2 place improvements in CMA rank for both NatWest and Royal Bank Brands
The Strategic Report for the year ended 31 December 2018 set out on pages 2 to 35 was approved by the Board of directors on 14 February 2019.
Business Review The financial performance of our business and our operating segments.
Governance A detailed review of our corporate governance and remuneration, including the Report of the directors and annual report on remuneration.
Capital and risk management Disclosures on our capital, liquidity and funding position and a detailed overview of the management of key risks relating to our business operations.
Financial Statements Our audited financial statements and related notes, including our Independent auditor’s report.
Risk Factors A description of certain risk factors that could adversely affect our future results, financial condition and prospects and cause them to be materially different.
Non-executive directors Frank Dangeard Alison Davis Patrick Flynn Morten Friis Robert Gillespie Brendan Nelson Baroness Noakes Mike Rogers Mark Seligman Dr Lena Wilson
Profit attributable to ordinary shareholders £1,622 million £752 million 13p Dividend per share in 2018
and a VAT release of £86 million in 2017. (2) Operating lease depreciation included in income of £121 million (2017 - £142 million).
(3) Comprises customer loans in our UK Personal & Business Banking, Ulster Bank RoI, Commercial Banking, Private Banking and RBS International operating segments. (4) Comprises gross new mortgage lending in our UK Personal & Business Banking, Ulster Bank RoI, Private Banking and RBS International operating segments. (5) 2017 includes an £1.8 billion reduction in net loans to customers as a result of asset reclassifications in 2018.
Lending in our personal and commercial business (3) Gross new mortgage lending (4)
Gross lending to SMEs and mid-corporates in Commercial Banking £30.0 billion £296.7 billion £30.7 billion £298.5 billion(5)
A pre-tax operating profit of £3.4 billion and an attributable profit of £1.6 billion represent a more consistent financial performance, following a return to profitability in 2017. We achieved that improvement through stable income generation - despite the low interest rate environment – as well as by reducing operating costs and de-risking the balance sheet further.
The bank received approval from shareholders on 6 February to buyback shares - equivalent to 4.99% of the Group’s issued share capital - from HM Treasury. Any buyback of these shares will be at the discretion of HM Treasury, however this approval provides another mechanism to return excess capital to shareholders in an efficient way.
Brexit and the economy The Brexit process continues and we have planned for a range of scenarios associated with exiting the European Union. We have put in place plans that will enable us to continue to serve our customers in continental Europe. We have our Dutch Banking entity in Amsterdam and we are in the final stages of seeking approval for two branches in Frankfurt, which we expect to be operationally ready if required, to support among other things the continued clearing of euro payments. These actions are prudent given the uncertainty and will allow us to serve our large corporate customers in Western Europe while we wait for clarity on the terms of the deal.
In the UK, we are seeing large corporate customers delay investment decisions until they have more detail on the outcome of the Brexit process. As one of the largest commercial lenders in the UK we recognise our responsibility to provide support at a highly uncertain time.
Progress on resolving our legacy issues The bank resolved its remaining major legacy issues in 2018. We settled the US Department of Justice investigations into our historic (pre-2007) activities in the US RMBS market in August 2018. While settling this long-running issue was welcome, the £3.6 billion settlement was a stark reminder of how in the past this bank failed to put the interests of customers first.
Building a more sustainable bank and community engagement We are aware of our responsibilities to the communities we serve, given the central role we play in the economy. In 2018 we provided £30.4 billion in gross new lending to UK homeowners and supported over £100 billion of lending to UK businesses, as we helped our customer continue to grow.
Our volunteering and fundraising partnerships continue to make a difference for the communities we serve. In 2018, our employees supported a wide variety of charities raising £4.4 million through their giving and fundraising efforts. Our flagship financial education programme, MoneySense, met its annual targets. Since 2015, we have reached 1.8 million young people and RBS employees have supported 59,000 in-school workshops.
Last year, we witnessed a growing focus on climate change from regulators and investors. In 2017, the bank publicly committed its support of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) - a voluntary set of guidelines encouraging consistent climate-related disclosures in annual reporting. We have now committed a further £10 billion to the Sustainable Energy sector by 2020. This will include continued financing of low carbon generation as well as energy efficiency projects, such as in the real estate sector, and alternative fuelled vehicles.
We are focused on becoming a more ethnically diverse organisation, to reflect the communities in which we operate. We introduced formal UK targets in 2017 to improve the proportion of non-white colleagues in our top 4 leadership layers, to at least 14% by 2025, and are already making good progress against this, with 8% representation.
Board changes We were pleased to welcome Patrick Flynn to the Board on 1 June 2018. Patrick’s appointment further strengthens our overall board composition and supports succession planning. Brendan Nelson will step down as Chairman of the Group Audit Committee with effect from 31 March 2019 at which time Patrick will assume the role of Chairman of the Group Audit Committee. Brendan has indicated that he will not stand for re-election at the 2019 Annual General Meeting. I’d like to thank Brendan for his significant contribution since joining the Board as a Non-Executive Director in 2010. The Board and the wider organisation have benefited from his extensive knowledge and experience and his presence will be greatly missed.
As a result of Ewen’s resignation we appointed Katie Murray as Chief Financial Officer, effective from 1 January 2019. Katie brings nearly 30 years of finance and accounting experience in capital management, investor relations and financial planning to the role. She has already contributed significantly to RBS over the last three years.
A good financial performance in uncertain economic conditions Our financial performance is good, given the uncertain economic outlook. In 2018, we continued to take costs out of the business and reduced operating expenses by £278 million. This means that we have now reduced operating costs by more than £4 billion in five years.
Our strategic plan has served us well and we will continue to focus on our five key priorities, as set out below, as we strive to become the UK and Republic of Ireland’s best bank for customers.
We are investing in innovation, with £1 billion committed to invest in 2019 aimed at improving legacy systems and delivering better solutions for customers. We continue to develop our mobile app which for NatWest now scores +41 for customer advocacy. Our Commercial Bank, the UK’s largest supporter of business, remains ahead of the rest of the market for customer advocacy and in Coutts we have a market leading private banking brand.
Customers want and need to do their banking quickly and safely. When we help them to do this, and combine it with expert advice, we see advocacy scores increase. That is how we are focusing the business, and we are confident the changes we are making will deliver a consistently higher quality of service.
Our first digital lending journey for Commercial Banking customers is now live. The new platform allows existing customers to apply digitally for secured and unsecured loans up to £750,000, subject to eligibility criteria. Customers are able to complete their loan application in a matter of minutes, and usually get a decision in principle within 24 hours. We have simplified and streamlined the customer experience, giving our customers a rapid response, all the while supported by the vast industry knowledge and insight of our Relationship Managers.
We are also embracing artificial intelligence (AI), which is helping us lower our cost base and deliver a 24/7 customer experience . Take Cora for instance –our AI Chat Bot which we launched in partnership with IBM Watson - she now handles an average of 83,000 queries a week. Given the success in the personal business, we have recently rolled out Cora to Commercial Banking.
Supporting sustainable growth Supporting our customers’ ambitions is a key part of our role in society. We have focused on growing lending in our target markets. Gross mortgage lending in UK Personal and Business Banking increased £1.5 billion in 2018, and we helped around 45,000 customers buy their first home. Our support doesn’t only extend to lending, we now have 12 NatWest accelerators. These hubs make up the UK’s largest fullyfunded business accelerator network, capable of supporting up to 1,000 entrepreneurs.
NatWest Markets continued to support large corporate customers with a range of financing needs in 2018. Our FX team was voted number one for customer satisfaction in the 2017 Greenwich Associates FX Survey and we helped clients raise £312 billion on the debt capital markets.
Employee engagement The turnaround of the bank would not have been possible without the hard work and determination of our colleagues. Over the last four years we have seen a significant reduction in the number of roles across the bank, as a result of divestment and restructuring aligned to our strategy. Despite this activity, colleague engagement is at its highest level since we started measuring in 2002. The independent Banking Standards Board report on culture also showed improvements in every category. Of course, there is always more we can do, and we have set stretching targets as we strive to become a more diverse and inclusive organisation.
At the same time we are trying new things outside our core banking services. We are piloting Bó and Mettle as two standalone digital banks. Bó is our digital personal bank targeted at helping people to manage their money better. Mettle is our digital bank for business customers.
These innovations complement the wider eco-systems that we want to build around key customer experiences – be it buying a home, or running a business. Building or acquiring complementary services to the core banking services we already offer in these areas will allow us to deepen our relationships with customers, and ultimately grow revenue.
We have made good progress on making RBS a much simpler, safer and more customer focused bank. From a position of capital strength, we will aim to improve returns for you, our shareholders.
Our chatbot Cora’s only two, but has already chatted with more than 4.3 million customers.
And the more conversations Cora has, the better Cora gets. Thanks to clever algorithms, Cora learns from every interaction so the knowledge and service on offer is always improving.
The labour market remained strong with employment rising further to a new record 32.5 million in the three months to November 2018 compared to 32.2 million for the three months to November 2017. This helped push unemployment down to 4.0% in the three months of November 2018, compared to 4.4% at the end of 2017. Pay growth rose to 3.4% in the three months to November 2018 and vacancies reached new highs. The Bank of England’s mounting concerns that the pace of activity is exceeding the potential growth rate of the UK economy prompted a rise in the Bank Rate to 0.75% in August 2018, the second increase since November 2017. However, the Bank of England signalled it expects UK economic growth to slow again in 2019 and therefore envisages any further tightening to be gradual and limited, contingent on the nature of the UK’s withdrawal from the EU.
Through MoneySense, our flagship financial education programme for 5-18 year olds, we have helped over 6.5 million young people to be more financially aware. During 2018, our employees helped over 77,000 young people learn about money through our MoneySense volunteer workshops in schools.
Money management is an essential life skill that, prepares young people for adult life as well as contributing positively to communities and wider society.
In a fast-changing, digital world it’s important that young people have the skills, knowledge, and confidence to manage their money well. MoneySense goes beyond the basics of budgeting and saving, with curriculum-based lessons that also explore fraud and scams, the connection between unmanageable debt and negative emotions and the dangers of money muling.
NatWest Markets played an active role in the issuance of a landmark Green bond by Royal Schiphol Group, which issued its first ever Green bond. This raised EUR 500million, a first for a European airport. These proceeds will go towards funding a portfolio of eligible environmental projects to improve energy efficiency. There will also be investment in new environmentally friendly forms of transportation at Amsterdam Schiphol Airport.
This sector may not seem the most obvious one for a green bond issuance. But this is part of an increasing trend of clients wanting to contribute to climate action. NatWest Markets will continue to help clients transition to a lower carbon economy.
The key influences have been mapped to the bank’s five strategic priorities
S ta ke h ol de r in te re st
The environment in which we operate influences our ability to serve customers and create value for the long term.
Every year we assess the importance and materiality of external influences both in terms of their relevance to our stakeholders (including customers, investors, policy makers, bank representatives and topic specialists) and their potential commercial impact on the bank.
The results help evaluate our performance in the context of wider societal issues, inform the bank’s future strategy and stakeholder engagement.
UK productivity & economic growth The UK economy continued to grow in 2018, albeit below its long-term trend. RBS’s performance is strongly tied to the economic performance of the UK economy. With the short and long-term outlook for the UK and global economy remaining uncertain, RBS recognises its role in supporting productivity and economic growth.
Political landscape Political risks continue to evolve with uncertainties related to Brexit.
Changing customer expectations Customers’ lives are following less predictable paths. RBS needs to continue helping customers with new ways to bank while meeting personalised service expectations and catering to a broad range of lifestyles and differing levels of digital and financial understanding.
To respond to growing competitive pressures, RBS will need to continue to improve the bank’s products and services in order to increase market share.
Reputation & trust A significant level of trust is required to ensure RBS is sustainable for the long term. Continued efforts to restore trust and safeguard reputation remain a key focus area.
Conduct & litigation Although RBS has resolved the majority of legacy conduct issues and litigation costs are falling, the focus remains on putting in place and maintaining measures to prevent future issues related to conduct.
Inclusion & diversity Building a more inclusive RBS is essential for our customers and colleagues. We will only achieve our ambition to be number one for customer service, trust and advocacy if we understand the needs of all of our people and our customers.
Below are four examples of engagement that have informed the bank’s strategic thinking in 2018: Building a more sustainable bank
A table of 2018 stakeholder engagement issues and outcomes can be found on the Sustainable Banking pages at rbs.com
Investments, retail and institutional investors. They are interested in financial and non-financial performance in the short, medium and long term.
Bank Representatives Includes colleagues, suppliers, and partners. They are responsible for product and service delivery and are the face of our brands.
Artificial Intelligence and Ethics The Sustainable Banking Committee and Technology Innovation Committee hosted a joint engagement session to debate ethical considerations surrounding Artificial Intelligence.
Customer Listening Event Consumer advocacy group Which? hosted a listening event with NatWest customers. Our CEO and senior management team heard views on service, products and ways to bank.
Our Female Development Programmes focus on supporting women to reach their full potential and manage their careers effectively. They support our aspiration to be fully gender balanced by 2030.
Engaging our colleagues is critical to delivering on our strategy and ambition as a bank. Being better for our colleagues means we are better for our customers, and this makes us a better bank.
Health and Wellbeing As a strong component of making RBS a great place to work, wellbeing initiatives have successfully delivered against three pillars; Physical, Mental and Social with the final fourth pillar, Financial Wellbeing well established and continuing to build momentum. Our internal wellbeing index has increased by 3% taking us 1% above other high performing norm companies. We continue to embrace the rapid acceleration of digital wellbeing by offering our colleagues online and on-site wellbeing tools and resources. This year we’ve seen over 20,000 onsite health checks completed across a number of our key hubs. We continue to support the Time to Change pledge and this year launched our new wellbeing campaign Live Well, Being You. Our month long wellbeing campaign in May 2018 focused on each of our four pillars with a specific focus on Mental Health Awareness Week and World Mental Health Day in October 2018. In 2018 we again supported our colleagues through change and have fully utilised the services of our Employee Assistance Programme.
Our Inclusion plans apply globally and are formed around 5 key priorities: Gender Balanced: • We continue to work towards our target of having at least 30% senior women in our top three leadership layers in each of our businesses by 2020 (40% on aggregate) and to be fully gender balanced across the bank by 2030.
• As at the 31 December 2018 we have, on aggregate, 37% women in our top three leadership layers, and our pipeline (c.4000 of our most senior roles) has 45% women.
• The reported mean pay gap for the bank in Great Britain is 36.6% (median 36.8%), and mean gender bonus gap is 66.7% (median 44.0%).
• Our positive action approach is helping us to improve the balance of women in senior roles.
Ethnically Diverse: • We continue to focus on building an ethnically diverse RBS. Our plan focuses on positive action and includes reciprocal mentoring, targeted development workshops and leadership programmes and ensuring we have a Black, Asian and Minority Ethnic (BAME) focus on recruitment, talent identification and promotion.
• For more information on our Inclusion work, including our positive action approaches, refer to rbs.com and the Sustainable Banking pages at rbs.com.
“ Becoming an inclusive bank is not an optional extra for us. We will only achieve our ambition to be number one for customer service, trust and advocacy if we understand the needs of all of our people and our customers. Quite simply, if we’re a more inclusive place to work, great people will want to work here and more customers will want to bank with us – so it’s a business imperative.”
Branch colleague Hannah Findlay recently carried out a Financial Health Check with a customer who wanted to increase her overdraft to cover a credit card payment.
Hannah explained that, instead of extending her overdraft, she could consolidate the debts and pay them off over five years – half the time of the credit card companies, with roughly a sixth of the interest, and a saving of around £300 a month.
Our Customers Our relationship with our customers is governed by a wide range of risk considerations, including our Anti-Money Laundering (AML) and Environmental, Social, and Ethical (ESE) risk assessments on current and new customers, to consider whether any of their activities carry human rights infringements.
Our People All of our people are legally recruited subject to local jurisdiction and in the UK must meet 1998 Immigration Act requirements.
Our Suppliers In 2018 we updated and enhanced our Sustainable Procurement Code, now referred to as the Supplier Code of Conduct (SCoC) (available on rbs .com). The SCoC continues to be a contractual requirement - we expect our suppliers to uphold the same values and commitments we have made on social and environmental impacts.
The paperless process involves customers uploading documents via a safe temporary portal and providing a digital signature. Not only is it an average of 8 days quicker, it’s also saving customers the hassle of printing documents, finding a stamp and popping to the post box.
For businesses with customers all over the world, managing payments in different countries can be costly and complicated. That’s where FXmicropay – our automated foreign exchange management service – can help.
We’ve worked with a large car hire company to develop digital foreign exchange and payments strategy. Now they can instantly price in more than 60 local currencies, get real-time customised reporting of the foreign exchange transactions, and hedge against currency fluctuations.
To improve FXmicropay’s accessibility to a broader range of customers we have recently made the service available on SAP Commerce Cloud to support their customers with multi-currency payments via their platform. This reduces the technology integration of the service to a couple of hours, freeing up more time to focus on making their business the best it can be.
“I looked at the statistics, and saw so many start-ups failing,” he explains. “The main reason was poor cash flow. While they had good ideas, they didn’t know how to run the business. My passion was to see the number of businesses that fail, reduce.” For Girish, one of the benefits of banking with NatWest is the support we provide for businesses like his, and those of his customers.
It’s just one way we’re making financial management as simple as possible – so our customers can get on with the important business of growing their business.
We earn their trust by focusing on their needs and delivering excellent service.
Our brands are our main connection with customers. Each takes a clear and differentiated position with the aim of helping us strengthen our relationship with them. For this reason we measure customer advocacy by brand.
Our ambition is to build the best bank for customers and reach No. 1 for customer service, trust and advocacy.
Source: Populus. Latest quarter’s data. Measured as a net % of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: 891 for NatWest (England & Wales), 215 for Royal Bank of Scotland (Scotland).
Natural We make use of energy and resources such as paper and water to conduct our business activities. We have committed to RE100 and pledged 100% renewable electricity in our global operations by 2025.
Infrastructure We rely on online and mobile banking, our high street and Post Office branches, mobile vans, telephony, webchat and self service options like ATMs and cash deposit machines. In support of these channels during 2018 our technology systems have been available 99.96% of the time.
