Corporate Responsibility 18 Our approach 18 Progress against priorities in 2008 19 Investing in financial education 20 Supporting business customers 21 Supporting personal customers 21 Environment
We are grateful for the support our customers gave us during 2008, when their faith in us might understandably have been dented, and recognise that our plans will succeed only if we continue to serve them well.
From a capital perspective, successive capital raisings have substantially strengthened the Group’s capital ratios. Reported losses have only partially eroded these, and our core Tier 1 ratio stood at 7.0% at the end of 2008, pro forma for the conversion of our preference shares, compared with 4.0% a year earlier. Additionally, the funded balance sheet was reduced by £93 billion, or 17% in constant currency terms. Unfortunately, the extreme dislocation of markets has impeded the risk reduction we target, leaving much still to do. Moreover, the fall in sterling exchange rates inflates our international balance sheet and this, plus extreme market movements, also increases the value of our derivatives balances, albeit recording amounts that would be largely netted off under US GAAP.
The task we face We are intensely engaged in finalising a strategic restructuring plan for RBS. The goal is to correct those factors that made us particularly vulnerable to the downturn and to adjust further our business to reflect changes in the environment facing our industry. While the plan will not be complete until the second quarter of 2009, we have decided a lot already.
on 2007. GTS has substantially improved its penetration into the Asia-Pacific market, increasing trade finance income in the region by 74%, and has expanded its supply chain finance activities with an enhanced product suite.
GTS has maintained its market share and is ranked fifth worldwide for transaction banking in terms of both revenue, at constant exchange rates and network. In the UK, it is number one for CHAPS, cheque processing and BACS transmissions. Streamline merchant services retained its number one position in the UK market, handling more than one in three of all card transactions.
• RBS and NatWest attracted more than one million new current accounts in the year.
Divisional review continued manage payments from a new, user-friendly interface. Early 2008 saw the launch of E-Z Deposit. This service enables business owners to scan deposits and to deliver the images electronically to the bank via a secure internet connection from their own premises. This eliminates the need to visit a branch, as well as reducing the time before deposits reach accounts.
External recognition of the Division’s achievements in 2008 included Ulster Bank winning the KPMG Business Banking Excellence Award for an unprecedented fourth successive year, while RBS UAE won the Best Premium/Priority Banking Service Award at the 2008 Banker Middle East Product Awards.
Progress against priorities in 2008 Consultation with our stakeholders had led to the identification of 10 priority areas for action in 2008. Full details of these are available at www.rbs.com/cr. Three leading priority areas were: • financial crime; • customer service; and
To respond to stakeholders’ interest in our approach to how we market and sell our products we: • increasingly focused our service on customers who get into financial difficulty; and
Supporting personal customers In December 2008, RBS and NatWest introduced measures to help mortgage customers should they face financial difficulties. First, repossession proceedings will not proceed for a full six months after a customer first falls into arrears. Secondly, customers in arrears will be given the opportunity to seek advice from independent money advice organisations before any steps are taken by the Group. These commitments will remain in place at least until the end of 2009.
Where HM Treasury has made a share transfer order in respect of securities issued by the holding company of a relevant entity, HM Treasury may transfer property, rights or liabilities of the holding company of the relevant entity or of any bank in the group to a company wholly owned by the Bank of England or HM Treasury, or a nominee of HM Treasury.
Over the last six months, the UK Government has taken action under the Banking (Special Provisions) Act 2008 and the Banking Act in respect of a number of UK financial institutions, including in extreme circumstances, full and part nationalisation. There have been concerns in the market in recent months regarding the risks of such nationalisation in relation to the Group and other UK banks. If economic conditions in the UK or globally continue to deteriorate, or the events described in the following risk factors occur to such an extent that they have a materially adverse impact on the financial condition, perceived or actual credit quality, results of operations or business of any of the relevant entities in the Group, the UK Government may decide to take similar action in relation to the Group. Given the extent of HM Treasury’s and the Bank of England’s powers under the Banking Act, it is difficult to predict what effect such actions might have on the Group and any securities issued by it. However, potential impacts may include full nationalisation of the Group and the total loss of value in RBS shares.
