European Systemic Risk Board as representing the most material threats to the stability of the EU
• 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.
• The 2016 EBA stress test did not contain a pass/fail threshold
• The Group’s modelled leverage ratio under the adverse scenario is projected as 3.6% on a fully loaded Basel 3 basis and 4.2% under the PRA
December 2018. The low point occurs in 2017 with a stress leverage ratio of 3.5% on a fully loaded Basel 3 basis as at 31 December 2016 and 4.2% under the PRA transitional definition.
• Under the 2016 BoE stress test, CET1 ratio reached a low point of 5.5% in 2017, below the
• The stress was based on an end of 2015 starting balance sheet position. Since then, the
• The 2016 EBA and BoE stress test results demonstrate that the Group has made good progress in transforming the balance sheet to being safe and sustainable. However, the legacy issues still heavily impact the Group’s performance.
• In August 2016 the Group successfully issued an additional £2 billion AT1 capital, bolstering the Group’s capital position and leverage ratio.
In November 2016, the BoE published its policy statement on its approach to setting MREL.
FSB total loss absorbing capacity standard being the higher of: • 16% of the Group’s RWAs; and
The higher of: • The sum of two times the Group’s Pillar 1 requirement and one times the
• Two times the applicable leverage ratio requirement for the Group
The higher of: • Two times the sum of the Group’s Pillar 1 requirement and Group’s Pillar 2A
MREL may consist of capital and other loss absorbing instruments. In order for liabilities to be eligible for MREL, a number of strict conditions will be set by the BoE including the ability for the BoE to apply its stabilisation powers to those liabilities. In addition, liabilities must have an effective remaining maturity (taking account of any rights of early repayment to investors) of greater than one year.
Key prudential regulatory developments that have been published and may impact the Group are set out in the following table.
Capital risk* continued Summary of potential changes to regulation that may impact the Group’s capital requirements
Credit risk RWAs • Restriction in the scope of using internal models.
• Increase in the number of risk factors captured in the calculation of the counterparty valuation adjustment (CVA).
Market risk RWAs • Change from value at risk to expected shortfall models.
• Relates to the CRR 2(1) proposal to amend regulation published by the European Commission.
• Incorporation of bank-specific loss data into the calculation. • Consultation published by the
• Changes to the design and calibration of the capital base and large exposure limit.
Note: (1) CRR 2 relates to the European Commission publication on 23 November 2016 to amend the Capital Requirements Regulation. Additional amendments were proposed to amend the Capital Requirements Directive and Banking Recovery and Resolution Directive.
Capital management is the process by which the Group ensures that it has 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.
Group, its businesses and the legal entities on which it operates.
The key elements of the Group’s capital management approach are set out below.
Capital planning is integrated into the Group’s wider annual budgeting process and is assessed and updated at least monthly.
• Capital plans are produced for the Group, its key operating entities and its businesses over a five year planning horizon.
Capital planning is one of the tools that the Group uses to monitor and manage the risk of excessive leverage.
Stress testing is used to quantify, evaluate and understand the potential impact on the financial strength of the Group, including its capital position, given specified changes to risk factors. Stress testing includes: • Scenario testing: examines the impact of a hypothetical future state of the world to define changes in risk factors affecting the Group; and
2) Risk appetite: through gaining a better understanding of the drivers of and the underlying risks associated with risk appetite.
3) Risk identification: through a better understanding of the risks that could potentially impact the Group’s financial strength and capital position.
The Group conducts an annual internal assessment of its material risks and evaluates how much capital is required to cover these risks. This is referred to as the Internal Capital
Adequacy Assessment Process (ICAAP). The ICAAP is approved by the Board and submitted to the PRA.
The ICAAP is used by the PRA to make an assessment of bankspecific capital requirements through the Pillar 2 framework.
The recovery plan is a key component of the overall risk management of the Group including the framework for managing its capital.
The recovery plan is prepared and updated annually and approved by the Board. The recovery plan is assessed for appropriateness on an ongoing basis, and is maintained in line with regulatory requirements.
Group is compliant with the principles of resolution planning, demonstrating the process by which the Group and relevant regulatory bodies can develop a set of actions that would be taken to manage the failure of the Group or one of its significant legal entities in an orderly manner.
Government’s Independent Commission on Banking report recommended that banks separate their retail and investment banking operations, helping to mitigate against the risk of the investment bank division running into financial difficulty.
Primary legislation and FCA/PRA regulations have been issued which must be complied with by 1 January 2019. For more details on ring-fencing, refer to page 125.
Capital base: (1) Own funds are based on shareholders’ equity. (2) The adjustment arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full. Additional valuation adjustments relating to unearned credit spreads on exposures under the advanced internal ratings approach has been included in the determination of the expected loss amount deducted from CET1.
Qualifying instruments and related share premium subject to phase out — 5,416 — 5,092
Qualifying instruments issued by subsidiaries and held by third parties — 339 — 1,627
Qualifying instruments issued by subsidiaries and held by third parties 2,268 4,818 2,257 7,354
Note: (1) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims.
Weighted undrawn commitments The table below provides a breakdown of weighted undrawn commitments. 2016 2015 £bn £bn
Undrawn commitments <1 year which may not be cancelled 1.8 0.6
Other undrawn commitments > 1 year which may not be cancelled & off-balance sheet items with 50% CCF 3.3 5.3
Total 58.6 63.5 Note: (1) Based on a 10% credit conversion factor (CCF).
November 2016. MREL policy and requirements remain subject to further potential development, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem.
(4) CRD IV capital buffers met by CET1 in addition to MREL requirements: being 3.5% in 2017 based on a capital conservation buffer of 2.5% and G-SIB requirement of 1.0%, and 4.0% in 2016 based on a capital conservation buffer of 2.5% and a G-SIB requirement of 1.5%. Excludes consideration of any additional management buffer.
(5) Corresponding shareholders’ equity was £48.6 billion (2015 - £53.4 billion). (6) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
proposals. The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
As at and for year ended Roll-off profile - weighted average rate spread (bps) 220 128 190 172 218 162 231
RBS plc - weighted average rate spread (bps) 121 69 106 143 244 186 98
Securitisation - weighted average rate spread (bps) 42 — — — — — 42
Covered bonds - weighted average rate spread (bps) 191 — — 137 — 150 306
Notes: (1) Based on final contractual instrument maturity. (2) Based on first call date of instrument (3) The weighted average spread reflects the average net funding cost to RBS. This is calculated as the difference between the issuing coupon and the equivalent hedging rate.
The table below analyses the movement in market and operational risk RWAs on the end-point CRR basis during the year.
NatWest Markets Other Total RWAs Total £bn £bn £bn £bn £bn
• NatWest Markets RWAs increased by £2.1 billion principally due to business movements and the impact of the weakening of sterling.
The chart below illustrates the concentration of risk-weighted assets by segment.
The table below analyses the movement in end-point CRR RWAs by segment during the year. Ulster Central
UK PBB RoI Banking Banking RBSI Markets Resolution W&G & other Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
IRB model changes relating to counterparty credit risk (in line with EBA Pillar 3 Guidelines). (2) Credit risk models were updated during the year including LGD model for quasi governments and PD model for banks.
Liquidity position: • The liquidity portfolio of £164 billion covered total wholesale funding, including derivative collateral, by more than two times. The liquidity portfolio increased by £8 billion in the year driven by secondary liquidity, as the volume of mortgage assets placed into the Discount Window Facility
• The regulatory liquidity coverage ratio (LCR) metric decreased to 123% at 31 December 2016 from 136% at the prior year end, driven by Capital Resolution run down and by UK PBB and Commercial Banking lending growth.
December 2016, down from 227% in 2015, primarily due to a change in approach that restricts reliance on DWF assets.
Funding position: • Net stable funding ratio (NSFR) remained broadly unchanged from the prior year at 121%. This is comfortably above the minimum target of 100% and reflects RBS’s funding strategy to rely on stable customer deposits.
• Loan:deposit ratio was 91% at the end of 2016, a 2%
Sources of liquidity and funding Liquidity and funding risks arise through the maturity transformation role that banks perform. It is dependent on RBS
specific factors such as maturity profile, composition of sources and uses of funding and the quality and size of the liquidity portfolio. Broader market factors, such as wholesale market conditions and depositor and investor behaviour, are also contributing factors.
RBS: • Has a clearly stated liquidity and funding risk tolerance: The liquidity and funding risk tolerance forms part of RBS’s bankwide risk appetite statement, which is overseen by the
ALCo Technical Committee, oversees the implementation of liquidity and funding management across RBS within set risk appetite.
• Incorporates liquidity costs, benefits and risks in product pricing and performance management: RBS uses internal funds transfer pricing to ensure liquidity costs are reflected in the measurement of business performance, and to correctly incentivise the business to source the most appropriate mix of funding.
Required and available stable funding sources less than and greater than 1 year timeline.
L-SREP An annual Liquidity Supervisory Review and Evaluation Process (L-SREP) with the PRA, that involves a comprehensive review of the RBS ILAAP, liquidity policies and risk management framework. This results in the settings of the Individual Liquidity Guidance, which influences the size and overall composition of the liquidity portfolio.
October 2014. The proposal included an implementation date of 1 January 2018, by which time banks are expected to meet and maintain an NSFR ratio of 100%. The European Commission
Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to ALCos at least monthly.
Any breach of internal metric limits will set in motion a series of actions and escalations outlined under the RBS Recovery Plan
Bank of Scotland International Limited, have been requested by local regulators to maintain separate recover plans to address specific liquidity risks. These plans will be aligned to the 2017
RBS in conjunction with a broader market stress, causing wider damage to the market and financial sector and severely impacting funding markets and assets.
RBS uses the most severe combination of these to set the internal stress testing scenario. The results of this enable the bank to set its internal liquidity risk appetite which complements the regulatory LCR requirement.
Liquidity portfolio The size of the portfolio is determined under the liquidity risk management framework with reference to RBS’s liquidity risk appetite.
Treasury, ring-fenced from the NatWest Markets trading book, and is the ultimate responsibility of the RBS Treasurer. This portfolio is held in the PRA regulated UK Domestic Liquidity
Subgroup (UK DoLSub) comprising RBS’s five licensed deposit taking UK banks: The Royal Bank of Scotland plc, National
RBS retains a prudent approach to setting the composition of the liquidity portfolio, which is subject to internal policies and limits over quality of counterparty, maturity mix and currency mix. The liquidity value of the portfolio is determined with reference to current market prices and the haircuts necessary to generate cash from the asset.
UK UK UK UK DoLSub (1) Other Total DoLSub (1) Total DoLSub (1) Other Total DoLSub (1) Total £m £m £m £m £m £m £m £m £m £m
Below AA rated governments — 237 237 — — — — — — 46
Local government — — — — — — — — — 12
Coutts & Co and Adam & Company PLC. In addition, certain of RBS’s significant operating subsidiaries, RBS N.V. and Ulster Bank Ireland DAC, hold managed portfolios that comply with local regulations that may differ from PRA rules.
(2) Comprises assets eligible for discounting at the Bank of England and other central banks.
The composition of RBS’s balance sheet is a function of the broad array of product offerings and markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
RBS’s asset and liability types broadly match. Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; interbank lending and funding largely nets off and this gap has narrowed over the past five years; and derivative assets are largely netted against derivative liabilities.
Commercial paper and certificates of deposit 3,205 3 3,208 742 202 944
Notes: (1) Includes £1.3 billion (2015 - £0.7 billion) relating to RBS’s participation in central bank financing operations under the European Central Bank’s Targeted Long Term Refinancing
The table below analyses repos by counterparty type. 2016 2015 £m £m
• Reverse repos at 31 December 2016 were £41.8 billion (2015 - £39.9 billion). Fair value of securities received as collateral for reverse repos was £41.8 billion (2015 - £39.8 billion), of which £30.5 billion (2015 - £29.0 billion) had been rehypothecated for
Liquidity and funding risk continued Loan:deposit ratios and funding surplus/(gap) The table below shows loans and advances to customers, customer deposits, loan:deposit ratios (LDR) and funding surplus/(gap). 2016 2015*
Central items & other 256 266 nm 10 416 3,272 nm 2,856
• Loan growth was driven by mortgage lending in UK PBB
Commercial Banking, Private Banking and RBSI. These increases were partially offset by deposit reductions in
Capital Resolution as the business continued to run down, and the sale of the International Private Banking business.
Liquidity and funding risk continued The table below shows RBS's principal funding sources. 2016 2015
The table below shows RBS's debt securities in issue and subordinated liabilities by residual maturity.
• Customer deposits and customer loans are broadly matched from a behavioural perspective.
• The net funding surplus in 2016 is concentrated in the longer dated buckets, reflecting the stable characteristics of customer deposits and lending that is behaviourally shorter dated.
Cash and balances at central banks 74,250 — — — 74,250 — — — 74,250 — 74,250
Total financial assets excluding disposal groups 127,376 12,117 13,626 23,230 176,349 65,422 50,577 160,870 453,218 328,852 782,070
• Pre-positioned with central banks as part of funding schemes and those encumbered under such schemes.
Covered assets held bonds & Repos & at central Readily Other Cannot securitisations Derivatives similar (2) Total (3) banks (4) available available be used Total Total
(1) £bn £bn £bn £bn £bn (5) £bn (6) £bn (7) £bn £bn £bn
(7) Cannot be used includes: (a) Derivatives, reverse repurchase agreements and trading related settlement balances. (b) Non-financial assets such as intangibles, prepayments and deferred tax. (c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation. (d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
Business risk is identified and managed at the product and transaction level. Estimated revenue, costs and capital are key considerations in the design of any new product or in any new investment decision.
RBS continued to reduce its business risk profile by implementing its strategic plan to shift the business mix towards the UK and retail and commercial banking segments, with higher risk activities in NatWest Markets and Capital Resolution curtailed through disposals and run-downs.
referendum result, and RBS has been closely monitoring and assessing the operating environment and its impact on business risk.
Reputational risk can arise from the conduct of employees; activities of customers and the sectors and countries in which they operate; provision of products and transactions; as well as operations and infrastructure.
Reputational risk is mitigated through the policy and governance framework, with ongoing staff training to ensure early identification, assessment and escalation of material issues.
The most material threats to RBS’s reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of its regulators, some of which have resulted in fines and public censure. Refer to the Litigation, investigations and reviews section of Note 31 on the consolidated accounts on page 367.
Risk Appetite Statements articulate the level of risk which functions and franchises must not exceed i .e. the RBS-wide cascaded risk appetite
We can clearly demonstrate that our products and services are designed to meet customer needs, their level of complexity is appropriate for the target market and they work in the way they are expected to
Our customers are sold products and services appropriate for their needs. Any information or advice provided is suitable, relevant and communicated in a clear, fair way. Delivery of post-sales support meets customer expectations
Conduct and regulatory risk is the risk that the behaviour of RBS
and its staff towards customers, or in the markets in which it operates, leads to unfair or inappropriate customer outcomes and results in reputational damage, financial loss or both. The damage or loss may be the result of a failure to comply with (or adequately plan for changes to) relevant official sector policy, laws, regulations, or major industry standards, or of failing to meet customers’ or regulators’ expectations. All the disclosures in this section are unaudited.
Conduct and regulatory risk exists across all stages of RBS’s relationships with its customers, from the development of its business strategies, to post-sales processes. The activities through which conduct risk may arise are varied and include product design, marketing and sales, complaint handling, staff training, and handling of confidential Insider Information. Conduct risk also exists if RBS does not take effective action to prevent fraud, bribery and money laundering. Regulatory risk arises from the regulatory, business or operating environment and from
RBS and certain members of staff are party to legal proceedings and are subject to investigation and other regulatory action in the
RBS continued to remediate historical conduct issues, while also focusing its customer-facing businesses and support functions around the needs of its customers including the delivery of a number of regulatory change programmes. Conduct and litigation costs were £5.9 billion in 2016 compared with £3.6 billion in
• On 8 November, RBS announced it would be taking two steps in relation to the FCA’s S166 review into GRG, firstly to implement a complaints process with independent thirdparty oversight for all customers in scope and secondly to provide an automatic refund of complex fees paid by inscope SME customers. The FCA review is ongoing and the final report findings are awaited. • RBS made a provision for the industry-wide review by the
• The UK’s Senior Managers and Certification regime was successfully implemented.
Risk Appetite Framework requires regular and consistent assessment through periodic Conduct Performance Assessment, reporting of risk exposures and the operating effectiveness of controls, across the businesses.
Key elements of the governance structure are set out below: • The Conduct & Regulatory Affairs (C&RA) Executive
Committee considers emerging material risks and issues, and implements Board and Executive Committee risk management policy decisions; • The Financial Crime Accountable Executive Committee
Bank-Wide Investment Committee, acting as the reception committee for reviewing externally mandated changes that may affect RBS. It also recommends appropriate responses, including change implementation activities. In doing so, it determines which businesses or functions own individual risks; and commissions and reviews impact assessments from customer businesses and functions.