Our products and services We provide a comprehensive range of banking products and related financial services to personal, business and commercial customers. We serve our customers 24/7 through the Royal Bank of Scotland, NatWest and Ulster Bank networks of branches, dedicated business relationship managers, mobile banking, digital banking, contact centres, intermediary channels and ATMs.
We believe in treating customers fairly, offering flexibility in how customers choose to bank with us and providing extra help to vulnerable customers and those in financial difficulty. This means keeping their funds safe and secure, improving financial capability and supporting enterprise.
MoneySense has been running for over 24 years, during which it has helped over 6.5 million young people learn about money.
One of the largest UK employers with a workforce of 67,400. We recruited 231 graduates and 285 apprentices.
Payment of £1.36 billion in tax to the UK Government, which supports central government and local authority lending(1)
Supporting enterprise £30.0 billion gross lending to SMEs and mid-corporates in Commercial Banking.
Improving digital capability 72% of our active personal current account customers used either mobile or online channels(*).
Addressing the risks and opportunities climate change presents to us and our customers
Housing 45,043 first time buyer mortgage customers(*). We supported the UK Government’s Help to Buy schemes, helping 7,700 customers on a Help to Buy mortgage scheme, totalling £1.4 billion.
Note: (1) Comprises £348 million corporate tax, £583 million irrecoverable VAT, £180 million bank levies and £250 million employer payroll taxes.
UK Personal & Business Banking UK Personal & Business Banking provides a comprehensive range of banking products and related financial services to the personal, private and small business segments in the UK. Offering 24/7 banking facilities, customers are served through the NatWest and Royal Bank of Scotland network and distribution channels.
Ulster Bank RoI Ulster Bank RoI provides a comprehensive range of financial services through Personal and Commercial Banking divisions. Personal Banking provides loan and deposit products through a network of branches and direct channels, including the internet, mobile and telephony. Commercial Banking provides services to business and corporate customers, including small and medium enterprises.
RBS International RBS International serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution customers in Luxembourg and London, supported by our market leading brands such as NatWest International and Coutts Crown Dependency. Across our personal banking propositions we continue to maintain our position as market leader in the Isle of Man and top three market positions in Guernsey and Jersey.
We are focused on serving customers brilliantly. This means treating customers fairly, offering them flexibility in how they choose to bank with us and offering extra help to vulnerable customers and those in financial difficulty. It also means keeping their funds safe and secure, improving financial capability, and supporting them in the moments that matter.
We have over 850 branches, which is the second largest branch network across the UK. 99.7% of the UK population live within 15 minutes of a branch, a mobile-van stop or a Post Office location and our fleet of 41 mobile vans serve more than 600 communities each week. We are also proud to have the most professional workforce of any bank in the UK, with over 13,000 colleagues achieving their Professional Banker Certificate.
Operating profit was €15 million compared with a loss of €151 million in 2017. Total income of €689 million remained stable with the prior year and operating expenses decreased by €115 million, or 14.9%. Net loans reduced by €1.0 billion principally reflecting the successful sale of a portfolio of non-performing loans of €0.6 billion which contributed to a reduction in the non-performing loan ratio from 16.7% in 2017 to 11.3% in 2018.
We have continued to strengthen our digital proposition in 2018 through enhancements to digital and mobile customer offerings. 69% of our active personal current account customers are choosing to bank with us through digital channels. We introduced a faster, more convenient and secure digital application experience for customers applying for current accounts and personal loans and made further enhancements to the mobile app during the year. Mobile payments and transfers increased 36% on prior year, reflecting the continued customer migration from physical to digital channels.
In our position as the largest UK commercial bank(1), with professional relationship management at our core and a strong regional network, we provide deep sector and business insight to help UK businesses and the UK economy succeed. This commitment and support has generated market-leading customer advocacy. In 2018, within total utilised lending of around £90 billion, we either made or renewed commitments for around £30 billion of term lending facilities, of which £18 billion utilised as at 31 December 2018, to our mainly UK-based customers. Additionally at Q3 2018, we provided a further £2 billion of growth funding to help British businesses prepare for the Brexit transition, bringing the total commitment to £3 billion.
Operating profit(2) was £1,358 million compared with £944 million in 2017. Total income(2) was £3,374 million (2017 – £3,238million) and operating expenses(2) decreased by £132 million, or 6.6%, reflecting continued operating model simplification and efficiencies.
(2) Comparisons with prior periods are impacted by transfers in preparation for ring-fencing. The net impact of these transfers on 2017 operating profit would have been to reduce income by £246 million, operating expenses by £10 million and impairments by £72 million. The variances in the commentary have been adjusted for the impact of these transfers.
Operating profit was £303 million compared with £152 million in 2017. Total income(1) was £775 million (2017 – £702 million) and operating expenses(1) decreased by £66 million, or 12.1%, as we continued to focus on front-to-back simplification and the digitalisation of key processes. Net lending growth was £0.9 billion, or 6.7%, compared with 2017. Assets under management have decreased by £1.0 billion, or 4.8%, reflecting negative market movements partially offset by new business inflows of £0.6 billion.
We continue to shift from a physical to a digital client offering as we deliver more innovative solutions. Approximately 60% of clients bank with us digitally, and 94% of clients positively rate our Coutts24 telephony service. We also recently launched Coutts Connect, a social platform which allows clients to network and build working relationships between one another.
We gained further external recognition for our investment management performance having won two Gold awards at the Portfolio Advisor Wealth Manager (PAM) awards in 2018.
Note: (1) Comparisons with prior periods are impacted by the transfers in preparation for ring-fencing. The net impact of the transfers on 2017 would have been to increase income by £24 million and increase operating expenses by £15 million. The net impact on the 2017 balance sheet would have been to reduce net loans to customers by £0.1 billion and assets under management by £0.7 billion. The variances in the commentary have been adjusted for the impact of these transfers.
We are one of the largest banks operating in the Channel Islands, Isle of Man and Gibraltar and in 2017 established new wholesale branches in Luxembourg and London. In line with the wider Group we are focused on serving customers well and becoming a bank that is simpler and easier to deal with.
During 2018, we repositioned our balance sheet so that excess funds were no longer up streamed to RBS. Instead some funds have been deployed into funding customer assets in our new London branch which looks after long-standing alternative investment fund customers who could not remain inside the UK ringfence. We have also established a liquidity portfolio across central and correspondent banks and sovereign bond holdings.
Operating profit was £336 million compared with £304 million in 2017. Total income(1) was £594 million (2017 – £540 million), the increase largely driven by deposit margin benefits. Operating expenses (1) increased by £27 million, or 11.6%, primarily due to £39 million higher back-office costs associated with becoming a non ringfenced bank. Net loans to customers were £13.2 billion and gross new mortgage lending in 2018 was £0.3 billion compared with £0.5 billion in 2017.
71% of wholesale customer payments are now processed using our newly introduced international banking platform, making the payments process simpler for customers.
We transformed our retail branches in each of our jurisdictions to include self service automation terminals giving customers more options in how they bank with us and in 2018 we helped our customers buy over 1000 new homes.
An operating loss of £70 million compared with a loss of £977 million in 2017. Total income(1) increased by £288 million, or 25.0%, primarily reflecting lower disposal losses in the legacy business and a £165 million indemnity insurance recovery, partially offset by lower income in the core business. The reduction in the core business was driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
Awards and rankings • Sterling Bond House of the Year 2018
• Tied #1 for Rates* Service Quality – UK FIs (* Government Bonds and Interest Rate Derivative Investors) (Source: Greenwich Associates, European Fixed Income 2018 – Rates).
We aim to be high tech and high touch, which means lower cost, high quality digital services with human expertise available when required. This will be underpinned by a clear commitment to our customers, shareholders and other stakeholders.
RBS, like all companies, continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment. Our central economic forecast, which supports our corporate plan, is in line with consensus as at the end of December 2018 and shows average UK GDP growth of around 1.0-2.0% from 2019 to 2023 and continued low interest rates. Given the current uncertainties we will continue to actively monitor and react to market conditions.
2019 Outlook As part of our continued cost savings plans, we expect to incur aggregate strategic costs of around £2.5 billion across 2018 and 2019, with £1.0 billion of this having been incurred during 2018. We plan to reduce operating expenses, excluding strategic costs and conduct and litigation costs, by £300 million in 2019 compared with 2018, excluding one-off items.
We expect to end 2019 with risk weighted assets (RWAs) of around £185 – 190 billion as the RWAs associated with Alawwal Bank are expected to reduce by around £5 billion, subject to regulatory approvals relating to the merger and our shareholding.
RBS Group (RBSG) capital and funding plans focus on issuing £3-5 billion of MREL-compliant instruments and around £1 billion of Tier 2 instruments. We do not plan to issue AT1 in 2019.
As in prior years, we will continue to target other funding sources to diversify our funding structure, including senior secured issuance of £2-3 billion from NatWest Bank. NatWest Markets Plc, as a standalone bank, plans to issue £3-5 billion of term senior unsecured instruments.
Medium term outlook While we remain comfortable with our 2020 target of a return on tangible equity of more than 12%, we recognise our 2020 target of a cost:income ratio of less than 50% is increasingly challenging for the business to achieve with the risk being to the downside. This reflects the ongoing economic and political uncertainty and the additional ongoing costs associated with ringfencing and Brexit.
NatWest Markets (NWM) The NWM franchise includes NWM Plc and NWM N.V., both of which are currently direct subsidiaries of RBSG. RBS has previously announced its intention for NWM N.V. to become a subsidiary of NWM Plc following the completion of the sale of the consortium holding in Alawwal. As such, NWM Plc’s financial reporting does not currently include NWM N.V.
NWM Plc is regulated and discloses capital ratios and RWAs on a standalone bank basis and is targeting by 2020 a CET1 ratio of circa 15%, MREL ratio of at least 30% and a leverage ratio of at least 4%.
We plan to transfer our Western Europe corporate business into NWM N.V. from the ring-fenced bank, in addition to the NWM business that is expected to be part of a FSMA Part VII Transfer Scheme from NWM Plc to NWM N.V., subject to court approval and as announced on 6 December 2018. NWM Plc legal entity RWAs are expected to be around £35 billion, NWM N.V. RWAs are expected to be around £8 billion with the consolidated NWM franchise position, excluding RWAs related to intercompany positions, expected to be around £39 billion by 2020.
In October 2018, the Federal Reserve Board terminated a Cease & Desist Order originally imposed in December 2013 in relation to historical compliance with Office of Foreign Assets Control (OFAC) economic sanctions regulations.
A memorandum of understanding with the Trustees of the Group Pension Fund, to align the scheme with the UK’s ring-fencing rules – and the £2 billion contribution made in October 2018 – significantly reduced the Group’s exposure to pension risk. The contribution to the scheme – which could be followed by up to a further £1.5 billion of dividendlinked contributions – facilitated a reduction in the risk profile of the fund, principally the sale of approximately £6 billion of quoted equity exposure and the purchase of further interest rate and inflation hedging.
RBS continued to make progress towards its aim of making risk simply part of the way colleagues work and think. In 2018 the risk culture action plan focused on building clarity, developing capability and embedding a standardised risk culture assessment and reporting approach.
From an operational risk perspective, throughout 2018 there was a continued focus on the control environment, ensuring that RBS maintains a safe and secure approach to doing business.
Oversight of the Group’s transformation – to meet the evolving needs of customers as well as to address the changing economic, regulatory and technology landscapes
– was further enhanced in order to effectively align with the innovation agenda.
While the longer-term effects on the operating environment of the UK’s exit are difficult to predict, consideration has also been given to the potential second and third order effects on the Group and its customers, including planning for the results of periodic financial volatility and slower economic growth.
Leverage ratios Both the CRR end-point and UK leverage ratios increased to 5.4% and 6.2% respectively as a result of reduced assets. The average CRR leverage ratio and UK leverage ratios increased to 5.4% and 6.2% respectively.
Cyber Security RBS has a multi-layered defence approach to cyber security and continues to invest in its defences as the external threat evolves. In 2018, RBS continued to take part in industry-wide initiatives to monitor and anticipate developments, identify vulnerabilities and share best practice.
RBS is committed to ensuring it acts responsibly and ethically, both when pursuing its own business opportunities and when awarding business. Consequently it has embedded appropriate policies, mandatory procedures and controls to ensure its employees, and any other parties it does business with, understand these obligations and abide by them, whenever they act for RBS. Anti-bribery and corruption (ABC) training is mandatory for all staff on an annual basis, with targeted training appropriate for certain roles. RBS considers ABC risk in its business processes including, but not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships. Where appropriate, there is a requirement for ABC contract clauses in written agreements.
In addition, RBS continues to focus on risks arising as a result of government undertakings to limit carbon emissions, which will require adjustments in all sectors of the economy. Though the nature and timing of these transitional risks remain uncertain, RBS classifies climate risk as an emerging threat and is integrating it into core risk management.
- RBS’s information technology systems are critical to the services it provides, with any outages experienced in the banking sector widely publicised. Cyber attacks continue to evolve in frequency, sophistication and severity. There is a risk that a cyber attack damages RBS’s ability to do business and/or compromises data security. - RBS faces increased operational risk as it makes changes to its structure and operations to reduce its cost base.
- A major investment programme has improved systems resilience. As RBS continues to simplify and modernise infrastructure and applications, system sustainability has improved. - A major security programme has delivered control enhancements to mitigate the risk of cyber attack. RBS continues to invest in its defences. RBS monitors people risk closely and has plans in place to support retention of key roles, with wider programmes supporting engagement and training. - RBS continues to implement change in line with its project plans while assessing the implementation risks and mitigating where possible.
Economic and political risk Risk Mitigation - RBS remains vulnerable to changes and uncertainty in the economic, political and legal environment. Scenarios that could have a potentially material negative effect on RBS include the impact of the UK’s exit from the European Union; changes in UK government and UK government policy; a second Scottish independence referendum; a UK recession (including significant falls in house prices); global financial volatility, a protracted period of low interest rates in the UK, vulnerabilities in emerging market economies resulting in contagion in RBS’s core markets, a Eurozone crisis or major geopolitical instability. - Accelerating climate change may lead to faster-than-anticipated climate-related impacts on RBS and the wider economy.
Financial resilience Risk Mitigation - RBS’s target markets are highly competitive, which poses challenges in terms of achieving some strategic objectives. Moreover, changes in technology, customer behaviour and business models in these markets have accelerated.
- RBS considers and incorporates the implications of proposed or potential regulatory activities in its strategic and financial plans. - RBS has dedicated resources in place to manage claims and complaints relating to GRG. - RBS has invested significant resources to meet the terms of the Alternative Remedies Package and manage the associated risks. - Building a healthy culture is a core priority. RBS continues to focus on creating a solid platform for behavioural and cultural change. - In addition, RBS continues to strengthen its control environment and the journey of improvement remains an ongoing area of focus. - A programme to determine the scale and scope of the impacts relating to the transition to alternative risk-free rates is underway. Activity to manage the transition will take place within RBS’s control framework and in line with expected standards of conduct.
As part of our developing strategy to address climate change, we are helping to accelerate the transition to a low carbon economy by supporting our customers and integrating climate change into core business decision making. To support this, RBS is currently undertaking climate scenario analysis across our main lending portfolio. Two scenarios are being considered: a ‘Business as Usual’ 3.7°C rise and a ‘Paris Agreement’ 2°C rise. The time frames used for analysis are aligned to RBS strategy: short 0-2 years, medium 3-5 years and long 6-30 years. Both physical and transitional risks are being incorporated. The results of the analysis will inform future strategy and focus areas for more in-depth climate scenario analysis.
At our AGM in May 2018 we announced new energy lending policies, meaning RBS will not provide project-specific finance to: • New coal fired power stations • New thermal coal mines • Oil sands projects • Arctic oil projects • Unsustainable vegetation or peatland clearance projects
RBS will also not provide finance to: • Mining companies generating more than 40% of their revenues from thermal coal – a reduction from 65%. • Power companies generating more than 40% of their electricity from coal – a reduction from 65%.
Location-based CO2e emissions per FTE (Scope 1, 2 & business travel) (tonnes)
We have reported on all emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. To our knowledge there are no material omissions. Independent limited assurance of total reported emissions in tonnes of CO2e, (Scope 1*, 2** and 3*** location based emissions) has been provided by Ernst & Young LLP. Our reporting year runs from October 2017 to September 2018. *Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles. **Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises. *** market-based emissions have been calculated using the GHG Protocol guidelines. ****Scope 3: Emissions associated with business travel (air, rail and road) by RBS employees.
These emissions are calculated using The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard revised edition (2004). The emissions reporting boundary is defined as all entities and facilities either owned or under operational control. Emissions factors used are from UK Government Emissions Conversion Factors for Greenhouse Gas Company Reporting (BEIS,2018), CO2 Emissions from Fuel Combustion (IEA,2017) or from relevant local authorities as required. For more information please see our website ( responsible-business/).
The full Governance report is on pages 47 to 88 of the 2018 Annual Report and Accounts.
Group Board Risk Committee Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBS’s compliance with approved risk appetite and oversees the operation of the RBS Policy Framework and submissions to regulators.
Group Sustainable Banking Committee Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on culture, people, customer, brand and environmental social and ethical issues.
Group Nominations and Governance Committee Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in the future. Its remit also includes governance oversight.
Technology and Innovation Committee Assists the Board in overseeing and monitoring the execution of RBS’s strategic direction in relation to technology and innovation.
The Board has thirteen directors comprising the Chairman, two executive directors and ten independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 47 and 48.
The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. Its role is to provide leadership of RBS within a framework of prudent and effective controls which enables risks to be assessed and managed.
In 2018, the Board and committee evaluation process was conducted externally by Independent Board Evaluation.
Situated off the Lincolnshire coast, this consented wind farm is owned by a group of companies, with Innogy Renewables UK managing the construction, operation and maintenance works on behalf of the project partners. Total planned investment amounts to around £2 billion. NatWest participated in financing as part of a 15-bank lending syndicate, NatWest Markets provided risk management solutions to Innogy to address interest rate and foreign exchange risks.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board of Directors (the “Board” of RBSG (the “group”)) have assessed the viability of the group taking into account the current position of the group, the Board’s assessment of the group’s prospects, and the group’s principal risks, as detailed in the strategic report on page 32. The Board’s assessment is further informed by the application of regulatory standards of capital and liquidity adequacy and stress test thresholds under extreme conditions.
