ESE ratings of customers and transactions are captured and analysed centrally by the Reputational and ESE Risk Team and reported externally in the annual Sustainability Report.
Also important is the setting of clear reputational risk appetite criteria, ensuring higher risk cases are escalated for informed debate and senior-level approval. Effective communication channels and incident response planning also ensure that cases resulting in reputational impact are appropriately managed, for example by declining or exiting business or by ensuring incident management plans are implemented to manage the impact of negative media coverage.
Conduct and regulatory risk exists across all stages of RBS’s relationships with its customers, from the development of its business strategies, through governance arrangements, to postsales processes. Activities through which conduct risk may arise are diverse and include product design, marketing and sales, complaint handling, staff training, and handling of confidential and non-public price sensitive information. Conduct risk also exists if
RBS does not take effective action to prevent fraud, bribery and money laundering. Regulatory risk arises from the regulatory, business or operating environment and from RBS’s response to it.
Objective qualitative and quantitative MI linked to the 7 Risk Appetite pillars
RBS continued to remediate historical conduct issues, while also focusing its customer-facing businesses and support functions around the needs of its customers.
The Conduct Risk Appetite Framework is divided into seven pillars, ensuring that conduct risk exposures are understood and managed in accordance with agreed risk appetite and that there is regular, consistent assessment and reporting of both risk exposures and the operating effectiveness of controls, across the businesses.
Executive Committee risk management policy decisions; • The Financial Crime Accountable Executive Committee
(accountable to the Executive Risk Forum) ensures that the customer businesses and the Services function fulfil strategic objectives by identifying and managing their financial crime risks effectively; and
• The Mandatory Change Advisory Committee (MCAC), reports to the Bank-Wide Investment Committee, and comprises representatives of the customer businesses and functions. The MCAC acts as the ‘reception committee’ for reviewing externally mandated changes that may affect RBS
and recommending appropriate responses, including the timely mobilisation of change implementation activities. In doing so, it agrees business or function owners of individual risks; and commissions and reviews impact assessments from customer businesses and functions.
Under the RBS Policy Framework, C&RA owns 23 conduct risk policies. Each policy is designed to provide both high-level direction and RBS-wide requirements. The policies are designed to ensure RBS meets its regulatory obligations, and to provide the necessary clarity for staff on their conduct obligations.
Assurance and monitoring activities are essential to help measure the extent to which RBS manages its delivery of specific customer outcomes.
C&RA works closely with the customer-facing businesses to assess business models, strategy and products and influence better outcomes for customers.
C&RA provides appropriate reporting of all material regulatory reviews and other regulatory developments worldwide to the appropriate RBS-wide committees, including the Board, the
An annual Money Laundering Reporting Officer’s Report is submitted to the Board and the FCA. Covering the operation and effectiveness of the systems and controls in place to comply with
Anti-Money Laundering (AML) law and regulation, it also describes RBS’s AML framework. In addition, it covers the systems and controls in place to prevent the financing of terrorism and to ensure compliance with sanctions as well as embargoes and export controls imposed by the UN, governments and other supranational bodies.
This is required to ensure appropriate customer outcomes are delivered, and that the management information is compliant with the Basel Committee on Banking Supervision principles for effective risk data aggregation and risk reporting.
impact are managed especially closely, with the aim of mitigating the impact through, for instance, changes to strategy or business activities, or external engagement.
It arises from day-to-day operations and is relevant to every aspect of the business.
Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. It may arise from forms of human error, an inability to deliver change on time or adequately, or the non- availability of technology services or the loss of customer data. Fraud and theft are sources of operational risk, as is the impact of natural and man-made disasters. It may also arise from a failure to take appropriate measures to protect assets or take account of changes in law or regulations.
The functional operating model for operational risk was embedded during 2015 and aims to ensure operational risk is managed in a consistent manner across RBS. This supplemented work by the customer businesses to increase understanding of the operational risk profile and the actions required to mitigate risks outside of appetite.
programme was established, aiming to deliver enhancements with an emphasis on simplifying and improving connectivity between individual ORMF components by the end of 2016.
Cyber attacks are increasing in frequency and severity across the industry and their threat to the security of RBS’s information from continues to be closely monitored. During 2015 RBS participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a large-scale programme to improve user access controls is in progress, along with a number of other actions, including a reduction in the number of external websites, enhancement of protection against malware, and the implementation of a staff education programme on information protection.
RBS’s ambitions. Better management of operational risk directly supports the strategic risk objective of improving stakeholder confidence and is vital for stability and reputational integrity.
The Global Head of Operational Risk reports to the Chief Risk
RBS’s internal control environment. This covers material risks and the key controls that underpin them, including financial, operational and compliance controls, as well as the supporting risk management frameworks.
The CEC outcomes, including forward-looking assessments for the next two half-yearly cycles and high-level plans required to improve the control environment, are reported to the Board, the
Framework, Sarbanes-Oxley 404 requirements concerning internal control over financial reporting (as referenced in the
The operational risk appetite framework is place to manage the risk to an acceptable level in line with stated risk appetite. Risk appetite provides RBS with a clear understanding of its acceptable levels of risk in relation to its strategic objectives and wider obligations.
This has led to the development of a number of risk appetite statements covering RBS’s most material operational risks.
Risk and control assessments are used to identify and assess material operational and conduct risks and key controls across all business areas. To support identification of risk concentrations, all risks and controls are mapped to the risk directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks.
During 2015 an enhanced end-to-end risk assessment methodology was designed, which is now being implemented across RBS. This approach enhances the understanding of the risk profile of RBS’s key products and services, and it will be used to identify and quantify the most material risks. Subject matter experts and key stakeholders are engaged from across
These key controls are regularly assessed for adequacy and tested for effectiveness. The control testing results are monitored and, where a material change in performance is identified, it results in a re-evaluation of the associated risk. During 2015, work continued on enhancing management information reporting, driving consistency and more focused actions to mitigate risk.
RBS purchases insurance to provide the business with financial protection against specific losses and to comply with statutory or contractual requirements.
single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2015 may relate to events that occurred, or were identified in, prior years.
Protection Insurance and Interest Rate Hedging Products settlements. A small number of operational risk events contributed a high percentage of the total losses. In 2015, around 1% of the events contributed 98% of the losses. This was in line with 2014.
Following developments in pension accounting and reporting during 2015, RBS revised its policy for determining whether or not it has an unconditional right to a refund of any surpluses in its employee pension funds and also revised prior periods (refer to page 267 - Accounting policies and page 286 Note 4, Pensions, for more details). The incremental impact of this, combined with the one-off accelerated payment expected of £4.2 billion to be made in 2016, is anticipated to improve RBS’s risk profile, capital planning, and resilience through the period to 2019. Subject to
PRA approval, the adverse core capital impact resulting from the accounting policy change and the accelerated payment is expected to be partially offset by a reduction in core capital requirements. Any such core capital offsets are likely to occur at the earliest from 1 January 2017, but they will depend on the
The Bank of England issued PS17/15 - ‘Assessing capital adequacy under Pillar 2’. This set out the final rules, statement of policy and supervisory statements for Pillar 2 capital policy, which informed the calculation of RBS’s pension risk capital at 31 *unaudited
RBS Investment Executive Ltd (RIEL), a team which specialises in pension investment strategy.
Risk appetite Investment policy for the schemes is defined by the trustee with input from RIEL and other specialist advisers employed by the trustee. While the trustee is responsible for the management of the scheme assets, it consults with RBS on material changes to the Main scheme’s risk appetite and investment policy.
RBS maintains an independent view of the risk inherent in pension funds, with an associated risk appetite, and has defined limits against which risk is measured. In addition to the scrutiny provided by the PRC, RBS also achieves this through regular pension risk monitoring and reporting to the Board, the Executive
Risk mitigation The trustee has taken measures to mitigate inflation and interest rate risks both by investing in suitable financial assets and by entering into inflation and interest rate swaps. The Main scheme also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes.
Change Change Change in net in value in value of pension of assets liabilities obligations 2015 £m £m £m
Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 874 363 511
2014 Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 447 413 34
Fall in credit spreads of 0.25% at all durations with no change in nominal or real swap yields 65 1,581 (1,516)
The chart below shows the pension liability cash flow profile, allowing for expected indexation of future payments. The majority of expected cash flows (77%) are anticipated within the next 40 years. The profile will vary depending on the assumptions made regarding inflation expectations and mortality.
Debt securities - RBS holds some debt securities for liquidity management purposes and is exposed to credit risk as a result.
UK personal lending - The Personal portfolio grew in mortgage lending while underwriting standards remained unchanged. This reflected improving economic conditions as well as the continued low interest rate environment.
Natural Resources - The Oil & Gas sector was affected by the large drop in oil price with prices remaining volatile. Exposures to the Oil & Gas sector materially reduced during 2015. Asset quality remains strong with the majority of the portfolio remaining investment grade. However, changing market conditions resulted in a limited number of customers experiencing financial stress during the year. The Mining & Metals sector was affected by the global market imbalance, prompted by a slowdown in demand especially from China - and oversupply of the key metal commodities following a legacy of heavy investment in new production capacity. There was a particular focus on mining, which is most vulnerable in these circumstances. Market conditions remained challenging, especially for customers with high financial or operational leverage. Exposure to the Mining &
Metals sector reduced materially during 2015. The sector was subject to heightened credit monitoring and ongoing risk appetite review. For further information, refer to the Key credit portfolios section on page 197.
The activities of the RBS credit risk management function, which is led by the Group Chief Credit Officer (GCCO), include: • approving credit for customers; • ensuring that credit risk is within the risk appetite set by the Board; • managing concentration risk and credit risk control frameworks; • developing and ensuring compliance with credit risk policies; and
Leadership GCCO The GCCO has overall responsibility for the credit risk function. The GCCO chairs the
Credit Risk Committee and, with the CRO, cochairs the RBS provisions committee.
Governance Credit Risk committee Authority over risk appetite (within the appetite set by the board), strategy, frameworks and policy as well as oversight of RBS credit profile.
Credit risk stewardship takes place throughout the customer lifecycle, from initial credit approval and on a continuous basis thereafter.
Wholesale customers are grouped by industry clusters and managed on an individual basis
Notes: (1) Co-chair with RBS Chief Risk Officer (2) Authority is delegated by Executive Risk Forum (3) For further information on the RBS provisioning and impairment practices refer to page 218.
• Counterparty exposures - measured using the mark-tomarket value of derivatives after the effect of enforceable netting agreements and regulator-approved models but before the effect of collateral. Calculations are gross of credit value adjustments.
RBS uses the output of credit risk models in the credit approval process - as well as for ongoing credit risk assessment, monitoring and reporting - to inform credit risk appetite decisions.
These models may be divided into different categories: Model Calculation method Wholesale Personal
Exposure at default (EAD) models provide estimates of credit facility utilisation at the time of a customer default, recognising that customers may make further drawings on unused credit facilities prior to default or that exposures may increase due to market movements.
The credit economic capital model is a framework that allows for the calculation of portfolio credit loss distributions and associated metrics over a given risk horizon for a variety of business purposes. The model takes into account migration risk (the risk that credit assets will deteriorate in credit quality across multiple years), factor correlation (the assumption that groups of obligors share a common factor) and contagion risk (for example, the risk that the weakening of the sovereign’s credit worthiness has a significant impact on the creditworthiness of a business operating in that country).
Credit risk: management basis continued Changes to credit models RBS reviews and updates models on an ongoing basis in order to reflect the impact of more recent data, changes to products and portfolios, and new regulatory requirements. Extensive changes were made to wholesale models between 2012 and 2014. To a lesser extent, the impact of these changes continued through 2015, resulting in some downwards rating migrations across internal asset quality bands. For further information, refer to the
has differentiated between instances where movements in risk measures reflect the impact of model changes and those where such movements reflect changes in the size of underlying credit portfolios or their credit quality.
• The need to ensure that any risk mitigation remains legally effective and enforceable.
(including any associated insurance) are monitored throughout the life of the transaction to ensure that they perform as anticipated. Similarly, documentation is also monitored to ensure it remains enforceable.
RBS mitigates counterparty credit risk arising from both derivatives transaction and repurchase agreements through the use of netting, collateral and market standard documentation.
Amounts owed by RBS to a counterparty are netted against amounts the counterparty owes the bank, in accordance with relevant regulatory and internal policies. However, generally, this is only done if a netting and collateral agreement is in place as well as a legal opinion to the effect that the agreement is enforceable in the relevant jurisdictions.
RBS restricts counterparty credit exposures by setting limits that take into account the potential adverse movement of an exposure after adjusting for the impact of netting and collateral (where applicable).
Practices for credit stewardship - including credit assessment, approval and monitoring as well as the identification and management of problem debts - differ between the wholesale and personal portfolios. For further information refer to the relevant sub-sections on pages 189 and 203. A key aspect of credit risk stewardship is ensuring that, when signs of impairment are identified, appropriate impairment provisions are recognised.
In the overall assessment of credit risk, impairment, provisioning and write-offs are used as key indicators of credit quality. The impairment, provisioning and write-off processes are described in more detail below.
A financial asset is impaired if there is objective evidence that the amount, or timing, of future cash flows has been adversely affected since its initial recognition. Refer to accounting policies on page 273 for details regarding the quantification of impairment losses.
Days-past-due measures are typically used to identify evidence of impairment. In both Wholesale and Personal portfolios, a period of 90 days past due is used. In sovereign portfolios, the period used is 180 days past due. Indicators of impairment include the borrower’s financial condition; a forbearance event; a loan restructuring; the probability of bankruptcy; or any evidence of diminished cash flows.
The amount of an impairment loss is measured as the difference between the asset carrying amount and the present value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. The current net realisable value of the collateral will be taken into account in determining the need for a provision. This includes cash flows from foreclosure (less costs of obtaining and selling the collateral), whether or not foreclosure is probable. Impairment provisions are not recognised where amounts due are expected to be settled in full on the realisation of collateral. RBS uses one of the following three methods to quantify the provision required: individual; collective; and latent, as set out below: Provision method Customer type Quantification method Key factors considered
• Future economic conditions based on factors available at the time.
• Portfolio-level emergence periods are based on products or businesses with similar homogenous characteristics. Emergence periods range from 120 to 274 days.
Refer to pages 218 to 223 for an analysis of impaired loans, related provisions and impairments. Refer to page 273 for details of accounting policies. For details on collateral, refer to the
Counterparty credit risk section on page 184 as well as the
In addition, for secured lending, key assumptions relate to the valuation of the security and collateral held, as well as the timing and cost of asset disposals based on underlying market depth and liquidity. Assessments are made by relationship managers on a case-by-case basis for individually-assessed provisions and are validated by credit teams. For individual impairments greater than £1 million, oversight is provided by the RBS Provisions
Available-for-sale portfolios are also regularly reviewed for evidence of impairment, including: default or delinquency in interest or principal payments; significant financial difficulty of the issuer or obligor; and increased likelihood that the issuer will enter bankruptcy or other financial reorganisation.
Banks and Natural Retail and Personal other FIs Sovereign Property resources leisure Other Total
Personal other FIs Sovereign Property resources leisure Other excluding Citizens Citizens Total
The following key portfolios are either designated high-oversight sectors under the sector framework or constitute a material proportion of CRAs and are discussed in more detail below.
Commercial Real Estate (CRE) (in Property) - refer to page 195; Oil & Gas (in Natural Resources) - refer to page 198; Mining & Metals (in Natural Resources) - refer to page 200; Automotive - refer to page 201; Shipping (in Other) - refer to page 202; and
• The increase in the Personal portfolio was predominantly driven by activity in the UK and is in line with RBS strategy to expand this portfolio. For further information on Personal refer to page 203. The decrease in the Wholesale portfolio was observed in a majority of sectors reflecting a continued focus on risk reduction and improving overall credit quality.
• The number of Watch Red customers continued to decrease during 2015 due to a reduced flow of new cases as well as through customers being taken off Watch as their financial position improved.
• The reduction in AQ10 assets during the year was primarily due to RCR, within Capital Resolution, completing its targeted run-down by the end of 2015.
• There was a significant amount of credit impairment release during 2015, in particular in RCR, within Capital Resolution, where the favourable environment and efficient deal execution supported the disposal strategy. Improved market appetite and greater liquidity was demonstrated, particularly in Ireland, where assets have been realised more quickly and at better prices, than previously anticipated.
Wholesale credit risk management This section sets out further detail on RBS’s approach to credit risk management for its Wholesale customers. Four formal frameworks are used to manage Wholesale credit concentration risks within RBS’s risk appetite. These frameworks are regularly reassessed to ensure they remain appropriate for RBS’s varied business franchises, economic and market conditions and to reflect refinements in risk measurement models as well as agreed risk appetite.
Concentration in a single sector or across sectors that are susceptible to similar stress events.
Basis for classification Size or LGD - based on net customer exposure for a given probability of default.
Size - based on exposure to a product or asset class.
Commercial Real Estate sectors was reduced. This took into account market/economic conditions and the successful execution of the RCR strategy to reduce exposures to these sectors.
Risk appetite limits were reduced for exit countries taking account of the revised risk appetite and international strategy.