Risk assessments are used to identify material conduct risks and implement key controls across all business areas. The risk assessment process is designed to confirm that risks are effectively managed and prioritised, as well as ensure controls are tested.
The conduct risk appetite framework has now been embedded and the Conduct Performance Assessment, which forms part of it, facilitates a consistent approach across RBS for assessing conduct and regulatory risk.
Risk appetite statements, in line with RBS-wide risk appetite, articulate the levels of risk which franchises and functions must not exceed. Where businesses are operating outside of appetite, the problems are addressed through agreed risk mitigation plans.
The most material conduct matters are reported to the appropriate committees, including the Board, the Group Audit
An annual Money Laundering Reporting Officer’s Report is submitted to the Board and the FCA. This covers RBS’s Anti-
Money Laundering (AML) framework and the operation and effectiveness of the systems and controls in place to comply with
Each business within RBS has enhanced its use of management information by linking it to the risk appetite statement. This is required to help ensure appropriate customer outcomes are delivered and that the management information is compliant with the Basel Committee on Banking Supervision’s principles for effective risk data aggregation and risk reporting.
Information is communicated to each customer-facing business and function about regulatory developments and discussions with regulators. This helps identify and execute any required mitigating changes to strategy or to business models.
systems failure or fraudulent activity). There can also be a link between operational risk failures and conduct risk issues.
During 2016, RBS’s operational risk management framework was enhanced with improved links between risk appetite and risk exposures. This underpins an appropriate risk-based approach to operational risk management.
Transformation Programme, the new approach, building on design in 2015, continued to be rolled out and embedded across the organisation. A significant number of assessments were carried out during 2016 in order to identify and quantify the most material risks to key products and services. Refer to page 203 for further details.
Through a network of oversight teams, the function seeks to ensure the integrity of the framework, and manages overall operational risk profile against risk appetite.
The Operational Risk Executive Committee (OREC), which is a sub-committee of the Executive Risk Forum (ERF), acts on all operational risk matters. This includes reviewing operational risk exposure against risk appetite; identifying and assessing both current and emerging material operational risks; reviewing and monitoring the operational risk profile; and reviewing and approving material operational risk policy management framework changes.
The Control Environment Certification (CEC) process is a half yearly self-assessment by the CEOs of RBS’s customer-facing franchises and business units, as well as the heads of the bank’s support and control functions. It gives an assessment on the adequacy and effectiveness of the internal control environment in a consistent and comparable manner, highlighting areas where targeted effort is needed to meet the standards required in order to create a safer and more secure bank for customers. It covers material risks and the key controls that underpin them, including financial, operational and compliance controls, as well as the supporting risk management frameworks.
The CEC outcomes, including forward-looking assessments for the next two half-yearly cycles and the progress made to improve the control environment, are reported to the Board, the Group
Audit Committee and the Board Risk Committee (BRC). They are also shared with external auditors.
Policy Framework, Sarbanes-Oxley 404 requirements concerning internal control over financial reporting (as referenced in the
RBS’s operational risk appetite is expressed through a set of qualitative risk appetite statements and quantitative measures which are defined at an aggregate, bank-wide and individual business level. Appetite covers RBS’s most material operational risks, defined by a materiality assessment, which in turn considers past, current and future risk exposures. Appetite exposures for all material risks are regularly reported to business risk committees, the OREC, ERF and BRC.
The process is designed to confirm that risks are effectively managed and prioritised in line with the stated risk appetite.
Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively.
Risks are mitigated through the application of key preventative and detective controls. This is an integral step in the risk assessment methodology, which determines residual risk exposure. Control owners are accountable for the design, execution, performance and maintenance of key controls.
Exposures specific to each business are communicated through regular risk and control reports discussed at business risk committees.
RBS uses the standardised approach to calculate its operational risk capital requirement. This is based upon multiplying three years’ average historical gross income by coefficients set by the regulator based on type of income.
As part of the wider ICAAP an operational risk economic capital model is used as a key capital benchmark. The model uses loss data and scenario analysis inputs from the operational risk framework, plus external loss data and certain other factors to provide a risk-sensitive view of RBS’s operational risk capital requirement.
Refer to the Capital risk section for operational risk capital requirement figures.
The operational risk event and loss data management process ensures RBS captures and records operational risk loss events that meet defined criteria. Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk.
The most serious events are escalated in a simple, standardised process to all senior management, by way of a ‘Group Notifiable
single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2016 may relate to events that occurred, or were identified in, prior years.
RBS’s operational risk losses (compared to 98% in 2015). These losses primarily resulted from new conduct-related provisions in respect of RBS's issuance and underwriting of residential mortgage-backed securities (RMBS), the majority settlement of the 2008 shareholder litigation, the automatic refund of complex fees paid by SME customers in RBS's Global Restructuring
Employment practices and workplace safety 1 15 — — — 1%
Note: (1) The calculation in the above table is based on the volume and value of events where the associated loss is more than or equal to £10,000.
will make payments or other contributions to or with respect to a pension scheme because of a moral obligation or because RBS
considers that it needs to do so for some other reason.
The Royal Bank of Scotland Group Pension Fund (the Main scheme), the AA Section of The Royal Bank of Scotland Group
Prior to 6 April 1997 individuals who contracted out of the UK
equalisation in the IAS 19 defined benefit obligations and risk disclosures.
As part of the 31 December 2015 triennial valuation, RBS made a single £4.2 billion payment to the RBS Group Pension Fund in
March 2016, instead of a series of annual contributions up to 2023, removing an element of pension risk. RBS and the trustee also agreed that the next valuation of the RBS Group Pension
Fund will take place as at 31 December 2018, giving certainty to pension funding commitments until at least 2020.
The Main scheme operates under a trust deed. The corporate trustee, RBS Pension Trustee Limited, is a wholly owned subsidiary of National Westminster Bank Plc. The trustee board comprises six directors selected by RBS and four directors nominated by members. The trustee is supported by RBS
The PC considers mechanisms that could potentially be used for managing risk within the funds as well as financial strategy. It also reviews actuarial assumptions from a sponsor perspective as appropriate. The PC is a key component of RBS’s approach to managing pension risk and it reviews and monitors risk management, asset strategy and financing issues on behalf of
The trustee has taken measures to mitigate inflation and interest rate risks, both by investing in suitable financial assets and by entering into inflation and interest rate swaps. The Main scheme also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes.
P ro p o rt io n o f lia b ili ty c a s h f lo w s
Pension risk reports are submitted quarterly in the RBS Risk and
RBS also undertakes stress tests and scenario analyses on its material defined benefit pension schemes each year as part of its risk measurement framework. These stress tests are also used to satisfy the requests of regulatory bodies such as the Bank of
The table below shows the sensitivity of the Main scheme’s assets and liabilities (measured according to IAS 19 ‘Employee
Benefits’). It includes changes in interest rates and equity values at the year-end, taking account of the current asset allocation and hedging arrangements. Asset sensitivity to changes in nominal yields increased over the year as swap yields fell at longer durations. Change in Change in Change in value of value of net pension assets liabilities obligations 2016 £m £m £m
Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 1,048 502 546 Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 1,485 1,552 (67)
2015 Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 874 363 511 Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 1,029 1,104 (75)
Credit quality - The portfolio was reduced due to strategic disposals and the ongoing run-off of assets in Capital Resolution, although this was offset by the depreciation of the value of sterling relative to most major currencies. Asset quality remained stable against a backdrop of challenging economic conditions in the Shipping and Natural Resources sectors.
Exposure (CE) and Potential Exposure (PE). This change is discussed further on page 209.
The activities of the RBS credit risk management function, which is led by the Group Chief Credit Officer (GCCO), include: • Approving credit for customers; • Ensuring that credit risk is within the risk appetite set by the Board; • Managing concentration risk and credit risk control frameworks; • Developing and ensuring compliance with credit risk policies; and
° Product and asset class - Personal credit risk appetite framework
Credit risk stewardship takes place throughout the customer relationship, from initial credit approval and on a continuous basis thereafter.
The methodology applied for assessing and monitoring credit risk varies between customer types and segments.
Wholesale customers - including corporates, banks and other financial institutions - are grouped by industry sectors and geography as well as by product/asset class and are managed on an individual basis.
Private Banking - are grouped into portfolios of similar risk and managed on a portfolio basis.
Notes: (1) Authority is delegated by the Executive Risk Forum. (2) For further information on the RBS provisioning and impairment practices refer to page 302. *unaudited
Risk appetite across all risk types is set using specific quantitative targets under stress, including earnings volatility and capital adequacy. The credit risk appetite frameworks have been designed to reflect factors that influence the ability to meet those targets.
Tools such as stress testing and economic capital are used to measure credit risk volatility and develop links between the credit risk appetite frameworks and risk appetite targets. The frameworks are supported by a suite of policies and transaction acceptance standards that set out the risk parameters within which franchises must operate. For further information on the specific frameworks for
RBS has changed its measure of credit risk exposure from Credit Risk Assets (CRA) to Current Exposure (CE) and Potential Exposure
Lending exposure Comprises cash balances at central banks as well as loans and advances to banks and customers.
Measured net of individual, collective and latent provisions unless otherwise stated.
Measured using the mark-tomarket value of derivatives after the effect of enforceable netting agreements and regulator-approved models but before the effect of collateral. Calculations are gross of credit valuation adjustments (CVAs).
• Trading book bonds • Equity securities • Settlement risk • Intra-group credit exposures • Securities financing transactions (repos) • Banking book debt securities
• Trading book bonds • Equity securities • Settlement risk • Suretyships • Intra-group credit exposures
Other • Net of cash and gold collateral. • Current Exposure and Potential Exposure are reported against the guarantor of a transaction to reflect the transfer of risk.
(3) Current Exposure and Potential Exposure for exchange-traded derivatives are defined as exposure at default (EAD).
measure, the following changes are noted: • Exposures to the Sovereign sector are higher. This is primarily due to the inclusion of government bond exposure held in the banking book and managed in Treasury and
• In the Banks & Other Financial Institutions sector, the netting of financial collateral reduced the Current Exposure value compared to CRA. Risk transfer also reduced current exposure compared to CRA.
RBS uses the output of credit risk models in the credit approval process, as well as for ongoing credit risk assessment, monitoring and reporting, to inform credit risk appetite decisions. These models are divided into different categories: Model (1) Calculation method Wholesale Personal
Each customer account is scored and models are used to assign a PD rating.
The credit economic capital (EC) model is a framework that allows for the calculation of portfolio credit loss distributions and associated metrics over a given risk horizon for a variety of business purposes. The model takes into account migration risk (the risk that credit assets will deteriorate in credit quality across multiple years), factor correlation (the assumption that groups of obligors share a common factor) and contagion risk (for example, the risk that the weakening of the sovereign’s credit worthiness has a significant impact on the creditworthiness of a business operating in that country).
The PD models used to assign a credit grade for the purposes of credit risk management assess the probability of a customer failing to honour its credit obligations over a one-year time period.
The AQ bands and corresponding probability of default ranges are set out below: AQ band Probability of default (mid-point) Indicative S&P rating
Collateral may consist of either cash or securities. Additional collateral may be called should the net value of the obligations to
RBS rise or should the value of the collateral itself fall. The majority of agreements are subject to daily collateral calls with collateral valued using RBS’s internal valuation methodologies.
Practices for credit stewardship - including credit assessment, approval and monitoring as well as the identification and management of problem debts - differ between the Wholesale and Personal portfolios. For further information refer to the relevant sub-sections on page 218 and 234. A key aspect of credit risk stewardship is ensuring that, when signs of impairment are identified, appropriate impairment provisions are recognised.
The amount of an impairment loss is measured as the difference between the asset carrying amount and the present value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. The current net realisable value of the collateral will be taken into account in determining the need for a provision. This includes cash flows from foreclosure (less costs of obtaining and selling the collateral), whether or not foreclosure is probable. Impairment provisions are not recognised where amounts due are expected to be settled in full on the realisation of collateral. RBS uses one of the following three methods to quantify the provision required: individual; collective; and latent, as set out below: Provision method Asset type Quantification method Key factors considered
Impaired but not individually significant, grouped into homogenous portfolios, by Retail products and
• For Wholesale customers PD, LGD and EAD values are used.
• For Personal, calculations are performed at portfolio level by product (e.g. mortgages, credit cards or unsecured loans).
Note: (1) Refer to pages 248 to 253 for an analysis of impaired loans, related provisions and impairments. Refer to page 302 for details of accounting policies. For details on collateral, refer to the Counterparty credit risk section on page 211 as well as the Wholesale and Personal risk mitigation sections on pages 218 and 234.
Determining whether evidence of impairment exists requires the exercise of management judgement. It should be noted that the following factors are not, of themselves, evidence of impairment, but may be evidence of impairment when considered with other factors: • Disappearance of an active market because an entity’s financial instruments are no longer publicly traded.
• A decline in the fair value of a financial asset below its cost or amortised cost.
The table below summarises Current and Potential Exposure, net of provisions and after risk transfer, by sector and asset quality.
Commercial Real Estate (CRE) (in Property) - refer to page 224; Oil & Gas (in Natural Resources) - refer to page 228; Mining & Metals (in Natural Resources) - refer to page 231; Shipping - refer to page 232; and
• RBS’s credit risk exposure has been affected by the significant appreciation of both the euro and US dollar against sterling. This was relevant to exposures in
on a constant currency basis (foreign exchange impact of £18.8 billion). This was predominately due to a reduction in the sovereign sector, driven by liquidity management activities, and in the transport sector in line with the exit strategy for the shipping sector.
Challenging economic conditions resulted in reduced global demand, oversupply and consequently volatile commodity prices, which adversely affected the shipping market and vessel values. Credit impairment releases were lower in 2016 with less asset disposal activity.
Banks and Natural Exposure Exposure other FI Sovereigns (2) Property resources Transport Other total total 2016 £m £m £m £m £m £m £m £m £m
Eurozone other (5) Germany 63 1,533 23,801 91 150 800 1,073 27,511 32,574 RoI (3) 13,440 433 1,624 692 436 218 2,542 19,385 20,661 Netherlands 30 1,966 4,176 451 94 138 1,126 7,981 12,247 France 76 2,309 2,402 357 447 827 679 7,097 15,982 Belgium 22 702 537 158 44 138 61 1,662 2,427 Luxembourg 6 625 21 346 32 41 106 1,177 1,917 Other (6) 14 382 609 55 84 34 123 1,301 2,022 **restated - refer to page 209 for further details. 2015 data is unaudited.
Notes: (1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS’s sector concentration framework. (2) Includes exposures to central governments, central banks and sub-sovereigns such as local authorities. (3) RoI: Republic of Ireland. (4) Comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa. RoW also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned to specific countries from a country risk perspective. (5) Countries where current exposure is greater than £1 billion. (6) Finland, Austria, Malta, Slovakia, Estonia, Lithuania, Latvia and Slovenia. (7) Non-eurozone countries displayed in the table are those that are A+ or worse and with current exposure greater than £1 billion.
• Sovereign exposure to the US and RoW decreased. This is in line with RBS strategy to reduce activity in the US as well as reductions in RoW, which were partly due to reduced exposure in the shipping sector and other Capital Resolution disposals.
Concentration in a single sector or across sectors susceptible to similar stress events.
Elevated approval requirements, mandatory controls and procedures, monitoring and reporting, the requirement for regular reviews and for plans to address any exposures in excess of limit.
“eligible” mitigants. To be eligible under the framework, mitigants must be legally enforceable, structurally effective and of appropriate maturity.
Risk appetite has remained broadly stable across all sectors, allowing for growth in our core franchises in accordance with our strategy. CRE limits have remained broadly flat, allowing for a limited amount of targeted growth within the sector and there has been some notable growth in certain of our non-Bank FI sectors where a more targeted growth strategy has been in place.
(TAS) were introduced to provide more detailed transactional lending and risk acceptance rules and guidelines. TAS are one of the tools used to control risk appetite at the customer/transaction level. The introduction of sector-specific TAS followed the introduction of general sector TAS in November 2015, providing full sector coverage. TAS are supplementary to the Credit Policy.
• The portfolio impact of the transaction, including the impact on any credit risk concentration limits or agreed business franchise risk appetite.
Shipping valuations - Vessel valuations are obtained using several different independent sources. Valuations are usually undertaken on a desktop basis, assuming a willing buyer and willing seller. Most vessels are valued on a charter-free basis, but in certain circumstances the valuations take account of longer term committed charter income. Valuations are normally performed on a quarterly basis. From time to time, particularly for facilities showing increased signs of financial stress, a more formal valuation or specialist advice will be obtained.
Wholesale customers whose credit profiles have deteriorated since origination. Expert judgement is applied by experienced credit risk officers to classify cases into categories that reflect progressively deteriorating credit risk to the bank. All customers that have been granted forbearance are managed under this framework. There are two classifications which apply to nondefaulted customers within the framework - Heightened
Heightened Monitoring customers are performing customers who have met certain characteristics, which have led to material credit deterioration. Collectively, characteristics reflect circumstances that may affect the customer’s ability to meet repayment obligations. Characteristics include trading issues, covenant breaches, material PD downgrades and past due facilities. Sector specific characteristics also exist. Heightened Monitoring customers require pre-emptive actions (outside the customer’s normal trading patterns) to return or maintain their facilities within the bank’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers who have met the criteria for Heightened Monitoring and also pose a risk of credit loss to the bank in the next 12 months, should mitigating action not be taken or be successful.
