• Successfully listed Citizens as a step towards full divestment by the end of 2016.
Within the overall strategic shape outlined for CIB in 2014, RBS is making further changes to improve its medium-term returns, building a stronger, safer and more sustainable business, focused mainly on UK and Western European customers, both corporates and financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.
2014 financial performance The earning power of our key customer businesses lies at the heart of the strong financial progress RBS made during 2014. What you can see from these results is that underneath all the noise of conduct, litigation and restructuring charges, we have strong performing customer businesses that are geared towards delivering sustainable returns for investors.
We remain acutely conscious of how much was invested to ensure our continued survival by our private shareholders and, critically, by the Government. As we reduce the tail risks our bank is exposed to, repair our overall profitability and reshape CIB we are creating the potential to build up excess capital, paving the way for distributions to the Government and other shareholders.
Our product offering will reduce by over a half as will the number of products and desks in our Markets business.
Building the number one bank for customer service, trust and advocacy in the UK We use independent surveys to measure our customers’ experience and track our progress against our goal in each of our markets.
Progress: We now offer our best rates to new and existing customers across our product range. There is now no Personal Banking or Business Banking deal that is not available to existing customers.
Progress: We have banned teaser rates. We run a fair and transparent credit card business for our customers.
We will stop offering different rates to customers who apply online, in branch or by phoning our call centres.
We will use simple language in our customer letters, on our websites and in our branches.
Progress: We have reduced the number of Personal and SME products on offer by 50%. We are becoming a smaller, simpler bank to do business with.
The bank will commit to pointing businesses to alternative sources of finance where it cannot support a loan application.
Progress: As at February 2015, none of our SME products or services are conditional on customers buying another of the Bank’s products or services.
January 2008. The strength of the UK recovery in 2014 prompted talk of when interest rates will begin to rise. Earlier in the year markets anticipated an increase as soon as in 2014, but at the end of 2014 market expectations were for the first increase to take place in early 2016, given below target UK inflation, exceptionally weak wage growth, a high household debt burden, daunting economic challenges in the eurozone and sluggish global growth. In addition to renewed concerns over the eurozone, other risks to the global economic and financial system continued to build over the course of 2014.
ECB Refi Rate UK Bank Rate Fed Funds Total pay (incl. bonuses)
For customers who like to do their banking on the move we’re continuing to develop our market-leading mobile banking app, which is used regularly by more than three million customers and supports around 3.5 million logons and half a million payments and transfers every day. We’ve also just become the first bank in the UK to introduce Touch ID fingerprint logons, offering even better security for our customers.
• The performance of our systems has improved with each one of our 130 services available to customers over 99.96% of the time. Through this work, in the second half of the year we have reduced system downtime by 79%.
Here are just some of the ways we’ve worked to build customer trust in 2014: Our mirror bank capability now lets our customers access critical services in the event of a system outage.
Malted magic Muntons supplies malt – an important ingredient in products like beer, whisky and confectionery – to a range of blue-chip customers.
Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBS’s compliance with approved risk appetite and oversees the operation of the RBS Policy Framework and submissions to regulators.
• Credit risk: 2014 saw a net release of £1.2 billion of impairment provisions, principally in RCR and Ulster Bank reflecting sustained improvements in economic and asset market conditions in the UK and Ireland. RBS continued to reduce its risk concentrations, notably in commercial real estate and eurozone periphery countries. RBS still has substantial credit risk exposures with credit risk RWAs of £295 billion compared with £357 billion at the end of 2013, a 17% reduction.
Top and emerging risk scenarios A number of top and emerging risk scenarios attracted particular attention.
Sustainability Sustainability at RBS means building trust through long term thinking that focuses on our customers and supporting the communities in which they live. We are committed to being open and transparent regarding the challenges faced by our business, so all our stakeholders can see what we are doing to become a more sustainable bank. You can read more about the issues raised here, as well as about our wider sustainability agenda, at rbs.com/sustainable.
Stakeholder engagement Operating in a sustainable manner is about managing our business in a way that takes account of the impact of our activities on our stakeholders. As such, we work with a number of stakeholder groups to understand their views of our organisation, and this helps shape the way we do business. As a large company we have many stakeholders and we engage with them in a variety of ways, from focus groups to meetings to online forums. These interactions inform decision making and ultimately improve RBS.
Scope 3 CO2e emissions from business travel (tonnes) 141,254 94,993 132,307 97,791 -31% -26%
Penny became the new Chairman of the Sustainable Banking Committee and refocused its strategic direction on three core themes - Bank-wide
Australasia Ltd / AXA New Zealand Ltd. He has an MBA
Keep Board and Board committee composition under review during 2015, to ensure balance of skills, experience, independence, knowledge and diversity remains appropriate.
The Group Nominations Committee engages with external consultants, considers potential candidates and recommends appointments of new directors to the Board. The terms of reference of the Group Nominations
Chief Executive and the Chief Financial Officer are invited to attend meetings.
April 2014; • Morten Friis was appointed a member of the Board Risk Committee and Group Audit Committee with effect from 10 April 2014; • Sandy Crombie was appointed Chairman of the Group Performance and Remuneration Committee with effect from 25 June 2014; and
RBS understands the importance of diversity and, with regard to gender diversity, recognises the importance of women having greater representation at key decision making points in organisations. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board, however, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board.