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost and subsequently at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for impairment annually or more frequently, at external reporting dates, when events or circumstances indicate that it might be impaired. An impairment test involves comparing the recoverable amount (the higher of value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. 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.
Pro forma results have been prepared that include only those business units of ABN AMRO that will be retained by RBS and assuming that the acquisition of ABN AMRO was completed on 1 January 2007. The per share data have been calculated on the assumption that the rights issue in June 2008 and the capitalisation issue in September 2008 occurred on 1 January 2007. The financial review and divisional performance in the Business review focus on the pro forma results. The basis of preparation of the pro forma results are detailed on page 74.
2008 compared with 2007 – pro forma Profit Group operating profit, excluding credit market write-downs and one-off items, impairment losses on reclassified assets, amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration costs, restructuring costs and share of shared assets, was £80 million, compared with a profit of £10,314 million in 2007. The reduction is primarily a result of a substantial decline in non-interest income, a number of specific losses such as counterparty failures, and a marked increase in the credit impairment charge, reflecting weakness in financial markets and a deteriorating global economy.
Total interest-earning assets – banking business (2, 3) 737,172 41,942 5.69 611,384 37,634 6.16
Customer accounts: other time deposits – UK 95,181 4,011 4.21 88,702 4,202 4.74
Notes: (1) In preparing these disclosures, the Group took into consideration the leading practice recommendations of the Financial Stability Forum issued in April 2008 and the report of the IASB Advisory Panel ‘measuring and disclosing fair value of financial instruments in markets that are no longer active’ issued in October 2008.
Business review continued 2008 compared with 2007 – pro forma Operating expenses, excluding purchased intangibles amortisation and integration costs, fell by 4%, £702 million to £15,916 million, with cost growth in the Group’s core retail and commercial banking franchises offset by efficiency programmes and a significant reduction in Global Banking & Markets staff costs.
Divisional performance The results of each division on both the statutory and pro forma basis are set out below. The pro forma divisional results are stated before credit market write-downs and one-off items, amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration costs, restructuring costs, share of shared assets and after allocation of manufacturing costs where appropriate (‘Group operating profit’). The Group manages costs where they arise. Customer-facing divisions control their direct expenses whilst Manufacturing is responsible for shared costs. In 2008, the Group did not allocate these shared costs between divisions in the day-to-day management of its businesses, and the way in which divisional results are presented reflects this. However, in order to provide a basis for market comparison, the pro forma results below also include an allocation of Manufacturing costs to the customer-facing divisions on a basis management considers to be reasonable.
Trade finance made good progress, with income continuing to grow strongly in the second half of the year and was up 57% for the full year. GTS has substantially improved its penetration into the Asia-Pacific market, increasing trade finance income in the region by 74%, and has expanded its supply chain finance activities with an enhanced product suite. Margins improved throughout the year reflecting the additional risk premium in the prevailing market conditions.
2008 compared with 2007 – statutory Global Transaction Services grew income by 39% from £1,778 million to £2,472 million and contribution by 38% to £1,818 million. Those results reflect strong business performance and a full year’s contribution from the ABN AMRO acquired business. The key driver of this growth has been the acquisition of the ABN AMRO business with the historic RBS business contributing year on year growth of 5%.
The division will pursue above market growth in customer deposits to improve its funding contribution to the Group, and will diversify its customer lending, reducing its exposure to commercial property.
Non interest income increased 1% to £1,031 million. 2007 benefited from the profit on disposal of the Securities Services Group business; adjusting for this underlying growth in non interest income was 6%. This strong performance reflects increased sales of interest rate and currency risk management products.
The performance of our commercial property book remains under close watch. Average LTVs in the UK portfolio is 68% and less than 5% of the portfolio has LTVs greater than 85%.
Insurance premium income 5,293 5,387 5,387 Net fees and commissions (401) (465) (465)
Funding costs rose by £707 million to £1,330 million, reflecting higher funding costs for the full year following the acquisition of ABN AMRO in October 2007.
