A detailed review of our corporate governance and remuneration, including the Report of the directors and annual report on remuneration.
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We are targeting an overall cost reduction this year of £250 million.
We already have strong relationships with millions of customers in this country, but we can deepen them even further by building propositions that provide support throughout their financial lives. This may mean looking to increase our presence in certain areas including through partnerships, where relevant, to ensure we are helping our customers meet their needs and ambitions.
For RBS, supporting financial capability goes beyond delivering fair products and great service. It also means helping our customers, wider society and future generations to develop good money management skills so they are empowered to make better financial decisions. Against a backdrop of weaker economic growth and social inequality there is an increased focus on customers in vulnerable situations and/or precarious financial situations, supporting our diverse range of customers to access suitable banking services and products.
Our customers We provide financial services to personal, commercial, large corporate and institutional customers.
Building a great place to work that reflects the society we are proud to serve
Since launching 25 years ago, MoneySense has helped more than 7.7 million young people learn about money and become more financially confident.
Found 15km into the Firth of Forth, NNG holds the rights and licenses to develop, build and operate the 448MW centre.
It’s simple to set up a profile with an existing LinkedIn account. And functionality like tags, group discussions and private messages makes Coutts Connect easy to use.
Our award-winning Coutts Institute helps clients make a difference to the causes and communities that they care about and the Coutts Foundation is an internal body which focuses on tackling poverty. Our efforts in philanthropy continued to be externally recognised, with Coutts awarded Best Private Bank for Philanthropic Services by Global Finance at the World’s Best
RBSI has started to work with trusted technology partners to serve customers future needs. To help colleagues respond to rapid change, RBSI has launched a multi-stage training program, covering future work-force capabilities and innovation, which will continue into next year.
Operating profit of £344 million in 2019 was 2.4% higher than 2018 primarily due to increased volumes of customer lending and deposits, driving a £16 million increase in income. Excluding strategic, litigation and conduct costs, operating expenses were £16 million lower as a £24 million reduction in back office operations costs was partially offset by increased investment spend. Net loans to customers increased £0.8 billion, or 6.0% in 2019, reflecting a Funds sector transfer of £0.5 billion from NatWest Markets and higher volumes in Institutional and Local Banking.
Investing in Colleagues We have also transformed our colleagues’ experience by deploying new digital tools. Workday was implemented as a new digital HR platform in November 2019, and includes a mobile app, giving colleagues an experience on par with the digital experience our customers enjoy. We extended ServiceNow to improve how we respond to colleagues queries, and our HR chat bot has expanded helping over 50,000 colleagues to answer their basic queries. These enhancements are enabling us to respond to the evolving world of work and needs of our colleagues.
Inclusion We are proud to be building an inclusive bank which is a great place for all colleagues to work.
Disability Smart: • We have plans in place to deliver against all segments of our bank-wide disability plan. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting accessibility checks into our key processes and practices.
To inform the continued development of our plan, RBS Group continues to enhance its participation in several climate related initiatives, including the UNEP FI Responsible Banking Principles, UNEP FI TCFD scenario analysis pilot and other TCFD working groups and the PRA and FCA’s Climate Financial Risk Forum.
We have worked with a consortium of partners led by D-Risk Group Ltd and Airbus Defence and Space supported by CLS Data. We have piloted Airbus’ Geospatial Financial Hub (GFH). The GFH maps flood risk against residential properties in the UK using JBA Risk Management Flood Map and Climate Change Flood Risk Indicator. The pilot calculated the physical risks to properties now and as global temperatures change in the future using climate data from the UK Climate Change Risk Assessment 2017 and UK Climate Projections 2009.
Risk management tools This image shows flood risk assessment using an RBS office as a case study
The above includes continued financing of low carbon generation and energy efficiency projects, as well as an increased focus on energy efficiency in real estate and alternative fueled vehicles.
Risk-weighted assets (RWAs) RWAs were down £9.5 billion at 31 December 2019, ending the year at £179.2 billion (from £188.7 billion in 2018). This reduction was driven by the completion of the merger of Alawwal bank and Saudi British Bank as well as revisions to LGD models in the personal and small business asset finance portfolio as well as reductions in market risk capital requirements.
Group Board Risk Committee Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk profile. It reviews RBS’s compliance with approved risk appetite and oversees a number of submissions to regulators.
In making their decisions, the directors took into account RBSG plc’s very strong capital position, achieved through organic capital build and optimising its capital usage and confirmed their strong desire to distribute excess capital back to shareholders.
Non-IFRS financial information RBS prepares its financial statements in accordance with IFRS as issued by the IASB and as adopted by the European Union, which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are not representative of the underlying performance of the business and which distort period-onperiod comparison. These non-IFRS financial measures are not measures within the scope of IFRS and are not a substitute for IFRS financial measures. Refer to the section, ‘Non-IFRS financial measures’, on pages 277 to 280 for further information and calculations of non-IFRS financial measures included throughout this document, and, where relevant, the most directly comparable IFRS financial measures.
Financial summary continued RBS's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is presented below.