The Board consider a period of three years to be an appropriate period for the assessment to be made. This period is within the group’s strategic plan and regulatory and internal stress testing periods.
The group’s business and strategic plans provide long term direction and are reviewed on, at least, an annual basis, including multi-year forecasts showing the expected financial position throughout the planning horizon. The base case plan indicates that the group will have sufficient capital and liquidity resources over the three year assessment period.
The group’s base case plan is also tested in a series of extreme stress scenarios as part of internal and external stress testing. Results from the stress scenarios, including management’s response, are used as part of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). These processes are summarised in the Capital and Risk Management section of the Annual Report & Accounts on pages 98 to 107.
Assessments of the risks of the greatest concern are captured through the group’s processes for continuously identifying and effectively managing the principal top and emerging risks, as detailed on page 32 of the strategic report. These assessments provide a view on the impact of the top risks crystallising, both individually and in combination.
These risks are outlined in the Risk Overview and further discussed in the Risk Factors, both contained in the Annual Report & Accounts on pages 30 to 32 and 253 to 263, respectively, and include political, legal, macroeconomic, regulatory, operational and execution risks.
The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
Reportable operating segments The reportable operating segments are as follows. For full business descriptions see Note 4 on page 191.
Allocation of central items RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets (and risk-weighted assets) held centrally, mainly relating to RBS Treasury, are allocated to the business using appropriate drivers.
Net interest income 8,656 8,987 8,708 8,767 9,258 Non-interest income 4,746 4,146 3,882 4,156 5,892
Profit/(loss) before impairment (losses)/releases 3,757 2,732 (3,604) (3,430) 1,291 Impairment (losses)/releases (398) (493) (478) 727 1,352
Preference shareholders 182 234 260 297 330 Dividend access share — — 1,193 — 320 Paid-in equity holders 288 394 244 88 49 Non-controlling interests (8) 35 10 409 60
Notable items within total income £m £m IFRS volatility in Central items & other (59) 2 Insurance indemnity 357 — Of which: NatWest Markets 165 — Central items & other 192 — UK PBB debt sale gain 61 185 FX losses in Central items & other (46) (183) Commercial Banking fair value and disposal gain 169 6 NatWest Markets legacy business disposal losses (86) (712)
Note: (1) Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business
Financial summary continued Segmental summary income statements PBB CPB UK Ulster Bank Commercial Private RBS NatWest Central items Total 2018 PBB RoI Banking Banking International Markets & other RBS £m £m £m £m £m £m £m £m
Cost:income ratio (2) 59.1% 111.9% 56.0% 78.0% 56.3% nm nm 79.0% Third party customer asset rate (3) 3.47% 2.38% 2.73% 2.71% 2.71% nm nm nm Third party customer funding rate (0.16%) (0.31%) (0.15%) (0.09%) (0.02%) nm nm nm
Notes: (1) RBS’s CET 1 target is approximately 14% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference share dividends is divided by average notional equity allocated at different rates of 14% (Ulster Bank RoI), 11% (Commercial Banking), 13.5% (Private Banking - 14% prior to Q1 2018), 16% (RBS International - 12% prior to November 2017) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes). Return on equity is calculated using profit for the period attributable to ordinary shareholders.
(2) Operating lease depreciation included in income £121 million (2017 - £142 million).
(3) Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.
 Net interest income decreased by £331 million, or 3.7%, driven by margin pressure, active capital management in Commercial Banking, a reduction in the NatWest Markets legacy business and one-off Central items in 2017.
 Net interest margin was 15 basis points lower than 2017, or 13 basis points lower excluding one-off items reflecting an 8 basis points reduction relating to increased liquidity, 3 basis points from competitive pressures and 2 basis points from mix impacts.
ECL loss rate - annualised (basis points) 12.45 15.33 (3) (19%)
 A net impairment loss of £398 million, 13 basis points of gross customer loans, decreased by £95 million, or 19.3%, compared with 2017 primarily reflecting lower single name charges in Commercial Banking, partially offset by fewer provision releases in UK PBB and NatWest Markets.
 In addition, we took an additional £101 million charge in Q3 2018 reflecting the more uncertain economic outlook and a net £60 million impairment charge in Ulster Bank RoI principally in relation to ongoing sales from our loan book to further reduce the level of non performing loans. Underlying credit conditions remained benign during 2018.
Summary consolidated balance sheet as at 31 December 2018 2018 2017 Variance £m £m £m
Tangible net asset value per ordinary share (1) 287p 288p (1p)
From 1 January 2018, the Group adopted IFRS 9 ‘Financial Instruments’. IFRS 9 changed the balance sheet classification categories from IAS 39. Refer to Note 33 for full details of the impact of IFRS 9 on the Group’s balance sheet.
 Cash and balances at central banks decreased by £9.4 billion, 9.6%, to £88.9 billion representing liquidity management, the payment of the settlement with the US Department of Justice and the pension contribution in the year.
 Trading assets decreased by £10.9 billion, 12.6%, to £75.1 billion and trading liabilities decreased by £9.6 billion, 11.7%, to £72.4 billion mainly due to the wind-down of the legacy business in NatWest Markets.
 Movements in the value of derivative assets, down £27.5 billion, 17.1%, to £133.3 billion, and liabilities, down £25.6 billion, 16.6% to £128.9 billion, due to trading volumes and valuations in NatWest Markets.
 Other financial assets includes debt securities, equity shares and other loans and increased by £7.6 billion, 14.6%, to £59.5 billion, primarily reflecting increases in the liquidity portfolio driven by increased customer surplus within in the ring-fenced banks, reduced funding requirement and net term issuance in NatWest Markets.
 Bank deposits decreased by £7.1 billion, 23.4%, to £23.3 billion, with decreases relating to funding management including a £5 billion payment in relation to the Bank of England Term Funding Scheme participation.
 Other financial liabilities included customer deposits at fair value through profit and loss and debt securities and increased by £9.6 billion, 29.0%, to £42.8 billion primarily including issuances in the year of covered bonds and MREL in the year.
Net interest margin 2.78% 2.86% (0.08%) Cost:income ratio 55.4% 59.1% (3.7%)
 UK PBB now has 6.4 million regular mobile app users, 16% higher than 2017, with 72% of our active current account customers being regular digital users. Total digital sales increased by 19% representing 45% of all sales. 61% of mortgage switching is now done digitally, compared with 51% in 2017. 57% of personal unsecured loans sales are via the digital channel, with digital volumes 31% higher. In business banking, 91% of current accounts and 68% of loans under £50,000 were originated digitally.
 Total income was £195 million, or 3.0%, lower reflecting £124 million lower debt sale gains and a £33 million transfer of the Collective Investment Funds business to Private Banking in Q4 2017. Excluding these items, income was £38 million, or 0.6%, lower, including a £28 million reduction in overdraft fees following changes implemented in H2 2017, which included increasing the number of customer alerts. Net interest income of £5,098 million decreased by 0.6% as balance growth and deposit margin benefits were offset by lower mortgage new business margins, with net interest margin down by 8 basis points to 2.78%.
 Net loans to customers increased by 0.4% to £162.3 billion. The business has maintained a prudent approach to risk and pricing in a very competitive market, with gross new mortgage lending in 2018 at £30.4 billion, 1.9% lower than 2017. Mortgage market share was maintained at 11.3% supporting a stock share of around 10%. Momentum continued in personal advances and business banking, increasing by 7.0% and 0.4% respectively.
 Customer deposits increased by £3.7 billion, or 2.1%, as growth continued across current accounts and savings.
 RWAs increased by £2.1 billion, or 4.9%, principally due to modelling changes on mortgages and unsecured loans.
Note: (1) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 14% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming a nil tax rate.
Capital and balance sheet 2018 2017 Variance 2018 2017 Variance €bn €bn €bn £bn £bn £bn
Loans to customers (amortised cost) - mortgages 16.0 17.3 (1.3) (7.5%) 14.4 15.4 (1.0) (6.5%)
Total loans to customers (amortised cost) 21.9 23.3 (1.4) (6.0%) 19.6 20.6 (1.0) (4.9%)
 Total income was in line with 2017. Net interest income increased by €22 million, or 4.6%, supporting a 12 basis point increase in net interest margin, primarily driven by an improving asset mix, lower cost of deposits and a one-off funding benefit in 2018, partially offset by a reduction in income on free funds. Non-interest income decreased by €22 million, or 10.5%, principally due to a lower number of non-recurring benefits and a reduction in fee income.
 Customer deposits increased by €1.0 billion, or 5.2%, supporting a reduction in the loan:deposit ratio to 105% from 115%.
 RWAs reduced by €3.8 billion, or 18.8%, principally reflecting the impact of the non-performing loan sale and an improvement in credit metrics.
Net interest margin 1.67% 1.74% (0.07%) Cost:income ratio 53.8% 56.0% (2.2%)
Customer deposits (excluding repos) 95.6 98.0 (2.4) (2.4%) Loan:deposit ratio (excluding repos) 92.0% 99.0% (7.0%)
 Approximately 85% of customers now interact with Commercial Banking digitally and we have developed solutions they value. We successfully launched the Bankline mobile app in the Apple app store, whilst our lending journey now enables customers to apply digitally for loans of up to £750,000 through a self-service application process. This is the largest value offered by a UK commercial bank, giving customers rapid, digital access to funding decisions, with approximately 50% of loan applications given a decision in principle in under 24 hours.
 Total income increased by £136 million, or 4.2%, reflecting asset disposal and fair value gains of £169 million, compared with a £64 million loss in 2017, partially offset by lower lending. Net interest margin decreased by 7 basis points to 1.67% primarily reflecting reclassification of net interest income to non-interest income under IFRS 9, the impact of transfers and asset margin compression, partially offset by higher funding benefits from deposit balances.
 Operating expenses decreased by £132 million, or 6.6%. Excluding strategic, litigation and conduct costs, operating expenses were £79 million, or 4.4%, lower reflecting continued operating model simplification.
 Net loans to customers decreased by £2.2 billion, or 2.4%, principally driven by significant active capital management reductions, with underlying lending growth of £3.5 billion, or 3.8%. At Q3 2018, we announced an additional £2 billion of growth funding to help British businesses prepare for the Brexit transition, bringing the total commitment to £3 billion.
Return on equity (1) 15.4% 6.4% 9.0% Net interest margin 2.52% 2.47% 0.05% Cost:income ratio 61.7% 78.0% (16.3%)
Notes: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 13.5% (14%
 A net impairment release of £6 million largely reflects a £9m release in Q4 2018 due to data quality improvements.
Strategic costs (9) (9) — — Litigation and conduct costs 9 (8) 17 nm
Notes: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% (12%
 Total income increased by £54 million, or 10.0%, largely driven by deposit margin benefits. Institutional Banking contributed 62% to income in 2018, with Local Banking contributing 32% and Depositary Services 6%. Net interest margin increased by 35 basis points primarily driven by the impact of transfers and a change in product mix.
 Net loans to customers remained broadly stable at £13.3 billion and are split: £9.2 billion within Institutional Banking, of which £2.2 billion relates to real estate exposures; and £4.1 billion in Local Banking, of which £2.7 billion relates to mortgages.
 During 2018, we repositioned our balance sheet so that excess funds previously placed with RBS Group are now deployed into funding customer assets in our new London branch. We have also established a liquidity portfolio across central and correspondent banks and sovereign bond holdings. These changes provide continuity for our customers and support compliance with incoming Basel III Liquidity Coverage Ratio rules.
 NatWest Markets continues to focus on customer service and is increasingly using technology to enhance the way it provides innovative financial solutions to its customers and partners. For example, FXmicropay makes it simpler for businesses operating globally to accept payments in multiple currencies, reducing costs and increasing revenues for our customers. Our success in harnessing technology has been recognised with two awards: Best in Service Globally among Corporates for Algorithmic trading in the 2018 Euromoney FX Survey and Best Order Management award in the Profit & Loss 2018 Digital FX Awards.
 Total income increased by £288 million, or 25.0%, primarily reflecting lower disposal losses in the legacy business and a £165 million indemnity insurance recovery, partially offset by lower income in the core business. The reduction in the core business was driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
 The net impairment release decreased by £10 million to £92 million reflecting a lower level of legacy releases.
 RWAs decreased by £8.4 billion to £44.9 billion, including RWAs for Alawwal bank of £5.9 billion. The decrease was driven by the legacy business, down £7.1 billion, in addition to reductions in the core business.
 Central items not allocated represented a charge of £1,038 million in 2018, largely comprises the £1,040 million charge relating to the civil settlement with the US Department of Justice and £333m of strategic costs, partially offset by a £241 million provision release relating to an RMBS litigation indemnity and indemnity insurance recoveries of £192 million.
Group audit committee Group Executive committee GRG Board Oversight Committee Group nominations and governance committee
2 Ross McEwan Appointed: 1 October 2013 Experience: Ross has more than 25 years experience in the finance, insurance and investment industries. He became Chief Executive of The Royal Bank of Scotland Group in October 2013 and between August 2012 and September 2013, was Chief Executive Officer for UK Retail, joining from Commonwealth Bank of Australia where he was Group Executive for Retail Banking Services for five years. Prior to this, Ross was Executive General Manager with responsibility for the branch network, contact centres and third party mortgage brokers. Prior to Commonwealth Bank of Australia, he was Managing Director of First NZ Capital Securities. He was also Chief Executive of National Mutual Life Association of Australasia Ltd/AXA New Zealand Ltd.
Independent non-executive directors 4 Frank Dangeard Appointed 16 May 2016 Experience: Frank assumed the role of Chairman, NatWest Markets Plc on 30 April 2018. Previously, Frank served as a nonexecutive director of Crédit Agricole CIB, EDF, Home Credit, Orange, Sonaecom SGPS, and as Deputy Chairman and acting Chairman of Telenor ASA. During his executive career he held various roles at Thomson S.A., including Chairman and Chief Executive Officer, and was Deputy Chief Executive Officer of France Telecom. Prior to that he was Chairman of SG Warburg France and Managing Director of SG Warburg.
A N Ri A N S Re Re N G T
8 Robert Gillespie Appointed 2 December 2013 Experience: Robert had a long career in investment banking, specialising in corporate advisory work. He was Director General of the Takeover Panel from 2010 until 2013 and prior to that held a number of senior management positions at UBS including being global head of investment banking from 1999 until 2005, chief executive of UBS for EMEA from 2004 to 06 and Vice Chairman of UBS Investment Bank from 2005 to 2008. He commenced his career at Price Waterhouse where he qualified as a Chartered Accountant and in 1981 joined S.G. Warburg which subsequently became part of UBS.
10 Baroness Noakes, DBE Appointed 1 August 2011 Experience: Baroness Noakes is an experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and International Government practices and has been President of the Institute of Chartered Accountants in England and Wales. She was appointed to the House of Lords in 2000 and has served on the Conservative front bench in various roles including as shadow Treasury minister between 2003 and May 2010. Baroness Noakes previously held non-executive roles on the Court of the Bank of England, Hanson, ICI, Severn Trent, Carpetright, John Laing and SThree.
12 Mark Seligman Appointed 1 April 2017; Senior Independent Director since 1 January 2018 Experience: Mark, is a former senior investment banker with broad financial services knowledge, has substantial FTSE 100 Board experience gained in various industry sectors, including as a Committee Chair and Senior Independent Director. During his executive career, he held various senior roles at Credit Suisse/BZW (including Deputy Chairman, CSFB Europe and Chairman, UK Investment Banking, CSFB); and previously SG Warburg (ultimately as Managing Director, Head of Advisory). He has also previously served as a non-executive Director of BG Group plc and as Deputy Chairman of G4S plc.
External appointments: Senior Independent Director of Kingfisher plc and non-Executive Director and Chairman of the audit committee of Smiths Group plc.
External appointments: Non-Executive Director of Intertek Group plc and member of its audit and nomination committees, and nonExecutive Director of Scottish Power Renewables Limited. Visiting Professor, University of Strathclyde Business School. Advisory Board member of MCR Pathways.
 US Department of Justice: US RMBS investigation - final settlement
Under the new model, the NWH Ltd board is the designated forum for matters relating specifically to our ring-fenced operations, with a strong focus on the customer-facing businesses operating within the NWH Ltd subgroup. It receives regular business reviews and updates from franchise and function CEOs and also considers NWH Ltd strategy; risk profile; customer, innovation and people issues; regulatory submissions; financial results; budget; and board and committee appointments as they relate to the NWH Ltd sub-group.
An integral part of our ring-fencing governance arrangements is the appointment of Double Independent Non-Executive Directors or “DINEDs” to the NWH Ltd subgroup boards and board committees.
The DINEDs are independent in two respects: (i) independent of management as nonexecutives; and (ii) independent of the rest of the Group by virtue of their NWH Ltd subgroup only directorships. They play a critical role in our ring-fencing governance structure, with an enhanced role in managing any conflicts which may arise between the interests of NWH Ltd and RBSG. The DINEDs attend RBSG Board meetings in an observer capacity.
On 30 April 2018 Yasmin Jetha stood down as a director of RBSG allowing her to assume DINED status. A further 3 DINEDs were appointed to the NWH Ltd sub-group boards with effect from 1 May: Francesca Barnes, Graham Beale and Ian Cormack. On 3 December Alison Rose-Slade was appointed as Deputy CEO, NatWest Holdings, and as a director of the NWH Ltd sub-group boards.
On 1 June 2018, we were pleased to welcome Patrick Flynn to the Board. Patrick’s appointment further strengthens our overall board composition and supports succession planning.
We were also delighted to announce the appointment of Katie Murray as Executive Director and Chief Financial Officer (CFO) with effect from 1 January 2019. Katie’s appointment followed a successful period as interim CFO.
Committee with effect from close of business on 31 March 2019.
The Board The Board has thirteen directors comprising the Chairman, two executive directors and ten independent non-executive directors, one of whom is the Senior Independent Director.
Biographies for each director and details of the Board committees they are members of can be found on pages 47 and 48. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.