When assessing credit risk the following must be considered at a minimum: • The amount, terms, tenor, structure, conditions, purpose and appropriateness of all credit facilities; • Compliance with relevant credit policies and transaction acceptance standards; • The customer’s ability to meet obligations, based on an analysis of financial information; • A review of payment and covenant compliance history; • The customer’s risk profile, including sector, sensitivity to economic and market developments and management capability; • Legal capacity of the customer to engage in the transaction; • Credit risk mitigation including requirements for valuation and revaluation. The customer’s credit grade and the loss given default estimate for the facilities; • The requirement for the provision of financial information, covenants and/or monitoring formulae to monitor the customer’s financial performance; *unaudited
• Refinancing risk - the risk of loss arising from the failure of a customer to settle an obligation on expiry of a facility through the drawdown of another credit facility provided by
Where the customer is part of a group, the credit assessment considers aggregated credit risk limits for the customer group as well as the nature of the relationship with the broader group (e.g.
At a minimum, credit relationships are reviewed and re-approved annually. The renewal process addresses borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refinancing risk.
RBS mitigates credit risk through the use of netting, collateral and market standard documentation, depending on the nature of the counterparty and its assets. The most common types of mitigation are: • Commercial real estate - Refer to CRE section on page 195.
• Financial collateral - Refer to Counterparty credit risk section on page 184.
For customers not managed in Capital Resolution, there are three Watch classifications - Amber, Red and Black - reflecting progressively deteriorating conditions.
Watch Red customers are performing customers who show signs of declining creditworthiness and so require active management.
Appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt.
Remediation strategies available in the business include granting a customer various types of concessions. Any decision to approve a concession will be a function of specific country and sector appetite, the credit quality of the customer, the market environment and the loan structure and security. For further information, refer to the Wholesale forbearance section below.
Credit risk: management basis continued Specialists within Restructuring conduct a detailed assessment of the viability of the business, as well as the ability of management to deal with the causes of financial difficulty, focusing on both financial and operational issues. Following the assessment, options which may include forbearance and/or restructuring of facilities are developed. Credit risk decisions, including reviewing and approving any operational and financial restructuring solutions in relation to these customers, are made by a dedicated
The aim of forbearance is to restore the customer to financial health while minimising risk to RBS. To ensure that forbearance is appropriate for the needs and financial profile of the customer,
RBS applies minimum standards when assessing, recording, monitoring and reporting forbearance.
The type of forbearance offered is tailored to the customer’s individual circumstances. For wholesale customers forbearance may involve the following types of concessions: • Covenant waiver
Provided that the underlying business model, strategy and debt level are viable, maintaining the business as a going concern is the preferred option, rather than realising the value of the underlying assets.
LGD. These are re-assessed prior to finalising any forbearance arrangement in light of the loan’s amended terms and any revised grading is incorporated in the calculation of the impairment loss provisions for RBS’s wholesale exposures.
The ultimate outcome of a forbearance strategy is unknown at the time of execution. It is highly dependent on the cooperation of the borrower and the continued existence of a viable business.
Provisions for forborne wholesale loans are assessed in accordance with normal provisioning policies (refer to Impairment loss provision methodology). The customer’s financial position and prospects as well as the likely effect of the forbearance, including any concessions granted, are considered in order to establish whether an impairment provision is required.
This may result in the recognition of an impairment loss or a write-off.
The transfer of wholesale loans subject to forbearance from impaired to performing status follows assessment by relationship managers and the Restructuring credit risk function. When no further losses are anticipated and the customer is expected to meet the loan’s revised terms, any provision is written off and the balance of the loan returned to performing status. This course of action is not dependent on a specified time period and follows the credit risk manager’s assessment that it is appropriate.
• Loans totalling £1.7 billion were granted approval for forbearance but had not yet reached legal completion at 31
December 2015 (2014 - £4.3 billion). These exposures are referred to as “in process” and are not included in the tables above. 64% (£1.1 billion) of these “in process” exposures related to non-performing customers, with associated provision coverage of 30%. 36% (£0.6 billion) related to performing loans. The principal types of arrangements offered were payment concessions and loan rescheduling.
• Forbearance in the Transport sector cluster was historically driven by RCR exposure to the Shipping sector. There have been lower levels of forbearance in the Shipping portfolio in 2015 as a result of the RCR disposal strategy. There was an increase in the volume of Non-RCR Shipping exposures granted forbearance, though these were on average smaller than those granted forbearance in 2014. (Refer to page 202 for further information).
• The value of loans forborne during 2014 and 2015 and still outstanding at 31 December 2015 was £5.6 billion (2014 - £12.2 billion), of which £1.7 billion related to arrangements completed during 2014 (2014 - £3.4 billion completed in
• Additional provisions charged in 2015 and relating to loans forborne during 2014 totalled £0.2 billion, predominantly driven by RCR and Restructuring cases. Provision coverage of these loans at 31 December 2015 was 66%.
The CRE sector relates to lending activity for the development of, and investment in, commercial and residential properties.
A dedicated portfolio controls team is responsible for portfolio strategy, credit risk appetite and policies, as well as oversight of valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks.
CRE occupier market fundamentals have improved gradually over the last year as a result of stable economic growth. Areas of weakness remain in secondary, regional retail and provincial office locations but, overall, vacancy rates are declining and rental values are showing signs of growth across a wide range of geographies and sub-sectors. The strongest rental growth to date has been in and around London, but it is now spreading to the wider south-east of England area and key regional centres. Over 2015, CRE investment activity was marginally down on the record levels seen in 2014, despite a very strong start in the first half of the year. There was continued demand from overseas investors who accounted for 50% of the total value of all UK
Commercial Residential Total Commercial Residential Total total £m £m £m £m £m £m £m
• Overall gross CRE lending fell due to asset sales, repayments and write-offs.
Capital Resolution (£2.8 billion) will leave the CRE portfolio concentrated in the UK and Ireland.
• Commercial Banking manages the majority (£18.1 billion) of the remaining CRE portfolio. The Commercial Banking portfolio shape and size remained broadly stable during 2015, with significant exposure (£12.2 billion) in the commercial investment sub-sector.
The table below provides a breakdown of the CRE portfolio by LTV band, along with provision coverage.
Performing performing Total Performing performing Total £m £m £m £m £m £m
Total 23,718 3,912 27,630 24,512 13,789 38,301 Total portfolio average LTV (2) 54% 177% 66% 56% 291% 123%
Notes: (1) Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect the relevant asset quality and recovery profile. (2) Weighted average by exposure.
reduced year on year, due to maintained underwriting standards applied on new lending and ongoing improvements in the economy.
• Exposures with LTVs greater than 100% are predominantly legacy deals.
• Accelerated divestment of legacy exits assets has reduced the amount of non-performing exposure with minimal security.
Banking was three years and two months, which has remained broadly unchanged since 2014.
£21.1 billion of the portfolio was AQ6 (B+) or better, reflecting maintained underwriting standards and improved economic conditions in the markets in which RBS operates.
RBS’s exposure to Natural Resources in terms of CRA and TCE (total exposure including committed but undrawn facilities), is set out below.
• Commodity Traders: CRA and TCE more than halved during 2015. The remaining exposure is mainly to the largest and most dominant traders in physical commodities
The tables below provide a breakdown of Oil & Gas sector exposure (including committed but undrawn exposure) split by sub-sector and geography. The analysis is based on RBS’s sector concentration framework. Other
Producers (incl. integrated oil companies) 992 84 773 329 354 2,532
Including committed undrawn exposures of which: exploration and production 310 — 38 119 146 613
Other wholesale and trading activities 489 135 798 685 1,040 3,147
• Oil prices fell materially during 2015 reaching a 12-year low by 31 December 2015. Market expectations are for oil prices to continue to be weak in the short to medium-term as a result of global oversupply due to OPEC maintaining a high production strategy.
• During 2015, RBS carried out in-depth analysis, stress testing and contagion risk analysis on the Oil & Gas sector.
• The portfolio management strategy during the year was to focus the portfolio towards investment grade customers with robust credit profiles and strong liquidity to manage through the extended downturn. At 31 December 2015, 65% (2014 75 %) of the portfolio exposure was investment grade (AQ1-
AQ4 or equivalent to BBB- and above). The decrease was mainly due to disposals in the US and Asia-Pacific.
• The other principal components of exposure to producers are Integrated Oil Companies (IOCs) and National Oil
Companies (NOCs). IOCs and NOCs are less vulnerable to the oil price decline due to scale, diversification and, in the case of NOCs, explicit support from governments.
• There was an increase in the number of forbearance events, predominantly involving the relaxation of financial covenants to give customers more financial flexibility. Most forbearance involved customers in the E&P and oilfield services sub-sectors where earnings have been more immediately and materially affected by the downturn.
• The number and value of cases on Watch in the Oil & Gas sector increased during the year. However these related predominantly to Watch Amber classifications as the sector continues to be monitored closely.
• The increase in AQ10 reflected changing market conditions which resulted in a limited number of customers experiencing financial stress during the year. AQ10 assets at 31 December 2105 totalled £138 million.
• RBS’s exposure to this sector significantly decreased in 2015 primarily due to proactive credit management and reductions in sub‐sectors considered the most vulnerable during the downward phase of this cycle as well as strategic disposals. *unaudited
• The asset quality of the portfolio remained strong and 63%
Of which: Of which: Capital Total Capital Total CRA Resolution exposure Resolution CRA exposure £m £m £m £m £m £m
States Environmental Protection Agency statement on emissions irregularities in the third quarter of 2015. RBS
• The portfolio management strategy was focused on supporting counterparties with robust investment grade ratings. The majority of the portfolio comprised UK
dealerships and Lombard asset finance facilities together with some international exposures.
TCE decrease during 2015 reflected scheduled loan repayments, secondary sales and corrections to minimum security covenants and prepayments.
• Sector concentration risks were in the Dry Bulk sub-sector which represented 37% of exposure (2014 - 38%); Tankers
The remaining exposures comprised gas (including liquid petroleum and natural gases), 14% (2014 - 10%) and
• A key protection for RBS was the minimum security covenant. The overall portfolio LTV at 31 December 2015 was 84% (2014 - 77%) reflecting the severe downturn being seen in the Dry Bulk sector. Amortisation across the portfolio was approximately 7% per annum excluding early repayments.
• Asset values fall as markets deteriorate and rise as they improve. Therefore, even if exposure falls, the overall LTV
position may rise or fall depending on the underlying value of the vessels. The Dry Bulk sub-sector saw asset value reductions of around 40-50% in 2015 (15-20% in 2014), with 15-20% falls in Q4 2015 alone. This led to a rise in the average LTV. In the Tankers sub-sector, LTVs showed the opposite - a lower leverage due to the stronger market conditions in that sector and amortisation.
RBS uses a credit risk appetite framework to control credit risk for its personal businesses. The framework sets limits that measure and control, for each relevant franchise or reportable segment, the quality of both existing and new business. The actual performance of each portfolio is tracked relative to these limits and action taken where necessary. These limits apply to a range of credit risk-related measures including expected loss of the portfolio, the expected loss in a given stress scenario, projected credit default rates and the LTV of personal mortgage portfolios.
RBS values residential property during the loan underwriting process by either appraising properties individually or valuing them collectively using statistically valid models. RBS updates residential property values quarterly using the relevant residential property index, namely: Region Index used
Personal customers in financial difficulty are managed through either collections or recoveries functions. Further details of these are set out below: Collections*
Collections functions in each of RBS’s personal businesses provide support to customers who cannot meet their obligations to RBS. Such customers may miss a payment on their loan, borrow more than their agreed limit, or ask for help. Dedicated support teams are also in place to identify and help customers who have not yet missed a payment but may be facing financial difficulty. The collections function uses a range of tools to initiate contact with such customers, establish the cause of their financial difficulty and support them where possible.
If collections strategies are unsuccessful the relationship is transferred to the recoveries team.
The type of forbearance granted will differ based upon an assessment of the customer's circumstances. Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans.
Forbearance options include, but are not limited to: • Payment concessions - A temporary reduction in, or elimination of, the periodic (usually monthly) loan repayment is agreed with the customer. At the end of the concessionary period, forborne principal and accrued interest outstanding is scheduled for repayment over an agreed period. Ulster
• Interest only conversions - The loan converts from principal and interest repayment to interest only repayment on a permanent or, in Ulster Bank RoI only, temporary basis.
Additionally for some forbearance types a loan may be transferred to the performing book if a customer makes payments that reduce loan arrears below 90 days (Ulster Bank RoI, PBB
Credit risk: management basis continued Impairments for forbearance Methodology used for provisioning and impairments for forborne loans will differ depending on whether the loans are performing or non-performing and which business is managing them due to local market conditions. The type of provisioning methodology used and specific factors considered for forborne loans is summarised below: Performing forborne loans - Latent calculation(1) Non-performing forborne loans
Difference in PD/LGD used for forborne population Treatment Difference in LGD used for forborne population
Collective • No difference in treatment for non-forborne loans, LGD models unaffected by forbearance.
• Forborne loans and previous forborne loans form a separate risk pool taking into account the term of the forbearance treatment and applicable post-probationary periods.
Collective • Forborne (and previously forborne) loans form a separate risk pool where specific LGDs are allocated using observed performance of these loans.
Individual • No difference in treatment for non-forborne loans, LGD models unaffected by forbearance. RBSI • An extended emergence period may be incorporated for forborne loans via management overlay (reviewed regularly in line with market conditions).
Individual • No difference in treatment non-forborne loans, LGD models unaffected by forbearance.
Note: (1) Once such loans are no longer separately identified, the use of account level PDs, refreshed monthly in the latent provision methodology, captures the underlying credit risk without a material time lag. There is no reassessment of the PD at the time forbearance is granted but the loan is subject to the latent provisioning described above.
LTV ratio value <=50% <=70% <=90% <=100% <=110% <=130% <=150% >150% LTVs Other Total 2014 £m £m £m £m £m £m £m £m £m £m £m *unaudited
by weighted value of 71% (2014 - 72%). Buy-to-let lending was £3.8 billion (2014 - £2.9 billion) with an average LTV by
• Based on the Halifax House Price Index at September 2015, the portfolio average indexed LTV by volume was 49%
• Of the total mortgage portfolio, approximately 60% (£63 billion) were fixed interest rate products of varying time durations with 2% (£2 billion) a combination of fixed and variable rates and the remainder variable rate.
• The arrears rate fell from 1.0% in December 2014 to 0.8% at the end of 2015. This reflected the growth in the mortgage portfolio, the stable UK economy and underlying asset quality.
• The flow of new forbearance was £273 million in the second half of 2015 compared with £367.5 million in the second half of 2014. The value of mortgages subject to forbearance has decreased by 16.8% since the previous year end to £3.6 billion (equivalent to 3.5% of the total mortgage book) as a result of improved market conditions and methodology changes.
• A summary of the maturity profile for bullet principal repayment interest only mortgages (excluding mixed repayment mortgages) is set out below:*
from 31 December 2014 as a result of amortisation - a portion of which related to the variable rate mortgage portfolio and the sale of a £0.3 billion buy-to-let mortgage portfolio. The volume of new business has increased reflecting continuing market demand.
• The portfolio average indexed LTV decreased from 93% at 31 December 2014 to 83% at 31 December 2015 as a result of improved market conditions and the sale of a buy-to-let mortgage portfolio.
• A total of 59% (£2.1 billion) of forborne loans were subject to a long term arrangement (capitalisations, term extensions, £2.0 billion). Short term forbearance comprises payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest only arrangements.
• The impairment release was driven by a decrease in defaulted assets leading to reduced loss expectations.
• Ulster Bank RoI stopped offering interest only loans as a standard mortgage offering for new lending in the Republic of Ireland in 2010. Interest only mortgages are now granted only to customers in need of forbearance. A summary of the maturity profile for bullet principal repayment interest only mortgages (excluding mixed repayment mortgages) is set out below:*
• Gross new mortgage lending amounted to £2.4 billion in 2015. Lending to owner-occupiers during this period was £2.2 billion (2014 - £2.4 billion) with an average LTV by weighted value of 54% (2014 - 57%). Buy-to-let lending was £0.2 billion (2014 - £0.2 billion) with an average LTV by
• The majority (98%) of RBSI’s personal lending is mortgage lending. The mortgage portfolio increased by
• Gross new mortgage lending amounted to £0.2 billion in 2015. Lending to owner-occupiers during this period was £0.2 billion (2014 - £0.2 billion) and had an average LTV
by weighted value of 66% (2014 - 66%). Buy-to-let lending was £0.1 billion (2014 - £0.1 billion) with an average LTV by weighted value of 59% (2014 - 60%).
• The number of customers granted forbearance in 2015 decreased by 10%.
• A total of £12 million of forborne loans were subject to a long-term arrangement (term extensions) at 31 December comprises covenant breaches, payment suspensions and reduced payments.
Notes: (1) 2016 includes pre-2016 maturity exposure. (2) 2015 includes pre-2015 maturity exposure.
The retail mortgage portfolio increased by 5.4% to £10.5 billion, of which £9.3 billion (2014 - £9.2 billion) was owneroccupied and £1.2 billion (2014 - £0.8 billion) was buy-to-let.
(2014 - £1.3 billion) and had an average LTV by weighted value of 70% (2014 - 71%). Buy-to-let lending was £0.3 billion
The arrears rate fell to 1.1% at 31 December 2015 (2014 1. 3%). This reflected improvements in the UK economy and underlying asset quality.
The flow of new forbearance was £59.4 million in 2015 compared to £82.5 million in 2014. The value of mortgages subject to forbearance decreased by 5% in 2015 to £0.52 billion (equivalent to 5% of the total mortgage portfolio) as a result of improved market conditions and methodology changes.
There was a reduction of impairment provision balances for personal mortgages in 2015 to £25.6 million compared with £35.6 million in 2014. The provision release resulted from lower LGDs and a decrease in forborne mortgages.
