The RBS Group (RBS) is an international banking and financial services company. Headquartered in Edinburgh, the Group operates in the United Kingdom, Europe, the Middle East, the Americas and Asia, serving over 30 million customers worldwide.
The Group provides a wide range of products and services to personal, commercial and large corporate and institutional customers through its two principal subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Citizens, Charter One, Ulster Bank, Coutts, Direct Line and Churchill.
We are rebuilding RBS for our shareholders but we know we have wider responsibilities to the communities in which our customers and our people live and work, and to the wider world. That is why we take sustainability seriously.
(3) Cost:income ratio is based on total income excluding movements in the fair value of own debt, Asset Protection Scheme, gain on redemption of own debt, strategic disposals and RFS Holdings minority interest, and operating expenses excluding Payment Protection Insurance costs, amortisation of purchased intangible assets, integration and restructuring costs, bonus tax, bank levy, write-down of goodwill and other intangible assets and RFS Holdings minority interest and after netting insurance claims against income.
(4) Net of provisions and including disposal groups. (5) Excluding derivatives collateral.
We served more than 400 communities using our 19 mobile branches
We gave over 50,000 employees more than 235,000 hours off work to volunteer in their community
We lent more than two-thirds of our energy project finance in the UK to renewables
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We provide financial services primarily in the North Eastern United States through the Citizens Bank, Charter One and RBS Citizens brands. We are engaged in retail and corporate banking activities.
We sell and underwrite retail and small business insurance over the telephone and internet, as well as through brokers and partnerships. Our brands include Direct Line, Churchill, Privilege, Green Flag and NIG.
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Our priorities are: • to serve customers well; • to restore RBS to a sustainable and conservative risk profile; and
We are building the new RBS on our Core businesses. They have competitive strengths in their markets. We are managing them so that their performances will improve and they can meet external challenges that arise. We separately manage the businesses that we are winding-down or plan to sell in our Non-Core Division.
Core income by division – 2011 Total income by region – 2011
We offer global payments, cash and liquidity management, trade finance, and commercial card products and services.
We provide financing, risk management and advisory services to major corporations, financial institutions and public sector clients in 38 countries.
Our Markets business serves the corporate and institutional clients of all Group businesses.
Restoring RBS to a sustainable and conservative risk profile is crucial. In 2011, we made our capital and liquidity positions stronger.
In addition: • we continued to improve how we manage risk; • the Group Board agreed the Group’s risk appetites; • we catalogued and measured the risks we face and assessed how they might relate to each other; and
It will take some time to rebuild sustainable value for all shareholders. Our Core businesses provide a strong foundation for the Group, generating a 10.5% return on equity in 2011. We are confident that our core businesses will generate strong value in their own right and as a cohesive whole. We outline how they are each performing against their own targets, and together to deliver our Strategic Plan, on pages
Although individual products differ from each other, much of what we do is to provide one of four fundamental banking services. Whether large or small, we help our customers to: • manage their cash; • obtain funds so that they can spend or invest today rather than wait until tomorrow; • manage risks; and
Managing cash Cash management gives customers a convenient way to store, access and get a return on their money. For personal and small business customers, this means products like current and savings accounts, whilst larger organisations might want access to more sophisticated and complex products through financial markets.
We also provide international cash management, which includes services such as credit card processing for retailers, payments services and international cash transfer.
• mortgages and asset finance help to pay for larger purchases.
Managing risks People and businesses face financial risks every day. Will the interest rate on a loan or credit card change? How will exchange rates move for companies that trade internationally?
Will inflation be higher or lower than we expect and how will that affect costs and revenues?
Provides a diverse range of services to the customer-facing operations of the Group.
Markets holds £6 billion of assets under management for Private Banking & Advice in UK Retail.
International Banking provides trade finance support to Citizens’ customers through MaxTrad and MaxTrad Express.
Our international capabilities support UK Corporate clients to do business internationally using Global Account.
When I became your Chairman in 2009, our urgent task was to stabilise RBS and then to begin the job of rebuilding the company.
We have made good progress in three years. The balance sheet has been reduced by over £700 billion from its peak. Our reliance on short-term wholesale funding, which stood at £297 billion at the end of 2008 has been cut to £102 billion. We repaid more than £20 billion of governmentguaranteed debt in 2011. At 10.6%, our Core Tier 1 ratio is one of the strongest among our peers.
Achievements like these require hard work. The Board is committed to restoring RBS to good health. We also made comprehensive changes to the executive management team after 2008. I am confident that they, ably led by Stephen Hester, are the right people to rebuild RBS. All of us understand our duties and responsibilities and are determined to fulfil them diligently.
A sign that we have succeeded will be the desire of private investors to acquire the UK government’s stake. While these investors hold only 18% of our shares today, their view of our performance, leadership and strategy is crucial. All being well, they will own the majority of the equity capital of the company in future years.
In the meantime, the job of rebuilding the Group is far from complete. The need to address the legacy of losses in a number of businesses means that the Group is not yet profitable, although in 2011 our core businesses earned a profit of £6 billion and a return on tangible equity of 10.5%.
During 2011, we faced weak and deteriorating economic and market conditions. We dealt with those. For example, we accelerated our NonCore run-down, reduced risk concentrations and strengthened our liquidity and funding position. The Independent Commission on Banking published its findings and the UK government responded with its plans. We have begun to deal with its far-reaching implications. In January 2012, we announced how we will reshape our international wholesale business.
So, we can adapt and we have adapted our plans to changing conditions. That is simply doing business.
Other external forces affect banks in the UK and especially RBS. We know we are different. I have said often that we are grateful to, and are well aware of the interest in the Group by UK taxpayers. We intend to repay them by restoring RBS, allowing the bank to do its vital job of serving our customers and being part of a vibrant and successful economy.
At present, we are an unusual company, operating commercially, listed on the stock market but majority-owned by the UK government. It is a challenge for all those involved to manage the complexities and occasional tensions in this structure. The ability to run the company on a commercial basis can be hindered by elements of the periodic debate on how to respond to such tensions, in the media and elsewhere. The Board believes it is important to remain commercially focussed, recognising where we can the political context in which we operate.
I understand people’s anger and anxiety about inequalities in pay at a time when the economy is weak and many people are finding things tough. RBS alone cannot fix these wider issues if we are to achieve what is asked of us commercially. But we have led the way in changing how we pay our people. We asked our shareholders how they expect us to set incentives. In response, we have aligned the longer-term rewards our people receive with our shareholders’ interests. When we reward good performance, the amount paid in cash is minimal, with most of it paid in shares and bonds. If the subsequent results so warrant, we can claw back awards. I am confident that our practices will stand favourable comparison with others’.
Fulfilling our wider responsibilities As we rebuild RBS, we are fulfilling our responsibilities to the communities in which our customers and people live and work. Last year, we: • provided more than 40p in every £1 lent to UK small and medium-sized businesses; • opened nearly 120,000 new start-up accounts across the UK; • provided an average of 4,000 business loans each week; • helped over 5,000 UK businesses back to health through our Specialised Relationship Management teams; and
These demonstrate the role we can and will play in serving and helping society and the economy. We are building on them. Our Boardlevel Sustainability Committee is talking to our stakeholders about the elements of our business that matter to them and in 2012 we will publish demanding environmental targets that will drive a reduction in our carbon footprint.
The Board We were pleased to welcome three new independent non-executive directors to the Board: Alison Davis, Tony Di Iorio and Baroness Noakes. They bring a wealth of experience, along with a strong global perspective. They have already made a significant contribution to the work of the Board since they joined.
Colin Buchan retired as a director in August 2011 and John McFarlane will step down in March 2012. We have greatly appreciated the experience, commitment and knowledge they brought to the Board.
Thanks Finally, I wish to thank our employees. They are rebuilding RBS each day by serving our customers. They did that very well indeed in 2011, even as many faced major uncertainties. I am grateful to them.
We are dealing with the new economic and regulatory challenges within the strategic plan and have retained our focus on building an RBS for all to be proud of. Great credit is due to our people for the accomplishments to date and to those who have supported us with their capital or their custom.
Priorities We are clear on RBS’s priorities: • to serve customers well; • to restore the Bank to a sustainable and conservative risk profile; and
2009-11 Report Card During the last three years RBS has: • sustained its customer franchises across our Core business in the face of restructuring and reputational pressures. Market shares are stable overall. Service standards are generally up. Lending support across the UK business substantially exceeds our natural customer market share.
• produced £34 billion in pre-impairment profits from Core businesses. These were used to self-fund our legacy losses and loan impairments, which to date have totalled £43 billion. Operating costs have been reduced by an average of £1 billion annually. Each of these totals is better than originally forecast despite a tougher economic environment.
2011 Results 2011 saw good progress across all measures of risk reduction and increased financial soundness; important given the much tougher market conditions. Customer service and support was sustained well.
We all understand that a company that is making losses at the bottom line tests the patience of those who depend on it. However, the restructuring task we have undertaken at RBS is unique in its scale and complexity, and needs to be phased in line with our ability to fund and execute it. In dealing with these legacy losses we expect to put the company on a sustainable footing for generations to come. 2011 proved what we already knew: that there are no shortcuts to this endpoint.
The weaknesses uncovered by the financial crisis – of leverage, risk concentration and business stretch – are being fixed. The primary vehicle for this is the run-off and sale of assets in our Non-Core division though there are many other parallel tasks. RBS’s total assets have already been reduced by £712 billion from their peak in 2008 – more than any other entity worldwide has achieved.
Adjustments to Plan The principles of RBS strategy are working well. The tougher external environment will slow progress and reduce profitability but requires largely tactical change from the original plan for the majority of our business.
People RBS people are doing a great job in serving customers whilst driving the change we need. Their engagement and efforts are essential to our task. I thank them sincerely. While the climate is tough for people in many walks of life, that does not take away from the exceptional demands we make on our staff and the continuing need we have for their talents, engagement and motivation.
However, I also warned of the risks from economic and regulatory/policy change. These have indeed impacted strongly and remain uppermost in our minds when looking at 2012. We will continue to prioritise customer service and risk reduction. We will strive to complement this with determined measures to improve business performance to pay for the remaining ‘clean-up’ and then to produce results for shareholders. We are building the capacity of our business to earn its cost of capital and produce solid returns as external conditions allow.
RBS is an enduring financial institution playing a key part in our markets and communities. We support others. We depend on the support of customers and our communities in turn. We are working our way out of a tough legacy whilst sustaining “business as usual” for the vast majority of what we do.
Why have you made changes to your wholesale businesses? Will you be making further changes, including selling businesses?
RBS is subject to dividend restrictions imposed by the European Commission that prevent us from paying dividends on ordinary shares, B shares and hybrid securities, unless we have a legal obligation to pay. Once this restriction has passed, the Board will be free to declare dividends as it deems appropriate and subject to normal market practice.
We have focused on actively managing down our exposure to sovereign bonds of southern peripheral European countries (Greece, Italy, Portugal and Spain), which we had acquired from ABN AMRO in 2007. In 2011, we reduced our exposure by over 90%. Our outstanding exposure is low at £0.3 billion, equivalent to less than 0.1 percentage points of our Core Tier 1 capital ratio. Reflecting our conservatism, we have written down the value of our Greek bond holdings by £1.1 billion, marking our position to 21% of its original value.
We need to cover our cost of capital in the long-run and justify our shareholders’ support.
We target a much lower leverage ratio than before. A <18x ratio means that our assets are less than 18 times as large as our equity capital.
(1) Based on indicative Core attributable profit taxed at standard rates and Core average tangible equity per the average balance sheet (c.75% of Group tangible equity based on risk-weighted assets at 31 December 2011).
(4) Eligible assets held for contingent liquidity purposes including cash, Government issued securities and other eligible securities with central banks.
RBS management hallmarks to include an open, investorfriendly approach, discipline and proven execution effectiveness, strong risk management and central focus on the customer
Franchises with substantial competitive strength Track market positions and customer satisfaction in all core businesses.
Reduced balance sheet scale Continue to de-risk and shrink the Group’s Non-Core balance sheet. Careful control of future asset growth to support Core customers profitably.
Concentrate on the core strengths of our wholesale businesses The restructuring of RBS’s wholesale businesses is already underway, refocusing the business in its core franchises, with disciplined deployment of capital to support its targeted client base.
Strong risk management Embed the new set of management disciplines to ensure that the RBS of the future is adequately protected, notably by its risk management processes and frameworks.
Markets to account for approximately one quarter of Group profit and revenue.
Our focus is to build the success of the Group on customer-driven businesses with substantial competitive strengths in their respective markets. We continue to track our market positions and to target competitive opportunities.
Our Tier 1 leverage ratio increased slightly to 16.9% in 2011 from 16.8% in 2010, below our medium-term target.
We significantly improved our Group loan-to-deposit ratio to 108% by the end of 2011, compared with 118% a year earlier. Our Core businesses achieved a loan:deposit ratio of 94% by the end of 2011, taking in more than £1 of deposits for every £1 of loans made.
Our Core Tier 1 capital ratio was 10.6% at the end of 2011, which although marginally lower than a year earlier, is above our upwardly revised medium-term target and positions the Group well to deal with future regulatory changes in capital requirements.
In the UK, we increased our business lending by 22% in 2011, exceeding our business lending targets as agreed under Project Merlin.
GBM third party assets, excluding derivatives, were down £35 billion compared with 31 December 2010 and are targeted to reduce by a further c.£60 billion to c.£300 billion over the implementation period of the restructure.
Run-down and disposals decreased Non-Core’s funded balance sheet to £94 billion by the end of 2011, below the revised year end target of £96 billion and significantly ahead of the original strategic plan target of £118 billion. NonCore ’s funded balance sheet is now less than 10% of the Group’s funded balance sheet, compared with 21% when the division was created.
Housing remained a drag anchor. Prices fell by around a further 4% and were almost a third below their peak level. Sales volumes were subdued and an overhang of properties on which borrowers had defaulted remained.
Ireland emerged from three years of recession. The export sector led modest growth in the first half of the year, as it benefited from the boost to competitiveness delivered by falling wages, and stronger demand in some of Ireland’s main markets. However, the economy appears to have shrunk again in the second half.
For Ireland, gross national product (GNP) is a better measure of people’s material well-being. It reflects the income residents receive rather than the value of the incomes generated in the country, an important distinction when there is a large foreign-owned sector that remits profits overseas.
Europe’s leaders avoided both a disorderly default and a break-up of the euro area.
An integral role for Risk Management Risk Management is essential to making RBS safer and more sustainable. A stronger culture of risk management and control provides the foundation for this.
In 2009, the Group Board set four strategic risk objectives aligned to the Strategic Plan. These are to: • maintain capital adequacy; • deliver stable earnings growth; • ensure stable and efficient access to funding and liquidity; and
We set risk appetite at Group level. It expresses the maximum level of risk that we will accept as we deliver our business objectives. We cascade this to each of our divisions through two channels. Each division: • has its own risk appetite statement, based on its own business plans but also aligned with those of the Group; and
• sets clear guidance on acceptable limits for all material types of risk, again aligned with Group targets.
By setting a clear risk appetite and embedding a strong risk culture throughout our businesses, we can identify, measure and control risk exposures, and respond effectively to shocks.
Key developments in 2011 In 2011, we strengthened our approach to risk management amidst a challenging external environment. Areas of progress included: • redefining the responsibilities of key risk committees to meet our future needs; • refining our understanding of the risks we face and their scale; • reducing our exposures in line with our objective of being safe and sustainable; • enhancing our Group Policy Framework and continuing assurance; • improving the quality of our data, including forward-looking measures; and
• improving our stress-testing capabilities and embedding them across the Bank.
In the table on the following page, we summarise the risks we face. We provide a more detailed discussion of developments in 2011 in the ‘Risk and balance sheet management’ section.
This is how we bring the Strategic Plan to life in our management of risk.
The main risk types facing the Group, which are covered by the risk appetite framework, are shown below
The risk that the Group will incur losses due to the failure of a customer to meet its obligation to settle outstanding amounts.
Reputational risk The risk of brand damage arising from financial and nonfinancial events due to failure to meet stakeholders’ expectations of the Group’s performance and behaviour.
Potential to put the entire business at risk. Otherwise, could lead to negative publicity, loss of revenue, costly litigation or a decline in the customer base.
20 UK Retail 21 UK Corporate 22 Wealth 23 Global Transaction Services 24 Ulster Bank 25 US Retail & Commercial 26 Global Banking & Markets 27 RBS Insurance 28 Business Services and Central Functions 29 Non-Core Division
• We met our commitment to stay open in all 168 locations where NatWest or RBS is the last bank in town.
• Our Emergency Cash service provides customers who lose their debit card immediate access to up to £300, simply by phoning us.
We had said that we would continue to serve more than 300 communities with our mobile banks. We beat our target. Our 19 mobile branches now serve more than 400 communities, and drove more than 7,000 miles each week to reach their customers.
In the Customer Charter, we said we will actively support the local communities in which we live and work. Through our Community Force programme, we awarded £3 million to over 470 local projects that our customers voted as worthy of support. In addition, we gave each of our retail banking employees a day of paid leave to support local projects, and our efforts totalled more than 16,000 volunteering days.
We continued to focus on building secured lending. While overall loans and advances to customers increased by 2%, mortgage balances increased by 5% and unsecured lending contracted by 11%. We won a 10% share of gross mortgage lending, higher than our 8% share of the stock of outstanding mortgages. Customer deposits increased by 6%, outperforming market deposit growth of only 3%. Savings balances grew by 9%, with 1.5 million accounts opened. Our loan:deposit ratio was 106% compared with 110% in 2010.
Despite the difficult economic climate and low interest rates, we delivered strong results. Operating profit increased by £619 million, 45%, to £1,991 million. Net interest income increased by 5%, driven by strong balance sheet growth. Non-interest income fell by 10%, primarily because of lower investment and protection income as a result of the dissolution of the UK Retail bancassurance joint venture.
Our customers are at the heart of what we do. We carried out over 5,000 hours of research, listening to what customers want so we can better deliver what they need.
In response to what they told us, we launched ‘Ahead for Business’. It is our promise to small and medium-sized enterprises that “By doing business with us, our customers can be confident of realising their ambitions.”
We will honour this promise by providing business expertise, sharing customers’ ambitions and making banking simple, so they can focus on their business.
In April, we spoke at the British Chambers of Commerce conference. We promised them that, “RBS will put proper, qualified bankers back on the street.” One way we are doing that is by investing in our people.
We helped more than 100,000 businesses to start-up, by: • providing two years’ free banking, business planning software and an online start-up course; • answering more than 4,000 calls on our Start-up Hotline, offering free advice and a complementary business plan review service; and
We redesigned our lending decision process, which will reduce risks while improving customer service and cutting costs. Expert Lender simplifies credit underwriting while
Deposits increased by 1% to £100.9 billion, helping our loan to deposit ratio to improve from 110% to 106%.
Operating profit decreased by 3% to £1,414 million. Net interest income was broadly flat at £2,585 million and the net interest margin improved by seven basis points to 2.58%. Non-interest income fell by 4% because of lower GBM cross-sales and fee income, although that was partly offset by increased income from Invoice Finance and Lombard.
Our return on equity increased from 12.1% to 12.4%, due to slightly lower capital usage.
In turbulent markets, many clients want to make sure they preserve their wealth. Coutts’ managed portfolios are one of the most consistent in the industry. Part of the performance of our lower risk mandates reflected decisions we took. These included: • a reduction in euro exposure; and
• We turned the windows of our head office in The Strand into a giant billboard to mark successful entrepreneurs.
Many of our clients are philanthropists. Coutts runs forums for philanthropy where clients can share ideas and experiences. These insights can help clients to plan a giving strategy that makes a real difference.
We remained an important source of funds for the Group. Customer deposits grew by 3% to £38.2 billion in a competitive environment and our loan:deposit ratio declined modestly to 44%.
We took a number of steps to prepare Wealth for the future.
• We began to implement our strategic plan, focusing on the Private Banking, Private Wealth and Private Office markets in the UK, Europe and the Middle East, and Asia.
• Our business relies on the quality of our people and we made a number of senior hires to strengthen our capabilities.
Operating profit increased by 6% on 2010 to £321 million, driven by an 11% growth in income, partially offset by increases in expenses and impairments. Income increased by £121 million with a 24 basis points improvement in lending margins, strong treasury income and increases in lending and deposit volumes. Non-interest income rose 3%, with investment income growing 2% despite turbulent market conditions.
Expenses increased by £97 million, largely driven by adverse foreign exchange movements and headcount growth to service the increased revenue base.
We recognise the importance of international trade in a strong global economy and we are committed to helping our customers do more business overseas. In 2011, we agreed a new partnership with UK Trade & Investment (UKTI), the government body that supports exporting and inward investment. Together we have worked hard to encourage and support UK businesses to increase their exports.
We launched a number of products to meet our customers’ evolving needs: • Capital Import Finance, launched in conjunction with our Lombard Asset Finance arm, supports UK companies that want to import capital equipment. It combines our strengths in trade finance and asset finance so that customers can take advantage of the lowest global prices.
• FI Global Account allows financial institutions to make payments in 132 currencies to 183 countries from a single base currency. This simplifies clients' transactions and can reduce the costs associated with maintaining individual accounts.