Roles and responsibilities The Board The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. The terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. They are available on rbs.com. During 2018 an internal review confirmed that the Board had fulfilled its remit as set out in its terms of reference.
Board Committees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Refer to page 34 of the Strategic Report for more details. The terms of reference are available on rbs.com.
Executive Management The Board and the CEO are supported by the Executive Committee (ExCo), which is responsible for overseeing all aspects of the Group’s operations. ExCo’s membership comprises the executive directors and the Group Chief Risk Officer; who are also members of the wider executive management team. Biographies of the executive management team can be found on rbs.com.
The non-executive directors combine broad business and commercial experience with independent and objective judgement and they provide independent challenge to the executive directors and the leadership team. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBS’s business activities. The standard terms and conditions of appointment of nonexecutive directors are available on rbs.com.
Company Secretary The Company Secretary, Aileen Taylor, works closely with the Chairman to ensure effective functioning of the Board and appropriate alignment and information flows between the Board and its committees.
As Chief Corporate Governance and Regulatory Officer & Board Counsel, Aileen advises the Board and individual directors on a broad range of strategic, governance, legal and regulatory issues. Aileen also facilitates Board induction and directors’ professional development.
In addition to scheduled meetings, additional meetings of the Board and its Committees were held on an ad hoc basis to deal with time-critical matters. There were nine ad hoc Board meetings, six ad hoc N&G meetings, four ad hoc RemCo meetings, six ad hoc BRC meetings and 1 ad hoc GAC meeting. The Chairman and the non-executive directors meet at least once per year without executive directors present.
Howard Davies 9/9 4/4 — — — — — Ross McEwan 9/9 — — — — — — Frank Dangeard 1 9/9 — — 4/4 3/3 — 6/6 Alison Davis 2 9/9 — — — 6/7 6/6 6/6 Patrick Flynn 3 5/5 — 3/3 5/5 — — 4/4 Morten Friis 9/9 — 7/7 9/9 — — — Robert Gillespie 4 9/9 4/4 — 5/5 7/7 6/6 — Brendan Nelson 9/9 4/4 7/7 9/9 — — — Baroness Noakes5 9/9 3/4 7/7 9/9 — — — Mike Rogers 6,7 8/9 — — — 7/7 5/6 — Mark Seligman 8 9/9 3/4 — — 7/7 — — Lena Wilson 9,10 8/9 — — — — 6/6 4/4 Former Directors Yasmin Jetha 11 3/3 — — — — 2/2 1/1 Penny Hughes 12 4/4 1/1 — 4/4 — 2/2 — Ewen Stevenson13 7/7 — — — — — — Notes: (1) Frank Dangeard was appointed to RemCo, and stood down from BRC, on 1 June 2018. (2) Alison Davis did not attend the February RemCo meeting due to a scheduling clash with a pre-existing commitment. (3) Patrick Flynn was appointed to the Board, GAC, BRC and TIC on 1 June 2018. (4) Robert Gillespie was appointed to BRC on 1 June 2018. (5) Baroness Noakes did not attend the December N&G meeting due to a scheduling clash with a preexisting commitment. (6) Mike Rogers assumed the role of SBC Chairman on 30 May 2018. (7) Mike Rogers did not attend the March Board and SBC meetings due to a scheduling clash with a preexisting commitment. (8) Mark Seligman was not able to attend the December N&G meeting due to a private commitment. (9) Lena Wilson did not attend the August Board meeting due to a scheduling clash with a pre-existing commitment. (10) Lena Wilson was appointed to the TIC on 1 June 2018. (11) Yasmin Jetha resigned from the Board on 30 April 2018. (12) Penny Hughes resigned from the Board on 30 May 2018. (13) Ewen Stevenson resigned from the Board on 30 September 2018. (14) Sandy Crombie resigned from the Board on 1 January 2018.
How the Board operated in 2018 At each scheduled Board meeting the directors receive reports from the Chairman, Board Committee Chairmen, Chief Executive, Chief Financial Officer, and other members of the executive management team, as appropriate.
Other senior executives attended Board meetings throughout the year to present reports to the Board. This provides the Board with an opportunity to engage directly with management on key issues and supports succession planning.
In September the Board met in Manchester, and spent time with local businesses, customers and staff, including branch visits.
Non-executive directors are also welcome to attend the stakeholder engagement sessions run by the Sustainable Banking Committee (further details of which are on page 60).
During 2018, bespoke training was arranged for the directors on a range of subjects to enhance their knowledge, including:  Banking structural reform;  Conflicts of interest;  Competition law;  Cyber security;  The balance sheet; and  EU General Data Protection Regulation.
In addition, all directors have access to an online resources portal, Diligent, through which they receive their board and committee papers. Diligent also contains internal policy information, corporate governance updates and external briefing notes on topical subjects, to support directors’ professional development and competence.
The Company Secretary maintains continuing professional development logs. These are reviewed regularly between the Chairman and each director individually, to assist in identifying future training and development opportunities that are specific to the individual director’s requirements.
Each director is required to advise RBS as early as possible and to seek the agreement of the Board before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director of RBS. The Board monitors the other commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. The time commitment required of our non-executive directors continues to be significant.
Election and re-election of directors In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at the company’s AGM. In accordance with the UK Listing Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders.
Under the Board Appointment Policy all nonexecutive directors appointed since 1 January 2017 are appointed for an initial 3 year term, subject to annual re-election at the AGM. Following assessment by the Group Nominations & Governance Committee they may then be appointed for a further 3 year term, and subsequent 12 month terms up to a maximum of nine years.
Progress following the 2017 evaluation A number of actions were progressed during 2018 in response to the findings of the 2017 internal performance evaluation, overseen by the Group Nominations and Governance Committee.
These included:  a focus on longer-term issues during strategy discussions, including RBS’s purpose;  a dedicated Board discussion on culture, led by the Chairman;  continued opportunities for the Board to meet RBS’s customers, for example during the Manchester board visit;  additional Board focus on executive succession planning; and
2018 Performance evaluation During September and October the 2018 Board and Committee evaluation was externally facilitated by Independent Board Evaluation (IBE). IBE was selected following a competitive tender process and the Board is satisfied that IBE have no other connection with RBS.
Key findings and recommendations The 2018 Board evaluation findings and recommendations included the following:  the Board is committed and hard-working, with a strong Chairman in position and a good working relationship with the CEO;  Board members are clear on their roles and accountability to shareholders and wider stakeholders;  The Board should strive to role model the culture and values of the organisation and balance holding management to account with encouragement and support;  the Board has reached an inflexion point, and there is now a clear need to focus on the longer term and forward-looking growth strategy;  there is scope to improve the quality of Board papers and review the length/number of Board and Committee meetings;  Board composition and succession planning should continue to be a priority; and in particular consideration should be given to reducing the Board’s size; and
Individual director and Chairman effectiveness reviews The Chairman met each director individually to discuss their own performance and continuing professional development and also shared peer feedback provided to IBE as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance from the nonexecutive directors, executive directors, DINEDs, and key external stakeholders and discussed it with the Chairman.
 the Chairman of the Group Performance and Remuneration Committee consults with major shareholders in respect of the Group’s remuneration policy.
Letter from Howard Davies Chairman of the Group Nominations and Governance Committee Dear Shareholder, As Chairman of the Board and Chairman of the Group Nominations and Governance Committee I am pleased to present our report on the Committee's activity during 2018.
In addition to recruitment, the Committee has overseen the process to reach agreement with the PRA in respect of a governance model that is compatible with ring-fencing legislation. The Committee has also spent time considering the Group’s arrangements in respect of legal entity governance. This has included overseeing work aimed at continuing to enhance the Group’s subsidiary governance framework. As part of this work, the Group has proposed the appointment of individuals to act as its representative on the boards of a number of material regulated subsidiaries. The aim of these appointments is to strengthen oversight and enhance communication between the subsidiary boards and the Group.
Tenure of non-executive directors The tenure of non-executive directors as at 31 December 2018 is set out below.
Performance evaluation The 2018 review of the effectiveness of the Board and its senior Committees was facilitated by Independent Board Evaluation, a specialist board evaluation consultancy. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. Overall the review concluded that the Committee operated effectively with no material recommendations being identified for action. The Committee will continue to ensure that the full Board is appropriately sighted on the work of the Committee
The Boardroom Inclusion Policy contains a number of measurable objectives, targets and ambitions reflecting the ongoing commitment of the Board to inclusion progress. The Board aims to meet the highest industry standards and recommendations wherever possible. That includes, but is not limited to, aspiring to meet the targets set by the HamptonAlexander Report: FTSE100 Women Leaders (33% female representation on the boards) and the Parker Report: Beyond 1 by ’21 (at least one director from an ethnic minority background on the boards) by 2020/2021. The policy supports our bank-wide ambition to aim for a 50/50 gender balance across all levels of the organisation by 2030.
Monitoring and reporting The Board’s performance against these targets varied throughout 2018 as the Group made a number of changes to its board governance structure in order to comply with ring-fencing legislation. These changes included a number of appointments to the board of NatWest Holdings Limited, the holding company of the ring-fenced subgroup. The boards of RBSG and NatWest Holdings Limited meet consecutively and share a largely common membership. When considered together, the director population across both boards currently meets the Parker target and exceeds the Hampton-Alexander target with a female representation of 39%.
Notwithstanding the largely common membership between the two boards, RBS remains committed to ensuring that the RBSG board meets the targets on a standalone basis. Following Katie Murray’s appointment on 1 January 2019, the RBSG board composition currently includes 31% female representation, rising from 25% at 31 December 2018. The RBSG board also remains committed to meeting the Parker Target by 2020/2021.
Inclusion and diversity progress, including information about the appointment process, will continue to be reported in the Group Nominations and Governance Committee’s report in the RBS Annual Report. The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. Further details on RBS’s approach to diversity can be found on pages 16 and 86.
Letter from Brendan Nelson Chairman of the Group Audit Committee Dear Shareholder, This report outlines the key areas of focus of the Group Audit Committee (GAC) and explains how it fulfilled its responsibilities during 2018.
The GAC has responsibility for monitoring and reviewing RBS’s financial reports and disclosures, its accounting policies and practices and standards of internal control. The GAC’s responsibilities are set out in more detail in its terms of reference which are reviewed annually and are available on rbs.com.
The Committee’s primary focus is the integrity and quality of RBS’s financial statements. During the year we scrutinised the quarterly, interim and full year results announcements and supporting documentation, and the 2018 Annual Report and Accounts.
Further detail on the most material issues considered by the Committee is provided in the report below.
The members of GAC are selected with a view to the expertise and experience of the GAC as a whole and with proper regard to the key issues and challenges facing RBS.
The Board is satisfied that all GAC members have recent and relevant financial experience and are independent as defined in the SEC rules under the US Securities Exchange Act of 1934 (the “Exchange Act”) and related guidance. The Board has further determined that Brendan Nelson, GAC Chairman, Baroness Noakes Patrick Flynn and Mark Seligman are all ‘financial experts’ for the purposes of compliance with the Exchange Act Rules and the requirements of the New York Stock Exchange, and that they have competence in accounting and auditing as required under the Disclosure Guidance and Transparency Rules.
RBS, in common with other large banks, was required to deliver ring-fencing by the beginning of 2019. Throughout 2018 the Committee received regular updates on the ring-fencing programme including, in particular, its impact on financial reporting for RBS and its subsidiaries.
In my role as GAC Chairman I also act as RBS’s Whistleblowing Champion. As such, I carry responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firm’s whistleblowing arrangements. RBS’s whistleblowing framework and procedures promote a culture where individuals feel comfortable raising concerns and challenging poor practice and behaviour. During 2018, the FCA completed its review of the whistleblowing arrangements of RBS and other firms. I am pleased to report that the FCA’s review concluded that RBS’s arrangements were well developed and cited several examples of good practice.
As you will have seen earlier in the report, I retire as a director of the Group at the forthcoming AGM and after 9 years as Chairman of the GAC I will be succeeded by Patrick Flynn who has been a valuable member of the GAC since June 2018.
“The Committee’s primary focus is the integrity and quality of RBS’s financial statements”
The Committee then recommended the quarterly, interim and full year results announcements and the Annual Report and Accounts, together with supporting documentation (including Pillar 3 reports, financial supplements and investor presentations) to the Board for approval.
GAC is particularly interested in the systems of internal control relating to financial management, reporting and accounting issues. A number of reports were received by GAC throughout the year in this regard and the effectiveness of RBS’s internal control systems, including any significant failings or weaknesses were evaluated.
Audit Partner – Jonathan Bourne has been EY’s lead audit partner for RBS since 2016. Mr Bourne attended each meeting of the GAC in 2018. External Audit Reports – EY reported to the GAC each quarter on their audit work and related conclusions, including the appropriateness of judgements made by management and their compliance with international financial reporting standards. The GAC also reviewed EY’s annual management letter. Audit Plan and fees – The GAC considered updates on EY’s 2018 plan and approved the 2018 audit fees including the fee for the 2018 interim results. The GAC was authorised by shareholders at the last Annual General Meeting to fix the remuneration of the external auditors. Annual Evaluation – An internal evaluation was carried out at the GAC’s request to assess the independence and objectivity of the External Auditor and the effectiveness of the audit process during 2018. GAC members, attendees, the Franchise and Functional Finance Directors and key members of the Finance team were consulted as part of the evaluation. The evaluation assessed the external auditor’s mindset and culture, skills, character and knowledge, quality control and judgement. The evaluation found that the External Auditor was operating effectively. A number of recommendations for continuous improvement were identified which are being implemented by the External Auditor. Following the evaluation the GAC recommended that the Board seek the reappointment of EY as external auditor at the next annual general meeting. CASS Opinions – During 2018 the external auditor presented the results of its assurance procedures on compliance with the FCA’s Client Asset Rules for RBS’s regulated legal entities for the year ended 31 December 2017. The GAC also considered the CASS Audit plan for 2018, the findings of which will be reported to the GAC once the audit is complete. External Auditor Report to the PRA – GAC considered EY’s 2018 written report to the PRA under supervisory statement SS1/16. The report responded to specific questions posed by the PRA, most of which concerned the interpretation of the IFRS 9 accounting rules by RBS. GAC also discussed the questions received from the PRA in relation to the report required for 2019.
Under the policy, audit related services and permitted non-audit service engagements may be approved by the Director of Finance up to certain financial thresholds. Engagements in excess of these limits require the approval of the GAC chairman. The Director of Finance may also approve the provision of services by the external auditor to non-consolidated subsidiaries of RBS within an annual cap and approve engagements with the external auditor where RBS has limited or no influence in the selection process. Where the fee for a non-audit service engagement is expected to exceed £100,000, a competitive tender process must be held and approval of the full GAC is required. All such approvals are reported to the GAC each quarter.
During 2018, approval was granted under the policy for the external auditors to undertake significant engagements in relation to a gap assessment in relation to IFRS 9 reporting infrastructure and to provide assurance over LIBOR submissions. The decision to approve EY was made in the first case as a result of EY’s existing knowledge of RBS systems which allowed work to commence quickly and in the second case, following a tender process. In each case the GAC was satisfied that the engagement did not impact the external auditor’s independence.
Letter from Baroness Noakes Chairman of the Group Board Risk Committee Dear Shareholder, I am pleased to present my report setting out how the Group Board Risk Committee (the Committee or BRC) discharged its responsibilities in 2018.
Membership The Board Risk Committee is comprised of five independent non-executive directors. The details of the members and their skills and experience are set out on pages 47 and 48. Brendan Nelson is chairman of the Group Audit Committee of which Baroness Noakes and Morten Friis are also members. Robert Gillespie is chairman of the Group Performance and Remuneration Committee. This common membership across Committees helps to ensure effective governance across the committees.
RBS, in common with other large banks, was required to deliver both ring-fencing and key parts of its resolution plans by the beginning of 2019. The ring-fencing programme was a key focus for the Committee throughout the year and detailed progress reports were scrutinised at each meeting.
Meetings and visits All members attended the nine scheduled meetings held in 2018 during the period in which they were Committee members. In addition, six ad hoc meetings were arranged to consider: Bank’s Executive Committee (ExCo) risk and conduct performance, ExCo risk & control objectives, risk and conduct management performance of Franchises and Functions, the year-end remuneration process, the results of various phases of internal and external stress tests; and the capital plans required for the Ring-fencing Transfer Scheme.
In 2018, members of the Committee undertook a programme of visits across various locations in conjunction with members of the Group Audit Committee, including a visit to India. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit Committee on pages 54 to 56.
Other key areas of focus in 2018 included: risk profile and reporting, stress testing, risk appetite, and recovery and resolution. Further detail on each of these key topics is provided on the pages that follow. Brexit risks, while considered by the BRC from time to time, were largely discussed at Board level given the potential strategic impact.
Baroness Noakes Chairman of the Group Board Risk Committee 14 February 2019
The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2019.
Ring-fencing / Operational Continuity in Resolution (OCiR) – BRC considered the key execution risks of the ring-fencing programme and oversaw the preparations for the successful implementation of the two ring-fencing transfer schemes which were implemented during the year. Regular updates were received from management on progress against plan and on their level of confidence in relation to RBS’s readiness for operating in a ring-fencing compliant state by 1 January 2019. Plans supporting the provision of Board attestations to the PRA in relation to ring-fencing and OCiR compliance were also reviewed. Separate joint sessions with the Group Audit Committee were held to monitor plans for operational readiness in the risk, finance and treasury functions, including the development of legal entity specific management information. Assurance - The outputs of integrated assurance work undertaken by Risk, Internal Audit and KPMG (appointed to provide independent assurance on defined aspects of ring-fencing implementation) were received by the Committee. Recovery and Resolution– BRC continued to monitor the other elements of Resolution Planning (outside of OCiR) in light of intensifying regulatory requirements. The Committee noted improved engagement across RBS and from regulators during the period and monitored progress on Minimum Requirement for own funds and Eligible Liabilities (MREL). BRC also examined a Solvent Wind Down report* for NatWest Markets separately and the Committee reviewed the draft 2018 Recovery plan before submission to the regulator*.
Risk appetite Risk appetite continued to be a key focus of the Committee, in particular the way in which the frameworks and risk appetite statements would operate after structural reform.
