Statutory basis including Direct Line Group discontinued operations 30,390 6 30,396 39,398 — 39,398 42,897 — 42,897 Direct Line Group discontinued operations (4,487) (6) (4,493) (5,052) — (5,052) (5,740) — (5,740)
38 Segmental analysis continued Segmental analysis of assets and liabilities included in disposal groups: 2012 2011 2010
UK Retail — — 7,048 8,808 — — UK Corporate — — 11,727 12,977 — — International Banking 144 51 414 88 251 549 Markets 91 2 17 29 19 — Direct Line Group 12,697 9,267 — — — — Centre (74) 1 136 2 — — Non-Core 576 808 5,670 1,779 11,639 8,404 RFS Holdings minority interest 579 41 438 312 575 475 14,013 10,170 25,450 23,995 12,484 9,428
At 1 January 2011 2,799 2,882 812 1,092 3,980 2 946 15 — 12,528 Transfers to disposal groups — — — — — — — (15) — (15) Currency translation and other adjustments — — — (28) 12 1 (1) — — (16) Acquisitions — — — — — 18 — — — 18 Write-down of goodwill - continuing operations (20) (60) — — — — — — — (80)
At 1 January 2012 2,779 2,822 812 1,064 3,992 21 934 — — 12,424 Transfers to disposal groups — — — — — — (540) — — (540)
Currency translation and other adjustments — — (3) (24) (169) (1) — — — (197) Write-down of goodwill - continuing operations — — — — — (18) — — — (18)
Operating (loss)/profit before tax (4,559) 1,821 (2,034) (393) (5,165) Total assets 899,604 305,588 47,966 59,137 1,312,295 Of which total assets held for sale 11,638 291 1,001 1,083 14,013 Total liabilities 835,268 288,005 61,801 56,773 1,241,847 Of which total liabilities held for sale 8,405 129 871 765 10,170 Net assets attributable to equity owners and non-controlling interests 64,336 17,583 (13,835) 2,364 70,448 Contingent liabilities and commitments 105,018 84,788 49,341 8,498 247,645 Cost to acquire property, plant and equipment and intangible assets 1,953 325 186 69 2,533
Operating profit/(loss) before tax 873 1,794 (3,419) (438) (1,190) Total assets 1,007,096 359,592 66,239 73,940 1,506,867 Of which total assets held for sale 19,343 53 6,011 43 25,450 Total liabilities 936,477 341,631 82,059 70,647 1,430,814 Of which total liabilities held for sale 21,903 104 1,988 — 23,995 Net assets attributable to equity owners and non-controlling interests 70,619 17,961 (15,820) 3,293 76,053 Contingent liabilities and commitments 118,702 95,703 51,465 12,949 278,819 Cost to acquire property, plant and equipment and intangible assets 2,522 500 1,484 58 4,564
The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of their interests in the company's shares arising from their participation are given in the Directors' remuneration report. Details of the remuneration received by each director during the year and each director's pension arrangements are also given in the Directors' remuneration report.
Asset Protection Scheme On 22 December 2009, the Group entered into an agreement, the Asset Protection Scheme (APS), with HM Treasury acting on behalf of the UK Government, under which the Group purchased credit protection which, subject to a first loss of £60 billion, covered 90% of losses net of recoveries in a portfolio of specified assets and exposures (covered assets) from HM Treasury. The portfolio of covered assets had a par value of approximately £282 billion. On 18 October 2012, the Group exited the APS.
The Group paid APS premiums totalling £2,500 million (2012 - £275 million; 2011 - £125 million; 2010 - £700 million; 2009 - £1,400 million).
The APS contract was accounted for as a derivative financial instrument, recognised at fair value (2011 - liability £231 million; 2010 - asset £550 million) and included within the Derivative liability/asset balance sheet caption. Changes in fair value of £44 million (2011 - £906 million; 2010 - £1,550 million) were recognised in profit or loss within Income from trading activities.
Bank of England facilities The Group also participates in a number of schemes operated by the Bank of England available to eligible banks and building societies.
Open market operations - these provide market participants with funding at market rates on a tender basis in the form of short and long-term repos on a wide range of collateral and outright purchases of high-quality bonds to enable them to meet the reserves that they must hold at the Bank of England.
At 31 December 2012, the Group had no amounts outstanding under these facilities (2011 - nil; 2010 - £16.1 billion).
At 31 December 2012, the Group had no debt outstanding guaranteed by the Government (2011 - £21.3 billion; 2010 - £41.5 billion).