We won awards that show the breadth of our network, the quality of our service and the strength our solutions. They included: • In Asia: 'Best Trade Financing Award' from CFO World, as well as 'Best Foreign Bank on Cash Management Bank' from Treasury China; • In Europe: topping the survey for Domestic Cash Managers in the Netherlands and Best Bank for Liquidity Management in Western Europe from Euromoney; and
• In the UK: Global Finance magazine named us as Best Trade Finance Provider for the second year running.
Operating profit was down 32%, partly reflecting the sale of Global Merchant Services (GMS) on 30 November 2010. Adjusting for the disposal, operating profit decreased 16%, driven by provisions on a single name impairment. Excluding GMS, income was 7% higher driven by the success of depositgathering initiatives and expenses increased by 10%. Higher expenses reflected business improvement initiatives and investments in technology and support infrastructure.
I joined in April and I took time to talk to our customers and our employees. I am clear about two things. At all times, but especially in difficult times, we must do what we can to support customers and deliver on our Customer Commitments. Secondly, I believe that we have a strategy in place to ensure we are well-placed to compete effectively in the markets in which we operate. We’ve been serving our personal and business customers, now 1.9 million of them, for 176 years.
• We serve 90% of customers in branches within five minutes.
• 98% of customers are satisfied with the helpfulness of branch staff.
We developed new ways to help customers control their finances. Our enhanced iPhone app gives customers access to all the accounts they have on Anytime Banking, transfer funds between their accounts and find the nearest branch or ATM. 65,000 customers have downloaded the iPhone app to date. Our free text message alert service allows our customers to keep track of their money, avoiding charges. More than 43,000 customers registered for the service and we sent over two million texts in 2011.
Customers and colleagues told us how to make it easier to open accounts. We made application forms simpler. A specialist account switching team makes it easier for people to move to Ulster Bank. We use texts to update customers on the progress of their switching application. 94% of customers who opened an account were satisfied with the process.
• Our share of new lending increased in Northern Ireland and the Republic of Ireland.
Disappointingly, operating profit before impairment losses fell by £40 million. Income fell by 7% driven by a contracting performing loan book coupled with higher funding costs. Lower income was partly offset by a 5% fall in expenses, which reflected tight management of the cost base across the business. Loans and advances to customers decreased by 5% in constant currency terms during 2011.
These and other efforts have led to positive results in Consumer Banking.
• Citizens Financial Group grew demand deposits in 2011 while reducing higher-cost term deposits.
• We have increased the number of deposit customers who hold loan products for ten consecutive quarters.
The economic environment has been particularly challenging for the US banking industry and new regulations have had a negative impact on revenue. Through diligent execution of our strategic plan, we have worked to address these challenges and strengthen our financial position.
• Asset quality improved throughout the year, which resulted in a lower provision for loan losses.
RBS closed a transaction of more than £2 billion for Bank of Ireland that assisted it in meeting its requirements under the Prudential Liquidity Assessment Review (PLAR) and was an important step in the normalisation of funding markets for the group. Subsequently, the bank successfully secured a significant external equity investment from a consortium of North American investors.
Our European Structured Retail businesses were named the Quality Leader in Europe by a study of 164 third-party distributors carried out by Greenwich Associates. Our expertise in assetbacked securities (ABS) debt markets earned us the best bank for ABS and best bank for ABS research accolades from Credit Magazine.
We are transforming how we handle customers’ claims. We have a new claims system which will help to capture and process enhanced information about the claim, enabling a more pro-active process of management and settlement for customers. This multi-million pound investment will take place over three years. Already, we are processing all Churchill home claims, and motor claims for Direct Line, Churchill and Privilege on the new system.
We also concluded a deal with Nationwide Building Society which will see our contract for the provision of home insurance expand to include post-sales service and claims management.
• We exited more than 20 buildings that were no longer cost effective, saving over £20 million.
Finance Finance is responsible for the external reporting of the Group's performance and financial position, including regulatory and central bank reporting. We have greatly improved the quality and transparency of RBS's external reporting.
The Treasury function drove the safety and soundness agenda with improvements in the Group's liquidity, funding and capital. Our Strategy and Corporate Finance function focuses on Group strategy, capital allocation and disposals.
Legal, Secretariat and Group Regulatory Affairs Our Legal, Secretariat and Group Regulatory Affairs functions help to set the framework within which the Group can deliver sustainable returns. They operate commercially but retain their independence and professional judgement so they can drive a culture of legal and regulatory compliance and good governance to protect the Group’s franchise.
Non-Core Division is central to the Group’s Strategic Plan. We are the primary vehicle for reducing risk and the size of the balance sheet. Non-Core allows the rest of RBS to focus on our strong customer franchises. Since we created the division in 2009 we have cut its assets by £164 billion.
We paid more attention to reducing the assets that most tie-up capital. These are mainly trading assets in our Non-Core Markets business. This has paid dividends. Our risk-weighted assets (RWA) fell by £60 billion. It also helped us to avoid having to find additional capital that we would have needed to meet new regulations.
We have reduced the Non-Core Real Estate portfolio by 49% since 2009 and in 2011 we: • formed a partnership with Blackstone to manage a fund of £1.4 billion of UK loans; • sold our Spanish portfolio to Perella Weinberg; • sold hotels, including the remaining properties in our Hilton hotel portfolio; and
• agreed to sell our tenanted pub portfolio to Scottish & Newcastle.
We made good progress in our Portfolios & Banking business. We exited more than 130 individual loans. That reduced TPAs by more than £1 billion. We also agreed to sell a portfolio of leveraged loans totalling £500 million.
We have now signed or completed almost all of our individual business and country exits, with only a handful to go. In 2011, we completed the sales of our Argentinean business to Banco Comafi S.A. as well as the completion of the share sale of RBS Uzbekistan to Korea Development Bank.
Our people continue to play a key part in the Non-Core asset reduction programme. The experience they have gained in the previous three years means we have built a strong knowledge base and skill-set. An important part of our success will be how well we manage our people as they come to the end of their journey with Non-Core. We have developed a bespoke programme of activities to support them and their managers as they begin to consider the next stage of their career, here in RBS or elsewhere.
We believe that balancing the needs of all our stakeholders is the best way to deliver sustainable commercial success. That’s why we’re committed to being: Secure Maintaining our financial health whilst meeting our responsibilities to customers, employees and suppliers
The Committee is supported by the Group Sustainability Forum, a network of senior sustainability managers from across the organisation. This forum is responsible for driving actions agreed at the GSC.
We are working to provide a simple, accessible and innovative service for our customers in response to their requirements. Banking is central to the daily lives of almost everyone, and it’s important that we understand their needs.
Giving support to enterprise in the economies in which we operate is a cornerstone of our customer offering. The health of RBS is directly influenced by the health and success of the businesses it supports. Whether it’s continuing to serve our existing clients in the best way possible or working to give start ups the help they need to become successful – we are here to support the growth of viable businesses. We provide advice and guidance to businesses through our relationship managers and in the form of business planning tools and online courses. We know it is a difficult time for some organisations and that’s why we created a specialist team to provide support. In 2011, our Specialised Relationship Management teams supported over 5,000 businesses back to health.
It has been another challenging year for some of our people as we continue to restructure the Group. We highly value our employees and seek to support them through this process with a range of tools and services to help them find other roles, either inside or outside of RBS. We also offer help with the emotional and practical challenges that they may experience.
Managing the safety and security of our employees and customers is one of our fundamental responsibilities. We use intelligence to keep up with the challenging and changeable environment that we operate in, and continually review and innovate the way we work to respond to changes in the threats we face. In 2011, we invested around £3.5 million in branch security in the UK, Ireland and the US. We also invested in a new fraud profiling system to help us detect fraud more easily to minimise the losses for our customers. Internally, we also developed our global safety and health modules in 2011 and improved our internal service, Lifematters, which helps employees access the resource and support they need when they are experiencing difficulties at work or at home.
As a large organisation we have a responsibility to manage our internal and external impacts. A core part of this is the way we govern our environmental, social and ethical risks, not only within our own operations, but also in relation to companies we lend to. In 2011, we implemented sector policies which clearly define our lending criteria in certain sensitive industries. 2012 will also see the launch of revised and more stretching targets to reduce our environmental footprint across our travel and energy, waste, water and paper use. These targets will drive forward the management of our own footprint, and allow our stakeholders to track our progress.
Our financial education programme MoneySense continues to be a success in the UK and Ireland. Our research into the habits of 40,000 young people in the UK told us that MoneySense is making children more aware of their financial responsibilities. Through our MoneySense programme we have a suite of products which help school children as well as adults and small businesses.
Helping our employees to support the causes that matter to them is a big part of what we do. We support the charitable contributions of our people, which meant in 2011 £6.6 million was given to 3,000 charities across the globe. As well as matching employee donations and fundraising, we also support employees to get involved. In 2011, over 50,000 employees volunteered a total of 236,600 hours to try and make a difference in this way.
There are also a number of programmes led by our business divisions. In total, in 2011, we invested £72 million in our communities through both cash and in-kind donations, as well as employee time.
On 6 February 2010, the businesses of ABN AMRO Holding N.V. acquired by the Dutch State were legally demerged to a newly established company, ABN AMRO Bank N.V., which on 1 April 2010 was transferred to ABN AMRO Group N.V., itself owned by the Dutch State. Following legal separation, RBS Holdings N.V. (formerly ABN AMRO Holding N.V.) has one operating subsidiary, The Royal Bank of Scotland N.V. (“RBS N.V.”), a fully operational bank within the Group. RBS N.V. is independently rated and regulated by the Dutch Central Bank. Certain assets within RBS N.V. continue to be shared by the Consortium Members.
Glossary A glossary of terms is provided on pages 476 to 483.
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: the global economic and financial market conditions and other geopolitical risks, and their impact on the financial industry in general and on the Group in particular; the ability to access sufficient sources of liquidity and funding; the recommendations made by the Independent Commission on Banking (ICB) and their potential implications; the ability to implement strategic plans on a timely basis, or at all, including the disposal of certain NonCore assets and assets and businesses required as part of the State Aid restructuring plan; organisational restructuring, including any adverse consequences of a failure to transfer, or delay in transferring, certain business assets and liabilities from RBS N.V. to RBS; the full nationalisation of the Group or other resolution procedures under the
At 31 December 2011, HM Treasury’s holding in the company’s ordinary shares was 66.9% and its economic interest was 82.2%.
The Group had total assets of £1,506.9 billion and owners' equity of £74.8 billion at 31 December 2011. The Group's risk asset ratios at 31 December 2011, were a Total capital ratio of 13.8%, a Core Tier 1 capital ratio of 10.6% and a Tier 1 capital ratio of 13.0%.
Organisational structure and business overview The Group’s activities are organised on a divisional basis as follows: UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through a number of channels including: the RBS and NatWest network of branches and ATMs in the United Kingdom, telephony, online and mobile. UK Retail remains committed to delivering ‘Helpful and Sustainable’ banking and to the commitments set out in its Customer Charter - the results of which are externally assessed and published every six months.
Ulster Bank is the leading retail and business bank in Northern Ireland and the third largest banking group on the island of Ireland. It provides a comprehensive range of financial services. The Retail Markets division which has a network of 236 branches, operates in the personal and financial planning sectors. The Corporate Markets division provides services to SME business customers, corporates and institutional markets.
To comply with EC State Aid requirements, the Group has agreed to dispose of RBS Insurance. It continues to be reported as a separate operating segment rather than within the Non-Core division as its business is distinct from the activities of the Non-Core division.
Organisational change In January 2012, the Group announced changes to its wholesale banking operations in light of a changed market and regulatory environment. The changes will see the reorganisation of the Group’s wholesale businesses into ‘Markets’ and ‘International Banking’ and the exit and downsizing of selected activities. The changes will ensure the wholesale businesses continue to deliver against the Group’s strategy.
The changes will include an exit from cash equities, corporate brokering, equity capital markets and mergers and acquisitions businesses. Significant reductions in balance sheet, funding requirements and cost base in the remaining wholesale businesses will be implemented.
Existing GBM and GTS divisions will be reorganised as follows: The ‘Markets’ business will maintain its focus on fixed income, with strong positions in debt capital raising, securitisation, risk management, foreign exchange and rates. It will serve the corporate and institutional clients of all Group businesses.
GBM's corporate banking business will combine with the international businesses of our GTS arm into a new ‘International Banking’ unit and provide clients with a 'one-stop shop' access to the Group’s debt financing, risk management and payments services. This international corporate business will be self-funded through its stable corporate deposit base.
Business divestments To comply with EC State Aid requirements the Group agreed a series of restructuring measures to be implemented over a four year period from December 2009. This supplements the measures in the Strategic Plan previously announced by the Group. These include divesting RBS Insurance, 80.01% of GMS (completed in 2010) and substantially all of RBS Sempra Commodities JV business (largely completed in 2010), as well as divesting the RBS branch-based business in England and Wales and the NatWest branches in Scotland, along with the Direct SME customers across the UK.
In the UK credit card market large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the internet.
In Ireland, Ulster Bank competes in retail and commercial banking with the major Irish banks and building societies, and with other UK and international banks and building societies active in the market. The challenging conditions in the Irish economy persist and many of the domestic Irish banks have required State support and are engaged in significant restructuring actions.
In the United States, Citizens competes in the New England, Mid-Atlantic and Mid-West retail and mid-corporate banking markets with local and regional banks and other financial institutions. The Group also competes in the US in large corporate lending and specialised finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US. The economic recovery in the US is proving weaker than expected and loan demand is weak in Citizens’ markets.
The Group’s businesses, earnings and financial condition have been and will continue to be affected by geopolitical conditions, the global economy, the instability in the global financial markets and increased competition. Together with a perceived increased risk of default on the sovereign debt of certain European countries and unprecedented stresses on the financial system within the eurozone, these factors have resulted in significant changes in market conditions including interest rates, foreign exchange rates, credit spreads, and other market factors and consequent changes in asset valuations.
The Group’s ability to meet its obligations’ including its funding commitments, depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise could adversely affect the Group’s financial condition. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government’s credit ratings.
The Independent Commission on Banking has published its final report on competition and possible structural reforms in the UK banking industry. The Government has indicated that it supports and intends to implement the recommendations substantially as proposed which could have a material adverse effect on the Group.
The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures and various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group’s businesses.
The Group’s insurance businesses are subject to inherent risks involving claims on insured events.
Any significant developments in regulatory or tax legislation could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.
The Group is subject to substantial regulation and oversight, and any significant regulatory or legal developments could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition. In addition, the Group is, and may be, subject to litigation and regulatory investigations that may impact its business, results of operations and financial condition.
Key financials Managed Statutory for the year ended 31 December 2011 £m £m £m £m £m £m
Total income (1) 27,777 32,662 29,567 28,937 31,868 33,026 Operating profit before impairment losses (2) 9,331 11,169 7,809 7,943 8,857 11,252 Loss before tax (766) (399) (2,647) (766) (399) (2,647) Loss attributable to ordinary and B shareholders (1,997) (1,125) (3,607) (1,997) (1,125) (3,607) Cost:income ratio (3) 62% 60% 69% 62% 57% 52% Basic loss per ordinary and B share from continuing operations (pence) (1.8p) (0.5p) (6.3p) (1.8p) (0.5p) (6.3p) Adjusted earnings/(loss) per ordinary and B share (pence) (4) 0.2p 0.5p (13.0p) — — —
Summary consolidated income statement for the year ended 31 December 2011 In the income statement on a managed basis set out below, movements in the fair value of own debt, Asset Protection Scheme, Payment Protection Insurance costs, sovereign debt impairment, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, bank levy, gains on pension curtailment, interest rate hedge adjustments on impaired available-for-sale Greek government bonds, write-down of goodwill and other intangible assets and RFS Holdings minority interest are shown separately. In the statutory consolidated income statement on page 307, these items are included in the appropriate captions.
Net interest income 12,689 14,200 13,567 12,679 14,209 13,388 Fees and commissions receivable 6,384 8,194 8,738 6,384 8,193 8,738 Fees and commissions payable (1,460) (2,211) (2,790) (1,460) (2,211) (2,790) Other non-interest income 5,908 7,351 4,786 7,078 6,549 8,424 Insurance net premium income 4,256 5,128 5,266 4,256 5,128 5,266 Non-interest income 15,088 18,462 16,000 16,258 17,659 19,638 Total income 27,777 32,662 29,567 28,937 31,868 33,026 Operating expenses (15,478) (16,710) (17,401) (18,026) (18,228) (17,417) Profit before insurance net claims and impairment losses 12,299 15,952 12,166 10,911 13,640 15,609 Insurance net claims (2,968) (4,783) (4,357) (2,968) (4,783) (4,357) Operating profit before impairment losses 9,331 11,169 7,809 7,943 8,857 11,252 Impairment losses (7,439) (9,256) (13,899) (8,709) (9,256) (13,899)
Bank levy (300) — — — — — Gains on pensions curtailment — — 2,148 — — — Interest rate hedge adjustments on impaired available-for-sale Greek government bonds (169) — — — — — Write-down of goodwill and other intangible assets (11) (10) (363) — — — RFS Holdings minority interest (7) (150) (356) — — —
Summary consolidated income statement for the year ended 31 December 2011 continued £m £m £m £m £m £m
Total income Total income, excluding movements in the fair value of own debt, Asset Protection Scheme, gain on redemption of own debt, strategic disposals and RFS MI, fell by 15% to £27,777 million, primarily reflecting lower net interest income, lower trading income in GBM and Non-Core and a fall in insurance net premium income.
Non-interest income Non-interest income decreased by £3,374 million in 2011 principally driven by lower trading income in GBM and Non-Core, and a fall in insurance net premium income. Volatile market conditions led to a reduction in GBM trading income, driven by the deterioration in global credit markets as sovereign difficulties in the eurozone grew. Non-Core trading losses increased by £690 million, reflecting costs incurred as part of the division’s focus on reducing capital trading assets.
In 2011, the Group redeemed certain mortgage backed debt securities in exchange for cash, resulting in gains totalling £255 million. This compared with a gain of £553 million in 2010 on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities.
Earnings Basic loss per ordinary and B share from continuing operations fell from a loss of 0.5p to a loss of 1.8p. Adjusted loss per ordinary and B share also fell, from earnings of 0.5p per share to 0.2p per share.
2011 compared with 2010 - statutory Operating loss Operating loss before tax for the year was £766 million compared with £399 million in 2010.
Total income Total income decreased 9% to £28,937 million in 2011.
Net interest income Net interest income decreased by 11% to £12,679 million.
Impairment losses Impairment losses were £8,709 million, compared with £9,256 million in 2010.
Risk elements in lending represented 8.6% of gross loans and advances to customers excluding reverse repos at 31 December 2010 (2010 - 7.3%).
Total income Total income, excluding fair value of own debt, gain on redemption of own debt, strategic disposals, fair value changes in the Asset Protection Scheme and RFS MI, increased by 10% to £32,662 million, primarily reflecting growth in net interest income coupled with lower Non-Core trading losses as underlying asset prices recovered and credit spreads tightened. Whilst income was down in Global Banking & Markets to more normal levels compared with the favourable market conditions seen in 2009, this was offset by good growth in Core Retail & Commercial and the improvement in Non-Core.
Impairment losses Impairment losses fell to £9,256 million from £13,899 million in 2009, with Core impairments falling by £898 million and Non-Core by £3,745 million. The decrease reflects an overall improvement in the economic environment. Impairments fell in all businesses, except Ulster Bank, which has faced an economic environment that remains challenging.
Risk elements in lending and potential problem loans at 31 December 2010 represented 7.4% of loans and advances, excluding reverse repos, compared with 6.2% a year earlier. Provision coverage was 46%, compared with 43% at 31 December 2009.
One-off and other items Integration and restructuring costs decreased from £1,286 million to £1,032 million, primarily as ABN AMRO integration activity neared completion, partly offset by restructuring activity following the conclusion of the strategic review.
In 2010 the Group recorded a gain of £553 million, compared with £3,790 million in 2009, on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities. In addition, the overall gain on strategic disposals, £171 million, primarily relates to gains on the sale of GMS partially offset by provisions for losses on the sales of other businesses undertaken as part of the Group’s Strategic Plan.
Tax The Group recorded a tax charge of £634 million in 2010, compared with a tax credit of £429 million in 2009.
Earnings Basic loss per ordinary and B share from continuing operations improved from a loss of 6.3p to a loss of 0.5p. Adjusted loss per ordinary and B share improved from a loss of 13.0p to earnings of 0.5p per share.
2010 compared with 2009 - statutory Operating loss Operating loss before tax for the year was £399 million compared with a loss of £2,647 million in 2009.
Non-interest income Non-interest income decreased to £17,659 million from £19,638 million in 2009. This included movements in the fair value of the Asset Protection Scheme resulting in a £1,550 million charge and gain on redemption of own debt of £553 million (2009 - £3,790 million). Excluding these items, non-interest income was up 18% primarily reflecting an increase in income from trading activities.
Operating expenses Operating expenses increased to £18,228 million (2009 - £17,417 million) of which integration and restructuring costs were £1,032 million compared with £1,286 million in 2009. Write down of goodwill and other intangible assets was £10 million compared with £363 million in 2009.
Risk elements in lending and potential problem loans represented 7.4% of gross loans and advances to customers excluding reverse repos at 31 December 2010 (2009 - 5.5%).
Earnings Basic earnings per ordinary share, including discontinued operations, was a loss of 0.5p per share compared with a loss of 6.4p for 2009.