Other expenses (2,403) (470) (2,237) (439) (244) (1,178) (78) (7,049) Strategic costs (290) (60) (301) (38) (20) (222) (450) (1,381) Litigation and conduct costs (925) (22) (62) (9) — (18) 141 (895)
 Customer deposits increased by £8.3 billion, 2% to £369.2 billion including increases of £5.0 billion in UK Personal banking reflecting continued growth across current accounts and savings.
 Other financial liabilities included customer deposits at fair value through profit and loss and debt securities in issue increased by £5.5 billion, 14%, to £45.2 billion primarily driven by £4 billion of MREL senior debt issued by RBSG plc.
 Other liabilities increased by £0.7 billion, 8% to £9.6 billion mainly due to the increase in lease balances following the adoption of IFRS 16 on 1 January 2019, partially offset by reductions in provisions in the year.
Net interest income 521 518 3 1% Non-interest income 256 257 (1) (0%) Total income 777 775 2 0% Other costs (439) (456) 17 (4%) Strategic costs (38) (21) (17) 81% Litigation and conduct costs (9) (1) (8) nm Operating expenses (486) (478) (8) 2% Impairment releases/(losses) 6 6 — — Operating profit 297 303 (6) (2%)
 Total income increased by £2 million, or 0.3%, as volume growth and one-off benefits were partially offset by lower deposit income. Net interest margin decreased by 12 basis points compared with 2018 primarily due to deposit margin pressure.
NatWest Markets N.V. from the 29 November 2019 only, whereas the NatWest Markets franchise excludes the Central items & other segment. For periods prior to Q4 2019, NatWest Markets N.V. was also excluded from the NatWest Markets Plc entity.
 A net impairment release of £51 million compared with a release of £92 million in 2018, both reflecting a small number of legacy cases.
External appointments: Senior Independent Director of Kingfisher plc, and non-executive director and chairman of the audit committee of Smiths Group plc.
Chairman and CEO The role of Chairman is distinct and separate from that of the CEO and there is a clear division of responsibilities, with the Chairman leading the Board and the CEO managing the business day to day.
Election and re-election of directors In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at RBSG plc’s AGM. In accordance with the UK Listing Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders.
The terms of reference of the Committee are reviewed annually, approved by the Board and are available at rbs.com.
The Committee has also continued to oversee work aimed at further enhancing the RBS Group’s subsidiary governance framework. As part of this work, the Committee considered the findings of a review of the framework and intends to implement a number of recommendations, including those aimed at increasing the level of connectivity between Group and subsidiary boards and committees.
Performance evaluations The annual review of the effectiveness of the Board and its senior Committees, including the GAC, was conducted internally in 2019.
The GAC then recommended the quarterly, interim and full year results announcements, the Annual Report and Accounts, together with supporting documentation (including Pillar 3 reports, financial supplements and investor presentations) and the Form 20-F to the Board for approval.
During 2019, approval was granted under the policy for the external auditors to undertake one significant engagement which related to the provision of a report supporting a solvency statement by the directors of Ulster Bank Ireland DAC in connection with a share capital reduction. The GAC was satisfied that the engagement did not impact the external auditor’s independence.
Risk Management Reports – Top and emerging risks were considered via quarterly Risk Management Reports, supplemented by shorter reports at intervening meetings. Key areas of focus included Brexit, the UK and global economic outlook, market conditions and change risk. Reports on legal and regulatory developments and significant litigation risks were also frequently considered. Updates from Executive and Subsidiary Risk Committees – Regular updates were received from the Group Executive Risk Committee, as BRC relies on the effective executive oversight of risk. In addition, quarterly reports were received from the chairmen of the risk committees of the segments and material regulated subsidiaries. Emerging Risks – Emerging risks likely to impact RBS over the next decade were considered at each meeting and the Committee held a dedicated horizon scanning session to consider strategic risks. Key topics included technological development, changing demographics, climate and resources, and geopolitical and economic shifts. Risk Function – Oversight of the Risk function has been an area of focus, with the Committee receiving updates on work being undertaken to optimise the operating model and enhance effectiveness.
Authority is delegated to Group SBC by RBSG plc Board and a regular report of the Committee’s activities is provided. The terms of reference are available on rbs.com and these are reviewed annually and approved by the RBSG plc Board.
During the year the TIC has reviewed innovation governance and how the various innovation activities connect to the RBS Group’s broader strategy. We have looked at innovation spend and budgets to challenge whether they are aligned to priorities. We have also spent time on the emerging skills and capabilities and ways of working that will be critical to success in the future such as greater agility, more collaboration, working with external partners and ecosystems, continuous learning, data governance and intelligence, and discussed how we can lead on these fronts.
(2) 10% of base salary is in line with the rate applicable to the vast majority of the workforce. Over 99.7% of employees in the UK receive this rate.
Illustrative scenarios of annual remuneration for executive directors under the remuneration policy
LTI awards LTI awards normally lapse on leaving unless the termination is for one of a limited number of specified ‘good leaver’ reasons or in exceptional circumstances the Committee may exercise its discretion to determine that an individual qualifies as a good leaver. LTI awards held by good leavers will normally vest on the original vesting dates, subject to the performance conditions being met.