Notes: (1) 2015 includes pre-2015 maturity exposure. (2) Includes £0.2 billion (2014 - £0.2 billion) of repayment mortgages that have been granted interest only concessions (forbearance). (3) 2014 includes pre-2014 maturity exposure.
Credit risk assets Balance sheet to CRA bridge* The table below provides a bridge between the balance sheet and the related components of credit risk assets (CRA).
Within Not within Netting Methodology Balance the scope of the scope Credit and Disposal differences and sheet market risk (1) of CRA (2) adjustments (3) collateral (4) groups (5) reclassifications (6) CRA 2015 £bn £bn £bn £bn £bn £bn £bn £bn
Cash and balances at central banks 79.4 — (4.1) — — 0.5 — 75.8
Reverse repurchase agreements and stock borrowing 64.7 — (64.7) — — — — —
(7) Includes intangible assets, property, plant and equipment, deferred tax, prepayments and accrued income and assets of disposal groups.
In this section, country exposure includes wholesale and retail net on-balance sheet exposure (drawn amounts under lending facilities, net of provisions, mark-to-market derivatives positions and issuer-risk debt securities positions in the banking book and trading book) together with off-balance sheet exposure
Standard and Poor’s, Moody’s or Fitch at 31 December 2015, and in which RBS’s net balance sheet exposure to counterparties operating (or individuals residing) in them exceeded £1 billion.
The exposures are stated before taking into account risk mitigants such as guarantees, insurance or collateral (with the exception of reverse repos) which may have been put in place to reduce or eliminate exposure to country risk events. The tables separately show CDS positions, as RBS may be either a net buyer or a net seller of protection.
• Italy - exposure fell by £1.6 billion to £2.6 billion.
This was the result of the maturity of a few large derivatives transactions with banks, and of reductions in corporate lending.
• Germany - net balance sheet exposure increased by £5.7 billion to £32.3 billion. This was the net result of an increase of £14.0 billion in cash deposits with the central bank, driven by Treasury’s global liquidity management, against reductions in other areas, notably in net HFT bonds.
• Ireland - exposure fell by £3.0 billion or 13% to £19.6 billion, with exposure to corporates and households (mostly mortgage lending) decreasing by £1.9 billion and £1.4 billion respectively. This largely reflected currency movements and portfolio sales. The latter also drove a £5.6 billion reduction in lending provisions and a £1.0 billion increase in Ulster
• France - net balance sheet exposure fell by £4.2 billion to £11.9 billion, with reductions mainly in net HFT bonds and lending to banks. Available-for-sale (AFS) bonds rose by £0.5 billion, as part of the bank’s liquidity management.
• Japan - net HFT bonds exposure increased by £4.1 billion to £7.2 billion, driven by collateral trading in London. This increase in holdings reflects reduced access to local repo markets following RBS’s decision to exit its Japanese onshore business. Derivatives exposure, largely to banks, decreased by £0.6 billion.
• China - net balance sheet exposure decreased by £2.5 billion to £1.1 billion, with reductions mostly in corporate lending, driven by RBS’s strategy. The portfolio is focused on the largest banks. Stress tests indicated that the impact of an economic downturn on credit losses would be limited.
Sovereign & other FI Corporate Personal Total lending AFS/LAR HFT (net) Derivatives SFT sheet exposure fair value Derivatives SFT
The following table analyses financial asset exposures, both gross and net of offset arrangements, as well as credit mitigation and enhancement.
Cash and balances at central banks 79.9 — 79.9 — — — — — — 79.9
Cash and balances at central banks 74.9 — 74.9 — — — — — — 74.9
Government Securities Clearing Corporation. (2) The carrying value on the balance sheet represents the exposure to credit risk by class of financial instrument. (3) The amount by which credit risk exposure is reduced through arrangements, such as master netting agreements and cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty. (4) RBS holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
Approximately 82% (£67.7 billion) of debt securities are issued by central or local governments.
• Net exposure fell by £37.1 billion or 14% principally reflecting lower funded assets as both CIB and Capital
Finance leases and instalment credit — 11,443 1 — 10 — 11,454 (2) 11,452
The table that follows details the relationship between internal asset quality (AQ) bands and external ratings published by
Cash and balances at central banks 73.3 — 1.4 0.2 — — — — — — — — — 74.9
PBB’s book reflecting market conditions along with growth in mortgage business.
bands. The small increase in AQ3 reflects improvements in asset quality within Ulster Bank RoI.
• Reverse repos decreased by £24.7 billion, with £22.4 billion in investment grade, reflecting reduced trading activities in
• Derivatives decreased by £91.1 billion with reductions across all bands except AQ4 where an increase of £7.9 billion is the result of existing counterparties being downgraded due to a decrease in MTM values and new counterparties coming on at lower grades.
• Past due loans increased by £0.7 billion, primarily within CIB
• Loans to banks decreased by £4.1 billion primarily in Capital
• Customer loans declined by £37.5 billion or 11% to £315.1 billion reflecting the run-down strategy being partially offset by core loan book.
• UK PBB: mortgage growth of £9.3 billion was the principal driver of the £7.4 billion gross lending increase in 2015 and £13.1 billion increase in the last two years reflecting strategy and investment. Unsecured balances continued to decline gradually, albeit at a much slower rate.
• Net impairment releases of £853 million were 37% lower compared with net impairment releases of £1,364 million in 2014. Although releases were at lower levels than in 2014, credit quality remained stable with continued increased recoveries in certain businesses.
UK PBB recorded a release of £6 million compared with a loss of £154 million, due to lower debt flows and increased releases and recoveries. Net releases were reported also in
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office. Ulster Bank RoI contributes a significant proportion of the European loan exposure. Refer to Business review on page 104.
Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (releases) written-off of which: commercial real estate 27,630 3,560 2,054 12.9 58 7.4 (811) 6,151
of which: commercial real estate 25,676 2,568 1,107 10.0 43 4.3 (121) 2,575
Europe of which: commercial real estate 1,628 974 935 59.8 96 57.4 (688) 3,576
Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (release) written-off of which: commercial real estate 43,317 13,291 9,014 30.7 68 20.8 (1,067) 2,745
Notes: (1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer. (2) Includes instalment credit.
Recoveries of amounts previously written-off — — — 175 78 253
Charge to the income statement from discontinued operations — — — — 103 103
Transfers between REIL and potential problem loans (260) — (260) — — —
Recoveries of amounts previously written-off — — — 102 103 205
The table below analyses REIL between UK and overseas, based on the location of the lending office. 2015 2014 Impaired loans Accruing past due REIL REIL REIL
Past due analysis The table below shows loans and advances to customers that were past due at the balance sheet date but are not considered impaired.
The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes
US federal agencies. The other financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor’s, Moody’s and
UK US Other institutions ABS £m £m £m £m £m £m £m £m
AFS reserves (gross of tax) 12 (78) 90 4 114 4 146 60
Designated as at fair value — — 111 2 4 — 117 —
Gross unrealised gains - excluding Citizens 451 144 541 8 166 6 1,316 128
• Total debt securities decreased by £4.1 billion (5%) during 2015, driven by lower held-for-trading positions across all issuer types, largely offset by an increase in available-forsale securities in Treasury’s liquidity portfolio.
Notes: (1) Residential mortgage-backed securities (RMBS) and commercial mortgaged-backed securities (CMBS) are securities that represent an interest in a portfolio of residential and commercial mortgages respectively. Repayments made on the underlying mortgages are used to make payments to holders of the mortgage-backed securities (MBS). The risk of the MBS will vary primarily depending on the quality and geographic region in which the underlying mortgage assets are located and the credit enhancement of the securitisation structure. Several tranches of notes are issued, each secured against the same portfolio of mortgages, but providing differing levels of seniority to match the risk appetite of investors. The most junior (or equity) notes will suffer early capital and interest losses experienced by the referenced mortgage collateral, with each more senior note benefiting from the protection provided by the subordinated notes below. Additional credit enhancements may be provided to the holder of senior MBS notes. The main categories of mortgages that serve as collateral to RMBS held by RBS are set out below and described in the Glossary on pages 420 to 426. The US market has more established definitions of differing underlying mortgage quality and these are used as the basis for RBS's RMBS categorisation.
(2) Includes US agency and Dutch government guaranteed securities. (3) Comprises HFT £303 million (2014 - £387 million), DFV nil (2014 - nil), AFS £106 million (2014 - £225 million) and LAR £37 million (2014 - £28 million). (4) Comprises HFT £46 million (2014 - £100 million), AFS £28 million (2014 - £30 million) and LAR £475 million (2014 - £728 million).
• Interest rate contracts: the reduction in notional was driven by continued participation in TriOptima tear up cycles partially offset by trading volume increases movements increased volatility. Fair values also decreased due to continued participation in TriOptima tear ups as well as the impact of a significant upward shift in the Euro and UK
• Exchange rate contracts: decreases in fair values were partially offset by the impact of the strengthening of the US
• Equity contract reductions driven by the run down and continued notional of the equities business to clients.
As part of its credit risk strategy to manage credit risk concentrations, RBS buys credit derivative products. The counterparties from which this protection is bought are subject to standard credit risk analysis. Eligibility criteria apply: credit protection bought from the same corporate group as the reference entity is not eligible in cases where double default under CRR article 153(3) applies. A summary of the notional principal amount of credit derivative transactions is detailed in the following table, split between protection bought for portfolio management purposes and that relating to intermediation in the credit derivative markets.
Client-led trading/residual risk (1) 22.0 16.6 — 0.2 52.1 50.0 0.9 1.3
Notes: (1) Residual risk relates to legacy positions in Capital Resolution in 2014. (2) Credit hedging in the banking book principally relates to portfolio management in Capital Resolution.
Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as marketimplied volatilities, that may lead to a reduction in earnings, economic value or both.
In many respects, it manages its traded and non-traded market risk exposures separately, largely in line with the regulatory definitions of the trading and non-trading books.
Following the restructuring of the CIB business in Q4 2015, the
Value-at-risk (VaR) remained volatile, reflecting a number of geopolitical developments and macroeconomic factors, as detailed on page 234.
VaR models of RBS plc and NatWest Plc. For more information, refer to page 234.
The completion of the disposal of Citizens during the year further reduced the non-traded market risk exposures arising mainly from its retail and commercial banking activities and Treasury portfolios.
The majority of traded market risk exposure arises in CIB and
The primary objective of RBS’s trading activities is to provide a range of financing, risk management and investment services to its customers - including major corporations and financial institutions around the world. From a market risk perspective, the trading activities are included within the following markets: currencies; emerging markets; rates; asset-backed products; and traded credit.
Other products are not transacted on an exchange. Of these over-the-counter transactions, those with standard terms may be cleared through central counterparties, while those that are more complex are settled directly with the counterparty and may give rise to counterparty credit risk. For more information on the management of counterparty credit risk, refer to the Credit risk section on page 184.
Non-traded market risk is largely managed in line with the following three key categories: interest rate risk; foreign exchange risk; and equity risk.
NTIRR comprises four primary risk factors: repricing risk, yield curve risk, basis risk and optionality risk. For more information, refer to page 243.
Non-traded foreign exchange risk exposures arise from two main sources: • Structural foreign exchange risk - arising from the capital deployed in foreign subsidiaries, branches and joint arrangements and related currency funding where it differs from sterling; and
Pension-related activities also give rise to market risk. Refer to pages 179 and 180 for more information on risk related to pensions.
More specific information on the governance, management and measurement of traded and non-traded market risk is provided in each of the dedicated sections below.
Its quantitative market risk appetite is expressed in terms of limits for the trading and non-trading activities that are consistent with business plans.
A market risk update is also included in the RBS Risk
The main measurement methods are VaR and SVaR. Risks that are not adequately captured by these model methodologies are captured by the risks not in VaR (RNIV) framework to ensure that
RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses in excess of VaR and SVaR.
For internal risk management purposes, VaR assumes a time horizon of one trading day and a confidence level of 99%. The
The internal traded VaR model captures all trading book positions including those products approved by the regulator. For an explanation of the distinction between internal VaR and regulatory VaR, refer to page 239.
• Equity risk - which arises from the impact of changes in equity prices, volatilities and dividend yields.
The table below analyses 1-day 99% internal VaR for RBS’s trading portfolios, segregated by type of market risk exposure. 2015 2014
• Identify risks not adequately captured in VaR, and ensure that such risks are addressed via the RNIV framework (refer to page 237).
As well as being an important market risk measurement and control tool, the VaR model is also used to determine a significant component of the market risk capital requirement (refer to page 237 for more information on calculation of capital requirements).
P&L for that day in respect of the trading activities within the scope of the firm’s regulatory VaR model, including any intraday activities, adjusted by stripping out fees and commissions, brokerage, and additions to and releases from reserves that are not directly related to market risk.
The table below shows regulatory back-testing exceptions for a period of 250 business days for 1-day 99% traded regulatory VaR vs.
Note: (1) A waiver was obtained for the RBS plc exception (Actual and Hypo) on 22 June 2015 as it was considered to be of a technical nature. Therefore, this exception is not included in the table above.
• The exceptions in RBS plc resulted from losses in the Rates business due to the rates sell-off and steepening across the euro and sterling curves between May and August. In addition, the exception on 31 December 2015 was due to various valuation adjustments carried out at the year end to re-mark the prices of certain trades.
Rates business due to adverse rate movements, losses on the sale of positions from Capital Resolution and the selldown of residual equity positions as part of disposal strategy.
• As noted above, statistically RBS would expect to see backtesting exceptions 1% of the time over the 250-day period.
• The top-level businesses presented in the table above are subject to quarterly review by the PRA. For these businesses, exceptions were noted during the period and analysis conducted as explained below.
• The exceptions in the Credit business were mainly driven by mark-downs and by tightening of CDS spreads.
• The exceptions in the Currencies business were mainly due to market moves adversely affecting spot and volatility foreign exchange positions.
The risk system simulates 99% VaR on the current portfolio for each 250-day period from 1 January 2005 to the current VaR
date, moving forward one day at a time. The SVaR is the worst
The internal traded SVaR model captures all trading book positions, including not only those products, locations and legal entities approved by the regulator.
• The 25% decline in SVaR was consistent with the decrease in VaR and was primarily driven by the exit from US ABP
The need for an RNIV calculation is typically identified in one of the following two circumstances: (i) as part of the New Product
Risk Assessment process, when a risk manager assesses that the associated risk is not adequately captured by the VaR model; or (ii) as a result of a recommendation made by Model Risk
RBS adopts two approaches for the quantification of RNIVs: • A VaR/SVaR approach. Under this approach, two values are calculated: (i) the VaR RNIV; and (ii) the SVaR RNIV.
RNIVs that are related specifically to instruments that have level 3 valuation hierarchy assumptions (refer to page 304) are mainly included in the following categories: proxied sensitivities or risk factors, higher-order sensitivity terms, and static pricing parameters.
Market risk continued The table below analyses capital requirements related to RNIVs. 2015 2014 £m £m
• The total RNIV charge fell by 31% year on year, primarily in stress-based RNIV reflecting ongoing improvements in the capture of risks in the RNIV framework.
Historical stress testing is a measure that is used for internal management. Using the historical simulation framework used for
January 2005. The methodology simulates the impact of the 99.9 percentile loss that would be incurred by historical risk factor movements over the period, assuming variable holding periods specific to the risk factors and the businesses.
Macroeconomic stress tests are carried out periodically as part of the firm-wide, cross-risk capital planning process. The scenario narratives are translated into risk factor shocks using historical events and insights by economists, risk managers and the front office. Market risk stress results are combined with those for other risks into the capital plan that is presented to the Board.
The cross-risk capital planning process is conducted twice a year, in April/May and October/November, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by the firm.
The market risks subject to capital requirements under Pillar 1 are primarily interest rate, credit spread and equity risks in the trading book and foreign exchange and commodity risks in both the trading and non-trading books. Interest rate and equity risks are split between general and specific risks. General risks represent market risks due to a move in a market as a whole, such as a main index or yield curve, while specific risks represent market risks arising from events particular to an underlying issuer.
RBS uses two broad methodologies to calculate its market risk capital charge: (i) the non-modelled approach, whereby regulatorprescribed rules are applied, and (ii) the internal model approach, where, subject to regulatory approval, a model such as VaR is used to calculate the capital charge.
Market risk RWAs of £21 billion and minimum capital requirement of £1.7 billion are composed as presented below.
RBS’s VaR model has been approved by the PRA to calculate its regulatory market risk capital requirement for the trading book for those legal entities under its jurisdiction. These legal entities are
VaR as it takes into account only regulator-approved products, locations and legal entities and it is based on a ten-day, rather than a one-day, holding period for market risk capital calculations.
As discussed earlier, RBS has an established RNIV framework that ensures that the risks not captured in VaR are adequately covered by its capital.
confidence level. The dependency of positions is modelled using a single-factor Gaussian copula.
The following table analyses RBS’s total market risk minimum capital requirement at 31 December 2015, calculated in accordance with the Capital Requirements Regulation (CRR); this represents 8% of the corresponding RWA amount, £21 billion. It comprises a number of regulatory capital requirements split into two categories: (i) the non-modelled position risk requirement (PRR) of £377 million, which has several components; and (ii) the Pillar 1 model-based PRR of £1.3 billion, which comprises several modelled charges. 2015 2014 £m £m
• The decline in the RNIV charge is explained on page 238.
• The VaR charge increased by 15%, driven by risk increases across the Rates business, primarily related to the European and US swap portfolios and the US options business.