Frameworks - BRC reviewed the overarching Risk Management Framework; the Risk Appetite Framework; the Risk Appetite Governance Framework and discussed how the frameworks would relate to legal entities after ring-fencing*. Proposed risk appetite statements for strategic risks for the Group’s main subsidiaries and franchises were also appraised by the Committee. Board Risk Measures (BRMs) and Material Risk Appetite – The Committee scrutinised a review of the qualitative statements of appetite for material risks and material high level measures, challenging the rationale for some of the proposed measures*. The Committee also reviewed escalated breaches of risk appetite and the action taken by management in response*.
A number of programmes impacting RBS’s control environment were ongoing in 2018. BRC maintained oversight of these programmes and of existing internal controls for the management of risk.
Transformation - The execution risks of the bank-wide transformation programme and impact on the control environment were kept under review at regular intervals throughout the year, including specific updates on Open Banking and the project to build a new digital bank. BRC also considered a 2020 refresh of the transformation portfolio and requested that risk metrics be refreshed and recalibrated. Control Environment Certification - Bi-annual reports on the control environment ratings of the franchises and functions were reviewed by the Committee. Where significant control weaknesses were identified BRC sought management’s assurance that measures were in place to ensure that the businesses could continue to operate safely. BRC also monitored the programme to remediate customer due diligence as well as plans to build robust processes for the future on a quarterly basis. Risk Culture – An assessment of risk culture was considered, including management’s plans to increase the intensity of executive review.
BRC received regular updates on key risks to RBS and monitored the safeguards in place to minimise the impact of such risks and ensure continuity of service to customers.
Operational resilience and Cyber Security – BRC requested updates on information and cyber security. BRC also considered data management and the potential risks inherent in distributed ledger technology, Cloud computing and Artificial Intelligence. Credit and Market risk - Updates were received in relation to upcoming non-traded market risk regulations; trading book settlement risk; and the most material decisions of the Executive Credit Group. BRC also requested a review of the UK Retail sector. Pension risk - Following agreement being reached with RBS’s pension trustees, the Committee received an update on pension risk appetite and measurement. Separately, a review of the pension risk of RBS’s large corporate portfolio was undertaken and reported to the Committee. Model risk management – The work to strengthen and validate models, including those used in stress testing, and improve supporting governance was a continuing focus. Conduct and compliance risk – The BRC received updates on the development of the RBS Group Compliance and Conduct Risk Framework*. Financial crime – The annual Group Money Laundering Reporting Officer’s Report* was reviewed by the Committee and the Committee received an overview of RBS’s approach to crypto-assets. The BRC also kept under review the plans to improve and remediate customer due diligence. Capital and Liquidity – These are important areas for risk management and regulatory requirements are intensifying. In addition to reviewing the Group, NWH Ltd and NWM Plc ICAAPs and ILAAPs* in Q1, BRC held focused sessions on RBS’s approach to liquidity and funding management and on capital. These sessions focused in particular on the capital requirements of the Group and its material subsidiaries. Data Management and GDPR – Updates were received on the work undertaken to address the risks related to data management and to deliver compliance with GDPR. LIBOR Programme – BRC reviewed the risks associated with the transition of LIBOR and other IBOR rates to alternative risk free rates and a submission to regulators setting out the preparations and actions being taken under the programme*.
Accountability – The BRC regularly considered accountability recommendations in respect of significant material events, on-going investigations and high earners. The risk and control objectives of members and attendees of RBS’s Executive Committee were also reviewed, with additional focus on underlying objectives for the Chief Risk Officer. Remuneration – The BRC reviewed the performance conditions for RBS’s Long-Term Incentive Plans and assessment of proposed vesting levels to ensure risk management and conduct performance was fairly reflected in vesting outcomes. The BRC also made recommendations to the Group Performance and Remuneration Committee on reflecting risk performance in the bonus calculation. Further detail on how risk is taken into account in remuneration decisions can be found in the Report of the Group Performance and Remuneration Committee on pages 62 to 78.
SBC has continued to play a forward-looking and strategic role on behalf of the Board, focusing on its priority areas of culture; customers; people; brand & communications; and environmental, social and ethical (ESE) issues.
 The Committee has prioritised customer matters, having received updates from the customer facing franchises, including digital and mobile strategy, customer journey management and business banking.
 The Committee recognises the importance of customer service so time has been dedicated to understanding the actions needed to be taken by management to improve RBS’s position in the customer service rankings published by the Competition and Markets Authority. This was with a keen focus on management’s longer term ambition.
 New areas of interest for 2018 included RBS’s reputation and relationships with the media.
 The Committee received a spotlight on suppliers which included how RBS ensures it works with suppliers that share the same values as well as understanding the quality of supplier relationships. This was complemented by obtaining the internal audit perspective.
The sessions continue to provide a valuable opportunity for Board members and senior management to listen to the external perspective.
During the year the Committee also undertook visits to our Private Banking and Premier Banking businesses along with visiting the Digital Studio in Bristol and the London Entrepreneurial Accelerator Hub. The purpose of these visits is to provide Board members with customer and entrepreneur insights and interaction.
The Committee’s programme of stakeholder engagement was enhanced by hosting a lunch with some of the members of the recently formed Colleague Advisory Panel, with the key themes of the discussion being shared with the Board. Further information about the Panel can be found in the Strategic Report on page 14.
Membership, Meetings and Escalation The structure of the Committee was amended part way through the year in preparation for ring-fencing. More information on ring-fencing governance can be found on page 49 of the Governance Report.
Authority is delegated to Group SBC by Group Board and a regular report of the Committee’s activities is provided to the Group Board. The terms of reference are available on rbs.com and these are reviewed annually and approved by the Group Board.
Group SBC began the year with six independent non-executive directors, with that changing to four independent non-executive directors due to changes in the structure of the Committee as referenced above. More details of membership and attendance at meetings can be found on page 50 of the Governance Report.
Performance evaluation The annual review of the effectiveness of the Group Board and its senior Committees, including Group SBC, was conducted externally in 2018. Group SBC has considered the outcomes of this evaluation and accepts the findings. Overall the feedback on the Committee was positive, although it was recognised that there was an opportunity to be clearer and simpler on remit.
Conclusion I want to take the opportunity to thank the Committee members and attendees for their continued contribution and support in 2018.
I am energised to continue to lead the Committee’s work during 2019 and look forward to reporting on progress of the sustainable banking agenda next year.
Role and responsibilities TIC was established in September 2017 in order to support the Board in overseeing and monitoring RBS’s strategic direction in relation to technology and innovation. Technology and innovation is transforming banking and it was agreed that a Board Committee should be established to allow the Board to dedicate sufficient time to this area of critical importance to our strategy and our customers.
Membership and meetings I have chaired the Committee since it was established, at which time, Frank Dangeard and Yasmin Jetha became the first members.
In June 2018, following review of the Committee’s membership in preparation for ring-fencing, Patrick Flynn and Lena Wilson were appointed as members of the Committee. Frank Dangeard continued as a member while Yasmin Jetha stood down and became a standing attendee following her appointment as a Double Independent Nonexecutive Director.
 New revenue streams – the Committee considered new initiatives that could generate revenue streams, challenge disruption and deliver innovative digital propositions for customers.
 Innovation strategy, culture and capability – the Committee discussed how management’s consideration of the future innovation strategy, culture and capability of the organisation is developing. Open Banking, the innovation budget and quantum computing were also discussed.
Given the focus of the Committee, it is important that it spends time considering external perspectives to ensure that it keeps abreast of emerging technology and innovation trends and can identify key threats resulting from new business models, technologies, processes, products and concepts. During the year, the Committee invited a number of speakers to meetings to provide an external perspective and insight.
Performance evaluation The annual review of the effectiveness of the Board and its Committees, including the TIC, was conducted externally in 2018. Overall, the review concluded that the Committee operated effectively. It included observations regarding the remit of the Committee and the focus of the agenda which will be taken into account in 2019. The outcomes of the evaluation have been reported to the Board.
Alison Davis Chairman of the Technology and Innovation Committee 14 February 2019
“Capital strength has been a key performance measure and I am delighted that progress in this area has enabled RBS to resume dividend payments.”
Dear Shareholder, This is my second report as Chairman of the Group Performance and Remuneration Committee (the Committee) and it has proved to be another busy year. We have established additional remuneration committees for a number of RBS subsidiaries as part of our governance arrangements for ring-fencing. This will provide additional oversight of remuneration across our key legal entities before proposals are considered by the Committee.
In addition, the Committee spent time considering the latest updates to reporting regulations and the UK Corporate Governance Code (the Code). We remain strong supporters of reforms aimed at improving the effectiveness, transparency and fairness of pay structures.
Fairness and simplicity – We continue to make good progress. The number of employees at RBS who believe they are paid fairly rose during the year and is significantly above the GFS norm. In the UK, our rates of pay continue to exceed the Living Wage. Over the last four years we have made improvements to starting salaries and faster progression for those on lower levels of pay.
We have also removed variable pay for a significant number of these employees and increased their fixed pay. This provides more certainty and allows employees to concentrate on customers’ needs. As a result of these changes, 56% of employees across the Group are rewarded through fixed pay only.
Executive director pay policy Turning to executive pay, the Directors’ Remuneration Policy was approved by shareholders at the 2017 AGM. No changes are being made to the policy at this time. Variable pay is delivered entirely in shares as long-term incentive (LTI) awards with no annual bonus. The Chief Executive’s management team receive a similar remuneration construct.
After a successful period as interim CFO, Katie Murray was appointed to the Board as CFO from 1 January 2019. Katie’s pay has been set at a competitive level within the approved remuneration policy. The pension rate is 10% of salary. This is in line with the rate applicable to the wider RBS workforce and recognises emerging best practice.
Performance and pay decisions The latest results demonstrate the business is building on its return to profitability in 2017 with a clear plan to deliver sustainable returns for shareholders. Income has risen and our core tier 1 capital ratio remains strong, exceeding our long-term target.
Performance has also been assessed for the LTI award granted to the Chief Executive in 2016, following the end of the performance period in 2018. The award will vest at 27.5% reflecting improvements in capital strength and employee engagement, but with no vesting in areas where performance did not meet targets, such as total shareholder return. No discretion was exercised in determining the outcome. Full details of the assessments against the objectives and the award levels can be found in this report.
In terms of pay decisions for our broader employees, the bonus pool for 2018 is £335 million, which is around 2% lower than 2017. The size of the bonus pool in recent years reflects our transition to a smaller and simpler bank, staffed by highly capable and engaged people. Immediate cash bonuses continue to be limited to £2,000.
I would like to thank my fellow Committee members for their guidance and constructive challenge during the year and I look forward to considering how we can continue to develop remuneration practices at RBS for the benefit of all our stakeholders.
Robert Gillespie Chairman of the Group Performance and Remuneration Committee 14 February 2019
Quantum and structure of pay appropriate for a smaller, safer bank.
Maximum LTI award (delivered in shares) 175% of salary 200% of salary
 No pro-rating of LTI awards will apply in agreed good leaver circumstances.
 Operating profit before tax of £3,359 million and CET1 ratio remains strong at 16.2%, exceeding our long-term target.
 The major legacy issues have now been resolved and 2018 saw the payment of the first dividend in 10 years.
 Employee engagement is at its highest level yet and there have been continued improvements in culture and inclusion scores.
 Risk & Operations – risk culture target met, control environment not met in full.
 People & Culture – engagement, culture and diversity performance all meeting targets.
Executive directors who have left/joined during the year Ewen Stevenson Ewen Stevenson stepped down from the Board on 30 September 2018 and left RBS on 30 November 2018. He did not receive any payment in lieu of notice and all outstanding LTI awards were forfeited on his final date of employment.
Katie Murray Katie Murray was appointed to the Board as Chief Financial Officer with effect from 1 January 2019. Benchmarking was undertaken for the role and the Committee agreed a remuneration package that was considered to be positioned appropriately compared to peers both in terms of fixed pay and projected total compensation. Remuneration includes a base salary at £750,000 per annum and a fixed share allowance of £750,000 per annum. Pension funding has been set at 10% of salary. This rate of 10% is the same as the pension rate applicable to the vast majority of RBS employees and recognises emerging best practice under the UK Corporate Governance Code and investor guidelines.
(1) Ewen Stevenson also received fixed pay of £317,708 in 2018 for the period after stepping down from the Board until he left RBS on 30 November 2018.
Key features of the remuneration policy for executive directors The Directors’ Remuneration Policy was approved by shareholders at the AGM on 11 May 2017. The policy will apply until the 2020 AGM unless changes are required which mandate a revised policy be submitted to shareholders for approval. There are no changes requiring shareholder approval at this time. The table below summarises the key features of the policy for executive directors. In the event of any conflict the approved policy, which can be found under the Board and Governance section of rbs.com, takes precedence over the information set out below.
Further benefits including relocation costs may be offered in line with market practice. RBS may also put in place certain security arrangements for executive directors.
LTI awards are subject to:  a one year pre-grant performance period;  a pre-vest performance assessment at the end of a three year period, with vesting taking place from years three to seven after grant;  malus prior to vesting and clawback which applies for seven (and potentially up to ten) years from the date of award; and
Performance will be assessed in the areas of Finance, Risk & Operations, Customers and People & Culture to determine whether the executive has achieved what would reasonably have been expected in the circumstances. Risk & Control and Stakeholder Perception underpins will also apply.
Remuneration for the Chairman and non-executive directors Element of pay Operation Maximum potential value Fees To reflect the required skills, experience and time commitment.
Reimbursement of reasonable out-of-pocket expenses. The Chairman and non-executive directors are entitled to travel assistance in connection with company business including the use of a car and driver. RBS will meet the cost of any tax due on the benefit. Other benefits may be offered in line with market practice.
The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the framework applicable to current directors, recognising that some adjustment to quantum within that framework may be necessary to secure the preferred candidate. A buy-out policy exists to replace awards forfeited or payments foregone which is in line with regulatory requirements. The Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
Executive directors As set out in executive directors’ service contracts, RBS or the executive director is required to give 12 months’ notice to the other party to terminate the employment. There is discretion for RBS to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
On an annual basis, all directors stand for election or re-election by shareholders at the company’s AGM. Non-executive directors appointed prior to 2017 do not have a set term as the letter of appointment operates on a rolling basis. From 2017 onwards, new non-executive directors have been appointed for an initial term of three years, commencing from the first election by shareholders. At the end of this period, further terms may be agreed, subject to an overall maximum tenure of nine years. The non-executive directors with terms of appointment that will currently expire unless otherwise renewed at the end of three years are: Mark Seligman (2020 AGM), Dr Lena Wilson (2021 AGM) and Patrick Flynn (2022 AGM).
RBS can continue to honour any previous commitments or arrangements entered into with current or former directors that may have different terms, including terms agreed prior to appointment as an executive director.
On termination, share awards will be treated in accordance with the relevant plan rules as approved by shareholders. Under the remuneration policy approved by shareholders at the 2017 AGM, LTI awards made in 2018 onwards will not be subject to pro rating for time in good leaver circumstances, for the reasons set out below.
RBS is unusual in having no annual bonus, and bonus awards would typically not be subject to pro rating for time. In addition, regulatory requirements can effectively prevent LTI awards being granted in the year of joining. The combination of these factors means executives at RBS could potentially receive no variable pay award either for the year of joining or in the final year of employment. This is not consistent with our aim of creating significant alignment with shareholders.
Removal of pro rating enables executive directors to receive an appropriate level of variable pay for the period that they work and helps to ensure executives are motivated up to the point of departure and beyond. It creates higher levels of shareholding for up to eight years post departure meaning executives can be held accountable for, and are financially exposed to, the longterm consequences of their actions.
The Committee already considers papers on the broader employee proposition, for example, the group-wide remuneration and deferral policy, annual pay outcomes including diversity information, and the annual Sharesave offer for employees.
The Financial Reporting Council’s (FRC) guidance asks Remuneration Committees to consider “How do workforce incentives support our culture and encourage the desired behaviours?” The removal of sales incentives for front-line employees in recent years is a good example where desired culture and remuneration proposals have been considered together at RBS.
Under the current policy, executive directors automatically retain a significant number of shares after they leave. Shares from fixed share allowances continue to be held for at least three years regardless of the reason for leaving and LTI awards held by good leavers will continue to be released up to eight years post departure.
The Committee will consider whether a more formal post-employment shareholding requirement should be introduced when the new directors’ remuneration policy is due to be submitted to shareholders at the 2020 AGM.
The pension contribution rates for executive directors should be aligned with those available to the workforce.
Remuneration Committees should address the following criteria when determining executive director policy: clarity; simplicity; risk; predictability; proportionality; and alignment to culture.
In terms of predictability, it is worth noting that variable pay at RBS is already constrained by the 1:1 regulatory cap on grant. The new long-term incentive construct is based around lower awards levels with more predictable outcomes. In addition, there are discretionary underpins which provide scope to adjust outcomes for significant risk, stakeholder or reputational matters not already captured in the performance assessment.
Remuneration Committee to report on its work including engagement with colleagues on executive remuneration.
Along with a broad range of strategic topics, the Panel will also be used to discuss executive remuneration and how it aligns with the wider company pay policy. Further information on the Panel can be found in the Strategic Report and the Report of the directors.
Remuneration schemes and policies should enable the use of discretion to override formulaic outcomes and include provisions to withhold or recover payments.
Wider workforce remuneration policy Consistent with our executive remuneration principles, the aim is to deliver a simple and transparent pay policy which promotes the long-term success of RBS. The policy supports a culture where individuals are rewarded for delivering sustained performance in line with risk appetite and for demonstrating the right conduct and behaviours.
Making RBS a great place to work RBS is committed to providing four key things: a fulfilling job; fair pay; excellent training and a good leader.
Fulfilling job The aim is for every colleague to have a clear and fulfilling job that connects to our purpose. Each colleague is set clear goals and objectives that reflect RBS’s overall strategy. Progress is reviewed throughout the year.
Fair Pay RBS is committed to providing a fair wage for the role performed and also being very clear on how pay works. Employees are provided with flexibility in terms of how they wish to receive pay to suit their personal circumstances.
RBS has also removed front-line incentives and variable pay for large numbers of employees, with an increase to fixed pay instead. This provides greater certainty for these employees and allows them to focus fully on providing the best service for customers.