Banking book: Notes: (1) The data for 2008 are on a Basel II basis; prior periods are on a Basel I basis.
Advances Committee Deals with transactions that exceed the Group Credit Members of GEMC (AC) Committee’s delegated authority and large exposures. Group Chief Credit Officer
The Group has adopted, as part of the move to Basel II, a new master grading scale for wholesale exposures which comprises 27 grades. These in turn map to ten asset quality (AQ) bands used for both wholesale and retail exposures. This replaced the less granular AQ1-5 bands used prior to 2008.
The following table shows the movement between 2007 and 2008 based on the old AQ1-5 bands. (unaudited)
Western Europe, 8% North America and 4% RoW but with the extent of the current global downturn all markets are coming under considerable pressure.
The arrears rate (three or more payments missed) on the combined Royal Bank and NatWest brands was 1.5% (31 December 2008) up from 1.0% (31 December 2007). The mortgage impairment charge was £33 million for 2008 (2007 – £19 million) and in current economic conditions is expected to increase further. Anticipated losses from impaired mortgages are covered by a combination of impairment provisions and post default suspended interest. The combined provision cover is currently 0.18% of balances.
Shipping The shipping exposure is £16.6 billion and is almost entirely within GBM. The portfolio is divided across the following sectors: Credit book Sector £bn %
On transfer of a relationship to GRG a strategy is devised to: • Work with the borrower to facilitate changes that will maximise the potential for turnaround of their situation and return them to profitability.
The following table provides an analysis of the credit quality of financial assets by the Group’s internal credit quality steps.
The following loans and advances to customers were past due at the balance sheet date but not considered impaired: Past due Past due Past due Past due 90 days 1-29 days 30-59 days 60-89 days or more Total £m £m £m £m £m
Service industries and business activities 13,706 949 1,297 — 15,952 108 Agriculture, forestry and fishing 157 1 7 — 165 —
The table below sets out the Group’s loans that are classified as REIL and PPL.
• On 27 October 2008 the Federal Reserve Bank commenced the Commercial Paper Funding Facility to provide a liquidity backstop to issuers of commercial paper. A special purpose vehicle (SPV) funded by the Federal Reserve Bank of New York will purchase eligible threemonth unsecured and asset-backed commercial paper from eligible issuers. In February 2009 the FED announced an extension to this facility until 30 October 2009.
Assets and liabilities with a contractual maturity of greater than 20 years – the principal amounts of financial assets and liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table as are interest payments after 20 years.
• Optionality – arises where a customer has an option to exit a deal early.
Sensitivity of net interest income (unaudited) There have been no material changes to the Group`s measurement and management of the sensitivity of net interest income to movement in interest rates.
General insurance business The Group`s focus in its general insurance operation is on high volume, relatively straightforward products. The key insurance risks are as follows: • Motor insurance contracts (private and commercial): claims experience varies due to a range of factors, including age, gender and driving experience together with the type of vehicle and location.
An objective of operational risk management is not to remove operational risk altogether, but to manage the risk to an acceptable level, taking into account the cost of minimising the risk with the resultant reduction in exposure. Strategies to manage operational risk include avoidance, transfer, and mitigation by controls or risk acceptance.
The Business Accountable for the ownership and day-to-day management and control of operational risk.
During the course of 2008, responsibility for policy and oversight of anti-money laundering, sanctions and counter-terrorist financing moved to the Group Head of Regulatory Risk & Compliance.
Market background (unaudited) Overall, 2008 has been characterised by rapid dislocation in financial markets. In many cases, the dramatic liquidity squeeze and rise in funding costs for financial institutions has resulted in reluctance or inability of market participants to transact, and has adversely affected the performance of most financial institutions globally, including the Group. Stock markets have experienced extraordinary falls, and levels of volatility have been at record highs. Commodity prices have reduced sharply in the second half of the year, and credit spreads continued to widen. Market perception of counterparty risk increased and the failure of major credit protection providers caused fair value losses for the Group and other market participants and further increased the costs of mitigating credit exposure. Sustained falls globally in both residential and commercial real estate prices, fund valuations and worsening loan performance combined with a sustained lack of liquidity in the market, resulted in a greater amount of assets being valued at significantly lower prices.