Loss exposures in RBS and in each business are regularly reviewed by a Risk of Credit Loss Committee. The committee members are experienced credit, business and Restructuring specialists. The purpose of the committee is to review and challenge the strategies undertaken for those customers who pose the largest risk of credit loss to the bank.
(see Heightened Monitoring characteristics). Corrective actions may include granting a customer various types of concessions.
Other potential outcomes of the relationship review are to: take the customer off the Risk of Credit Loss framework; offer additional lending and continue monitoring; transfer the relationship to Restructuring if appropriate; or exit the relationship altogether.
The Risk of Credit Loss framework does not apply to problem debt management for Business Banking customers in UK PBB.
For the Wholesale problem debt portfolio, customer relationships are managed by the Restructuring team (this excludes customers managed by PBB). The factor common to all customers with
Restructuring involvement is that RBS’s exposure is outside risk appetite. The purpose of Restructuring is to protect the bank’s capital. Where practicable, Restructuring do this by working with corporate and commercial customers to support their turnaround and recovery strategies and enable them to return to mainstream banking. Restructuring will always aim to recover capital in a fair and efficient manner.
Specialists in Restructuring work with customers experiencing financial difficulties, and showing signs of financial stress, with the aim of restoring their business to financial health whenever practicable. The objective is to find a mutually acceptable solution, including restructuring of existing facilities, repayment or refinancing.
Forbearance takes place when a concession is made on the contractual terms of a loan in response to a customer’s financial difficulties. Concessions granted where there is no evidence of financial difficulty, or where any changes to terms and conditions are within current risk appetite, or reflect improving credit market conditions for the customer, are not considered forbearance.
A recalibration of covenants or a covenant amendment may be used to cure a potential or actual covenant breach. In return for this relief, RBS may seek to obtain a return commensurate with the risk that it is required to take. The increased return for the increased risk can be structured flexibly to take into account the customer’s circumstances.
For example it may be structured as either increased margin on a cash or payment-in-kind basis, deferred-return instruments or both. While RBS considers these types of concessions qualitatively different from other forms of forbearance, they constitute a significant proportion of UK
May be granted where the customer’s business condition or economic environment is such that it cannot meet obligations and where other forms of forbearance are unlikely to succeed. Debt forgiveness can be used for stressed corporate transactions and is typically structured on the basis of projected cash flows from operational activities, rather than underlying tangible asset values.
Loans may be forborne more than once, generally where a temporary concession has been granted and circumstances warrant another temporary or permanent revision of the loan’s terms. All customers are assigned a PD and related facilities an
The transfer of wholesale loans subject to forbearance from impaired to performing status follows assessment by relationship managers and the Restructuring credit team. When no further losses are anticipated and the customer is expected to meet the loan’s revised terms, any provision is written off and the balance of the loan returned to performing status. This course of action is not dependent on a specified time period and follows the credit risk manager’s assessment.
Note: (1) Previously reported forbearance types are classified as non-payment (covenant concessions, release of security) and payment (payment concessions and loan rescheduling, forgiveness of all or part of the outstanding debt, variation in margin, standstill agreements).
• Forbearance in the Transport sector has increased in 2016 driven by the Shipping sector (£0.7 billion). A number of
Shipping facilities which were forborne in 2016 were included in a portfolio sale during Q4. (Refer to page 232 for further information).
• The decrease in exposure in the Natural Resources sector is reflective of forbearance being granted to defaulted customers with provisions in the Oil & Gas sector given the sector’s challenges (refer to page 228 for further information). As the exposure measure is net of provisions, this reduced forborne exposure is not reported in the table above. On a gross basis, the level of forbearance granted to customers in the Natural Resources sector was consistent with 2015.
• Forbearance for performing Retail & Leisure customers increased driven by a limited number of covenant waivers for individually material cases, while the volume of customers receiving forbearance decreased.
• The value of loans forborne during 2015 and 2016 and still outstanding at 31 December 2016 was £4.3 billion (2015 - £4.5 billion), of which £1.0 billion related to arrangements completed during 2015 (2015 - £1.3 billion completed in
A dedicated portfolio controls team is responsible for reviewing portfolio strategy, credit risk appetite and policies, as well as oversight of valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees.
The majority of CRE lending applications are reviewed by specialist CRE transactional credit teams, including a dedicated development team. Lending guidelines and policy are informed by lessons learned from the 2008 financial crisis.
New business is monitored and controlled against agreed underwriting standards. Sub-sector and asset class limits are used to restrict exposure to emerging risks when appropriate.
Commercial Residential Total Commercial Residential Total total £m £m £m £m £m £m £m 2015**
A breakdown of the Commercial Banking UK investment portfolio for 2016 by UK region is set out below.
• A slowdown in the UK commercial property investment market, which began in the third quarter of 2015, continued after the EU referendum result in June 2016. As a result, capital values were down by approximately 3% on average in the second half of 2016. Despite a minor recovery in the final months of 2016, forecasts suggest that values will remain under pressure during 2017. However, the sector continues to attract equity flows given its attractive yields.
• Lending to the CRE sector in the UK increased during the year as a result of CPB and PBB having appetite to support activity in the sector.
• The increase in exposure in RoI and Western Europe was primarily due to foreign exchange movements.
The table below provides a breakdown of the CRE portfolio by LTV band.
AQ1-AQ9 AQ10 Total AQ1-AQ9 AQ10 Total £m £m £m £m £m £m
Notes: (1) Includes other regions in addition to UK and RoI.
• The reduction in overall portfolio average is primarily the result of repayments, asset sales and write-offs of legacy non-performing assets from Ulster Bank RoI, CPB and
Commercial Banking and 1.1x in Capital Resolution (2015 3. 4x and 1.6x respectively).
A breakdown of CRE portfolio lending, gross of provision and after risk transfer, risk elements in lending (REIL) and provisions is provided below. Total Commercial Banking Capital Resolution
CRE loans, REIL and provisions £m £m £m £m £m £m
• The growth in AQ6 band is the result of the introduction of a more conservative calibration of certain commercial real estate asset quality models, rather than deterioration of underlying asset quality.
Of which: Of which: Of which: Of which: Capital Capital Capital Capital
Commodity traders 631 1 992 1 900 444 1,320 452 Of which: Natural resources 568 — 744 — 521 212 752 212
and 32% (£1.1 billion and £2.5 billion) respectively on a constant currency basis, with foreign exchange impact of £0.5 billion (CE) and £1.0 billion (PE). This portfolio remains subject to active risk management (see below).
• Mining & Metals - CE and PE decreased during the year by 23% and 10% (£0.2 billion and £0.2 billion) on a constant currency basis, with foreign exchange impact of £0.1 billion
(CE) and £0.3 billion (PE). There was some deterioration in asset quality due to challenging market conditions and this portfolio remains subject to active risk management (see below).
• Water & Waste - CE and PE increased during the year by 16% and 10% (£0.7 billion and £0.8 billion) on a constant currency basis, with foreign exchange impact of £0.1 billion
(CE) and £0.1 billion (PE). These increases are predominately due to mark-to-market movements in longdated inflation linked swaps driven by changes in long-term inflation outlook.
Oil & Gas* Exposure to the Oil & Gas sector, split by sub-sector and geography, measured on a Potential Exposure basis, net of provisions and after risk transfer, is summarised below.
Producers (including international oil companies) 1,177 51 1,028 275 256 2,787 Oilfield service providers 700 10 678 279 51 1,718 Other wholesale and trading activities 450 76 475 45 432 1,478 Refineries 21 2 — 327 18 368 Pipelines 98 — 310 31 8 447
• Oil prices dipped below $30 per barrel at the start of the year but ended the year above $50 per barrel following positive announcements from OPEC and Non-OPEC
• The sub-sector in which a customer operates is a primary consideration for assessing credit risk. Customers involved in exploration and production (E&P) are most immediately exposed to low oil prices and these companies have introduced capital spending reductions and tight cost controls to conserve cash. In turn, this has impacted oilfield service providers, with E&P companies buying fewer products and services from the oilfield service providers, and demanding lower prices for those they do purchase.
Companies (NOCs). IOCs and NOCs are less vulnerable to the oil price decline due to scale, diversification and, in the case of NOCs, implicit support from governments. At 31
December 2016, 29% of the portfolio exposure was to IOCs and NOCS combined (2015 - 28%).
• Committed lending exposure included legal commitments to syndicated bank facilities and bilateral facilities with tenors up to five years. These committed facilities are for general corporate purposes - including funding operating needs and capital expenditures - and are available as long as counterparties comply with the terms of the credit agreement. Contingent obligations relate to guarantees, letters of credit and suretyships provided to customers. RBS
• The number of forbearance events was consistent with 2015. In 2016 there was an increase in payment concessions granted compared to 2015 which predominantly involved the relaxation of financial covenants to give customers more financial flexibility. Most forbearance involved customers in the E&P and oilfield services subsectors where earnings have been more immediately and materially affected by the downturn.
• The increase in AQ10 reflected ongoing challenging market conditions which resulted in a small number of customers experiencing financial stress during the year. AQ10 assets million).
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 £ m il li o n s
Credit risk: management basis continued Mining & Metals* Exposure to the Mining & Metals sector, measured on a Potential Exposure basis, net of provisions and after risk transfer, is summarised below.
A breakdown of asset quality for the Mining & Metals portfolio, measured on both a Current Exposure and Potential Exposure basis, net of provisions and after risk transfer, is summarised below.**
• The deterioration in asset quality reflected the challenging operating environment in 2016.
Credit risk: management basis continued Shipping* Exposure to the Shipping sector, measured on both a Current Exposure and Potential Exposure basis net of provisions and after risk transfer, is summarised below.
Resolution and is related to exposure secured by oceangoing vessels. The remaining exposure outside Capital
Resolution related principally to is within the Shipbuilding and Inland Water Transport sub-sectors. The reduction in exposure was mainly driven by asset sales and debt repayments in Capital Resolution, in line with RBS’s strategy.
• Within Capital Resolution, Concentrations were as types included liquid petroleum gas, natural gas and rollon /roll-off vessels at 22% of exposure (2015 - 19%).
• The Capital Resolution portfolio LTV at 31 December 2016 was 102% (2015 - 85%), or 92% net of the provisions outlined below. The year-on-year increase in
• Provisions, excluding latent provisions, increased from £169 million to £386 million during 2016. Again, this was due to weak market conditions, and increasing LTV, which led to an increase in the portfolio’s levels of default.
• There was an increase in the number of forbearance events, mainly involving the relaxation of minimum security covenants due to deteriorating asset prices. Total forbearance for this sector was £723 million.
This section sets out further detail on RBS’s approach to credit risk management for its personal customers.
Additionally, in the UK and Ireland support is provided to customers with unsecured loans who establish a repayment plan with RBS through a debt advice agency or a self-help tool. Such
• Interest only conversions - The loan converts from principal and interest repayment to interest only repayment. This is only available in Ulster Bank RoI and Ulster Bank North on a temporary basis. These forbearance concessions are no longer offered to customers in UK PBB, RBSI and Private
Monitoring of forbearance - Forborne loans are separated into a distinct population and reported on a regular basis until they exit the forborne population.
A loan is considered to have exited forbearance when it meets the criteria set out by the European Banking Authority (EBA)
requirements for Financial Reporting. These include being classified as performing for two years since the last forbearance event, making regular repayments and the debtor being less than 30 days past due.
The act of granting of forbearance in itself will only change the delinquency status of the loan in exceptional circumstances, which can include capitalisation of principal and interest in arrears, where the loan may be returned to the performing book if it remains up to date for the duration of the probation period and is deemed likely to continue to do so.
Once a loan has been identified as impaired it is managed by recoveries teams in the relevant businesses. The teams seek to minimise RBS’s loss by maximising cash recovery while treating customers fairly.
Credit risk: management basis continued Overview of personal portfolio split by product type and segment on a Current Exposure basis net of provisions*
Average LTV by weighted value 62% 59% 54% 62% 62% 61%
Forbearance stock and flow on a Current Exposure basis net of provisions
Forbearance type: Notes: (1) Q4 2016 forbearance calculation has moved to the FINREP EBA basis. (2) Capitalisation term extensions, economic concessions. (3) Payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest arrangements *unaudited
Mortgage LTV distribution by segment on a Current Exposure basis net of provisions
<=50% <=70% <=80% <=90% <=100% <=110% <=130% <=150% >150% LTVs Other Total £m £m £m £m £m £m £m £m £m £m £m £m
Note: (1) LTV is calculated on a Current Exposure basis, gross of provisions.
**restated - refer to page 209 for further details. 2015 data is unaudited.
• Other Personal lending remained stable during the year in the context of an upward trend in unsecured household debt in the wider UK market. Asset quality remained stable with no deterioration in the arrears rate from the prior year.
• Approximately 12% by value of owner-occupied mortgages were on interest-only terms with a bullet repayment and 5%
(2015 - 49%) and 56% by weighted value of debt outstanding (2015 - 56%). The £2.2 billion of mortgages granted by Ulster Bank North were indexed against the UK
December 2016. The number of properties repossessed in 2016 was also lower at 519 compared with 727 in 2015.
• The flow of new forbearance was £406 million in 2016 compared with £435 million in 2015. The value of mortgages subject to forbearance decreased by 10.4% compared with 2015 to £1.3 billion (equivalent to 1.1% of the total mortgage book). This was mainly driven by benign market conditions.
• A release of provision on historically-impaired mortgages was the key driver in an overall provision release of £20.5 million for the year (2015 charge of £2.8 million). The value of underlying defaults was slightly lower year-on-year.
The table below summarises UK mortgage exposure by region and LTV.
2016 £m £m £m £m £m £m £m £m 2015** £m £m £m £m £m £m £m £m
Notes: (1) 2017 includes pre-2017 maturity exposure. (2) Includes £0.1 billion (2015 - £0.1 billion) of repayment mortgages that have been granted interest-only concessions (forbearance). (3) Maturity date relates to the expiry of the interest only period. (4) 2016 includes pre-2016 maturity exposure.
• The number of customers approaching Ulster Bank RoI for the first time in respect of forbearance assistance declined during 2016. The majority (69%) of forbearance arrangements were less than 90 days in arrears.
• The AQ10 population reduced to £1.8 billion. This was mainly the result of the disposal of a distressed portfolio.
Notes: (1) 2017 includes pre-2017 maturity exposure. (2) Includes £0.2 billion (2015 - £0.3 billion) of repayment mortgages that have been granted interest only concessions (forbearance). (3) Maturity date relates to the expiry of the interest only period. (4) 2016 includes pre-2016 maturity exposure.
• Approximately 82% of all mortgages were on interest-only terms; 82% of owner-occupied mortgages were interest-only with 90% of buy-to-let mortgages on interest-only terms.
by weighted value of 69% (2015 - 64%). Buy-to-let lending was £170 million (2015 - £79 million) with an average LTV
• The number of customers granted forbearance in 2016 decreased by 28%. A total of £37 million of forborne loans were subject to a long-term arrangement (term extensions and covenant breaches) at 31st December 2016 (2015 - £35 million). Short term forbearance comprises payment suspensions and reduced payments.
Lending to owner-occupiers during this period was £1.8 billion (2015 - £1.4 billion) and had an average LTV by weighted value of 70% (2015 - 70%). Buy-to-let lending was £323 million (2015 - £316 million) with an average LTV by
• Fixed interest rate products of varying time durations accounted for approximately 65% of the mortgage portfolio with 6% a combination of fixed and variable rates and the remainder variable rate.
granted forbearance in 2016. The value of mortgages subject to forbearance remain low, showing a decrease of 12% in 2016 to £0.18 billion (equivalent to 1.6% of the total mortgage portfolio) as a result of improved market conditions.
• There was a reduction of impairment provision balances for personal mortgages in 2016 to £23 million compared with £26 million in 2015. The provision release resulted from revised modelling assumptions reflecting current market conditions.
The table below shows interest only mortgage portfolios (excluding mixed repayment mortgages) by type and by contractual year of maturity.
Balance sheet to current exposure bridge* The table below provides a bridge between the balance sheet and the related components of Current Exposure (CE).
(5) Primarily includes cash in ATMs and branches; Other assets (see note below); and Settlement balances (not within the scope of current exposure). (6) Balance sheet position shows reverse repurchase and stock borrowing position; current exposure position shows net reverse repurchase / stock borrowing and repurchase /
stock lending position. (7) Balance sheet position includes intangible assets, property, plant and equipment, deferred tax, prepayments and accrued income and assets of disposal groups.