Flexible benefits are provided allowing employees to change pension contributions and choose from a range of protection, healthcare and lifestyle options. Employees in the UK and Republic of Ireland can also participate in employee share plans and over 23,000 currently do so.
Excellent training RBS offers a number of ways for colleagues to learn and develop. This includes technical training, continuing professional development and further education qualifications on the job. Support is also provided for personal development. This helps employees serve customers well and also assists colleagues with their career aspirations.
RBS remains committed to embedding a strong service mindset through Service Excellence training which sits at the heart of achieving our ambition to be number 1 for customer service, trust and advocacy.
Gender and ethnicity pay gaps The latest gender and ethnicity pay gap reporting for RBS can be found in the ‘Our Colleagues’ section of the Strategic Report and on the Sustainable Banking pages at rbs.com.
Listening to colleagues In 2018 a more frequent approach to listening to our workforce was developed. This provides more opportunities to improve by assessing colleague sentiment and feedback, and checking progress in making RBS a great place to work.
In 2018, a new Colleague Advisory Panel was established to enhance the colleague voice at Board level and a ‘meet the Board’ event took place for the first time following the AGM.
Single total figure of remuneration for executive directors for 2018 (audited) Ross McEwan Ewen Stevenson (5)
Notes: (1) The value of the fixed share allowance is based on 100% of salary and, as part of fixed remuneration, it is not subject to any performance conditions. (2) Includes standard benefit funding of £26,250 with the remainder for Ross McEwan in 2018 being travel assistance in connection with company business
(£72,220), relocation expenses (£15,493) consisting of a flight allowance and assistance with tax return preparation, and home security arrangements (£2,676). (3) The executive directors receive a monthly cash allowance to help fund pension arrangements but do not participate in the company’s defined benefit pension schemes. The executive directors can choose to participate in the company’s defined contribution pension arrangements. (4) The 2018 value relates to an LTI award granted in 2016. Performance has been assessed over the three year period to 31 December 2018 as set out below resulting in 487,285 shares due to vest in two equal tranches in March 2020 and March 2021. No discretion was exercised by the Committee as a result of share price appreciation or depreciation over the performance period. The estimated value above is £11,013 higher than the value of 487,285 shares at the time of grant, as a result of the share price rising from £2.2574 to £2.28 over the period.
(5) Reflects remuneration paid to Ewen Stevenson for the period to 30 September 2018, the date he stepped down from the Board.
Economic Profit (25%) (£200 million) 25% £800 million (£1,275 million) 0% 0%
Net Promoter Score (NPS) (7.5%) Net Trust Score (NTS) (5%) Engagement Index (EI) (12.5%)
Final outcome and discretionary underpin If the Committee considers that the vesting outcome calibrated in line with the performance conditions above does not reflect underlying financial results, or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the award allow for an underpin to be used to reduce the vesting.
In making its final judgement, the Committee considered the overall context of performance, noting significant improvements in capital strength and employee engagement over the period and the Trust score for NatWest also meeting the target. Relative TSR, the cost:income ratio and customer performance were not at the required level. The Committee also considered the potential impact of the US Department of Justice charge on the Economic Profit outcome. Input was also received from the Board Risk Committee on risk performance. Taking all circumstances into account, the Committee determined that no further adjustment was necessary under the discretionary underpin.
Maximum shares for performance assessment (1) 1,771,948 Outcome following performance assessment (27.5% vesting) 487,285
25% Targets set based on spot economic profit in FY2019 with vesting range from 25% up to 100% for performance ahead of Strategic Plan
Cost:income ratio 12.5% C:I ratio – significant progress to 56% Vesting under the Safe & Secure and Customers & People categories will be qualified by Committee discretion taking into account the margin by which targets have been missed or exceeded and any other relevant factors
CET1 ratio 12.5% CET1 ratio target of >= 13% CET1 ratio is in range for full vesting
Advocacy 7.5% Significant progress to Number 1 in our chosen segments for customer advocacy and trust (further details below).
Delivery of ring-fencing requirements to meet the 1 January 2019 implementation deadline, ensuring timely remediation of issues throughout.
Good financial performance for 2018. RoTE at 4.8% exceeded the target.
Improve the control environment. Franchise/Function control environment to be rated 2 within appetite and achievement of self declared forecasted control environment ratings by the end of 2018.
Material progress towards our desired risk culture. Positive progress towards 2 (systematic) with strong tone from the top and effective action plans in place. Achieve Proactive Risk Culture rating as a minimum with no deterioration from 2017 assessment.
While improvements had been made, a number of franchises and functions had still to attain the desired control environment ratings. This part of the objective was therefore not considered to have been met in full.
Risk Culture target met, with overall assessment as ‘Positive progress towards 2 (systematic) with strong tone from the top and effective plans in place’. With one exception, all areas had achieved the required ‘Proactive’ Risk Culture rating.
Net Promoter Score performance was mixed during 2018, with three of the six customer segments on target. While the digital strategy was delivering positive customer advocacy, it was recognised that progress was not consistent enough.
The Culture index had continued to improve with a three point increase since 2017, exceeding the target.
Satisfactory progress had been made. As at Q3, there had been a 7% increase since the targets were introduced at the end of 2014 and six of the business areas were already at or above the 30% target.
Improvements made during the year. As at Q3, eight business areas had met their 2018 target and a further three business areas had already reached the longer term 14% target.
Outcome of the pre-grant assessment The Committee also received advice from the Board Risk Committee and the Sustainable Banking Committee in making its final assessment. After considering all the factors above, the Committee determined that good progress had been made with strong performance particularly in relation to capital and people scores. 2018 was seen as a milestone year with a number of important legacy issues resolved, the resumption of dividends and arrangements in place for ring-fencing. Overall, the Committee considered that a 6% reduction was appropriate as customer and risk performance was not fully at the desired level. The resulting award level for the Chief Executive is set out below. As the Chief Financial Officer was appointed from 1 January 2019, the first LTI award will be granted in 2020, following an assessment of performance over 2019.
Pre-vest assessment for 2019 LTI awards In addition to the pre-grant assessment detailed on the previous page, a further assessment of performance will take place at the end of three years, prior to vesting. It is intended to be a look-back at the performance year for which the LTI award was granted to consider whether anything has come to light which might call into question the original award. Once the vesting amount has been approved, employment conditions as well as malus and clawback will continue to apply.
The pre-vest assessment allows the Committee to make a balanced assessment of performance in the round rather than relying on formulaic adjustments. Adjustments will be made if there have been failures of risk management and in the event of underperformance.
Factors considered in assessing pre-vest performance Four core questions will be considered as part of the pre-vest assessment under the themes of Finance; Customers; People; and Risk & Control.
When assessing the performance of the year for which the award was made, “knowing what we know now”, and taking into account all circumstances, has RBS:  Remained safe and secure, taking into account our financial results and capital position?
 Been a good bank for customers taking into account our customer and advocacy performance?
In determining the final vesting level of the award, the Committee will consider both individual and collective performance which means that there may be different vesting levels by participant.
Material progress towards our desired risk culture target where risk is simply part of the way we work and think.
Positive progress on risk culture rating for Group and NWH Ltd with strong tone from the top and effective action plans in place.
Based on employee engagement and leadership scores for Group and NWH Ltd.
Progress on the number of women in senior roles across the top three layers of the Bank.
For the Chief Financial Officer, performance will be assessed in line with the framework and measures above and the performance of the Finance function will also be taken into account.
Payments for loss of office (audited) Ewen Stevenson resigned as Chief Financial Officer on 29 May 2018. He stepped down from the Board on 30 September 2018 and ceased to be an employee of RBS on 30 November 2018. Taking into account a range of business factors, it was agreed that Mr Stevenson could be released early from his 12 month notice period. No payment was made in lieu of notice.
In line with his contractual arrangements, Mr Stevenson continued to receive standard payments in respect of his fixed pay for the period up to his final date of employment. Payments for the period from 30 September to 30 November 2018 comprised salary (£133,333), fixed share allowance (£133,333), pension funding (£46,667) and benefit funding (£4,375), a total of (£317,708) before tax.
After considering the time commitment, number of meetings and responsibilities for this role, including providing regular updates to the Board, it was agreed that fees of £15,000 per annum should be paid to the Chair of the Panel with effect from 1 November 2018. The fees are equivalent to that paid to a member of our Board Oversight Committees.
Notes: (1) The benefits column for Howard Davies includes private medical cover. (2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. HMRC deems these expenses as taxable where the meetings take place at the company’s main offices and RBS settles the tax on behalf of the non-executive directors. (3) Under the ‘Other’ column, Frank Dangeard received fees as Chairman of the NatWest Markets Working Group and from 1 October 2018 received a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. Brendan Nelson received fees as a member of the Board and Audit Committee of NWM Plc from the end of April 2018. Lena Wilson joined the Board on 1 January 2018 and received fees as Chair of the Colleague Advisory Panel from 1 November 2018.
Key to table: Group N&G Group Nominations and Governance Committee TIC Technology and Innovation Committee
Group RemCo Group Performance and Remuneration Committee GRG BOC Board Oversight Committee for the GRG business areas
Implementation of remuneration policy in 2019 Details of remuneration to be awarded in 2019 to executive directors are set out below. The salary, benefits, pension and fixed share allowance for the Chief Executive are unchanged from 2018 and arrangements for the Chief Financial Officer are in line with those announced on appointment. The LTI pre-grant assessment has been completed and the Committee recommended to the Board who approved that an LTI award of £1,650,000 would be granted to the Chief Executive in March 2019. Details of the pre-grant assessment are set out on page 71.
Chairman (composite fee) £750,000 Non-executive director basic fee £80,000 Senior Independent Director £30,000
Fees for RBSG Board Committees (1) Member Chairman Group Board Risk Committee £34,000 £68,000 Group Audit Committee £34,000 £68,000 Group Performance and Remuneration Committee £30,000 £60,000 Group Sustainable Banking Committee £30,000 £60,000 Technology and Innovation Committee £30,000 £60,000 GRG Board Oversight Committee £15,000 £30,000 Group Nominations and Governance Committee £15,000 —
Other external directorships Agreement from the Board must be sought before directors accept any additional roles outside of RBS. Procedures are in place to make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was appropriate for executive directors to retain any remuneration receivable in respect of any external directorships, taking into account the nature of the appointment. Neither of the executive directors hold a non-executive director role at any other company at this time. Details of the directorships held by other directors can be found in the biographies section of the corporate governance report.
Notes: (1) Ross McEwan holds 142,925 shares from his 2015 and 2016 fixed share allowances that are included in the shares held below but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period. (2) Value is based on the share price of £2.17 as at 31 December 2018 for Ross McEwan and £2.50 as at 30 September 2018 for Ewen Stevenson, the date he stepped down from the Board. In both cases the shareholding requirement was exceeded. During the year the share price ranged from £2.03 to £3.02.
(2) Performance assessment has taken place but awards are still subject to deferral periods and employment conditions before vesting. These awards count on a net of tax basis towards meeting the shareholding requirement. In Ewen Stevenson’s case, the award was forfeited on his final date of employment.
Breakdown of all shares and share interests held by the Chief Executive as at 31 December 2018
Annual bonus against max. opportunity 0% 85% 0% 0% 0% n/a n/a n/a n/a n/a LTI vesting rates against max. opportunity (2) 0% 0% 0% 0% 0% 73% 62% 56% 89% 41%
Remuneration paid to all employees (1) 3,628 3,945 (8.0%) Distributions to holders of ordinary shares (2) 241 — — Distributions to holders of preference shares and paid-in equity 470 628 (25.2%) Taxation and other charges recognised in the income statement: - Social security, Bank levy and Corporation tax 1,062 1,100 (3.5%) - Irrecoverable VAT and other indirect taxes incurred by RBS (3) 616 533 15.6%
(3) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
Change in Chief Executive pay compared with employees The table below shows the percentage change in remuneration for the Chief Executive between 2017 and 2018 compared with the percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary, benefits and annual bonus. The Chief Executive also receives a fixed share allowance as part of his fixed pay and this remained unchanged over the period.
Salary Benefits Annual Bonus 2017 to 2018 change 2017 to 2018 change 2017 to 2018 change
Notes: (1) Executive directors are not eligible for an annual bonus but receive variable pay in LTI awards. Standard benefit funding for executive directors remained unchanged between 2017 and 2018. The benefits for the Chief Executive excludes other benefits such as travel assistance in connection with company business and relocation benefits, the value of which is disclosed each year in the total remuneration table.
(2) The data represents full year average salary costs of the UK based employee population. This is considered to be the most representative comparator group as it covers the majority of employees and the Chief Executive is based in the UK. The changes in salary and benefits for employees have largely been driven by a simplification and rebalancing of fixed pay arrangements. There was no material change to total remuneration as a result of these changes. The percentage reduction in benefits is not equal to the percentage uplift in salary because the underlying values are different and salary makes up a larger proportion of total remuneration.
A significant proportion of the Chief Executive’s pay is delivered in LTI awards, where awards are linked to the company’s performance and share price movements over the longer-term. Therefore, the ratios will depend significantly on LTI outcomes and may fluctuate from one year to the next. None of the three employees identified at the 25th, 50th and 75th percentiles this year received LTI awards. The table also includes ratios covering salary only so that a further comparison is possible as well as the remuneration values for the identified employees. The steps that RBS takes to ensure employees are paid fairly are set out earlier in this report.
Notes: (1) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartile) were determined as at 31 December 2018 based on full-time equivalent remuneration for all UK employees other than for variable pay where the actual amount to be paid has been used. (2) ‘Option A’ methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a pension funding allowance set as a percentage of salary. Some employees, but not the Chief Executive, continue to participate in the defined benefit pension scheme, under which it would be possible to recognise a higher value. For simplicity and consistency with our regulatory disclosures, the pension funding allowance value has been included in the calculation for all employees.
(3) The data for the three individuals identified has been considered and fairly reflects pay at the relevant quartiles amongst the UK employee population. Each of the three individuals was a full-time employee during the year and none received an exceptional award which would otherwise inflate their pay figures.
Summary of remuneration levels for employees in 2018 49,875 employees earned total remuneration up to £50,000 11,508 employees earned total remuneration between £50,000 and £100,000 4,924 employees earned total remuneration between £100,000 and £250,000 932 employees earned total remuneration over £250,000
Buyout award (3) — — 1,962 — — — — —
Notes: (1) Remuneration for 2018 for eight members of the Chief Executive’s executive management team. (2) The value of the LTI awards reflects awards that were granted in 2016 and performance-assessed at the end of 2018. An estimated value is shown above based on the average share price between October and December 2018, consistent with the method used for executive directors in this report. (3) The buyout includes awards granted in replacement of awards forfeited on leaving a previous employer and also an award in respect of lost variable pay opportunity for 2018.
Consideration of matters relating to directors’ remuneration Membership of the Group Performance and Remuneration Committee All members of the Group Performance and Remuneration Committee (the Committee) are independent non-executive directors. Robert Gillespie served as Chairman of the Committee and Alison Davis, Mike Rogers and Mark Seligman were members of the Committee throughout 2018. Frank Dangeard joined the Committee with effect from 1 June 2018.
The Committee held seven scheduled meetings in 2018 and a further four ad hoc meetings. Details of attendance can be found in the ‘Our Board’ section of the governance report.
The role and responsibilities of the Committee The Committee is responsible for:  approving the remuneration policy for all employees and reviewing the effectiveness of its implementation;  reviewing performance and making recommendations to the Board on arrangements for executive directors;  approving performance and remuneration arrangements for a defined ‘in scope’ population capturing members and attendees of the Group Executive Committee, and the direct reports of the Chief Executive including heads of key legal entities, control function heads and the company secretary. The Committee also approves arrangements where employees earn total compensation which exceeds an amount determined by the Committee, currently £1 million; and
Summary of the principal activity of the Committee in 2018 The tasks that the Committee undertook during the year included reviewing and, where appropriate, approving: First half of 2018
 2017 performance reviews and remuneration arrangements for the Committee’s ‘in scope’ population.
Performance evaluation The Committee has considered the findings of the annual review of the effectiveness of the Committee. This year the evaluation process was conducted externally by Independent Board Evaluation.
The Committee was felt to be fulfilling its remit in an effective way and is trusted by the Group Board to handle this potentially sensitive issue well. The Committee was encouraged to take a broad view of its agenda and to communicate as freely as possible with the Board so that remuneration decisions are seen to be taken in a strategic context. Actions were agreed as part of the evaluation and progress will be tracked and reported to the Committee during 2019.
Advisers to the Committee PricewaterhouseCoopers LLP (PwC) was first appointed as remuneration adviser by the Committee in 2010, following a review of potential advisers and the services provided. An annual review of the quality of advice and the associated level of fees was undertaken during 2018, following which the Committee agreed to retain the services of PwC. The Committee will continue to review the performance of its advisers each year. PwC is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK.
PwC also provides professional services in the ordinary course of business including assurance, advisory, tax and legal advice to RBS subsidiaries. There are processes in place to ensure the advice received by the Committee is independent of any support provided to management.
In relation to the fees paid to PwC for advising the Committee, a fixed fee structure has operated since October 2017 to cover standard services with any exceptional items charged on a time/cost basis. The fees for 2018 in relation to directors’ remuneration amounted to £128,625 excluding VAT (2017 - £170,476).
Statement of shareholder voting The tables below set out the voting by shareholders on the resolutions to approve the Directors’ Remuneration Policy at the 2017 AGM and the Annual Report on Remuneration at the 2018 AGM.
Shareholder dilution The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares. In line with the Investment Association’s Principles of Remuneration, RBS’s employee share plans contain monitored limits that govern the number of shares that may be issued to satisfy share plan awards.
Remuneration policy for all employees The remuneration policy supports the business strategy and is designed to promote the long-term success of RBS. It aims to reward employees for delivering good performance provided this is achieved in a manner consistent with RBS values and within acceptable risk parameters. The remuneration policy applies the same principles to all employees, including Material Risk Takers (MRTs), with some minor adjustments to the policy where necessary to comply with local regulatory requirements. The key elements of the policy are set out below.
Operation Base salaries are reviewed annually and should reflect the talents, skills and competencies that the individual brings to the business.
