Conclusion Overall, the Board is pleased with the bank’s performance in 2018 during a period of significant uncertainty in the macroeconomic environment. We dealt with our last major outstanding legacy issue, reduced our cost base, delivered lending growth in a tough operating environment and paid our first dividend in a decade. We still have more work to do to reach our 2020 ambitions, but we continue to make good progress on improving returns for shareholders and delivering better service for customers.
Technology & innovation Digital maturity is seen as critical to the future success of RBS as the banking sector goes through a period of rapid technological change. Together with digital innovation and ongoing efforts to reduce costs, there is potential for significant disruption to traditional banking business models.
Social inequality & financial exclusion Squeezed incomes, the “gig economy” and rising cost of living means many UK consumers find themselves in precarious financial situations. Access to mainstream financial services coupled with a lack of digital footprint and skills remains a concern across a number of stakeholders.
Creating a Healthy Culture Building a healthy culture is one of our core priorities. We have clear cultural goals to reinforce Our Values and set ourselves cultural priorities each year, regularly engaging our management. We gather feedback from our colleagues through our listening strategy, and through metrics and key performance indicators to assess our progress and respond accordingly. We do this along with feedback from regulators and industry bodies. Almost 60,000, 80%, of our colleagues completed our most recent opinion survey, the highest participation in the last five years. The results were the most positive we have seen since we started measuring engagement in 2002 and showed we are changing the culture of the bank for the better. Key measures of engagement, leadership and our culture have improved significantly, and we are now above the global financial services norm in all of our comparable survey categories. The results are encouraging, and show that our hard work is paying off. However, we recognise that we have more to do to continue to nurture this culture, and we encourage colleagues to tell us what they think via the bi-annual colleague survey and our regular comments boards. When colleagues wish to report concerns relating to wrong doing or misconduct one of the ways in which they can do this is by raising their concerns via Speak Up, our whistleblowing service.
Performance and Reward Our approach to performance management provides clarity for our employees about how their contribution links to our ambition and all our employees have goals set across a balanced scorecard of measures. Further progress has been made in making sure employees are paid fairly for the work they do and are supported by simple and transparent pay structures. We simplified our Value Account construct, making it easier for our employees to understand the value of their fixed pay and to bring it more in line with industry best practices. We are confident that we pay our employees fairly. We keep our HR policies and processes under review to ensure we do so. In the UK, our rates of pay continue to exceed the Living Wage and we ensure people performing the same roles are paid fairly and consistently. More information on our remuneration policies can be found in the 2018 Directors Remuneration Report in the 2018 Annual Report and Account's.
After three decades spent growing profits for big businesses, Girish Shah decided to put his skills and experience to work for himself, launching My Controller Accountants in 2017.
We measure Trust by asking customers “how much do you trust the bank to do the right thing?” Scores for NatWest have fluctuated during 2018 and, over the last five years, have improved in line with the market. Trust in the Royal Bank of Scotland has also improved over the last five years, but legacy issues are still in customers’ memories and it remains the least trusted bank in the sector.
Progress continued on our inclusion agenda to value diversity in all its forms to be gender balanced, ethnically diverse, disability smart and LGBT innovative.
We welcome the growing prominence of the Sustainable Development Goals (SDGs). It has helped us to understand our own contribution against the framework and global goals. In 2018, we completed an assessment of our business activities against the SDGs and we are engaging with a range of stakeholders to help us further align our strategy to the SDGs in 2019.
These changes preserve value for the banking group, provide continuity for our customers and support compliance with incoming Basel III Liquidity Coverage Ratio rules.
We expect to maintain ordinary dividends of around 40% of attributable profit. We have updated our medium term guidance of CET1 to be approximately 14% at the end of 2021.
RBS employs a continuous process for identifying and managing its top and emerging risks. These are risks that could have a significant negative impact on RBS’s ability to operate or meet its strategic objectives.
 On 29 June 2018, the Court of Session in Scotland approved the reduction of capital and the cancellation of the share premium account and capital redemption reserve (together the “capital reduction”) of NWM Plc. As part of the capital reduction, NatWest Holdings transferred to RBSG with effect from 2 July 2018, thereby creating the legal separation of those RBS Group entities that will be within the ring-fenced sub-group from those held outside the ring-fence.