Notes: (1) Based on an assessment of S&P, Moody’s and Fitch ratings, where available, or on RBS’s internal master grading scale. (2) The figures presented are based on the spot IRC charge at 31 December 2015 and will therefore not agree with the IRC position risk requirement, as this is based on the 60-day average. The figures presented above are in capital terms. (3) The IRC figures by product category presented above are based on an internal allocation and do not constitute standalone position risk requirements.
• Spot IRC capital fell £62.4 million or 25% year on year, for the same reasons noted on the previous page for the IRC PRR.
For general information on the independent model validation carried out by Model Risk Management (MRM), which applies also to market risk models (including VaR), refer to page 138.
Any pricing models that are used as the basis for valuing books and records are subject to approval and oversight by asset-level modelled product review committees.
The review process comprises the following steps: • The committees prioritise models for review by MRM, considering the materiality of the risk booked against the model and an assessment of the degree of model risk, that is the valuation uncertainty arising from the choice of modelling assumptions.
• MRM quantifies the model risk by comparing front office model outputs with those of alternative models independently developed by MRM.
• The conclusions of the review are used by MRM to inform risk limits and by Finance to inform model reserves.
All model changes are approved through model governance committees at franchise level. Changes to existing models that have an impact on VaR exceeding 5% at legal entity level or 15%
at a major business level are also subject to MRM review and sign-off as are all model changes that require regulator approval before implementation.
Non-traded market risk positions are reported to the ALCo and the Board, monthly in the case of interest rate risk and quarterly in the case of foreign exchange and equity risk.
The Executive Risk Forum (ERF) approves the non-traded market risk framework. The non-traded market risk policy statement sets out the governance and risk management framework through effective identification, measurement, reporting, mitigation, monitoring and control.
The key models used for managing non-traded market risk benefit from the validation process described on this page.
Non-traded interest rate risk (NTIRR) factors are grouped into the following categories: • Repricing risk - which arises when asset and liability positions either mature (in the case of fixed-rate positions)
• Yield curve risk - which arises from unanticipated changes in the shape of the yield curve, such that rates at different maturity points may move differently. Such movements may give rise to interest income and economic value volatility.
• The two risk factors above incorporate the duration risk arising from the reinvestment of maturing swaps hedging net free reserves (or net exposure to equity and other low fixedrate or non-interest-bearing liability balances including, but not limited to, current accounts).
• Basis risk - which arises when related instruments with the same tenor are valued using different reference yield curves. Changes in the spread between the different reference curves can result in unexpected changes in the valuation of or income difference between assets, liabilities or derivative instruments. This occurs, for example, in the retail and commercial portfolios, when products valued on the basis of the Bank of England base rate are funded with
Due to the long-term nature of many non-trading book portfolios and their varied interest rate repricing characteristics and maturities, it is likely that net interest income will vary from period to period, even if interest rates remain the same. New business originated in any period will alter RBS’s interest rate sensitivity if the resulting portfolio differs from portfolios originated in prior periods, depending on the extent to which exposure has been hedged.
aggregates its interest rate positions and hedges them externally using cash and derivatives - primarily interest rate swaps.
Chief Executive Officer, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the non-trading book that are not of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority under the credit approval framework.
The table below shows the NTIRR VaR for RBS’s retail and commercial banking activities at a 99% confidence level together with a currency analysis of period end VaR. It captures the risk resulting from mismatches in the repricing dates of assets and liabilities. This includes any mismatch between structural hedges and stable non and low interest bearing liabilities such as equity and money transmission accounts as regards their interest rate repricing behavioural profile.
Average Period end Maximum Minimum £m £m £m £m 2015 Excluding Citizens Citizens Total Period end VaR £m £m £m £m
• Average interest rate VaR was lower in 2015 as RBS
steered its structural interest rate exposure more closely to the neutral duration prescribed by its internal risk management policy.
The reported sensitivities will vary over time due to a number of factors such as market conditions and strategic changes to the balance sheet mix and should not therefore be considered predictive of future performance. The sensitivities do not capture potential management responses to sudden changes in the interest rate environment.
+ 25 basis point shift in yield curves (6) 48 25 1 68
− 25 basis point shift in yield curves (7) (66) (24) 1 (96)
+ 100 basis point shift in yield curves (28) 347 60 (17) 362
− 100 basis point shift in yield curves (34) (298) (2) (12) (346)
− 100 basis point shift in yield curves — — (85) — (85)
+ 100 basis point shift in yield curves (28) 347 214 (17) 516
• Assumptions relating to customer pricing are kept under review and may vary at different levels of interest rates. As a result, the increase in sensitivity between a 25 basis point rate rise and a 100 basis point rate rise is not linear.
Banks generally have the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.
The table below shows the impact on net interest income associated with product hedges managed by Treasury. These relate to the main UK banking businesses except Private Banking and RBSI. Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve after hedging the net interest rate exposure of the bank externally. This internal allocation has been developed over time alongside the bank’s external hedging programme and provides a basis for stable income attribution to the product and equity hedges.
LIBOR) fell from 1.54% to 1.48%. This reflects the impact of maturing hedges being reinvested at lower rates and new hedges added during the year at prevailing market rates.
• The impact of interest rate shifts on cashflow hedge reserves is broadly symmetrical. The slight asymmetry reflects the changing sensitivity of derivative valuations to the same interest rate shock at differing levels of interest rates (i.e. convexity).
Net assets of Non- Net assets of Net Structural foreign Residual structural overseas controlling overseas operations investment currency exposures Economic foreign currency operations interests excluding NCI (1) hedges pre-economic hedges hedges (2) exposures 2015 £m £m £m £m £m £m £m
Notes: (1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners’ equity, which consisted mainly of Citizens in US dollar in 2014. (2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.
They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.
• Economic hedges decreased by £3.1 billion due to the decrease in US dollar net assets.
• Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.4 billion in equity, respectively (2014 - £0.6 billion).
Non-trading books in CIB and Capital Resolution, other than the structured credit portfolio, do not typically form part of the structural interest rate framework due to the short-term nature of the interest rate risks they carry. They are therefore monitored and managed through the same framework and using the same metrics as portfolios in the trading book.
Average Period end Maximum Minimum £m £m £m £m £m £m £m £m
(2) The table above excludes the structured credit portfolio and loans and receivables.
• The average VaR for the non-trading book, predominantly comprising available-for-sale portfolios, was £2.1 million during 2015 compared with £4.6 million in 2014. This was largely driven by a decline in the credit spread VaR as a result of (i) Capital Resolution run-down, and (ii) the transfer of collateral and money market non-trading books into
Net loans and advances to banks 19.0 11.2 7.8 24.8 11.2 13.6 Interest rate
Net loans and advances to customers 308.0 17.4 290.6 394.8 23.2 371.6 Interest rate
Deposits by banks 28.1 20.0 8.1 40.9 25.5 15.4 Interest rate
Debt securities in issue 31.1 7.1 24.0 51.9 12.4 39.5 Interest rate
Derivatives 254.7 252.4 2.3 350.0 346.9 3.1 Interest rate, credit spreads
Notes: (1) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by RBS to measure market risk are detailed under traded market risk measurement on page 232. (2) Non-trading businesses are entities that primarily have exposures that are not classified as trading book. For these exposures, with the exception of pension-related activities, the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more information refer to pages 243 to 250.
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
December 2015, the consolidated statement of comprehensive income, the consolidated and company statements of changes in equity, the consolidated and parent company cash flow statements, the accounting policies and the related Notes 1 to 40 on the consolidated financial statements, the related Notes 1 to 15 on the parent company financial statements and the information identified as “audited” in the Capital and risk management section of the Business review. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Separate opinion in relation to IFRSs as issued by the IASB
Union, the Group has applied IFRSs as issued by the International Accounting Standards Board (IASB).
Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group
As required by the UK Listing Rules we have reviewed the directors’ statement regarding the appropriateness of the going concern basis of accounting on page 89 and the directors’ statement on the longer-term viability of the Group contained within the Strategic
We agreed with the directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties.
In Notes 20 and 30 of the consolidated financial statements the directors have summarised the most significant legal proceedings, investigations and other regulatory and government actions involving the Group. The recognition and measurement of provisions and the measurement and disclosure of contingent liabilities in respect of litigation, customer remediation and regulatory investigations requires significant judgement by the directors and as a result is a key area of focus in our audit. As set out in the Accounting policies, judgement is needed to assess whether an obligation exists at 31 December 2015 in order to determine if: • It is likely that an economic outflow such as a payment will occur; and
At 31 December 2015 the Group held provisions for liabilities and charges totalling £7,366 million, including conduct and litigation claims totalling £6,108 million. The most significant areas of judgement were: • The assessment of the provisions for payment protection insurance (£996 million at 31 December 2015) including the impact on the provision of the UK Supreme Court’s decision in the case of Plevin v Paragon in November 2014 and the draft consultation paper issued by the FCA on 26 November 2015; and
This work also included, amongst other things, reviewing regulatory correspondence and the Group’s complaint logs.
We assessed the provisions and disclosures in light of legal advice and correspondence with regulators received in connection with legal proceedings, investigations and regulatory matters.
The directors exercise significant judgement when determining both when and how much to record as loan impairment provisions. Because of the significance of these judgements and the size of loans and advances, the audit of loan impairment provisions is a key area of focus. At 31 December 2015, gross loans and advances were £371,657 million against which loan impairment provisions of £7,119 million were recorded. The basis of the provisions is summarised in the
Where applicable, the impact of forbearance is assessed individually or on a portfolio basis.
We tested the design and operating effectiveness of the key controls to determine which loans and advances are impaired and provisions against those assets. These included testing: • System-based and manual controls over the timely recognition of impaired loans and advances; • Controls over the impairment calculation models including data inputs; • Controls over collateral valuation estimates; and
For the collective and latent impairment models used by the Group, we tested a sample of the data used in the models as well as assessing the model methodology and testing the calculations within the models. We assessed whether the modelling assumptions used considered all relevant risks, and whether the additional adjustments to reflect un-modelled risks were reasonable in light of historical experience, economic climate, current operational processes and the circumstances of the customers as well as our own knowledge of practices used by other similar banks. We also tested the extraction from underlying systems of historical data used in the models. Our credit risk specialists have assessed certain regulatory models used in certain wholesale collective impairment provisions together with the adjustments recorded that convert the regulatory models to an
The valuation of the Group’s financial instruments was a key area of focus of our audit given the degree of complexity involved in valuing some of the financial instruments and the significance of the judgements and estimates made by the directors. As set out in Note 9 of the consolidated financial statements, financial instruments held at fair value comprised assets of £406 billion and liabilities of £357 billion. In the Group’s accounting policies, the directors have described the key sources of estimation involved in determining the valuation of financial instruments and in particular when the fair value is established using a valuation technique due to the instrument’s complexity or due to the lack of availability of market-based data.
Our audit focused on testing the valuation of the more illiquid financial instruments disclosed as level 3 instruments which comprised assets of £4 billion and liabilities of £3 billion. Our audit also focused on testing the valuation adjustments including those for credit risk, funding related and own credit.
We tested the design and operating effectiveness of the key controls in the Group’s financial instrument valuation processes including the controls over data feeds and other inputs into valuation models and the controls over testing and approval of new models or changes to existing models.
Our audit work also included testing a sample of the underlying valuation models and the assumptions used in those models using a variety of techniques. This work included valuing a sample of financial instruments using independent models and source data and comparing the results to the Group’s valuations and the investigation of any significant differences.
For each cash generating unit where material amounts of goodwill exist, we critically assessed the cash flow forecasts and the appropriateness of the other key assumptions used including, growth rates and discount rates.
With the support of our taxation specialists we critically assessed the estimate of future taxable profits used to calculate the level of deferred tax assets recognised on the balance sheet taking into account the impact of the changes in the recent UK Finance
Our audit focused on determining whether the new interpretations had been appropriately applied and the restatements were appropriate.
Our audit work included reviewing the terms of the Group’s pension deeds to assess and consider the rights of pension trustees, which was a key determinant in the application of the changes in interpretation. We also assessed and met with external advisors to discuss the advice received by the Group in respect of the rights of pension trustees. A key focus of our audit work also included the calculation of: • the liability for the minimum funding requirement, which together with the actuarial valuation at the balance sheet date determined the accounting deficit or surplus to be recognised; and
The Group identified a number of deficiencies in the controls over the provision of access to IT application systems which increased the risk that individuals had inappropriate access and the Group put in place a programme of activities to remediate those deficiencies during 2015. However for the IT application systems and databases that support financial reporting, the existence of these deficiencies during the year and at the yearend meant there was an increased risk that the data and reports from the affected systems and databases were not reliable.
In addition and where appropriate we extended the scope of our substantive audit procedures.
The description of the risks above should be read in conjunction with the significant issues considered by the Group Audit Committee discussed on pages 51 to 54.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns.
Under the International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Group Audit Committee which we consider should have been disclosed.
International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
Basic and diluted (loss)/earnings from continuing operations 7 (27.7p) 0.5p (85.0p)
Total liabilities and equity 815,408 1,051,019 *Restated - refer to page 267 for further details.
Recycled to profit or loss on disposal of businesses (3) — 36 (110)
Recycled to profit or loss on ceding control of Citizens (5) (36) — —
Foreign currency (losses)/gains on hedges of net assets (176) 108 105
Recycled to profit or loss on ceding control of Citizens (962) — —
*Restated - refer to page 267 for further details. For notes to these tables see page 265.
Costs of placing Citizens equity (29) (45) Redemption of equity preference shares (2) (1,214) — —
Movements in available-for-sale securities - recycled to profit or loss on disposal of businesses (7) — — (5)
Paid-in equity holders 2,646 784 979 * Restated - refer to page 267 for further details.
(2) Non-cumulative dollar preference shares totalling $1.9 billion were redeemed in September 2015.
(3) Net of tax - £11 million charge in 2014 and £35 million charge in 2013.
(8) Includes £2,491 million relating to the secondary offering of Citizens in March 2015 (2014 - £2,117 million relating to the IPO of Citizens).
Adjustments for non-cash items and other adjustments included within income statement (5,601) (84) 7,347
Effects of exchange rate changes on cash and cash equivalents 576 909 512
Cash and cash equivalents at 31 December 35 103,592 107,904 121,177
Citizens when it sold its final tranche on 30 October 2015.
Citizens is no longer a reportable segment, therefore segment disclosures for all periods have been restated.
(Loss)/profit attributable to ordinary shareholders and other equity owners - continuing operations (2,749) (52) (2,801) 756 — 756 (9,118) — (9,118)
The Group adopted a number of new and revised IFRSs effective
IAS 19 ‘Defined Benefit Plans: Employee Contributions’ was issued in November 2013. This amendment distinguishes the accounting for employee contributions that are related to service from those that are independent of service.
The consolidated accounts incorporate the financial statements of the company and entities (including certain structured entities)
(interchange) each time a cardholder purchases goods and services. The Group also receives interchange fees from other card issuers for providing cash advances through its branch and automated teller machine networks. These fees are accrued once the transaction has taken place.
• Periodic fees payable by a credit card or debit card holder are deferred and taken to profit or loss over the period of the service.
Assets and liabilities of disposal groups classified as held for sale and non-current assets classified as held for sale are shown separately on the face of the balance sheet.
discontinued operation is a cash generating unit or a group of cash generating units that either has been disposed of, or is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations, (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale.
The residual value and useful life of property, plant and equipment are reviewed at each balance sheet date and updated for any changes to previous estimates.
Accounting policy 7). Operating lease rentals receivable are included in Other operating income.
If the Group has a contract that is onerous, it recognises the present obligation under the contract as a provision. An onerous contract is one where the unavoidable costs of meeting the
Group’s contractual obligations exceed the expected economic benefits. When the Group vacates a leasehold property, a provision is recognised for the costs under the lease less any expected economic benefits (such as rental income).
Income tax expense or income, comprising current tax and deferred tax, is recorded in the income statement except income tax on items recognised outside profit or loss which is credited or charged to other comprehensive income or to equity as appropriate.
On initial recognition, financial assets are classified into held-tomaturity investments; held-for-trading; designated as at fair value through profit or loss; loans and receivables; or available-for-sale financial assets. Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way transactions in financial assets are recognised on trade date.
Held-for-trading - a financial asset is classified as held-for-trading if it is acquired principally for sale in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-fortrading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-fortrading financial assets are recognised in profit or loss as they arise.
Loans and receivables - non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables, except those that are classified as available-for-sale or as held-for-trading, or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see
Reclassifications - held-for-trading and available-for-sale financial assets that meet the definition of loans and receivables (nonderivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity.
This fair value becomes the asset's new cost or amortised cost as appropriate. Gains and losses recognised up to the date of reclassification are not reversed.
Fair value - the Group’s approach to determining the fair value of financial instruments measured at fair value is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Note 9.
Provision is made for loan commitments, other than those classified as held-for-trading, if it is probable that the facility will be drawn and the resulting loan will be recognised at an amount less than the cash advanced. Syndicated loan commitments in excess of the level of lending under the commitment approved for retention by the Group are classified as held-for-trading and measured at fair value.
Cash collateral given or received is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded.
Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities but where it does not intend to settle the amounts net or simultaneously and therefore the assets and liabilities concerned are presented gross.
Hedge relationships are formally designated and documented at inception. The documentation identifies the hedged item and the hedging instrument and details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued. Hedge accounting is also discontinued if the Group revokes the designation of a hedge relationship.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to profit or loss in the same periods in which the hedged forecast cash flows affect profit or loss.