 The LTI construct is based on lower maximum award levels and reasonable performance expectations, which helps to create more predictable outcomes and encourage safe and secure growth.
More generally, meetings also take place with RBSG plc’s retail shareholders allowing Board members to hear directly from the wider shareholder base on any matters of importance. Two such events were held in 2019 with more planned for 2020. Shareholders continue to play a vital role in developing remuneration practices and the Committee is very grateful for their involvement in the process.
A colleague opinion survey provides all colleagues with the opportunity to have a say on what it feels like to work at RBS (twice per year). Nearly 58,000 colleagues from across RBS took part in the latest survey. The 2019 report shows steady improvement since last year, and RBS compares favourably against benchmarks for Global Financial Services and High Performing companies across the board. Feedback from colleagues is included in the measures that impact executive pay.
(6) Alison Rose was appointed as CEO on 1 November 2019 and Katie Murray was appointed as CFO on 1 January 2019. Remuneration above includes fixed pay since appointment to the Board together with the estimated vesting value of the full 2017 LTI award, including the performance period prior to appointment.
RoTE for 2019 was as follows:  4.7% for RBS Group
Note: (1) Ross McEwan’s agreed award level for the 2020 LTI award represents a 26% reduction compared to his 2019 LTI award, which was considered by the
Progress towards execution of the NatWest Markets strategic review. To be measured with reference to RWA reduction and capital accretion.
Three further questions to be considered: 1. Is the underperformance due to factors within management’s reasonable control in the circumstances? 2. Can the underperformance be linked back to the performance year to which the award relates, rather than performance developments since? 3. Is it appropriate to reflect the underperformance in the current pre-vest test (i.e. if the underperformance has not been adequately reflected in other ways such as subsequent pregrant tests and awards in the interim)?
Notes: (1) Interests for Ross McEwan are as at 31 October rather than 31 December 2019. As noted earlier in the report, the Committee agreed that good leaver treatment should apply. Outstanding LTI awards will continue to vest on their scheduled vesting dates subject to the assessment of performance where appropriate. (2) Performance assessment has taken place and outstanding awards remain subject to deferral and service or good leaver conditions before vesting. (3) The performance period ended on 31 December 2019 with the vesting outcomes determined in January 2020, as set out earlier in this report. In the case of
Ross McEwan, the 2017 award was pro-rated to reflect that he was employed for 35 of the 36 months covering the performance period. (4) Award granted under the all-employee Sharesave plan. The award price is the option price at which shares can be bought at the end of the savings period.
During 2019, Robert Gillespie was Chairman of the Committee and Alison Davis, Mike Rogers, Mark Seligman and Frank Dangeard were members. The Committee held seven scheduled meetings in 2019 and a further eight ad hoc meetings. Details of attendance can be found in the corporate governance report on page 66.
 2019 variable pay proposals and the 2019 Directors’ Remuneration Report.
Operation Role-based allowances are fixed allowances which form an element of the employee’s overall fixed remuneration for regulatory purposes and are based on the role the individual performs.
For awards made in respect of the 2019 performance year, immediate cash awards continue to be limited to a maximum of £2,000. In line with regulatory requirements, a significant proportion of annual bonus awards for more senior employees is deferred and includes partial delivery in shares.
During 2020, RBS will consider its approach to new remuneration requirements proposed under the fifth iteration of the Capital Requirements Directive.
The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; and staff who individually, or as part of a Committee, have authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The quantitative criteria are: individuals earning €500,000 or more in the previous year; individuals in the top 0.3% of earners in the previous year; and individuals who earned more than the lowest paid identified staff per certain qualitative criteria. In addition to the qualitative and quantitative criteria, RBS has applied its own minimum standards to identify roles that are considered to have a material influence over its risk profile.
Remuneration and culture RBS continues to assess conduct and its impact on remuneration as part of the annual Group-wide bonus pool process and also via the accountability review framework. RBS has continued to simplify its approach to reward and removed incentives for employees where this could drive unintended behaviours. The Committee will continue to review workforce remuneration and the alignment of incentives and reward with culture.
Remuneration of MRTs The quantitative disclosures below are made in accordance with regulatory requirements in relation to 754 employees who have been identified as MRTs for RBSG plc. The number of MRTs has increased from 588 last year, largely as a result of changes made to MRT identification in order to comply with ringfencing rules, with identification taking place for four key ‘institutions’. Further detail on remuneration of MRTs identified for subsidiary institutions is included in Pillar 3 reporting, which can be found on rbs.com.
Internal control The Board of Directors is responsible for the system of internal controls that is designed to maintain effective and efficient operations, compliant with applicable laws and regulations. The system of internal controls is designed to manage, or mitigate, risk to an acceptable residual level rather than eliminate it entirely. Systems of internal control can only provide reasonable and not absolute assurance against material misstatement, fraud or loss.
NatWest Markets N.V. NatWest Markets N.V. (NWM N.V.), RBS Group’s banking entity in the Netherlands, began transacting new business on 25 March 2019 to ensure continuity of service to European Economic Area (EEA) customers following the UK’s exit from the European Union (EU). NWM N.V. Group was acquired by NWM Plc, and became a part of NWM Group, with effect from 29 November 2019.