 Non-interest income increased by £600 million, or 14.5%. Excluding notable items, non-interest income decreased by £381 million principally due to lower core NatWest Markets income driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
 The tax charge for the year ended 31 December 2018 is higher than the UK statutory tax rate reflecting the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised. These factors have been offset partially by adjustments in respect of prior years.
 Other assets includes property, plant & equipment, deferred tax, assets of disposal groups, accruals, deferred income and pension scheme surpluses and decreased by £0.4 billion, 2.3% to £16.4 billion.
 Subordinated liabilities decreased by £2.2 billion, 17.2% to £10.5 billion, primarily as a result of redemptions of £2.0 billion reflecting on-going liability management activities.
Loans to customers (amortised cost) - SME & mid-corporates 30.0 30.7 (0.7) (2.3%)
 Operating expenses decreased by £66 million, or 12.1%. Excluding strategic, litigation and conduct costs, operating expenses decreased by £4 million, or 0.8% driven by operating model efficiencies.
 Customer deposits increased by £2.0 billion, or 7.6%, mainly due to higher personal client account balances.
 Private Banking manages a further £6.7 billion of assets under management on behalf of RBS Group which sit outside of Private Banking. Total assets under management overseen by Private Banking have decreased by 5.7% to £26.5 billion as a result of market movements partially offset by net new business.
Total Net loans to customers (amortised cost) 13.3 8.7 4.6 52.9%
 The RBS International mobile app has been further developed to include new functionality, allowing customers to manage their finances more effectively and has 67 thousand users, an increase of 23% from 2017. 71% of wholesale customer payments are now processed using our newly introduced international banking platform, making the payments process simpler for customers.
 Customer deposits decreased by £3.1 billion reflecting a large inflow of short term placements in Institutional Banking in 2017. Customer deposits represent RBS International’s primary funding source and are split: £18.1 billion Institutional Banking and £9.4 billion Local Banking.
 RWAs decreased by £0.1 billion, or 1.4%, with model updates offset by business movements.
He is also Professor of Practice at the Paris Institute of Political Science (Sciences Po) and author of several books on financial subjects.
Report of the Group Nominations and Governance Committee 53 Report of the Group Audit Committee 54 Report of the Group Board Risk Committee 57
Ring-Fencing Governance We also introduced some significant changes to the way our board operates. In Q1 the Board approved a new board and committee operating model in order to align with UK ringfencing requirements effective from 1 January 2019. The transition towards the new model began in May 2018 and I am pleased to report that the revised operating rhythm is now embedded. Under the new arrangements, the RBSG Board has adopted a revised remit aligned primarily to the legal and regulatory obligations of a listed holding company. This includes: strategy; significant acquisitions and disposals; budget and financial results; risk appetite; regulatory submissions; board and committee appointments; executive pay and performance; culture; and shareholder relations.
Each director is required to notify the Board of any actual or potential situational or transactional conflict of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts. Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the company’s Articles of Association. The Board considers each request for authorisation on a case by case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process.
Board and Committee meetings The table below shows Board and Committee meeting attendance during 2018.
Board engagement with stakeholders The board maintained its stakeholder focus through a range of activities involving employees, shareholders, customers and others.
IBE undertook a formal and rigorous evaluation by:  holding 1:1 interviews with directors, senior management and external advisers;  discussing the key themes and recommendations for action with the Chairman and Committee Chairmen; and
Communication with the company's largest institutional shareholders is undertaken as part of the Investor Relations programme:  The Chairman, Chief Executive and Chief
The Committee holds at least four scheduled meetings per year and also meets on an ad hoc basis as required. In 2018, there were ten meetings. Individual attendance by directors at these meetings is shown in the table on page 50.
Performance evaluations The performance of the GAC was evaluated by an external party in 2018. The evaluation concluded that the GAC operated effectively during 2018. The Committee was described as thorough and diligent in tackling its agenda. Some recommendations for improvement were identified mainly on length of meetings and paper submissions. The Board and the GAC have considered and discussed the outcomes of the evaluation and will track progress on the recommendations during 2019.
The BRC has responsibility for overseeing the management of risks that could impact RBS’s businesses and operations. The Committee also monitors risk profile, risk appetite and the promotion of a culture of risk awareness within the organisation. The BRC’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the Committee and are available on RBS’s website: rbs.com.