Analysis of results Net interest income Managed Statutory 2011 2010 2009 2011 2010 2009 £m £m £m £m £m £m
- Group 1.61 1.81 1.55 1.60 1.81 1.55 - UK 1.87 2.04 1.48 1.87 2.04 1.48 - Overseas 1.26 1.50 1.66 1.26 1.49 1.62 Net interest margin (7) - Group 1.92 2.01 1.76 1.92 2.00 1.74
The Royal Bank of Scotland plc base rate (average) 0.50 0.50 0.64 0.50 0.50 0.64 London inter-bank three month offered rates (average)
Notes: (1) Interest-earning assets and interest-bearing liabilities for 2010 and 2009 exclude the Retail bancassurance long-term assets and liabilities attributable to policyholders, in view of their distinct nature.
As a result, interest receivable has been increased by £6 million for 2010 and £20 million for 2009. (2) Interest receivable has been increased by £8 million (2010 - £11 million; 2009 - £46 million) and interest payable has been increased by £150 million (2010 - £30 million decrease; 2009 - £350 million increase) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (3) Interest receivable has been decreased by £90 million in 2010 in respect of a non-recurring receivable. (4) Interest payable has been decreased by £143 million in respect of non-recurring adjustments (2010 - £319 million increase; 2009 - nil). (5) Gross yield is the interest earned on average interest-earning assets of the banking book. (6) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (7) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. (8) The analysis into UK and overseas has been compiled on the basis of location of office. (9) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
Liabilities Deposits by banks - UK 17,224 242 1.41% 21,816 334 1.53 - Overseas 46,890 735 1.57% 59,542 996 1.67 Customer accounts: demand deposits - UK 112,522 664 0.59% 120,796 621 0.51 - Overseas 43,177 483 1.12% 39,218 609 1.55 Customer accounts: savings deposits - UK 76,719 1,177 1.53% 68,142 935 1.37 - Overseas 25,257 130 0.51% 25,587 213 0.83 Customer accounts: other time deposits - UK 44,243 481 1.09% 42,818 431 1.01 - Overseas 34,447 596 1.73% 45,080 914 2.03 Debt securities in issue - UK 119,735 2,755 2.30% 123,729 2,186 1.77 - Overseas 42,473 765 1.80% 72,247 1,065 1.47 Subordinated liabilities - UK 17,345 409 2.36% 19,998 480 2.40 - Overseas 6,226 189 3.04% 9,336 252 2.70 Internal funding of trading business - UK (40,242) 149 (0.37%) (41,451) (140) 0.34 - Overseas (8,783) (40) 0.46% (6,864) (41) 0.60 Interest-bearing liabilities - UK 347,546 5,877 1.69% 355,848 4,847 1.36 - Overseas 189,687 2,858 1.51% 244,146 4,008 1.64 Total interest-bearing liabilities - banking business (1,2,4) 537,233 8,735 1.63% 599,994 8,855 1.48 - trading business (9) 307,564 293,993 Interest-bearing liabilities 844,797 893,987 Non-interest-bearing liabilities: Demand deposits - UK 46,495 29,022 - Overseas 19,909 23,994 Other liabilities (2,9) 548,915 648,295 Owners' equity 75,039 76,906 Total liabilities and owners' equity 1,535,155 1,672,204
Liabilities Deposits by banks - UK 24,837 675 2.72 - Overseas 106,353 2,177 2.05 Customer accounts: demand deposits - UK 109,756 559 0.51 - Overseas 38,287 408 1.07 Customer accounts: savings deposits - UK 54,048 772 1.43 - Overseas 26,976 473 1.75 Customer accounts: other time deposits - UK 67,728 807 1.19 - Overseas 58,168 1,618 2.78 Debt securities in issue - UK 130,002 3,162 2.43 - Overseas 96,075 1,654 1.72 Subordinated liabilities - UK 25,001 852 3.41 - Overseas 10,347 458 4.43 Internal funding of trading business - UK (60,284) (317) 0.53 - Overseas (14,845) (191) 1.29 Interest-bearing liabilities - UK 351,088 6,510 1.85 - Overseas 321,361 6,597 2.05 Total interest-bearing liabilities - banking business (1,2,4) 672,449 13,107 1.95 - trading business (9) 331,380 Interest-bearing liabilities 1,003,829 Non-interest-bearing liabilities: Demand deposits - UK 16,456 - Overseas 27,149 Other liabilities (2,9) 918,743 Owners' equity 57,303 Total liabilities and owners' equity 2,023,480
Assets Loans and advances to banks - UK 21,373 278 1.30 - Overseas 30,403 554 1.82 Loans and advances to customers - UK 333,408 11,864 3.56 - Overseas 242,204 9,504 3.92 Debt securities - UK 53,955 1,466 2.72 - Overseas 71,152 2,711 3.81 Interest-earning assets - UK 408,736 13,608 3.33 - Overseas 343,759 12,769 3.71 Total interest-earning assets - banking business (1,2,3) 752,495 26,377 3.51 - trading business (9) 291,092 Interest-earning assets 1,043,587 Non-interest-earning assets (1,2) 979,893 Total assets 2,023,480
Liabilities Deposits by banks - UK 24,837 676 2.72 - Overseas 105,877 2,222 2.10 Customer accounts: demand deposits - UK 109,758 559 0.51 - Overseas 38,414 411 1.07 Customer accounts: savings deposits - UK 54,048 772 1.43 - Overseas 26,996 473 1.75 Customer accounts: other time deposits - UK 68,039 827 1.22 - Overseas 60,430 1,719 2.84 Debt securities in issue - UK 130,002 3,162 2.43 - Overseas 96,075 1,652 1.72 Subordinated liabilities - UK 26,710 852 3.19 - Overseas 10,333 457 4.42 Internal funding of trading business - UK (60,284) (317) 0.53 - Overseas (14,845) (192) 1.29 Interest-bearing liabilities - UK 353,110 6,531 1.85 - Overseas 323,280 6,742 2.09 Total interest-bearing liabilities - banking business (1,2,4) 676,390 13,273 1.96 - trading business (9) 331,380 Interest-bearing liabilities 1,007,770 Non-interest-bearing liabilities: Demand deposits - UK 16,456 - Overseas 27,149 Other liabilities (2,9) 914,802 Owners' equity 57,303 Total liabilities and owners' equity 2,023,480
2011 over 2010 - managed 2011 over 2010 - statutory Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average volume
Overseas (57) 183 126 (58) 182 124 Customer accounts: savings deposits
Overseas 196 122 318 197 123 320 Debt securities in issue
Analysis of change in net interest income - volume and rate analysis continued 2010 over 2009 - managed 2010 over 2009 - statutory
Non-interest income Managed (1) Statutory 2011 2010 2009 2011 2010 2009 £m £m £m £m £m £m
2011 compared with 2010 - managed Non-interest income decreased by £3,374 million in 2011 principally driven by lower trading income in GBM and Non-Core and a fall in insurance net premium income.
2010 results included £482 million of income recorded for GMS prior to its disposal in November 2010.
Non-Core trading losses increased by £690 million, reflecting costs incurred as part of the division’s focus on reducing capital trading assets, with activity including the restructuring of monoline exposures, which mitigated both significant immediate and future regulatory uplifts in riskweighted assets.
Non-interest income continued 2010 compared with 2009 - managed Net fees and commissions increased by £35 million to £5,983 million primarily due to improved performance in GBM (£160 million), driven by higher portfolio management and origination income, and UK Corporate (£94 million), principally reflecting strong refinancing levels and increased operating lease activity. These increases were partially offset by reduced fees in UK Retail (£144 million) and Ulster Bank (£72 million) due to the restructuring of current account overdraft fees in the final quarter of 2009 and a non-recurring gain in 2009 respectively.
2010 compared with 2009 - statutory Net fees and commissions increased by £34 million to £5,982 million primarily due to improved performance in GBM (£160 million), driven by higher portfolio management and origination income, and UK Corporate (£94 million), principally reflecting strong refinancing levels and increased operating lease activity. This increase was partially offset by reduced fees in UK Retail (£144 million) and Ulster Bank (£72 million) principally reflecting the restructuring of current account overdraft fees.
Other operating income increased by £606 million to £1,479 million. This improvement principally reflected a profit on sale of securities of £496 million compared with £162 million in 2009, higher profits from associated entities and an increased credit of £249 million compared with £51 million in 2009 relating to movements in fair value of own debt. These were partially offset by losses in the fair value of securities and investment properties.
Operating expenses and insurance claims Managed (1) Statutory 2011 2010 2009 2011 2010 2009 £m £m £m £m £m £m
Staff costs - excluding gains on pensions curtailment 8,163 8,956 9,081 8,678 9,671 9,993 - gains on pensions curtailment — — — — — (2,148) Premises and equipment 2,278 2,276 2,468 2,451 2,402 2,594 Other administrative expenses - Payment Protection Insurance costs — — — 850 — —
2011 compared with 2010 - managed Group expenses were 7% lower in 2011, driven by cost savings achieved as a result of the cost reduction programme and Non-Core run-off, largely reflecting the disposal of RBS Sempra and specific country exits.
2011 compared with 2010 - statutory Group expenses fell by 1% in 2011, driven by cost savings achieved as a result of the cost reduction programme and Non-Core run-off, largely reflecting the disposal of RBS Sempra and specific country exits, partially offset by Payment Protection Insurance costs.
Staff costs fell 10%, driven by lower GBM discretionary compensation as a result of its decrease in revenues, and in Non-Core, given the impact of a 32% reduction in headcount and continued business disposals and country exits.
General insurance claims were £1,730 million lower, mainly due to the non-repeat of bodily injury reserve strengthening in 2010, de-risking of the motor book, more benign weather in 2011 and claims in Non-Core decreasing as legacy policies ran-off.
2010 compared with 2009 - managed The main driver of a 4% decrease in operating expenses is the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.
Operating expenses and insurance claims continued 2010 compared with 2009 - statutory The main driver of a 7% decrease in operating expenses, excluding gains on pensions curtailment, is the recognition of benefits from the Groupwide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.
Staff costs 38 210 365 Premises and equipment 6 3 78 Other administrative expenses 51 143 398 Depreciation and amortisation 11 20 18 106 376 859
At 31 December 2011 statement the year 2011 £m £m £m £m
Staff costs 356 353 328 Premises and equipment 156 117 48 Other administrative expenses 276 104 51 788 574 427 2011 compared with 2010 Restructuring costs were £788 million compared with £574 million in 2010. The increase is due to the number of Group restructuring projects increasing during the year.
2010 compared with 2009 Restructuring costs were £574 million compared with £427 million in 2009. The increase is a result of the number of restructuring projects being undertaken.
Staff costs - redundancy 201 — 274 (349) 126 Staff costs - other 17 (1) 82 (58) 40 Premises and equipment 117 — 156 (107) 166 Other administrative expenses 46 (2) 276 (210) 110 381 (3) 788 (724) 442
2011 compared with 2010 Divestment costs of £165 million compared to £82 million in 2010 related to the European Commission mandated divestments.
2010 compared with 2009 Divestment costs of £82 million in the year relate to the European Commission mandated divestments.
Comprising: Loan impairment losses 7,241 9,144 13,090 7,241 9,144 13,090 Securities - sovereign debt impairment — — — 1,099 — —
- interest rate hedge adjustments on impaired available-for-sale Greek government bonds — — — 169 — —
- other 198 112 809 200 112 809 Charge to income statement 7,439 9,256 13,899 8,709 9,256 13,899 2011 compared with 2010 - managed Impairment losses decreased by 20% compared with 2010, driven largely by a £1,569 million reduction in Non-Core loan impairments, despite continuing challenges in Ulster Bank and corporate real estate portfolios.
Retail & Commercial impairment losses fell by £153 million, driven by improving credit metrics in UK Retail and US Retail & Commercial partially offset by increases in Ulster Bank, largely reflecting a deterioration in credit metrics on the mortgage portfolio, and a single name provision in Global Transaction Services (GTS).
Total Core and Non-Core Ulster Bank impairment losses decreased by 4%, as the £223 million increase in Core Ulster Bank losses was more than offset by a decrease in losses recognised in Non-Core.
Impairments fell in all Core businesses, except Ulster Bank Group, which faced an economic environment that remains challenging, with rising default levels across both personal and corporate portfolios.
UK corporation tax rate 26.5 28.0 28.0 Effective tax rate nm nm 16.2 nm = not meaningful
The actual tax (charge)/credit differs from the expected tax credit computed by applying the standard rate of UK corporation tax as follows: £m £m £m
Expected tax credit 203 112 741 Sovereign debt impairment where no deferred tax asset recognised (275) — — Other losses in year where no deferred tax asset recognised (530) (450) (780) Foreign profits taxed at other rates (417) (517) (276) UK tax rate change - deferred tax impact (110) (82) — Unrecognised timing differences (20) 11 274 Non-deductible goodwill impairment (24) (3) (102) Items not allowed for tax - losses on strategic disposals and write-downs (72) (311) (152) - UK Bank levy (80) — —
Divisional performance The results of each division on a managed basis are set out below. The results are stated before movements in the fair value of own debt, Asset Protection Scheme, Payment Protection Insurance costs, sovereign debt impairment, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, bank levy, gains on pensions curtailment, interest rate hedge adjustments on impaired available-for-sale bonds, write-down of goodwill and other intangible assets and RFS MI.
UK Retail 48.4 48.8 51.3 UK Corporate 76.1 81.4 90.2 Wealth 12.9 12.5 11.2 Global Transaction Services 17.3 18.3 19.1 Ulster Bank 36.3 31.6 29.9 US Retail & Commercial 58.8 57.0 59.7 Retail & Commercial 249.8 249.6 261.4 Global Banking & Markets 151.1 146.9 123.7 Other 10.8 18.0 9.4 Core 411.7 414.5 394.5 Non-Core 93.3 153.7 171.3 Group before benefit of Asset Protection Scheme 505.0 568.2 565.8 Benefit of Asset Protection Scheme (69.1) (105.6) (127.6) Group before RFS Holdings minority interest 435.9 462.6 438.2 RFS Holdings minority interest 3.1 2.9 102.8 Group 439.0 465.5 541.0
Analysis of income by product Personal advances 1,089 993 1,192 Personal deposits 961 1,102 1,349 Mortgages 2,277 1,984 1,214 Cards 950 962 869 Other, including bancassurance 201 374 329 Total income 5,478 5,415 4,953
Analysis of impairments by sector Mortgages 182 177 124 Personal 437 682 1,023 Cards 169 301 532 Total impairment losses 788 1,160 1,679
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 0.2% 0.2% 0.1% Personal 4.3% 5.8% 7.5% Cards 3.0% 4.9% 8.6% Total 0.7% 1.1% 1.6%
Performance ratios Return on equity (1) 26.4% 18.0% 3.0% Net interest margin 3.92% 3.91% 3.59% Cost:income ratio 49% 52% 60% Adjusted cost:income ratio (2) 49% 53% 61%
Capital and balance sheet Loans and advances to customers (gross) (3)
- mortgages 95.0 90.6 83.2 - personal 10.1 11.7 13.6 - cards 5.7 6.1 6.2 110.8 108.4 103.0 Customer deposits (excluding bancassurance) (3) 101.9 96.1 87.2 Assets under management (excluding deposits) 5.5 5.7 5.3 Risk elements in lending(3) 4.6 4.6 5.7 Loan:deposit ratio (excluding repos) 106% 110% 115% Risk-weighted assets 48.4 48.8 51.3
2011 compared with 2010 UK Retail delivered strong full year results, as operating profit increased by £619 million to £1,991 million, despite continued uncertainty in the economic climate and the low interest rate environment. Profit before impairments was up £247 million or 10%, while impairments fell by £372 million, with further improvements in the unsecured book and continued careful mortgage underwriting. Return on equity improved to 26.4%.
Gross mortgage lending market share of 10% continues above our stock position of 8%.
- Customer deposits grew 6%, outperforming the market total deposit growth of 3%. Savings balances grew by £6 billion, or 9%, with 1.5 million accounts opened, demonstrating the strength of our customer franchise and our strategy to further develop primary banking relationships.
Net interest income increased by 5% to £4,272 million, driven by strong balance sheet growth. Net interest margin remained broadly flat with recovering asset margins largely offset by more competitive savings rates and lower long term swap rate returns adversely impacting liability margins.
Risk-weighted assets were broadly stable, with volume growth in lower risk secured mortgages partly offset by a decrease in the unsecured portfolio.
The division has continued to focus in 2010 on growing secured lending while at the same time building customer deposits, thereby reducing the Group’s reliance on wholesale funding. Loans and advances to customers grew 5%, with a change in mix from unsecured to secured as the Group actively sought to improve its risk profile. Mortgage balances grew by 9% while unsecured lending contracted by 10%.
Net interest income increased significantly by 18% to £4,078 million, driven by strong balance sheet growth and repricing. Net interest margin improved by 32 basis points to 3.91%, with widening asset margins partially offset by contracting liability margins in the face of a competitive deposit market.
Net interest income 2,585 2,572 2,292 Net fees and commissions 948 952 858 Other non-interest income 327 371 432 Non-interest income 1,275 1,323 1,290 Total income 3,860 3,895 3,582 Direct expenses
Operating profit before impairment losses 2,199 2,224 2,052 Impairment losses (785) (761) (927)
Analysis of income by business Corporate and commercial lending 2,676 2,598 2,131 Asset and invoice finance 660 617 501 Corporate deposits 683 728 986 Other (159) (48) (36)
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Banks and financial institutions 0.4% 0.3% 0.2% Hotels and restaurants 1.0% 0.8% 1.5% Housebuilding and construction 2.6% 2.9% 2.5% Manufacturing 0.7% — 0.9% Other 0.5% 0.4% 0.5% Private sector education, health, social work, recreational and community services 1.3% 0.3% 0.9% Property 0.6% 0.8% 0.8% Wholesale and retail trade, repairs 1.0% 0.9% 0.7% Asset and invoice finance 0.4% 0.6% 1.3% Total 0.7% 0.7% 0.8%
Capital and balance sheet Total third party assets 111.8 114.6 114.9 Loans and advances to customers (gross) (1)
Customer deposits (1) 100.9 100.0 87.8 Risk elements in lending (1) 5.0 4.0 2.3 Loan:deposit ratio (excluding repos) 106% 110% 126% Risk-weighted assets 76.1 81.4 90.2
The division also took measures to reduce the risk retained in the business allowing for quicker and more consistent decisions by simplifying the credit underwriting process and improving automated decision making.
2011 compared with 2010 Operating profit decreased 3% to £1,414 million, as lower income and higher impairments were only partially offset by a decrease in expenses. Net interest income remained broadly flat. Net interest margin improved 7 basis points with benefits from re-pricing the lending portfolio and the revision to income deferral assumptions in Q1 2011 partially offset by increased funding costs together with continued pressure on deposit margins. A 1% increase in deposit balances supported an improvement in the loan:deposit ratio to 106%.
2010 compared with 2009 Operating profit grew by £338 million, 30%, compared with 2009, driven by strong income growth and significantly lower impairments, partially offset by higher costs.
UK Corporate performed strongly in the deposit market, with customer deposit balance growth of £12 billion contributing to a 16 percentage point improvement in the loan:deposit ratio in 2010. While customer lending increased only marginally (with gross lending largely offset by customer deleveraging) net interest income rose by £280 million, 12%, and net interest margin rose by 29 basis points driven primarily by the good progress made on loan repricing.
Impairments were 18% lower, primarily as a result of higher charges taken during the first half of 2009 to reflect potential losses in the portfolio not yet specifically identified.
Performance ratios Return on equity (1) 18.7% 18.9% 30.3% Net interest margin 3.59% 3.37% 4.38% Cost:income ratio 71% 70% 59%
2011 has been a significant year for the Coutts businesses from a strategic perspective. In Q1 2011, a new divisional strategy was defined with the execution of early changes already making an impact.
A refocus on territories where the businesses have the opportunity for greatest scale or growth such as UK, Asia, Middle East, and Eastern Europe.
Strategic investment in technology leading to the development of a single global technology platform for the Wealth division. The platform was successfully deployed in Adam & Company in 2011 with Coutts UK to follow in 2012.
Injection of new management into key roles from both internal and external sources including key segment heads, marketing, products & services, and international executive leadership.
Following the establishment of a single global brand in Q4 2011, focus turned to the reorganisation of key global functions such as marketing and product & services, as well as some local management structures. These reorganisations have realigned the division to maximise execution of the divisional strategy.
The execution plan for the strategy will continue into 2012 and position Wealth strongly against its peers.
Client assets and liabilities managed by the division decreased by 1%. Customer deposits grew 3% in a competitive environment and lending volumes grew 5%. Assets under management declined 9%, with fund outflows contributing 3% of the decrease and market conditions making up the balance.
Assets under management grew by 4% largely through improving market conditions. On a constant currency basis, assets fell 2% with valuation gains being offset by client losses in the international businesses, resulting from the private banker attrition previously experienced.