RBS – Annual Report and Accounts 2019 109 authorisation at the Annual General Meeting in 2020.
Shareholdings The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company at 31 December 2019.
Presentation of information Where indicated in the section headers, information in the Capital and risk management section (pages 112 to 189) is within the scope of the Independent auditor’s report. Where a main section header, presented in bold, is marked as audited, all subsequent sub sections are also audited, the end of the audited section is marked by ∆.
The ICAAP is used to form a view of capital adequacy separately to the minimum regulatory requirements. The ICAAP is used by the PRA to assess RBS’s specific capital requirements through the Pillar 2 framework.
Capital allocation RBS has mechanisms to allocate capital across its legal entities and businesses. These aim to optimise the use of capital resources taking into account applicable regulatory requirements; strategic and business objectives; and risk appetite. The framework for allocating capital is approved by the Asset & Liability Management Committee.
Stress testing – liquidity Liquidity risk monitoring and contingency planning A suite of tools is used to monitor, limit and stress test the risks on the balance sheet. Limit frameworks are in place to control the level of liquidity risk, asset and liability mismatches and funding concentrations. Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the Asset & Liability Management Committee at least monthly. Liquidity Condition Indicators are monitored daily. This ensures any build-up of stress is detected early and the response escalated appropriately through recovery planning.
Resolution would be implemented if RBS was assessed by the UK authorities to have failed and the appropriate regulator put it into resolution. The process of resolution is owned and implemented by the Bank of England (as the UK resolution authority). A multi-year programme is in place to further develop resolution capability in line with regulatory requirements.
Scenario analysis based on hypothetical adverse scenarios is performed on non-traded exposures as part of the Bank of England and European Banking Authority stress exercises. RBS also produces an internal scenario analysis as part of its financial planning cycles.
 On an IFRS 9 transitional basis, the reduction in the CET1 ratio from the start point to the minimum stressed ratio before the impact of strategic management actions or AT1 conversion improved from 660 basis points in 2018 to 630 basis points in 2019.
Capital, liquidity and funding risk Definitions (audited) Regulatory capital consists of reserves and instruments issued that are available, have a degree of permanency and are capable of absorbing losses. A number of strict conditions set by regulators must be satisfied to be eligible as capital.
 Additional Tier 1 (AT1) capital. This is the second type of loss absorbing capital and must be capable of absorbing losses on a going concern basis. These instruments are either written down or converted into CET1 capital when the CET1 ratio falls below a prespecified level.
Capital management is critical in supporting the businesses and is enacted through an end-to-end framework across businesses and the legal entities. Capital is managed both on an RBS Group consolidated level, as well as at NWH Group, NatWest Markets Plc, NatWest Markets N.V. and RBS International Limited levels. In addition, NWH Group banking subsidiaries are also subject to the same principles, processes and management as RBS Group, of which it is a part. Note that although the aforementioned entities are regulated in line with Basel III principles, local implementation of the framework differs across geographies.
(4) RBS Group may be subject to a non-disclosable PRA buffer requirement as set by the PRA. The PRA buffer consists of three components: a. A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could extend up to 40%. b. A Group risk buffer to cover the excess capital requirements that subsidiaries or sub-groups may have in excess of their share of RBS Group. c. A buffer to cover stress risks informed by the results of the BoE concurrent stress testing results.
(4) Corresponding shareholders’ equity was £43.5 billion (2018 - £45.7 billion). (5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
 The reduction in credit risk primarily reflected: a £4.6 billion reduction due to the completion of the merger of Alawwal bank and SABB, a £2.0 billion reduction due to revision in the treatment of nostros, a £1.7 billion reduction from revisions to LGD models and decreases due to foreign exchange movements. These were offset by increases in UK Personal Banking asset size due to increased lending and a £1.3 billion increase following the adoption of IFRS 16.
 The counterparty credit risk decrease primarily reflected decreased exposures and the impact of foreign exchange movements. CVA also decreased, primarily reflecting the reduction in the capital multiplier.
Debt securities in issue Debt securities Commercial in issue paper Covered Subordinated Total notes MTNs and CDs MTNs bonds Securitisation liabilities Total in issue
Notes: (1) Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes. (2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT) include collateral given to secure derivative liabilities.
(4) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes. (5) Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate. (6) Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of RBS’s liquidity portfolio and unencumbered debt securities. (7) Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
Sector Risk – based on economic capital and other qualitative factors
Wholesale In the Wholesale portfolio, customer PDs and facility LGDs are reassessed prior to finalising any forbearance arrangement. The ultimate outcome of a forbearance strategy is highly dependent on the cooperation of the borrower and a viable business or repayment outcome. Where forbearance is no longer appropriate, RBS will consider other options such as the enforcement of security, insolvency proceedings or both, although these are options of last resort.
UK Personal Ulster Commercial Private RBS NatWest Central items Banking Bank RoI Banking Banking International Markets & other Total
The table above shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 142 for Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £76.1 billion and debt securities of £59.4 billion (2018 – £87.2 billion and £57.0 billion respectively).