An associate is an entity over which the Group has significant influence. A joint venture one which it controls jointly with other parties. Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for post-acquisition changes in the Group’s share of net assets.
If an award is modified, the original cost continues to be recognised as if there had been no modification. Where modification increases the fair value of the award, this increase is recognised as an expense over the modified vesting period. A
new award of shares or share options is treated as the modification of a cancelled award if, on the date the new award is granted, the Group identifies them as replacing the cancelled award. The cancellation of an award through failure to meet nonvesting conditions triggers an immediate expense for any unrecognised element of the cost of an award.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8
The Group operates a number of defined benefit pension schemes as described in Note 4 on the accounts. As described in
Accounting policy 5, the assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit credit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any recognisable surplus or deficit of scheme assets over liabilities is recorded in the balance sheet as an asset (surplus) or liability
A pension asset of £215 million and a liability of £3,789 million were recognised on the balance sheet at 31 December 2015
As set out in Note 20, at 31 December 2015 the Group recognised provisions for liabilities in respect of Payment
Where the Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Payment Protection Insurance policies. The provision is management’s best estimate of the anticipated costs of redress and related administration expenses. The determination of appropriate assumptions to underpin the provision requires significant judgement by management. The principal assumptions underlying the provision together with sensitivities to changes in those assumptions are given in Note 20.
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and temporary differences. Deferred tax assets are recognised in respect of unused tax losses and other temporary differences to the extent that it is probable that there will be future taxable profits against which the losses and other temporary differences can be utilised. The Group has considered their carrying value as at 31 December 2015 and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets. These estimates are based on forecast performance and take into account the Group’s plans to implement the UK ring-fencing regime and the resultant transfers between members of the Group.
The Group's loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost in accordance with Accounting policy 16. At 31 December 2015, customer loan impairment provisions amounted to £7,118 million
In accordance with Accounting policies 14, 16 and 23, financial instruments classified as held-for-trading or designated as at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured at fair value.
December 2015 that would affect RBS from 1 January 2016 or later.
3 and other standards and makes the relevant disclosures accordingly. The effective date is 1 January 2016.
Amortisation’ issued in May 2014 amends IAS 16 ‘Property, Plant and Equipment’ and IAS 38 ‘Intangible Assets’ requiring amortisation to be based on the consumption of an asset, introducing a rebuttable presumption that this is not achieved by an amortisation profile aligned to revenue. The effective date is 1
None of these amendments is expected to have a material effect on RBS’ financial statements.
with an effective date of 1 January 2018. IFRS 9 replaces the current financial instruments standard IAS 39, setting out new accounting requirements in a number of areas. The Group is continuing its assessment of the standard’s effect on its financial statements.
• Financial assets with terms that give rise to interest and principal cash flows only and which are held in a business model whose objective is to hold financial assets to collect their cash flow are measured at amortised cost.
• Financial assets with terms that give rise to interest and principal cash flows only and which are held in a business model whose objective is achieved by holding financial assets to collect their cash flow and selling them are measured at fair value through other comprehensive income.
However, at initial recognition, any financial asset may be irrevocably designated as measured at fair value through profit or loss if such designation eliminates a measurement or recognition inconsistency.
The Group continues to evaluate the overall effect, but expects that the measurement basis of the majority of the Group’s financial assets will be unchanged on application of IFRS 9.
In January 2016, the IASB amended IAS12 ‘Income taxes’ to clarify the recognition of deferred tax assets in respect of unrealised losses. The amendment is effective from 1 January
‘Leases’. Accounting for finance leases will remain substantially the same. Operating leases will be brought on balance sheet through the recognition of assets representing the contractual rights of use and liabilities will be recognised for the contractual payments. The effective date is 1 January 2019.
Changes in the fair value of own debt designated as at fair value through profit or loss attributable to own credit risk (1)
Profit on sale of property, plant and equipment 91 137 35
Notes: (1) Measured as the change in fair value from movements in the year in the credit risk premium payable by RBS. (2) Includes income from activities other than banking.
Pension costs - defined benefit schemes (see Note 4) 523 462 508 - curtailment and settlement gains (see Note 4) (65) — (7)
Property, plant and equipment depreciation and write down (see Note 16) 950 671 759
Included in operating expenses are the following integration, restructuring and divestment costs. Premises and
The average number of persons employed, rounded to the nearest hundred, in continuing operations during the year, excluding temporary staff, was 88,800 (2014 - 92,800; 2013 - 97,900); on the same basis there were 10,100 people employed in discontinued operations (2014 - 18,200; 2013 - 22,900). The average number of temporary employees during 2015 was 7,800 (2014 - 8,100; 2013 9, 800). The number of persons employed in continuing operations at 31 December, excluding temporary staff, by reportable segment, was as follows: 2015 2014* 2013*
Rest of the World 16,400 16,900 16,400 *Represented to reflect the segmental reorganisation.
There were no people employed in discontinued operations at 31 December 2015 (2014 - 17,400; 2013 - 19,000).
Variable compensation as a % of operating profit (4,5) 8% 7% nm 23%
Reconciliation of variable compensation awards to income statement charge 2015 2014 2013 £m £m £m
Income statement charge for amounts deferred from prior years 38 137 242
Variable compensation deferred from 2013 and earlier 289 204 48 21 2
The Group sponsors a number of pension schemes in the UK
The Royal Bank of Scotland Group Pension Fund (the “Main scheme”) operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation
(principally the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004). Under UK legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities. Pension fund trustees are required to: prepare a statement of funding principles; obtain regular actuarial valuations and reports; put in place a recovery plan addressing any funding shortfall; and send regular summary funding statements to members of the scheme.
Westminster Bank Plc. RBSPT is the legal owner of the Main scheme assets which are held separately from the assets of the
Group. The Board of RBSPT comprises four trustee directors nominated by members selected from eligible active staff and pensioner members who apply and six appointed by the Group.
The Main scheme, accounting for 88% (2014 - 87%) of the
Main scheme and certain other UK and Irish schemes have been limited to 2% per annum or CPI inflation if lower. Also, with effect from 1 October 2012, the normal pension age for future benefits was increased to 65 unless members elect to contribute to maintain a normal pension age of 60.
Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material.
The assets of the Main scheme, which represent 88% of plan assets at 31 December 2015 (2014 - 88%), are invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including property and hedge funds.
The Main scheme employs derivative instruments to achieve a desired asset class exposure or to match assets more closely to liabilities. The value of assets shown reflects the assets owned by the scheme, with any derivative holdings valued on a mark-to-market basis.
Equity and bond put options 6,109 2 12 7,409 1 61
Main scheme, adjusted to take account of the nature of liabilities, risk appetite of the trustees, size of the scheme and any local regulatory constraints. The use of derivative instruments outside the Main scheme is not material.
“banks”). At 31 December 2015, the gross notional value of the swaps was £26,871 million (2014 - £34,163 million) and had a net positive fair value of £1,444 million (2014 - £2,433 million).
(2014 - £2 million) and other financial instruments issued by the
Group with a value of £1,144 million (2014 - £2,172 million) are held by the Main scheme.
Changes in value of net pension liability plan assets obligation funding (1) liability plan assets obligation funding (1) liability £m £m £m £m £m £m £m £m
Return on plan assets above recognised interest income 4,629 — (4,629) 5,171 — (5,171)
Effect of changes in actuarial financial assumptions — 3,757 3,757 — 4,806 4,806
Effect of changes in actuarial demographic assumptions — 401 401 — 491 491
Contributions by plan participants and other scheme members — — — 5 5 —
Currency translation and other adjustments — — — (36) (73) (37)
Return on plan assets above recognised interest income (415) — 415 (458) — 458
Contributions by plan participants and other scheme members — — — 6 6 —
Transfer to disposal groups — — — (299) (297) 2 *Restated - refer to page 267 for further details.
Analysis of net pension deficit Main scheme 2015 2014 £m £m
The weighted average duration of the Main scheme’s defined benefit obligation at 31 December 2015 is 19.1 years (2014 - 20.0 years).
The defined benefit obligation is attributable to the different classes of scheme members in the following proportions (Main scheme): The table below sets out the sensitivities of the present value of defined benefit obligations at 31 December to a change in the principal actuarial assumptions.
0.25% additional rate of increase in pensions in payment 945 982
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
History of defined benefit schemes 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 £m £m £m £m £m £m £m £m £m £m
Present value of plan obligations 30,966 31,776 26,958 25,648 22,955 35,152 36,643 31,484 30,110 27,137
Experience gains/(losses) on plan liabilities 233 3 102 (232) (208) 258 18 176 (207) (200)
Actual return on plan assets 703 5,766 1,997 1,329 1,966 749 6,485 2,270 1,696 2,065
Actual return on plan assets - % 2.3% 23.8% 8.9% 6.3% 10.3% 2.2% 22.8% 8.6% 6.8% 9.1%
In May 2014, the triennial funding valuation of the Main scheme was agreed which showed that the value of the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this deficit, RBS agreed to pay annual additional contributions of £650 million from 2014 to 2016 and £450 million (indexed in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.
In January 2016, RBS sought regulatory approval to accelerate the settlement of the outstanding additional contributions of £4.2 billion and it entered into a Memorandum of Understanding with the trustee of the Main scheme which, among other things, will bring forward the date of the next triennial funding valuation to no later than 31 December 2015.
The analysis of auditor’s remuneration is as follows: 2015 2014 £m £m
Credit/(charge) for the year arising from UK tax rate changes 94 — (313)
Reduction in the carrying value of deferred tax assets — (1,472) (701)
Items not allowed for tax - losses on disposals and write-downs (23) (12) (20)
Non-taxable items - gain on sale of Direct Line Insurance Group — 41 —
- gain on sale of Global Merchant Services — — 37
(Reduction)/increase in carrying value of deferred tax asset in respect of: - US losses and temporary differences — (775) —
Notes: (1) In recent years the UK Government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 20% with effect from 1 April 2015, 19% from 1
April 2017 and 18% from 1 April 2020. The Finance (No 2) Act 2015 restricts the rate at which tax losses are given credit in future periods to the main rate of UK corporation tax rate, excluding the Banking Surcharge 8% rate introduced by this Act. Deferred tax assets and liabilities at 31 December 2015 take into account the reduced rates in respect of tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
(Loss)/profit from continuing operations attributable to ordinary shareholders (3,186) 57 (9,516)
Diluted weighted average number of ordinary shares outstanding during the year 11,576 11,447 11,311
Basic earnings/(loss) per ordinary share from discontinued earnings per ordinary share from discontinued operations was
Prior to an agreement between RBS and HM Treasury (HMT) for the retirement of the Dividend Access Share (DAS) approved on 25 June 2014, the DAS was entitled to a dividend amounting to the greater of 7% of the aggregate issue price of B shares and 250% of the ordinary dividend rate multiplied by the number of B
shares issued, less any dividends paid on the B shares and on ordinary shares issued on their conversion. When calculating earnings per share, IFRS requires profit or loss to be allocated to participating equity instruments as if all of the profit or loss for the period had been distributed.
Under the DAS retirement agreement, once RBS has paid a further £1,180 million of dividends on the DAS it will lose its preferential dividend rights and become a single B share. The dividends are payable at the discretion of the directors. Unpaid
DAS dividends will be subject to an increase of 5% per annum from 1 January 2016 and an increase of 10% per annum from 1
Earnings per share for periods ended after 25 June 2014 reflect
December 2014. Dividends can be paid on ordinary shares only once the retirement dividend, subject to increases as above, has been paid.
Assets of disposal groups 82,011 82,011 *Restated - refer to page 267 for further details.
Notes: (1) Includes items in the course of transmission to other banks of £338 million (2014 - £513 million). (2) The carrying amount of other customer accounts designated as at fair value through profit or loss is £297 million (2014 - £432 million) higher than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively. Measured as the change in fair value from movements in the period in the credit risk premium payable.
(3) Comprises bonds and medium term notes of £30,206 million (2014 - £48,476 million) and certificates of deposit and other commercial paper of £944 million (2014 - £1,804 million).
Gains/(losses) on financial assets/liabilities designated as at fair value through profit or loss 388 55 (113)
Losses on disposal or settlement of loans and receivables (558) (232) (179)
IFRS Balance and similar Cash financial arrangements and netting Balance Gross offset sheet agreements collateral collateral related collateral arrangements sheet total £m £m £m £m £m £m £m £m £m
There were no reclassifications in 2015. In 2008 and 2009, financial assets were reclassified from held-for-trading (HFT) into loans and receivables (LAR) and from HFT into AFS. The tables below show the carrying value, fair value and the effect on profit or loss of these reclassifications.
Reclassified from HFT to LAR 1,506 1,348 11 (76) 193 258
Reclassified from HFT to AFS (1) 251 251 29 — 27 (2)
In 2014, UK Government bonds with a fair value of £3.6 billion were reclassified from available-for-sale (AFS) to held-to-maturity (HTM).
IPV is a key element of the control environment. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team independent of those trading the financial instruments, in the light of available pricing evidence.
The Modelled Product Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure for review by the RBS Pricing Model
Risk team. The CIB and RCR Valuation Committees are made up of valuation specialists and senior business representatives from various functions and oversee pricing, reserving and valuations issues. These committees meet monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by the CIB and RCR Valuation
Particular attention is paid to instruments crossing from one level to another, new instrument classes or products, instruments that are generating significant profit and loss and instruments where valuation uncertainty is high.
• Foreign currency exchange rates - there are observable prices both for spot and forward contracts and futures in the world's major currencies.
• Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in
Otherwise, expected losses are applied to estimated potential future positive exposures which are modelled to reflect the volatility of the market factors which drive the exposures and the correlation between those factors.
(short positions) levels, by marking individual cash positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
Bid-offer adjustments for each risk factor (including delta (the degree to which the price of an instrument changes in response to a change in the price of the underlying), vega (the degree to which the price of an instrument changes in response to the volatility in the price of the underlying), correlation (the degree to which prices of different instruments move together)) are determined by aggregating similar risk exposures arising on different products. Additional basis bid-offer reserves are taken where these are charged in the market.
December 2015, net gains of £81 million (2014 - £119 million)
(2014 - £53 million) were deferred and £53 million (2014 - £139 million) were recognised in the income statement.
Secondary senior debt issuance spreads are used in the calculation of the own credit adjustment applied to senior debt.
The own credit adjustment does not alter cash flows, is not used for performance management, is disregarded for regulatory capital reporting processes and will reverse over time as the liabilities mature.
The cumulative own credit adjustment (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that have a material impact on the valuation of Level 3 financial instruments. The table excludes unobservable inputs where the impact on valuation is less significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, these inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels. Level 3 (£bn) Range
Credit 0.2 0.2 DCF based on recoveries Recovery rates (3) 0% 40%
Interest and foreign exchange contracts 1.7 1.5 Option pricing model Correlation (5) 0% 99%
(3) Recovery rate: reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(6) Volatility: a measure of the tendency of a price to change with time. (7) Level 3 structured notes issued of £0.5 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component. (8) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement. (9) The table above excludes unobservable inputs where the impact on valuation is less significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the issuer but unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, their inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
The Level 3 sensitivities on the previous page are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the non-correlated sum of the additive figures as shown in the above table.
The diverse range of products traded by RBS results in a wide range of instruments that are classified into Level 3 of the hierarchy. Whilst the majority of these instruments naturally fall into a particular level, for some products an element of judgment is required. The majority of RBS’s financial instruments carried at fair value are classified as Level 2: inputs are observable either directly (i.e. as a price) or indirectly (i.e. derived from prices).
A key input in the decision making process for the allocation of assets to a particular level is liquidity. In general, the degree of valuation uncertainty depends on the degree of liquidity of an input.
The availability and quality of independent pricing information are considered during the classification process. An assessment is made regarding the quality of the independent information. For example, where consensus prices are used for non-modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be Level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating.
CVA applied to derivative exposures and own credit adjustments applied to derivative liabilities are calculated on a portfolio basis.
Whilst the methodology used to calculate each of these adjustments references certain inputs which are not based on observable market data, the uncertainty of the inputs is not considered to have a significant effect on the net valuation of the related portfolios. The classification of the derivative portfolios which the valuation adjustments are applied to is not determined by the observability of the valuation adjustments, and any related sensitivity does not form part of the Level 3 sensitivities presented.
Collateralised derivative exposures are generally discounted at the relevant OIS rates whilst funding valuation adjustments are applied to uncollateralised derivative exposures. Whilst these adjustments reference certain inputs which are not based on observable market data, the uncertainty of the inputs is not considered to have a significant effect on the valuation of the individual trades. The classification of derivatives is not determined by the observability of these adjustments, and any related sensitivity does not form part of the Level 3 sensitivities presented.
Amounts recorded in the income statement in respect of balances held at year end
Items where fair value approximates Carrying Fair value of hierarchy level carrying value value Fair value Level 1 Level 2 Level 3 2015 £bn £bn £bn £bn £bn £bn
Items where fair value approximates Carrying Fair value of hierarchy level carrying value value Fair value Level 1 Level 2 Level 3 2014* £bn £bn £bn £bn £bn £bn
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. This approach is adopted for lending portfolios in
10 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Cash and balances at central banks 79,404 — 79,404 74,872 — 74,872
Settlement balances and short positions 6,194 18,005 24,199 6,426 21,106 27,532
The tables below show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolidated balance sheet, as the tables include all cash flows relating to principal and future coupon payments, presented on an undiscounted basis. The tables have been prepared on the following basis: Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by RBS. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
Loans and advances to banks (1) 1 1 — 42 40 2
Notes: (1) Impairment provisions individually assessed. (2) Impairment provisions individually assessed on balances of £5,047 million (2014 - £17,655 million).