Net interest income 1,076 974 912 Non-interest income 1,175 1,587 1,575 Total income 2,251 2,561 2,487 Direct expenses
Analysis of income by product Domestic cash management 866 818 805 International cash management 868 801 734 Trade finance 318 309 290 Merchant acquiring 16 451 505 Commercial cards 183 182 153 Total income 2,251 2,561 2,487
Performance ratios Return on equity (1) 30.4% 42.8% 42.2% Net interest margin 5.52% 6.73% 9.22% Cost:income ratio 60% 57% 59%
Capital and balance sheet Total third party assets 25.9 25.2 18.4 Loans and advances 15.8 14.4 12.7 Customer deposits 71.7 69.9 61.8 Risk elements in lending 0.2 0.1 0.2 Loan:deposit ratio (excluding repos) 22% 21% 21% Risk-weighted assets 17.3 18.3 19.1
Excluding GMS, income was 7% higher driven by the success of depositgathering initiatives, as deposits increased £2 billion in a competitive environment.
Excluding GMS, expenses increased by 10%, reflecting business improvement initiatives and investment in technology and support infrastructure.
Expenses were broadly in line with 2009, at £1,464 million, as increased investment in front office and support infrastructure was mitigated by tight management of business costs.
Analysis of impairments by sector Mortgages 570 294 74 Corporate - property 324 375 306 - other corporate 434 444 203 Other lending 56 48 66 Total impairment losses 1,384 1,161 649
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 2.8% 1.4% 0.5% Corporate - property 6.8% 6.9% 3.0% - other corporate 5.6% 4.9% 1.8% Other lending 3.5% 3.7% 2.7% Total 4.1% 3.1% 1.6% Performance ratios Return on equity (1) (26.1%) (21.0%) (11.7%) Net interest margin 1.77% 1.84% 1.87% Cost:income ratio 60% 59% 73%
Capital and balance sheet Loans and advances to customers (gross) - mortgages 20.0 21.2 16.2 - corporate - property 4.8 5.4 10.1 - other corporate 7.7 9.0 11.0 - other lending 1.6 1.3 2.4 34.1 36.9 39.7
Customer deposits 21.8 23.1 21.9 Risk elements in lending - mortgages 2.2 1.5 0.6 - corporate - property 1.3 0.7 0.7 - other corporate 1.8 1.2 0.8 - other lending 0.2 0.2 0.2 Total risk elements in lending 5.5 3.6 2.3
Loan:deposit ratio (excluding repos) 143% 152% 177% Risk-weighted assets 36.3 31.6 29.9 2011 was another difficult year for the business due to the continued challenging economic environment. This was reflected in the financial performance, with ongoing pressure on income and a further increase in impairment losses.
Ulster Bank continues to make progress on its customer commitments and deposit gathering strategy, while cost management and targeting growth in areas that leverage competitive advantage, remain priorities. In 2011, customer numbers increased by 2%, representing a strong performance in current and savings accounts, driven by the enhanced customer service highlighted by our 'Help for what matters' programme.
Loans to customers fell by 5% in constant currency terms. On 1 July 2010 the division transferred a portfolio of development property assets to the Non-Core division, partially offset by a simultaneous transfer of a portfolio of retail mortgage assets to the core business.
Net interest income 3,042 2,962 2,777 1,896 1,917 1,775 Net fees and commissions 1,138 1,126 1,119 709 729 714 Other non-interest income 473 465 368 295 300 235 Non-interest income 1,611 1,591 1,487 1,004 1,029 949 Total income 4,653 4,553 4,264 2,900 2,946 2,724 Direct expenses
Analysis of impairments by sector Residential mortgages 56 90 113 35 58 72 Home equity 160 194 261 99 126 167 Corporate and commercial 87 312 510 54 202 326 Other consumer 92 150 215 57 97 137 Securities 126 53 — 80 34 —
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Residential mortgages 0.6% 1.0% 1.1% 0.6% 1.0% 1.1% Home equity 0.7% 0.8% 1.0% 0.7% 0.8% 1.1% Corporate and commercial 0.2% 1.0% 1.6% 0.2% 1.0% 1.7% Other consumer 0.8% 1.4% 1.8% 0.8% 1.4% 1.8% Total 0.5% 1.0% 1.4% 0.5% 1.0% 1.4%
- residential mortgages 9.4 9.4 10.6 6.1 6.1 6.5 - home equity 23.1 23.6 25.0 14.9 15.2 15.4 - corporate and commercial 35.3 31.7 31.6 22.8 20.4 19.5 - other consumer 11.8 10.6 12.1 7.6 6.9 7.5 79.6 75.3 79.3 51.4 48.6 48.9 Customer deposits (excluding repos) 92.1 91.2 97.4 59.5 58.7 60.1 Risk elements in lending - retail 1.0 0.7 0.6 0.6 0.4 0.4 - commercial 0.6 0.7 0.4 0.4 0.5 0.2 Total risk elements in lending 1.6 1.4 1.0 1.0 0.9 0.6 Loan:deposit ratio (excluding repos) 85% 81% 80% 85% 81% 80% Risk-weighted assets 91.1 88.4 96.9 58.8 57.0 59.7
Significant organisational changes and investment in Commercial Banking, including unification under the RBS Citizens brand, has been important in positioning the business for growth. The enhanced sales training programme for managers and sales colleagues in this business has begun to deliver results with both higher credit balances and increased client satisfaction. External researchers TNS awarded Citizens the second highest score in relationship manager satisfaction among its competitors for 2011.
Risk management was also an important focus for 2011 and in Q4 2011, CFG’s Board of directors approved a new formal risk appetite statement aimed at ensuring sustained predictable earnings and further strengthening the control environment.
2011 compared with 2010 Operating profit increased to $769 million from $473 million, an increase of $296 million, or 63%. Excluding a credit of $113 million related to changes to the defined benefit plan in Q2 2010, operating profit increased $409 million, or 114%, substantially driven by lower impairments and improved income.
Non-interest income was up $20 million, or 1%, primarily driven by higher account and transaction fees, partially offset by the impact of legislative changes on debit card and deposit fees.
Excluding the defined benefit plan credit of $113 million in Q2 2010, total expenses were down $31 million, or 1%, due to a number of factors including lower Federal Deposit Insurance Corporation (FDIC) deposit insurance levies, and lower litigation and marketing costs, partially offset by higher regulatory costs.
Impairment losses declined by $278 million, or 35%, largely reflecting an improved credit environment slightly offset by higher impairments related to securities. Loan impairments as a percent of loans and advances improved to 0.5% from 1.0%.
Customer deposits were up 1% with particularly strong growth achieved in checking balances. Consumer checking balances grew by 6%, while small business checking balances grew by 5% over the year.
2010 compared with 2009 Operating profit of £306 million ($473 million) represented a marked improvement from an operating loss of £113 million ($174 million) with income up 7%, expenses down 2% and impairment losses down 27%.
Total expenses were down 2%, reflecting a £73 million ($113 million) credit related to changes to the defined benefit pension plan, and lower Federal Deposit Insurance Corporation (FDIC) deposit insurance levies, partially offset by the impact of changing rates on the valuation of mortgage servicing rights and litigation costs.
Net interest income from banking activities 719 1,276 2,243 Net fees and commissions receivable 1,281 1,495 1,335 Income from trading activities 3,736 4,982 7,812 Other operating income (net of related funding costs) 205 159 (332) Non-interest income 5,222 6,636 8,815 Total income 5,941 7,912 11,058 Direct expenses
Analysis of impairments by sector Manufacturing and infrastructure (139) 51 (91) Property and construction (42) (74) (49) Banks and financial institutions 54 (177) (348)
Total impairment losses (49) (151) (640) Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) 0.1% 0.2% 0.6%
Performance ratios Return on equity (1) 7.7% 16.6% 29.8% Net interest margin 0.73% 1.05% 1.38% Cost:income ratio 73% 56% 42% Compensation ratio (2) 41% 34% 26% Compensation ratio - continuing business 39% 32%
Capital and balance sheet Loans and advances to customers 74.7 75.1 90.9 Loans and advances to banks 29.9 44.5 36.9 Reverse repos 100.5 94.8 73.3 Securities 111.0 119.2 106.0 Cash and eligible bills 28.1 38.8 74.0 Other 17.5 24.3 31.1 Total third party assets (excluding derivatives mark-to-market) 361.7 396.7 412.2 Net derivative assets (after netting) 37.0 37.4 68.0 Customer deposits (excluding repos) 37.4 38.9 46.9 Risk elements in lending 1.8 1.7 1.8 Risk-weighted assets 151.1 146.9 123.7
On 12 January 2012 the Group announced changes to its wholesale banking operations in light of a changed market and regulatory environment. The changes will see the reorganisation of RBS’s wholesale businesses into ‘Markets’ and ‘International Banking’ and the exit and downsizing of selected activities. The changes will ensure the wholesale businesses continue to deliver against the Group’s strategy.
Due to this deterioration in the markets both the Rates and Credit businesses suffered significantly, and income from trading activities fell from £4,982 million in 2010, to £3,736 million in 2011. The heightened volatility increased risk aversion amongst clients and limited opportunities for revenue generation in the secondary markets.
Portfolio Management and Origination revenue also fell sharply as clients curtailed new activity and continued to repay existing debt.
Equities revenue fell 16% as wider market conditions reduced investor confidence, resulting in lower client issuance and reduced activity in the secondary markets.
2010 compared with 2009 A fall in operating profit, of 42% year on year reflects sharply reduced revenue partially offset by lower costs and a significant improvement in impairments.
Expenses fell by 6% to £4,397 million. This was largely driven by a decrease in staff costs, including on-going benefits from cost synergies.
The low level of impairments in 2010 reflected a small number of specific cases partially offset by an improved picture on latent loss provisions. This contrasted with 2009, which witnessed a significantly higher level of specific impairments.
At 16.6%, return on equity remained consistent with the 15% targeted over the business cycle in GBM’s strategic plan. The compensation ratio of 34% was below that of peers.
Analysis of income by product Personal lines motor excluding broker - own brands 1,742 1,825 1,814 - partnerships 209 343 360 Personal lines home excluding broker - own brands 471 474 442 - partnerships 363 388 389 Personal lines rescue and other excluding broker - own brands 181 192 191 - partnerships 125 155 220 Commercial 315 314 305 International 340 316 288 Other (1) 61 232 300 Total income 3,807 4,239 4,309
In-force policies (000s) Personal lines motor excluding broker - own brands 3,787 4,162 4,762 - partnerships 320 645 844 Personal lines home excluding broker - own brands 1,811 1,797 1,774 - partnerships 2,497 2,530 2,566 Personal lines rescue and other excluding broker - own brands 1,844 1,966 2,262 - partnerships 7,307 7,497 6,688 Commercial 422 352 346 International 1,387 1,082 944 Other (1) 1 644 1,049 Total in-force policies (2) 19,376 20,675 21,235
Gross written premium Personal lines motor excluding broker - own brand 1,584 1,647 1,738 - partnerships 137 257 311 Personal lines home excluding broker - own brand 474 478 462 - partnerships 549 556 560 Personal lines rescue and other excluding broker - own brand 174 178 176 - partnerships 174 159 141 Commercial 435 397 395 International 570 425 354 Other (1) 1 201 343 Total gross written premium 4,098 4,298 4,480
Performance ratios Return on regulatory capital (3) 11.3% (7.9%) 1.7% Return on tangible equity (4) 10.3% (6.8%) 1.4% Loss ratio (5) 70% 91% 83% Commission ratio (6) 10% 10% 8% Expense ratio (7) 20% 20% 21% Combined operating ratio (8) 100% 121% 112% Balance sheet Total insurance reserves (£m) (9) 7,284 7,643 7,139
RBS Insurance continued RBS Insurance continues to make good progress ahead of its divestment from the Group. Q4 2011 operating profit of £125 million was the fifth successive quarter of year-on-year improvement. Operating profit of £454 million for 2011 shows a return to full year profitability and represents close to a £750 million turnaround from 2010. These results demonstrate the success of the first phase of management’s transformation plan - to return to profit in 2011. The full year combined operating ratio improved to 100% (2010 - 121%) with a full year return on equity of 10.3% compared with a negative return of 6.8% in 2010.
As part of the plan to build competitive advantage, the rationalisation of occupied sites continues, with 15 site exits by the end of 2011. The consolidation of the four UK general insurance underwriting entities within the RBS Insurance Group was successfully completed in December 2011. All UK general insurance business is now written through one underwriter with the aim of improving operational and capital efficiency.
Investment income fell £12 million, 4%, reflecting decreased yields on the portfolio in 2011, partially offset by higher realised gains.
At the end of 2011, RBS Insurance's investment portfolios comprised primarily cash, gilts and investment grade bonds. Within the UK portfolio, £8.9 billion, and the International portfolio, £827 million, there was no exposure to sovereign debt issued by Portugal, Ireland, Italy, Greece or Spain.
Net claims were £326 million higher than in 2009, driven by increases to bodily injury reserves relating to prior years, including allowance for higher claims costs in respect of Periodic Payment Orders due to an increased settlement rate of such claims. Although bodily injury frequency has stabilised, severity has continued to deteriorate. Claims were also impacted by the adverse weather experienced in the first and fourth quarters.
A VAT recovery of £176 million in 2010 compared with £85 million recovered in 2011.
The Group’s credit spreads have fluctuated over the course of the year, but ended the year slightly wider, resulting in an overall annual decrease in the carrying value of own debt.
Non-interest income 325 1,005 (3,904) Total income/(loss) 1,206 2,964 (2,370) Direct expenses
Loss from trading activities Monoline exposures (670) (5) (2,387) Credit derivative product companies (85) (139) (947) Asset-backed products (2) 29 235 (288) Other credit exotics (175) 77 (558) Equities (11) (17) (47) Banking book hedges (1) (82) (1,613) Other (3) 192 (100) 679 (721) (31) (5,161)
Impairment losses Banking & portfolios 3,833 5,328 8,350 International businesses 82 200 499 Markets 4 (52) 372 Total impairment losses 3,919 5,476 9,221
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) (4) Banking & portfolios 4.9% 5.0% 5.8% International businesses 3.7% 4.4% 4.1% Markets (3.0%) 0.2% 7.5% Total 4.8% 4.9% 5.7%
Notes: (1) Includes losses on disposals of £127 million for 2011 (2010 - £504 million). (2) Asset-backed products include super asset backed structures and other asset-backed products. (3) Includes profits in RBS Sempra Commodities JV of £4 million for 2011 (2010 - £372 million). (4) Includes disposal groups.
Performance ratios Net interest margin 0.64% 1.16% 0.69% Cost:income ratio 107% 76% (100%) Adjusted cost:income ratio 128% 101% (80%)
Capital and balance sheet Total third party assets (excluding derivatives) (1) 93.7 137.9 201.0 Total third party assets (including derivatives) (1) 104.7 153.9 220.9 Loans and advances to customers (gross) (2) 79.4 108.4 149.5 Customer deposits (2) 3.5 6.7 12.6 Risk elements in lending (2) 24.0 23.4 22.9 Risk-weighted assets (1) 93.3 153.7 171.3
Gross customer loans and advances Banking & portfolios 77.3 104.9 138.3 International businesses 2.0 3.5 9.4 Markets 0.1 — 1.8 79.4 108.4 149.5
Risk-weighted assets Banking & portfolios 64.8 83.5 92.5 International businesses 4.1 5.6 11.5 Markets 24.4 64.6 67.3 93.3 153.7 171.3
Commercial real estate 42.6 (5.6) (2.4) 0.7 (3.4) (0.4) 31.5 Corporate 59.8 (8.5) (11.3) 2.5 (0.1) (0.2) 42.2 SME 3.7 (1.6) — 0.1 (0.1) — 2.1 Retail 9.0 (1.1) (1.4) — (0.3) (0.1) 6.1 Other 2.5 (0.6) — — — — 1.9 Markets 13.6 (2.9) (1.8) 1.0 — (0.1) 9.8 Total (excluding derivatives) 131.2 (20.3) (16.9) 4.3 (3.9) (0.8) 93.6 Markets - RBS Sempra Commodities JV 6.7 (1.3) (5.0) — — (0.3) 0.1 Total (3) 137.9 (21.6) (21.9) 4.3 (3.9) (1.1) 93.7
Ulster Bank Mortgages — 42 42 Commercial real estate - investment 609 630 286 - development 1,552 1,759 733 Other corporate 173 251 217 Other EMEA 15 52 106 Total Ulster Bank 2,349 2,734 1,384
US Retail & Commercial Auto and consumer 58 82 136 Cards (9) 23 130 SBO/home equity 201 277 452 Residential mortgages 16 4 54 Commercial real estate 40 185 224 Commercial and other (3) 17 83 Total US Retail & Commercial 303 588 1,079
Global Banking & Markets Manufacturing and infrastructure 57 (290) 1,404 Property and construction 752 1,296 1,413 Transport (3) 33 178 Telecoms, media and technology 68 9 545 Banking and financial institutions (98) 196 620 Other (20) 14 567 Total Global Banking & Markets 756 1,258 4,727
Other Wealth 1 51 251 Global Transaction Services 1 — 49 Central items 3 2 1
Gross loans and advances to customers (excluding reverse repurchase agreements) by donating division and sector
Global Banking & Markets Manufacturing and infrastructure 6.6 8.7 17.5 Property and construction 15.3 19.6 25.7 Transport 3.2 5.5 5.8 Telecoms, media and technology 0.7 0.9 3.2 Banking and financial institutions 5.6 12.0 16.0 Other 6.8 9.0 13.5 Total Global Banking & Markets 38.2 55.7 81.7
Gross loans and advances to customers (excluding reverse repurchase agreements) 79.3 108.2 147.3
The division focused on reducing capital intensive trading assets, with activity including the restructuring of monoline exposures, which, at a cost of c.£600 million in 2011, achieved a reduction of £32 billion in riskweighted assets.
An operating loss of £4,203 million for 2011 was £1,302 million lower than 2010. Income declined by £1,758 million reflecting continued divestment, including business and country exits. The decrease was partially offset by a reduction in expenses of £961 million, largely driven by the fall in headcount. Impairment losses fell by £1,557 million despite ongoing challenges in the real estate and Ulster Bank portfolios.
2011 compared with 2010 Operating loss of £4,203 million in 2011 was £1,302 million lower than the loss recorded in 2010. The continued divestment of Non-Core businesses and portfolios has reduced revenue streams as well as the cost base.
Staff expenses fell by 14% over the year, largely driven by the impact of business divestments, including a number of country exits and the disposal of substantially all of the Group’s interest in the RBS Sempra Commodities JV.
Impairments were £3,745 million lower than 2009. The decline reflects the overall improvement in the economic environment, although still high loss rates reflect the difficult conditions experienced in specific sectors, including both UK and Irish commercial property sectors.
Managed and Statutory 2009 2011 2010 Managed Statutory £m £m £m £m
Commentary on consolidated balance sheet - managed and statutory 2011 compared with 2010 Total assets of £1,506.9 billion at 31 December 2011 were up £53.3 billion, 4%, compared with 31 December 2010. This principally reflects an increase in cash and balances at central banks and the mark-to-market value of derivatives in Global Banking & Markets, partly offset by decreases in debt securities and equity shares and the continuing disposal and run-off of Non-Core assets.
Movements in the value of derivative assets up £102.5 billion, 24%, to £529.6 billion, and liabilities, up £100.0 billion, 24%, to £524.0 billion, primarily reflect increases in interest rate contracts as a result of a significant downward shift in interest rates across all major currencies, together with increases in the mark-to-market value of credit derivatives as a result of widening credit spreads and rising credit default swap prices.
Deferred taxation was down £2.5 billion, 39%, to £3.9 billion, largely as a result of the utilisation of brought forward tax losses in the UK.
Customer accounts fell £7.7 billion, 2%, to £503.0 billion. Within this, repos increased £6.7 billion, 8%, to £88.8 billion. Excluding repos, customer deposits were down £14.4 billion, 3%, to £414.1 billion, reflecting the transfer to disposal groups of £21.8 billion of customer accounts relating to the UK branch-based businesses. This was partly offset by the net effect of growth in Global Transaction Services £2.7 billion, UK Corporate, £0.9 billion, UK Retail, £5.8 billion, US Retail & Commercial, £0.6 billion and Wealth, £1.8 billion, together with exchange rate and other movements of £0.3 billion and declines in Global Banking & Markets, £0.8 billion, Ulster Bank, £0.8 billion and Non-Core, £3.1 billion.
Loans and advances to banks increased by £16.6 billion, 20%, to £100.5 billion. Reverse repurchase agreements and stock borrowing (‘reverse repos’) were up £7.5 billion, 21%, to £42.6 billion and bank placings rose £9.1 billion, 19%, to £57.9 billion, primarily as a result of the investment of surplus liquidity in short-term assets.
Loans and advances to customers were down £40.4 billion, 7%, at £555.3 billion. Within this, reverse repurchase agreements were up £11.5 billion, 28%, to £52.5 billion. Customer lending decreased by £51.9 billion to £502.7 billion or £48.9 billion before impairment provisions. This reflected planned reductions in Non-Core of £39.7 billion along with declines in Global Banking & Markets £16.7 billion, US Retail & Commercial, £2.6 billion and Ulster Bank, £2.0 billion. These were partially offset by growth in UK Retail, £5.4 billion, Wealth, £2.4 billion and Global Transaction Services, £1.7 billion, together with the effect of exchange rate and other movements, £2.6 billion.
Debt securities were down £31.6 billion, 13%, to £217.5 billion driven mainly by reductions in Global Banking & Markets.
The value of derivative assets were down £11.1 billion, 3%, to £427.1 billion, primarily reflecting a decrease in interest contracts, movements in five to ten year interest yields, and the combined effect of currency movements, with Sterling weakening against the dollar but strengthening against the Euro.