 Commercial Banking accounted for the majority of Wholesale exposures. The Commercial Banking charge for the year of £391 million, 38 basis points, increased year-on-year (2018 – 14 basis points) primarily due to a small number of material individual provisions, model enhancements and increased economic uncertainty. Stage 3 provisions were the largest contributor to the overall ECL provisions which reduced during the year as increased charges for Stage 3 impairments were more than offset by higher write-offs and repayments. Provision coverage overall remained broadly stable with increases in Stage 3 coverage for both individual and collective assessments, offset by a slight decrease in Stage 2.
 Interest rate profile – 86% of customers in the UK Personal Banking mortgage portfolio were on fixed rates (58% on five-year deals). In addition, 99% of all new mortgage completions were fixed-rate deals (57% of these were five-year deals).
Credit risk – Banking activities continued Personal portfolio (audited) Mortgage LTV distribution by stage The table below shows gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL reflected portfolios carried at fair value.
By geography and sub sector (1) UK RoI Other Total UK RoI Other Total £m £m £m £m £m £m £m £m
 2019 trends – Portfolio exposure reduced slightly during 2019, with new business and refinance activity lower than in previous years. CRE retail capital values have continued to decline in 2019.
 The majority of exposures were in AQ1-AQ4, with a significant proportion in AQ5-AQ8. As expected, mortgage exposures have a higher proportion in AQ1-AQ4 than unsecured borrowing. The movement in UK mortgages was primarily in bands AQ4-AQ5 and was reflective of a slight increase in the portfolio default rate from a low level that included the effect of the natural seasoning of strong business growth in prior years.
 ECL provisions coverage shows the expected trend with increased coverage in the poorer asset quality bands, and also by stage.
Asset quality of uncollateralised derivative assets AQ1-AQ4 3,361 3,384 AQ5-AQ8 972 773 AQ9-AQ10 22 24 Net exposure 4,355 4,181
Western Europe 21,646 8,989 23,490 54,125 14,370 39,755 Of which: France 3,097 1,943 4,365 9,405 2,497 6,908 Germany 6,597 3,903 1,270 11,770 2,371 9,399 Italy 3,757 532 880 5,169 3,642 1,527 Luxembourg 4 38 4,592 4,634 2 4,632 Netherlands 971 626 5,692 7,289 541 6,748 Spain 2,410 260 1,410 4,080 2,493 1,587 United States 14,441 5,754 7,974 28,169 1,483 26,686 Japan 2,722 2,685 302 5,709 12 5,697 2018
2019 2018 Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m
The sensitivity of net interest earnings table shows the expected impact of an immediate upward or downward change of 25 and 100 basis points to all interest rates. Yield curves are expected to move in parallel except that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate. At 31 December 2019, the floor also affects sterling interest rates, reducing the size of the down-rate shock at most maturities.
Credit spread risk is monitored daily through sensitivities and VaR measures. The dealing authorities in place for the bond portfolios further mitigate the risk by imposing constraints by duration, asset class and credit rating. Exposures and limit utilisations are reported to senior management on a daily basis.
The sensitivity of this ratio to exchange rates is monitored monthly and reported to the Asset & Liability Management Committee at least quarterly. Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with RBS policy.
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity shares with no observable market parameters or (iii) other unlisted equity shares.
The key inputs into these measurement methods are market data and risk factor sensitivities. Sensitivities refer to the changes in trade or portfolio value that result from small changes in market parameters that are subject to the market risk limit framework. Revaluation ladders are used in place of sensitivities to capture the impact of large moves in risk factors or the joint impact of two risk factors.
When simulating potential movements in such risk factors, a combination of absolute, relative and rescaled returns is used.
Market risk – other disclosures Replacement of Interbank Offered Rates (IBORs) (audited) Central banks and regulators in major jurisdictions (notably the UK, the EU, the US, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for IBOR based interest rates.
Securities 30.1 — 30.1 30.0 — 30.0 interest rate, credit spreads, equity
 Planning for LIBOR transition continued including an extended SONIA pilot and further industry engagement.
Risk mitigation Activity to mitigate the most-material compliance and conduct risks is carried out across RBS with specific areas of focus in the customerfacing businesses and legal entities. Examples of mitigation include consideration of customer needs in business and product planning, targeted training, complaints management, as well as independent monitoring activity. Internal policies help support a strong customer focus across RBS. Independent assessments of compliance with applicable regulations are also carried out at a legal entity level.
Pillar 1. The model uses historical loss data (internal and external) and forward-looking scenario analysis to provide a risk-sensitive view of RBS’s P2A capital requirement.
Risk mitigation Model risk is mitigated by ensuring adherence to policies and procedures relating to the approval, validation and ongoing monitoring of material models.
We evaluated how the discount rates and long-term growth rates used by management compared to our ranges which were determined using peer practice, external market data and calculations performed by our valuation specialists.
Among other procedures, we examined the relevant regulatory and legal correspondence to assess developments in certain cases. For the cases which were settled during the period, we compared the actual outflows with the provision that had been recorded, considered whether further risk existed, and evaluated the level of disclosures provided.