The Funding for Lending Scheme The Funding for Lending Scheme was launched in July 2012. Under the scheme UK banks and building societies are able to borrow UK treasury bills from the Bank of England in exchange for eligible collateral during the drawdown period (1 August 2012 to 31 January 2014). Borrowing is limited to 5% of the participant’s stock of loans to the UK non-financial sector as at 30 June 2012, plus any expansion in lending from that date to the end of 2013. Eligible collateral comprises all collateral eligible for the Bank of England’s discount window facility. The term of each transaction is four years from the date of drawdown. The price for borrowing UK treasury bills under the scheme depends on the participant’s net lending to the UK non-financial sector between 30 June 2012 and the end of 2013. If lending is maintained or expanded over that period, the fee is 0.25% per year on the amount borrowed. If lending declines, the fee increases by 0.25% for each 1% fall in lending, up to a maximum fee of 1.5%. As at 31 December 2012, the Group had borrowed UK treasury bills with a fair value £749.million under the scheme.
The accounts were approved by the Board of directors on 27 February 2013 and signed on its behalf by: Philip Hampton Chairman
Called-up share capital At 1 January 15,318 15,125 14,630 Ordinary shares issued 197 193 523 Share capital sub-division and consolidation (8,933) — — Preference shares redeemed — — (1) Cancellation of non-voting deferred shares — — (27)
Capital redemption reserve At 1 January 198 198 170 Share capital sub-division and consolidation 8,933 — — Preference shares redeemed — — 1 Cancellation of non-voting deferred shares — — 27 At 31 December 9,131 198 198
The accompanying notes on pages 479 to 486 form an integral part of these financial statements.
Net decrease in cash and cash equivalents (886) (474) (14,091) Cash and cash equivalents at 1 January 1,883 2,357 16,448 Cash and cash equivalents at 31 December 15 997 1,883 2,357
1 Presentation of accounts The accounts are prepared on a going concern basis (see the Report of the directors, page 347) and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006.
The accounting policies that are applicable to the company are included in the Group accounting polices which are set out on pages 360 to 371 of the Group financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investment in its subsidiaries are stated at cost less any impairment.
Dividends received from banking subsidiary 58 58 60 Dividends received from other subsidiaries 1,978 12 24 Gain on redemption of own debt — — 53 Profit on disposal of investment in subsidiaries 157 — — 2,193 70 137 Interest receivable from subsidiaries 1,097 1,019 1,042 Interest payable to subsidiaries (378) (262) (263) Other net interest payable, non-interest income and operating expenses (247) (291) (263) Write-down of investments in subsidiaries (1,785) (570) (5,124) Impairment of loans to Group entities (1,409) — — Operating loss before tax (529) (34) (4,471)
3 Financial instruments - classification The following table shows the company's financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately.
Assets Loans and advances to banks (1) - loans and receivables 24,066 18,368 19,535 Loans and advances to customers (1) - loans and receivables 1,266 4,056 6,689 Debt securities (1) - loans and receivables 1,522 1,568 1,454 Investment in Group undertakings 54,995 53,871 49,125 Derivatives (1) held-for-trading 220 1,223 1,223
Liabilities Deposits by banks (2) - amortised cost 1,455 1,091 —
4 Financial instruments - valuation Fair value of financial instruments not carried at fair value The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Assets Loans and advances to banks 24.1 24.8 18.4 18.4 19.5 19.5 Loans and advances to customers 1.3 1.3 4.1 4.1 6.7 6.7 Debt securities 1.5 2.0 1.6 1.5 1.5 1.8
Liabilities Deposits by banks 1.5 1.5 1.1 1.1 — — Customer accounts 0.8 0.8 1.0 1.0 1.0 1.0 Debt securities in issue 9.3 9.0 8.4 7.9 8.7 8.8 Subordinated liabilities 11.3 10.3 8.8 5.6 8.0 5.8
Assets Loans and advances to banks 6,382 17,684 24,066 2,694 15,674 18,368 4,651 14,884 19,535 Loans and advances to customers — 1,266 1,266 1,341 2,715 4,056 3,855 2,834 6,689 Debt securities 26 1,496 1,522 65 1,503 1,568 — 1,454 1,454 Derivatives 296 215 511 918 584 1,502 2 1,473 1,475
Liabilities Deposits by banks 320 1,135 1,455 9 1,082 1,091 — — — Customer accounts 838 — 838 977 — 977 1,029 — 1,029 Debt securities in issue 5,506 3,804 9,310 3,800 4,573 8,373 1,460 7,282 8,742 Derivatives — 7 7 25 54 79 25 206 231 Subordinated liabilities 647 10,658 11,305 121 8,656 8,777 307 7,741 8,048
2012 2011 2010 Notional Notional Notional amount Assets Liabilities amount Assets Liabilities amount Assets Liabilities £bn £m £m £bn £m £m £bn £m £m
Exchange rate contracts 3 214 2 7 1,182 26 6 1,195 231 Interest rate contracts 6 297 5 4 320 — 4 280 — Credit derivatives — — — 10 — 53 — — — 511 7 1,502 79 1,475 231
Included above are derivatives held for hedging purposes as follows: Fair value hedging Assets £m Liabilities £m Assets £m Liabilities £m Assets £m Liabilities £m 7 Debt securities The company holds debt securities issued by a Group undertaking of £1,522 million (2011 - £1,568 million; 2010 - £1,454 million) classified as loans and receivables.