Deposits by banks declined £54.9 billion, 36%, to £98.8 billion, with reduced inter-bank deposits, down £49.6 billion, 43%, to £65.9 billion and lower repurchase agreements and stock lending (‘repos’), down £5.3 billion, 14%, to £32.7 billion.
Subordinated liabilities decreased by £4.5 billion, 14% to £27.1 billion. This reflected the redemption of £2.6 billion undated loan capital, debt preference shares and trust preferred securities under the liability management exercise completed in May, together with the conversion of £0.8 billion US dollar and Sterling preference shares and the redemption of £1.6 billion of other dated and undated loan capital, which were partially offset by the effect of exchange rate movements and other adjustments of £0.5 billion.
Cash and balances at central banks were up £4.8 billion, 9%, to £57.0 billion principally due to an improvement in the Group's structural liquidity position during 2010.
Net cash flows from operating activities 3,325 19,291 (992) Net cash flows from investing activities 14 3,351 54 Net cash flows from financing activities (1,741) (14,380) 18,791 Effects of exchange rate changes on cash and cash equivalents (1,473) 82 (8,592) Net increase in cash and cash equivalents 125 8,344 9,261
The major factors contributing to the net cash inflow from operating activities of £19,291 million were the increase of £17,095 million in operating assets less operating liabilities, depreciation and amortisation of £2,220 million and income taxes received of £565 million, partly offset by the net operating loss before tax of £940 million from continuing and discontinued operations.
Risk-weighted assets (1) Credit risk 344,300 385,900 513,200 551,300 Counterparty risk 61,900 68,100 56,500 61,100 Market risk 64,000 80,000 65,000 46,500 Operational risk 37,900 37,100 33,900 36,900 508,100 571,100 668,600 695,800 Asset Protection Scheme relief (69,100) (105,600) (127,600) n/a 439,000 465,500 541,000 695,800
Banking book: On-balance sheet 480,200 Off-balance sheet 84,600 Trading book 44,200 609,000
Note: (1) The data for 2008 onwards are on a Basel II basis; 2007 is on a Basel I basis.
Group operating profit/(loss) on a managed basis excludes: movement in fair value of own debt; Asset Protection Scheme; Payment Protection Insurance costs; sovereign debt impairment; amortisation of purchased intangible assets; integration and restructuring costs; gain on redemption of own debt; strategic disposals; bonus tax; bank levy; gains on pensions curtailment; interest rate hedge adjustments on available-for-sale Greek government bonds; write-down of goodwill and other intangible assets; and
Income statement for the year ended 31 December 2011 Reallocation of one-off Managed items Statutory £m £m £m
Net interest income 12,689 (10) 12,679 Non-interest income (excluding insurance net premium income) 10,832 1,170 12,002 Insurance net premium income 4,256 — 4,256 Non-interest income 15,088 1,170 16,258 Total income 27,777 1,160 28,937 Operating expenses (15,478) (2,548) (18,026) Profit before other insurance net claims and impairment losses 12,299 (1,388) 10,911 Insurance net claims (2,968) — (2,968) Operating profit before impairment losses 9,331 (1,388) 7,943 Impairment losses (7,439) (1,270) (8,709) Operating profit/(loss) 1,892 (2,658) (766) Fair value of own debt 1,846 (1,846) — Asset Protection Scheme (906) 906 — Payment Protection Insurance costs (850) 850 — Sovereign debt impairment (1,099) 1,099 — Amortisation of purchased intangible assets (222) 222 — Integration and restructuring costs (1,064) 1,064 — Gain on redemption of own debt 255 (255) — Strategic disposals (104) 104 — Bonus tax (27) 27 — Bank levy (300) 300 — Interest rate hedge adjustments on impaired available-for-sale Greek government bonds (169) 169 — Write-down of goodwill and other intangible assets (11) 11 — RFS Holdings minority interest (7) 7 — Loss before tax (766) — (766) Tax charge (1,250) — (1,250) Loss from continuing operations (2,016) — (2,016) Profit from discontinued operations, net of tax 47 — 47 Loss for the year (1,969) — (1,969) Non-controlling interests (28) — (28) Preference share and other dividends — — — Loss attributable to ordinary and B shareholders (1,997) — (1,997)
Net interest income 14,200 9 14,209 Non-interest income (excluding insurance net premium income) 13,334 (803) 12,531 Insurance net premium income 5,128 — 5,128 Non-interest income 18,462 (803) 17,659 Total income 32,662 (794) 31,868 Operating expenses (16,710) (1,518) (18,228) Profit before insurance net claims and impairment losses 15,952 (2,312) 13,640 Insurance net claims (4,783) — (4,783) Operating profit before impairment losses 11,169 (2,312) 8,857 Impairment losses (9,256) — (9,256) Operating profit/(loss) 1,913 (2,312) (399) Fair value of own debt 174 (174) — Asset Protection Scheme (1,550) 1,550 — Amortisation of purchased intangible assets (369) 369 — Integration and restructuring costs (1,032) 1,032 — Gain on redemption of own debt 553 (553) — Strategic disposals 171 (171) — Bonus tax (99) 99 — Write-down of goodwill and other intangible assets (10) 10 — RFS Holdings minority interest (150) 150 — Loss before tax (399) — (399) Tax charge (634) — (634) Loss from continuing operations (1,033) — (1,033) Loss from discontinued operations, net of tax (633) — (633) Loss for the year (1,666) — (1,666) Non-controlling interests 665 — 665 Preference share and other dividends (124) — (124) Loss attributable to ordinary and B shareholders (1,125) — (1,125)
Fair value of own debt (142) 142 — Amortisation of purchased intangible assets (272) 272 — Integration and restructuring costs (1,286) 1,286 — Gain on redemption of own debt 3,790 (3,790) — Strategic disposals 132 (132) — Bonus tax (208) 208 — Gains on pensions curtailment 2,148 (2,148) — Write-down of goodwill and other intangible assets (363) 363 — RFS Holdings minority interest (356) 356 — Loss before tax (2,647) — (2,647) Tax credit 429 — 429 Loss from continuing operations (2,218) — (2,218) Loss from discontinued operations, net of tax (105) — (105) Loss for the year (2,323) — (2,323) Non-controlling interests (349) — (349) Preference share and other dividends (935) — (935) Loss attributable to ordinary and B shareholders (3,607) — (3,607)
Balance sheet as at 31 December 2009 There are no differences between the managed and statutory balance sheets for 2011 and 2010. Therefore, no reconciliations have been provided for these years.
Assets Cash and balances at central banks 51,548 713 52,261 Net loans and advances to banks 48,777 7,879 56,656 Reverse repurchase agreements and stock borrowing 35,097 — 35,097 Loans and advances to banks 83,874 7,879 91,753 Net loans and advances to customers 554,654 132,699 687,353 Reverse repurchase agreements and stock borrowing 41,040 — 41,040 Loans and advances to customers 595,694 132,699 728,393 Debt securities 249,095 18,159 267,254 Equity shares 15,960 3,568 19,528 Settlement balances 12,024 9 12,033 Derivatives 438,199 3,255 441,454 Intangible assets 14,786 3,061 17,847 Property, plant and equipment 17,773 1,624 19,397 Deferred tax 6,492 547 7,039 Prepayments, accrued income and other assets 18,604 2,381 20,985 Assets of disposal groups 18,432 110 18,542 Total assets 1,522,481 174,005 1,696,486
Liabilities Bank deposits 115,642 (11,504) 104,138 Repurchase agreements and stock lending 38,006 — 38,006 Deposits by banks 153,648 (11,504) 142,144 Customer deposits 414,251 131,598 545,849 Repurchase agreements and stock lending 68,353 — 68,353 Customer accounts 482,604 131,598 614,202 Debt securities in issue 246,329 21,239 267,568 Settlement balances 10,412 1 10,413 Short positions 40,463 — 40,463 Derivatives 421,534 2,607 424,141 Accruals, deferred income and other liabilities 24,624 5,703 30,327 Retirement benefit liabilities 2,715 248 2,963 Deferred tax 2,161 650 2,811 Insurance liabilities 7,633 2,648 10,281 Subordinated liabilities 31,538 6,114 37,652 Liabilities of disposal groups 18,857 33 18,890 Total liabilities 1,442,518 159,337 1,601,855
Non-controlling interests 2,227 14,668 16,895 Owners’ equity 77,736 — 77,736 Total equity 79,963 14,668 94,631
Risk and balance sheet management Risk and balance sheet management In this section (pages 100 to 249) of the Business review, certain information has been audited and is part of the Group’s financial statements as permitted by IFRS 7. Other disclosures are unaudited and are labelled with an asterisk (*). In this section, the 2009 data relate to the Group before RFS Holdings minority interest (RFS MI).
Introduction* Introduction* All the disclosures in this section (pages 100 to 109) are unaudited as indicated by an asterisk (*). All the disclosures in this section (pages 100 to 109) are unaudited as indicated by an asterisk (*).
maintain stakeholder confidence: to ensure that stakeholders have confidence in the Group’s recovery plan, its ability to deliver its strategic objectives and the effectiveness of its business culture and operational controls.
Each objective is essential in its own right, but also mutually supportive of the others. Each objective is essential in its own right, but also mutually supportive of the others.
In 2011, the Group made significant progress in strengthening its approach to risk management in an external environment that remained challenging.
The delivery of proactive and effective risk management relies on high quality data inputs on which to make assessments. It also requires robust forward-looking measurement and stress testing capabilities (see stress testing on page 102). Both of these areas continue to be enhanced and improvements embedded across the Group.
Risk control frameworks are used to identify and address concentrations of risk. These systems are reinforced by a Group Policy Framework (see page 102), which was enhanced during 2011, with assurance activity ongoing to ensure the policy standards it comprises remain appropriate.
A clear risk appetite provides a greater understanding across the Group of the acceptable levels of risk for each business. It provides a solid platform from which the Group can focus on its key business strengths and competitive advantages over the long-term.
Building on these core foundations, the Group has developed a framework that sets and implements an appropriate risk appetite for the Group (and its main businesses), supported by a regular monitoring and review process.
The development of this framework has been based on the following best practice principles: strong leadership from the Group Board in establishing and setting risk appetite and in ensuring its purpose is understood and its use promoted as good business practice; a strong risk management culture, in which risk is clearly and meaningfully aligned with business behaviours and outcomes; a close collaborative partnership between the risk, strategy, treasury and finance functions that facilitates a broader internal debate on key issues; and clear accountability by each division (and business unit) for the level of risk it is prepared to take to achieve its business objectives.
Group-wide stress testing is used to assess whether strategic plans are consistent with risk appetite and to measure the key drivers of risk (down to business unit level), with mitigating actions identified whenever the risk profile is considered to be outside (or close to) acceptable levels (see page 102).
The key channels through which risk appetite is cascaded throughout and embedded in each division are: divisional risk appetite statements - each division has developed its own risk appetite statement, which is based on the four strategic risk objectives and is appropriate for its business plans but also aligned with the Group’s risk appetite targets; risk control frameworks and limits - risk control frameworks set clear guidance on acceptable limits and tolerances for all material risk types (e.g. credit, market and country risk), aligned with the Group’s risk appetite targets; Group operational and conduct risk appetite - the Group has developed a robust control environment to ensure it conducts its activities in accordance with its regulatory and other obligations; and culture, values and remuneration - a programme of communication, engagement and training is being rolled out across the Group to engender a wide understanding of the purpose of risk appetite.
The Executive Risk Forum (see Risk governance on page 103) is the main body overseeing the Group’s stress testing approach, processes and results. The forum is primarily responsible for reviewing and challenging the results of any Group-wide stress test and ensuring that, where necessary, appropriate management actions are undertaken. The Board Risk Committee will provide oversight and challenge as appropriate.
A series of stress events are monitored on a regular basis to assess the potential impact of a severe yet plausible event on the Group. There are four core types of scenario stress testing: macroeconomic stress testing, which considers the impact on both earnings and capital for a range of scenarios; enterprise-wide stress testing, which considers scenarios that are not macroeconomic in nature but are sufficiently broad to entail multiple risks or affect multiple divisions and are likely to affect earnings, capital and funding; cross-divisional stress testing, which includes scenarios that affect multiple divisions due to their sensitivity to a common risk factor; and divisional and risk-specific stress testing, which is undertaken to support risk identification and management.
Industry-wide stress tests The Group takes part in a number of industry-wide stress tests, in particular, the European Banking Authority Stress Test and IMF UK Financial Sector Assessment Program, results of which were published in July 2011. These confirmed that the Group remains well capitalised with a strong Core Tier 1 capital ratio and a strong Total capital ratio under both baseline and adverse scenarios. During 2011, the Group also undertook the FSA anchor scenario test.
The GPF was introduced in 2009. Enhancements applied in 2011 included the following: The GPF was introduced in 2009. Enhancements applied in 2011 included the following: the Group’s policy standards, which comprise the GPF, were rewritten to ensure they clearly express the mandatory controls required to mitigate the key risks the Group faces; the Group’s policy standards, which comprise the GPF, were rewritten to ensure they clearly express the mandatory controls required to mitigate the key risks the Group faces; all of the Group’s policy standards were benchmarked against relevant external reference points such as peer organisations to challenge and verify the content of the policy standards. Where identified, further improvements to the policy standards are now being implemented; all of the Group’s policy standards were benchmarked against relevant external reference points such as peer organisations to challenge and verify the content of the policy standards. Where identified, further improvements to the policy standards are now being implemented; for each policy standard, appropriate risk based assurance activity was introduced to ensure each division is appropriately controlled and compliance with policy can be demonstrated; and for each policy standard, appropriate risk based assurance activity was introduced to ensure each division is appropriately controlled and compliance with policy can be demonstrated; and risk appetite has its own policy standard within the GPF that clearly sets out roles and responsibilities in relation to the implementation of the risk appetite framework and provides assurance that risks are being actively managed within approved levels and tolerances.
risk appetite has its own policy standard within the GPF that clearly sets out roles and responsibilities in relation to the implementation of the risk appetite framework and provides assurance that risks are being actively managed within approved levels and tolerances.
The GPF will continue to be improved and embedded. The results of assurance activity, monitoring and analysis of the internal and external environment will be used to reassess the policy standards on a regular basis.
Committee and Operational Risk Executive Committee. In addition, Divisional Risk Committees report to the Group Risk Committee. (2) The following specialist sub-committees report directly to the Group Risk Committee: Global Markets Risk Committee, Group Country Risk Committee, Group Models Committee, Group Credit Risk
Committee and Operational Risk Executive Committee. In addition, Divisional Risk Committees report to the Group Risk Committee.
Introduction*: Risk governance continued The key risk responsibilities of each of these committees as well as their membership are set out in the table below. Further information on the Group Board and Board Committees is available on page 252.
In particular, the Executive Risk Forum was repositioned as a strategic committee focusing on strategic level risks and issues, and retaining the approval authority for the most material risk limits and decisions. The Group Risk Committee was refocused to operate primarily as an oversight committee across risk types, concentrating particularly on thematic and emerging risks and issues.
The committees that sit below the Group Risk Committee were streamlined significantly, aligned more closely to key risk types and given clearer empowerment and accountability where required.
A Capital and Stress Testing Committee was created as a sub-committee of the Group Asset and Liability Management Committee to cover risk and capital matters.
Group Chief Executive Group Finance Director Chief Administrative Officer Chief Executive Officers of divisions Head of Restructuring and Risk
The Group Remuneration Committee is responsible for the overview of the Group’s policy on remuneration and receives advice from Risk Management and the Board Risk Committee to ensure that there is thorough risk input into incentive plan design and target setting as well as risk review of performance bonus pools and clawback. It operates under delegated authority from the Group Board.
The Executive Risk Forum operates as a committee of the Executive Committee with full authority to act on all risk and control matters across the Group.
The Group Asset and Liability Management Committee (GALCO) is a sub-committee of the Executive Risk Forum and is responsible for identifying, managing and controlling Group balance sheet risks in executing its chosen business strategy.
Group Finance Director Group Treasurer Chief Executive Officers of divisions Head of Restructuring and Risk Key Group Finance function heads Global Head of Markets
The Capital and Stress Testing Committee is a subcommittee of the Group Asset and Liability Management Committee and focuses on the broad risk capital agenda, including risk appetite, capital usage, stress testing, Internal Capital Adequacy Assessment Process, capital planning, allocation and management, economic capital and prudential developments, including Basel oversight.
The Executive Credit Group decides on requests for the extension of existing or new credit limits on behalf of the Group Board where the proposed aggregate facility limits are in excess of the credit approval authorities granted to individuals in divisions or in Group Risk Management, or where an appeal against a decline decision of the Group Chief Credit Officer (or delegates) or Group Chief Risk Officer is referred for final decision.
Group A members (1) Head of Restructuring and Risk Deputy Chief Risk Officer Group Chief Credit Officer/Chief Credit Officer N.V. Head of Global Restructuring Group Chief Risk Officer, Non-Core division/APS (alternate)
Attendees: at least two executives of the division, as appropriate. Representatives from finance, risk, internal audit and external audit.
Risk coverage* The main risk types faced by the Group are presented below, together with a summary of the key areas of focus and how the Group managed these risks in 2011.
The risk that the Group has insufficient capital or is unable to meet its financial liabilities as they fall due.
The Group plans for and maintains an adequate amount and mix of capital consistent with its risk profile. This ensures that in any foreseeable scenario the Group holds minimum capital to meet the standards and requirements of investors, regulators and depositors. The amount of capital required is determined through risk assessments and stress testing.
The risk that the Group will incur losses owing to the failure of a customer to meet its obligation to settle outstanding amounts.
The Group manages credit risk based on a suite of credit approval and risk concentration frameworks and associated risk management systems and tools. It also continues to reduce the risk associated with legacy exposures through further reductions in Non-Core assets.
During 2011, asset quality continued to improve, resulting in loan impairment charges 21% lower than in 2010 despite continuing challenges in Ulster Bank Group (Core and Non-Core) and corporate real estate portfolios. The Group continued to make progress in reducing key credit concentration risks, with credit exposures in excess of single name concentration limits declining 15% during the year and exposure to commercial real estate declining 14%. Refer to pages 134 to 207.
Potential to affect parts of the Group’s credit portfolio that are directly or indirectly linked to the country in question.
Market risk The risk arising from changes in interest rates, foreign currency, credit spreads, equity prices and risk related factors such as market volatilities.
The Group’s market risk policy statements set out its qualitative tolerance for market risk. They define the governance, responsibilities and requirements for the identification, measurement, analysis, management and communication of the market risk arising from the Group’s trading and nontrading investment activities.
The Group Market Risk limit framework expresses the Group’s quantitative tolerance for market risk. The Group limit metrics capture, in broad terms, the full range of market risk exposures, ensuring the risk is appropriately defined and communicated.
The level of operational risk remains high due to the scale of structural change occurring across the Group, the pace of regulatory change, the economic downturn and other external threats, such as e-crime. Refer to pages 236 to 239.
Risk type Definition Features How the Group managed risk and the focus in 2011
Compliance risk The risk arising from noncompliance with national and international laws, rules and regulations.
Management of compliance risk entails early identification and effective management of changes in legislative, regulatory and other requirements that may affect the Group.
It also requires active engagement with regulators, close analysis of emerging regulatory themes, and interaction with rule-makers and legislators.
Within the GPF, compliance risk policies define minimum standards to which all businesses must adhere. GPF policies are supplemented, where appropriate, by divisional policies to meet local product or market requirements.
During 2011, the Group managed the increased levels of scrutiny and legislation by enlarging the capacity of its compliance, anti-money laundering and regulatory affairs teams and taking steps to improve its operating models, tools, systems and processes. Refer to pages 239 to 244.
The Group Sustainability Committee and risk committees continue to assess reputational risk issues. In 2011, an Environmental, Social and Ethical (ESE) Risk Policy was developed with sector ESE risk appetite positions drawn up to assess the Group’s appetite to support customers in sensitive sectors including defence, oil and gas. This also included the establishment of divisional reputational risk committees.
Influenced by many factors such as pricing, sales volume, input costs, regulations and market and economic conditions.
Funding position can be volatile due to the uncertainty of future investment returns and the projected value of schemes’ liabilities.
The Group manages pension risk from a sponsor perspective using a framework that encompasses risk reporting and monitoring, stress testing, modelling and an associated governance structure that helps ensure the Group is able to fulfil its obligation to support the defined benefit pension schemes to which it has exposure.
Each risk type maps into the Group’s risk appetite framework and contributes to the overall achievement of its strategic objectives with underlying frameworks and limits. The key frameworks and developments over the past year are described in the relevant sections of the following pages.
Two of the Group’s four key strategic risk objectives relate to the maintenance of capital adequacy and ensuring stable and efficient access to liquidity and funding. This section on balance sheet management explains how the Group is performing on achieving these objectives.
The Group’s own determination of how much capital is sufficient is derived from the desired credit rating level and the application of both internally and externally defined stress tests that identify potential changes in capital ratios over time.
Monitoring and maintenance* Based on these determinations, which are continually reassessed, the Group aims to maintain capital adequacy both at Group level and in each regulated entity.
Capital allocation* Capital resources are allocated to the Group’s businesses based on key performance parameters agreed by the Group Board in the annual strategic planning process. Principal among these is a profitability metric which assesses the effective use of the capital allocated to the business. Projected and actual return on equity is assessed against target returns set by the Group Board. The allocations also reflect strategic priorities and balance sheet and funding metrics.