RBS’s risk profile improved materially in 2018, with progress made in relation to pensions, the settlement of the US Department of Justice’s investigation into Residential Mortgage Backed Securities and, ring-fencing implementation.
Now that the majority of legacy issues have been addressed and ring-fencing delivered, RBS is increasingly looking to the future and I anticipate that BRC will spend progressively more time overseeing aspects of innovation and technology. Operational resilience, cyber security and a satisfactory control environment are, however, key to ensuring that RBS can continue to provide excellent service to its customers and these areas will be monitored closely by the BRC in the year ahead.
A proportion of every BRC meeting was spent reviewing risk reports, assessing the most material risk exposures relative to strategy and risk appetite and scrutinising management’s recommendations to monitor and control such exposures.
Dear Shareholder, I am pleased to present the first report of the Technology and Innovation Committee (the Committee or TIC).
Broader pay considerations Colleague engagement – In preparation for the new Code, we have taken steps to supplement our existing channels for colleagues to be heard at Board level. We have established a Colleague Advisory Panel to provide direct engagement with Board members. Amongst other strategic topics, this forum will be used to discuss executive remuneration and how it aligns with the wider company pay policy.
Ross McEwan will be granted an LTI award in early 2019, following an assessment of performance over 2018. The assessment determined that overall performance had been strong, particularly in relation to capital and people measures, but the Committee applied a modest downwards adjustment of around 6% to the maximum grant as customer performance was not at the desired level.
Continues to provide transparency between performance and reward, with performance measured against pre-set objectives and disclosed each year.
Benefits To provide a range of flexible and market competitive benefits that are valued and assist individuals in carrying out their duties effectively.
Remuneration Committees should develop a formal policy for post-employment shareholding requirements encompassing both unvested and vested shares.
Wellbeing is essential for people to bring the best of themselves to work. A range of measures are provided to support good physical, mental, social and financial health. There is also an Employee Assistance Programme where employees can access confidential advice, support and short-term counselling.
The number of employees at RBS who believe they are paid fairly increased during 2018 and is significantly above the Global Financial Services Norm.
Ring-fencing structure delivered as planned with all key activities completed in order to ensure compliance. Reporting on activities will be provided to the PRA.
Achieve planned progress towards becoming number 1 for customer service, trust and advocacy by 2020 in chosen customer segments and brands.
Achieve CET1 ratio targets for Group and NWH Ltd, with appropriate repatriation of capital to the Group.
Improve diversity across our leaders to create a more mature, inclusive culture.
Taking into account that fees for these committees had remained unchanged since 2014 and market practice by peers, the Chairman and the executive directors agreed it would be appropriate to raise the fees for the Chairman of the Group Board Risk Committee and Group Audit Committee from £60,000 to £68,000, and for members of the Group Board Risk Committee and Group Audit Committee from £30,000 to £34,000. The changes are within the 15% limit for fee increases under the directors’ remuneration policy and took effect from 1 October 2018.
Where appropriate, RBSG Board directors also received fees in respect of membership of other subsidiary company boards and committees including NatWest Markets Plc, the value of which is included in the table below. In terms of other changes during the year, the NatWest Markets Working Group was replaced by the NatWest Markets Plc Board from 1 May 2018 and the UBIDAC Board Oversight Committee was stood down at the end of October 2018.
Lena Wilson was appointed as Chair of the Colleague Advisory Panel during 2018. This is considered a key role that will enhance our existing engagement mechanisms and strengthen the colleague voice at Board level. The Panel will also meet the new requirements for workforce engagement under the UK Corporate Governance Code.
Notes: (1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. As the contents of other staff costs per Note 3 is different to prior years, the 2017 balance has been re-presented for consistency. (2) In 2018 RBS paid an interim dividend of 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders’ approval at the Annual General Meeting on 25 April 2019.
Variable remuneration awarded for 2018 performance Variable remuneration consisted of a combination of annual bonus and long-term incentive awards, deferred over a three to seven year period in accordance with regulatory requirements. Under the RBS bonus deferral structure, immediate cash awards are limited to £2,000 per employee.
(2) Executive directors are included. The table is based on an exchange rate where applicable of €1.13 to £1 as at 31 December 2018.