Current and Potential Exposures presented in Credit risk: management basis are used by Risk Management for risk management and monitoring. However, they exclude certain exposures, primarily trading securities and take account of legal netting agreements that provide a right of legal set-off but do not meet the offset criteria in IFRS. The tables that follow are therefore provided to supplement the disclosures in the Credit risk: management basis section, to reconcile to the balance sheet. The tables in this section include balances relating to disposal groups, reflecting the total credit risk and losses faced by RBS. All the disclosures in this section are audited.
Cash and balances at central banks 74.3 — 74.3 — — — — — — 74.3
• Net exposure fell by £9.8 billion or 4% reflecting disposals and run-down within Ulster Bank RoI and Capital Resolution and lower held-for-trading bonds partially offset by higher unsecured lending.
Derivatives financial Balance Exposure repos Lending Debt Equity assets sheet value Offset post offset £m £m £m £m £m £m £m £m £m
Finance leases and instalment credit — 12,269 — — 3 — 12,272 (3) 12,269
For geographic concentrations refer to: • Lending: Loans and related credit metrics and Credit risk management basis: Portfolio overview - asset quality
• Debt securities: Issuer and IFRS measurement and Credit risk - Country risk and Credit risk management basis: Portfolio overview - geography
Standard & Poor’s (S&P), for illustrative purposes only. This relationship is established by observing S&P’s default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the probability of default ranges associated with the master grading scale to these default rates given that, for example, the S&P published default rates do not increase uniformly by grade and the historical default rate is nil for the highest rating categories.
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Past due Impaired provision Total 2016 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Past due Impaired provision Total 2015 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest.
• Customer loans increased by £12.4 billion (4%) mainly reflecting lending in UK PBB and Commercial Banking offset by disposals and wind downs in Capital Resolution.
These reductions were predominantly driven by the portfolio sale of non-performing SME lending and buy-to-let mortgages in Ulster Bank RoI in Q4 2016 and related writeoffs. These decreases were offset by the adverse impact of exchange rate movements of £1.0 billion in REIL and £0.5 billion in loan impairment provisions respectively.
• Net impairment charge of £537 million largely related to the
• Amounts written off were significantly lower at £3.7 billion compared with £9.0 billion in 2015, primarily in commercial real estate (£1.5 billion in 2016 compared with £6.2 billion in 2015).
Individual Collective Latent Total Individual Collective Latent Total £m £m £m £m £m £m £m £m
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office. Ulster Bank RoI contributes a significant proportion of the European loan exposure. Refer to Business review on page 136.
Finance leases and instalment credit 11,443 107 79 0.9 74 0.7 (8) 37
Notes: (1) REIL are stated without giving effect to any security held that could reduce the eventual loss should it occur or to any provisions marked. (2) For details on impairment methodology refer to Credit risk on page 212 and Accounting policy 15 Impairment of financial assets on page 302.
Charges/(releases) to income statement from discontinued operations — — — — — — — — — — 103
Notes: (1) Designated as at fair value through profit or loss balances are £171 million (2015 - £147 million), of which £142 million are other financial institutions (2015 - £111 million) and £29 million are corporate (2015 - £36 million). (2) Includes government sponsored entities. (3) HFT short positions of £3 million (2015 - £2 million) did not relate to non-periphery eurozone countries.
GBP USD Euro Other Total Assets Liabilities Notional Assets Liabilities £bn £bn £bn £bn £bn £m £m £bn £m £m
• At Group level, derivative assets and liabilities reduced reflecting lower trading volumes of £34 billion, TriOptima tear-ups of £9 billion, partially offset by the impact of foreign exchange movements. Increases in trading activity in NatWest Markets of £15 billion was more than offset by disposals and run-off in Capital Resolution.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The following table shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures. For details of CVA methodology, refer to Note 9 on the consolidated accounts: Financial instruments - valuation.
• FVA reserves increased by £184 million during 2016, primarily driven by interest rates tightening with the movements in the first half of the year partially reversing in the second half of 2016.
• The decrease in CVA reserves of £156 million, was driven by credit spreads tightening together with trade close-outs and novations.
Derivatives: settlement basis and central counterparties The table below analyses the derivative notional and fair value by trading and settlement method.
The following disclosures in this section are audited: • Traded market risk - Internal VaR
Traded market risk: • The year was characterised by higher market volatility. This was particularly notable during Q1 2016 - due to market concerns over the stability of the financial sector - and around key events, such as the UK referendum on EU
• NatWest Markets significantly reduced its traded market risk exposure in the run-up to these key events, reflecting market uncertainty. Value-at-Risk (VaR) fell as low as £11 million on 22 June, the day before the EU referendum, from £16 million at the start of that month. The focus of the risk reduction was in the Rates business.
• Market flows increased markedly following these events, supporting NatWest Markets’ customer activity. Given the significant risk reduction achieved in recent years, notably in
• Total market risk RWAs fell 18% or £3.8 billion to £17.4 billion, driven by reductions under both the standardised approach and the internal model approach.
Non-traded market risk: • The non-traded market risk appetite statement and metrics were revised in early 2016. The risk appetite metrics were enhanced to capture a combination of earnings-based and economic value-based metrics, as prescribed by regulatory guidelines. The appetite framework was also aligned to
• Hedging activity aims to reduce RBS’s sensitivity to potential adverse impacts of exchange rate and interest rate movements, in particular on its Common Equity Tier 1 ratio.
Ahead of the EU referendum, the residual sensitivity of this ratio was low and no adverse impact from RBS’s economic risk exposure resulted from the outcome of the vote.
The primary objective of RBS’s trading activities is to provide a range of financing, risk management and investment services to its customers - including major corporations and financial institutions around the world. From a market risk perspective, the trading activities are focused on the following markets: currencies; rates; securitised products; and traded credit.
• Non-trading book foreign exchange risk - arising from customer transactions and profits and losses that are in a currency other than the functional currency of the transacting operation.
Although this is not an economic risk, the difference in accounting between the exposure and the hedge creates volatility in the income statement.
Pension-related activities also give rise to market risk. Refer to page 205 for more information on risk related to pensions.
RBS manages the key categories of traded and non-traded market risk separately. Each category is discussed in dedicated sections below.
Forum (ERF) and quarterly to the Board Risk Committee. In addition, traded market risk positions are reported monthly to the
Treasury and Market Risk Committee and non-traded market risk positions are reported to the ALCo (monthly in the case of interest rate, credit spread and accounting volatility risks and quarterly in the case of foreign exchange and equity risks).
RBS’s policy is to manage risk exposures within an appetite that is set by the ERF and, in the case of non-traded market risk, endorsed by the ALCo. This appetite is expressed in the form of exposure limits.
The Market Risk Committee cascades the limits further down the organisation as required. For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions.
The limit framework at RBS level comprises VaR, stressed valueat -risk (SVaR) and sensitivity and stress limits (for more details on VaR and SVaR, refer to pages 263 to 266). The limit framework at trading unit level also comprises additional metrics that are specific to the market risk exposures within its scope.
These additional metrics aim to control various risk dimensions such as product type, exposure size, aged inventory, currency and tenor.
remains within its risk appetite, triggers at RBS and lower levels have been set such that if exposures exceed a specified level, action plans are developed by the front office, Market Risk and
Traded market risk exposures are monitored against limits and analysed daily by market risk reporting and control functions. A
Businesses’ profit and loss performance is monitored automatically via loss triggers which, if breached, require a remedial action plan to be agreed with the Market Risk function. The loss triggers are set using both a fall-from-peak approach and an absolute loss level.
The main risk measurement methods are VaR, SVaR and the incremental risk charge. Risks that are not adequately captured by VaR or SVaR are captured by the Risks not in VaR (RNIV)
framework to ensure that RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses in excess of VaR and SVaR.
The key inputs into these measurement methods are market data and risk factor sensitivities. Sensitivities refer to the changes in deal or portfolio value that result from small changes in market parameters that are subject to the market risk limit framework. Revaluation ladders are used in place of sensitivities to capture the impact on the income statement of large moves in risk factors or the joint impact of two risk factors.
Historical simulation VaR may not provide the best estimate of future market movements. It can only provide a forecast of portfolio losses based on events that occurred in the past. The
Market data time series are updated on a daily basis, with a tenworking -day time lag.
The use of a 99% confidence level VaR statistic does not provide information about losses beyond this level, usually referred to as
Finally, where market data time series are not appropriate (due to poor quality or a lack of liquidity in the market), RBS uses proxy time series or excludes the risk factor from its VaR model and capitalises the risk through its RNIV framework.
Traded VaR (1-day 99%) Average Period end Maximum Minimum Average Period end Maximum Minimum £m £m £m £m £m £m £m £m
Markets’ strategic Rates and Currencies businesses, resulted in a risk increase in the second half of 2016.
• On a period end basis, total traded VaR increased in 2016 by 39%. The increase was mainly driven by the Rates business.
Therefore, VaR is subject not only to model management review and validation but also to regulation compliance, which includes
The performance and adequacy of the VaR model are tested on a regular basis through the following processes: • Back-testing - Internal and regulatory back-testing is conducted on a daily basis.
• RNIV framework - The RNIV framework ensures that all material risks outside the internal VaR models are captured by, if necessary, developing an RNIV calculation to manage the risk (refer to page 266).
• Model Risk Management review - As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure that the model is still fit for purpose given current market conditions and book constitution (refer to page 169).
The Actual P&L for a particular business day is the firm’s actual
• The exceptions in the Currencies business were mainly driven by the increased volatility connected with the large market movements in the run-up to and following the EU
The need for an RNIV calculation is typically identified in one of the following three circumstances: (i) as part of the New Product
The market risk economic capital framework uses models to calculate the market and default risk in the trading book which are aligned with other models that are used for limit setting and market risk management. The results are annualised to be consistent with the other economic capital models to permit consolidation of all risk types as part of the RBS-wide economic capital programme.
• Specific interest rate risks have both a systematic component and an idiosyncratic component. The systematic component captures the risk in market movements of credit spreads (across sectors, geographic locations and ratings)
VaR and SVaR capture general and specific risks using a single model but not risks arising from the impact of defaults and rating changes associated with traded credit products and their derivatives. For these risks, two product-dependent approaches are used: • The incremental risk charge model captures risks arising from rating migration and default events for the more liquid traded credit instruments and their derivatives.
The changes were requested by RBS, reflecting the continued simplification of its operations. RBS has IMA permission for the following material legal entities: RBS plc and NatWest Plc.
While internal VaR provides a measure of the economic risk, regulatory VaR is one of the measures of regulatory capital requirements by legal entity.
VaR as it takes into account only regulator-approved products, locations and legal entities. In addition, it is based on a directly modelled ten-day holding period, rather than a scaled one-day holding period, for market risk capital calculations.
RBS’s SVaR model has also been approved by the PRA for use in the capital requirement calculation. The distinction between regulatory SVaR and internal SVaR is the same as that between regulatory VaR and internal VaR.
As discussed earlier, RBS has an established RNIV framework that ensures that the risks not captured in VaR are adequately covered by its capital. In line with regulatory guidelines for external reporting, VaR RNIV values are reported as a subset of the VaR-based regulatory capital charge, whereas SVaR RNIV
The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) that are held in the trading book. It further captures basis risk between different instruments, maturities and reference entities. Following the internal ratings-based approach for credit risk, the IRC is calculated over a one-year capital horizon with a 99.9%
The transition matrix is estimated using Moody’s history of issuer ratings.
At 31 December 2016, total market risk RWAs were £17 billion
All model changes are approved through model governance committees at franchise level. Changes to existing models are subject to MRM review and RBS follows regulatory guidance for assessing the materiality of extensions and changes to the internal model approach for market risk.
As noted earlier, RBS largely manages the key categories of nontraded market risk separately. The categories are: interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
Non-traded interest rate risk (NTIRR) factors are grouped into the following categories: • Gap risk - which arises from the timing of rate changes in non-trading book instruments. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve
• Basis risk - which captures the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices, or on the same interest rate indices but with different tenors.
aggregates its interest rate positions and hedges them externally using cash and derivatives, primarily interest rate swaps.
Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with RBS
Non-traded equity risk is the potential variation in the income and reserves arising from changes in non-trading book equity valuations. Any such risk is identified prior to any investments and then mitigated through a framework of controls.
Once approved by ADCo for execution, such transactions are referred for approval to the Board, the Executive Committee, the
Following the approval of an enhanced non-traded market risk appetite framework in early 2016, VaR disclosures reflect a more complete economic risk measure for the banking book.
• Total internal non-traded VaR rose from £33 million to £72 million on a period end basis, primarily driven by credit spread risk, which remains the largest contributor to the total VaR.
• Interest rate risk mainly arises from the structural hedges carried out by Treasury. It rose towards the end of the year as the equity structural hedging strategy was adjusted in anticipation of future conduct fines.
NTIRR can be measured from either an economic value-based or earnings-based perspective, or a combination of the two. Valuebased approaches measure the change in value of the balance sheet assets and liabilities over a longer timeframe, including all cash flows. Earnings-based approaches measure the potential short-term (generally one-year) impact on the income statement of changes in interest rates.
The non-traded interest rate risk VaR metrics for RBS’s retail and commercial banking activities are included within the non-traded
VaR table above. The VaR captures the risk resulting from mismatches in the repricing dates of assets and liabilities. It includes any mismatch between structural hedges and stable non and low interest-bearing liabilities such as equity and money transmission accounts as regards their interest rate repricing behavioural profile.
The following table shows the sensitivity of net interest income, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel with the exception that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base case earnings sensitivity and mismatches in the repricing dates of loans and deposits.
Multi-year forward projections would increase the negative impact of a downward change in rates or, conversely, the benefit of an immediate upward change in interest rates to current market rates. This is because, over time a greater proportion of maturing structural hedges will be reinvested at prevailing rates which may be higher or lower. Also, in the absence of dynamic assumptions relating to further management actions, the variance to the base case income forecast arising from margin compression or expansion on managed rate products will continue to accrue.
• Interest rate exposure remains asset-sensitive, so that rising interest rates will have a positive impact on net interest income.
• Assumptions relating to customer pricing are kept under review and may vary at different levels of interest rates. As a result, the increase in sensitivity between 25 basis points and 100 basis points is not linear.
• Changes in pricing assumptions and increased hedging of customer deposits are the key actions in personal and commercial banking that may reduce interest rate sensitivity.
After hedging the net interest rate exposure of the bank externally, RBS Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve. Over time, the hedging programme has built up a portfolio that provides a basis for stable income attribution to the product and equity structural hedges.
The table below shows the impact on net interest income associated with product hedges managed by RBS Treasury.
Net interest income - impact of product structural hedging £m £m
The average size of the hedge increased from £72 billion in 2015 to £90 billion, split by business broadly in line with the proportion of income as shown above. The increase largely reflected growth in hedged product balances and increased hedging of rate-on sensitive customer deposits. During the year, interest rates remained at or close to historical low levels, as a result of which the average book yield (including 3-month LIBOR) fell from 1.48% to 1.20%. This reflects the impact of maturing hedges being reinvested at lower rates and new hedges added during the year at lower market rates.
compared with 1.45% one year previously. The market rate matching the amortising structure of the hedge was 0.60%.
Equity structural hedges are used to minimise the volatility on earnings arising from returns on equity. The hedges managed by
(2015 - £0.7 billion), which is an incremental benefit relative to short-term wholesale cash rates. The average size of the hedge was £33 billion in 2016, lower than in 2015 (£41 billion), primarily reflecting the payment of £4.2 billion into the pension fund, an additional £3.1 billion provision for various investigations and litigation matters relating to RBS's issuance and underwriting of residential mortgage-backed securities (RMBS) and the £1.2 billion payment of the final Dividend Access Share (DAS)
The equity hedge also aims broadly to track a time series of medium-to-longer-term swap rates. Other factors, such as the impact of the sale of fixed-rate securities or additional hedging activity, are not captured in the equity yield. The average book yield (including 3-month LIBOR) rose from 2.3% to 2.4%.
The table below shows the estimated sensitivity of equity reserves to interest rate movements, on a pre-tax basis. The scenarios shown are simplified scenarios in which all rates across the yield curve have been moved up or down instantaneously by 25 basis points and 100 basis points and taxation effects have not been estimated. In this analysis, interest rates have not been floored at zero. Note that a movement in the
AFS reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
+25 basis points -25 basis points +100 basis points -100 basis points 2016 £m £m £m £m
Available-for-sale reserve (36) 35 (150) 135 Cashflow hedge reserve (417) 422 (1,641) 1,714
• The asymmetry in results between the upward and downward interest rate shocks reflects the changing sensitivity of derivative valuations to the same interest rate movement at different levels of interest rates (i.e.
• The reduction in the sensitivity of the available-for-sale reserve primarily results from the reduction of Capital
Net investments in Non-controlling foreign operations investment currency exposures Economic foreign currency foreign operations interests (NCI) excluding NCI (1) hedges pre-economic hedges hedges (2) exposures 2016 £m £m £m £m £m £m £m
• The reduction in the residual structural foreign currency exposure was driven by provisions for RMBS and dividends received from EU subsidiaries. These reductions were partly offset by appreciation of the US dollar and the euro against sterling in 2016.
• Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening in foreign currencies against sterling would result in a gain of £0.3 billion in equity (2015 a £0.5 billion gain). A 5% weakening in foreign currencies against sterling would result in a loss of £0.3 billion in equity
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity shares with no observable market parameters or (iii) other unlisted equity shares. 2016 2015 £m £m
Unrealised gains included in Tier 1 or Tier 2 capital 53 301
RBS capitalises non-traded market risk as part of the Pillar 2A
The capital calculations under ICAAP are also used for economic capital purposes.
Net loans and advances to customers 323.0 18.1 304.9 308.0 17.4 290.6 Interest rate
Deposits by banks 33.3 20.7 12.6 28.1 20.0 8.1 Interest rate
Derivatives 236.5 234.6 1.9 254.7 252.4 2.3 Interest rate, credit spreads
Notes on the consolidated accounts 1 Net interest income 314 2 Non-interest income 314 7 Earnings per ordinary share 327 10 Financial instruments - maturity analysis 341 16 Property, plant and equipment 349 17 Prepayments, accrued income and other assets 350 18 Discontinued operations and assets and liabilities of disposal groups 20 Provisions for liabilities and charges 352 21 Accruals and other liabilities 353 24 Non-controlling interests 358 32 Net cash flow from operating activities 382 33 Analysis of the net investment in business interests and intangible assets 34 Interest received and paid 383 35 Analysis of changes in financing during the year 383 36 Analysis of cash and cash equivalents 383 38 Directors’ and key management remuneration 389 39 Transactions with directors and key management 389 41 Post balance sheet events 390
December 2016 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European
The Royal Bank of Scotland Group plc’s financial statements comprise: Group Parent Company
• Information identified as “audited” in the Capital and risk management section of the Business review on pages 163 to 276.
Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act
As explained in the accounting policies, in addition to complying with its legal obligation to apply IFRSs as adopted by the European
• Provisions for conduct, litigation and regulatory matters, customer remediation and claims.
Audit scope • The significant components of our audit cover the reportable segments identified in the financial statements together with the central functions of the Group based in the UK and overseas and include
• The components where we performed full or specific audit procedures accounted for 93% or more of
We identified the risks of material misstatement described below as those that merited the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas. In identifying the risks of material misstatement below, we considered the risk of management override of internal control over financial reporting, including the impact on the recognition of revenue.
Provisions for conduct, litigation and regulatory matters, customer remediation and claims
The most significant items at year end were: • RMBS - A provision of £3.4 billion was recorded in 2016 in addition to the £3.4 billion already recorded for a total provision of £6.8 billion at 31
• Business formerly known as Williams & Glyn – a provision of £750 million was recorded following the revised proposal presented in
February 2017 by HM Treasury to the European Commission for RBS to meet its remaining State Aid commitments by alternative means.
These and other legacy matters have historically resulted in significant charges being taken to reflect the Group’s best estimate of costs relating to these areas.
Management judgement is needed to assess whether an obligation exists and a provision should be recorded at 31 December 2016 in accordance with the accounting criteria. This includes determining if
• It is likely that an economic outflow such as a payment will occur; and
The most significant areas of judgement are: • Completeness of provisions recognised: judgement in the determination of whether an outflow in respect of identified material conduct matters are probable or can be estimated reliably.
Group’s key controls over the identification, estimation and monitoring of provisions considering the potential for management override of controls. The controls tested included those implemented by management to identify and monitor claims, assess the completeness and accuracy of data used to estimate provisions, and ensure the accuracy and completeness of disclosures made in accordance with accounting standards.
We examined regulatory correspondence to assess developments in key cases, the Group’s complaint handling reports and RBS litigation reports to identify potentially material cases. We also confirmed the details of significant cases directly with the Group’s external legal representatives. For cases where a provision was not recognised, we considered whether the outcome was probable and reliably estimable in accordance with the accounting criteria.
We assessed the provisions recorded by testing the data and assumptions used in the calculation of the provisions recorded, including expected claim rates, legal costs, and the timing of settlement. This included comparing the assumptions to peers which were involved in similar matters.
In addition, we attended and observed key management meetings and reviewed the minutes of the legal provision committee meetings to assess the effectiveness of management’s review process and the appropriateness of the conclusions reached.
• The provision for the remaining claimants for the UK shareholder action incorporates assumptions which are reasonable for the purpose of determining a provision under IAS37.
• The PPI provision remains sensitive to key assumptions, such as future complaint volumes, time barring and Plevin outcomes.
• The provision related to the FCA review of RBS’s treatment of SMEs is sensitive to a number of assumptions. We consider it is reasonable based on the information available at this time.
The Group Audit Committee also discussed and approved the recording of a provision of £750m in the 2016 annual accounts, as a consequence of a revised proposal presented by HM Treasury to the European Commission in February 2017. This proposal envisages that RBS will deliver a package of remedies to promote competition in the market for banking services to SMEs in the UK. It remains subject to a consultation exercise by the European Commission and approval by the College of Commissioners as well as a markettesting exercise by HM Treasury. We discussed and agreed the quantum of the provision, based on management’s assessment of the cost to deliver the package of remedies and their conclusion that it met the criteria to be recorded as an adjusting post balance sheet event.
Future profitability estimates impacting the recognition of deferred tax and the impairment of goodwill and, in the parent company accounts, investments in subsidiaries.
Key judgements in determining the value in use include: • Revenue forecasts impacted by business and strategic changes underway and the changing competitive environment.
• Interpretation of recent changes to tax rates and laws for deferred tax assets.
We tested the design and operating effectiveness of the Group’s key controls around the preparation and review of budgets and forecasts. We tested the controls over the value in use model including the significant assumptions, inputs, calculations, methodologies and judgements.
We performed our own scenario analysis for certain assumptions we considered could have a significant impact on the results of the impairment tests.
We evaluated how the discount rates and long term growth rates used by management compared to peer practice. We also tested how previous management forecasts compared to actual results to evaluate the accuracy of the forecasting process.
In addition, we attended and observed management meetings where key judgements were discussed, including the value in use model and the carrying value of deferred tax assets. We also reviewed Board and Executive Committee minutes to assess the effectiveness of management’s review process and the appropriateness of the conclusions reached.
We are satisfied that the carrying values of deferred tax assets, goodwill and, in the parent company accounts, investments in subsidiaries are reasonable and in compliance with IFRS. The recoverable amounts exceed the carrying amounts when key assumptions are stressed.
We considered the key assumptions impacting the forecast recovery period for material deferred tax assets and the extension of the recovery period for its subsidiary, National Westminster Bank Plc, from 5 to 6 years given the underlying profitability of this business.
Note 15 (page 348) and Note 22 (page 354) of the financial statements, and Note 7 (page 396) of the Parent company financial statements.
A significant degree of judgement is required to determine the timing and amount of impairment to recognise with respect to loans and advances. At year end the group reported total gross loans and advances of £386.5 billion (2015: £371.7 billion) and impairment provisions of £4.5 billion (2015: £7.1 billion).
We performed a sample of loan reviews on performing loans to establish our own view as to whether any IAS 39 loss indicators were present.
We are satisfied that impairment provisions were reasonable and in compliance with IFRS. We highlighted the following: • We discussed our benchmarking comparison for certain models which indicated that the assumptions were within an acceptable range of outcomes. The data used as inputs into the models and calculators is materially complete and accurate.
The key judgements and estimates are: • Complex model-dependent valuations, which are aligned with material pricing models as defined by the RBS Modelled
Product Review Committee. These include interest-rate swaps linked to pre-payment behaviour and interest rate and foreign exchange options with exotic features such as those having multiple call dates or with a variable notional.
• Our re-pricing of instruments valued using illiquid pricing inputs covered material products associated with this risk and the results were compared to the valuations recorded by management. For derivatives our valuation used EY
models and independent data and for illiquid cash positions, prices of comparable positions and other data points were used.
comparing valuation judgements applied by management to our knowledge of current industry practice through benchmarking exercises (ii) re-valuing a sample of counterparty level FVA and CVA calculations using independent models, (iii) testing funding spreads to third party data, including comparison with recent trade activity and (iv) independently recalculating illiquid CVA inputs.
We are satisfied that the fair value of financial instruments with higher risk characteristics and the recognition of related income is reasonable and in accordance with IFRS.
We highlighted the following: • Our independent valuation of a sample of derivatives were either within our threshold or, where initially outside, were corroborated by other data, for example, trade exit activity, valuation adjustments for model or data limitations, or benchmarking to peer practice.
Hedge effectiveness testing including the impact on non-interest income The Group undertakes fair value and cash flow hedge accounting programs to mitigate income statement volatility arising from the use of vanilla interest rate and foreign exchange hedges in economic hedging.
Hedge effectiveness testing for both of these programs is identified as a risk area because the application of accounting rules and execution of hedge effectiveness testing leads to significant adjustments to the balance sheet and income statement which are inherently complex and involve some management judgement. These adjustments impact non-interest income and there is an incentive to manipulate the hedge effectiveness results, to avoid undesirable income statement volatility. Any hedge ineffectiveness remains in the income statement.
While the majority of the RBS process for hedge accounting is automated a risk arises that management design an effectiveness testing methodology that does not comply with IAS 39 or manually override otherwise automated results to influence the income statement impact.
We are satisfied that the Group has appropriately applied hedge accounting in accordance with IFRS.
Pension valuation and retirement benefit obligations RBS operates a number of defined benefit schemes which in total are significant in the context of the overall balance sheet. At year end the Group reported a net pension liability of £87 million (2015: £3.6 billion).
The pension schemes hold certain complex and illiquid assets for which there are no quoted prices.
We tested the design and operating effectiveness of key controls over the completeness and accuracy of data extracted and supplied to the Group’s actuaries, which is used to calculate the pension schemes’ surplus or deficit.
We tested the fair value of scheme assets by independently calculating a fair value for a sample of the assets held. Our sample included cash, equity instruments, and derivative financial instruments. We also tested the existence of the sampled pension assets by obtaining written confirmation from the pension asset custodian and by examining the relevant legal documentation.
We are satisfied that the pension valuation and retirement benefit obligations recorded at 31 December 2016 are reasonable and in
Our audit procedures have a focus on IT systems and controls due to the pervasive nature and complexity of the IT environment, the large volume of transactions processed in numerous locations daily and the reliance on automated and IT dependent manual controls. Our areas of audit focus included user access management, developer access to the production environment and changes to the IT
Where deficiencies were identified, we tested compensating controls or performed alternate procedures. In addition, we sought to understand where relevant, changes were made to the IT landscape during the audit period.
We are satisfied that IT controls relevant to financial reporting operated effectively as at year-end.
The audit scope of Specific scope components may not have included testing of all significant accounts within the component; however the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken in each of the components by us, as the primary audit engagement team, or by component auditors in the United Kingdom or from other EY global network firms operating under our instruction. Of the five full scope components, audit procedures were performed on one of these directly by the primary audit engagement team. Where work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.
During the course of our audit, we reassessed initial materiality and have made no subsequent adjustments.
The application of materiality at the individual account or balance level is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and corrected misstatements exceed materiality.
An amount below which identified misstatements are considered to be clearly trivial.
We agreed with the Group Audit Committee that we would report to them all corrected and uncorrected audit misstatements in excess of £14 million, which is set at 5% of planning materiality, as well as misstatements below that threshold that, in our view, warranted reporting on qualitative grounds.
Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report is made solely to the Group’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
• based on the work undertaken in the course of the audit: o the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Note: (1) The maintenance and integrity of the RBS web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the directors’
statement that they consider the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s performance, business model and strategy; and whether the Annual
Report and Accounts appropriately addresses those matters that we communicated to the
• the Parent Company financial statements and the part of the Directors’ Remuneration
Write down of goodwill and other intangible assets (159) (1,332) (523)
The accounts were approved by the Board of directors on 23 February 2017 and signed on its behalf by: Howard Davies
Recycled to profit or loss on ceding control of Citizens (8) — (962) —
Movements in cash flow hedging reserve - amount recognised in equity — 32 18 - amount transferred from equity to earnings — — (18)
(4) AT1 capital notes totalling £2.0 billion issued in August 2016.
Net (investment in)/divestment of business interests and intangible assets 33 (886) 391 (1,481)
Effects of exchange rate changes on cash and cash equivalents 8,094 576 909
Cash and cash equivalents at 31 December 36 98,570 103,592 107,904
The accompanying notes on pages 314 to 390, the accounting policies on pages 297 to 313 and the audited sections of the Business review: Capital and risk management on pages 163 to 276 form an integral part of these financial statements.
December 2014 to clarify the application of the investment entity consolidation exception.
An amendment to IAS 1, ‘Presentation of Financial Statements’ was issued in December 2014 to clarify the application of materiality to financial statements.
that are controlled by the Group. The Group controls another entity (a subsidiary) when it is exposed, or has rights, to variable returns from its involvement with that entity and has the ability to affect those returns through its power over the other entity; power generally arises from holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. A subsidiary is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it through a sale or a significant change in circumstances. Changes in the Group’s interest in a subsidiary that do not result in the Group ceasing to control that subsidiary are accounted for as equity transactions.
Fees in respect of services are recognised as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.
Payment services - this comprises income received for payment services including cheques cashed, direct debits, Clearing House
BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer's account monthly or quarterly in arrears.
Trade finance - income from the provision of trade finance is recognised over the term of the finance unless specifically related to a significant act, in which case income is recognised when the act is executed.
The results of discontinued operations, comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised either on measurement to fair value less costs to sell or on disposal of the discontinued operation, are shown as a single amount on the face of the income statement; an analysis of this amount is presented in Note 18 on the accounts.
Employees may receive variable compensation satisfied by cash, by debt instruments issued by the Group or by RBSG shares.
A curtailment occurs when the Group significantly reduces the number of employees covered by a plan. A plan amendment occurs when the Group introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Past service cost may be either positive
Items of property, plant and equipment (except investment property - see Accounting policy 9) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, these are accounted for separately.
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both.
Group entities record transactions in foreign currencies in their functional currency, the currency of the primary economic environment in which they operate, at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 23).
Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective impairment assessments, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics.
For loans that are individually assessed for impairment, the timing of write off is determined on a case-by-case basis. Such loans are reviewed regularly and write off will be prompted by bankruptcy, insolvency, renegotiation and similar events.
• Credit cards: the irrecoverable amount is written off after 12 months; three years later any remaining amounts outstanding are written off.
Amounts recovered after a loan has been written off are credited to the loan impairment charge for the period in which they are received.
Designated as at fair value through profit or loss - financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the
Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Income from trading activities includes gains and losses on held-for-trading financial liabilities as they arise.
Financial liabilities designated as at fair value through profit or loss principally comprise structured liabilities issued by the
Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value.
A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. A
Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
Derivative financial instruments are initially recognised, and subsequently measured, at fair value. The Group’s approach to determining the fair value of financial instruments is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Note 9 on the accounts.
The judgements and assumptions involved in the Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
Judgement is involved in determining whether an obligation exists, and in estimating the probability, timing and amount of any outflows. Where the Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Furthermore, for an individual matter, there can be a wide range of possible outcomes and often it is not practicable to quantify a range of such outcomes. The Group’s outstanding litigation is periodically assessed in consultation with external professional advisers, where appropriate, to determine the likelihood of the
The Group makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £1,803 million were recognised as at 31 December 2016 (2015 - £2,631 million).
Collective component - this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collectively assessed provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions).
Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk.
Adjustments are also made when valuing financial liabilities measured at fair value to reflect the Group’s own credit standing.
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Further details about the Group’s valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given in Note 9 on the accounts.
A number of IFRSs and amendments to IFRS were in issue at 31 December 2016 that would affect the Group from 1 January 2017 or later.
Neither of these amendments is expected to have a material effect on the Group’s financial statements.
The principle features of IFRS 9 are as follows: Recognition and derecognition
The sections in IAS 39 setting out the criteria for the recognition and derecognition of financial instruments have been included unamended in IFRS 9.
• Amortised cost - Financial assets with terms that give rise to interest and principal cash flows only and which are held in a business model whose objective is to hold financial assets to collect their cash flow are measured at amortised cost.
• Fair value through other comprehensive income - Financial assets with terms that give rise to interest and principal cash flows only and which are held in a business model whose objective is achieved by holding financial assets to collect their cash flow and selling them are measured at fair value through other comprehensive income.
• Fair value through profit and loss - Other financial assets are measured at fair value through profit and loss.
Financial liabilities - IFRS 9’s requirements on the classification and measurement of financial liabilities are largely unchanged from those in IAS 39. However, there is a change to the treatment of changes in the fair value attributable to own credit risk of financial liabilities designated as at fair value through profit or loss which are recognised in other comprehensive income and not in profit or loss as required by IAS 39.
IFRS 9’s hedge accounting requirements are designed to align the accounting more closely to the risk management framework; permit a greater variety of hedging instruments; and remove or simplify some of the rule-based requirements in IAS 39. The elements of hedge accounting: fair value, cash flow and net investment hedges are retained. There is an option in IFRS 9 for an accounting policy choice to continue with the IAS 39 hedge accounting framework; the Group currently anticipates applying this option.