In general, RBS seeks to dispose of property and other assets not readily convertible into cash, obtained by taking possession of collateral, as rapidly as the market for the individual asset permits.
For cash flow hedge relationships of interest rate risk, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to LIBOR, EURIBOR or the Bank of England official
The following table shows when hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges.
Hedged forecast cash flows expected to occur £m £m £m £m £m £m 13 Debt securities
UK US Other institutions ABS (1) 2015 £m £m £m £m £m £m £m £m
Gross gains of £69 million (2014 - £502 million) and gross losses of £133 million (2014 - £386 million) were realised on the sale of available-for-sale securities in continuing operations.
Gross gains of £11 million (2014 - £20 million) and gross losses of nil (2014 - £3 million) were realised on the sale of available-for-sale securities in discontinued operations.
Designated as at fair value through profit or loss 1 146 147 11 290 301
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. Unquoted equity shares generated no material gains or losses in 2015 or 2014.
Disposals and write-off of fully amortised assets — (1,310) (1,310) (20) (2,072) (2,092)
Currency translation and other adjustments (430) (13) (443) (298) (5) (303)
Net book value at 31 December 5,558 979 6,537 6,264 1,517 7,781
The Group's goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash-generating unit (CGU) to which goodwill has been allocated with its carrying value. The
Group’s goodwill was reviewed at 30 September 2015 and was also subject to a further full review at 31 December 2015 following the changes to the reportable segments described in
Impairment testing inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of CGUs; and the valuation of the separable assets of each business whose goodwill is being reviewed. Sensitivity to the more significant variables in each assessment are presented in the tables on the following page.
The annual review at 30 September 2015 indicated no impairment to goodwill.
Banking (£0.6 billion) and Corporate & Institutional Banking (£0.1 billion). All UK Retail, Wealth and US Retail & Commercial goodwill was allocated to UK Personal & Business Banking,
Private Banking and Citizens Financial Group respectively. The goodwill allocated to Corporate & Institutional Banking was written-off immediately following the 2014 re-segmentation.
The analysis of goodwill by reportable segment is shown in Note 36.
The carrying value of goodwill and the amount by which it is exceeded by the recoverable amount are set out below by reportable segment, along with the key assumptions applied in calculating the recoverable amount and sensitivities to changes in those assumptions. The details below are based on the updated review performed at 31 December 2015 and take into account the revised reportable segments. Consequential
Consequential impact of 1% impact of 5% Assumptions Recoverable adverse movement in adverse movement
16 Property, plant and equipment Long Short Computers Operating Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2015 £m £m £m £m £m £m £m
Change in fair value of investment properties - continuing operations (25) — — — — — (25)
Disposals and write-off of fully depreciated assets (630) (48) (46) (194) (614) (391) (1,923)
Currency translation and other adjustments — 1 (6) 7 50 7 59
Disposals and write-off of fully depreciated assets — (20) (42) (103) (449) (234) (848)
Net book value at 31 December 1,933 1,854 110 536 845 889 6,167
Investment property valuations principally employ present value techniques that discount expected cash flows. Expected cash flows reflect rental income, occupancy and residual market values; valuations are sensitive to changes in these factors. The fair value measurement of non-specialised properties in locations where the market for such properties is active and transparent are categorised as level 2 - 94% (2014 - 78%); otherwise investment property fair value measurements are categorised as
Rental income from investment properties in continuing operations was £79 million (2014 - £217 million). Direct operating expenses of investment properties in continuing operations were 17 Prepayments, accrued income and other assets 2015 2014*
Pension schemes in net surplus (refer to Note 4) 215 180
18 Discontinued operations and assets and liabilities of disposal groups In accordance with a commitment to the European Commission to divest Citizens Financial Group, Inc. (Citizens) by 31 December 2016, RBS disposed of 30% of its interest in Citizens during the second half of 2014 primarily through an initial public offering in the
USA and disposed of further tranches of 28% in March 2015, 21% in August 2015 and the remaining 21% in October 2015 to complete the divestment. Consequently, Citizens is classified as a disposal group and treated as a discontinued operation until October 2015.
Provision for loss on disposal of interest in associate (130) — —
Other discontinued operations reflect the results of Direct Line Insurance Group plc presented as a discontinued operation until 12 March 2013; also included are some remaining elements of the RBS N.V. business. The profit from discontinued operations includes a gain of £334 million (2014 - £82 million; 2013 - £37 million) attributable to non-controlling interests.
Disposal groups at 31 December 2014 includes Citizens along with some remaining elements of the RBS N.V. business.
Notes: (1) To reflect the developments detailed in Note 30, RBS increased its provision for PPI by £600 million in 2015 (2014 - £650 million; 2013 - £900 million), bringing the cumulative charge to £4.3 billion, of which £3.3 billion (77%) in redress had been paid by 31
December 2015. Of the £4.3 billion cumulative charge, £3.9 billion relates to redress and £0.4 billion to administrative expenses.
RBS will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of RBS’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FSA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FSA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
In 2015, RBS increased its provision by £68 million (2014 - £185 million; 2013 - £550 million), principally reflecting a marginal increase in redress experience compared to expectations and the cost of a small number of consequential loss claims over and above interest offered as part of basic redress payments. The outcomes of all cases have now been agreed with the independent skilled person appointed to review all decisions.
Uncertainties remain over the number of transactions that will qualify for redress and the nature and cost of that redress, including the cost of consequential loss claims.
Background information in relation to Interest Rate Hedging Products claims is given in Note 30.
(5) Arising out of its normal business operations, RBS is party to legal proceedings in the United Kingdom, the United States and other jurisdictions. An additional charge of £2.2 billion was recorded in 2015 as a result of greater levels of certainty on expected outcomes, primarily in respect of mortgage-backed securities and securities-related litigation following third party settlements and regulatory decisions. Detailed descriptions of RBS’s legal proceedings and discussion of the associated uncertainties are given in
(8%) introduced by the Act. Deferred tax assets and liabilities at 31 December 2015 take into account the reduced rates in respect of tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
tax losses were largely attributable to loan impairment charges arising from the accelerated recovery strategy recorded in the final quarter of the period. In 2014, core profitability remained strong and a taxable profit arose. In 2015 a further tax loss arises as a result of restructuring costs incurred as part of RBS's strategic plan. A reduction in the carrying value of deferred tax assets of £701 million was recorded in 2013 with a further reduction of £850 million being recorded in 2014. In addition, deferred tax of £150 million was not recognised in respect of excess 2013 UK taxable losses. Restructuring will continue to constrain the utilisation of carried forward tax losses in the nearterm. RBS expects that the balance of recognised deferred tax asset at 31 December 2015 of £462 million in respect of tax losses amounting to £2,433 million will be recovered by the end
59% of the losses that arose were relieved against taxable profits arising in other UK Group companies. Based on its strategic plan, RBS expects that the recognised deferred tax asset of £628 million in respect of tax losses amounting to £3,307 million will be recovered by the end of 2020.
Ulster Bank Ireland Limited – a deferred tax asset of £210 million has been recognised in respect of losses of £1,678 million (2014 - £1,776 million; 2013 - £592 million) of total tax losses of £7,083 million carried forward at 31 December 2015 (2014 - £8,599 million; 2013 - £11,575 million). These losses arose principally as a result of significant impairment charges between 2008 and 2013 reflecting challenging economic conditions in the Republic of Ireland. Impairment charges have reduced and Ulster Bank
Deferred tax assets of £6,349 million (2014 - £5,738 million; 2013 - £4,942 million) have not been recognised in respect of tax losses and other temporary differences carried forward of jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £4,737 million expire within five years and £7,148 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
Issuances and redemptions during the year (values as at date of transaction) are set out below. Capital 2015 2014 treatment £m £m
US$686 million floating rate subordinated notes Tier 2 — 431 €227 million floating rate subordinated notes Tier 2 — 179
AUD53.7 million floating rate subordinated notes (partial redemption) Tier 2 — 29 €79.75 million floating rate notes (partial redemption) Tier 2 — 65
AUD451.8 million 6.50% subordinated notes (partial redemption) Tier 2 — 240
AUD149.2 million 7.46% subordinated notes (partial redemption) Tier 2 — 79
Notes: (1) The entire holding of B shares was converted into ordinary shares in October 2015. (2) One dividend access share in issue. (3) 75.8 million shares with a total nominal value of £0.5 million were redeemed in September 2015.
There is no authorised share capital under the company’s constitution. At 31 December 2015, the directors had authority granted at the 2015 Annual General Meeting to issue up to £274 million nominal of ordinary shares other than by pre-emption to existing shareholders.
The company did not pay an ordinary dividend in 2015 or 2014.
From December 2009, HM Treasury owned 51 billion B shares with a nominal value of £0.01 each and a dividend access share with a nominal value of £0.01.
Treasury’s option into ordinary shares at the rate of ten B shares for each ordinary share. In October 2015, all of the B shares were converted into ordinary shares of £1 each.
HM Treasury to provide for the future retirement of the Dividend
Agreement once RBS has paid dividends on the DAS totalling £1.5 billion, it will lose its preferential rights and become a single
The Group has resumed payments on all discretionary non-equity capital instruments following the end of the European
Commission ban in 2012 for RBS and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
In the context of macro-prudential policy discussions, the Board decided to partially neutralise any impact on CET1 capital of coupon and dividend payments for 2013, 2014 and 2015. £300 million of new equity was issued during the course of 2015 and the Board has decided a further £300 million of new equity will be issued during the course of 2016 to again partially neutralise the
Notes: (1) Subordinated notes issued to limited partnerships that have in turn issued partnership preferred securities to trusts that have issued trust preferred securities to investors. The trust preferred securities are redeemable only at the issuer’s option and dividends are payable at RBS’s discretion. On maturity of the subordinated notes, the partnerships are required to reinvest in eligible capital instruments issued by RBS.
(2) Preferred securities - US$276 million RBS Capital Trust IV, floating rate noncumulative trust preferred securities. Notice of redemption issued in January 2015 and subsequent settlement was in March 2015.
(4) Preferred securities in issue - £93 million RBS Capital Trust D, fixed/floating rate non-cumulative trust preferred securities.
(5) Issued in August 2015. The coupons on these notes are non-cumulative and payable at the company’s discretion. In the event the Group’s CET1 ratio falls below 7% any outstanding notes will be converted into ordinary shares at a price of $3.606 nominal per £1 share. While taking the legal form of debt these notes are classified as equity under IFRS.
Limited. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act.
After 1 year but within 5 years 4,801 (420) (83) 4,298 294
After 1 year but within 5 years 4,924 (445) (85) 4,394 297
Amounts recognised as income and expense in discontinued operations are £75 million (2014 - £124 million; 2013 - £134 million) in relation to operating leases - minimum rentals payable.
Operating leases - cars and light commercial vehicles 8 3 10 — 21 10 4 6 — 20
RBS consolidates a number of asset-backed commercial paper (ABCP) conduits. A conduit is an SE that issues commercial paper and uses the proceeds to purchase or fund a pool of assets. The commercial paper is secured on the assets and is redeemed by further commercial paper issuance, repayment of assets or funding from liquidity facilities. Commercial paper is typically short-dated, usually up to three months. At 31 December 2015 assets held by the conduits totalled £0.6 billion (2014 - £0.6 billion). At 31 December 2015 and 2014 the conduits were funded entirely by RBS.
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of debt securities by RBS. RBS retains all of the risks and rewards of these loans, the partnerships are consolidated, the loans retained on RBS’s balance sheet and the related covered bonds included within debt securities in issue. At 31 December 2015, £11,207 million of mortgages provided security for debt securities in issue of £5,585 million (2014: mortgages - £13,401 million, bonds - £7,114 million).
RBS enters into securities repurchase agreements and securities lending transactions under which it transfers securities in accordance with normal market practice.
29 Capital resources RBS's regulatory capital resources in accordance with PRA definitions were as follows: PRA transitional basis £m £m
Qualifying instruments and related share premium subject to phase out 5,092 5,820
Qualifying instruments issued by subsidiaries and held by third parties 7,354 7,490
It is RBS’s policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS has regard to the supervisory requirements of the PRA. The PRA uses risk asset ratio (RAR) as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its riskweighted assets (the assets and off-balance sheet exposures are
with a Tier 1 component of not less than 4%. RBS has complied with the PRA’s capital requirements throughout the year.
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2015. Although RBS is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of RBS's expectation of future losses. More than More than 1 year but 3 years but
Standby facilities, credit lines and other commitments 55,602 25,610 41,754 14,748 137,714 214,884
Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived.
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of £321 million (2014 - £425 million; 2013 - £462 million) from these activities.
Regulation Authority. In addition, the FSCS has the power to raise levies on a firm that has ceased to participate in the scheme and is in the process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial year it ceased to be a participant in the scheme.
Landsbanki ‘Icesave’ and London Scottish Bank plc. The industry repaid the remaining balance on the non-Bradford and Bingley loans during the period. The Bradford and Bingley loan is interest bearing with the reference rate being the higher of 12 month
Treasury have agreed that the period of these loans will reflect the expected timetable for recoveries from the estate of Bradford
RBS Group has accrued £41 million for its share of estimated
Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of these Matters is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of the Matters as at 31 December 2015 (see Note 20).
In respect of certain matters described below, we have established a provision and in certain of those matters, we have indicated that we have established a provision.
Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened)
Court of Justice of England and Wales by sets of current and former shareholders, against RBS (and in one of those claims, also against certain former individual officers and directors)
December 2013. Since then, further High Court claims have been issued against RBS under the Group Litigation Order which is now closed to further claimants. The aggregate value of the shares subscribed for at 200 pence per share by the claimant shareholders is approximately £4 billion although their damages claims are not yet quantified.
The court timetable provides that a trial of the preliminary issue of whether the rights issue prospectus contained untrue and misleading statements and/or improper omissions will commence in March 2017. In the event that the Court makes such a finding, further trial(s) will be required to consider whether any such statements and/or omissions caused loss and, if so, the quantum of that loss.
RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the US that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and a purported class action suit. Together, the pending individual and class action cases
In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued.
Court’s judgment is approximately US$383 million, which consists of the difference between the amount of the judgment against RBS Securities Inc. (US$636 million) and the current estimated market value of the four MBS that FHFA would return to RBS Securities Inc. pursuant to the judgment, plus the costs and attorney’s fees that will be due to FHFA if the judgment is upheld.
RBS Securities Inc. intends to pursue a contractual claim for indemnification against Nomura with respect to any losses it suffers as a result of this matter.
System for amounts that have now been provided for or paid to the plaintiffs.
Certain other claims on behalf of public and private institutional investors have been threatened against RBS in connection with various mortgage-related offerings. RBS cannot predict whether any of these threatened claims will be pursued, but expects that several may.
on page 339 (for which no provisions have been made), may be necessary in future periods for amounts that could be substantial in some instances and in aggregate could be substantially in excess of the £3.8 billion in existing provisions.
US, RBS has or will have contractual claims to indemnification from the issuers of the securities (where an RBS company is underwriter) and/or the underlying mortgage originator (where an
RBS company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a number of factors, including the ongoing creditworthiness of the indemnifying party, a number of whom are or may be insolvent.
Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US
Influenced and Corrupt Organizations Act), but declined to dismiss (a) certain Commodity Exchange Act claims on behalf of persons who transacted in Eurodollar futures contracts and options on futures contracts on the Chicago Mercantile Exchange
Since then, the Court has issued additional orders broadly addressing other potential grounds for dismissal of various of plaintiffs’ claims, including dismissal for lack of personal jurisdiction, and the Court is now in the process of applying these rulings across the cases in the coordinated proceeding. The
Court’s dismissal of plaintiffs’ antitrust claims is currently on appeal to the United States Court of Appeals for the Second
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action pending in the United States District Court for the
Group companies have settled all claims that are or could be asserted on behalf of the classes in a consolidated action alleging an antitrust conspiracy in relation to foreign exchange transactions, which is pending in the United States District Court for the Southern District of New York. Following the Court’s preliminary approval of the settlement on 15 December 2015,
Beginning in July 2015, numerous class action antitrust complaints were filed in US federal courts against a number of primary dealers of US Treasury securities, including RBS
On 25 November 2015, RBS plc and other members of the
Group, as well as a number of other interest rate swap dealers, were named as defendants in a class action antitrust complaint filed in the United States District Court for the Southern District of
New York. A similar complaint was filed in the United States
Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made under certain restructuring agreements as, among other things, avoidable fraudulent and preferential conveyances and transfers. On 25 September 2014, the Court largely denied the defendants' motion to dismiss this matter and, as a result, discovery is ongoing.
Netherlands and Australia, and on RBS in England, relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO). The claims in the
Netherlands have been stayed pending the outcome of the claims in England. In November 2012, the Federal Court of
Australia issued a judgment against RBS N.V. and others in one such case holding that RBS N.V. and others committed certain wrongful acts in connection with the rating and sale of the CPDO.
RBS is dealing with a large number of active litigation claims in relation to the sale of interest rate hedging products (IRHPs). In general claimants allege that the relevant interest rate hedging products were mis-sold to them, with some also alleging RBS
These claims have been brought by customers who are dissatisfied with redress offers made to them through the FCA
Court does not allow this, the customer will need to formally apply for leave to appeal in the Court of Appeal.
