220 841 153,882 38,503 761 1,311,457 1,241,275 2,533 1,506,063 1,430,293 4,564 1,452,634 1,376,078 3,059 Reconciling item RFS Holdings minority interest 838 572 — 804 521 — 942 647 76 1,312,295 1,241,847 2,533 1,506,867 1,430,814 4,564 1,453,576 1,376,725 3,135
Net interest income 8,212 2,157 770 263 11,402 Net fees and commissions 2,834 1,220 564 257 4,875 Income from trading activities (314) 1,539 193 257 1,675 Other operating (loss)/income (710) 282 356 61 (11)
Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.
Cash flow hedging reserve At 1 January — — (1) Amount transferred from equity to earnings — — 1 At 31 December — — —
Loss for the year (684) (107) (4,554) Other comprehensive income Cash flow hedges — — 1 Total comprehensive loss for the year (684) (107) (4,553)
Customer accounts 1,029 — — — — — Debt securities in issue 589 1,089 6,436 128 1,248 — Subordinated liabilities 317 310 1,357 1,873 1,998 3,482 1,935 1,399 7,793 2,001 3,246 3,482
The Royal Bank of Scotland plc, Direct Line Insurance Group plc and RFS Holdings B.V. are directly owned by the company, and all of the other subsidiary undertakings are owned directly, or indirectly through intermediate holding companies, by these companies. All of these subsidiaries are included in the Group's consolidated financial statements and have an accounting reference date of 31 December.
Owners' equity 68,130 74,819 75,132 77,736 58,879 Non-controlling interests 2,318 1,234 1,719 16,895 21,619 Subordinated liabilities 26,773 26,319 27,053 37,652 49,154 Deposits 622,684 611,759 609,483 756,346 897,556 Derivatives, settlement balances and short positions 467,802 572,499 478,076 475,017 1,025,641 Other liabilities 124,588 220,237 262,113 332,840 348,803 Total liabilities and equity 1,312,295 1,506,867 1,453,576 1,696,486 2,401,652
Loans and advances to customers - net 500,135 515,606 555,260 728,393 874,722
Notes: (1) Excludes derivative cash collateral of £37 billion at 31 December 2012 (2011 - £41 billion; 2010 - £38 billion), 2012 average of £38 billion (2011 - £35 billion; 2010 - £34 billion). (2) Excludes Federal Home Loan Bank’s long-term borrowings of £1 billion at 31 December 2012 (2011 and 2010 - £1 billion), 2012 average of £1 billion (2011 and 2010 - £1 billion).
Operating leases 214 185 694 559 910 1,376 Contractual obligations to purchase goods or services 110 334 500 15 — — 324 519 1,194 574 910 1,376
The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties The Group has credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as the Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. The Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a material adverse impact on the Group’s financial condition and results of operations.
The Group relies increasingly on customer deposits to meet a considerable portion of its funding and it is actively seeking to increase the proportion of its funding represented by customer deposits. The level of deposits may fluctuate due to certain factors outside the Group’s control, such as a loss of confidence, increasing competitive pressures for retail customer deposits or the encouraged or mandated repatriation of deposits by foreign wholesale or central bank depositors, which could result in a significant outflow of deposits within a short period of time. There is currently heavy competition among UK banks for retail customer deposits, which has increased the cost of procuring new deposits and impacted the Group’s ability to grow its deposit base and such competition is expected to continue. An inability to grow, or any material decrease in, the Group’s deposits could, particularly if accompanied by one of the other factors described above, have a materially adverse impact on the Group’s ability to satisfy its liquidity needs.
The Basel Committee on Banking Supervision’s package of reforms to the regulatory capital framework includes a material increase to the minimum Core Tier 1 (common equity) requirement and the total Tier 1 capital requirement, a capital conservation buffer and a countercyclical buffer. In addition, a leverage ratio is to be introduced, together with a liquidity coverage ratio and a net stable funding ratio. Further measures may include bail-in debt which may impact existing as well as future issues of debt and expose them to the risk of conversion into equity and/or write-down of principal amount. Such measures would be in addition to proposals for the write-off of Tier 1 and Tier 2 debt (and its possible conversion into ordinary shares) if a bank becomes non-viable.
There is no assurance that the price that the Group receives or has received for any assets sold pursuant to the State Aid restructuring plan will be or has been at a level the Group considers adequate or which it could obtain in circumstances in which the Group was not required to sell such assets in order to implement the State Aid restructuring plan or if such sale were not subject to the restrictions contained in the terms thereof. Further, if the Group fails to complete any of the required disposals within the agreed timeframes for such disposals, under the terms of the State Aid approval, a divestiture trustee may be empowered to conduct the disposals, with the mandate to complete the disposal at no minimum price.