Annual bonus The purpose is to support a culture where employees recognise the importance of serving customers well and are rewarded for superior performance.
Operation The annual bonus pool is based on a balanced scorecard of measures including Customer, People, Financial & Business Delivery, and Risk & Control measures. Allocation from the pool depends on performance of the franchise or function and the individual.
For awards made in respect of the 2018 performance year, immediate cash awards continue to be limited to a maximum of £2,000. In line with regulatory requirements, a significant proportion of annual bonus awards for our more senior employees is deferred and includes partial delivery in shares.
The deferral period varies from three years for standard MRTs, rising to five years for individuals identified as Risk Manager MRTs and seven years for Senior Managers under the UK’s Senior Managers Regime. All awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in shares and a twelve month retention period will apply post vesting in line with regulatory requirements
Operation RBS provides certain employees in senior roles with long-term incentive awards. For awards made in respect of the 2018 performance year, the population receiving long-term incentive awards will be limited to executive directors and certain members of the Group’s senior executive committees.
Awards will be subject to pre-grant and prevest performance assessments that consider progress against Customer, People, Financial & Business Delivery, and Risk & Control measures, aligned with RBS’s strategic aims. Vesting will take place over a three to seven year period following grant.
The number of shares that vest under the award may vary between 0% -100% depending on the performance achieved. Awards are subject to malus and clawback provisions and a twelve month retention period applies post vesting.
Other share plans The purpose is to offer employees in certain jurisdictions the opportunity to acquire shares.
Operation Employees in certain countries are eligible to contribute to share plans which are not subject to performance conditions.
Criteria for identifying MRTs The European Banking Authority has issued criteria for identifying MRT roles, those staff whose activities have a material influence over RBS’s performance or risk profile. The criteria are both qualitative (based on the nature of the role) and quantitative (for example those who exceed the stipulated total remuneration threshold).
Personal hedging strategies In accordance with UK regulatory requirements and internal dealing rules that apply to employees, the conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards. These conditions are explicitly acknowledged and accepted by employees when any share-based awards are granted.
Variable pay determination For the 2018 performance year, RBS operated a robust multi-step process, which is control function led, to assess performance and the appropriate bonus pool by franchise and function. At multiple points throughout the process, reference is made to Group-wide business performance (from both affordability and appropriateness perspectives) and the need to distinguish between go-forward and resolution activities.
The process considers a balanced scorecard of performance assessments at the level of each franchise or function, across financial, customer and people measures. Risk and conduct assessments at the same level are then undertaken to ensure that performance achieved without appropriate consideration of risk, risk culture and conduct controls, is not inappropriately rewarded.
Accountability review process and malus/clawback The accountability review process was introduced in 2012 to identify any material risk management, control and general policy breach failures, and to ensure accountability for those events. This allows RBS to respond in instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year.
Under the accountability review process RBS can apply:  Malus - to reduce (to zero if appropriate) the amount of any unvested variable pay awards prior to payment;  Clawback - to recover awards that have already vested; and
Any variable pay awarded to MRTs from 1 January 2015 onwards is subject to clawback for seven years from the date of grant. For awards made in respect of the 2016 performance year onwards, this period has been extended to ten years for executive directors and other Senior Managers under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal seven year clawback period.
Circumstances in which RBS may apply malus, clawback or in-year bonus reduction include:  the individual being culpable, responsible or ultimately accountable for conduct which results in significant financial losses for RBS;  the individual failing to meet appropriate standards of fitness and propriety;  reasonable evidence of an individual’s misbehaviour or material error;  RBS or the individual’s relevant business unit suffering a material failure of risk management; and
Remuneration of MRTs The quantitative disclosures below are made in accordance with Article 450 of the EU Capital Requirements Regulation in relation to 588 employees who have been identified as MRTs.
Other Business Areas 1 29 30 2. Aggregate remuneration expenditure Aggregate remuneration expenditure in respect of 2018 performance was as follows: Aggregate remuneration Senior mgmt
Other Business Areas 1.10 — 1.10 4. Outstanding deferred remuneration through 2018 The table below includes deferred remuneration awarded or paid out in 2018 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and long-term incentives.
Unvested at year end 40.17 148.51 188.68 5. Guaranteed Awards (including ‘Sign-on’ awards) and Severance Payments RBS does not offer ‘Sign-on awards’. Guaranteed awards may only be granted to new hires in exceptional circumstances in compensation for awards foregone in their previous company and are limited to the first year of service. Three new hire guarantees were made in respect of the 2018 performance year.
Severance payments and / or arrangements can be made to employees who leave RBS in certain situations, including redundancy. Such payments are calculated by a pre-determined formula set out within the relevant social plans, policies, agreements or local laws. Where local laws permit, there is a cap on the maximum amount that can be awarded.
No severance payments were made during the year in excess of contractual payments, local policies, standards or statutory amounts, other than payments to three individuals of £215,869, £81,923 and €502,877 each made in commercial settlement of potential legal proceedings related to the termination of employment.
6. Ratio between fixed and variable remuneration The variable component of total remuneration for MRTs at RBS shall not exceed 100% of the fixed component. The average ratio between fixed and variable remuneration for 2018 is approximately 1 to 0.62. The majority of MRTs are based in the UK.
Consolidated 1:0.80 1:0.60 1:0.62 7. Discount Rate Under CRD IV regulations, a notional discount is available which allows variable pay to be awarded at a level that would otherwise exceed the 1:1 ratio, provided that at least 25% of variable pay is delivered ‘in instruments’ (shares) and deferred over five years or more. The discount rate was not used for remuneration awarded in respect of the 2018 performance year.
Employees who earned total remuneration of over €1 million in 2018 represent just 0.1% of our employees. This number reduces to 67 employees if we exclude pension and benefit funding. These employees include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows:  The Chief Executives responsible for each area and their direct reports.
Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 (the “Code”) except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee (Group RemCo) should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board and this is an approach RBS has adopted for a number of years. Remuneration for the executive directors is first considered by the Group RemCo which then makes recommendations to the Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group RemCo, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how RBS has applied the main principles of the Code can be found in the Corporate Governance Report on pages 47 to 82. A copy of the Code can be found at www.frc.org.uk.
RBS has also implemented the recommendations arising from the Walker Review and complied in all material respects with the Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016.
Ongoing processes for the identification, evaluation and management of the principal risks faced by RBS operated throughout the period from 1 January 2018 to 14 February 2019, the date the directors approved the Annual Report & Accounts. These processes include the semi-annual Control Environment Certification process which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control frameworks and certify that their business or function is compliant with the requirements of Sarbanes-Oxley Section 404 and the UK Corporate Governance Code Section C2. The policies that govern these processes, and reports on internal controls arising from them, are reviewed by the Board and meet the requirements of the Financial Reporting Council’s Guidance On Risk Management Internal Control & Related Financial & Business Reporting issued in September 2014.
The remediation of known control issues remained an important focus of the Group Audit Committee and the Board Risk Committee during 2018. For further information on their oversight of remediation of the most significant issues, please refer to the Report of the Group Audit Committee and the Report of the Board Risk Committee. The Group Audit Committee has received confirmation that management has taken, or is taking, action to remedy significant failings or weaknesses identified through RBS’s control framework. The Group Audit Committee and the Board Risk Committee will continue to focus on such remediation activity, particularly in view of the transformation agenda.
Internal control over financial reporting RBS is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2018.
Management's report on RBS’s internal control over financial reporting will be filed with the Securities and Exchange Commission as part of the 2018 Annual Report on Form 20-F.
Disclosure controls and procedures As required by US regulations, management (including the Chief Executive and Chief Financial Officer) have conducted an evaluation of the effectiveness and design of RBS’s disclosure controls and procedures (as defined in the Exchange Act rules) as at 31 December 2018. Based on this evaluation, management (including the Chief Executive and Chief Financial Officer) concluded that RBS’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) NYSE Standards require the majority of the Board to be independent. The NYSE Standards contain different tests from the Code for determining whether a director is independent. RBS follows the Code’s requirements in determining the independence of its directors and currently has 10 independent non-executive directors, one of whom is the senior independent director. (ii) The NYSE Standards require nonmanagement directors to hold regular sessions without management present and that independent directors meet at least once a year. The Code requires the Chairman to hold meetings with non-executive directors without the executives present and nonexecutive directors are to meet without the Chairman present at least once a year to appraise the Chairman’s performance and RBS complies with the requirements of the Code. (iii) The NYSE Standards require that the nominating/corporate governance committee of a listed company be composed entirely of independent directors. The Chairman of the Board is also the Chairman of the Group Nominations and Governance Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). The terms of reference of the Group Nominations and Governance Committee differ in certain limited respects from the requirements set out in the NYSE Standards, including because the Group Nominations and Governance Committee does not have responsibility for overseeing the evaluation of management. (iv) The NYSE standards require that the compensation committee of a listed company be composed entirely of independent directors. Although the members of the Group RemCo are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group RemCo and the Group RemCo has not assessed the independence of any compensation consultant, legal counsel or other adviser, in each case, in accordance with the independence tests prescribed by the NYSE Standards.
The directors present their report together with the audited accounts for the year ended 31 December 2018.
Following placing and open offers in December 2008 and in April 2009, HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT in the form of B shares. HMT sold 630 million of its holding of the company’s ordinary shares in August 2015. In October 2015 HMT converted its entire holding of 51 billion B shares into 5.1 billion new ordinary shares of £1 each in the company. HMT sold a further 925 million of its holding of the company’s ordinary shares in June 2018.
Activities RBS is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of RBS, including the products and services provided by each of its operating segments and the markets in which they operate are contained in the Business review. Details of the strategy for delivering the company’s objectives can be found in the Strategic Report.
Results and dividends The profit attributable to the ordinary shareholders of the Group for the year ended 31 December 2018 amounted to £1,622 million compared with a profit of £752 million for the year ended 31 December 2017, as set out in the consolidated income statement on page 176.
The final and special dividends recommended by directors are subject to shareholders’ approval at the Annual General Meeting on 25 April 2019. If approved, payment will be made on 30 April 2019 to shareholders on the register at the close of business on 22 March 2019. The ex-dividend date will be 21 March 2019. No dividend was paid in 2017.
In the context of prior macro-prudential policy discussions, previously RBS partially neutralised the impact on Core Tier 1 capital of coupon and dividend payments in relation to hybrid capital instruments through equity issuances of ordinary shares, this policy was cancelled in 2018. Approximately £300 million was raised each year in 2016 and 2017 through the issue of new ordinary shares, and during 2018 £136 million was raised.
Creating a healthy culture Building a healthy culture that embodies Our Values is a core priority for RBS.
RBS has made further progress on making sure employees are paid fairly for the work they do with simple and transparent pay structures, and in the UK RBS’s rates continue to exceed the Living Wage. More information can be found on page 62 of the 2018 Annual Report and Accounts.
Colleague Voice In response to changes which have been made to the UK Corporate Governance Code, RBS has established a Colleague Advisory Panel (“the Panel”) which is chaired by Lena Wilson, Non-executive Director. The purpose of the Panel is to promote greater colleague voice in the boardroom and provide an additional way for the Board to engage directly with colleagues. The Panel consists of existing employee representatives (e.g. Unite, Financial Services Union (FSU), EEC, Employee Led Networks, Junior Management/Colleague Focus Groups and colleagues who have volunteered to be involved). Colleagues from locations outside of the UK and Ireland also sit on the Panel to ensure a broad, diverse range of views. In total, there are approximately 20 colleagues (or their representatives) who attend each Panel meeting. The Panel does not duplicate existing methods to inform and consult, in particular with employee representatives, focusing instead on broader strategic issues facing RBS. The design of the Panel has been built around having two-way dialogue with clear outputs from the sessions and follow-up to ensure it is viewed as a valuable addition to existing colleague voice methods. More detail can be found on the Panel on page 14 of the Strategic Report.
Inclusion Building a more inclusive RBS is essential for customers and colleagues. The ambition to be number one for customer service, trust and advocacy will only be achieved by understanding the needs of all colleagues and customers.
RBS’s inclusion guidelines apply to all colleagues globally and cover being LGBT Innovative, Gender Balanced, Disability Smart, Ethnically Diverse, all leading to Inclusive Culture. Detailed information can be found on page 16 of the Strategic Report and on the Sustainable Banking pages on rbs.com.
RBS has been recognised for work on Equality, Diversity and Inclusion in 2018 by retaining a position in the Times Top 50 Employers for Women; being recognised again as a Top 10 Employer for Working Families; being rated as an Exemplary Level Employer by Carer Positive Scotland; being named a Stonewall Global Diversity Champion; being Platinum Ranked by Business in the Community for both Gender and Ethnicity work; and being upgraded to Gold Rated Disability Standard for the
Going concern RBS’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect RBS’s future results are set out on pages 253 to 263. RBS’s regulatory capital resources and significant developments in 2018 and anticipated future developments are detailed in the Capital, liquidity and funding section on pages 97 to 110. This section also describes RBS’s funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves.
Additional information Where not provided elsewhere in the Report of the directors, the following additional information is required to be disclosed by Part 6 of Schedule 7 to the Large and Mediumsized Companies and Groups (Accounts and Reports) Regulations 2008.
The rights and obligations attached to the company’s ordinary shares and preference shares are set out in our Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at rbs.com/about/board-andgovernance. Non-cumulative preference share details are set out in Note 22 of the consolidated accounts.
On a show of hands at a General Meeting of the company, every holder of ordinary shares and cumulative preference shares, present in person or by proxy and entitled to vote, shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote, shall have four votes for every share held. The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
For shares held in the Company’s other Employee Share Trusts, the voting rights are exercisable by the Trustees. However, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation. The Trustees have chosen to waive their entitlement to the dividend on shares held by the Trusts. The total amount of dividends waived during the year ended 31 December 2018 was £0.2 million.
Directors The names and brief biographical details of the current directors are shown on pages 47 and 48.
Directors’ interests The interests of the directors in the shares of the company at 31 December 2018 are shown on page 75. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2018 to 14 February 2019.
Directors’ indemnities In terms of section 236 of the Companies Act, Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Executive Committee, individuals authorised by the PRA/FCA, certain directors and/or officers of RBS subsidiaries and all trustees of RBS pension schemes.
Controlling shareholder In accordance with the UK Listing Rules, the company has entered into an agreement with HM Treasury (the ‘Controlling Shareholder’) which is intended to ensure that the Controlling Shareholder complies with the independence provisions set out in the UK Listing Rules. The company has complied with the independence provisions in the relationship agreement and as far as the company is aware the independence and procurement provisions in the relationship agreement have been complied with in the period by the controlling shareholder.
Shareholdings The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company at 31 December 2018.
Listing Rule 9.8.4 The information to be disclosed in the Annual Report and Accounts under LR 9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR 9.8.4 (10) and (11) given in Additional Information on page 264.
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 166 to 175.
Katie Murray Frank Dangeard Alison Davis Patrick Flynn Morten Friis Robert Gillespie Brendan Nelson Baroness Noakes Mike Rogers Mark Seligman Dr Lena Wilson
RBS is able to absorb shocks and is prepared to manage new, emerging and unforeseen risks
RBS’s strategy is informed and shaped by an understanding of the risk landscape, including a range of significant risks and uncertainties in the external economic, political and regulatory environment. Identifying these risks and understanding how they affect RBS informs risk appetite and risk management practice.
RBS has a strong focus on defining the control environment to ensure the effective operation of policies and processes embedded in the customer-facing businesses, thus facilitating the management of the risks they take in the course of their day-to-day activities.
To achieve this, RBS is focusing on leaders as role models and taking action to build clarity, continuing to develop capability and motivate employees to reach the required standards of risk culture behaviour. This includes: taking personal responsibility for understanding and proactively managing the risks associated with individual roles; respecting risk management and the part it plays in daily work; understanding clearly the risks associated with individual roles; aligning decision-making to RBS’s risk appetite; considering risk in all actions and decisions; escalating risks and issues early; taking action to mitigate risks; learning from mistakes and near-misses; challenging others’ attitudes, ideas and actions; and reporting and communicating risks transparently.
RBS’s target risk culture behaviours are embedded in Our Standards and are clearly aligned to the core values of “serving customers”, “working together”, “doing the right thing” and “thinking long-term”. These act as an effective basis for a strong risk culture because Our Standards are used for performance management, recruitment and development.
A simple decision-making guide – the “YES check” – has been included in the Code of Conduct. It is a simple set of five questions, designed to ensure RBS values guide day-to-day decisions:  Does what I am doing keep our customers and RBS safe and secure?  Would customers and colleagues say I am acting with integrity?  Am I happy with how this would be perceived on the outside?  Is what I am doing meeting the standards of conduct required?  In five years’ time would others see this as a good way to work?
If conduct falls short of RBS’s required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned. RBS-wide remuneration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any employee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appropriate, the relevant authority would be notified.
Risk management framework continued Risk governance Committee structure The diagram illustrates RBS’s risk committee structure in 2018 and the main purposes of each committee.
Acts on all material and/or enterprise-wide risk and control matters across the RBS Group.
Reviews and approves the risk appetite framework and risk appetite targets for RBS Group’s strategic risk objectives.
Responsible for the establishment of risk policies – as well as oversight of compliance – for each relevant risk type. In addition, they are responsible for the approval of certain risk measures and recommendation of other measures to Group Board for approval.
Includes Retail Credit Risk Committee, Wholesale Credit Risk Committee, Operational Risk Executive Committee, Financial Crime
Considers the financial strategy, risk management, balance sheet and remuneration and policy implications of the RBS Group’s pension schemes.
Risk management structure The diagram illustrates RBS’s risk management structure in 2018 and key risk management responsibilities.
Notes: (1) While separate roles, the individual undertaking the RBS Group Chief Executive role also performs the NatWest Holdings Chief Executive role. (2) The RBS Group Risk function is led by the RBS Group Chief Risk Officer. The RBS Group Chief Risk Officer reports directly to the RBS Group Chief Executive and has a secondary reporting line to the chair of the Group Board Risk Committee as well as a right of access to the committee. (3) The NatWest Holdings Chief Risk Officer (Chief Risk Officer, Ring-Fenced Bank) reports directly to the RBS Group Chief Risk Officer and the NatWest
Holdings Chief Executive, along with a secondary reporting line to the NatWest Holdings Board Risk Committee chair and right of access to the committee including the Deputy Chairman.