While not being part of the bank’s system of internal control, the bank’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Capital &
Engaging colleagues Engaging colleagues is crucial to achieving RBS’s ambition. Every year colleagues are asked to share their thoughts on what it’s like to work for RBS via a colleague opinion survey. The results from the 2018 survey are the most positive ever reported since engagement started to be measured in 2002. All key measures have improved and RBS is now above the global financial norms in all comparable survey categories. The continued strengthening of the culture in RBS was also echoed in this year’s improved Banking Standards Board assessment which provided further proof of progress across a range of measures.
(5) The NatWest Holdings Risk function is independent of the NatWest Holdings customer-facing franchises and support functions. It provides oversight of risk management ensuring that risk exposures arising from management and business activities are adequately monitored and controlled. The directors of Financial Risk & Analytics, Compliance & Conduct, Restructuring, Risk Policy & Frameworks and Operational Risk & Services as well as the Chief Financial Crime Officer, Chief Credit Officer, Deputy Chief Risk Officer and Head of Risk Strategy & Transformation report to the NatWest Holdings Chief Risk Officer. The Director of Risk, Ulster Bank Ireland DAC and the Director of Compliance, Ulster Bank Ireland DAC, report to the Ulster Bank Ireland DAC Chief Executive; they also have a reporting line to the NatWest Holdings Chief Risk Officer.
Risk identification and measurement Risk identification and measurement within the risk management process comprise:  Regular assessment of the overall risk profile, incorporating market developments and trends, as well as external and internal factors.  Monitoring of the risks associated with lending and credit exposures.  Assessment of trading and non-trading portfolios.  Review of potential risks in new business activities and processes.  Analysis of potential risks in any complex and unusual business transactions.
Stress testing – liquidity Liquidity risk monitoring and contingency planning In implementing the liquidity risk management framework, 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.
 On an IFRS 9 non-transitional (fully loaded) basis the leverage ratio under the adverse scenario reaches a low point of 4.1%
 IFRS 9 adoption on 1 January 2018 favourably impacted CET1 by 30 basis points. RWAs reduced by £12.2 billion to £188.7 billion primarily driven by the legacy business in NatWest Markets, the impact of capital initiatives in Commercial Banking and the impact of the non-performing loan sale and improvement in credit metrics in Ulster Bank RoI.
 The liquidity portfolio increased by £11 billion in 2018 to £198 billion, with primary liquidity increasing by £4 billion to £128 billion. The increase in primary liquidity is driven by increased customer surplus within NatWest Holdings, reduced funding requirement in NatWest Markets and net term issuance, partially offset by settlement of the payment to the US Department of Justice, contribution to the Group pension fund and Term Funding Scheme (TFS) repayment. Increase in secondary liquidity is driven primarily by repayment of TFS, resulting in the return of previously encumbered assets.
Capital, liquidity and funding risk continued Capital and leverage: Capital resources (audited)
Capital, RWAs and capital adequacy ratios, on the basis of end-point Capital Requirements Regulation (CRR) and transitional rules, calculated in accordance with PRA definitions, are set out below.
At 1 January 2018 (1) 144.6 15.4 17.0 23.8 200.8 Foreign exchange movement 1.0 (0.1) — — 0.9 Business movements (11.3) (0.9) (1.4) (1.4) (15.0)
Personal and corporate deposits Personal (1) 178,293 1,499 179,792 173,314 1,497 174,811 309,868 1,641 311,509 301,022 2,358 303,380 Financial institutions deposits Banks (3) 6,758 15,865 22,623 7,480 19,595 27,075 Non-bank financial institutions (NBFI) (4) 46,800 564 47,364 52,284 1,091 53,375 53,558 16,429 69,987 59,764 20,686 80,450
Capital, liquidity and funding risk continued Contractual maturity (audited) This table shows the residual maturity of financial instruments, based on contractual date of maturity of RBS’s banking activities, including hedging derivatives. Trading activities comprising Mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
Settlement balances 3,066 — — — 3,066 — — — 3,066 3,066 Trading liabilities 72,350 72,350 Derivatives — 181 306 — 487 1,062 416 978 2,943 125,954 128,897 Other financial liabilities 202 1,386 2,499 4,153 8,240 9,542 10,536 11,414 39,732 39,732
Key developments in 2018  Asset quality (AQ) remained stable with 61% of the loan exposure and other financial assets rated AQ1-AQ4 (1 January 2018 – 62%) (equating to an indicative investment rating of BBB- or better).