Brendan Nelson (Chairman) 7/7 Sandy Crombie (1) 4/4 Morten Friis (2) 4/4 Baroness Noakes 7/7
Technology Services. The Committee monitored remediation progress and received regular reports on actions undertaken by the business to address the weaknesses. The Committee has received assurances that the majority of significant items have been closed and that the issue did not lead to the identification of any errors in the financial statements; • the quality and transparency of disclosures contained within the external financial statements.
The Committee invited management to report on improvements to the business and to provide assurances that the business was addressing the risks in an appropriate and sound manner. A larger project will begin in 2015 which will encompass specific remediation issues and wider cultural change. This will be closely monitored by the Board Risk
This is an important tool for employees to raise issues and to identify improper behaviours. The Committee considered the enhancements made to the process during the year and also discussed the output of an
October. Risk reporting is now more strategic and forward looking and current and future risk positions are reported relative to risk appetite and limits.
Affairs functions have started the process of researching and developing an appropriate risk culture programme for RBS, and have kept the
• the remediation of known regulatory issues in the RBS Americas region.
The Committee reviewed the capital and liquidity position of the bank regularly. It reviewed and recommended that the Board approve the
The RBS Capital Resolution Board Oversight Committee was established following the creation of RBS Capital Resolution (RCR) on 1 January
Board as required. The terms of reference of the Committee are available on the RBS website rbs.com and these are reviewed annually and approved by the Board. A report on the activities of the Committee in fulfilling its responsibilities is provided to the Board following each meeting. The principal responsibilities of the Committee are shown below grouped under its three core themes of work: Bank-wide
Committee in seeking to make objective decisions. Some key messages for 2014 are as follows: • Operating profit is up significantly to £3.5 billion from a £7.5 billion loss in 2013
• Bonus awards above £2,000 are subject to deferral requirements and the Committee approved a 2014 deferral structure for higher earners and MRTs that exceeds current regulatory requirements.
These decisions aim to strike a difficult balance where pay is restrained in a market context but remains at sufficient levels to reward those employees who are building the future franchise. The intention is to demonstrate that good performance and a continuous focus on the right behaviours will be rewarded, while reflecting the impact on all stakeholders of conduct events in the reduction of specific bonus pools.
As a minimum, shares will be subject to retention periods as required under the PRA and
• The Committee recognises the importance of alignment with shareholders through the use of shareholding requirements, a longer vesting period for long-term incentive awards and retention periods post vesting. Upon leaving, any outstanding share awards held by
‘how’ outcomes have been achieved, and whether employees believe they are paid fairly for the work they do.
Element of pay Purpose and link to strategy Operation Maximum potential value
Any future increases to fees will be considered against directors at comparable companies and will not normally be greater than the average inflation rate over the period under review, taking into account that any change in responsibilities, role or time commitment may merit a larger increase.
Existing annual incentive awards under the Deferral Plan will not normally lapse on termination, unless termination is for Cause (as defined in the rules of the Deferral Plan). The awards will normally continue to vest on the original vesting dates, subject to provisions regarding malus, clawback, competitive activity and detrimental activity as appropriate.
LTIP vesting amount included in the total remuneration table above (audited)
Measure: Economic Profit is defined as Operating Profit after Tax and preference share charges less Tangible Net Asset Value multiplied by the
Reason: The Safe & Secure Bank measures have a particular focus on risk reduction and the building of a safer, sustainable franchise.
Stephen Hester and Bruce Van Saun received shares on 7 March 2014 following the assessment of performance conditions for the LTIP award granted in 2011. The award for Stephen Hester was reduced to reflect time served during the period. The underlying award structure consisted of four performance categories each of which could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 375% of salary.
The performance assessment is set out below. The current executive directors did not participate in this award.
Balance Sheet & Risk 25% Half objectives met 25% Objectives met or exceeded in all material respects
(289,536 shares), the Executive Share Option Plan (option over 207,467 shares at £4.62) and the Medium-term Performance Plan (117,809 scheme interests) all lapsed as a result of his departure.
Notes: (1) Chair until 25 June 2014 (2) Chairman from 25 June 2014 (3) Robert Gillespie was appointed to the Committee on 1 April 2014.
• Assessment of the performance to date of unvested LTIP awards and performance targets for 2014 awards.
The amount of the award that vests may vary between 0-100% depending on the performance achieved. Awards are subject to malus and clawback provisions and a minimum six month retention period applies to MRTs post vesting.
The effectiveness of RBS’s internal controls framework is reviewed regularly by the Board, the Group Audit Committee and the Board Risk
RBS’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control matters which they have identified. The system of internal controls of the authorised institutions and other regulated entities in RBS is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Supervision section on page 470.
(since the Chairman was considered independent on appointment) (ii) although the members of the Group Performance and Remuneration
A review of RBS's performance during the year ended 31 December 2014, including details of each segment, and RBS's financial position as at that date is contained in the Business review on pages 111 to 162.
How we behave forms the character of our company and dictates how others see us. RBS’s code of conduct, Our Code, reflects our values and applies to everyone who works here. It is supported by the YES Check: a simple decision-making framework to help our people translate Our Code into their day-to-day roles. The YES check has been designed to meet the Financial Conduct Authority’s standard of conduct and is underpinned by ethical principles.
Employee Council provides an opportunity for elected representatives and management to discuss developments in RBS’s European operations. Discussions have continued to take place with employee representatives where appropriate on the progress of our strategic plans.