(3) Certain instruments have been reclassified from the held-for-trading category to loans and receivables or available-for-sale categories, as permitted by the amendment to IAS 39 issued in October 2008, therefore affecting comparability by measurement classification.
– valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.
Asset-backed collateralised debt and loan obligations (audited) Collateralised debt obligations are securities whose performance is dependant on a portfolio of referenced underlying securitised assets. The referenced assets generally consist of ABS, but may also include other classes of assets. Collateralised loan obligations represent securities in special purpose entities, the assets of which are primarily cash flows from underlying leveraged loans.
The Group has accumulated these assets from a range of trading and funding activities. The carrying value of the Group’s other asset-backed securities by underlying asset type and geographical region are shown below.
Monoline insurers The Group has purchased protection from monoline insurers, mainly against specific ABS, CDOs and CLOs. Monoline insurers are entities which specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default by the debt security counterparty. This protection is typically held in the form of derivatives such as credit default swaps (CDS) referencing the underlying exposures held by the Group.
The Group sponsors own-asset securitisations as a way of diversifying funding sources, managing specific risk concentrations, and achieving capital efficiency. The Group purchases the securities issued in ownasset securitisations set up for funding purposes. During 2008, the Group was able to pledge AAA-rated asset-backed securities as collateral for repurchase agreements with major central banks under schemes such as the Bank of England’s Special Liquidity Scheme, launched in April 2008, which allowed banks to temporarily swap highquality mortgage-backed and other securities for liquid UK Treasury Bills. This practice has contributed to the Group’s sources of funding during 2008 in the face of the contraction in the UK market for interbank lending and the investor base for securitisations.
The Group values the funding flexibility and liquidity provided by the ABCP market to fund client- and Group-originated assets. Whereas there are plans to decrease the multi-seller conduit business in line with the Group’s balance sheet, the Group is reviewing the potential for new own-asset conduit structures to add funding diversity.
Notes: (1) Total assets held by the conduits and commercial paper issued at 31 December 2007 included: • £5.2 billion assets and commercial paper issued relating to and by the Group’s securitisation arbitrage conduit which was dissolved in 2008
UK Europe US ROW Total life AAA AA A BBB BBB 2007 £m £m £m £m £m £m £m £m £m £m £m
The non-money market funds had total assets of £18.7 billion at 31 December 2008 (31 December 2007 – £19.4 billion). The sub categories of non-money market funds are: • £16.0 billion (2007 – £17.0 billion) in multi-manager funds, which offer fund of funds products across bond, equity, hedge fund, private equity and real estate asset classes.
Capital restructuring In November 2008, HM Treasury announced the establishment of UK Financial Investments Limited, a company wholly owned by the UK Government which will manage, on an arms-length basis, the UK Government’s shareholding in the company and other banks that subscribed to the government’s recapitalisation fund.
The Group offers a competitive remuneration and benefits package to all employees.
Employee consultation Each year, all employees are invited to complete the global employee opinion survey. The survey is confidential and independently managed by Towers Perrin-ISR. The survey provides a channel for employees to express their views and opinions about the Group on a range of key issues.
The rules governing the appointment of directors are set out in Corporate governance on page 153. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
Directors' disclosure to auditors: Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
There were nine scheduled Board meetings during 2008. The directors were supplied with comprehensive papers in advance of each Board meeting covering the Group’s principal business activities. Members of executive management attend and make regular presentations at meetings of the Board. In addition to scheduled meetings, a number of ad hoc Board meetings and Chairman’s Committee meetings were held during 2008. These meetings were attended by the majority of directors.
• Annual incentives for 2009 will be based on performance against a framework of measures, with all payments deferred for up to three years with potential clawback.
Group Chief Executive – Stephen Hester Stephen Hester became Group Chief Executive on 21 November 2008. His annual basic salary is £1,200,000.