The Royal Bank of Scotland plc Banking Great Britain 100% National Westminster Bank Plc (1) Banking Great Britain 100% RBS Citizens Financial Group, Inc. Banking US 100% Coutts & Company (2) Private banking Great Britain 100% RBS Securities Inc. Broker dealer US 100% Direct Line Insurance Group plc Insurance Great Britain 65% Ulster Bank Limited (3) Banking Northern Ireland 100% RBS Holdings N.V. (4) Banking The Netherlands 98%
9 Accruals, deferred income and other liabilities 2012 2011 2010 £m £m £m
Current tax 183 92 114 Accruals 1 — 3 Deferred income — — 2 Other liabilities 307 612 915 491 704 1,034
Dated loan capital 7,590 6,459 6,685 Undated loan capital 2,946 1,516 563 Preference shares 769 802 800 11,305 8,777 8,048
Non-cumulative convertible preference shares of £0.01 Series 1 £15 million 7.387% (callable anytime from December 2010) (3) 15 15 15
Notes: (1) Further details of the contractual terms of the preference shares are given in Note 26 on the consolidated accounts. (2) Partially repurchased following completion of the exchange and tender offers in May 2010. (3) Partially converted into ordinary shares in the company in 2010.
Operating loss before tax - continuing operations (529) (34) (4,471) Interest on subordinated liabilities 486 419 462 Decrease in accruals and deferred income — (5) (1) Impairment of loans to Group entities 1,409 — — Gain on redemption of own debt — — (53) Profit on disposal of investment in subsidiaries (157) — — Write-down of investment in subsidiaries 1,785 570 5,124 Elimination of foreign exchange differences (194) (4) 272 Other non-cash items (1) — — Net cash inflow from trading activities 2,799 946 1,333 (Increase)/decrease in loans and advances to banks and customers (4,737) 3,596 (6,300) Decrease/(increase) in securities 46 (114) (168) Decrease in other assets 4 5 105 Decrease/(increase) in derivative assets 991 (27) (306) Changes in operating assets (3,696) 3,460 (6,669) (Decrease)/increase in deposits by banks and customers (585) 328 (78) Increase/(decrease) in debt securities in issue 937 (369) (3,020) Decrease in other liabilities (309) (303) (267) Decrease in derivative liabilities (72) (152) (215) Increase in settlement balances and short positions — — 11 Changes in operating liabilities (29) (496) (3,569) Income taxes paid (58) (95) (133) Net cash (outflow)/inflow from operating activities (984) 3,815 (9,038)
At 1 January 42,091 41,869 53,359 8,777 8,048 8,762 Issue of ordinary shares 120 2 1 — — — Redemption of preference shares — — 117 — — — Redemption of paid-in equity — — (132) — — — Cancellation of non-voting deferred shares — — (27) — — — Issue of subordinated liabilities — — — 2,747 940 — Repayment of subordinated liabilities — — — — (193) (98) Net cash inflow/(outflow) from financing 120 2 (41) 2,747 747 (98) Transfer to retained earnings — (50) (12,252) — — — Share capital sub-division and consolidation (8,933) — — — — — Ordinary shares issued in respect of employee share schemes 437 270 803 — — — Other adjustments including foreign exchange — — — (219) (18) (616)
At 1 January - cash equivalents 1,883 2,357 16,448 Net cash outflow (886) (474) (14,091)
Summary consolidated income statement 2012 £m 2011 £m £m 2009 £m £m