(gender) for the second year; increasing our ranking from Silver to Gold for Race for Opportunity (race); retaining a position in the Times Top 50
Scheme Indemnity Provisions have been issued to all trustees of RBS
RBS made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that RBS’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the
disposed of 29.5% of its interest in CFG in 2014 and it is intended that
Key competitive factors in this market segment include cost management, growing digital sales focus, branch network re-shaping, and product simplification. Cost management remains a key focus in the market, as banks seek to simplify their organisational and IT architectures while at the same time investing to ensure that they can meet customers’
UK banks, from specialised global and regional investment banks and from large foreign universal banks that offer combined investment and commercial banking capabilities as well as from new entrants and nonbank challengers. In asset finance and invoice finance, the bank competes with banks and specialist finance providers, both captive and non-captive. In the small business banking market, the bank competes with other UK banks, specialist finance providers and building societies.
In all of these areas, entrants with new technology-based business model are also showing rapid growth. In Private Banking, The Royal Bank of
Company compete as private banks with UK clearing and private banks, asset managers and with international private banks. Competition in wealth management remains strong as banks maintain their focus on competing for affluent and high net worth customers.
(the “IT and Operational Investment Plan”), further initiatives designed to reduce the size of the Group’s balance sheet and derisk its business, in particular through the divestments of the Group’s interest in Williams & Glyn, its remaining stake in Citizens Financial
Scheme, strategic disposals and RFS Holdings minority interest are shown separately. In the statutory consolidated income statement on page 342, these items are included in the appropriate captions. On a non-statutory basis the results of Citizens are included in the appropriate captions and are included in discontinued operations in the statutory results.
Bank (£365 million), which benefited from favourable economic and market conditions supported by rising Irish property values and proactive debt management. Excluding these releases, the underlying charge was lower at just over £500 million.
On a non-statutory basis, operating loss excluding own credit adjustments, gain on redemption of own debt, write down of goodwill, strategic disposals RFS MI and in 2012 the Asset Protection Scheme, and including the results of Citizens was £7,500 million compared with £1,113 million in 2012. The decline in performance primarily related to increased impairment losses resulting from the establishment of RCR, elevated conduct and litigation costs and lower income in CIB.
Write down of goodwill was £1,059 million compared with £18 million in 2012 in relation to a write-off in CIB.
Total interest-earning assets - banking business (1,2,4,5) 502,830 15,294 3.04 543,881 16,706 3.07
Analysis of change in net interest income - volume and rate analysis
On a non-statutory basis operating expenses increased by £591 million, or 3%, to £18,510 million, primarily due to increased litigation and conduct costs of £3,844 million (2012 - £2,191 million), partly offset by lower staff numbers principally in UK PBB, Ulster Bank, CIB and Non-
Comprising: (Release)/charge to income statement (1,155) 8,432 5,279 (1,352) 8,120 5,010
Loan impairment provision coverage of REIL remained stable at 64% and the provision now stands at £18.0 billion, a £7.2 billion reduction in the year. Provision coverage of gross loans is 4.4% compared with 6.0% at the end of 2013.
The strategic goal of UK PBB is to become the number one personal and business bank for customer service, trust and advocacy in the UK.
Hello’ campaign: • The business committed to responsible and fair lending by removing 0% teaser deals from its offering and introducing the new Clear Rate and cash-back credit cards in 2014.
Mortgage balance growth in UK PBB was affected in H1 2013 by mortgage advisor training; however, balances recovered during H2 2013 assisted by early adoption of the second phase of the UK Government’s
Total income decreased by £29 million to £830 million largely as a result of the non-recurrence of significant hedging gains on the mortgage portfolio in 2013. Net interest income increased by £17 million to £636 million, primarily driven by a significant reduction in the cost of deposits and a benefit from the recognition of income on certain previously nonperforming assets, partly offset by the adverse impact on the tracker mortgage book of lower European Central Bank refinancing interest rates. Net interest margin increased 39 basis points to 2.27%.
Rates actively repositioned the business during 2013, lowering the balance sheet and reducing risk. This, combined with a weak trading performance in H1 2013, resulted in subdued returns.
Central items not allocated, represented a credit of £647 million in 2013 compared with £845 million in 2012, a reduction of £198 million.
2014 £bn £bn £bn £bn £m £bn £bn £bn £bn £m £bn £bn £bn £bn £m
Risk-weighted assets 1 January Risk 31 December 2014 Repayments Disposals (1) parameters (2) Impairments Other (3) 2014 £bn £bn £bn £bn £bn £bn £bn
Notes: (1) Excludes disposal groups. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Loans and advances to customers declined £62.5 billion, 14%, to £378.2 billion. Within this, reverse repos were down £5.9 billion, 12%, to £44.0 billion. Customer lending decreased by £56.6 billion, 14%, to £334.2 billion, or £64.3 billion to £351.7 billion before impairments. This reflected the transfer to disposal groups at 31 December 2014 of £60.1 billion
Intangible assets decreased by £4.6 billion, 37%, to £7.8 billion primarily as a result of the transfer to disposal groups of £4.5 billion of intangible assets relating to Citizens.
This was partly offset by decreases resulting from the disposals of the interest in associates in Direct Line Group and the Chicago area retail branches, small business operations and select middle market relationships in the Chicago area, which formed part of Citizens.
Non-controlling interests increased by £2.5 billion to £2.9 billion, due to the disposal of a 29.5% interest in Citizens during the second half of 2014, primarily through an initial public offering in the USA.