(3) Awards were granted to Mr Whittaker in lieu of unvested share awards from his previous employer.
Mark Fisher opted to cease future accrual of pension benefit within the RBS Fund with effect from 6 April 2006. The increase in pension shown in the table arises from his increase in pensionable salary over the year. He was provided with a cash allowance in place of further pension benefits as detailed on page 164.
Chairman Executive directors Non-executive directors Philip Hampton Stephen Hester Colin Buchan
In our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 31 December 2008 and of its loss and cash flows for the year then ended.
Our report dated 25 February 2009 which will be included in the Annual Report on Form 20-F for the year ended 31 December 2008 to be filed with the Securities and Exchange Commission, expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting of the Group.
Investments in Group undertakings 16 — — 42,196 43,542 Settlement balances 17,832 16,589 — —
Cash flow hedges Net losses taken direct to equity (1,618) (426) (109) — — — Net losses/(gains) taken to earnings 162 (138) (140) 2 3 3
Net (decrease)/increase in cash and cash equivalents (14,030) 77,304 19,102 3,496 916 (469) Cash and cash equivalents 1 January 148,955 71,651 52,549 1,573 657 1,126 Cash and cash equivalents 31 December 134,925 148,955 71,651 5,069 1,573 657
8. Impairment of intangible assets and property, plant and equipment At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cashgenerating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of current observable data, to reflect the effects of current conditions not affecting the period of historical experience.
rate agreements are contracts under which two counterparties agree on the interest to be paid on a notional deposit of a specified term starting on a specific future date; there is no exchange of principal. Futures are exchange-traded forward contracts to buy (or sell) standardised amounts of underlying physical or financial commodities. The Group buys and sells currency, interest rate and equity futures.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value for a net open position in a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities which are derivatives of the same underlying instrument, fair value is determined by valuing the gross long and short positions at current mid market prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. The sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable is given in Note 11 on pages 202 and 203.
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and short-term timing differences. Tax relief is given for operating losses by offset when future profits arise and therefore the recoverability of deferred tax assets is a matter of judgement.
Customer accounts: demand deposits 4,341 4,327 3,083 Customer accounts: savings deposits 3,911 2,560 1,373 Customer accounts: other time deposits 8,108 6,301 4,444 Deposits by banks 6,576 3,406 2,621 Debt securities in issue 9,941 5,687 3,286
The analysis of trading income is based on how the business is organised and the underlying risks managed.
The average number of persons employed in the continuing operations of the Group during the year, excluding temporary staff, was 197,100 (2007 – 157,200; 2006 – 142,600); on the same basis the discontinued operations employed 32,200 (2007 – 13,300; 2006 – nil). The average number of temporary employees during 2008 was 7,000 (2007 – 4,900). The number of persons employed in the continuing operations of the Group at 31 December, excluding temporary staff, was as follows: Group
Interim valuations of the Group’s schemes were prepared to 31 December by independent actuaries, using the following assumptions: Main scheme All schemes
Assets Cash and balances at central banks — — — 17,866 — 17,866 Loans and advances to banks (1) 71,639 — — 147,821 — 219,460 Loans and advances to customers (2, 3) 103,811 3,067 — 709,090 12,570 828,538
For each of the portfolio categories shown in the above table, set out below is a description of the types of products that comprise the portfolio and the valuation techniques that are applied in determining fair value, including a description of valuation techniques used, including for those in level 2, and inputs to those models and techniques. Where reasonably possible alternative assumptions of unobservable inputs used in models would change the fair value of the portfolio significantly, the alternative inputs are indicated along with the impact this would have on the fair value. Where there have been significant changes to valuation techniques during the year a discussion of the reasons for this are also included.
Derivatives Level 3 derivative assets comprised credit derivatives of £8.0 billion, equity derivatives of £0.1 billion and interest rate, foreign exchange rate and commodity derivative contracts of £2.2 billion. Derivative liabilities comprise credit derivatives of £2.6 billion interest rate, foreign exchange rate and commodity derivatives contracts of £1.4 billion.