The divisions use return on capital metrics when making pricing decisions on products and transactions with a view to ensuring customer activity is appropriately aligned with Group and divisional targets and allocations.
Key points* Market risk RWAs were impacted by the new CRD III rules but decreased overall by £16 billion in 2011 reflecting de-risking of Non-Core and a reduction in trading VaR.
Pillar 3* The Group publishes its Pillar 3 Disclosures on its website, providing a range of additional information relating to Basel II and risk and capital management across the Group. The disclosures focus on capital resources and adequacy and discuss a range of credit risk measures and management methods (such as credit risk mitigation, counterparty credit risk and provisions) and their associated RWAs under the various Basel II approaches. Detailed disclosures are also made on equity exposures, securitisations, operational risk, market risk and interest rate risk in the banking book.
Balance sheet management: Capital management continued Capital resources The Group’s regulatory capital resources in accordance with FSA definitions were as follows: Statutory Proportional*
Regulatory adjustments and deductions Own credit (2,634) (1,182) (1,057) (1,057) Unrealised losses on AFS debt securities 1,065 2,061 1,888 1,888 Unrealised gains on AFS equity shares (108) (25) (134) (134) Cash flow hedging reserve (879) 140 252 252 Other adjustments for regulatory purposes 571 204 (193) 41 Goodwill and other intangible assets (14,858) (14,448) (17,847) (14,786) 50% excess of expected losses over impairment provisions (net of tax) (2,536) (1,900) (2,558) (2,558)
Other Tier 1 capital Preference shares - equity 4,313 4,313 7,281 7,281 Preference shares - debt 1,094 1,097 3,984 3,984 Innovative/hybrid Tier 1 securities 4,667 4,662 5,213 2,772
Tier 2 deductions 50% of securitisation positions (2,019) (2,321) (1,353) (1,353) 50% excess of expected losses over impairment provisions (3,451) (2,658) (3,578) (3,578)
Balance sheet management: Capital management continued Risk-weighted assets by division* Risk-weighted assets by risk category and division are set out below: Credit risk
Asset Protection Scheme* The Group acceded to the Asset Protection Scheme (APS or ‘the Scheme’) in December 2009.
Following accession to the APS, arrangements were put in place within the Group that extended effective APS protection to all other regulated entities holding assets covered by the APS.
Impact The Group calculates its capital requirements in accordance with the capped basis. Accordingly, the APS has no impact on the Pillar 1 regulatory capital requirement in respect of the assets covered by the APS. It does, however, improve the Core Tier 1 capital ratio of the Group. The protection afforded by the APS assists the Group in satisfying the forward-looking stress testing framework applied by the FSA.
For further information on the assets covered by APS see pages 247 to 249.
Basel III* The rules issued by the Basel Committee on Banking Supervision (BCBS), commonly referred to as Basel III, are a comprehensive set of reforms designed to strengthen the regulation, supervision, risk and liquidity management of the banking sector. In the EU they will be enacted through a revised Capital Requirements Directive referred to as CRD IV.
In December 2010, the BCBS issued the final text of the Basel III rules, providing details of the global standards agreed by the Group of Governors and Heads of Supervision, the oversight body of the BCBS and endorsed by the G20 leaders at their November 2010 Seoul summit. There are transition arrangements proposed for implementing these new standards as follows: National implementation of increased capital requirements will begin on 1 January 2013; There will be a phased five year implementation of new deductions and regulatory adjustments to Core Tier 1 capital commencing on 1 January 2014; The de-recognition of non-qualifying non-common Tier 1 and Tier 2 capital instruments will be phased in over 10 years from 1 January 2013; and Requirements for changes to minimum capital ratios, including conservation and countercyclical buffers, as well as additional requirements for Global Systemically Important Banks, will be phased in from 2013 to 2019.
The Group, in conjunction with the FSA, regularly evaluates its models for the assessment of RWAs ascribed to credit risk across various classes. This, together with the changes introduced by CRD IV relating primarily to counterparty risk, is expected to increase RWA requirements by the end of 2013 by £50 billion to £65 billion. These estimates are still subject to change; a degree of uncertainty remains around implementation details as the guidelines are not finalised and must still be enacted into EU law. There could be other future changes and associated impacts from these model reviews.
The Group is managing the changes to capital requirements from new regulation and model changes and the resulting impact on the common equity Tier 1 ratio, focusing on risk reduction and deleveraging. This is principally being achieved through the continued run-off and disposal of Non-Core assets and deleveraging in GBM as the business focuses on the most productive returns on capital.
The major categories of new deductions and regulatory adjustments which are being phased in over a five year period from 1 January 2014 include: Expected loss net of provisions; Deferred tax assets not relating to timing differences; Unrealised losses on available-for-sale securities; and Significant investments in non-consolidated financial institutions.
Wholesale funding - £21 billion of net term wholesale debt was issued in 2011 from secured and unsecured funding programmes, across a variety of maturities and currencies.
Funding issuance The Group has access to a variety of funding sources across the globe, including short-term money markets, repurchase agreement markets and term debt investors through its secured and unsecured funding programmes. Diversity in funding is provided by its active role in the money markets, along with access to global capital flows through GBM’s international client base. The Group’s wholesale funding franchise is well diversified by currency, geography, maturity and type.
Balance sheet composition The Group’s balance sheet composition is a function of the broad array of product offerings and diverse markets served by its Core divisions. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise liquidity transformation in normal business environments, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
Diversification of the Group’s funding base is central to its balance sheet management strategy. The Group’s businesses have developed large customer franchises based on strong relationship management and high quality service. These customer franchises are strongest in the UK, the US and Ireland, but extend into Europe and Asia. Customer deposits provide large pools of stable funding to support the majority of the Group’s lending. Improvement of the Group’s loan:deposit ratio to 100% or better, by 2013, is a strategic objective.
Simulated liquidity stress testing is periodically performed for each business as well as the major operating subsidiaries. A variety of firmspecific and market-related scenarios are used at the consolidated level and in individual countries. These scenarios include assumptions about significant changes in key funding sources, credit ratings, contingent uses of funding, and political and economic conditions in certain countries.
The Group’s actual experiences from the 2008 and 2009 period factor heavily into the liquidity analysis. This systemic and name-specific crisis provides important data points in estimating stress severity.
The Group’s lead regulator is the UK Financial Services Authority (FSA). The FSA implemented a new liquidity regime on 1 June 2010. The new rules provide a standardised approach applied to all UK banks. At RBS Group, the rules focus on the UK Defined Liquidity Group (a subset comprising the Group’s five UK banks, The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Co) and cover adequacy of liquidity resources, controls, stress testing and the Individual Liquidity Adequacy Assessment (ILAA). The ILAA informs the Group Board and the FSA of the assessment and quantification of the Group’s liquidity risks and their mitigation, and how much current and future liquidity is required.
In the US, the Group’s operations must meet liquidity requirements set out by the US Federal Reserve Bank, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Financial Industry Regulatory Authority. In the Netherlands, the Group is subject to the De Nederlandsche Bank liquidity oversight regime.
In December 2010, the Basel Committee on Banking Supervision issued the ‘International framework for liquidity risk measurement, standards and monitoring’ which confirmed the introduction of two liquidity ratios: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).
The introduction of both of these ratios will be subject to an observation period, which includes review clauses to identify and address any unintended consequences.
Balance sheet management: Liquidity and funding risk continued Funding sources The table below shows the Group’s primary funding sources including deposits in disposal groups and excluding repurchase agreements.
Deposits by banks - central banks 3,680 0.5 6,655 0.9 8,535 1.0
Debt securities in issue - conduit asset backed commercial paper (ABCP) 11,164 1.6 17,320 2.3 25,583 3.1
Interbank funding excluding derivative collateral - bank deposits 37.3 38.2 83.7 - bank loans (24.3) (31.3) (31.3)
Key points Short-term wholesale funding excluding derivative collateral declined £27.3 billion in 2011, from £129.7 billion to £102.4 billion. This is £52.9 billion lower than the Group’s liquidity portfolio. Deleveraging in Non-Core and GBM has led to the reduced need for funding.
The Group’s customer deposits excluding cash collateral grew by approximately £7.1 billion in 2011.
Less than 1 year 25,583 76,008 33,696 — 1,614 136,901 2,144 139,045 50.0 1-5 years — 895 69,400 — 142 70,437 4,235 74,672 26.9 More than 5 years — 16 22,704 — 16,271 38,991 25,159 64,150 23.1 25,583 76,919 125,800 — 18,027 246,329 31,538 277,867 100.0
Short-term borrowings* Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certificates of deposit. Derivative collateral received from financial institutions is excluded from the table below, as are certain long-term borrowings.
At year end - balance (£bn) 129 93 16 16 254 115 92 26 38 271 242
During the year - maximum balance (£bn) 175 111 32 39 357 157 127 37 57 378 357 - average balance (£bn) 142 93 22 31 288 137 109 34 50 330 292 - weighted average interest rate 0.9% 1.1% 0.7% 1.2% 1.0% 0.6% 0.8% 0.9% 1.0% 0.7% 1.9%
Balance sheet management: Liquidity and funding risk continued Long-term debt issuances The table below shows debt securities issued by the Group with an original maturity of one year or more. The Group also executes other long-term funding arrangements (predominantly term repurchase agreements) which are not reflected in the following tables.
Private - unsecured 12,414 17,450 14,895 - unsecured: guaranteed — — 15,459 - secured 500 — —
Key points In line with the Group’s Strategic Plan, it has been an active issuer in recent years as it improved its liquidity and funding profile. Secured funding has increased as a proportion of total wholesale funding more recently as market dislocation and uncertainty over future regulatory developments have made unsecured markets less liquid.
The table below shows the original maturity of public long-term debt securities issued.
1-3 years 3-5 years 5-10 years >10 years Total 2011 £m £m £m £m £m * unaudited
GBP EUR USD AUD Other Total 2011 £m £m £m £m £m £m
Key points In line with the Group’s plan to diversify its funding mix, issuances were spread across G10 currencies and maturity bands, including £5.7 billion of public issuance with an original maturity of greater than 10 years.
Secured funding The Group has access to secured funding markets through own-asset securitisation and covered bond funding programmes to complement existing wholesale funding programmes and access to the repo markets. The Group monitors and manages encumbrance levels related to these secured funding programmes. This includes the potential encumbrance of Group assets that could be used in own-asset securitisations and/or covered bonds that could be used as contingent liquidity.
For information on the Group’s own-asset securitisations, covered bond programme and securities repurchase agreements, refer to Note 30 on the consolidated accounts on pages 396 and 397.
Balance sheet management: Liquidity and funding risk continued Liquidity portfolio The table below shows the composition of the Group’s liquidity portfolio (at estimated liquidity value). All assets within the liquidity portfolio are unencumbered.
Loan to deposit ratio and funding gap The table below shows the Group’s loan:deposit ratio and customer funding gap, including disposal groups.
Key points The Group’s loan:deposit ratio improved 1,000 basis points to 108% during 2011, as loans declined and deposits grew.
The customer funding gap almost halved with Non-Core contributing £27 billion of the £40 billion reduction.
Key points* The NSFR increased by 10% in the year to 111%, with the funding cushion over term assets and undrawn commitments increasing from £4 billion to £51 billion.
Term assets decreased in the year by £38 billion primarily reflecting Non-Core disposals and run-offs. The decrease in other assets is primarily due to the closure of certain equities businesses in Global Banking & Markets and other asset movements.
Group-sponsored conduits can be divided into multi-seller conduits and own-asset conduits. In determining whether or not to consolidate a conduit the Group applies the same criteria as to SPEs. Liquidity commitments from the Group to the conduit exceed the nominal amount of assets funded by the conduit as liquidity commitments are sized to cover the funding cost of the related assets.
The ways the Group may be involved with conduits and other special purpose entities are described on page 124.
Total assets and other aspects relating to the Group’s consolidated accounts are set out below.
Total assets held by the conduits 11,208 1,893 13,101 16,390 3,624 20,014 23,409 3,957 27,366 Commercial paper issued (1) 10,590 859 11,449 15,522 2,540 18,062 22,644 2,939 25,583
Notes: (1) Includes £0.3 billion of ABCP issued to RBS plc at 31 December 2011 (2010 - £0.7 billion). (2) Programme-wide credit enhancement (PWCE) is an additional programme-wide credit support which would absorb first loss on transactions where liquidity support is provided by a third party. (3) Maximum exposure to loss quantifies the Group’s exposure to its sponsored conduits. It is determined as the Group’s liquidity commitment to its sponsored conduits and additional PWCE which would absorb first loss on transactions where liquidity support is provided by third parties. Historically, PWCE has been greater than third party liquidity. Therefore the maximum exposure to loss is total deal specific liquidity.
(4) Liquidity commitments from the Group to the conduit exceed the nominal amount of assets funded by the conduit given that liquidity commitments are sized to cover the accrued funding cost of the related assets.
The maturity of the commercial paper issued by the Group’s conduits is managed to mitigate the short-term contingent liquidity risk of providing back-up facilities. The Group’s limits sanctioned for such liquidity facilities in 2011 totalled approximately £16.8 billion for multi-seller conduits (2010 - £22.6 billion; 2009 - £25.0 billion).
The weighted average life of the funded assets was 1.9 years at 31 December 2011 (2010 - 2.3 years; 2009 - 1.9 years).
The Group’s maximum exposure to loss on its multi-seller conduits is £16.7 billion (2010 - £22.8 billion; 2009 - £25.2 billion), being the total amount of the Group’s liquidity commitments plus the extent of the programme-wide credit enhancement of conduit assets for which facilities were not provided by third parties.
Multi-seller conduits accounted for 93% of the total liquidity and credit enhancements committed by the Group at 31 December 2011 (2010 - 84%; 2009 - 73%). The Group’s multi-seller conduits have continued to fund the vast majority of their assets solely through ABCP issuance.
Auto loans 3,663 390 4,053 2,241 — 6,294 Corporate loans 146 72 218 16 — 234 Credit card receivables 865 — 865 699 — 1,564 Trade receivables 1,136 126 1,262 649 — 1,911 Student loans 488 — 488 352 — 840 Consumer loans 1,362 — 1,362 101 — 1,463 Mortgages - prime 2,239 — 2,239 308 — 2,547 - non-conforming 727 — 727 34 — 761 - commercial 21 489 510 8 — 518 Other 760 617 1,377 331 — 1,708 11,407 1,694 13,101 4,739 — 17,840
BBB 2011 £m £m £m £m £m £m £m £m £m £m
Balance sheet management: Liquidity and funding risk continued Assets and liabilities by contractual cash flow maturity continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2009 £m £m £m £m £m £m
Assets by contractual maturity Cash and balances at central banks 52,239 — — 1 25 — Loans and advances to banks 42,615 1,757 966 282 868 71 Debt securities 17,581 14,484 29,675 26,788 52,104 30,335 Settlement balances 12,020 6 1 — 8 1 Other financial assets 265 215 402 127 421 — Total maturing assets 124,720 16,462 31,044 27,198 53,426 30,407 Loans and advances to customers 126,238 65,946 130,323 101,984 180,595 202,809 Derivatives held for hedging 488 1,547 3,049 1,076 751 10 251,446 83,955 164,416 130,258 234,772 233,226
Notes: (1) The Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. The Group expects most guarantees it provides to expire unused. (2) The Group has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown.
Held-for-trading assets of £763 billion and liabilities of £708 billion (2010 - £665 billion assets, £586 billion liabilities; 2009 - £651 billion assets, £568 billion liabilities) have been excluded from the table in view of their short-term nature.
The Group provides financial products to satisfy a variety of customer requirements. Loans and deposits are designed to meet customer objectives with regard to repricing frequency, tenor, index, prepayment, optionality and other features. When aggregated, they form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market rates.
The Group uses a variety of approaches to quantify its interest rate risk. IRRBB is measured using a version of the same value-at-risk (VaR) methodology that is used for the Group’s trading portfolios. Net interest income exposures are measured in terms of sensitivity over time to movements in interest rates. Additionally, Citizens measures the sensitivity of the market value of equity to changes in forward interest rates.
With the exception of Citizens and GBM, divisions are required to manage IRRBB through internal transactions with Group Treasury, to the greatest extent possible. Residual risks in divisions must be measured and reported as described below.
IRRBB VaR for the Group’s retail and commercial banking activities at a 99% a confidence level was as follows: Average Period end Maximum Minimum £m £m £m £m
Euro 26 33 32 Sterling 57 79 111 US dollar 61 121 42 Other 5 10 9
Key points Interest rate exposure at 31 December 2011 was considerably lower than at 31 December 2010 but average exposure was 9% higher in 2011 than in 2010.
+ 100 basis points shift in yield curves 244 232 510 – 100 basis points shift in yield curves (183) (352) (687) Bear steepener 443 Bull flattener (146)
Key points* The Group’s interest rate exposure remains slightly asset sensitive, driven in part by changes to underlying business assumptions as rates rise. The impact of the steepening and flattening scenarios is largely driven by the investment of net free reserves.
US dollar 17,570 1 17,569 (2,049) 15,520 (4,071) 11,449 Euro 8,428 (3) 8,431 (621) 7,810 (2,236) 5,574 Other non-sterling 5,224 272 4,952 (4,100) 852 — 852 31,222 270 30,952 (6,770) 24,182 (6,307) 17,875
Group before RFS Holdings minority interest 401 2,388 2,789 RFS Holdings minority interest 60 211 271
Risk management Introduction This section focuses on each of the key types of risk that RBS Group faces - explaining how the Group manages these risks and highlighting the enhancements made as a result of progress under the Group’s ongoing initiatives to strengthen its approach to risk management.
Organisation The existence of a strong credit risk management function is vital to support the ongoing profitability of the Group. The potential for loss through economic cycles is mitigated through the embedding of a robust credit risk culture within the business units and through a focus on the importance of sustainable lending practices. The role of the credit risk management function is to own the credit approval, concentration and credit risk control frameworks and to act as the ultimate authority for the approval of credit. This, together with strong independent oversight and challenge, enables the business to maintain a sound lending environment within risk appetite.
In the final quarter of 2011, the Executive Risk Forum (ERF) approved a change to the management of the credit portfolio, delegating greater authority to the Group Chief Credit Officer as chair of the functional credit committees that analyse and recommend the limits to the ERF. With effect from October 2011, the Group Chief Credit Officer chairs a single Credit Risk Committee, with the authority to approve limits for the majority of portfolios across the Group. The ERF retains its strategic role as the most senior risk committee outside the Group Board and will continue to approve material portfolio concentrations and higher risk portfolios such as commercial real estate. This change strengthens individual accountability across the risk organisation and encourages the engagement of business leaders in first line of defence risk activity.
In the two years since the new concentration framework was rolled out across the Group, the ERF has reviewed all material industry and product portfolios and agreed a risk appetite commensurate with the franchises represented in these reviews. In particular, limits have been reviewed and re-sized, to refine the Group’s risk appetite in areas where it faces significant balance sheet concentrations or franchise challenges. The product/asset class, sector, single name and country limits are now firmly embedded in the risk management processes of the Group and form a pivotal part of the Risk function’s engagement with the businesses on the appropriateness of risk appetite choices.
The new sector and asset class limits have been informed by the work undertaken to stress the portfolios and historical loss experience. In addition, they factor in the future consequences for risk and return in asset classes likely to be affected by the introduction of new regulatory capital rules under Basel III.
Wholesale - formal policies, specialised tools and expertise, tailored monitoring and reporting and, in certain cases, specific limits and thresholds are deployed to address certain lines of business across the Group, where the nature of credit risk incurred could represent a concentration or a specific/heightened risk in some other form. For example, in response to volatile conditions in the syndicated loan, fixed income and equities markets during 2011, the Group engaged in only selective underwriting activity in these markets. In addition to the limit structures the Group has in place to manage its overall exposure to underwriting activity, market-linked controls were introduced in the loan underwriting book in 2011, to align the risk profile more closely to asset price movements. Those portfolios identified as potentially representing a concentration or heightened risk are subject to formal governance, including periodic review, at either Group or divisional level, depending on materiality.
Single name concentration framework* Within wholesale portfolios, much of the activity undertaken by the credit risk function is organised around the assessment, approval and management of the credit risk associated with a borrower or group of related borrowers.
A formal single name concentration framework addresses the risk of outsized exposure to a borrower or borrower group. The framework includes specific and elevated approval requirements, additional reporting and monitoring, and the requirement to develop plans to address and reduce excess exposures over an appropriate timeframe.
Reducing the risk arising from concentrations to single names remains a key focus of management attention. Continued progress was made in 2011 and credit exposures in excess of single name concentration limits were reduced by over 15% during the year. The challenges posed by continued market illiquidity and the impact of negative credit migration caused by the current economic environment are expected to continue throughout 2012.
Country For information on how the Group manages credit risk by country, refer to the Country risk section on page 208.
Work began in the second half of 2011 on a major revision of the Group’s key credit policies. This will ensure that the Group’s control environment is appropriately aligned to the risk appetite that the Group Board has approved and provide a sound basis for the Group’s independent audit and assurance activities across the credit risk function. The work is expected to be concluded by the end of the second quarter of 2012.
Problem debt management The Group’s procedures for managing problem debts differ between wholesale and retail customers, as discussed below.