For the significant provisions made we assessed the provisioning methodology. For example, we tested the underlying data and assumptions used in the determination of the provisions recorded, including expected claim rates, legal costs, and the timing of settlement. We considered the accuracy of management’s historical estimates and peer bank settlement in similar cases by comparing the actual settlement to the provision. We also developed our own range of reasonable alternative estimates and compared them to management’s provision.
We involved modelling specialists to assist us to test the assumptions, inputs and formulae used in a sample of ECL models. This included assessing the appropriateness of model design and formulae used, alternative modelling techniques, refinements made to models in the second year of IFRS 9, and recalculating the Probability of Default, Loss Given Default and Exposure at Default, and model implementation for a sample of models. To evaluate data quality, we agreed ECL calculation data points to source systems. To test credit monitoring, we recalculated the risk ratings for a sample of performing loans.
 Certain fair value adjustments made to derivatives including Funding Valuation Adjustments (FVA) and Credit Valuation Adjustments (CVA) relating to derivative counterparties whose credit spread is less readily able to be determined, and material product and deal specific adjustments on long dated derivative portfolios.
Among other procedures, we assessed the Group accounting policy on foreign currency translation differences against IAS 21 and assessed management’s accounting basis for the reclassification of FX reserves from equity to profit and loss. More specifically, our assessment focused on the basis for the 2019 transactions being a trigger for reclassification under IAS21 and conversely why historical transactions would not have been trigger events.
We involved actuarial specialists to evaluate the actuarial assumptions by comparing them to third party sources obtained independently by us and market practice. We assessed the impact on pension liabilities of changes in financial, demographic and longevity assumptions over the year and whether these were in line with our own expectations.
We tested user access by assessing the controls in place for in-scope applications and verifying the addition and removal of users.
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review: Capital and risk management on pages 112 to 189 form an integral part of these financial statements.
Items that do qualify for reclassification FVOCI financial assets (14) 7 26 Cash flow hedges 294 (581) (1,069) Currency translation (1,836) 310 100 Tax (170) 189 256
Attributable to: Ordinary shareholders 1,044 305 2 Preference shareholders 39 182 234 Paid-in equity holders 367 355 487 Non-controlling interests 250 17 52 1,700 859 775 *Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
Total equity is attributable to: Ordinary shareholders 38,993 41,182 41,707 Preference shareholders 496 496 2,565 Paid-in equity holders 4,058 4,058 4,058 Non-controlling interests 9 754 763 *Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) Includes interest received of £11,245 million (2018 - £10,927 million, 2017 - £10,946 million) and interest paid of £3,318 million (2018 - £2,511 million, 2017 - £2,300 million). (2) 2018 has been re-presented to align the balance sheet classification. MREL was previously presented in Operating activities and is now presented in
Actuarial gains and losses (i.e. gains and/or losses on re-measuring the net defined benefit asset or liability) are recognised in other comprehensive income in full in the period in which they arise. The difference between scheme assets and scheme liabilities, the net defined benefit asset or liability, is recognised in the balance sheet subject to the asset celling test which requires the net defined benefit surplus to be limited to the present value of any economic benefits
Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is calculated using tax rates expected to apply in the periods when the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
 Credit cards: the irrecoverable amount is written off after 12 months; three years later any remaining amounts outstanding are written off.
Salaries 2,513 2,560 2,750 Bonus awards 299 225 298 Temporary and contract costs 401 442 430 Social security costs 300 307 318 Pension costs 303 401 467 Other 202 187 413 Staff costs 4,018 4,122 4,676
UK 44,600 46,600 51,200 USA 400 500 500 Europe 4,100 4,100 4,200 Rest of the World 13,800 14,200 13,800 Total 62,900 65,400 69,700
Fees and commissions receivable - Payment services 292 61 659 33 27 24 — 1,096 - Credit and debit card fees 427 28 154 12 2 — — 623 - Lending (credit facilities) 356 14 415 2 32 82 — 901 - Brokerage 55 8 — 5 — 96 — 164 - Investment management, trustee and 44 3 3 186 41 1 — 278 fiduciary services - Trade finance — 2 95 1 4 3 — 105 - Underwriting fees — — — — — 170 — 170 - Other 2 5 90 27 2 69 (172) 23 Total 1,176 121 1,416 266 108 445 (172) 3,360
Notional Fair value amounts Assets Liabilities amounts Assets Liabilities £bn £m £m £bn £m £m
At 31 December 2019, the gross notional value of the swaps was £75 billion (2018 - £72 billion) and had a net positive fair value of £3,340 million (2018 - £2,557 million) against which the banks had posted approximately 110% collateral.
Notes: (1) RBS Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that RBS Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the surplus is not recognised.