Risk – based on loss given default for a given probability of default
Credit risk continued Wholesale Provisions for forborne loans are assessed in accordance with normal provisioning policies. The customer’s financial position and prospects – as well as the likely effect of the forbearance, including any concessions granted, and revised PD or LGD gradings – are considered in order to establish whether an impairment provision is required.
This adjustment process leverages the existing Wholesale credit models framework that utilises Credit Cycle Indices (CCI) to measure the point-in-time default rate conditions in a comprehensive set of region/industry groupings. The CCI are constructed by summarising market data based point-in-time PDs for all publicly listed entities in the respective region/industry grouping on a monthly frequency. Positive CCI values indicate better than average conditions, i.e. low default rates and a CCI value of zero indicates default rate conditions at long run average levels. The CCI can be interpreted as an aggregation of the primary economic loss drivers most relevant for each portfolio segment into a single measure. The central base case scenario forecasts provided at the level of economic loss drivers are fed into the ECL calculations by first translating them into corresponding CCI forecasts for each portfolio segment and subsequently applying the aforementioned mean-reversion adjustment.
Wholesale Current and forward-looking economic information is incorporated into the LGD estimates using the existing CCI framework. For low default portfolios (for example, sovereigns) loss data is too scarce to substantiate estimates that vary with systematic conditions. Consequently, for these portfolios, LGD estimates are assumed to be constant throughout the projection horizon.
 Persistence (Personal and Business Banking only) – the persistence rule ensures that accounts which have met the criteria for PD driven deterioration are still considered to be significantly deteriorated for three months thereafter. This additional rule enhances the timeliness of capture in Stage 2. It is a Personal methodology feature and is applied to PD driven deterioration only.
 For the UK PBB franchise, the simulated ECL uplift observed in the Downside 2 scenario was a little higher than under the 25% PD increase, with similar seen in the percentage of exposures simulated to move to Stage 2.
The table below summarises gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
Provisions The table below summarises provisions by segment on an IAS 39 basis. Ulster Central UK Bank Commercial Private RBS NatWest items PBB RoI Banking Banking International Markets & other Total £m £m £m £m £m £m £m £m
 Interest rate profile – As at 31 December 2018, 81% of customers in the UK PBB mortgage portfolio were on fixed rates (42% on five-year deals). In addition, 97% of all new mortgage completions in 2018 were fixed rate mortgages (62% of which were five-year mortgages), as customers sought to minimise the impact of potential rate rises.
Investment Residential (2) 4,426 363 54 4,843 4,319 227 39 4,585 Office (3) 2,889 164 651 3,704 3,055 235 600 3,890 Retail (4) 5,168 40 92 5,300 5,401 42 132 5,575 Industrial (5) 2,270 51 176 2,497 2,438 36 14 2,488 Mixed/other (6) 3,221 180 123 3,524 4,609 203 228 5,040
 Overall ECL reduction was mainly driven by business-as-usual write-offs in Stage 3.
Key points  ECL reduced over the course of 2018 as write-offs outweighed
 The increase in Stage 1 exposure was due to a combination of transfers and short-term borrowing to governments and central banks which are now in NatWest Markets following changes in preparation for ring-fencing.
 The portfolio experienced fortuitous recoveries, reported in other (P&L only items – primarily fortuitous recoveries). This benefited the income statement without affecting ECL.
AQ1-AQ4 359 1 360 — — — — — — AQ5-AQ8 136 2 138 — — — — — — AQ10 1 1 — — —
Pension-related activities also give rise to market risk. Refer to page 160 for more information on risk related to pensions.
The following disclosures in this section are audited:  Internal banking book VaR.  Foreign exchange risk.  Equity risk.
Due to the long-term nature of many retail and commercial portfolios – and their varied interest rate repricing characteristics and maturities – net interest income is likely to vary from period to period, even if interest rates remain the same. New business originated in any period will alter RBS’s interest rate sensitivity if the resulting portfolio differs
Credit spread risk RBS’s bond portfolios primarily comprise high-quality securities maintained as a liquidity buffer to ensure RBS can continue to meet its obligations in the event that access to wholesale funding markets is restricted. Additionally other high-quality bond portfolios are held for collateral purposes and to support payment systems.