RBS N.V. and the other defendants are liable for damages arising from the attacks because they allegedly conspired with
and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes. The Corporate & Institutional Banking (CIB)
Connecticut Department of Banking, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related disclosures. On 31 August 2015, the Connecticut Department of Banking issued two letters to RBS Securities Inc., indicating that it is has concluded that RBS Securities Inc. may have violated the
Inc. submitted responses to these letters in October 2015, and related discussions are ongoing.
States District Court for the District of Connecticut, each to one count of conspiracy to commit securities fraud while employed at
At this stage, as there remains considerable uncertainty around the outcome of MBS-related regulatory and governmental investigations it is not practicable reliably to estimate the aggregate potential impact on RBS which is expected to be material.
In issuing MBS, CIB generally assigned certain representations and warranties regarding the characteristics of the underlying loans made by the originator of the residential mortgages; however, in some circumstances, CIB made such representations and warranties itself. Where CIB has given those or other representations and warranties (whether relating to underlying loans or otherwise), CIB may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties.
At this stage, as there remains considerable uncertainty around the outcome of loan repurchase related claims it is not practicable reliably to estimate the aggregate potential impact, if any, on RBS which may be material.
RBS is co-operating with investigations and new and ongoing requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating to a number of trading rates, including LIBOR and other interest rate settings, and non-deliverable forwards.
(CIB) segment. RBS plc agreed to pay penalties of £217 million to the FCA and US$290 million to the CFTC to resolve the investigations. The fines were paid on 19 November 2014.
Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, RBS plc and RBS Securities
RBS is responding to investigations and inquiries from other governmental and regulatory (including competition) authorities on similar issues relating to failings in its FX business within its
On 21 July 2014, the Serious Fraud Office in the UK announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions. At this stage, as there remains considerable uncertainty around the outcome of this investigation it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.
announced that RBS and other UK banks had agreed to a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses classified as retail clients or private customers under FSA rules.
In January 2013 the FSA issued a report outlining the principles to which it wished RBS and other UK banks to adhere in conducting the review and redress exercise. This exercise is being scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services and Markets Act), who is reviewing and approving all outcomes, and the FCA is overseeing this. RBS has reached agreement with KPMG in relation to redress determinations for all in scope customers. The review and redress exercise was closed to new entrants on 31 March 2015. RBS and KPMG are now focussing on securing a few remaining acceptances of redress offers and assessing consequential loss claims. In October 2015, RBS
agreed with the FCA that its review was nearing completion, and on 31 October 2015 all customers who had received final redress offers but had not yet responded were informed that the final date for acceptance of those offers is 31 January 2016.
Customers who have not yet received a final redress determination will be given three months to accept any redress offer before that offer lapses. As at the end of January 2016, 94%
Limited (UBIL), along with a number of Irish banks, to undertake a similar exercise and past business review in relation to the sale of IRHP to retail designated small and medium sized businesses in the Republic of Ireland. RBS also agreed to undertake a similar exercise and past business review in respect of relevant customers of RBS International. The reviews undertaken in respect of both RBS International customers and UBIL customers are complete.
Skilled Person is susceptible to judicial review. If so, the additional claims which seek to set aside the decisions of KPMG
RBS will be writing to the relevant customers during 2016. In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product, in response to concerns raised by the FCA with regard to (a) the target market for the product and (b) how the product may have been described to customers by certain advisers. Redress has been paid/offered to certain customers who took out the structured product.
RBS provisions in relation to investment advice total £249 million to date for these matters, of which £73 million had been utilised
Ombudsman Service, are now barred. The compensation payments were covered by existing provisions.
The Skilled Person review focuses on the allegations made in the
Large in his 2013 Independent Lending Review, and is broader in scope than the reviews undertaken by Clifford Chance and
Person is expected to deliver the initial findings from its review to
In May 2013, the EC announced it had reached an agreement with Visa regarding immediate cross border credit card MIF rates.
Since 2011, RBS has been implementing a policy statement agreed with the FCA for the handling of complaints about the mis-selling of PPI. RBS is also monitoring developments following the UK Supreme Court’s decision in the case of Plevin v
complaints. The Consultation Paper also contains proposals for the introduction in 2018 on a date to be confirmed of a deadline for submission of PPI complaints. The deadline for submitting a response to the Consultation Paper is 26 February 2016. RBS
December 2015. This is in contrast to payments made during Q3, which covered the period from 1 June until 31 August 2015. This change was due to enhanced operating processes introduced in
market study, in parallel with its market study into small and medium-sized enterprise (SME) banking which was announced in
June 2013. In July 2014 the CMA published its preliminary findings in respect of both the PCA and SME market studies. The
published a summary of its provisional findings and notice of possible remedies.
The CMA has provisionally concluded there are a number of competition concerns in the provision of PCAs, business current accounts and SME lending, particularly around low levels of customers searching and switching, resulting in banks not being put under enough competitive pressure, and new products and new banks not attracting customers quickly enough.
and it will decide on the length of this extension by early March 2016. The CMA also intends to announce in early March 2016 when the provisional decision on remedies will be published.
Alongside the MIR, the CMA is also reviewing the undertakings given by certain banks following the Competition Commission’s 2002 investigation into SME banking as well as the 2008
At this stage as there remains uncertainty around the final outcome of these reviews it is not practicable reliably to estimate the potential impact on RBS, which may be material.
On 18 November 2015, the FCA also announced that a market study would be undertaken into asset management. The FCA
• a Bank Secrecy Act/anti-money laundering compliance programme for the US Branches on a consolidated basis
Control (OFAC) with respect to RBS plc’s historical compliance with US economic sanction regulations outside the US. As part of the settlement, RBS and RBS plc entered into a consent Cease and Desist Order with the Federal Reserve (US Dollar
RBS agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by RBS’s global business lines outside the US, and to adopt, implement, and comply with the programme. Prior to and in connection with the
appointed the independent consultant and their report was submitted to the authorities on 14 June 2015. The independent consultant review examined a significant number of sanctions alerts and no reportable issues were identified.
Pursuant to the US Dollar Processing Order, the authorities have requested a second annual review to be conducted by an independent consultant during the course of 2016 and RBS is currently in discussions to agree the scope and timing of such review. In addition, pursuant to requirements of the US Dollar
Co Ltd. entered into a non-prosecution agreement (the NPA) in which Coutts & Co Ltd. paid a US$78.5 million penalty and acknowledged responsibility for certain conduct set forth in a statement of facts accompanying the agreement. Under the
NPA, which has a term of four years, Coutts & Co Ltd. is required, among other things, to provide certain information, cooperate with DOJ’s investigations, and commit no U.S. federal offenses. If Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute it for certain tax-related and monetary transaction offenses in connection with US related accounts.
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result of this review, Coutts & Co undertook a past business review into the suitability of investment advice provided to its clients. This review is well advanced, with the focus on Coutts &
Co contacting remaining clients and offering redress in appropriate cases. RBS has made appropriate provision based on its estimate of exposure arising from this review.
scheme and around potential over or under-payment of quarterly premiums paid by customers. In January 2015, RBS announced a review of all EFG loans where there is a possibility that the customer may have been disadvantaged. The review has been completed and RBS is in the final stages of advising customers of their review outcome, which in some cases involves payment of redress. RBS has made appropriate provision based on its estimate of exposure arising from this review.
31 Net cash flow from operating activities 2015 2014* 2013* £m £m £m
Decrease in loans and advances to banks and customers 58,766 11,245 49,314
Note: (1) Includes cash proceeds of £1,628 million in 2015 relating to the disposal of the controlling interest in Citizens and £578 million in 2013 relating to the disposal of the controlling interest in Direct Line Group.
33 Interest received and paid £m £m £m 34 Analysis of changes in financing during the year
Share capital, share premium, Subordinated liabilities paid-in equity and merger reserve £m £m £m £m £m £m
Net cash inflow/(outflow) from financing 2,169 314 264 (3,047) (1,321) (1,704)
Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £11,031 million (2014 - £11,508 million; 2013 - £10,342 million).
Commercial & Private Banking (CPB) comprises three reportable segments. Commercial Banking, Private Banking and RBS
CIB Capital Resolution was created from non-strategic portfolios from CIB, to enable the build of a strong go-forward CIB
Transaction Services. There is a three stage process in place to guide the business down; starting with taking capital out, then running down the cost base and finally managing tail risk in the longer-term.
Estate Finance (ex. Ireland), Corporate and Markets. The remaining funded assets of £4.6 billion are included in Capital
Communications and Human Resources. Central functions manages RBS capital resources and RBS-wide regulatory projects and provides services to the reportable segments.
Balances relating to Citizens and the international private banking business are also included.
In line with RBS’s strategy to be a simpler bank, the following reporting changes have been implemented in relation to the presentation of RBS results: The following items previously reported separately after operating profit are now being reported within operating profit. • Own credit adjustments; • Gain/(loss) on redemption of own debt; • Write-down of goodwill; • Strategic disposals; and • RFS Holdings minority interest (RFS MI).
External segment Total External segment Total External segment Total £m £m £m £m £m £m £m £m £m *Restated - refer to pages 267 and 349 for further details. Re-presented to reflect the segmental reorganisation.
Currency translation and other adjustments — — (9) — — 221 212
Write down of goodwill - continuing operations — — — — (130) — (130)
2015 UK USA Europe RoW Total £m £m £m £m £m
Net assets attributable to equity owners and non-controlling interests 42,591 1,543 7,191 2,822 54,147
Net assets attributable to equity owners and non-controlling interests 33,798 15,982 5,810 3,119 58,709
Of which total liabilities held for sale — 3,210 81 87 3,378
Cost to acquire property, plant and equipment and intangible assets 1,086 428 232 10 1,756 *Restated - refer to pages 267 and 349 for further details.
Chairman and executive directors - amounts receivable under long-term incentive plans and share option plans 324 1,469
(a) At 31 December 2015, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions, as defined in UK legislation, in the Group, were £129,070 in respect of loans to four persons who were directors of the company at any time during the financial period.
Scotland Group plc. The UK Government's shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. As a result, the UK
The Group enters into transactions with many of these bodies on an arm’s length basis. Transactions include the payment of: taxes principally UK corporation tax (page 292) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (page 282)
Limited regarding a payment of £4.2 billion into The Royal Bank of Scotland Group Pension Fund before 31 March 2016 and bringing forward the date of the next triennial valuation of the scheme to no later than 31 December 2015. Pension matters are further disclosed in Note 4 on page 286.
Statement of changes in equity for the year ended 31 December 2015 2015 2014 2013 £m £m £m
Transfer on impairment of investment in RBS plc (2,341) — —
Effects of exchange rate changes on cash and cash equivalents 9 (3) 14
The accounts are prepared on a going concern basis (refer to the Report of the directors, page 89) and in accordance with International
Interpretations Committee of the IASB as adopted by the European Union (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006.
The accounting policies that are applicable to the company are included in RBS accounting polices which are set out on pages 267 to 280 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investments in its subsidiaries are stated at cost less any impairment.
The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the
As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income statement or a statement of comprehensive income. Condensed information is set out below.
The company did not pay an ordinary dividend in 2015, 2014 or 2013.
Loans and advances to customers (1) - loans and receivables 268 299
Prepayments, accrued income and other assets - non-financial assets 3 193
Notes: (1) Fair value hierarchy: level 2 - £11.9 billion (2014 - £13.7 billion) and level 3 - £11.2 billion (2014 - £12.6 billion). (2) Fair value hierarchy level 2. (3) Fair value hierarchy level 3 (2014 – level 2).
For further information on the timing of cash flows to settle financial liabilities, refer to Note 10 in the consolidated accounts.
Debt securities comprise the partial repurchase of preferred securities issued by the trusts referred to in Note 25 on the consolidated accounts and Citizens bonds now classified as third party securities.
US$650 million 6.43% notes 2043 (callable January 2034) (1,2) Ineligible 436 414 €500 million 4.24% notes 2046 (callable January 2016) (1,2) Ineligible 382 405 £400 million 5.65% notes 2047 (callable June 2017) (2) Ineligible 413 413 €1,000 million 3.63% notes 2024 (callable March 2019) Tier 2 750 795
US$550 million floating rate notes (redeemed March 2015) (1,2) Ineligible — 352
US$450 million floating rate notes (redeemed March 2015) (1,2) Ineligible — 288
US$150 million 8.00% notes (callable October 2093) Tier 2 103 98
Non-cumulative convertible preference shares of US$0.01 US$65 million 9.12% series 1 (callable) Ineligible 45 42
Note: (1) Further details of the contractual terms of the preference shares are given in Note 24 on the consolidated accounts.
Details of the company’s share capital are set out in Note 24 on the consolidated accounts.
Other adjustments including foreign exchange — — — 403 462 (245)
Caledonian Sleepers Rail Leasing Ltd BF Care Homes 1 Ltd OTH
BF R.B. Leasing (December) Ltd BF R.B. Leasing (Eden) Ltd BF R.B. Leasing (March) Ltd BF R.B. Leasing (September) Ltd BF R.B. Leasing Company Ltd BF
Enitity name Activity(1) Notes R.B. Quadrangle Leasing Ltd BF R.B.S. Special Investments Ltd BF RB Investments 2 Ltd BF RB Investments 3 Ltd OTH
RBSSAF (12) Ltd BF RBSSAF (13) Ltd BF RBSSAF (16) Ltd BF RBSSAF (19) Ltd BF RBSSAF (22) Ltd BF
Australia RBS (Australia) Pty Ltd BF Australia RBS Cross City Tunnel (Australia) Trust BF Australia RBS Group (Australia) Pty Ltd BF Australia RBS Holdings (Australia) Pty Ltd BF (3) Australia RBS Holdings II (Australia) Pty Ltd BF (3) Australia RBS Holdings III (Australia) Pty Ltd BF Australia RBS Holdings IV (Australia) Pty Ltd BF Australia RBS Infrastructure Investment (Australia)
China The Royal Bank of Scotland (China) Co., Ltd BF (3) Finland Artul Kiinteistöt Oy BF Finland Fab Ekenäs Formanshagen 4 SC Finland Forssa Liikekiinteistöt Oy BF Finland Koy Espoon Entresse II BF Finland Koy Espoon Niittysillantie 5 BF Finland Koy Helsingin Mechelininkatu 1 BF Finland Koy Helsingin Osmontie 34 BF Finland Koy Helsingin Panuntie 11 BF Finland Koy Helsingin Panuntie 6 BF Finland Koy Iisalmen Kihlavirta BF Finland Koy Jämsän Keskushovi BF Finland Koy Kokkolan Kaarlenportti Fab BF Finland Koy Kouvolan Oikeus ja Poliisitalo BF Finland Koy Lohjan Huonekalutalo BF Finland Koy Millennium BF Finland Koy Nummelan Portti BF Finland Koy Nuolialan päiväkoti BF Finland Koy Otapuisto BF Finland Koy Päiväläisentie 1-6 BF Finland Koy Raision Kihlakulma BF Finland Koy Ravattulan Kauppakeskus BF Finland Koy Tapiolan Louhi BF Finland Koy Vapaalan Service-Center BF Finland Nordisk Renting Oy BF France RBS France Holdings SARL BF France RDS Metropolis SAS BF Germany patus 455. GmbH BF Germany RBS (Deutschland) AG CI Germany RBS Deutschland Holdings GmbH BF
Germany RBS Real Estate Holdings Germany GmbH SC Germany RBS Structured Financial Services GmbH BF Germany West Register PRIME Düsseldorf 2 GmbH BF Germany West Register PRIME Holding GmbH OTH Gibraltar Bantam (Gibraltar) Ltd OTH Gibraltar Borneo (Gibraltar) Ltd BF Gibraltar Gosport Ltd OTH Gibraltar Java Interco (Gibraltar) Ltd BF Gibraltar Kalimantan Holdings (Gibraltar) Ltd BF (3) Gibraltar RBS (Gibraltar) Ltd CI Gibraltar RBS Services (Gibraltar) Ltd BF (3) Gibraltar Sotomar Ltd BF Guernsey Alsecure Life Insurance PCC Ltd BF (3) Guernsey Alsecure US Life Insurance PCC Ltd BF (3) Guernsey Drummonds Insurance PCC Ltd BF Guernsey Lothbury Insurance Company Ltd BF Guernsey Morar ICC Insurance Ltd BF Guernsey RBS Employment (Guernsey) Ltd SC Guernsey RoyScot Guernsey Ltd BF Hong Kong RBS Asia Capital Investment Ltd BF (3) Hong Kong RBS Asia Corporate Finance Ltd BF Hong Kong RBS Asia Financial Services Ltd BF Hong Kong RBS Asia Futures Ltd BF Hong Kong RBS Asia Ltd BF Hong Kong RBS Nominees (Hong Kong) Ltd BF Hong Kong RBS Securities Japan Ltd BF India RBS Business Services Private Ltd OTH India RBS Financial Services (India) Private Ltd BF India RBS Global Trade Service Centre Private Ltd OTH India RBS India Development Centre Private Ltd OTH Republic of Ireland
Isle Of Man Coutts & Co (Manx) Ltd BF Isle Of Man Isle of Man Bank (Nominees) Ltd BF Isle Of Man Isle of Man Bank Ltd CI Isle Of Man Lombard Manx Leasing Ltd BF Isle Of Man Lombard Manx Ltd BF Isle Of Man The Royal Bank of Scotland Employment
Jersey Rostand Nominees Ltd BF Jersey Rouge 2004 Ltd BF Jersey RoyScot Jersey Ltd BF Jersey The Royal Bank of Scotland International
Jersey Vert 2004 Ltd OTH Kazakhstan JSC SB RBS (Kazakhstan) BF Luxembourg RBS European Finance S.A. BF Luxembourg RBS European Investments SARL BF (3) Luxembourg RBS Pan European Finance S.A. BF Malaysia The Royal Bank of Scotland BERHAD CI Mauritius RBS Asia (Mauritius) Ltd BF Netherlands AA Merchant Banking B.V. BF (3) Netherlands Alternative Investment Fund B.V. BF (3) Netherlands Dordtsche Poort B.V. BF (3) Netherlands Dotremont Beleggingsmaatschappij B.V. BF (3) Netherlands FI Equity Partners B.V. BF (3) Netherlands Intermediaire Compagnie "ICO" B.V. OTH (3) Netherlands National Westminster International Holdings
Netherlands NatWest Securities B.V. BF Netherlands RBS Asia Holdings B.V. BF (3) Netherlands RBS AA Holdings (Netherlands) B.V. BF Netherlands RBS Capital BO Funds II B.V. BF (3) Netherlands RBS Corporate Investments Management
Netherlands RBS Holdings N.V. BF (3) Netherlands RBS Hollandsche N.V. CI (3) Netherlands RBS Investments Netherlands B.V. BF Netherlands RBS Netherlands B.V. BF Netherlands RBS Netherlands Holdings B.V. BF Netherlands RBS Nominees (Netherlands) B.V. BF (3) Netherlands RBS Participaties B.V. BF (3) Netherlands RBS Participations (Netherlands) B.V. BF (3) Netherlands RBS Private Equity B.V. BF (3) Netherlands RBS Special Corporate Services B.V. BF (3) Netherlands RBS Ventures II B.V. BF (3) Netherlands RBS-CBFM Netherlands B.V. BF Netherlands The Royal Bank of Scotland N.V. CI (3) Netherlands Vadrid B.V. BF (3) Norway BD Lagerhus AS BF Norway Eiendomsselskapet Apteno Larvik AS BF Norway Hatros 1 AS BF Norway Nordisk Renting AS BF
Aspire Oil Services Ltd BF EAA 28 Attraction Inns Ltd BF IA 30 Ballymore (London Arena) Ltd OTH IA 45 Big Society Capital Ltd OTH IA 10 (4) Business Growth Fund plc BF EAA 24 Cala Campus Ltd OTH EAJV 50 CFN Packaging Group Ltd OTH IA 25 Cloud Electronics Holdings Ltd BF IA 20 Coneworx Ltd OTH IA 40 DF Ventures Ltd BF IA 20 Entaco Group Ltd BF IA 33 Ferrostatics Holdings Ltd BF IA 35 Flats 4 U Ltd OTH IA 30 Forest Garden Group Ltd OTH IA 28 GATX Asset Residual Management Ltd
Pollokshields Developments Ltd OTH IA 49 Prestige Walker Ltd OTH IA 30 Race 500 Ltd BF IA 21 RBS Covered Bonds (LM) Ltd BF IA 20 RBS Covered Bonds LLP BF FC 99 RBS Secured Funding (LM) Ltd BF FC 20 (6) RBS Sempra Commodities LLP BF FC 51 RBS Sempra Products Ltd OTH FC 51 Salwan Pharmacy Ltd OTH IA 20 Star Capital Partners Investments LLP
Tay Valley Lighting (Leeds) Ltd OTH EAJV 50 Tay Valley Lighting (Newcastle and North Tyneside) Ltd
The Storage Pod Ltd OTH IA 48 Topco (No1) Ltd OTH IA 45 Uniconn Ltd OTH IA 30 Vocalink Holdings Ltd BF EAA 21 Wealdland Ltd OTH IA 29 Welsh Industrial Partnership (GP) Ltd
The following table details active related undertakings which are 100% owned by the Group but are not consolidated for accounting purposes(8).