Pension allowances provisions instruments forward Other Total £m £m £m £m £m £m £m
Cash flow hedging - exchange rate Other financial liabilities - debt securities in issue 12,264 59 Subordinated liabilities — — Total 89,110 298 2018 Fair value hedging - interest rate Loans to banks and customers - amortised cost 6,197 875 (62) 91 Other financial assets - securities 31,879 362 108 10 Total 38,076 1,237 46 101
Other financial liabilities - debt securities in issue 23,289 (19) (7) — Subordinated liabilities 2,359 22 15 — Total 25,648 3 8 —
Fair value hedging - exchange rate Other financial assets - securities 3 — — —
RBS – Annual Report and Accounts 2019 236 12 Financial instruments - valuation continued RBS contributes to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
Bid-offer Fair value positions are adjusted to bid (long positions) or offer (short positions) levels, by marking individual cash positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued.
Net book value at 31 December 5,607 1,015 6,622 5,606 1,010 6,616
Recoverable amount is the higher of fair value and value in use. Value in use is the present value of expected future cash flows from the CGU. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Terminal Pre-tax amount exceeded Discount Terminal Forecast Forecast discount Goodwill growth rate discount rate carrying value rate growth rate Income cost rate 31 December 2019 £bn % % £bn £bn £bn £bn £bn %
Own shares held - at 31 December 2019, 15 million ordinary shares of £1 each of the company (2018 - 8 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts purchased 24 million ordinary shares and delivered 17 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans. In future, the company is intending to use shares purchased by the RBS Group Employee Share Ownership Trust and any available treasury shares to satisfy obligations under its employee share plans.
Trading assets 27,918 35,571 Loans to banks - amortised cost 39 1,050 Loans to customers - amortised cost 17,920 25,930 Other financial assets (1) 4,688 713 50,565 63,264 Note: (1) Includes assets pledged for pension derivatives and stock borrowings.
Other commitments - these include documentary credits, which are commercial letters of credit providing for payment by RBS Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
London Interbank Offered Rate (LIBOR) and other rates litigation NWM Plc and certain other members of RBS Group, including RBSG plc, are defendants in a number of class actions and individual claims pending in the United States District Court for the Southern District of New York (SDNY) with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints allege that certain members of RBS Group and other panel banks 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.
RBS – Annual Report and Accounts 2019 257 26 Memorandum items continued Litigation, investigations and reviews Among the non-class claims dismissed by the SDNY in December 2016 were claims that the Federal Deposit Insurance Corporation (FDIC) had asserted on behalf of certain failed US banks. In July 2017, the FDIC, on behalf of 39 failed US banks, commenced substantially similar claims against RBS Group companies and others in the High Court of Justice of England and Wales. The action alleges that the defendants breached English and European competition law, as well as asserting common law claims of fraud under US law.
Two motions to certify FX-related class actions have been filed in the Tel Aviv District Court in Israel. RBSG plc and NWMSI have been named as defendants in the first motion. RBS plc has been named in the second. These motions have been consolidated but not yet served on the named RBS Group companies.
Class action antitrust claims commenced in March 2019 are pending in the SDNY against NWM Plc, NWMSI and other banks in respect of Euro-denominated bonds issued by European central banks (EGBs). The complaints allege a conspiracy among dealers of EGBs to widen the bid-ask spreads they quoted to customers, thereby increasing the prices customers paid for the EGBs or decreasing the prices at which
Separately, NWM Plc is defending claims filed in France by three French local authorities relating to structured interest rate swaps. NWM N.V. was named as a co-defendant in two of the three claims. The plaintiffs allege, among other things, that the swaps are void for being illegal transactions, that they were mis-sold, and that information
In 2014 and 2015, NWM Plc paid significant penalties to resolve investigations into its FX business by the FCA, the CFTC, the DoJ, and the Board of Governors of the Federal Reserve System (Federal Reserve). As part of its plea agreement with the DoJ, NWM Plc pled guilty to a one-count information charging an antitrust conspiracy occurring between as early as December 2007 to at least April 2010. NWM Plc admitted that it knowingly, through one of its Euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the Euro/US dollar currency pair exchanged in the FX spot market. On 5 January 2017, the United States District Court for the District of Connecticut imposed a sentence on NWM Plc consisting of a US$395 million fine and a three-year probation, which ended in January 2020.
RBS – Annual Report and Accounts 2019 261 26 Memorandum items continued Litigation, investigations and reviews Response to reports concerning certain historic Russian and Lithuanian transactions Media coverage in March 2019 highlighted an alleged money laundering scheme involving Russian and Lithuanian entities between 2006 and 2013. The media reports alleged that certain European banks, including ABN AMRO and at least one US bank, were involved in processing certain transactions associated with this scheme. RBS Group has responded to regulatory requests for information.
Bank of England £1.0bn £0.9bn £0.6bn De Nederlandsche Bank €0.1bn €0.1bn €0.1bn 30 Directors' and key management remuneration 2019 2018
US$106 million floating rate notes (callable semi-annually) Ineligible 81 83 US$762 million 7.648% notes (callable September 2031) (1) Ineligible 585 604
RBS – Annual Report and Accounts 2019 272 10 Related undertakings continued
The Royal Bank of Scotland Invoice Discounting Ltd BF FC (1)
Profit for the period attributable to ordinary shareholders divided by average tangible equity. Average tangible equity is total equity less intangible assets and other owners’ equity.