(4) The NatWest Holdings Risk function provides risk management services across the RBS Group, including to the RBS Group Chief Risk Officer and – where agreed – to the NatWest Markets and RBSI Chief Risk Officers. These services are managed, as appropriate, through service level agreements.
(6) The Chief Risk Officers for NatWest Markets and RBSI have dual reporting lines into the RBS Group Chief Risk Officer and the respective chief executives of their entities. There are additional reporting lines to the NatWest Markets and RBSI Board Risk Committee chairs and a right of access to the committee.
Risk management framework continued Three lines of defence RBS uses the three lines of defence model to articulate accountabilities and responsibilities for managing risk across the organisation. The three lines of defence model is adopted across the industry to support the embedding of effective risk management and is expressed through a set of principles as outlined below. All roles, regardless of level, sit within one of these three lines. First line of defence – Management and supervision The first line of defence encompasses most roles within RBS, including those in customer franchises, Technology and Services as well as support functions such as Human Resources, Communications & Marketing and Finance. Responsibilities include:  Owning, managing and supervising, within a defined risk appetite, the risks which exist in business areas and support functions.  Ensuring the business has effective mechanisms for identifying, reporting and managing risk and controls.  Ensuring appropriate controls are in place to mitigate risk, balancing control, customer service and competitive advantage.  Ensuring that the culture of the business supports balanced risk decisions and compliance with policy, laws and regulations. Second line of defence – Oversight and control The second line of defence is the Risk function as well as the policy and control elements of Human Resources, Legal and the Finance function. Responsibilities include:  Leading the articulation, design and development of risk culture and appetite.  Setting the standard for risk management across the Group.  Overseeing and challenging the management of risks and controls.  Analysing the aggregate risk profile and ensuring that risks are being managed within risk appetite.  Providing expert advice to the first line on risk management, including the application of effective risk and control frameworks and the consideration of risk in decision-making.
For certain strategic risks, risk capacity defines the maximum level of risk the RBS Group can assume before breaching constraints determined by regulatory capital and liquidity needs, the operational environment, and from a conduct perspective. Articulating risk capacity helps determine where risk appetite should be set, ensuring there is a buffer between internal risk appetite and the Group’s ultimate capacity to absorb losses.
To facilitate this, a detailed annual review of the framework is carried out. The review includes:  Assessing the adequacy of the framework when compared to internal and external expectations.
Establishing risk appetite Risk appetite is communicated across RBS through risk appetite statements. The risk appetite statements provide clarity on the scale and type of activities that can be undertaken in a manner that is easily conveyed to staff.
RBS’s risk profile is frequently reviewed and monitored to ensure it remains within appetite and that management focus is concentrated on all strategic risks, material risks and emerging risk issues. Risk profile relative to risk appetite is reported regularly to the Board and senior management.
Risk management framework continued Significant and emerging risks that may affect future results and performance are reviewed and monitored. Action is taken to mitigate potential risks as and when required. In depth analysis is carried out, including the stress testing of exposures relative to the risk.
Risk assurance Assurance is carried out on targeted credit risk, market risk, compliance and conduct risk and financial crime risk activities to provide assurance to both internal and external stakeholders including the Board, senior management, the customer-facing franchises, Internal Audit and the Group’s regulators. Selected key controls are also reviewed. Qualitative reviews are carried out to assess various risk aspects as appropriate, including: the quality of risk portfolios, the accuracy of the Basel model inputs and related probability of default/loss given default classifications, the quality of risk management practices, policy compliance and adherence to risk appetite. This can include testing the Group’s credit portfolios and market risk exposures to assist in the early identification of emerging risks, as well as undertaking targeted reviews to examine specific issues.
The adequacy and effectiveness of selected key controls owned and operated by the second line of defence are also tested (with a particular focus on credit risk and market risk controls). Selected controls within the scope of Section 404 of the US Sarbanes-Oxley Act 2002 as well as selected controls supporting risk data aggregation and reporting are also reviewed. Assurance is carried out on Anti-Money Laundering, Sanctions, and Anti-Bribery & Corruption processes and controls. This helps inform whether or not the financial crime control environment is adequate and effective and whether financial crime risk is appropriately identified, managed and mitigated. The Risk Assurance Committee ensures a consistent and fair approach to all aspects of the second-line assurance review activities. The committee also monitors and validates the ongoing programme of reviews and tracks the remediation of the more material review actions.
Key developments in 2018 In April 2018, the PRA set out its expectations on the model risk management practices that should be adopted when using stress test models. RBS has a strong focus on model risk management and, as a result, practices were reviewed and, where appropriate, work to enhance them in line with regulatory expectations continues.
RBS further invested in model risk management during 2018, particularly given business demand and the growing complexity of requirements, such as new regulation and AI. This included the specification of additional IT systems to enhance capability in this area.
Model Risk Management performs reviews of relevant risk and pricing models in two instances: (i) for new models or amendments to existing models and (ii) as part of its ongoing programme to assess the performance of these models. Model Risk Management reviews may test and challenge the logic and conceptual soundness of the methodology, or the assumptions underlying a model. Reviews may also test whether or not all appropriate risks have been sufficiently captured as well as checking the accuracy and robustness of calculations. Based on the review and findings from Model Risk Management, RBS’s model or risk committees consider whether a model can be approved for use. Models used for regulatory reporting may additionally require regulatory approval before implementation.
Model Risk Management reassesses the appropriateness of approved risk models on a periodic basis. Each periodic review begins with an initial assessment. Based on the initial assessment, an internal model governance committee will decide to re-ratify a model or to carry out additional work. In the initial assessment, Model Risk Management assesses factors such as a change in the size or composition of the portfolio, market changes, the performance of – or any amendments to – the model and the status of any outstanding issues or scheduled activities carried over from previous reviews. Model Risk Management also monitors the performance of RBS’s portfolio of models to ensure they appropriately capture underlying business rationale. For more information relating to market risk models and pricing models, refer to page 159.
 Scenario results and management actions are reviewed and agreed by senior management through executive committees including Executive Risk Committee, Board Risk Committee and the Board.
 Risk appetite – through gaining a better understanding of the drivers of – and the underlying risks associated with – risk appetite.
 Risk identification – through a better understanding of the risks that could potentially impact RBS’s financial strength and capital position.
 Risk mitigation – through identifying actions that can be taken to mitigate risks, or could be taken, in the event of adverse changes to the business or economic environment. Risk mitigation is substantially supplemented through RBS’s recovery plan.
Capital sufficiency – going-concern forward-looking view With a view to ensuring that RBS and its operating subsidiaries maintain sufficient CET1 capital, going-concern capital requirements are assessed on a forward-looking basis – including as part of the annual budgeting process. These assessments consider the resilience of capital adequacy and leverage ratios under a range of hypothetical future states. The assessments incorporate assumptions regarding a range of regulatory and accounting aspects such as IFRS 9, taking account of a number of factors including economic variables and impairments.
The examination of capital requirements under adverse economic and market conditions is assessed through stress testing.
The Board approves the capital plans, including those for key legal entities and businesses as well as the results of the stress tests relating to those capital plans.
Internal assessment of liquidity Under the liquidity risk management framework, RBS undertakes the Individual Liquidity Adequacy Assessment Process. This includes assessment of net stressed liquidity outflows. RBS considers a range of extreme but plausible stress scenarios on its liquidity position over various time horizons, as outlined below.
Stress testing – recovery and resolution planning The RBS Group Recovery Plan explains how The Royal Bank of Scotland Group plc (RBSG) and its subsidiaries as a consolidated group would identify and respond to a financial stress event and restore its financial position to remain viable on an ongoing basis.
The Recovery Plan ensures that risks which could delay the implementation of a recovery strategy are highlighted and preparations are made to minimise the impact of these risks. Preparations RBS has taken include:  developing a series of recovery indicators to provide early warning of potential stress events
 developing a recovery playbook to provide a concise description of the actions required during recovery
 detailing a range of options to address different stress conditions
The Recovery Plan is intended to enable RBS to maintain critical services and products it provides to its customers (its critical economic functions), maintain its important business lines (core business lines) and operate within risk appetite whilst restoring the bank’s financial condition.
The Recovery Plan is assessed for appropriateness on an ongoing basis and is updated annually, in line with regulatory requirements. It is reviewed and approved by the Board prior to submission to the PRA each year.
Individual Recovery Plans have been prepared for NatWest Holdings Limited, NatWest Markets Plc, RBS International Holdings Limited, Ulster Bank Ireland DAC and NatWest Markets N.V. These plans reflect the structure and operations of the post-ring-fenced group and detail the recovery options, recovery indicators and escalation routes for each entity to manage its own response to a financial stress.
If RBS was assessed by the UK authorities as failing or likely to fail the authorities have a wide range of powers to place RBS into Resolution. The UK’s Special Resolution Regime places an obligation on banks to ensure they are resolvable. Resolvability is a measure of how effectively a set of actions could be taken to manage the failure of RBS, through execution of a preferred resolution strategy which the Group is Single Point of Entry Bail-in of the Group Hold Co. The process of resolution is owned and implemented by the Bank of England (as UK Resolution Authority).
RBS has a multi-year programme of work through to 1 January 2022 to ensure impediments to resolvability are removed and the regulatory resolution strategy could be executed.
Scenario analysis based on hypothetical adverse scenarios is performed on non-traded exposures as part of the industry-wide Bank of England and European Banking Authority stress exercises. In addition, RBS produces its own internal scenario analysis as part of the financial planning cycles.
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management. Macroeconomic stress tests are carried out periodically as part of the bank-wide, crossrisk capital planning process. The scenario narratives are translated into risk factor shocks using historical events and insights by economists, risk managers and the first line.
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forwardlooking /hypothetical. Vulnerability-based stress testing is used for internal management information and is not subject to limits. However, the results for relevant scenarios are reported to senior management
Risk management framework continued Regulatory stress testing In 2018, RBS took part in regulatory stress tests conducted by the Bank of England and the European Banking Authority. The scenarios are hypothetical in nature and do not represent forecasts of RBS’s future business or profitability. The results of the regulatory stress tests are carefully assessed by RBS and form part of the wider risk management of RBS.
 Designed to evaluate the impact, over three years, of a general macro financial downturn.  A static balance sheet assumption was made across the period of stress and therefore mitigating actions such as balance sheet reduction, business growth and cost savings are not factored into the stress outcomes.
 On an IFRS 9 non- transitional basis, the Tier 1 leverage ratio low-point was projected to be 4.8% under stress, significantly above the leverage ratio hurdle rate of 3.25%.
CET1 ratio under the adverse scenario reached a low point of 9.48%
 On an IFRS 9 transitional basis, RBS’s leverage ratio under the adverse scenario reached a low point of 4.83%.
 The stress was based on an end of 2017 balance sheet starting position. Since then, RBS has taken a number of actions to further improve its capital position stress resilience, including the continued reduction in certain credit portfolios and the resolution of various litigation cases and regulatory investigations.
 The 2018 Bank of England and European Banking Authority stress test results demonstrated that good progress has been made in transforming the balance sheet to a safe and sustainable position.
Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other specific loss absorbing instruments, including senior notes issued by the Group, may be used to cover certain gone concern capital requirements which, in the EU, is referred to as MREL. Gone concern refers to the situation in which resources must be available to enable an orderly resolution, in the event that the Bank of England (BoE) deems that the Group has failed, or is likely to fail.
Liquidity RBS maintains a prudent approach to the definition of liquidity resources. RBS manages its liquidity to ensure it is always available when and where required, taking into account regulatory, legal and other constraints. Following ring-fencing legislation, liquidity is no longer considered fungible across the Group and the liquidity portfolio has been restructured during 2018 to reflect this. Principal liquidity portfolios are maintained in the UK Domestic Liquidity Sub-Group (UK DoLSub) (primarily in NatWest Bank Plc), UBI DAC, NatWest Markets Plc, RBS International and NWM N.V.. Some disclosures in this section where relevant are presented, on a consolidated basis, for RBS, the UK DoLSub and on a solo basis for NatWest Markets plc.
Key developments in 2018  RBS continued to strengthen and de-risk its capital position; CET1 ratio remains ahead of the c14% target and increased by 30 basis points in the year to 16.2%. The directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders’ approval at the Annual General Meeting on 25 April 2019.
 CRR leverage ratio increased to 5.4% (2017 – 5.3%). UK leverage ratio improved to 6.2% (2017 – 6.1%) in line with the balance sheet reduction.
 In 2018, RBSG plc issued approximately £7 billion MREL compliant senior debt bringing the total MREL senior debt issues to approximately £16 billion relative to the end state (1 January 2022) requirements of approximately £24 billion. These funds enabled RBSG plc to invest in £4.8 billion of NatWest Holdings MREL eligible issuance and £5.1 billion NWM plc eligible issuance in December 2018.
 During the year, RBS changed its approach to managing liquidity in preparation for ring-fencing. NatWest Markets left the UK DoLSub and now manages its liquidity on a stand-alone basis.
 The rise in primary liquidity resulted in higher liquidity coverage ratio (LCR) of 158% (2017 – 152%). The internal Stressed Outflow coverage ratio decreased to 154% (2017 – 168%) due to stress methodology changes and higher stressed behavioural outflows over the three month horizon.
Capital, liquidity and funding risk continued Capital management Capital management ensures that there is sufficient capital and other loss absorbing instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite, maintaining its credit rating and supporting its strategic goals.
Capital management is critical in supporting the businesses and is enacted through an end to end framework across businesses and the legal entities. Capital is managed both on a Group consolidated level, as well as at NatWest Holdings Group, NatWest Markets Plc, NatWest Markets NV, and RBS International levels. In addition, NatWest Holdings banking subsidiaries are also subject to the same principles, processes and management as the Group of which it is a part. Note that although the aforementioned entities are regulated in line with Basel III principles, local implementation of the framework differs across geographies.
 Capital resources and capital requirements are assessed across a defined planning horizon.
The UK DoLSub is PRA regulated and comprises RBS’s four licensed deposit taking UK banks: National Westminster Bank Plc, The Royal Bank of Scotland plc, Coutts & Company and Ulster Bank Limited.
Capital, liquidity and funding risk continued Minimum requirements Capital adequacy ratios The Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios of capital to RWAs that the Group is expected to have to meet once CRR is fully implemented by 1 January 2019. These ratios apply at the consolidated group level. Different minimum capital requirements may apply to individual legal entities or sub-groups.
(effective from November 2018). The rate had previously increased from 0.0% to 0.5% (effective June 2018). The Republic of Ireland CCyB is currently 0.0%, the CBI have announced an increase to 1.0% effective July 2019. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions. Firm specific CCyB is based on a weighted average at CCyB’s applicable to countries in which the Bank has exposures.
(4) From 1 January 2015, UK banks have been required to meet at least 56% of its Pillar 2A capital requirement with CET1 capital and with balance with Additional Tier 1 and/or Tier 2 capital. Additional capital requirements under Pillar 2A may be specified by the PRA as a ratio or as an absolute value. The table sets out an implied ratio to cover the full value of Pillar 2A requirements. The PRA has recently determined that the Pillar 2A capital requirement for 2018 remains unchanged.
(5) The Group may be subject to a PRA buffer requirement as set by the PRA. The PRA buffer consists of two components: - A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could range between 10% and 40%. - A buffer to cover stress risks informed by the results of the BoE concurrent stress testing results. - The PRA requires that the level of this buffer is not publicly disclosed.
The rate had previously increased from 0.0% to 0.5% (effective June 2018). Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions. On 3 October 2017 the PRA, via revised policy statement (PS21/17), increased the Tier 1 leverage ratio requirement for UK banks by 25 basis points to 3.25% (CET1 requirement of 2.4375%). The PRA minimum leverage ratio requirement is supplemented with a G-SII additional leverage ratio buffer, currently 0.2625% under transitional arrangements (2017 – 0.175%) increasing to 0.35% from 1 January 2019.
NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its interpretation of the CRR2 proposals with effect from 1 January 2018.
The table below sets out the key Capital and Leverage ratios.
End-point PRA transitional End-point PRA transitional CRR basis (1) basis CRR basis (1) basis £bn £bn £bn £bn
Tier 1 capital (£bn) 34.7 36.2 36.0 39.6 CRR leverage exposure (£bn) 644.5 644.5 679.1 679.1 CRR leverage ratio (%) 5.4% 5.6% 5.3% 5.8% Average Tier 1 capital (£bn) (2) 35.7 37.9 36.4 40.0 Average leverage exposure (£bn) (2) 665.2 665.2 692.5 692.5 Average leverage ratio (%) (2) 5.4% 5.7% 5.3% 5.8%
Notes: (1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases. (2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items (2017 – three month-end average of both on and off-balance sheet items).
Liquidity coverage ratio (1) 158% 153% Stressed outflow coverage (2) 154% 147% Net stable funding ratio (3) 141% 144% 2017 Liquidity coverage ratio (1) 152% Stressed outflow coverage (2) 168% Net stable funding ratio (3) 132%
(2) RBS's stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in accordance with PRA guidance.
End-point transitional End-point transitional CRR basis basis CRR basis basis £m £m £m £m
Shareholders’ equity 45,736 45,736 48,330 48,330 Preference shares - equity (496) (496) (2,565) (2,565)
Goodwill and other intangible assets (6,616) (6,616) (6,543) (6,543) Expected losses less impairments (654) (654) (1,286) (1,286) Foreseeable ordinary and special dividends (1,326) (1,326) — — Other regulatory adjustments (105) (105) 28 28
Qualifying instruments and related share premium 4,051 4,051 4,041 4,041 Qualifying instruments and related share premium subject to phase out — 1,393 — 3,416
Qualifying instruments and related share premium 6,301 6,386 6,396 6,501 Qualifying instruments issued by subsidiaries and held by third parties 182 1,565 369 1,876
Derivatives - netting and variation margin (141.3) (161.7) - potential future exposures 42.1 49.4 Securities financing transactions gross up 2.1 2.3 Undrawn commitments (analysis below) 50.3 53.1 Regulatory deductions and other adjustments (2.9) (2.1)