Early problem recognition Each division has established Early Warning Indicators (EWIs) designed to identify those performing exposures that require close attention due to financial stress or heightened operational issues. Such identification may also take place as part of the annual review cycle. EWIs vary from division to division and comprise both internal parameters (e.g. account level information) and external parameters (e.g. the share price of publicly listed customers).
Watchlist process* There are three Watchlist ratings - amber, red and black - reflecting progressively deteriorating conditions. Watchlist Amber loans are performing loans where the counterparty or sector shows early signs of potential stress or has other characteristics such that they warrant closer monitoring. Watchlist Red loans are performing loans where indications of the borrower’s declining creditworthiness are such that the exposure requires active management, usually by the Global Restructuring Group (GRG). Watchlist Black loans comprise risk elements in lending and potential problem loans.
Once on the Watchlist process, customers come under heightened scrutiny. The relationship strategy is reassessed by a forum of experienced credit, portfolio management and remedial management professionals within the division. In accordance with Group-wide policies, a number of mandatory actions will be taken, including a review of the customer’s credit grade and facility security documentation. Other appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt. Such circumstances include deteriorating trading performance, an imminent breach of covenant, challenging macroeconomic conditions, a late payment or the expectation of a missed payment.
Global Restructuring Group In cases where the Group’s exposure to the customer exceeds £1 million, the relationship may be transferred to the GRG following consultation with the originating division. The GRG’s primary function is active management of the exposures to minimise loss for the Group and where feasible return the exposure to the Group’s mainstream loan book following an assessment by the GRG that no further losses are expected.
At 31 December 2011, credit risk assets relating to exposures under GRG management (excluding those placed under GRG stewardship for operational reasons rather than concerns over credit quality and those in the AQ10 internal asset quality (AQ) band) totalled £22 billion. Credit risk assets are defined on page 144. The internal asset quality bands are defined on page 145.
Payment holidays and loan rescheduling - payment holidays or changes to the contracted amortisation profile including extensions in contracted maturity or roll-overs may be granted to improve the customer’s liquidity. Such concessions often depend on the expectation that the customer’s liquidity will recover when market conditions improve or will benefit from access to alternative sources of liquidity, e.g. an issue of equity capital. Recently, these types of concessions have become more common in commercial real estate transactions, particularly where a shortage of market liquidity rules out immediate refinancing and makes short-term forced collateral sales unattractive.
The asset quality of the restructured loans, the sectors affected and provision coverage are as follows: Wholesale restructurings by sector AQ1-AQ9 (1)
Property 1,980 2,600 18 Transport 686 694 11 Non-bank financial institutions 228 420 65 Retail and leisure 503 148 24 Other 1,078 251 28 Total 4,475 4,113 22
The incidence of the main types of restructuring is analysed below: Wholesale restructurings by type of arrangement Loans by value
In the case of non-performing loans that are restructured, the loan impairment provision assessment (based on management’s best estimate of the incurred loss) almost invariably takes place prior to the restructuring. The quantum of the loan impairment provision may change once the terms of the restructuring are known, resulting in an additional provision charge or a release of the provision in the period the restructuring takes place.
Recoveries The goal of the recoveries function is to collect the total amount outstanding and reduce the loss to the Group by maximising the level of cash recovery whilst treating customers fairly. A range of treatment options are available within recoveries, including litigation procedures for secured assets. In UK Retail and Ulster Bank, no repossession procedures are initiated until at least six months following the emergence of arrears. Additionally, certain forbearance options are made available to customers within recoveries.
Forbearance Within the Group’s retail businesses, forbearance generally occurs when the business, for reasons relating to the actual or potential financial stress of a borrower, grants a permanent or temporary concession to that borrower. Forbearance is granted following an assessment of the customer’s ability to pay. It is granted principally to customers with mortgages. Granting of forbearance to unsecured customers is less extensive.
Identification of forbearance Mortgages are identified for forbearance treatment following initial contact from the customer, in the event of payment arrears or when the customer is transferred to collections or recoveries.
The incidence of the main types of retail forbearance on the balance sheet as at 31 December 2011 is analysed below. For a small proportion of mortgages, more than one forbearance type applies.
Provisioning for retail customers Within UK Retail and Ulster Bank, provisions are assessed in accordance with the Group’s provisioning policies (refer to Impairment loss provision methodology on pages 202 and 203). For the non-performing population, a collective assessment is made. Within the performing book, latent loss provisions are held for those losses that are incurred but not yet identified.
The majority of mortgage accounts subject to forbearance in these divisions remain in the performing book but are identified and monitored separately from other performing accounts. They are subject to higher provisioning rates than the remainder of the performing book (currently approximately five times higher in UK Retail and approximately eight times higher in Ulster Bank). These rates are reviewed quarterly in UK Retail and monthly in Ulster Bank. Once forbearance is granted, the account continues to be assessed separately for latent provisioning for 24 months (UK Retail only) or until the forbearance period expires. After that point, the account is no longer separately identified for latent provisioning.
In Citizens, the amount of recorded impairment depends upon whether the loan is collateral dependent. If the loan is considered collateral dependent, the excess of the loan’s carrying amount over the fair value of the collateral is the impairment amount. If the loan is not deemed collateral dependent, the excess of the loan’s carrying amount over the present value of expected future cash flows is the impairment amount.
Collateral and other credit enhancements received Within its secured portfolios, the Group has recourse to various types of collateral and other credit enhancements to mitigate credit risk and reduce the loss to the Group arising from the failure of a customer to meet its obligations. These include: cash deposits; charges over residential and commercial property, debt securities and equity shares; and third-party guarantees. The existence of collateral may affect the pricing of a facility and its regulatory capital requirement. When a collateralised financial asset becomes impaired, the impairment charge directly reflects the realisable value of collateral and any other credit enhancements.
Physical assets - these include business assets such as stock, plant and machinery, vehicles, ships and aircraft. In general, physical assets qualify as collateral only if they can be unambiguously identified, located or traced, and segregated from uncharged assets. Assets are valued on a number of bases according to the type of security that is granted.
Receivables - when taking a charge over receivables, the Group assesses their nature and quality and the borrower’s management and collection processes. The value of the receivables offered as collateral will typically be adjusted to exclude receivables that are past their due dates.
2011 2010 Corporate risk elements in lending and potential problem loans (excluding commercial real estate)
Commercial real estate The table below analyses commercial real estate lending by loan-to-value (LTV). Due to market conditions in Ireland and to a lesser extent in the UK, there is a shortage of market based data. In the absence of external valuations, the Group deploys a range of alternative approaches including internal expert judgement and indexation.
Notes: (1) Other performing loans of £9.0 billion include unsecured lending to commercial real estate clients, such as major UK homebuilders. The credit quality of these exposures is consistent with that of the performing portfolio overall. Other non-performing loans of £1.9 billion are subject to the Group’s standard provisioning policies. (2) Weighted average by exposure.
Wholesale market exposures As set out in the table below, the Group receives collateral for reverse repurchase transactions and for derivatives, typically in the form of cash, quoted debt securities or equities. The risks inherent in both types of transaction are further mitigated through master bilateral netting arrangements. Industry standard documentation such as master repurchase agreements and credit support annexes accompanied by legal opinion, is used for financial collateral taken as part of trading activities.
Reverse repurchase agreements 100.9 95.1 76.1 Securities received as collateral (1) (98.9) (94.3) (74.0)
Derivative assets gross exposure 529.6 427.1 441.5 Counterparty netting (441.6) (330.4) (358.9) Cash collateral held (37.2) (31.1) (33.7) Securities received as collateral (5.3) (2.9) (3.6)
Note: (1) In accordance with normal market practice, at 31 December 2011 £95.4 billion (2010 - £93.5 billion; 2009 - £73.0 billion) had been resold or re-pledged as collateral for the Group’s own transactions.
All borrowing applications, whether secured or not, are subject to appropriate credit risk underwriting processes including affordability assessment. Pricing is typically higher on unsecured than secured loans. For secured loans, pricing will typically vary by LTV. Higher LTV products are typically subject to higher interest rates commensurate with the associated risk.
Residential mortgages by average LTV Performing £m Non-performing £m Performing £m Non-performing £m Performing £m Non-performing £m
Note: (1) 83% of residential mortgages with LTV > 130% are within Ulster Bank due to the continued challenging economic environment in Ireland.
Probability of default/customer credit grade These models assess the probability that a customer will fail to make full and timely repayment of its obligations. The probability of a customer failing to do so is measured over a one year period through the economic cycle, although certain retail scorecards use longer periods for business management purposes.
Wholesale businesses - as part of the credit assessment process, each counterparty is assigned an internal credit grade derived from a default probability. There are a number of different credit grading models in use across the Group, each of which considers risk characteristics particular to that type of customer. The credit grading models score a combination of quantitative inputs (for example, recent financial performance) and qualitative inputs (for example, management performance or sector outlook).
Retail businesses - each customer account is separately scored using models based on the most material drivers of default. In general, scorecards are statistically derived using customer data. Customers are assigned a score, which in turn is mapped to a probability of default. The probabilities of default are used to support automated credit decision making and to group customers into risk pools for regulatory capital calculations.
Credit risk assets In the tables and commentary below, exposure refers to credit risk assets, which consist of: Lending - cash and balances at central banks and loans and advances to banks and customers (including overdraft facilities, instalment credit and finance leases); Rate risk management; and
Non-Core exposure declined during 2011 as a result of the continued disposal and run-off of assets. Substantial de-risking was achieved though an exposure reduction of £33 billion over the year, in line with balance sheet reduction targets. Significantly, the division was able to take action to reduce exposure within the Middle East & North Africa region, which saw material volatility early in 2011 (exposure down 66%). The division also reduced single name concentration excesses, in part due to disposals in the leveraged finance book. In addition, the division’s project finance business achieved a material reduction through asset sales, unwinding of trades within the markets business and legal defeasance of structured finance transactions.
The table below shows credit risk assets by asset quality (AQ) band: Probability of default range
Note: (1) ‘Other’ largely comprises assets covered by the standardised approach, for which a probability of default equivalent to those assigned to assets covered by the internal ratings based approach is not available.
Risk management: Credit risk continued Credit risk measurement*: Asset quality continued
AQ10 credit risk assets by division AQ10 £m % of divisional credit risk assets AQ10 £m % of divisional credit risk assets AQ10 £m % of divisional credit risk assets
Overall, the asset quality of the Group’s corporate exposure was broadly maintained despite the difficult external conditions in the UK, with moderate weakening of credit quality in the Core divisions.
A notable exception is Ulster Bank, where weakness in the Irish property sector continued to impact portfolio trends and the stock of defaulted assets in the Core book (AQ10) continued to grow. Refer to the section on Ulster Bank on page 159 for more details.
In line with expectations, the percentage of defaulted assets in the Non-Core division increased following the run-off and disposal of performing assets. Weaknesses in the commercial real estate market continued to be the main driver of defaulted assets within Non-Core.
Risk management: Credit risk continued Credit risk measurement*: Credit risk assets by sector and geographical region continued 2009 UK £m
Key points Conditions in the financial markets and the Group’s focus on risk appetite and sector concentration had a direct impact on the composition of its Core portfolio during the year. The following key trends were observed: (i) A 35% increase in exposure to sovereigns, driven by the significant deposits placed with central banks; (ii) A 10% reduction in exposure to the property sector, driven by tightened controls in Core as well as by a reduction in NonCore; (iii) A modest reduction in exposure to other corporate and financial institution sectors, driven by subdued borrowing activity by larger corporates; and
The Group’s sovereign portfolio comprises central governments, central banks and sub-sovereigns such as local authorities, primarily in the Group’s key markets in the UK, Western Europe and the US. Exposure predominantly comprises cash balances placed with central banks such as the Bank of England, the Federal Reserve and the Eurosystem (including the European Central Bank and central banks in the eurozone) and consequently, the asset quality of this portfolio is high. Exposure to sovereigns fluctuates according to the Group’s liquidity requirements and cash positions, which determine the level of cash placed with central banks. However, during 2011, there was a marked increase in these balances as the Group boosted its regulatory liquidity position. Information on the Group’s exposure to sovereigns, including eurozone peripheral sovereigns, can be found in the Country risk section on page 208.
The bank sector is one of the largest in the Group’s portfolio but the sector is well diversified geographically, largely collateralised and tightly controlled through a combination of the single name concentration framework and a suite of credit policies specifically tailored to the sector and country limits. The largest segment of exposure to the sector remains to globally systemically important financial institutions. The environment remains challenging as a result of low economic growth in advanced economies, higher costs due to increased regulatory requirements and the growing difficulty of returning to historical levels of profitability. Over 2011, there was modest increase in exposure to banks due to mark-to-market movements in derivatives. However, the Group’s portfolio was in general characterised by declining limits, a rising number of counterparties subject to heightened credit monitoring due to the problems faced by the peripheral eurozone countries and a corresponding deterioration in asset quality, balanced to some extent by the improved stability of banks outside the eurozone.
The leisure sector displays weaker credit metrics than the wider corporate portfolio, in line with the industry trend. Default experience in hotels and restaurants is particularly high. The Group’s risk appetite towards the sector is driven by the importance of the leisure sector to the UK franchise, especially for the UK Corporate division, but is mitigated through tighter origination policies and guidelines and a reduction in exposure to high risk sub-sectors. The gaming sub-sector is subject to specific controls due to its inherent high credit and reputational risk profile.
The commercial real estate lending portfolio totalled £74.8 billion at 31 December 2011, a 14% year-on-year decrease (2010 - £87.4 billion). The commercial real estate sector comprises exposure to entities involved in the development of or investment in commercial and residential properties (including homebuilders). The analysis below excludes rate risk management and contingent obligations.
By division Investment £m Development £m Total £m Investment £m Development £m Total £m Investment £m Development £m Total £m
UK (excluding NI) (1) 28,653 6,359 1,198 6,511 42,721 25,904 9,108 5,118 2,591 42,721 Ireland (ROI & NI) (1) 5,146 1,132 2,591 6,317 15,186 3,157 3,121 793 8,115 15,186
Residential 12,871 7,449 1,096 1,325 319 23,060 Office 7,155 1,354 2,248 404 352 11,513 Retail 8,709 1,641 1,893 285 275 12,803 Industrial 4,317 507 520 24 105 5,473 Mixed/other 9,669 4,235 3,001 4,898 194 21,997 42,721 15,186 8,758 6,936 1,245 74,846
Residential 17,197 7,352 1,065 2,134 505 28,253 Office 9,381 1,536 5,034 1,614 975 18,540 Retail 5,760 686 998 492 700 8,636 Industrial 11,378 2,599 3,592 2,053 402 20,024 Mixed/other 12,501 3,633 3,125 3,243 231 22,733 56,217 15,806 13,814 9,536 2,813 98,186
Short-term lending to property developers without sufficient pre-let revenue at origination to support investment financing after practical completion is classified as speculative. Speculative lending at origination represents approximately 1% of the portfolio. The Group’s appetite for originating speculative commercial real estate lending is very limited and any such business requires senior management approval.
The commercial real estate market is expected to remain challenging in key markets and new business will be accommodated from run-off of existing Core exposure. As liquidity in the market remains tight, the Group is focusing on re-financings and supporting its existing client base.
Risk management: Credit risk continued Key credit portfolios*: Commercial real estate continued
Key points Nearly 85% of the commercial real estate portfolio with LTV > 100% is within Ulster Bank Group (Core and Non-Core) and GBM (NonCore ). A majority of portfolios are managed within the GRG and are subject to monthly reviews. Significant levels of provisions have been taken against these portfolios; provisions as a percentage of risk elements in lending for the Ulster Bank Group commercial real estate portfolio were 53% at 31 December 2011 (2010 - 44%). The reported LTV levels are based on gross loan values. The weighted average LTV for AQ10 excluding Ulster Bank is 129%.
Risk management: Credit risk continued Key credit portfolios* continued Retail assets The Group’s retail lending portfolio includes mortgages, credit cards, unsecured loans, auto finance and overdrafts. The majority of personal lending exposures are in the UK, Ireland and the US. The analysis below includes both Core and Non-Core balances.
Notes: (1) Mainly student loans and loans secured by recreational vehicles or marine vessels. (2) Personal exposures in other divisions.
Total portfolio average LTV at 31 December 57.8 58.2 59.1 73.8 75.3 74.5
Average LTV on new originations during the year 63.0% 68.0% 70.3% 65.8% 65.3% 64.4%
Note: (1) The ‘One Account’ current account mortgage is excluded (£5.4 billion - 5.6% of assets) at 31 December 2011, 0.9% of these accounts were 90 days continually in excess of the limit (2010 - 0.8%).
The UK Retail mortgage portfolio totalled £96.4 billion (98.6% in Core) at 31 December 2011, an increase of 4.1% from 2010, due to continued strong sales growth and lower redemption rates from before the financial crisis.
The assets are prime mortgages and include 7.2% (£6.9 billion) of exposure to residential buy-to-let. There is a small legacy selfcertification book (0.3% of total assets). Self-certified mortgages were withdrawn from sale in 2004.
The number of properties repossessed in 2011 was 1,671, up from 1,392 in 2010.
The mortgage impairment charge was £187 million for 2011, an increase of 2% from 2010. A significant part of the mortgage impairment charge related to reduced expectations of cash recovery on already defaulted debt. It also included an additional provision charge for mortgage customers who received forbearance.
The mortgage portfolio comprises £6.4 billion of residential mortgages (99% in first lien position: Core - £5.8 billion; Non-Core - £0.6 billion) and £17.4 billion of home equity loans and lines (41% in first lien position: Core - £14.9 billion; Non-Core - £2.5 billion). Home equity Core consists of 47% in first lien position.
Citizens continues to focus on the ‘footprint’ states of New England, Mid Atlantic and Mid West, targeting low risk products and maintaining conservative risk policies. At 31 December 2011, the portfolio consisted of £19.5 billion (82% of the total portfolio) within footprint.
Loan acceptance criteria were tightened during 2009 to address deteriorating economic and market conditions.
Non-Core comprises 13% of the residential mortgage portfolio. Its largest component (74%) is the serviced by others (SBO) home equity portfolio. The SBO portfolio consists of purchased pools of home equity loans and lines, which resulted in an annualised charge-off rate of 8.7% in 2011. It is characterised by out-of-footprint geographies, high second lien concentration (95%) and high average LTV (113% at 31 December 2011). The SBO book has been closed to new purchases since the third quarter of 2007 and is in run-off, with exposure down from £2.8 billion in 2010, to £2.3 billion at 31 December 2011. The arrears rate of the SBO portfolio decreased from 3.0% in 2010, to 2.3% at 31 December 2011, as the legacy of poorer assets receded, and account servicing and collections became more effective following a servicer conversion in 2009.
Notes: (1) The ratio for UK Retail assets refers to the impairment charges for the year. This is the Core UK loans book and excludes the Non-Core direct loans book that was sold in late 2011. (2) The ratio for Citizens refers to the impairment charges in the year, net of recoveries realised in the year.
Impairments remain sensitive to the external environment, including unemployment levels and interest rates.
Citizens’ average auto loan portfolio totalled £4.9 billion during 2011, of which 98% is considered Core. £101 million (2%) is NonCore and anticipated to run off by 2013. Citizens’ vehicle financing business lends to US consumers through a network of 4,200 auto dealers in 25 US states. Citizens’ credit policy is considered conservative, targeting prime customers and has historically experienced credit losses below those of industry peers.
The net write-off rate on the total auto portfolio fell to 0.18% at 31 December 2011, from 0.34% in 2010. The 30+ days past due delinquency rate fell to 1.04% at 31 December 2011, from 1.57% in 2010.
Ulster Bank Group (Core and Non-Core) At 31 December 2011, Ulster Bank Group accounted for 10% of the Group’s total customer loans (2010 - 10%; 2009 - 10%) and 9% of the Group’s Core customer loans (2010 - 9%; 2009 - 9%). Ulster Bank’s financial performance continues to be overshadowed by the challenging economic climate in Ireland, with impairments remaining elevated as high unemployment, coupled with higher taxation and limited liquidity in the economy, continues to depress the property market and domestic spending.
The impairment charge of £3,717 million for 2011 (2010 - £3,843 million; 2009 - £1,926 million) was driven by a combination of new defaulting customers and deteriorating security values. Provisions as a percentage of risk elements in lending increased from 44% in 2010, to 53% at 31
December 2011, predominantly as a result of the deterioration in the value of the Non-Core commercial real estate development portfolio.
Non-Core The impairment charge for the year was £2,333 million (2010 - £2,682 million; 2009 - £1,277 million), with the commercial real estate sector accounting for £2,160 million (93%) of the total 2011 charge.