Retirement benefit liabilities decreased by £0.7 billion, 17%, to £3.2 billion with net actuarial gains of £0.5 billion arising from improved asset returns and higher discount rates partly offset by an increase in the assumed inflation rate. Additional employer contributions of £0.4 billion to the
Net cash inflows from investing activities of £21,183 million related to the net inflows from sales of securities of £19,211 million, the sale of property, plant and equipment of £1,448 million and net divestments of business interests and intangible assets of £1,150 million offset by net cash outflows from the purchase of property, plant and equipment of
The financial information on a non-statutory basis, prepared using RBS’s accounting policies, shows the underlying performance of RBS which excludes certain one-off and other items which are listed on page 104. This information is provided to give a better understanding of the results of RBS’s operations.
The main risk types faced by RBS are presented below. For further information, refer to pages 184 to 334.
products and services which have implications for profitability, risk, the customer base, and for business growth.
RBS considers proposed or potential regulatory requirements in strategic and financial planning rounds and plans accordingly.
RBS’s pension schemes’ combined deficit had risen by £2.1 billion at the most recent valuation, requiring RBS to set aside additional capital in support. Additional capital required if the deficit widened further would depend on the size of the deficit, the efficacy of management actions undertaken to address it, and the regulatory view of those actions.
A failure of information technology systems could lead to an inability to process transactions or provide services to its customers. Should a failure not be rectified promptly, it might lose funding, be subject to fines, incur remediation costs or face legal action. Its reputation might also suffer.
Given this central aim, the Board has set out four key strategic objectives, aligned with the strategic plan: • Maintain capital adequacy. To ensure there is sufficient capital resources to meet regulatory requirements and to cover the potential for unexpected losses in its asset portfolio.
• Risk control frameworks and limits - Risk control frameworks set detailed tolerances and limits for material risk types (e.g. credit risk and market risk) that are used to manage risk on a day-to-day basis.
Risk appetite is set at RBS-wide level then cascaded and embedded across all business areas. Each franchise is required to develop, own and manage a risk appetite statement aligned with the bank’s risk appetite that: • Covers the limits and tolerances in place for all identified material risks; and
RBS Risk Management runs a Risk Academy which helps to train staff and to spread a common risk culture across the bank. Training plans are aligned with Risk function strategy to ensure staff have the skills and capabilities to support business and to meet changing regulatory and policy requirements.
UK, as well as the increasing focus of overseas regulators on conduct risk.
Support Functions and Divested Businesses, who leads the function, reports to the Chief Risk Officer.
The losses in this category resulted from new conduct-related provisions, and further increased provisions relating to Payment Protection Insurance and Interest Rate Hedging Products, together with regulatory settlements.
requirements. These requirements are expected to be phased in from 2016, with full implementation by 2019 but this is subject to ongoing review to accommodate regulatory and other changes.
The Board Risk Committee (BRC) is responsible for providing oversight and advice to the Board in relation to current and potential future risk exposures of RBS and future risk strategy, including determination of risk appetite and tolerance. The BRC will review the performance of RBS
Forum (ERF) in relation to risk management matters, including recommendations on risk appetite, risk policies and risk management strategies. ERF oversees stress testing approach, processes and results.
RBS stress testing framework is designed to embed stress testing as a key risk management technique into mainstream risk reporting, capital planning and business processes at business, legal entity and RBS-wide levels.
The stress test was conducted on a static balance sheet basis and thus did not permit key strategic initiatives, such as, the wind down of higher risk and capital intensive assets as part of RCR.
In 2014, Ulster Bank Ireland Limited (UBIL) and RBS N.V. participated in a comprehensive assessment performed by the European Central Bank
RBS’s 2015 Recovery Plan will be prepared in line with revised rules taking into account the European Union Bank Recovery and Resolution
The ability to change severity levels supports management of earnings volatility and capital risk. Economic models are used in the ICAAP
assessing risk profiles within the risk appetite framework, functional risk management e.g. credit exposures at both RBS and business levels, assessing business line profitability on a risk adjusted basis and the management and allocation of capital.
The PRA estimates that the total impact of proposals will increase overall
The FSB has issued policy proposals for public consultation on TLAC.
Qualifying instruments issued by subsidiaries and held by third parties 3,175 7,490 5,151 9,374 — —
• The lower regulatory capital deduction for DTA is due to the reduction in the net DTA balance reflecting the write down of deferred tax assets during the year.
Notes: (1) Exposure at default post credit risk mitigation reflects an estimate of the extent to which a bank will be exposed under a specific facility, in the event of the default of a counterparty; AIRB: advanced internal ratings based; STD: standardised. (2) Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks. (3) Securitisation structured purpose entities primarily relate to securitisation related vehicles. (4) Telecommunications, media and technology.
• The liquidity portfolio increased by £4.6 billion in the year, primarily reflecting the proceeds from the Citizens IPO and the sale of €9 billion securities from the RBS N.V. bond portfolio. It includes £57 billion of secondary liquidity being assets eligible for discounting at central banks. The costs associated with maintaining the secondary liquidity portfolio are minimal being largely administrative and operational costs.
Bank - £3.0 billion) being offset by a decrease in the funding surplus in CPB of £6.6 billion (Commercial Banking - £5.7 billion; Private *unaudited
regulatory process, RBS undertakes the following: • An annual exercise to complete the ILAA; and
• Management action - Unencumbered marketable assets that are held outside of the central liquidity portfolio and are of verifiable liquidity value to the firm, are assumed to be monetised (subject to haircut/valuation adjustment).
ASF/RSF (1) ASF/RSF (1) ASF/RSF (1) Weighting £bn £bn £bn £bn £bn £bn %
The composition of RBS’s balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses.
Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; interbank lending and funding largely nets off and this gap has narrowed over the past 5 years; and derivative assets are largely netted against derivative liabilities.
The Risk Infrastructure function provides a variety of services that enable the credit risk management function to operate. These include reporting of credit risk data, risk assurance, provision of credit risk models, systems strategy and change management.
Except for US personal portfolios, where the write-off of the irrecoverable amount takes place within 60-180 days, the typical time frames from initial impairment to write-off for collectively-assessed portfolios are: • Personal mortgages: Write-off usually occurs within five years of default and is accelerated where accounts are closed earlier.
• Wholesale models - A number of credit grading models consider risk characteristics relevant to different customer types. These models use a combination of quantitative inputs, such as recent financial performance, and qualitative inputs such as management performance or sector outlook. As part of the credit assessment process, RBS assigns each customer an internal credit grade based on its PD.
exposure, with 30% of the increase in CFG exposure driven by foreign exchange movements.
Product and asset class concentration risk is the risk of an outsized loss arising from a concentration in certain products or asset classes. The product and asset class framework monitors specific credit risk types such as settlement or wrong-way risk and products such as long-dated derivatives or securitisations. These product and asset classes may require specific policies and expertise as well as tailored monitoring and reporting measures. In some cases specific limits and thresholds are deployed to ensure that the credit risk inherent in these lines of business and products is adequately controlled. Exposures are reviewed regularly in accordance with the product and asset class concentration framework.
• Financial collateral - Refer to Counterparty credit risk section on *unaudited
All wholesale customers are assigned a PD and related facilities a LGD.
• At the year end, the total exposure to CCPs was £5.4 billion (2013 - £4.1 billion) as regulatory initiatives encouraged the wider use of
• The reduction in exposure to the retail and leisure sector was in line with selective risk appetite. The reductions were predominantly in relation to Ulster Bank and CIB exposure, partially offset by modest growth in CFG in line with business strategy. The CPB retail and leisure portfolio was stable compared to last year.
• Exposure in healthcare was £8.9 billion at the year end (2013 - £9.5 billion) with the exposure heavily biased towards the UK, which represented 69% of the exposure (70% in 2013).
• Provisions for the non-performing loans disclosed above are individually assessed and therefore not directly comparable across periods. Provision coverage increased in 2014, driven by the provision coverage level in Ulster Bank (including Ulster Bank RCR
Performing Non-performing Total Performing Non-performing Total Performing Non-performing Total £m £m £m £m £m £m £m £m £m 2013 Non-Core RBS excluding Non-Core Total
Collections functions in each of RBS’s personal businesses provide support to customers who cannot meet their obligations to RBS. Such customers may miss a payment on their loan, borrow more than their agreed limit, or ask for help. Dedicated support teams are also in place to identify and help customers who have not yet missed a payment but may be facing financial difficulty. The collections function may use a range of tools to initiate contact with such customers, establish the cause of their financial difficulty and support them where possible. In the process, they may consider granting the customer forbearance.
If collections strategies are unsuccessful the relationship is transferred to the recoveries team. For further details on recoveries, refer to following page.
Mortgages granted forbearance are reviewed regularly to ensure that customers are meeting the agreed terms. Key metrics have been developed to record the proportion of loans that fail to meet the agreed terms over time, as well as the proportion of loans that return to performing with no arrears. Personal forbearance loans can be modified more than once.
• The portfolio average indexed LTV improved from 62.0% to 57.3%.
• The flow of new forbearance was £367 million in the second half of 2014. This compared to £748 million in the first half 2014, which included changes in contractual terms for both financially stressed and non-financially stressed customers. The underlying flow of new forbearance continued on a downward trend and, on a like-for-like basis, was 18% lower in 2014 compared to 2013.
The analysis is updated as new trends and data become available.
• The assets included £2.1 billion (12%) of residential buy-to-let loans.
• The interest rate product mix was approximately 64% on tracker rate products, 23% on variable rate products and 13% on fixed rate.
(2013 - 73%); the volume of new business increased from £438 million in 2013 to £618 million in 2014. The maximum LTV available to Ulster Bank customers was 90%.
Ireland in 2012. Interest only mortgages are now granted only to high net worth customers or customers in need of forbearance. 2014 2013
The table below shows LTVs for the Private Banking residential mortgage portfolio split between performing (AQ1-AQ9) and non-performing
Bullet principal Bullet principal Conversion to repayment Other Total repayment amortising Other Total £m £m £m £m £m £m £m *unaudited
The table below shows forbearance agreed during the year split between performing and non-performing.
(£0.2 billion at 31 December 2014) for which repayment of principal is due at maturity, and an interest only portfolio that comprises loans that convert to amortising after an interest only period (typically ten years). The majority of the bullet loans are due to mature in 2015.
CFG’s credit card portfolio is comprised of good quality consumer loans originated in-footprint through the branch network and totalled £952 million at 31 December 2014 (2013 - £945 million). The product portfolio credit quality continued to improve with weighted average credit scores for new originations throughout 2014 higher than the portfolio average.
Japanese bonds. The decrease in short positions reflects positions settled due to increased prices resulting from low yields due to economic volatility in the eurozone.
from 64% in 2013 mainly reflecting asset transfers to RCR on 1
REIL as a % of gross loans and advances (1) 3.3% 70.3% 6.8% 5.3% 51.8% 9.4% 5.0% 37.9% 9.1%
UK PBB Bank Banking Banking CIB items CFG Non-Core Non-Core Total £m £m £m £m £m £m £m £m £m £m
The movement in loan impairment provisions by segment is shown in the table below.