Key points (audited)  On average, non-traded VaR remained broadly unchanged year on year.  The main component of the VaR is credit spread risk. VaR peaked at year-end, mainly driven by higher volatility in credit spreads due to economic uncertainty that affected the UK Gilts portfolio.
Key points  Statistically RBS would expect to see back-testing exceptions 1% of the time over the 250-day period.  The exceptions in the Rates business were mainly driven by the increased volatility connected with large market movements due to political uncertainty in Italy and Spain.
Key developments in 2018  An enhanced compliance and conduct risk framework was developed, setting minimum standards for the management and measurement of compliance and conduct risks across RBS.
Key developments in 2018  In March 2018, the Federal Reserve Board terminated a Cease &
Risk mitigation Risks are mitigated by applying key preventative and detective controls, an integral step in the risk assessment methodology which determines residual risk exposure. Control owners are accountable for the design, execution, performance and maintenance of key controls. Key controls are regularly assessed for adequacy and tested for effectiveness. The results are monitored and, where a material change in performance is identified, the associated risk is re-evaluated.
 As part of its requirement by UK law to separate its everyday banking services from its investment banking by 1 January 2019 – known as ring-fencing – RBS made a number of changes to the way its business was structured. Certain Personal & Business Banking businesses and Commercial Banking businesses of The Royal Bank of Scotland plc transferred to Adam & Company PLC and National Westminster Bank Plc. The role of issuer under the covered bond programme transferred to National Westminster Bank Plc. Adam & Company PLC was renamed "The Royal Bank of Scotland plc", and The Royal Bank of Scotland plc was renamed "NatWest Markets Plc". The Royal Bank of Scotland plc superseded the prior issuer (former RBS plc) in respect of banknotes.
Risk governance The Board has ultimate responsibility for business risk and for approving strategic plans, initiatives and changes to strategic direction.
Responsibility for the day-to-day management of business risk lies primarily with the franchises, with oversight by the Finance function. The franchises are responsible for delivery of their business plans and the management of such factors as pricing, sales volumes, marketing expenditure and other factors that can introduce volatility into earnings.
 Balance sheet as at 31 December 2018;  Statement of changes in equity for the year then ended;  Cash flow statement for the year then ended; and
As IFRS 9 was adopted at the start of the year, we performed audit procedures on the opening balances to gain assurance on the transition from IAS 39. This included evaluating the accounting interpretations for compliance with IFRS 9 and testing the adjustments and disclosures made on transition.
With the support of our actuarial specialists, we challenged the estimation of the augmentation cap and GMP equalisation adjustments including the inputs used in the calculation. We also assessed the methodology and judgements made in calculating these estimates and the associated accounting treatment in accordance with IAS 19 and IFRIC 14.
Our audit approach relies upon IT applications and the related control environment including:  User access management across application, database and operating systems;  Changes to the IT environment, including transformation that changes the IT landscape;  IT operational controls;  IT application or IT dependent controls; and
Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Accounting policies
Notes: (1) Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017), the call of RBS Capital Trust D in March 2017 (redeemed in June 2017), the call of RBS Capital Trust C in May 2016 (redeemed in July 2016). (2) AT1 capital notes totalling £2.0 billion issued in August 2016. (3) During 2017, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million was credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion. The nominal value of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion in respect of the movement in exchange rates since issue.
18. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
22. Associates and joint ventures An associate is an entity over which the Group has significant influence. A joint venture is one which it controls jointly with other parties. Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for postacquisition changes in the Group’s share of net assets.
 not apply IFRS 16 to operating leases with a remaining lease term of less than 12 months or low value leases (non property leases)
Balances with banks 250 175 97 Customer deposits: demand 223 99 433 Customer deposits: savings 510 445 432 Customer deposits: other time 116 179 190 Other financial liabilities 791 554 557 Subordinated liabilities 461 572 845 Internal funding of trading businesses 42 23 (4)
Write down of goodwill and other intangible assets 37 29 159
NatWest Markets helps global financial institutions and corporates manage their financial risks and achieve their short and long-term financial goals while navigating changing markets and regulation. NatWest Markets does this by providing global market access, financing, risk management and trading solutions from trading hubs in London, Singapore and Stamford with sales offices across key locations in the UK, EU, US and Asia.