Provisions as a % of gross loans Impairment charge Amounts written-off
Non-Core Commercial real estate - investment 3,860 2,916 1,364 75.5 47 35.3 609 1
Risk management: Credit risk continued Key credit portfolios*: Ulster Bank Group (Core and Non-Core) continued
Core Mortgages 21,162 1,566 439 7.4 28 2.1 294 7 Personal unsecured 1,282 185 158 14.4 85 12.3 48 30 Commercial real estate - investment 4,284 598 332 14.0 56 7.7 259 — - development 1,090 65 37 6.0 57 3.4 116 — Other corporate 9,039 1,205 667 13.3 55 7.4 444 11 36,857 3,619 1,633 9.8 45 4.4 1,161 48 Non-Core Mortgages — — — — — — 42 — Commercial real estate - investment 3,854 2,391 1,000 62.0 42 25.9 630 — - development 8,760 6,341 2,783 72.4 44 31.8 1,759 — Other corporate 1,970 1,310 561 66.5 43 28.5 251 —
Ulster Bank Group Mortgages 22,201 882 153 4.0 17 0.7 116 3 Personal unsecured 2,433 174 145 7.2 83 6.0 66 27 Commercial real estate - investment 8,192 1,748 413 21.3 24 5.0 370 — - development 10,109 4,268 1,106 42.2 26 10.9 953 4 Other corporate 12,479 1,976 648 15.8 33 5.2 421 — 55,414 9,048 2,465 16.3 27 4.4 1,926 34 * unaudited
Residential mortgages The tables below show how the continued decrease in property values has affected the distribution of residential mortgages by indexed LTV. LTV is based upon gross loan amounts and whilst including defaulted loans, does not take account of provisions made.
Average LTV on new originations during the year 67.0 75.9 72.8
Average LTV on new originations during the year 73.9% 78.9% 78.5%
The mortgage REIL continued to increase as a result of the continued challenging economic environment. At 31 December 2011, REIL as a percentage of gross mortgages was 10.9% (by value) compared with 7.4% in 2010. The impairment charge for 2011 was £570 million compared with £336 million for 2010. Repossession levels were higher than in 2010, with a total of 161 properties repossessed during 2011 (compared with 76 during 2010). 76% of repossessions during 2011 were through voluntary surrender or abandonment of the property.
Risk management: Credit risk continued Key credit portfolios*: Ulster Bank Group (Core and Non-Core) continued Commercial real estate The commercial real estate lending portfolio for Ulster Bank Group totalled £17.1 billion at 31 December 2011, of which £12.3 billion or 72% is NonCore. The geographic split of the total Ulster Bank Group commercial real estate portfolio remained similar to 2010, with 26% in Northern Ireland, 63% in the Republic of Ireland and 11% in the UK.
Exposure by geography Commercial £m Residential £m Commercial £m Residential £m Total £m
Key points Commercial real estate remains the primary driver of the increase in the defaulted loan book for Ulster Bank Group. The outlook remains challenging, with limited liquidity in the marketplace to support sales or refinancing. The decrease in asset valuations has placed pressure on the portfolio.
During 2011, impaired commercial real estate loans amounting to £1 billion (exposures greater than £10 million) were restructured and remain in the non-performing book.
Balance sheet analysis All the disclosures in this section (pages 161 to 228) are audited unless otherwise indicated by an asterisk (*).
Finance lease and instalment credit — 8,321 8,529 16,850 13 2 15 14 — 16,879 134 16,745
RFS MI gross of provisions — — — 2 — — — — — 2 — 2
Financial assets, after taking account of netting and offset arrangements, decreased from £974 billion at 2010 to £903 billion at 2011 (£923 billion including disposal groups), principally reflecting reductions in loans and advances, including planned reductions of £29 billion in Non-Core reflecting disposal strategy as well as reductions in securities. Debt securities declined by £8 billion reflecting lower government and financial institution bond holdings. Equity shares decreased by £7 billion reflecting closure of GBM's global index and emerging markets positions in order to mitigate the potential impact of unfavourable market conditions.
In terms of sector concentration, 37% of net financial assets related to financial institutions, including central banks, down from 38% in 2010. However, overall balances increased, principally reflecting higher central bank deposits in the Group's liquidity portfolio.
Central and local government assets represented 16% of total financial assets, broadly unchanged from 2010, predominantly reflecting the Group's government bond holdings, most of which are issued by G10 governments, despite a reduction in holdings in both Group Treasury and GBM.
Risk management: Credit risk continued Balance sheet analysis: Credit concentration: Sector and geographical region continued
Loans and advances to banks and customers by geographical region The table below analyses loans and advances, including reverse repos, gross of provisions by geographical region (location of office).
Loans and advances to banks (1) - UK 55,061 70,400 59,348 - US 7,976 9,810 8,537 - Europe 8,865 10,655 5,535 - RoW 11,531 9,778 10,611 Group before RFS MI 83,433 100,643 84,031 RFS MI — 2 7,879 83,433 100,645 91,910
Key points Gross loans and advances declined by £55.2 billion during 2011 of which £19.4 billion related to the transfer to disposal groups.
Customer lending declined £37.9 billion, principally reflecting the transfer to disposal groups and the Non-Core disposal strategy - UK down £23.7 billion - US down £0.4 billion - Europe down £9.5 billion - Rest of the World down £4.3 billion
Loans and advances Securities Reverse repos Core Non-Core Total Debt Equity Total Derivatives Other (1) Total
US Central and local government — 177 14 191 22,936 317 23,253 9 1 23,454 — 23,454 Finance - banks 7,289 671 15 686 1,245 — 1,245 — 29,426 38,646 15 38,631 - other (3) 17,368 8,993 341 9,334 29,885 681 30,566 165,879 3,496 226,643 168,601 58,042 Residential mortgages — 20,311 2,926 23,237 — — — — — 23,237 — 23,237 Personal lending — 7,505 936 8,441 — — — — — 8,441 — 8,441 Property — 2,413 1,370 3,783 26 23 49 38 — 3,870 — 3,870 Construction — 412 45 457 21 3 24 11 — 492 — 492 Manufacturing — 6,782 42 6,824 101 12 113 452 — 7,389 — 7,389 Service industries and business activities - retail, wholesale and repairs — 4,975 98 5,073 52 — 52 63 — 5,188 — 5,188 - transport and storage — 1,832 937 2,769 26 1 27 1,084 — 3,880 — 3,880 - health, education and recreation — 2,946 88 3,034 74 4 78 93 — 3,205 — 3,205 - hotels and restaurants — 627 57 684 93 3 96 1 — 781 — 781 - utilities — 1,033 28 1,061 243 16 259 322 — 1,642 — 1,642 - other 23 4,927 394 5,321 429 105 534 1,421 — 7,299 — 7,299 Agriculture, forestry and fishing — 27 — 27 7 — 7 6 — 40 — 40 Finance lease and instalment credit — 2,471 — 2,471 17 — 17 — — 2,488 — 2,488 Interest accruals 6 181 45 226 259 — 259 — — 491 — 491 Group 24,686 66,283 7,336 73,619 55,414 1,165 56,579 169,379 32,923 357,186 168,616 188,570
Europe Central and local government — 116 715 831 13,362 3 13,365 60 — 14,256 — 14,256 Finance - banks 247 8,361 250 8,611 10,859 — 10,859 — 6,701 26,418 — 26,418 - other (3) — 2,534 474 3,008 4,521 240 4,761 289 90 8,148 1 8,147 Residential mortgages — 18,393 553 18,946 — — — — — 18,946 — 18,946 Personal lending — 1,972 492 2,464 — — — — 28 2,492 — 2,492 Property — 4,846 11,538 16,384 — — — 168 — 16,552 9 16,543 Construction — 1,019 735 1,754 — 22 22 18 — 1,794 24 1,770 Manufacturing — 4,383 3,732 8,115 57 5 62 23 — 8,200 9 8,191 Service industries and business activities - retail, wholesale and repairs — 3,992 772 4,764 16 2 18 23 — 4,805 24 4,781 - transport and storage — 5,667 862 6,529 143 — 143 15 — 6,687 6 6,681 - health, education and recreation — 1,235 349 1,584 164 5 169 2 — 1,755 8 1,747 - hotels and restaurants — 892 535 1,427 — — — 6 — 1,433 6 1,427 - utilities — 1,569 530 2,099 124 3 127 85 — 2,311 — 2,311 - other — 2,966 1,555 4,521 131 70 201 34 — 4,756 25 4,731 Agriculture, forestry and fishing — 699 53 752 — 1 1 1 — 754 31 723 Finance lease and instalment credit — 260 435 695 — — — — — 695 — 695 Interest accruals 7 101 71 172 437 — 437 — — 616 — 616 Group 254 59,005 23,651 82,656 29,814 351 30,165 724 6,819 120,618 143 120,475
RoW Central and local government 117 54 629 683 11,414 — 11,414 190 92 12,496 — 12,496 Finance - banks 6,605 4,767 147 4,914 2,886 — 2,886 — 2,777 17,182 25 17,157 - other (3) 1,956 4,051 53 4,104 268 235 503 30,700 592 37,855 27,872 9,983 Residential mortgages — 502 200 702 — — — — — 702 — 702 Personal lending — 1,510 1 1,511 — — — 1 — 1,512 — 1,512 Property — 304 546 850 269 15 284 61 1 1,196 — 1,196 Construction — 59 10 69 9 2 11 22 — 102 — 102 Manufacturing — 2,395 322 2,717 7 13 20 1,052 306 4,095 — 4,095 Service industries and business activities - retail, wholesale and repairs — 1,276 28 1,304 3 34 37 96 — 1,437 — 1,437 - transport and storage — 366 239 605 225 6 231 443 — 1,279 35 1,244 - health, education and recreation — 358 225 583 — 4 4 34 — 621 — 621 - hotels and restaurants — 25 — 25 — 2 2 — — 27 — 27 - utilities — 1,479 369 1,848 13 22 35 94 — 1,977 — 1,977 - other — 2,372 179 2,551 78 259 337 857 2 3,747 — 3,747 Agriculture, forestry and fishing — 85 — 85 — — — 3 — 88 — 88 Finance lease and instalment credit — 91 26 117 127 — 127 2 — 246 — 246 Interest accruals 12 18 — 18 49 — 49 — — 79 — 79 Group 8,690 19,712 2,974 22,686 15,348 592 15,940 33,555 3,770 84,641 27,932 56,709
US Central and local government — 263 53 316 24,975 766 25,741 5 112 26,174 — 26,174 Finance - banks 8,978 820 12 832 1,951 — 1,951 — 19,455 31,216 184 31,032 - other (3) 16,023 9,522 587 10,109 21,958 126 22,084 121,717 4,950 174,883 123,678 51,205 Residential mortgages — 20,548 3,653 24,201 — — — — — 24,201 — 24,201 Personal lending — 6,816 2,704 9,520 — — — — — 9,520 — 9,520 Property — 1,611 3,318 4,929 95 4 99 23 — 5,051 — 5,051 Construction — 442 78 520 5 — 5 16 — 541 — 541 Manufacturing — 5,459 143 5,602 412 22 434 583 — 6,619 — 6,619 Service industries and business activities - retail, wholesale and repairs — 4,264 237 4,501 132 — 132 68 — 4,701 — 4,701 - transport and storage — 1,786 1,408 3,194 99 2 101 929 — 4,224 — 4,224 - health, education and recreation — 2,380 313 2,693 1,308 3 1,311 292 — 4,296 — 4,296 - hotels and restaurants — 486 136 622 104 — 104 3 — 729 — 729 - utilities — 1,117 53 1,170 567 2 569 272 — 2,011 — 2,011 - other 124 4,042 577 4,619 789 279 1,068 1,200 42 7,053 — 7,053 Agriculture, forestry and fishing — 31 — 31 28 — 28 3 — 62 — 62 Finance lease and instalment credit — 2,315 — 2,315 — — — — — 2,315 — 2,315 Interest accruals 7 183 73 256 240 — 240 — — 503 — 503 Group 25,132 62,085 13,345 75,430 52,663 1,204 53,867 125,111 24,559 304,099 123,862 180,237
Europe Central and local government — 365 1,017 1,382 18,648 — 18,648 66 — 20,096 — 20,096 Finance - banks 94 10,219 313 10,532 11,843 — 11,843 — 7,936 30,405 — 30,405 - other (3) — 2,642 1,019 3,661 4,886 347 5,233 746 53 9,693 1 9,692 Residential mortgages — 19,473 621 20,094 — — — — — 20,094 5 20,089 Personal lending — 2,270 600 2,870 62 — 62 — 25 2,957 — 2,957 Property — 5,139 12,636 17,775 — 43 43 — — 17,818 5 17,813 Construction — 1,014 873 1,887 — 27 27 1 — 1,915 14 1,901 Manufacturing — 5,853 4,181 10,034 18 87 105 39 — 10,178 6 10,172 Service industries and business activities - retail, wholesale and repairs — 4,126 999 5,125 32 2 34 33 — 5,192 15 5,177 - transport and storage — 5,625 1,369 6,994 141 22 163 2 — 7,159 5 7,154 - health, education and recreation — 1,442 496 1,938 27 9 36 — — 1,974 — 1,974 - hotels and restaurants — 1,055 535 1,590 — 120 120 — — 1,710 4 1,706 - utilities — 1,412 623 2,035 74 188 262 10 — 2,307 — 2,307 - other — 3,877 2,050 5,927 109 176 285 54 1 6,267 23 6,244 Agriculture, forestry and fishing — 849 68 917 — 1 1 — — 918 21 897 Finance lease and instalment credit — 370 744 1,114 — — — — — 1,114 — 1,114 Interest accruals 28 143 101 244 575 — 575 — — 847 — 847 Group before RFS MI 122 65,874 28,245 94,119 36,415 1,022 37,437 951 8,015 140,644 99 140,545 RFS MI — — — 2 — — — — — 2 — 2
RoW Central and local government 131 1,245 28 1,273 13,201 — 13,201 169 36 14,810 — 14,810 Finance - banks 5,277 4,946 331 5,277 3,332 — 3,332 — 1,243 15,129 — 15,129 - other (3) 847 7,776 1,033 8,809 — 440 440 25,045 796 35,937 19,747 16,190 Residential mortgages — 390 1 391 — — — — — 391 — 391 Personal lending — 1,450 613 2,063 — — — 29 1 2,093 — 2,093 Property — 337 1,780 2,117 669 10 679 51 — 2,847 — 2,847 Construction — 102 319 421 176 12 188 23 — 632 — 632 Manufacturing — 2,604 1,338 3,942 1 25 26 428 14 4,410 — 4,410 Service industries and business activities - retail, wholesale and repairs — 612 327 939 — 19 19 62 — 1,020 1 1,019 - transport and storage — 563 505 1,068 115 30 145 94 — 1,307 — 1,307 - health, education and recreation — 232 41 273 — 15 15 23 — 311 — 311 - hotels and restaurants — 131 21 152 — 3 3 1 — 156 — 156 - utilities — 1,152 622 1,774 39 41 80 82 — 1,936 — 1,936 - other 1 1,836 1,869 3,705 106 221 327 495 1 4,529 — 4,529 Agriculture, forestry and fishing — 16 59 75 — — — 3 — 78 — 78 Finance lease and instalment credit — 8 19 27 — — — — — 27 — 27 Interest accruals 55 94 32 126 74 — 74 — — 255 — 255 Group before RFS MI 6,311 23,494 8,938 32,432 17,713 816 18,529 26,505 2,091 85,868 19,748 66,120 RFS MI — — — 1,786 — 22 22 1,808 — 3,616 — 3,616 Group 6,311 23,494 8,938 34,218 17,713 838 18,551 28,313 2,091 89,484 19,748 69,736
(3) Loans made by the Group's consolidated conduits to asset owning companies are included within Finance.
Asset quality The asset quality analysis presented below is based on the Group’s internal asset quality ratings which have ranges for the probability of default as set out below. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across the Group map to both a Group level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Debt securities are analysed by external ratings and are therefore excluded from the table below and are set out on pages 175 and 176.
Other financial instruments Commitments Contingent liabilities Total 2011 £m £m £m £m £m £m £m £m £m
Total AQ1 78,592 74,192 113,437 4,582 481,622 556 75,356 14,076 842,413 AQ2 342 1,881 15,622 93 8,177 — 24,269 3,154 53,538 AQ3 196 1,981 32,830 546 10,819 — 23,471 4,427 74,270 AQ4 19 1,612 103,617 760 14,421 — 40,071 5,847 166,347 AQ5 90 1,261 112,537 79 6,516 45 34,593 4,301 159,422 AQ6 9 188 47,892 46 2,221 — 17,153 1,662 69,171 AQ7 8 432 31,379 13 2,393 — 19,163 1,037 54,425 AQ8 7 30 11,871 19 1,252 — 4,159 276 17,614 AQ9 5 83 16,006 4 1,150 320 2,286 943 20,797 AQ10 1 164 570 6 1,047 — 2,354 221 4,363 Past due — 2 10,995 1,623 — — — — 12,620 Impaired — 137 38,610 — — 414 — — 39,161 Impairment provision — (123) (19,760) — — (26) — — (19,909)
AQ1 56,655 91,952 126,444 6,815 408,489 658 78,728 9,745 779,486 AQ2 14 598 13,282 1,271 2,659 3 26,128 1,980 45,935 AQ3 48 2,197 25,981 156 3,317 — 25,731 4,337 61,767 AQ4 188 639 95,777 571 3,391 6 41,027 6,522 148,121 AQ5 99 2,322 114,796 64 4,860 144 38,612 5,169 166,066 AQ6 3 159 65,497 34 1,070 — 25,991 2,230 94,984 AQ7 2 178 46,072 1 857 69 18,752 2,456 68,387 AQ8 — 15 16,573 14 403 — 9,289 9,545 35,839 AQ9 — 115 14,263 2 450 80 3,889 932 19,731 AQ10 5 355 5,644 2 1,581 — 2,829 407 10,823 Accruing past due — 10 13,430 2,675 — — — — 16,115 Impaired — 145 35,556 — — 375 — — 36,076 Impairment provision — (127) (18,055) — — (29) — — (18,211) Group before RFS MI 57,014 98,558 555,260 11,605 427,077 1,306 270,976 43,323 1,465,119 RFS MI — 2 — — — — — 32 34 Group 57,014 98,560 555,260 11,605 427,077 1,306 270,976 43,355 1,465,153
Core AQ1 78,534 73,689 94,704 4,566 477,746 468 69,220 13,247 812,174 AQ2 342 1,877 13,970 91 7,500 — 23,404 3,122 50,306 AQ3 56 1,967 30,082 546 10,360 — 22,319 4,354 69,684 AQ4 18 1,557 97,001 759 13,475 — 38,808 5,655 157,273 AQ5 90 1,256 105,392 79 5,087 45 33,226 4,092 149,267 AQ6 9 140 41,476 46 1,987 — 16,118 1,634 61,410 AQ7 8 432 27,114 13 796 — 17,514 949 46,826 AQ8 7 20 9,857 19 666 — 4,068 236 14,873 AQ9 5 83 11,515 4 592 272 1,769 898 15,138 AQ10 1 164 264 6 339 — 1,274 180 2,228 Past due — 2 9,451 1,623 — — — — 11,076 Impaired — 136 15,170 — — 413 — — 15,719 Impairment provision — (122) (8,292) — — (25) — — (8,439)
AQ1 56,637 91,298 103,645 6,814 396,419 366 71,091 9,651 735,921 AQ2 14 550 10,534 1,271 2,243 3 24,923 1,728 41,266 AQ3 48 2,165 22,851 155 3,132 — 23,546 4,268 56,165 AQ4 10 539 85,779 571 3,017 6 36,909 5,070 131,901 AQ5 99 2,247 100,051 64 3,988 15 35,302 4,924 146,690 AQ6 3 138 53,498 34 805 — 24,050 2,140 80,668 AQ7 2 154 38,438 1 595 69 17,605 2,309 59,173 AQ8 — 15 13,290 14 257 — 8,617 9,434 31,627 AQ9 — 107 9,898 2 237 50 3,442 886 14,622 AQ10 5 300 2,777 2 368 — 1,500 250 5,202 Past due — 3 10,744 2,629 — — — — 13,376 Impaired — 144 13,367 — — 375 — — 13,886 Impairment provision — (126) (7,740) — — (29) — — (7,895)
AQ1 18 654 22,799 1 12,070 292 7,637 94 43,565 AQ2 — 48 2,748 — 416 — 1,205 252 4,669 AQ3 — 32 3,130 1 185 — 2,185 69 5,602 AQ4 178 100 9,998 — 374 — 4,118 1,452 16,220 AQ5 — 75 14,745 — 872 129 3,310 245 19,376 AQ6 — 21 11,999 — 265 — 1,941 90 14,316 AQ7 — 24 7,634 — 262 — 1,147 147 9,214 AQ8 — — 3,283 — 146 — 672 111 4,212 AQ9 — 8 4,365 — 213 30 447 46 5,109 AQ10 — 55 2,867 — 1,213 — 1,329 157 5,621 Accruing past due — 7 2,686 46 — — — — 2,739 Impaired — 1 22,189 — — — — — 22,190 Impairment provision — (1) (10,315) — — — — — (10,316)
Note: (1) Excluding items in the course of collection from other banks of £1,470 million (2010 - £1,958 million; 2009 - £2,533 million).
Risk management: Credit risk continued Balance sheet analysis: Debt securities continued
Core AAA 13,110 37,698 44,101 10,532 35,595 839 141,875 70 47,441 AA to AA+ — — 18,025 3,485 3,242 612 25,364 13 3,656 A to AA- — — 9,138 4,420 1,605 1,089 16,252 8 1,879 BBB- to A- — — 2,845 1,050 1,412 1,903 7,210 4 1,108 Non-investment grade — — 1,464 1,444 3,658 2,014 8,580 4 3,052 Unrated — — 53 420 1,375 768 2,616 1 978 13,110 37,698 75,626 21,351 46,887 7,225 201,897 100 58,114
The proportion of debt securities rated A to AA- increased to 18%, principally reflecting the Japanese government downgrade in 2011.