RBS’s traded market risk profile decreased significantly, with market risk limits being reduced across all businesses, in some instances by 50-60%.
However, at the year end RBS retained a majority stake in CFG and fully consolidated the position.
The assurance approach policy comprises various elements, including the Risk and Control Assurance Framework process. This process ensures that, on an ongoing basis, specifically designed controls are in place for the risks that RBS faces to ensure that its exposure does not exceed its appetite. The adequacy and effectiveness of these controls are tested according to their rating, at least annually. The results of this testing are shared regularly at the Market Risk Governance and Control
Limit reporting is supplemented with regulatory capital and stress testing information as well as ad hoc reporting.
The table below analyses internal VaR for RBS’s trading portfolios, segregated by type of market risk exposure, and split between CIB and RCR or Non-
Prior to this change, VaR was higher as only the associated hedges, which had a risk-additive impact on overall trading book exposures, were captured in the internal risk management framework.
° the decision to exit the US ABP trading business and the unwinding of equity positions in Run-off & Recovery (RoR)
A portfolio is said to produce a back-testing exception when the Clean or
This was consistent with the decrease in VaR and was primarily driven by the decision to exit the US ABP trading business.
• Higher-order sensitivity terms: to account for the fact that the VaR
Scenario-based sensitivity analysis measures the sensitivity of the current portfolio to defined movements in market risk factors. These risk factor movements and the resulting valuation changes are typically smaller than those considered in other stress tests.
Comprehensive Capital Analysis and Review and macroeconomic scenarios identified by the firm such as a euro crisis and a China hard landing.
The independent model validation framework governing both pricing models and risk models (including VaR) is described below.
Model Risk’s independent review comprises some or all of the following steps, as appropriate: • Testing and challenging the logical and conceptual soundness of the methodology; • Testing the assumptions underlying the model, where feasible, against actual behaviour. In its validation report, Model Risk will opine on the reasonableness and stability of the assumptions and specify which assumptions, if any, should be routinely monitored in production; • Testing whether all key market risks have been sufficiently captured; • Re-applying the proposed approach to verify that the same outcome is achieved; • Comparing outputs with results from alternative methods; • Testing parameter selection and calibration; • Ensuring model outputs are sufficiently conservative in areas where there is significant model uncertainty; • Confirming the applicability of tests for accuracy and stability; recalculating and ensuring that results are robust; and
The table below shows the impact on net interest income associated with product hedges managed by RBS Treasury. These relate to the main UK
The structured credit portfolio is measured on a notional and fair value basis because of its illiquid nature. Notional and fair value decreased to £0.4 billion and £0.3 billion respectively (2013 - £0.7 billion and £0.5 billion), reflecting the sale of underlying assets, primarily consumer ABS,
• Total eurozone net balance sheet exposure decreased by £4.9 billion or 5% to £97.6 billion. Reductions in eurozone periphery countries and in net lending in other countries were partly offset by increases in debt securities in Germany and France. The main reductions were in lending to corporate clients (mostly in Ireland,
The Pension Risk Committee (PRC), acting as a sub-committee of the
The trustee has taken measures to mitigate inflation and interest rate risks both by investing in suitable physical assets and by entering into inflation and interest rate swaps. The Main scheme also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes. The assets of the Main scheme, which represented 88% of RBS’s pension plan assets at 31 December 2014, are invested in a diversified portfolio of quoted and private equity, government and corporate fixed interest and index-linked bonds, property and other alternative assets.
Fall in credit spreads of 0.25% at all durations with no change in nominal or real swap yields 71 1,261 (1,190)
Business risk is identified and managed at the product and transaction level. Estimated revenue and costs, including the potential range of outcomes, are key considerations in the design of any new product or investment decision. All policies that ultimately seek to manage and control financial impact at the product and transaction level are therefore relevant to business risk management, including policies on conduct, funding and investment spending.
As required by the UK Listing Rules we have reviewed the directors’ statement on page 99 that the Group is a going concern.
The directors exercise significant judgement when determining both when and how much to record as loan impairment provisions. Because of the significance of this judgement and the size of loans and advances, the audit of loan impairment provisions is a key area of focus. At 31 December 2014 gross loans and advances were £439,473 million against which loan impairment provisions of £17,500 million were recorded. The basis of the provisions is summarised in the accounting policies and in Note 13 to the consolidated financial statements.
The description of the risks above should be read in conjunction with the significant issues considered by the Group Audit Committee discussed on
We agreed with the Group Audit Committee that we would report all audit differences in excess of £10 million, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Group Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’
Citizens Financial Group initial public offering: - transfer from available-for-sale reserve 9 — 59 - transfer from cash flow hedging reserve (34) — —
Accounting policy 9) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, these are accounted for separately.
Held-for-trading - a financial asset is classified as held-for-trading if it is acquired principally for sale in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial assets are recognised at fair value with transaction costs being recognised in profit or loss.
Designated as at fair value through profit or loss - financial assets may be designated as at fair value through profit or loss only if such designation
Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable. The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements.
Collective component - this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collectively assessed provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions). Collectively assessed provisions are established on a portfolio basis using a present value methodology taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include mortgages, credit card receivables and other personal lending. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends. Latent loss provisions are held against estimated impairment losses in the performing portfolio that have yet to be identified as at the balance sheet date. To assess the latent loss within its portfolios, the Group has developed methodologies to estimate the time that an asset can remain impaired within a performing portfolio before it is identified and reported as such.