The classification and measurement and impairment requirements will be applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge accounting will be applied prospectively from that date.
The table below sets out the key descriptions used for credit impairment under IFRS 9, and their equivalent usage under IAS 39 and existing regulatory reporting.
Assets that are defaulted will be shown as credit impaired. RBS intends to use 90 days past due as a consistent measure for default across all product classes. Also where RBS considers that the customers is unlikely to pay in credit obligations,
Regulatory PDs adjusted to point in time metrics are used in the latent provision calculation.
A framework is being established that incorporates both quantitative and qualitative measures and is aligned to the
Group’s current risk management framework. Decisions in relation to credit deterioration will be management decisions, subject to approval by governing bodies such as the Group Provisions Committee.
Management propose to establish an approach that is primarily informed by the increase in lifetime probability of default, with additional qualitative measures to account for assets where PD does not move, but a high risk factor is determined, these include the Risk of Credit Loss framework and binary triggers (examples includes the use of payday lending, forbearance and 30 days past due).
In most cases, management expect an asset that has demonstrated a doubling of its lifetime probability of default would be considered to have a significant increase in credit risk.
The evaluation of future cash flows, the risk of default and impairment loss should take into account expectations of economic changes that are reasonable.
Management have developed the default modelling capability for IFRS 9 to simulate multiple economic forecasts as part of the model outcomes for PD, LGD and exposure.
An estimate of the amount that will not be recovered in the event of default, plus the cost of debt collection activities and the delay in cash recovery. LGD is a downturn based metric, representing a prudent view of recovery in adverse economic conditions.
Models are used to provide estimates of credit facility utilisation at the time of a customer default, recognising that customers may make further drawings on unused credit facilities prior to default or that exposures may increase due to market movements. EAD cannot be lower than the reported balance sheet, but can be reduced by a legally enforceable netting agreement.
The reference date used to assess a significant increase in credit risk is as follows. Term lending: the date the facility became available to the customer.
Current Accounts/ Overdrafts: the account opening date or, if later, the date of initial granting of overdraft facility or of limit increases.
Modification is not separately defined but accounting impact arises as an EIR
The table below summarises the existing Group balance sheet captions for financial assets and their IAS 39 classification, and indicates the expected classifications that will apply under IFRS 9.
IFRS 2 ‘Share-based payment’ was amended in June 2016 to clarify the accounting for net settlement of tax in respect of sharebased payments and the calculation of the cost of modified awards and those with vesting conditions that are not market conditions. The effective date is 1 January 2018
Advance Consideration’ was issued in December 2016 clarifying the date of a foreign exchange transaction to be used on initial recognition of a related asset or other item. The effective date is
IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17
Internal funding of trading businesses (4) 105 91 £m £m £m
Property, plant and equipment depreciation and write down (see Note 16) 574 950 671
Notes: (1) Awards are equity-settled unless international comparability is better served by cash-settled awards. (2) All awards have vesting conditions and therefore some may not vest. (3) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Employee Share Plan.
Average Shares Average Shares Average Shares exercise price under option exercise price under option exercise price under option £ (million) £ (million) £ (million)
The market value of awards vested/exercised in 2016 was £40 million (2015 - £55 million; 2014 - £44 million). There are vested options over 4 million shares exercisable up to 2019 (2015 - 5 million; 2014 - 7 million).
Reconciliation of variable compensation awards to income statement charge 2016 2015 2014 £m £m £m
Add: current year charge for amounts deferred from prior years 147 140 201
Notes: (1) The tables above relate to continuing businesses only. (2) Cash awards are limited to £2,000 for all employees. (3) Excludes other performance related compensation. (4) Adjusted operating profit before variable compensation expense.
and overseas, including the Main Section of The Royal Bank of
Scotland Group Pension Fund (the “Main scheme”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation (principally the
Pensions Act 2004). Under UK legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities. Pension fund trustees are required to: prepare a statement of funding principles; obtain regular actuarial valuations and reports; put in place a recovery plan addressing any funding shortfall; and send regular summary funding statements to members of the scheme.
Similar governance principles apply to the Group’s other pension schemes, although different legislative frameworks apply to the
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and unfunded post-retirement benefit plans.
The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is assumed.
Equity and bond put options 1,860 — 2 6,109 2 12
Main scheme, adjusted to take account of the nature of liabilities, risk appetite of the trustees, size of the scheme and any local regulatory constraints.
Swaps are used to manage interest rate and inflation risk of the liabilities, as well as being used to manage other risks within the
Main scheme. They have been executed at prevailing market rates and within standard market bid/offer spreads with a number of counterparty banks, including The Royal Bank of Scotland plc.
At 31 December 2016, the gross notional value of the swaps was £55,874 million (2015 - £44,387 million) and had a net positive fair value of £3,629 million (2015 - £1,444 million). Collateral is required on all swap transactions. The counterparty banks had delivered a net amount of £3,991 million of collateral at 31
Longevity at age 60 for current pensioners (years) Males 27.4 27.8 Females 29.1 29.8
Longevity at age 60 for future pensioners currently aged 40 (years) Males 29.0 29.1 Females 31.2 31.4
Fair of defined ceiling/ Net Fair of defined ceiling/ Net value of benefit minimum pension value of benefit minimum pension
Currency translation and other adjustments — — — (36) (73) — (37)
Effect of changes in actuarial financial assumptions (1,124) (1,124) (1,387) (1,387)
Currency translation and other adjustments — — — 533 602 69
Return on plan assets above recognised interest income 8,562 (8,562) 9,254 (9,254)
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 17) (276) (215)
The defined benefit obligation is attributable to the different classes of scheme members in the following proportions (Main scheme): The table below sets out the sensitivities of the present value of defined benefit obligations at 31 December to a separate change in the principal actuarial assumptions.
0.25% additional rate of increase in pensions in payment 1,339 945
Pension liabilities are calculated on the central assumptions and under the relevant sensitivity scenarios. The sensitivity to pension liabilities is the difference between these calculations.
Fair value of plan assets 43,824 30,703 30,077 24,272 22,441 49,229 34,708 34,359 28,488 26,370
Present value of plan obligations 38,851 30,966 31,776 26,958 25,648 43,990 35,152 36,643 31,484 30,110
Actual return on plan assets 9,872 703 5,766 1,997 1,329 10,708 749 6,485 2,270 1,696
The key assumption methodology used in the 31 December 2015 valuation is set out below. As at that date the funding level disclosed on the assumptions below was 84%. This is before any allowance for the £4.2 billion contribution made in March 2016.
Fees payable for the audit of the Group’s annual accounts — 4.0
Fees payable for the audit of the Group’s annual accounts 4.0 —
Notes: (1) Includes fees for the period Deloitte were principal Group auditor (2016 - 1 January 2016 to effective resignation on 24 March 2016: 2015 - 1 January 2015 - 31 December 2015). (2) Comprises no fees (2015 - £0.8 million) in relation to reviews of interim financial information, £0.1 million (2015 - £2.5 million) in respect of reports to the Group’s regulators in the UK and overseas, £0.2 million (2015 - £0.4 million) in respect of internal controls assurance and no fees (2015 - £1.1 million) in relation to non-statutory audit opinions. (3) Comprises fees of £1.4 million (2015 - £1.1 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the
(4) Includes fees for the period EY were principal Group auditor (2016: 1 January 2016 to 31 December 2016). (5) Comprises fees of £1.1 million in relation to reviews of interim financial information, £2.2 million in respect of reports to the Group’s regulators in the UK and overseas, £0.7 million in relation to non-statutory audit opinions. (6) Comprises fees of £0.2 million in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the Group.
Reduction in the carrying value of deferred tax assets (317) — (1,472)
Items not allowed for tax: - losses on disposals and write-downs (45) (23) (12)
(Reduction)/increase in carrying value of deferred tax asset in respect of: - US losses and temporary differences — — (775)
Notes: (1) In recent years, the UK Government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 20% with effect from 1 April 2015, 19% from 1
April 2017 and 17% from 1 April 2020. The Finance (No 2) Act 2015 restricts the rate at which tax losses are given credit in future periods to the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by this Act. Deferred tax assets and liabilities at 31 December 2016 take into account the reduced rates in respect of tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
(2) Prior year tax adjustments include releases of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations in line with the strategy to become a smaller, simpler UK focused bank. The prior year tax adjustments also reflect adjustments to reflect submitted tax computations in the UK and overseas.
Effect of dilutive share options and convertible securities 51 60 91
There were no basic earnings/(loss) per ordinary share from were no diluted earnings per ordinary share from discontinued operations (2015 – 10.4p; 2014 – no dilutive impact.)
An agreement on 25 June 2014 between RBS and Her Majesty’s
• Prior to 25 June 2014 the DAS was entitled to a dividend amounting to the greater of 7% of the aggregate issue price of B shares and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any dividends paid on the B shares and on ordinary shares issued on their conversion. When calculating earnings per share, IFRS requires profit or loss to be allocated to participating equity instruments as if all of the profit or loss for the period had been distributed.
Notes: (1) Includes items in the course of transmission to other banks of £295 million (2015 - £338 million). (2) The carrying amount of other customer accounts designated as at fair value through profit or loss is £155 million (2015 - £297 million) higher than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively. Measured as the change in fair value from movements in the period in the credit risk premium payable.
Losses on disposal or settlement of loans and receivables (277) (558) (232)
There were no reclassifications in 2016 and 2015. In 2008 and 2009, financial assets were reclassified from held-for-trading (HFT) into loans and receivables (LAR) and from HFT into available-for-sale (AFS). The tables below show the carrying value, fair value and the effect on profit or loss of these reclassifications.
Amount recognised in would have been (increase) in the income statement recognised had profit or loss
Carrying Fair Impairment reclassification as a result of value value Income losses not occurred reclassification
Reclassified from HFT to LAR 1,002 877 (19) (15) 4 38
Note: (1) A loss of £2 million (2015 - loss of £3 million) was taken to AFS reserves.
IPV differences are classified according to the quality of independent market observables into IPV quality bands linked to the fair value hierarchy principles, as laid out in IFRS 13 ‘Fair
IPV takes place at least each month end date, for exposures in the regulatory trading book and at least quarterly for exposures in the banking book. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Pricing Unit determines IPV policy, monitors adherence to that policy and performs additional independent reviews of highly subjective valuation issues.
Valuation Committee is made up of valuation specialists and senior business representatives from various functions and oversee pricing, reserving and valuations issues. This committee meets monthly to review and ratify any methodology changes.
Valuation Committee and to discuss other relevant matters including prudential valuation.
process for instruments which include the sourcing of independent prices and model inputs. The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidity and valuation uncertainty of an instrument.
through to more complex derivatives. The valuation of modelled products requires an appropriate model and inputs into this model. Sometimes models are also used to derive inputs (e.g. to construct volatility surfaces). RBS uses a number of modelling methodologies.
Overnight Index Swaps (OIS) rate and other quoted interest rates in the swap, bond and futures markets.
RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products. NatWest Markets and Capital
Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. The sources of independent data are reviewed for quality and are applied in the
IPV processes using a formalised input quality hierarchy. These adjustments reflect RBS's assessment of factors that market participants would consider in setting a price.
CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively managed by a credit and market risk hedging process, and therefore movements in CVA are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the credit risk.
Where a positive exposure exists to a counterparty that is considered to be close to default, the CVA is calculated by applying expected losses to the current level of exposure.
The discount rates applied to derivative cash flows in determining fair value reflect any underlying collateral agreements.
FVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate funding costs and benefits that arise in relation to uncollateralised derivative exposures.
December 2016, net gains of £72 million (2015 - £81 million)
were carried forward. During the year, net gains of £27 million million) were recognised in the income statement and £12 million
For issued debt this adjustment is based on debt issuance spreads above average inter-bank rates (at a range of tenors).
The fair value of RBS's derivative financial liabilities is also adjusted to reflect RBS's own credit risk through debit valuation adjustments (DVA). Expected gains are applied to estimated potential future negative exposures, the modelling of which is consistent with the approach used in the calculation of CVA.
The own credit adjustments (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below. The cumulative adjustments below represent reductions/(increases) to the balance sheet liability amounts.
• The cumulative OCA increase during the year was mainly due to the widening of spreads on RBS issuance. The OCA
on senior debt is determined by reference to secondary debt issuance spreads, which widened to 62 basis points at 31
• RBS five year CDS credit spreads widened to 125 basis points at 31 December 2016 (31 December 2015 – 58 basis points).
Level 3: instruments valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(3) For an analysis of debt securities (by issuer, measurement classification and analysis of asset backed securities) and derivatives (by type of contract) refer to Capital and risk management: Balance sheet analysis – Debt securities and Derivatives respectively.
Credit 0.2 0.2 DCF based on recoveries Credit spreads 87 bps 925 bps
Whilst the business has simplified, the diverse range of products historically traded by RBS results in a wide range of instruments that are classified into Level 3 of the hierarchy. Whilst the majority of these instruments naturally fall into a particular level, for some products an element of judgment is required. The majority of RBS’s financial instruments carried at fair value are classified as Level 2: inputs are observable either directly (i.e. as a price) or indirectly (i.e. derived from prices).
A key input in the decision making process for the allocation of assets to a particular level is market activity. In general, the degree of valuation uncertainty depends on the degree of liquidity of an input.
If an input fails the observability or quality tests then the instrument is considered to be in Level 3 unless the input can be shown to have an insignificant effect on the overall valuation of the product.
For some instruments with a wide number of available price sources, there may be differing quality of available information and there may be a wide range of prices from different sources.
In these situations the highest quality source is used to determine the classification of the asset. For example, a tradable quote would be considered a better source than a consensus price.
Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specified target level of certainty of 90%. The assessments recognise different favourable and unfavourable valuation movements where appropriate. Each unobservable input within a product is considered separately and sensitivity is reported on an additive basis.
Whilst certain inputs used to calculate CVA, FVA and own credit adjustments are not based on observable market data, the uncertainty of the inputs is not considered to have a significant effect on the net valuation of the related derivative portfolios and issued debt. The classification of the derivative portfolios and issued debt is not determined by the observability of these inputs and any related sensitivity does not form part of the Level 3 sensitivities presented.
Amount recorded in the income statement (1) (124) 5 (119) (70) (973) (3) (976) (1,169)
Amount recorded in the statement of comprehensive income — 71 71 — — 198 198 —
Foreign exchange and other adjustments 49 9 58 57 9 — 9 1
Notes: (1) There were £45 million net losses on HFT instruments (2015 - nil) recorded in income from trading activities in continuing operations. Net losses on other instruments of £4 million (2015 - £193 million) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued operations.
For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, customer demand deposits and notes in circulation, carrying value is a reasonable approximation of fair value.
Cash and balances at central banks 74,250 — 74,250 79,404 — 79,404
Loans and advances to banks 30,078 60 30,138 30,536 110 30,646
Settlement balances and short positions 5,010 20,712 25,722 6,194 18,005 24,199
and liabilities of £317 billion (2015 - £344.4 billion) have been excluded from the following tables.
Loans and advances to customers 47,915 33,443 65,027 52,675 65,427 77,710
Cash and balances at central banks 79,404 — — — — —
Loans and advances to banks (1) — — — 1 1 —
Loans and advances to customers (2) 8,865 4,055 4,810 10,849 6,534 4,315
Financial and non-financial assets recognised on the balance sheet, obtained during the year by taking possession of collateral or calling on other credit enhancements, were £30 million (2015 - £34 million).
RBS enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of RBS’s interest rate hedges relate to the management of RBS’s nontrading interest rate risk. RBS manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges and qualifying for hedge accounting. The majority of
RBS’s fair value hedges involve interest rate swaps hedging the interest rate risk in recognised financial assets and financial liabilities. Cash flow hedges relate to exposures to the variability in future interest payments and receipts on forecast transactions and on recognised financial assets and financial liabilities. RBS
For cash flow hedging relationships, the initial and ongoing prospective effectiveness is assessed by comparing movements in the fair value of the expected highly probable forecast interest cash flows with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap.
over the entire life of the hedge relationship. The method of calculating hedge ineffectiveness is the hypothetical derivative method. Retrospective effectiveness is assessed by comparing the actual movements in the fair value of the cash flows and actual movements in the fair value of the hedged cash flows from the interest rate swap over the life to date of the hedging relationship.
For fair value hedge relationships of interest rate risk, the hedged items are typically large corporate fixed-rate loans, government securities, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. At 31 December 2016, fixed rate financial assets of £29 billion (2015 - £25 billion)
were hedged by interest rate swaps in fair value hedge relationships.
Gains/(losses) on the hedged items attributable to the hedged risk 1,146 110 809
Gross gains of nil million (2015 - £11 million) were realised on the sale of available-for-sale securities in discontinued operations. There were no gross losses in 2016 or 2015.
Listed Unlisted Total Listed Unlisted Total £m £m £m £m £m £m
Designated as at fair value through profit or loss 3 169 172 1 146 147
Dividend income from available-for-sale equity shares was £13 million (2015 - £45 million) in continuing operations and nil (2015 - £15 million) in discontinued operations.