Net interest income 8,223 — 404 29 8,656 Net fees and commissions 2,183 12 102 60 2,357 Income from trading activities 1,308 124 68 7 1,507 Other operating income 467 119 229 67 882
Net interest income 8,243 82 302 81 8,708 Net fees and commissions 2,287 9 175 64 2,535 Income from trading activities 790 159 18 7 974 Other operating income 261 (40) 9 143 373
In October 2018 the Court ruled on the requirement to and method for equalising guaranteed minimum pension benefits arising between 1990 and 1997 between men and women. In 2017 the Group considered that equalisation would change the Main section’s defined benefit obligation by 0.2%.The estimate was updated following the clarity provided by the Court ruling and the impact of any future conversion exercise to rectify the position. The £102 million cost on revision of the previous estimate of the financial assumptions in respect of equalisation is recognised in equity.
0.25% additional rate of increase in pensions in payment — 1,215 (1,215)
UK tax losses carried forward - NatWest Markets Plc 151 125 - National Westminster Bank Plc 505 541 - Ulster Bank Limited 19 14
Exchange rate contracts 3,426 36,545 38,230 3,425 39,211 41,681 Interest rate contracts 10,536 96,410 90,444 12,016 120,945 112,160 Credit derivatives 16 346 208 38 531 558 Equity and commodity contracts 1 48 15 3 156 107
Total maturing liabilities 14,502 7,884 25,985 21,193 11,053 3,510 Customer deposits 351,054 8,114 1,727 14 6 26 Derivatives held for hedging 181 306 1,062 416 637 531
For notes to the above table refer to the following page.
13 Financial instruments – maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2017 £m £m £m £m £m £m
Guarantees and commitments notional amount Guarantees (3) 7,718 — — — — — Commitments (4) 121,229 — — — — —
(2) ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities and amount to £28 million, of which £5 million was FVOCI.
Retirement benefit liabilities (Note 5) 165 129 Deferred tax (Note 7) 454 583 Liabilities of disposal groups 1 10 Notes in circulation 2,152 2,186 Current tax 100 227 Accruals 1,047 1,074 Deferred income 451 469 Other liabilities 1,580 2,436 Provisions for liabilities and charges 3,004 7,757 8,954 14,871
Ordinary shares There is no authorised share capital under the company’s constitution. At 31 December 2018, the directors had authority granted at the 2018 Annual General Meeting to issue up to £600 million nominal of ordinary shares other than by pre-emption to existing shareholders.
In the three years to 31 December 2018, the percentage increase in issued share capital due to non pre-emptive issuance (excluding employee share schemes) for cash was 2.6%. In addition, the company issued 32 million ordinary shares of £1 each in connection with employee share plans.
Finance lease contracts and hire purchase agreements Accumulated allowance for uncollectable minimum receivables 62 63 54
Investment advice review As a result of an FSA review in 2013, the FCA required RBS to carry out a past business review and customer contact exercise on a sample of historic customers who received investment advice on certain lump sum products, during the period from March 2012 until December 2012. The review was conducted by an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000. Redress was paid to certain customers in that sample group.
RBS later agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April 2015. That exercise is materially complete. Phase 2 (covering sales in 2010) started in April 2018 and was targeted for completion by the end of 2018, however the deadline has now been extended to April 2019.
US/Swiss tax programme In December 2015, Coutts & Co Ltd., a member of the Group incorporated in Switzerland, entered into a non-prosecution agreement (the NPA) with the DoJ. This was entered into as part of the DoJ’s programme for Swiss banks, related to its investigations of the role that Swiss banks played in concealing the assets of US tax payers in offshore accounts (US related accounts). Coutts & Co Ltd. paid a US$78.5 million penalty and acknowledged responsibility for certain conduct set forth in a statement of facts accompanying the agreement. Under the NPA, which has a term of four years, Coutts & Co Ltd. is required, among other things, to provide certain information, cooperate with the DoJ’s investigations, and commit no U.S. federal offences. If Coutts & Co Ltd. abides by the NPA, the DoJ will not prosecute it for certain tax-related and monetary transaction offences in connection with US related accounts.