Trading market Non-cumulative dollar preference shares On 26 March 1997, 8 February 1999, 30 September 2004, 26 August 2004, 19 May 2005, 9 November 2005, 25 May 2006, 27 December 2006, 28 June 2007, 27 September 2007 and 4 October 2007, the company issued the following Series of American Depository Shares (ADSs) representing noncumulative dollar preference shares of the company, in the United States, of which the following were outstanding at 31 December 2012: 6,255,408 Series F ("Series F ADSs") representing 6,255,408 non-cumulative dollar preference shares, Series F; 9,687,654 Series H ("Series H ADSs") representing 9,687,654 non-cumulative dollar preference shares, Series H; 30,027,877 Series L ("Series L ADSs") representing 30,027,877 non-cumulative dollar preference shares, Series L; 23,125,869 Series M (“Series M ADSs”) representing 23,125,869 non-cumulative dollar preference shares, Series M; 22,113,160 Series N ("Series N ADSs") representing 22,113,160 non-cumulative dollar preference shares, Series N; 9,883,307 Series P ("Series P ADSs") representing 9,883,307 non-cumulative dollar preference shares, Series P; 20,646,938 Series Q ("Series Q ADSs") representing 20,646,938 non-cumulative dollar preference shares, Series Q; 10,163,932 Series R ("Series R ADSs") representing 10,163,932 non-cumulative dollar preference shares, Series R; 26,449,040 Series S ("Series S ADSs") representing 26,449,040 non-cumulative dollar preference shares, Series S; 51,245,839 Series T ("Series T ADSs") representing 51,245,839 non-cumulative dollar preference shares, Series T; and 10,130 Series U ("Series U ADSs") representing 10,130 non-cumulative dollar preference shares, Series U.
Non-cumulative preference shares of US$0.01 - Series F (1) 1.91 1.21 1.19 1.06 1.22 1.04 - Series H (1) 1.81 1.14 1.13 1.03 1.15 0.99 - Series L (1) 1.44 0.91 0.90 0.86 0.92 0.78 - Series M (2) 1.20 0.75 — 0.26 1.02 0.89 - Series N (2) 1.19 0.74 — 0.26 1.01 0.88 - Series P (2) 1.17 0.73 — 0.25 0.99 0.87 - Series Q (2) 1.27 0.79 — 0.27 1.07 0.94 - Series R (2) 1.15 0.72 — 0.25 0.97 0.85 - Series S (2) 1.24 0.77 — 0.27 1.05 0.92 - Series T (2) 1.36 0.85 — 0.29 1.15 1.01 - Series U (2) 3,820 2,406 — 2,474 5,019 3,935 Non-cumulative convertible preference shares of US$0.01 - Series 1 (1) 91.18 57.86 56.87 59.98 60.33 49.66 Non-cumulative preference shares of €0.01 - Series 1 (2) 72.17 44.65 — — 49.46 46.53 - Series 2 (2) 68.29 42.25 — — 46.00 41.79 - Series 3 (2) 4,547 2,813 — — 3,125 2,782 Non-cumulative convertible preference shares of £0.01 - Series 1 (1) 119.40 73.87 73.87 73.87 73.87 73.87 Non-cumulative preference shares of £1 - Series 1 (2) 144.86 89.62 — — 81.62 80.73 - Series 2 (redeemed April 2009) (2) — — — — 54.71 —
Passive Foreign Investment Company (PFIC) considerations In general, a foreign corporation will be a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable 'look-through rules', either (i) at least 75% of its gross income is 'passive income' or (ii) at least 50% of the average quarterly value of its assets is attributable to assets which produce passive income or are held for the production of passive income. The company does not believe that it was a PFIC for its 2012 taxable year. Although interest income is generally passive income, a special rule allows banks to treat their banking business income as non-passive. To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The company's possible status as a PFIC is determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US Holder holds ordinary shares, ordinary ADSs, preference ADSs or PROs. If the company were to be treated as a PFIC for any year during which a US Holder holds ordinary shares, ordinary ADSs, preference ADSs or PROs, US Holders would generally be subject to adverse US federal income tax consequences. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company's ordinary shares, ordinary ADSs, preference ADSs or PROs.
IAS International Accounting Standards IASB International Accounting Standards Board ICB Independent Commission on Banking IFRS International Financial Reporting Standards IMF International Monetary Fund IPO Initial Public Offering IPV Independent Price Verification IRC Incremental Risk Charge IRRBB Interest Rate Risk in the Banking Book LAR Loans and Receivables LIBOR London Interbank Offered Rate LTIP Long Term Incentive Plan LTV Loan-to-value M&IB Markets & International Banking MBS Mortgage-backed Securities MTN Medium-term Notes NI Northern Ireland NYSE New York Stock Exchange OFT Office of Fair Trading OTC Over-the-counter PPI Payment Protection Insurance PPL Potential Problem Loans R&C Retail & Commercial RBSG The Royal Bank of Scotland Group plc REIL Risk Elements In Lending RFS RFS Holdings B.V. RMBS Residential Mortgage-backed Securities RNIV Risks Not In VaR ROE Return on Equity ROI Republic of Ireland RoW Rest of the World RWA Risk-weighted asset SEC US Securities and Exchange Commission SME Small and Medium-sized Enterprise SPE Special Purpose Entity SVaR Stressed Value-at-Risk TSR Total Shareholder Return UK United Kingdom UKFI UK Financial Investments Limited US/USA United States of America VaR Value-at-Risk
Market risk - the risk that the value of an asset or liability will change as a result of market factors such as foreign exchange rates, commodity prices, interest rates, credit spreads and equity prices.
Risk-weighted assets (RWAs) - assets adjusted for their associated risks using weightings established in accordance with the Basel Capital Accord as implemented by the FSA. Certain assets are not weighted but deducted from capital.
Standardised approach - a method used to calculate credit risk capital requirements under Pillar 1 of Basel II. In this approach the risk weights used in the capital calculation are determined by regulators. For operational risk, capital requirements are determined by multiplying three years’ historical gross income by a percentage determined by the regulator. The percentage ranges from 12 to 18%, depending on the type of underlying business being considered.
Tax Accounting policies 363 Business review 63 Critical accounting policies 370 Notes on the consolidated accounts 386 Notes on the consolidated accounts - deferred tax 432
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