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. Unquoted equity shares generated no material gains or losses in 2016 or 2015.
Currency translation and other adjustments 1,273 76 1,349 (418) (6) (424)
Disposals and write-off of fully amortised assets — (651) (651) — (1,310) (1,310)
Disposals and write-off of fully amortised assets — (471) (471) — (1,222) (1,222)
The Group's goodwill acquired in business combinations is reviewed annually at 31 December for impairment.
The recoverable amounts for all CGUs at 31 December 2016 were based on value in use, using management's latest five-year forecasts. The long-term growth rates have been based on expected nominal growth of the CGUs. The risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
Banking to International Private Banking which was included within disposal groups at 31 December 2015, see Note 18. The 2015 annual review indicated that the remaining £0.5 billion goodwill relating to Private Banking was impaired. Other CGUs’
The carrying value of goodwill and the amount by which it is exceeded by the recoverable amount are set out below by reportable segment, along with the key assumptions applied in calculating the recoverable amount and sensitivities to changes in those assumptions. Consequential
Goodwill growth rate discount rate carrying value rate growth rate pre-tax earnings 31 December 2016 £bn % % £bn £bn £bn £bn
Other intangible assets are reviewed for indicators of impairment. In 2016 £159 million of previously capitalised software was impaired primarily as a result of legacy Services software which is no longer expected to derive future economic benefit (2015 - £834 million, primarily as a result of the reorganisation of NatWest Markets, formerly CIB).
Transfers to disposal groups — (7) — (41) (25) — (73)
Currency translation and other adjustments — 9 11 (3) (2) 5 20
(a) Profit/(loss) from discontinued operations, net of tax 2016 2015 2014 £m £m £m
Provision for loss on disposal of interest in associate — (130) —
Included within the Group’s cash flows are the following amounts attributable to discontinued operations: £m £m £m
Union Bancaire Privée: fair value hierarchy level 3) (£3,344 million assets; £2,724 million liabilities).
Total protection customer mortgage backed Other Property insurance (1) redress (2) securities (3) regulatory (4) and other (5) (6)
Transfer from accruals and other liabilities — 37 17 17 36 107
The principal assumptions underlying RBS’s provision in respect of PPI sales are: assessment of the total number of complaints that
RBS will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of RBS’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FCA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FCA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
Note: (1) Uphold rates exclude claims where no PPI policy was held.
(Consequential Loss) remaining. Background information in relation to Interest Rate Hedging Products is given in note 31.
(3) In the US, RBS is subject to civil litigation and various civil and criminal investigations relating to its issuance and underwriting of US
(5) The Group has recognised a £750 million provision in 2016 as a consequence of the announcement that HM Treasury is seeking a revised package of remedies that would conclude its remaining State Aid commitments.
(6) The majority of property provisions relate to vacant leasehold property and comprise the present value of the shortfall between rentals payable and rentals receivable from sub-letting. Other provisions include restructuring provisions of £450 million principally termination benefits.
Notes in circulation 2,028 1,886 Current tax 336 368 Accruals 1,311 1,915 Deferred income 483 359 Other liabilities 2,833 3,221
Accelerated value of AFS Cash losses capital Deferred financial financial flow Share carried
Deferred tax assets in respect of unused tax losses are recognised if the losses can be used to offset probable future taxable profits after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses are analysed further below.
The main rate of UK Corporation Tax will reduce from 20% to 19% from 1 April 2017 and to 17% from 1 April 2020. Under the
Finance (No 2) Act 2015, tax losses carried forward at 31
introduced by the Act. Deferred tax assets and liabilities at 31
The Royal Bank of Scotland plc – The Royal Bank of Scotland plc reported taxable profits in 2011 and 2014, and tax losses in 2012, 2013 and 2015. The tax loss for 2012 reflected the reversal of previous own credit gains offset by core banking profitability. In 2013 UK tax losses were largely attributable to loan impairment charges arising from the accelerated recovery strategy recorded in the final quarter of the period. In 2014, core profitability remained strong and a taxable profit arose. In 2015 a further tax loss arises as a result of restructuring costs incurred as part of
National Westminster Bank plc – The deferred tax asset in respect of tax losses at 31 December 2016 relates to residual unrelieved trading losses that arose between 2009 and 2014.
59% of the losses that arose were relieved against taxable profits arising in other UK Group companies. Taxable profits arose in 2015 and 2016. Based on its strategic plan, RBS expects that the recognised deferred tax asset of £605 million in respect of tax losses amounting to £3,361 million will be recovered by the end
2016 - final redemption £m £m £m £m £m £m £m
The Royal Bank of Scotland Group plc US$1,285 million 5.90% Trust Preferred Tier 1 902 —
Gains/(losses) on available-for-sale financial assets, net of tax 19 (8) — 11
There is no authorised share capital under the company’s constitution. At 31 December 2016, the directors had authority granted at the 2016 Annual General Meeting to issue up to £1,166 million nominal of ordinary shares other than by preemption to existing shareholders.
In addition, the company issued 56 million ordinary shares of £1 each in connection with employee share plans. In October 2015, the company allotted and issued 5.1 billion new ordinary shares of £1 each to HM Treasury on conversion of 51 billion B shares.
The company did not pay an ordinary dividend in 2016 or 2015.
RBS and HM Treasury. In line with the terms of the DAS
Between 1 January 2017 and the date of approval of these accounts, dividends amounting to US$77 million and £0.4 million have been declared in respect of equity preference shares for payment on 31 March 2017.
Certain of RBS's subordinated securities in the legal form of debt are classified as equity under IFRS.
The non-cumulative preference shares are redeemable at the option of the company, in whole or in part from time to time at the rates detailed in the table below plus dividends otherwise payable for the then current dividend period accrued to the date of redemption.
In the context of macro-prudential policy discussions, the Board decided to partially neutralise any impact on CET1 capital of coupon and dividend payments from 2013 onwards. £300 million of new equity was issued during the course of 2016 and the
Note: (1) Those preference shares where RBS has an obligation to pay dividends are classified as debt; those where distributions are discretionary are classified as equity. The conversion rights attaching to the convertible preference shares may result in RBS delivering a variable number of equity shares to preference shareholders; these convertible preference shares are treated as debt.
Except as described above, the holders of the non-cumulative preference shares have no right to participate in the surplus assets of the company. Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the non-cumulative preference shares or proposing the winding-up or liquidation of the company.
Notes: (1) If the US$ and CAD EMTN notes were called, RBS would issue, at the prevailing market price, ordinary shares to the value of US$78 million and CAD43 million respectively to settle the coupons deferred in 2009 and 2010.
(2) Subordinated notes issued to limited partnerships that have in turn issued partnership preferred securities to trusts that have issued trust preferred securities to investors. The trust preferred securities are redeemable only at the issuer’s option and dividends are payable at RBS’s discretion. On maturity of the subordinated notes, the partnerships are required to reinvest in eligible capital instruments issued by RBS.
(6) Issued in August 2015. In the event of conversion, converted into ordinary shares at a price of $3.606 nominal per £1 share.
Capital redemption reserve - under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK
companies legislation apply to the capital redemption reserve as if it were part of the company’s paid up share capital.
After 1 year but within 5 years 4,801 (420) (83) — 4,298 294
Nature of operating lease assets on the balance sheet £m £m
There were no amounts recognised as income and expense in discontinued operations (2015 - £75 million; 2014 - £124 million) in relation to operating leases - minimum rentals payable.
The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables (refer to page 328) and operating lease assets (refer to pages 349 and 350).
Operating leases - cars and light commercial vehicles 5 5 12 — 22 8 3 10 — 21
In a securitisation, assets, or interests in a pool of assets, are transferred generally to an SE which then issues liabilities to third party investors. The majority of securitisations are supported through liquidity facilities or other credit enhancements. RBS
RBS consolidates a number of asset-backed commercial paper (ABCP) conduits. A conduit is an SE that issues commercial paper and uses the proceeds to purchase or fund a pool of assets. The commercial paper is secured on the assets and is redeemed by further commercial paper issuance, repayment of assets or funding from liquidity facilities. Commercial paper is typically short-dated, usually up to three months. At 31 December 2016 assets held by the conduits totalled £0.1 billion (2015 - £0.6 billion). At 31 December 2016 and 2015 the conduits were funded entirely by RBS.
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of debt securities by RBS. RBS retains all of the risks and rewards of these loans. The partnerships are consolidated, the loans retained on RBS’s balance sheet and the related covered bonds included within debt securities in issue. At 31 December 2016, £8,621 million of mortgages provided security for debt securities in issue of £3,935 million (2015: mortgages - £11,207 million, bonds - £5,585 million).
Asset backed Investment Asset backed Investment securitisation funds securitisation funds vehicles and other Total vehicles and other Total £m £m £m £m £m £m
Loans and advances to customers 588 40 628 139 — 139
Loans and advances to customers 1,339 871 2,210 2,663 2 2,665
Notes: (1) Income from interests in unconsolidated structured entities includes interest receivable, changes in fair value and other income less impairments. (2) A sponsored entity is a structured entity established by RBS where RBS provides liquidity and/or credit enhancements or provides ongoing services to the entity. RBS can act as sponsor for its own or for customers’ transactions. (3) In 2016, no assets were transferred into sponsored structured entities (2015 - nil) which are not consolidated by RBS and for which RBS held no interest at 31 December 2016.
Securities sold under repurchase transactions are not derecognised if RBS retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such repurchase transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
Assets subject to securities repurchase agreements or security lending transactions 2016(1) 2015 £m £m
RBS's regulatory capital resources in accordance with PRA definitions were as follows: PRA transitional basis £m £m
Qualifying instruments issued by subsidiaries and held by third parties 4,818 7,354
‘weighted’ to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. RBS has complied with the PRA’s capital requirements throughout the year.
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2016. Although RBS is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of RBS's expectation of future losses. More than More than 1 year but 3 years but
RBS agrees to make funds available to a customer in the future.
Other commitments - these include documentary credits, which are commercial letters of credit providing for payment by RBS to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of £251 million (2015 - £321 million; 2014 - £425 million) from these activities.
RBS Group has accrued £38 million for its share of estimated
Litigation, investigations and reviews The Royal Bank of Scotland Group plc (the “company” or RBSG)
The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised.
For a discussion of certain risks associated with the Group’s litigation, investigations and reviews, see “Risk Factors” on pages
Between March and July 2013, claims were issued in the High
Litigation Order. RBS’s defence to the claims was filed on 13
RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the US that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and a purported class action suit.
31 Memorandum items continued The primary FHFA lawsuit against RBS remains pending in the
RMBS issued by Nomura Holding America Inc. (Nomura) and subsidiaries, and is the subject of an appeal. On 11 May 2015, following a trial, the United States District Court for the Southern
District of New York issued a written decision in favour of FHFA
Court’s judgment is approximately US$383 million, which consists of the difference between the amount of the judgment against RBS Securities Inc. (US$636 million) and the estimated market value of the four RMBS that FHFA would return to RBS
Other remaining RMBS lawsuits against RBS companies include cases filed by the Federal Home Loan Banks of Boston and
RBS companies are also defendants in a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar
Mortgage Inc. et al., which remains pending in the United States
District Court for the Southern District of New York. RBS has reached an agreement in principle to settle this matter, subject to documentation and court approval. The amount of the settlement is covered by an existing provision.
Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences may occur.
United States District Court for the Southern District of New York.
corporate debt purchaser plaintiffs. Over 35 other USD LIBORrelated actions naming RBS as a defendant, including purported class actions on behalf of lenders and mortgage borrowers, were also made part of the coordinated proceeding.
31 Memorandum items continued In a series of orders issued in 2013 and 2014, the district court overseeing the coordinated USD proceeding dismissed class plaintiffs' antitrust claims and claims under RICO (Racketeer
USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser plaintiffs who transacted directly with a defendant. On 23 May 2016, the district court’s dismissal of plaintiffs’ antitrust claims was vacated by the United States Court of Appeals for the
Second Circuit, which held that plaintiffs have adequately pled antitrust injury and an antitrust conspiracy, but remanded to the lower court for further consideration on the question of whether plaintiffs possess the requisite antitrust standing to proceed with antitrust claims.
Certain members of the Group have also been named as defendants in class actions relating to (i) JPY LIBOR and
Euroyen TIBOR (one case relating to Euroyen TIBOR futures contracts and one relating to other derivatives allegedly linked to
(RBS plc) and a number of other financial institutions were named as defendants in several purported class action complaints (subsequently consolidated into one complaint) in the
In 2015, Group companies settled a consolidated antitrust class action (the “consolidated action”), pending in the United States
District Court for the Southern District of New York, asserting claims on behalf of persons who entered into (a) over-the-counter foreign exchange (FX) spot transactions, forwards, swaps, futures, options or other FX transactions the trading or settlement of which is related in any way to FX rates, or (b) exchange-traded
Income Security Act claims on behalf of employee benefit plans that engaged in FX transactions, including claims based on alleged non-collusive FX-related conduct, was dismissed on 20
On 26 September 2016, a class action complaint was filed in the
United States District Court for the Southern District of New York asserting claims on behalf of “indirect purchasers” of FX
New York antitrust laws. RBS and the other defendants have made a motion to dismiss this matter.
Certain other foreign exchange transaction related claims have been or may be threatened against RBS in other jurisdictions.
US Treasury securities or derivatives based on such instruments, including futures and options. On 8 December 2015, all pending matters were transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pre-trial proceedings. RBS anticipates making a motion to dismiss these claims.
Group, as well as a number of other interest rate swap dealers, were named as defendants in a number of class action antitrust complaints filed in the United States District Court for the
In addition, two complaints containing similar allegations of collusion were filed in United States District Court for the
Javelin, who allege that they would have successfully established exchange-like trading of interest rate swaps if the defendant dealers had not unlawfully conspired to prevent that from happening through boycotts and other means, in violation of the
U.S. antitrust laws. On 2 June 2016, all of these matters were transferred to the United States District Court for the Southern
In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment
Scotland N.V. (RBS N.V.) in the New York bankruptcy court. In the operative complaint, filed in August 2012, the trustee seeks to recover US$75.8 million in redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that RBS N.V. allegedly received from its swap counterparties at a time when RBS N.V. allegedly ‘knew or should have known of
Madoff’s possible fraud’. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US
further claim, for US$21.8 million, was filed in October 2011. On 22 November 2016, the bankruptcy court dismissed the claims filed in October 2011 on the ground that the transfers at issue were extraterritorial to the United States and not subject to the fraudulent conveyance statute upon which the trustee’s claim is based.
encouraged those customers that were eligible to seek redress under the FCA redress programme to participate in that programme. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
redress programme. The claims followed a preliminary decision against another UK bank. RBS has since been successful in opposing an application by a customer to amend its pleadings to include similar claims against RBS, on the basis that the bank does not owe a legal duty of care to customers in carrying out the
HMRC issued a tax assessment in 2012 against RBS for approximately £86 million regarding a value-added-tax (“VAT”)
(“EUAs”) by an RBS joint venture subsidiary in 2009. RBS has commenced legal proceedings before the First-tier Tribunal
Liquidated Companies previously traded in EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to)
the EUA supply chains forming the subject of the Tax Dispute.
The Claimants are claiming approximately £72.5 million by alleging that RBS dishonestly assisted the directors of the
Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. RBS
NatWest is defending a lawsuit filed by a number of US nationals
Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
31 Memorandum items continued The attacks were allegedly perpetrated by Hezbollah and certain
Iraqi terror cells allegedly funded by the Islamic Republic of Iran.
Iraqi terror cells, in violation of the US Anti- terrorism Act, by agreeing to engage in "stripping" of transactions initiated by the
The plaintiffs are a number of US military personnel (or their estates, survivors, or heirs) who were killed or injured in 21 attacks in Iraq between 2006 and 2011. RBS N.V. has made a motion to have this case transferred to the United States District
UK, the US, the EU and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU
and other mortgage-backed securities, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and synthetic products.
In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due diligence on mortgages. RBS completed its production of documents requested by the New York State Attorney General in 2008, principally producing documents related to loans that were pooled into one securitisation transaction.
As at 31 December 2016, the total aggregate of provisions in relation to certain of the RMBS and other securitised products investigations (described immediately above) and RMBS litigation matters (set out under “Litigation” on page 368), including an additional provision of £3.4 billion ($4.2 billion) in 2016, is £6.8 billion ($8.3 billion). RBS continues to cooperate with the DOJ in its civil and criminal investigations of RMBS matters. The duration and outcome of these investigations and RMBS litigation matters remain uncertain, including in respect of whether settlements for all or any of such matters may be reached. Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences as described above may occur.
In issuing RMBS, NatWest Markets in some circumstances made representations and warranties regarding the characteristics of the underlying loans. As a result, NatWest Markets may be, or may have been, contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. Depending on the extent to which such loan repurchase related claims are pursued against and not rebutted by NatWest Markets on timeliness or other grounds, the aggregate potential impact on RBS, if any, may be material.