Notable items within income – page 53, Notable items within expenses – page 54
Loans to customers - amortised cost 326,947 305,089 310,116 Customer deposits 369,247 360,914 361,316 Loan:deposit ratio (%) 89% 85% 86%
Over the next three years, the RBS Group intends to re-focus its NatWest Markets franchise to the RBS Group’s corporate and institutional customer offering and realise significant reductions in risk weighted assets, cost base and complexity. This entails significant commercial, operational and execution risks and the intended benefits for RBS Group may not be realised within the timeline and in the manner currently contemplated. As part of the new Purpose-led Strategy announced on 14 February 2020, the RBS Group intends to implement a more strategically congruent and economically sustainable model for its NWM franchise. Over the medium term, it intends to re-focus the NWM franchise on principally serving the RBS Group’s corporate and institutional customer base. This will require NWM Group to simplify its operating model and technology platform, as well as reduce its cost base and capital requirements. A focus of the NWM franchise realignment is the intended reduction in its level of RWAs, to reduce it to c. 10% of the RBS Group’s RWAs in the medium term. This is intended to be achieved by exiting certain exposures and optimising inefficient capital across the NWM Group, especially in relation to its Rates products. It is anticipated that the re-focusing of the NWM franchise is expected to be capital ratio accretive in year one and over the course of the transition plan period.
The longer term effects of Brexit on the RBS Group’s operating environment depend significantly on the terms of the ongoing relationship between the UK and EU and are difficult to predict. They are subject to wider global macro-economic trends and events, but may significantly impact the RBS Group and its customers and counterparties who are themselves dependent on trading with the EU or personnel from the EU. They may result in, or be exacerbated by, periodic financial volatility and slower economic growth, in the UK in particular, but also in the ROI, the rest of Europe and potentially the global economy.
A number of factors may impact the RBS Group’s ability to maintain its CET1 ratio target of 13-14% (over the medium to long term) and make discretionary capital distributions. See also, ‘The RBS Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options’.
The RBS Group has dedicated significant resources towards the preparation of the RBS Group for a potential resolution scenario. However, if the assessment reveals that the RBS Group is not adequately prepared to be resolved, or does not have adequate plans in place to meet resolvability requirements by 1
Any reduction in the credit rating assigned to RBSG plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for the RBS Group, reduce the RBS Group’s liquidity position and increase the cost of funding. Rating agencies regularly review RBSG plc and other RBS Group entity credit ratings, which could be negatively affected by a number of factors that can change over time, including the credit rating agency’s assessment of the RBS Group’s strategy and management’s capability; its financial condition including in respect of profitability, asset quality, capital, funding and liquidity; the level of political support for the industries in which the RBS Group operates; the implementation of structural reform; the legal and regulatory frameworks applicable to the RBS Group’s legal structure; business activities and the rights of its creditors; changes in rating methodologies; changes in the relative size of the loss-absorbing buffers protecting bondholders and depositors; the competitive environment, political and economic conditions in the RBS Group’s key markets (including the impact of Brexit and any further Scottish independence referendum); any reduction of the UK’s sovereign credit rating and market uncertainty. See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’.
The RBS Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain other of the RBS Group’s securities. The Banking Act 2009, as amended (‘Banking Act’), implemented the BRRD in the UK and created a special resolution regime (‘SRR’). Under the SRR, HM Treasury, the Bank of England and the PRA and FCA (together ‘Authorities’) are granted substantial powers to resolve and stabilise UK-incorporated financial institutions. Five stabilisation options exist under the current SRR: (i) transfer of all of the business of a relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly-owned by the Bank of England; (iii) transfer of part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferor’s assets, rights or liabilities; (iv) the write-down, conversion, transfer, modification, or suspension of the relevant entity’s equity, capital instruments and liabilities; and (v) temporary public ownership of the relevant entity. These tools may be applied to RBSG plc as the parent company or an affiliate where certain conditions are met (such as, whether the firm is failing or likely to fail, or whether it is reasonably likely that action will be taken (outside of resolution) that will result in the firm no longer failing or being likely to fail). Moreover, the SRR provides for modified insolvency and administration procedures for relevant entities, and confers ancillary powers on the Authorities, including the power to modify or override certain contractual arrangements in certain circumstances. The Authorities are also empowered by order to amend the law for the purpose of enabling the powers under the SRR to be used effectively. Such orders may promulgate provisions with retrospective applicability.
Adverse outcomes or resolution of current or future legal or regulatory actions, including conduct-related reviews or redress projects, could result in restrictions or limitations on the RBS Group’s operations, and could adversely impact the RBS Group’s capital position or its ability to meet regulatory capital adequacy requirements. Failure to comply with undertakings made by the RBS Group to its regulators may result in additional measures or penalties being taken against the RBS Group.
Investor Relations 250 Bishopsgate, London EC2M 4AA, England Telephone: +44 (0)207 672 1758 Facsimile: +44 (0)207 672 1801 Email: investor.relations@rbs.com
The forward-looking statements contained in this document speak only as at the date hereof, and the RBS Group does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.