Since the signing of the NPA in 2015, Coutts & Co Ltd has identified and disclosed to the DoJ a number of US related accounts that were not included in its original submission supporting the NPA. Coutts & Co Ltd is in discussions with the DoJ regarding these additional accounts and has agreed with the DoJ to undertake additional review work, which is ongoing.
The net increase to loan impairments under IAS 39 was £616 million under the expected credit loss requirements of IFRS 9, including £85 million under provisions for contingent liabilities and commitments. This includes discontinued activities which is shown below on other assets and other liabilities
Held-for-trading 31 December exported to 30 December Classification Expected 1 January
Assets Cash and balances at central banks 98,337 — — 98,337 — (1) — 98,336 Trading assets 85,991 — 85,991 — — — 85,991 Derivatives — 160,843 160,843 — — — 160,843 Settlement balances — 2,517 2,517 — — — 2,517 Loans and advances to banks 30,251 (18,734) (11,517) — Loans to banks - amortised cost — 11,517 11,517 — (3) — 11,514 Loans and advances to customers 349,919 (39,747) (310,172) — Loans to customers - amortised cost — 310,116 310,116 (2,191) (524) — 307,401 Debt securities 78,933 (27,481) (51,452) — Equity shares 450 (29) (421) — Other financial assets — 51,929 51,929 2,752 (3) — 54,678 Settlement balances 2,517 — (2,517) — Derivatives 160,843 — (160,843) — Intangible assets 6,543 — — 6,543 — — — 6,543 Property, plant and equipment 4,602 — (4,602) — Deferred tax 1,740 — (1,740) — Assets of disposal groups 195 — (195) — Other assets 3,726 — 6,537 10,263 — — 25 10,288
The accompanying notes on pages 242 to 252 form an integral part of these financial statements.
Share premium account At 1 January 887 25,693 25,425 Ordinary shares issued 140 235 268 Capital reduction (4) — (25,789) — Redemption of debt preference shares (5) — 748 —
(3) Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017). (4) On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium account and capital redemption reserve were transferred to retained earnings. (5) During 2017, non-cumulative US dollar preference shares recorded as debt were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million has been credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion. The nominal value of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion in respect of the movement in exchange rates since issue.
Notes: (1) Includes interest received of £508 million (2017 - £999 million, 2016 - £1,066 million) and interest paid of £819 million (2017 - £777 million, 2016 - £743 million). (2) Comprises loans to banks.
Financial liabilities Amounts due to subsidiaries (3) 0.6 0.5 — — Other financial liabilities Debt securities in issue (2) 16.8 16.7 9.1 9.8 Subordinated liabilities (2) 7.9 8.3 8.0 8.8
The following table details active related undertakings incorporated in the UK which are 100% owned by the Group and fully consolidated for accounting purposes.
Desertlands Entertainment Ltd BF FC (94) Northern Isles Ferries Ltd BF FC (94)
Digi Ventures Ltd OTH FC (19) P of A Productions Ltd BF FC (94)
FreeAgent Central Ltd SC FC (81) Patalex Productions Ltd BF FC (94)
Lombard Corporate Finance (14) Ltd BF FC (94) RB Investments 3 Ltd OTH FC (19)
Lombard Finance Ltd BF FC (24) RBS Collective Investment Funds Ltd BF FC (16)
Royal Bank Leasing Ltd BF FC (16) Ulster Bank Ltd CI FC (6) Royal Bank of Scotland (Industrial Leasing) Ltd BF FC (16) Ulster Bank Pension Trustees Ltd TR DE (6)
RBS Americas Property Corp. SC FC (21) Svenskt Fastighetskapital Holding AB BF FC (45)
Nordisk Renting A/S FC FC 100 (41) RBSSAF (11) Ltd FC FC 100 (94)
These reviews raised significant concerns about the effectiveness of competition in the retail banking sector. The CMA’s Retail Banking Market Order 2017 imposes remedies primarily intended to make it easier for consumers and businesses to compare personal current account (‘PCA’) and SME bank products, increase the transparency of price comparison between banks and amend PCA overdraft charging. These remedies impose additional compliance requirements on the Group and could, in aggregate, adversely impact the Group’s competitive position, product offering and revenues.