As part of the agreement with the DOJ, RBS plc entered into a
Deferred Prosecution Agreement (DPA) in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. The DPA expired in April 2015 and is of no further effect.
January 2014, the US District Court for the District of Connecticut entered a final judgment in relation to the conviction of RBS
In February 2014, RBS paid settlement penalties of approximately €260 million and €131 million to resolve investigations by the European Commission (EC) into Yen LIBOR
31 Memorandum items continued In October 2014, the EC announced its findings that (1) RBS and one other financial institution had participated in a bilateral cartel aimed at influencing the Swiss Franc LIBOR benchmark interest rate between March 2008 and July 2009; and (2) RBS and three other financial institutions had participated in a related cartel on bid-ask spreads of Swiss Franc interest rate derivatives in the
On 3 February 2017, it was announced that RBS and the CFTC
entered into a civil settlement resolving the CFTC’s investigation of ISDAFIX and related trading activities. As part of the settlement, RBS has paid a penalty of US$85 million and agreed to certain undertakings.
FX businesses within its NatWest Markets segment. RBS plc agreed to pay penalties of £217 million to the FCA and US$290 million to the CFTC to resolve the investigations. The fines were paid on 19 November 2014.
On 20 May 2015, RBS plc announced that it had reached settlements with the DOJ and the Board of Governors of the
Federal Reserve System (Federal Reserve) in relation to investigations into its FX business within its NatWest Markets segment. RBS plc paid a penalty of US$274 million to the
RBS plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators
(including the FCA and the CFTC). A violation of the terms of probation could lead to the imposition of additional penalties.
Subsequent to the sentencing, RBS plc paid the criminal fine, which had been covered by an existing provision.
Inc. agreed to take certain remedial actions with respect to FX
FX business within its NatWest Markets segment. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and may well be material.
Since 2013, RBS and other banks have been undertaking a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses classified as retail clients or private customers under FSA rules. This exercise was scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services and Markets Act), and overseen by the FCA. RBS has reached agreement with
KPMG in relation to redress determinations for all in scope customers, as well as the majority of the consequential loss claims received.
All of these claims were stayed pending the outcome of the other bank’s case. The trial in that case was heard on 25 January 2016. The court decided in favour of KPMG, finding that (1)
RBS may then proceed to full hearing to assess the fairness of
In February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice offered by banks and building societies to retail clients. As a result of that review the FSA announced that firms involved were cooperative and agreed to take immediate action. RBS was one of the firms involved.
The action required included a review of the training provided to advisers, considering whether changes are necessary to both advice processes and controls for new business, and undertaking a past business review to identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this right for customers).
Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required RBS to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the UK Financial Planning channel of the UK Personal & Business Banking (UK PBB) segment of RBS, which includes RBS plc and NatWest, during the period from
Services and Markets Act, under which a Skilled Person was appointed to carry out the exercise. Redress has been paid to certain customers in this sample group. Following discussions with the FCA after issue of the draft section 166 report, RBS
As a result of an uplift in packaged current account complaints,
RBS proactively put in place dedicated resources in 2013 to investigate and resolve complaints on an individual basis. RBS
has made gross provisions totalling £409 million to date for this matter.
In November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK Government’s Department for Business Innovation and Skills, was published (“Tomlinson
The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA announced that an independent Skilled
Republic of Ireland. The report was published in December 2014 and found no evidence to support the principal allegation.
The Skilled Person review focused on the allegations made in the
Large in his 2013 Independent Lending Review, and was broader in scope than the reviews undertaken by Clifford Chance and
Mason, Hayes & Curran which are referred to above. The Skilled
Person delivered the draft findings from its review to the FCA in
March 2016. RBS was then given the opportunity to consider and respond to those draft findings before the Skilled Person delivered its final report to the FCA during September 2016.
customers in the UK and the Republic of Ireland that were in
On 11 September 2014, the Court of Justice upheld earlier decisions by the EU Commission and the General Court that
On 26 November 2015, the FCA issued Consultation Paper 15/39, in which it set out proposed rules and guidance for how firms should handle PPI complaints fairly in light of the Plevin decision and how the FOS should consider relevant PPI
The proposals in the Consultation Paper included an FCA-led communications campaign to raise awareness of the deadline and to prompt those who intend to complain to act ahead of the deadline.
If the proposals contained in these Consultation Papers are agreed and implemented, RBS would expect higher claims volumes, persisting longer than previously modelled, and additional compensation payments in relation to PPI claims made as a result of the Plevin judgment. If the end of June 2019 deadline is implemented by the FCA, complaints made after that time would lose the right to be assessed by firms or by the
In November 2014, the CMA announced its decision to proceed with a market investigation reference (MIR) into retail banking, which would cover PCA and SME banking. On 9 August 2016, the CMA published its final report. The CMA concluded that there are a number of competition concerns in the provision of PCAs, business current accounts and SME lending, particularly around low levels of customers searching and switching, resulting in banks not being put under enough competitive pressure, and new products and new banks not attracting customers quickly enough.
These include remedies making it easier for customers to compare products, ensure customers benefit from technological advantages around open banking, improve the current account switching service and provide PCA overdraft customers with greater control over their charges along with additional measures targeted at SME customers.
Market Investigation Order 2017 which is the primary legal framework setting out the obligations for the implementation of the majority of remedies, including an implementation deadline for each. Other remedies are to be delivered via undertakings signed by Bacs and recommendations to be taken forward by other regulators (including the FCA).
In February 2015, the FCA launched a market study into investment and corporate banking. On 18 October 2016 by publication by the FCA published its final report. It found that whilst many clients feel well served by primary capital market services there were some areas where improvements could be made to encourage competition, particularly for smaller clients. It set out a package of remedies, including prohibiting the use of restrictive contractual clauses and ending league table misrepresentation by asking league table providers to review their recognition criteria.
In November 2015, the FCA also announced that a market study would be undertaken into asset management. On 18 November 2016, the FCA published the interim report which indicated that price competition is weak and expressed concerns around the lack of transparency on the objectives, and appropriate benchmarks, for reporting fund performance. The FCA has proposed a number of remedies. The deadline for responses to the interim report was 20 February 2017 and the FCA expects to publish the final report in Q2 2017.
In December 2016, the FCA launched a market study into the provision of mortgages. The FCA has announced that it intends to publish an interim report in summer 2017 with the final report expected in Quarter 1 2018.
In July 2011, RBS agreed with the Board of Governors of the
(which is publicly available) to address deficiencies related to governance, risk management and compliance systems and controls in the US branches of RBS plc and RBS N.V. branches
In the Governance Order, RBS agreed to create the following written plans or programmes: Key points
operations; ● a plan to oversee compliance by RBS’s US operations with all applicable US laws, rules, regulations, and supervisory guidance; ● a Bank Secrecy Act/anti-money laundering compliance programme for the US Branches on a consolidated basis; ● a plan to improve the US Branches’ compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the
Federal Reserve; ● a customer due diligence programme designed to ensure reasonably the identification and timely, accurate, and complete reporting by the US Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations; and
continues to work closely with the regulators in its efforts to fulfil its obligations under the Governance Order, which will remain in effect until terminated by the regulators.
In December 2013 RBS and RBS plc agreed a settlement with the Federal Reserve, the New York State Department of
Under the US Dollar Processing Order (as part of the OFAC
compliance programme) RBS was required to appoint an independent consultant to conduct an annual review of OFAC
compliance policies and procedures and their implementation and an appropriate risk-focused sampling of US dollar payments.
Processing Order, RBS has provided the required written submissions, including quarterly updates, in a timely manner, and
December 2013, Coutts & Co Ltd., a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme.
Coutts & Co Ltd is also cooperating with investigations and enquiries from authorities in other jurisdictions in relation to the same subject matter. In this context, the Monetary Authority of
Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016. The outcomes of other proceedings, investigations and enquiries are uncertain but may include financial consequences and/or regulatory sanctions.
has with the Panama-based law firm Mossack Fonseca or any individuals named in recent media coverage in connection with the same. RBS responded to the FCA setting out details of the limited services provided to Mossack Fonseca and its clients.
announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The
Separately, on 15 April 2016, the CBI notified UBI DAC that it was also commencing an investigation under its Administrative
Protection Code 2006 during the period 4 August 2006 to 30
Write down of goodwill and other intangible assets 159 1,332 533
(Increase)/decrease in loans and advances to banks and customers (12,960) 58,766 11,245
34 Interest received and paid £m £m £m 35 Analysis of changes in financing during the year
Ordinary shares issued in respect of employee share schemes 166 225 234
Other adjustments including foreign exchange — — — 3,178 (11) 214 36 Analysis of cash and cash equivalents £m £m £m
The directors manage RBS primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business - interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by RBS Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Markets will continue to offer financing, rates and currencies products to its customers. Reported operating segments are as follows: Personal & Business Banking (PBB) comprises two reportable segments. UK Personal & Business Banking (UK PBB) and
UK. During the period presented W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not include certain portfolios that were intended to be divested as part of W&G, for example, certain NatWest branches in Scotland.
Balances relating to Citizens and the international private banking business are also included in relevant years.
Net Depreciation Impairment interest Non-interest Total Operating and (losses)/ Operating income income income expenses amortisation releases profit/(loss)
Assets Liabilities assets Assets Liabilities assets Assets Liabilities assets £m £m £m £m £m £m £m £m £m
Write down of goodwill - continuing operations — — (498) — (498)
Write down of goodwill - continuing operations — — — — —
2016 UK USA Europe RoW Total £m £m £m £m £m
Of which total liabilities held for sale 2 71,282 — 36 71,320
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2016 and 2015.
Executive Committee. The captions in the Group's primary financial statements include the following amounts attributable, in aggregate, to key management: Loans and advances to customers 3,276 2,741
On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of
Government and UK Government controlled bodies became related parties of the Group. During 2015, all of the B shares held by the UK Government were converted into ordinary shares of £1 each (see Note 24).
RBS entities that have been eliminated on consolidation are not reported.
(2015 - £1,950 million loss; 2014 - £1,128 million profit). Refer to Note 2 on the parent company accounts.
Statement of changes in equity for the year ended 31 December 2016 2016 2015 2014 £m £m £m
Notes: (1) In October 2015, all B shares were converted into ordinary shares of £1 each. (2) In September 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion). The nominal value of £0.3 million (2015 - £1 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion (2015 - 0.2 billion) in respect of the movement in exchange rates since issue.
The accompanying notes on pages 394 to 415 form an integral part of these financial statements.
The company is incorporated in the UK and registered in Scotland. The accounts are prepared on the historical cost basis except that derivative financial instruments and certain issued securities are stated at fair value. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
Other net interest income, non-interest income and operating expenses (915) 14 (94)
The following table shows the company's financial assets and liabilities in accordance with the categories of financial instruments in IAS
Prepayments, accrued income and other assets - non-financial assets 70 3
Loans and advances due from subsidiaries (1) 28.9 29.7 22.4 23.1
Loans and advances due from subsidiaries 17,386 11,578 28,964 3,992 18,424 22,416
2016 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: 2016 2015 £m £m
The majority of the impairment charge for 2016 and 2015 relates to the company’s investment in RBS plc. At 31 December 2016 and 2015 its carrying value exceeded its recoverable amount (based on its value in use) and an impairment of £6.0 billion (2015 - £2.8 billion) was recognised. At 31 December 2015 the effect of the impairment on the company’s retained earnings was partially offset by the release of the balance on the merger reserve (£2.3 billion) which became a realised profit on writing down the company’s investment in RBS plc.
RBS plc, a 1% adverse movement in the discount rate would increase the impairment by £6.3 billion (2015 - £7.7 billion), a 1% adverse movement in the terminal growth rate value would increase the impairment by £2.9 billion (2015 - £3.8 billion) and a 5% adverse movement in profit would increase the impairment by £2.7 billion (2015 - £3.6 billion).
The Royal Bank of Scotland plc and RFS Holdings B.V. are directly owned by the company, and all other subsidiary undertakings are owned either by the company, or directly, or indirectly through intermediate holding companies, by these companies. All of these subsidiaries are included in RBS's consolidated financial statements and have an accounting reference date of 31 December.
For full information on all related undertakings, refer to Note 15 to the parent company financial statements.
Dated loan capital 8,830 7,836 Undated loan capital 836 694 Preference shares 1,002 836
US$750 million 6.80% dated notes 2042 (callable quarterly) (1,2) Ineligible 609 506
US$650 million 6.43% dated notes 2043 (callable January 2034) (1,2) Ineligible 525 436 €500 million 4.24% dated notes 2046 (redeemed January 2016) (1,2) Ineligible — 382 £400 million 5.65% dated notes 2047 (callable June 2017) (2) Ineligible 413 413
Cumulative preference shares of £1 £0.5 million 11% and £0.4 million 5.5% (not callable) Ineligible 1 1
Net cash inflow/(outflow) from financing 2,340 2,314 314 (425) (1,745) (2,180)
Other adjustments including foreign exchange — — — 1,727 403 462 13 Analysis of cash and cash equivalents £m £m £m
Directors’ remuneration is disclosed in Note 38 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
(“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital Requirements
(country-by-country) Reporting Regulations 2013 will be published on the RBS Group’s website.
The following table details active related undertakings incorporated in the United Kingdom which are 100% owned by the Group and fully consolidated for accounting purposes.
Entity name Activity(1) Address Notes Adam & Company Group PLC BF 25 St. Andrew Square, Edinburgh, EH2 1AF, Scotland
Adam & Company Investment Management Ltd BF 25 St. Andrew Square, Edinburgh, EH2 1AF, Scotland
Caledonian Sleepers Rail Leasing Ltd BF 1 Princes Street, London, EC2R 8PB, England Care Homes 1 Ltd BF 135 Bishopsgate, London, EC2M 3UR, England
Care Homes Holdings Ltd BF 135 Bishopsgate, London, EC2M 3UR, England
Churchill Management Ltd BF 1 Princes Street, London, EC2R 8PB, England
Desertlands Entertainment Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Farming and Agricultural Finance Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Heartlands (Central) Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Helena Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
KUC (Public Houses) Ltd BF 1 Princes Street, London, EC2R 8PB, England
KUC Holdings Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
KUC Properties Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Lombard & Ulster Ltd BF 11-16 Donegall Square East, Belfast, BT1 5HD, Northern Ireland
Lombard Business Finance Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Business Leasing Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Corporate Finance (3) Ltd BF 1 Princes Street, London, EC2R 8PB, England
Lombard Corporate Finance (10) Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (13) Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (December 3) Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Initial Leasing Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard North Central Leasing Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Technology Services Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Vehicle Management (1) Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Lombard Vehicle Management (2) Ltd BF 280 Bishopsgate, London, EC2M 4RB, England
Nanny McPhee Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
National Westminster Bank Plc CI 135 Bishopsgate, London, EC2M 3UR, England
National Westminster Properties No. 1 Ltd SC 135 Bishopsgate, London, EC2M 3UR, England
NatWest Machinery Leasing Ltd BF 135 Bishopsgate, London, EC2M 3UR, England
Nevis Derivatives No. 1 LLP BF 35 Great St Helen's, London, EC3A 6AP, England
Northern Isles Ferries Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
P of A Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex III Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Pittville Leasing Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England Premier Audit Company Ltd BF Smith House, P.O.Box 343, Elmwood Avenue, Feltham, TW13 7WH, England Price Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England Priority Sites Investments Ltd BF 135 Bishopsgate, London, EC2M 3UR, England Priority Sites Ltd INV 135 Bishopsgate, London, EC2M 3UR, England
Entity name Activity(1) Address Notes R.B. Quadrangle Leasing Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England R.B.S. Special Investments Ltd BF 135 Bishopsgate, London, EC2M 3UR, England RB Investments 2 Ltd BF 135 Bishopsgate, London, EC2M 3UR, England RB Investments 3 Ltd OTH 135 Bishopsgate, London, EC2M 3UR, England
RBEF Ltd INV 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Argonaut Ltd OTH 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Asset Finance Europe Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBS Asset Management Holdings BF 135 Bishopsgate, London, EC2M 3UR, England
RBS Asset Management Ltd BF 135 Bishopsgate, London, EC2M 3UR, England
RBS CI Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Corporate Finance Ltd BF 250 Bishopsgate, London, EC2M 4AA, England
RBS Corporate Investments (UK) Ltd BF 250 Bishopsgate, London, EC2M 4AA, England
RBS Equities Holdings (UK) Ltd BF 250 Bishopsgate, London, EC2M 4AA, England
RBS Equity Products (UK) Ltd BF 250 Bishopsgate, London, EC2M 4AA, England
RBS Invoice Finance (Holdings) Ltd BF Smith House, Elmwood Avenue, Feltham, TW13 7QD, England
RBS Invoice Finance Ltd BF Smith House, Elmwood Avenue, Feltham, TW13 7QD, England
RBS Life Holdings Ltd OTH 24/25 St. Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Mezzanine Ltd BF 24/25 St. Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Property Developments Ltd INV 36 St. Andrew Square, Edinburgh, EH2 2YB, Scotland