United States RBS Capital Funding LLC V BF NC (3,10) United States RBS Capital Funding LLC VI BF NC (3,10) United States RBS Capital Funding LLC VII BF NC (3,10) United States RBS Capital Funding Trust V BF NC (3,10) United States RBS Capital Funding Trust VI BF NC (3,10) United States RBS Capital Funding Trust VII BF NC (3,10) United States RBS Capital LP B BF NC (10) United States RBS Capital LP C BF NC (10) United States RBS Capital LP D BF NC (10)
United States RBS Capital LP II BF NC (10) United States RBS Capital Trust B BF NC (10) United States RBS Capital Trust C BF NC (10) United States RBS Capital Trust D BF NC (10) United States RBS Capital Trust II BF NC (10) United States RBSG Capital Corp BF NC (10) United States West Granite Homes Inc. OTH NC (9)
Indonesia PT Altron Indonesia BF FC 98 Indonesia PT RBS Finance
Denmark Nordisk Renting A/S OTH FC 100 Hong Kong Atlas Nominees Ltd BF FC 100 Hong Kong RBS Securities (Far
Notes: (1) Activity: Banking and Financial institution - BF Credit institution – CI Service company - SC Other/non-financial - OTH
(2) Accounting treatment: Equity accounting - Associate - EAA Equity accounting - Joint Venture - EAJV Fully consolidated - FC Investment Accounting - IA Not consolidated - NC
The Royal Bank of Scotland plc Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Republic of Ireland, Italy, Japan, Jersey, Republic of Korea, Luxembourg, Malaysia, Netherlands, Norway, Poland, Romania, Singapore, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates, United States
RBS's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years are presented below.
Profit/(loss) from discontinued operations, net of tax (6) 1,541 (3,445) 558 318 651
Notes: (1) Includes loss on strategic disposals of £157 million (2014 - £191 million profit; 2013 - £161 million profit; 2012 - £111 million profit; 2011 - £25 million loss). (2) Includes loss on redemption of own debt of £263 million (2014 - £20 million gain; 2013 - £175 million gain; 2012 - £454 million gain; 2011 - £255 million gain). (3) Includes own credit adjustments of £309 million gain (2014 - £146 million loss; 2013 - £120 million loss; 2012 - £4,649 million loss; 2011 - £1,914 million gain). (4) Includes write down of goodwill of £498 million (2014 - £130 million; 2013 - £1,059 million; 2012 - £18 million; 2011 - £80 million). (5) Includes sovereign debt impairment of £1,099 million and related interest rate hedge adjustments of £169 million in 2011. (6) Includes a gain of £1,117 million relating to the sell-down of Citizens (2014 - £3,994 million loss).
Market capitalisation at year end - £bn 35.1 45.2 38.2 36.3 22.3
Net asset value per ordinary share - £ 4.66 5.12 5.23 6.30 6.90
Return on average ordinary shareholders' equity (4) (4.0%) (6.5%) (14.7%) (8.9%) (3.1%)
The geographic analysis, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas –
Loans and advances to customers - gross 118,573 92,190 130,247 341,010 395,698 465,875 521,271 535,366
Loans and advances to customers - UK 247,678 10,205 4.12 252,695 10,792 4.27
Total interest-earning assets - banking business (1,2,3,5) 413,345 11,925 2.88 432,935 13,090 3.02
Customer accounts: demand deposits - UK 131,617 537 0.41 118,628 470 0.40
Debt securities in issue - UK 29,502 762 2.58 38,801 1,042 2.69
Total interest-bearing liabilities - banking business (1,2) 285,045 3,173 1.11 313,415 3,879 1.24
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements. 2015 over 2014 2014 over 2013
Average loans and advances to customers - gross 387,956 472,545 509,937 541,588 578,057
Closing Total provision loans provision loans provision loans provision loans provision loans
Note: (1) Includes £33 million written-off in respect of loans and advances to banks (2014 - £8 million; 2013 - £40 million; 2012 - £29 million).
Closing provisions for impairment as a % of total REIL 59% 65% 64% 52% 49%
Both REIL and PPL are reported gross and take no account of the value of any security held which could reduce the eventual loss should it occur, nor of any provision marked. Therefore impaired assets which are highly collateralised, such as mortgages, will have a low coverage ratio of provisions held against the reported impaired balance.
Note: (1) Excludes derivative cash collateral of £30 billion at 31 December 2015 (2014 - £39 billion; 2013 - £26 billion); and 2015 average of £36 billion (2014 - £30 billion; 2013 - £31 billion).
Contractual obligations to purchase goods or services 81 221 570 570 — —
Contractual obligations to purchase goods or services 104 285 703 734 1 —
Contractual obligations to purchase goods or services 107 266 189 588 12 —
Subscription”) for an additional £8 billion in aggregate in the form of further B shares (the "Contingent B shares"), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
London Stock Exchange plc, on 14 October 2015. Following such conversion, HM Treasury no longer holds any B shares and its resulting holding represents 72.6% of the company’s ordinary share capital. The Dividend Access Share remains outstanding.
Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company also agreed to a number of undertakings.
(within the meaning of the UKLA's Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that its affiliates do not so vote.
Share Acquisition and Contingent Capital Agreement above). On 9 April 2014, the company entered into the DAS Retirement
RBS's undertakings with respect to State Aid which are significantly more onerous to RBS than those granted in order to obtain the State Aid approval.
Pursuant to the terms of the State Aid Commitment Deed, RBS is required to dispose of its RBS England & Wales and NatWest
Capital and Centerbridge Partners. The pre-IPO investment took the form of a £600 million bond, which was issued by RBS on 21
Williams & Glyn at the IPO price, subject to a minimum ownership level linked to the tangible book value of Williams &
Glyn prior to the IPO. To the extent the maximum ownership level is reached, the bond will be partially redeemed in cash such that investors will receive a total value of £600 million of cash and shares at the IPO price. At the IPO, subject to RBS’s consent, investors will have the option to acquire up to 10% additionally at the IPO price, subject to their pro forma ownership being no more than 49% in aggregate. RBS provided a £270 million secured financing package to the investor consortium in relation to the investment. The Group remains committed to full divestment by the end of 2017, although it continues to face significant challenges and risks in separating the Williams & Glyn business, some of which may only emerge as various separation process phases are progressed. The Williams & Glyn separation process is a high priority for the Group. The associated risks are discussed in more detail in the Risk Factors.
Deed with HM Treasury and UK Financial Investments Limited in relation to the company’s obligations under the UK Listing Rules to put in place an agreement with any controlling shareholder (as defined for these purposes in the Listing Rules). The Relationship
Treasury (or any of its subsidiaries) will be arm's length and normal commercial arrangements, (ii) that neither HM Treasury nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
In the past eight years, the Group has dramatically downsized and simplified the scale and complexity of its operations as compared to its operations preceding and during the financial crisis. However, the Group’s operations remain diverse and complex, and the Group operates in legal and regulatory environments that expose it to potentially significant litigation, civil and criminal regulatory and governmental investigations and other regulatory risk. The Group has settled a number of legal and regulatory investigations over the past several years but continues to be, and may in the future be, involved in a number of legal and regulatory proceedings and investigations in the UK, the US, Europe and other jurisdictions.
The Group is involved in ongoing reviews, investigations and proceedings (both formal and informal) by governmental law enforcement and other agencies and litigation (including class action litigation), relating to, among other matters, the offering of securities, conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including structured products and government securities), product mis-selling, customer mistreatment (including alleged mistreatment of small and medium enterprises by RBS’s
Global Restructuring Group, as alleged in the November 2013 report by Lawrence Tomlinson), anti-money laundering, sanctions, and various other compliance issues. In the US, ongoing matters include various civil and criminal federal and state investigations relating to the securitisation of mortgages, as well as the trading of various forms of asset-backed securities.
Legal, governmental and regulatory proceedings and investigations are subject to many uncertainties, and their outcomes, including the timing and amount of fines or settlements, which may be material, are often difficult to predict, particularly in the early stages of a case or investigation.
referendum and consequences for the UK could significantly impact the environment in which the Group, its customers and investors operate, introducing significant new uncertainties in financial markets, as well as the legal and regulatory requirements and environment to which the Group, its customers and investors are subject. Uncertainty as to the outcome of the referendum will therefore lead to additional market volatility and is likely to adversely impact customer and investor confidence prior to the vote.
In the event of a result supporting the UK’s exit from the
European Union, the lack of precedent means that it is unclear how the UK’s access to the EU Single Market and the wider trading, legal and regulatory environment would be impacted and hence how this would affect the Group, its customers and investors. During a transitional period, when the terms of the exit would be negotiated, or beyond, the related uncertainty could have a material adverse effect on any of the Group’s business, financial condition, credit ratings and results of operations. A
Glyn with a view to fully divesting the business by the end of 2017. The scale and complexity of this process, and the diversion of Group resources required to support it, or delays in meeting the divestment deadline, could have a material adverse effect on the Group’s operations, operating results, financial position and reputation.
The Group has met all of the divestment commitments contained within the set of conditions upon which state aid approval was received from the European Commission for the financial assistance provided to the Group by the UK Government in
Direct SME banking and certain mid-corporate customers as a separate business under the Williams & Glyn brand (“Williams &
Glyn”). In connection with the receipt of such aid, the Group entered into a state aid commitment deed with HM Treasury (as amended from time to time, the “State Aid Commitment Deed”).
In light of its obligations under the State Aid Commitment Deed to fully divest Williams & Glyn by the end of 2017, the Group has been actively seeking to fully divest Williams & Glyn in accordance with this timetable. Due to significant execution challenges, the separation of the Williams & Glyn business from the Group will now not be until after Q1 2017, as previously announced. The Group remains committed to full divestment by the end of 2017, although it continues to face significant challenges and risks in separating the Williams & Glyn business, some of which may only emerge as various separation process phases are progressed. Delays in separation may impact the
Group’s ability to meet the divestment deadline and could affect the means by which divestment can be achieved.
There is potential for non-compliance if the Group fails to meet this deadline, which might result in the Group breaching the terms of the State Aid Commitment Deed and might constitute a misuse of state aid. In such circumstances, a divestiture trustee may be appointed, with the mandate to complete the disposal at no minimum price. This may adversely affect the attractiveness of, and result in additional execution risks in respect of the sale of, Williams & Glyn. Furthermore, a failure to comply with the terms of the State Aid Commitment Deed could result in the imposition of additional remedies or limitations on the Group’s operations, additional supervision by the Group’s regulators, and loss of investor confidence, any of which could have a material adverse impact on the Group. Delays in execution may also impact the Group’s ability to carry out its strategic programme and implement mandatory regulatory requirements, including the
The availability and interest of buyers or investors for Williams &
The separation of the Williams & Glyn business from the Group requires significant structural, governance and IT changes, which will be complex to implement and will impact the Group’s customers, operations and controls. In particular, a key component of the separation is the successful migration of the
Williams & Glyn business to a stand-alone and operational technology platform. Given the current interconnectedness of the
platform, will result in significant costs. There are currently approximately 6,000 employees (FTE) engaged on the project and total costs incurred to 31 December 2015 relating to the separation and divestment of Williams & Glyn were £1.2 billion and are expected to increase through to completion.
Group’s financial condition may also be exposed to risk with respect to the control, management and results of operations of
Williams & Glyn during a transitional period. The divestment may also have a negative impact on the Group’s competitive position, including through the emergence of a new competitor. Depending on the form in which Williams & Glyn is divested, the Group may agree or be required to provide services for, or other forms of support (financial or otherwise) to, Williams & Glyn, which may result in reputational and financial exposure for the Group and may require significant attention from the Group’s senior management, in particular in respect of managing conflicts of interests and confidentiality of data.
The Group has been, and will remain, in a period of major restructuring through to 2019, which carries significant execution and operational risks, and there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer-focussed and profitable bank.
In 2015, the Group also continued the run-down of the higher risk and capital intensive assets in RBS Capital Resolution (“RCR”), which has now been merged into Capital Resolution, and strengthened the Group’s capital position, including through the full divestment of the Group’s interest in Citizens Financial Group
Williams & Glyn. The Group expects this restructuring period to be disruptive and likely to increase operational and people risks for the Group and may divert management resources from the conduct of the Group’s operations and development of its business.
Although one of the objectives of the Group’s strategic programme is to achieve a medium-term reduction in annual underlying costs (excluding restructuring and conduct-related charges), this level of cost saving may not be achieved within the planned timescale or at any time. Such risks are linked to and additional to the risks relating to the implementation of the UK
On completion of the implementation of its strategic programme and the UK ring-fencing regime in 2019, the Group’s businesses will be primarily concentrated in the UK and Western Europe, and therefore its potential for profitability and growth will be largely dependent on its success with its retail and SME customers in the UK. Due to the changed nature of the Group’s business model, future levels of revenue may not be achieved in the timescale envisaged or at any time. In addition, there can be no guarantee that the new business model defined for CIB will result in a sustainable or profitable business. As a result, in addition to the execution risks associated with the implementation of its strategic programme and of the UK ring-fencing regime, there can be no assurance that even if the Group executes its strategic programme, it will prove to be a successful strategy or that the restructured Group, on completion of these restructuring measures, will be a viable, competitive, customer-focussed and profitable bank.
(the “UK ring-fencing regime”). These reforms form part of a broader range of structural reforms of the banking industry seeking to improve the resilience and resolvability of banks and which range from structural reforms (including ring-fencing) to the implementation of a new recovery and resolution framework
The Prudential Regulation Authority (“PRA”) is carrying out consultations with the Group and other affected UK banks and is expected to publish the majority of its final rules and supervisory statements during the first half of 2016. The PRA has indicated that the implementation of the UK ring-fencing regime may be further amended in light of any finalised EU proposals for the mandatory separation of proprietary trading and related trading activities which are currently being considered by the European
Parliament and the European Council. A preliminary plan outlining the Group’s anticipated legal and operating structure under the new regime was submitted to the PRA and the