Other unique trades are valued using a specialised model for each instrument and the same market data inputs as all other trades where applicable. By their nature, the valuation is also driven by a variety of other model inputs, many of which are unobservable in the market.
Equity shares – private equity Private equity investments include unit holdings and limited partnership interests primarily in corporate private equity funds, debt funds and fund of hedges funds. Externally managed funds are valued using recent prices where available. Where not available, the fair value of investments in externally managed funds is generally determined using statements or other information provided by the fund managers.
Currency translation and other adjustments 2,839 535 Additional investments in Group undertakings 10,323 3,663 Impairment of investment in RFS Holdings B.V. (14,321) —
The Royal Bank of Scotland plc Banking Great Britain 100% National Westminster Bank Plc (1) Banking Great Britain 100% Citizens Financial Group, Inc. Banking US 100% Coutts & Co (2) Private banking Great Britain 100% Greenwich Capital Markets, Inc. Broker dealer US 100% RBS Insurance Group Limited Insurance Great Britain 100% Ulster Bank Limited (3) Banking Northern Ireland 100% ABN AMRO Bank N.V. (4) Banking The Netherlands 38%
(4) RFS Holdings B.V. (RFS) owns 100% of the outstanding shares of ABN AMRO Holding N.V. (ABN AMRO). The company owns 38% of RFS; the balance of shares is held by the State of the Netherlands, successor to Fortis N.V., Fortis SA/NV, and Banco Santander S.A. (the consortium members). Although the company does not control a majority of the voting rights in RFS, through the terms of the Consortium and Shareholders’ Agreement and RFS’s Articles of Association, it controls the board of RFS and RFS is a subsidiary of the company. The capital and income rights of shares issued by RFS are linked to the net assets and income of the ABN AMRO business units which the individual consortium members have agreed to acquire.
Accumulated amortisation: Currency translation and other adjustments — 1 3 3 7 Disposals and write-off of fully amortised assets — — (1) (80) (81) Charge for the year – continuing operations — 110 124 401 635 Charge for the year – discontinued operations — — — 24 24
Global Banking & Markets Value in use 8,946 (8,946) — Global Transaction Services Value in use 3,121 — 3,121 UK Retail & Commercial Banking Value in use 6,009 — 6,009 US Retail & Commercial Banking Value in use 7,405 (4,382) 3,023 Europe & Middle East Retail & Commercial Banking Value in use 1,201 (1,201) — Asia Retail & Commercial Banking Value in use 970 (863) 107 RBS Insurance Value in use 935 — 935
Contracts for future capital expenditure not provided for in the accounts at the year end (excluding investment properties and operating lease assets) 128 201
Investment properties are valued to reflect fair value, that is, the market value of the Group’s interest at the reporting date excluding any special terms or circumstances relating to the use or financing of the property and transaction costs that would be incurred in making a sale. Observed market data such as rental yield, replacement cost and useful life, reflect relatively few transactions involving property that is not necessarily identical to property owned by the Group.
In 2007 the Group moved from the UK 80 series to the 00 series for mortality.
Group 2007 – final redemption £m £m £m £m £m £m £m
The Royal Bank of Scotland plc £150 million 5.625% undated subordinated notes (callable June 2032) 144 144 £175 million 7.375% undated subordinated notes (callable August 2010) 190 183 €152 million 5.875% undated subordinated notes (redeemed October 2008) — 114 £350 million 6.25% undated subordinated notes (callable December 2012) 380 354 £500 million 6% undated subordinated notes (callable September 2014) 565 517 €500 million 5.125% undated subordinated notes (callable July 2014) 516 371 €1,000 million floating rate undated subordinated notes (callable July 2014) 966 742 £500 million 5.125% undated subordinated notes (callable March 2016) 556 499 £200 million 5.625% subordinated upper tier 2 notes (callable September 2026) 210 210 £600 million 5.5% undated subordinated notes (callable December 2019) 677 595 £500 million 6.2% undated subordinated notes (callable March 2022) 614 543 £200 million 9.5% undated subordinated bonds (callable August 2018) (3) 253 228 £400 million 5.625% subordinated upper tier 2 notes (callable September 2026) 397 397 £300 million 5.625% undated subordinated notes (callable September 2026) 431 318 £350 million 5.625% undated subordinated notes (callable June 2032) 364 363 £400 million 5% undated subordinated notes (callable March 2011) 424 402 JPY25 billion 2.605% undated subordinates notes (callable November 2034) 217 103 CAD700 million 5.37% fixed rate undated subordinated notes (callable May 2016) 464 363
Ordinary shares In June 2008, the company issued 6,123 million ordinary shares of 25p each at 200p per share by way of a rights issue. The rights issue was on the basis of 11 new shares for every 18 shares held on 9 May 2008. The net proceeds were £12 billion.