December 2014 that would affect RBS from 1 January 2015 or later.
Other administrative expenses include: • Payment Protection Insurance costs, Interest Rate Hedging
Variable compensation as a % of operating profit (4) 6% 24% 23% 30%
Less: forfeiture of amounts deferred from prior years (56) (37) (64) — —
and the US and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material.
Rate of increase in salaries 1.8 1.8 1.8 1.8 1.8 1.7
The analysis of auditor’s remuneration is as follows: 2014 2013 £m £m
Earnings per ordinary and equivalent B share have been calculated based on the following: £m £m £m
The valuation of modelled products requires an appropriate model and inputs into this model. Sometimes models are also used to derive inputs
• Recovery rates/loss given default - these are used as an input to valuation models and reserves for asset-backed securities and other credit products as an indicator of severity of losses on default.
Credit valuation adjustments (CVA) 1,414 1,766 2,814 - of which: monoline insurers and credit derivative product companies (CDPC) 47 99 506
The table below analyses CVA relating to counterparties other than monoline insurers and CDPCs by rating and sector.
For issued debt and structured notes this adjustment is based on debt issuance spreads above average inter-bank rates (at a range of tenors).
Settlement balances and other liabilities 7,560 4 9 1 — 1
(2013 - £34 billion; 2012 - £39 billion) were hedged by interest rate swaps in fair value hedge relationships.
Note: (1) Includes asset-backed securities issued by US federal agencies and government sponsored entities, and covered bonds.
Business Banking, Private Banking and Citizens Financial Group respectively. The goodwill allocated to Corporate & Institutional Banking was written off immediately following re-segmentation. The change in reportable segments in 2014 did not impact the impairment tests performed in 2013 and 2012.
Write down of property, plant and equipment — 15 3 — — — 18
On reclassification to disposal groups at 31 December 2014, the carrying value of Citizens exceeded its fair value less costs to sell (Fair Value
Fair values have been established in accordance with Accounting policy 14 (page 353) and 16 (page 354), and Note 11.
Notes: (1) To reflect current experience of PPI complaints received, the Group increased its provision for PPI by £650 million in 2014 (2013 - £900 million; 2012 - £1,110 million), bringing the cumulative charge to £3.7 billion, of which £2.9 billion (79%) in redress had been paid by 31 December 2014. Of the £3.7 billion cumulative charge, £3.4 billion relates to redress and £0.3 billion to administrative expenses.
Pension allowances Provisions gains transition instruments assets Intangibles hedging schemes forward Other Total £m £m £m £m £m £m £m £m £m £m £m £m £m
AUD53.7 million floating rate subordinated notes 2017 (partial redemption) Tier 2 29 — —
AUD193 million 6% subordinated notes 2014 (partial redemption) Tier 2 — — 129
US$271 million floating rate subordinated notes (partial redemption) Tier 2 — — 171
Non-cumulative preference shares of €0.01 — — — 2,044 2,044 2,044
The DAS Retirement Agreement sets out terms for the removal of the
Under IFRS certain of the Group's preference shares are classified as debt and are included in subordinated liabilities on the balance sheet.
(2) Preferred securities in issue - US$357 million RBS Capital Trust III, fixed/floating noncumulative trust preferred securities. Notice of redemption issued in December 2014. As a result, the related subordinated notes have been reclassified to liabilities.
Notes: (1) Debt securities retained by RBS may be pledged with central banks. (2) Corporate, social housing and student loans.
It is RBS’s policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS has regard to the supervisory requirements of the PRA. The PRA uses risk asset ratio (RAR) as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the RAR should be not less than 8% with a Tier 1 component of not less than 4%. RBS has complied with the PRA’s capital requirements throughout the year.
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. The Group's maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to the Group's normal credit approval processes.
The status of the previously disclosed settlements in the other MBS class actions in which RBS companies were defendants is as follows: In re
Court. On 21 January 2015, the U.S. Supreme Court held in Gelboim v.
Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS
In November 2012, the Federal Court of Australia issued a judgment against RBS N.V. and others in one such case holding that RBS N.V. and others committed certain wrongful acts in connection with the rating and sale of the CPDO. In March 2013, RBS N.V. was ordered to pay A$19.7 million. RBS N.V. appealed this decision and the appeal court found against RBS N.V. in May 2014. The decision is not being further appealed. RBS N.V. made the required payments totalling A$19.7 million in March and April 2013. The judgment may potentially have significance to the other claims served and to any future similar claims.
Australian Securities and Investments Commission (ASIC) in relation to potential misconduct involving the Australian Bank Bill Swap Rate. RBS
The action required included a review of the training provided to advisers, considering whether changes are necessary to advice processes and controls for new business, and undertaking a past business review to identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this right for customers).
In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange fees applicable in respect of
Current Account (PCA) market in July 2008, the OFT launched a follow up review of the PCA market in July 2012. This review was intended to consider whether certain initiatives agreed by the OFT with banks in light of the July 2008 report, primarily around transparency, unarranged overdrafts and customers in financial difficulty, had been successful and whether the market should be referred to the Competition Commission
Non-Core Division was dissolved on 31 December 2013. It managed separately assets that RBS intended to run off or dispose of. The division contained a range of businesses and asset portfolios primarily from the legacy GBM businesses, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also included a number of other portfolios and businesses including those in regional markets that were no longer strategic to RBS.
Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, restructuring costs, amortisation of purchased intangible assets, write down of other intangible assets and bank levy) have now been allocated to the reportable segments.