On 19 January 2009, the Group announced that it had reached agreement with HM Treasury and UK Financial Investments to replace the £5 billion of preference shares it holds with new ordinary shares. The offer of the new ordinary shares and redemption of the preference shares are subject to shareholder approval at an Extraordinary General Meeting.
Securities issued during the year — 1,073 — — 1,073 —
Ordinary shares issued in respect of rights issue, net of £246 million expenses 10,469 — — 10,469 — —
Tier 1: Ordinary shareholders' equity 45,525 44,684 Minority interests 21,619 38,388 Adjustment for: – Goodwill and other intangible assets (20,049) (48,492) – Goodwill and other intangible assets of discontinued businesses — (3,232) – Unrealised losses on available-for-sale debt securities 3,687 630 – Reserves arising on revaluation of property and unrealised gains on available-for-sale equities (984) (3,321) – Reallocation of preference shares and innovative securities (1,813) (1,813) – Other regulatory adjustments (362) 480
Less than less than less than Over £m £m £m £m £m £m
The Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis informing them of operational, systems and control evaluations and issues as deemed appropriate or required and it is possible that any matters discussed or identified may result in investigatory actions by the regulators, increased costs being incurred by the Group, remediation of systems and controls, public or private censure or fines. Any of these events or circumstances could have a material adverse impact on the Group its business, reputation, results of operations or share price.
The OFT’s investigation into the fairness of bank current account charges is ongoing. On 12 August 2008, the OFT indicated to the Group and other banks that, although it had not concluded its investigation and had reached no final view, it had serious concerns that contractual terms relating to Relevant Charges in personal current account agreements were unfair under the Regulations. The OFT is currently consulting with the Group and other banks on this issue. Given the stage of the investigation, the Group cannot reliably estimate the impact of any adverse outcome of the OFT’s market study or investigation upon it, if any. However, the Group is co-operating fully with the OFT to achieve resolution of the matters under investigation.
US Retail & Commercial Banking comprises Citizens which is engaged in retail and corporate banking activities through its branch network in 13 states in the United States and through non-branch offices in other states.
– contributions and allowances in respect of defined contribution pension schemes 3 30
(including the Local and public 2008 Bank of England) government corporations Total £m £m £m £m
(4) Includes purchased intangibles amortisation of £919 million in 2008 (2007 – £234 million; 2006 – £94 million; 2005 – £97 million; 2004 – £45 million).
Share price per ordinary share at year end – £ 0.494 3.72 5.56 4.90 4.89 Market capitalisation at year end – £bn 19.5 44.4 62.8 56.1 55.6 Net asset value per ordinary share – £ 1.15 3.74 3.24 2.83 2.59 Return on average total assets (3) (1.18%) 0.65% 0.74% 0.73% 0.94% Return on average ordinary shareholders’ equity (4) (50.0%) 18.8% 18.5% 17.5% 18.3% Adjusted return on average ordinary shareholders’ equity (5) (4.7%) 18.6% 19.0% 18.2% 18.9% Average owners’ equity as a percentage of average total assets 2.9% 3.9% 4.4% 4.5% 5.9%
US policy rates also declined substantially in 2008, from 4.25% in January to effectively zero in December. With no room to cut interest rates further, the Federal Reserve has since started to target longer term market interest rates to directly lower the cost of funds for households and firms, for example by purchasing mortgage-backed securities and corporate commercial paper. More unorthodox policy measures are likely this year. Similar to the UK, monetary policy failed to gain much traction in the wider economy. Three-month US$ LIBOR averaged close to 100bps higher than the prevailing policy rate.
In addition, the company agreed to limit its activities to the higher of: (i) the annual rate of growth of UK nominal GDP in the preceding year; and (ii) the average historical growth of the balance sheets in the UK banking sector during the period 1987-2007, unless there is evidence that the thresholds are exceeded for reasons unrelated to the provision of the aid. HM Treasury agreed, in certain circumstances, to consult with the company with a view to making submissions to the European Commission to obtain clarity as to the duration of the conditions and/or seek their disapplication.
Second Placing and Open Offer Agreement Pursuant to a placing and open offer agreement dated 19 January 2009 entered into between the company, UBS, Merrill Lynch International and HM Treasury, (i) the company agreed to invite Qualifying Shareholders to apply to subscribe for New Shares at the Issue Price by way of the Open Offer, (ii) UBS and Merrill Lynch International were appointed as joint sponsors, joint bookrunners and joint placing agents and agreed to use reasonable endeavours to procure Placees to subscribe for the New Shares on such terms as may be agreed by the Company and HM
Qualifying Shareholders were not party to these arrangements and so did not acquire any direct right against Merrill Lynch International, UBS and Computershare pursuant to these arrangements. The company was responsible for enforcing the other parties’ obligations thereunder.
Non-cumulative dollar preference shares On 26 March 1997, 8 February 1999, 30 September 2004, 26 August 2004, 19 May 2005, 9 November 2005, 25 May 2006, 27 December 2006, 28 June 2007, 27 September 2007 and 4 October 2007 the company issued the following American Depository Shares (ADSs) representing noncumulative dollar preference shares of the company, in the United States, which were outstanding at 31 December 2008: 8,000,000 Series F (“Series F ADSs”) representing 8,000,000 non-cumulative dollar preference shares, Series F; 12,000,000 Series H (“Series H ADSs”) representing 12,000,000 non-cumulative dollar preference shares, Series H; 34,000,000 Series L (“Series L ADSs”) representing 34,000,000 non-cumulative dollar preference shares, Series L; 37,000,000 Series M (“Series M ADSs”) representing 37,000,000 non-cumulative dollar preference shares, Series M; 40,000,000 Series N (“Series N ADSs”) representing 40,000,000 non-cumulative dollar preference shares, Series N; 22,000,000 Series P (“Series P ADSs”) representing 22,000,000 non-cumulative dollar preference shares, Series P; 27,000,000 Series Q (“Series Q ADSs”) representing 27,000,000 non-cumulative dollar preference shares, Series Q; 26,000,000 Series R (“Series R ADSs”) representing 26,000,000 non-cumulative dollar preference shares, Series R; 38,000,000 Series S (“Series S ADSs”) representing 38,000,000 non-cumulative dollar preference shares, Series S; 64,000,000 Series T (“Series T ADSs”) representing 64,000,000 non-cumulative dollar preference shares, Series T; and 15,000 Series U (“Series U ADSs”) representing 15,000 non-cumulative dollar preference shares, Series U.
On 24 February 2009, the closing price of the ordinary shares on the London Stock Exchange was £0.2210, equivalent to $0.3184 per share translated at the Noon Buying Rate of $1.4408 per £1.00 on 24 February 2009.
On 24 February 2009, the closing price of the ordinary ADSs on the New York Stock Exchange was $6.83.
Any paying agent or other person by or through whom interest is paid to, or by whom interest is received on behalf of an individual, may be required to provide information in relation to the payment and the individual concerned to HM Revenue & Customs. HM Revenue & Customs may communicate this information to the tax authorities of other jurisdictions.
ABN AMRO Holding N.V. Gustav Mahlerlaan 10 1082 PP Amsterdam The Netherlands