The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 20,917 30,590
Other net interest payable, non-interest income and operating expenses (94) (572) (247)
Loans and advances to customers 0.3 0.3 0.3 — 0.2 0.2 0.2 1.3 1.3
Net asset value per ordinary and equivalent B share - £ 5.25 5.24 6.31 6.90 7.02
Government Banks Other Total Short positions positions £m £m £m £m £m £m
Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper (CP) and certificates of deposit (CD).
Derivative collateral received from financial institutions is excluded from the table, as are certain long-term borrowings.
Bank Plc. Retail banking activities in England, Scotland and Wales are managed by the Personal & Business Banking business, and by Ulster
Holding Company Act of 1956. As such, it is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System
Total capital expenditure on premises (excluding investment properties), computers and other equipment in the year ended 31 December 2014
RBS entered into a State Aid Commitment Deed with HM Treasury at the time of the initial EC decision and following the European Commission’s approval of amendments to the restructuring plan in April 2014 entered into a Revised State Aid Commitment Deed with HM Treasury (together referred to as the “State Aid Commitment Deeds”).
Set out below are certain risk factors which could adversely affect the
Futures Trading Commission (CFTC) in the US in relation to investigations into failings in RBS’s foreign exchange business within its
Legal, governmental and regulatory proceedings and investigations are subject to many uncertainties, and their outcomes, including the timing and amount of fines or settlements, which may be material, are often difficult to predict, particularly in the early stages of a case or investigation. It is expected that the Group will continue to have a material exposure to legacy litigation and governmental and regulatory proceedings and investigations in the medium term. For more detail on certain of the Group’s ongoing legal, governmental and regulatory proceedings, see pages 430 to 439. Adverse regulatory, governmental or law enforcement proceedings or adverse judgements in litigation could result in restrictions or limitations on the Group’s operations or have a significant effect on the Group’s reputation, results of operations and capital position.
EU. The implementation of these policies, including the outcome of the
Transformation Plan and regulatory commitments. The failure to attract or retain a sufficient number of appropriately skilled personnel to manage the complex restructuring required to implement the Transformation Plan, and in particular the implementation of the ring-fence and the restructuring of the Group’s CIB business could prevent the Group from successfully implementing its strategy. This could have a material adverse effect on the Group’s business, financial condition and results of operations.
Implementation of the State Aid restructuring plan exposes the Group to a number of risks. The most significant risks relate to required asset disposals, a number of which are now completed. The Group completed an initial public offering of CFG’s common stock in September 2014. The divestment of Williams & Glyn continues to progress following the announcement of a pre-IPO investment by a consortium of investors in
The Basel Committee changes and other future changes to capital adequacy and loss absorbency and liquidity requirements in the
(including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide, including interbank markets, have experienced severe reductions in liquidity and term-funding during prolonged periods in recent years. Although credit markets continued to improve during 2014 and such markets remain accommodating in the early part of 2015 (in part as a result of measures taken by central banks around the world, including the ECB), and the Group’s overall liquidity position remained strong, certain European banks, in particular in the peripheral countries of Spain, Portugal, Greece, Italy and Ireland, remained reliant on central banks as one of their principal sources of liquidity. Although the measures taken by Central Banks have had a positive impact, the risk of volatility returning to the global credit markets remains.
The financial performance of the Group has been, and may continue to be, materially affected by counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments
The value in use and fair value of the Group’s cash generating units are affected by market conditions and the performance of the economies in which the Group operates. Where the Group is required to recognise a goodwill impairment, it is recorded in the Group’s income statement, although it has no effect on the Group’s regulatory capital position.
For further information on the payment of dividends, see page 498.
Following a sub-division and one-for-ten consolidation of RBS’s ordinary shares in June 2012, the ratio of one ADS representing 20 ordinary shares was adjusted to one ADS representing two ordinary shares. As at 31 December 2014, 30.7 million ordinary ADSs were outstanding.
Corporate US Holders of PROs may be subject to UK tax charges (or tax relief) by reference to fluctuations in exchange rates and in respect of profits, gains and losses arising from the PROs (including on a disposal or redemption), but only if such corporate US Holders carry on a trade in the UK through a UK permanent establishment to which the PROs are attributable.
No stamp duty, SDRT or similar tax is imposed in the UK on the issue, transfer or redemption of the PROs.
ADSs, preference ADSs or PROs that are made within the United States or through certain U.S-related financial intermediaries may be subject to information reporting and backup withholding unless (i) the US Holder is an exempt recipient or (ii) in the case of backup withholding, the US
Certain US Holders who are individuals (and under proposed regulations, certain entities) may be required to report information relating to the company’s securities, subject to certain exceptions (including an exception for securities held in accounts maintained by US financial institutions). US Holders are urged to consult their tax advisers regarding the application of these rules in the US Holders’ particular circumstances.
Certificates of deposit (CDs) - bearer negotiable instruments acknowledging the receipt of a fixed term deposit at a specified interest rate.
Derivative - a contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options.
International Accounting Standards Board (IASB) - the independent standard-setting body of the IFRS Foundation. Its members are responsible for the development and publication of International Financial
Liquidity coverage ratio (LCR) - the ratio of the stock of high quality liquid assets to expected net cash outflows over the following 30 days. High quality liquid assets should be unencumbered, liquid in markets during a time of stress and, ideally, central bank eligible.
Asset settlement balances are amounts owed to the Group in respect of sales and liability settlement balances are amounts owed by the Group in respect of purchases.