Notes: (1) Includes profit on strategic disposals of £113 million (2011 - £24 million loss; 2010 - £171 million profit; 2009 - £82 million loss; 2008 - £442 million profit). (2) Includes gain on redemption of own debt of £454 million (2011 - £255 million; 2010 - £553 million; 2009 - £3,790 million). (3) Includes own credit adjustments of £4,649 million loss (2011 - £1,914 million gain; 2010 - £242 million gain; 2009 - £97 million loss; 2008 - £1,232 million gain). (4) Includes Payment Protection Insurance costs of £1,110 million (2011 - £850 million), Interest Rate Hedging Products redress and related costs of £700 million and regulatory fines of £381 million. (5) Includes integration and restructuring costs of £1,415 million (2011 - £1,021 million; 2010 - £1,012 million; 2009 - £1,276 million; 2008 - £1,348 million). (6) Includes amortisation of purchased intangible assets of £177 million (2011 - £222 million; 2010 - £369 million; 2009 - £272 million; 2008 - £443 million). (7) Includes write-down of goodwill and other intangible assets of £124 million (2011 - £80 million; 2010 - £1 million; 2009 - £296 million; 2008 - £16,869 million). (8) Includes gains on pensions curtailment of £2,148 million in 2009. (9) Includes sovereign debt impairment of £1,099 million and related interest rate hedge adjustments of £169 million in 2011.
Loans and advances 564,086 598,916 655,778 820,146 1,012,919 Debt securities and equity shares 172,670 224,263 239,678 286,782 293,879 Derivatives and settlement balances 447,644 537,389 438,682 453,487 1,010,391 Other assets 127,895 146,299 119,438 136,071 84,463 Total assets 1,312,295 1,506,867 1,453,576 1,696,486 2,401,652
Loss per ordinary and B share from continuing operations - pence (1) (53.7) (21.3) (2.9) (57.2) (1,429.8) Diluted loss per ordinary and B share from continuing operations - pence (1,2) (53.7) (21.3) (2.9) (57.2) (1,429.8) Dividends per ordinary share - pence (1) — — — — 19.3 Share price per ordinary share at year end - £ 3.25 2.02 3.91 2.92 4.94 Market capitalisation at year end - £bn 36.3 22.3 42.8 31.4 19.5 Net asset value per ordinary and B share - £ 5.67 6.36 6.43 6.51 11.54 Return on average total assets (3) (0.42%) (0.13%) (0.07%) (0.18%) (1.19%) Return on average ordinary and B shareholders' equity (4) (8.9%) (2.9%) (0.7%) (7.2%) (50.1%) Average owners' equity as a percentage of average total assets 5.1% 4.9% 4.6% 2.8% 2.9% Risk asset ratio - Tier 1 12.4% 13.0% 12.9% 14.1% 10.0% Risk asset ratio - Total 14.5% 13.8% 14.0% 16.1% 14.1% Ratio of earnings to combined fixed charges and preference share dividends (5) - including interest on deposits 0.29 0.87 0.97 0.73 0.02 - excluding interest on deposits (2.94) (0.17) 0.67 (0.44) (8.06) Ratio of earnings to fixed charges only (5) - including interest on deposits 0.30 0.87 0.98 0.78 0.02 - excluding interest on deposits (3.71) (0.17) 0.78 (0.66) (10.06)
Overseas US 33,854 31,290 21,164 86,308 90,331 90,753 93,569 126,277 Rest of the World 38,587 15,981 25,918 80,486 93,890 107,742 264,712 327,391 Total Overseas offices 72,441 47,271 47,082 166,794 184,221 198,495 358,281 453,668 Loans and advances to customers - gross 218,988 112,071 190,212 521,271 535,366 573,315 745,519 885,611
Fixed rate 37,374 22,437 64,130 123,941 88,429 95,000 223,902 168,982 Variable rate 111,567 89,634 126,082 327,283 385,443 425,803 480,577 677,316 Reverse repos 70,047 — — 70,047 61,494 52,512 41,040 39,313 Loans and advances to customers – gross 218,988 112,071 190,212 521,271 535,366 573,315 745,519 885,611
The Group provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to the Group’s corporate and commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a margin over a bench mark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base rate; other variable rate retail lending is charged at variable interest rates set by the Group such as its mortgage standard variable rate in the UK.
Loan impairment provisions For a discussion of the factors considered in determining the amount of provisions, refer to ‘Impairment loss provision methodology’ on page 179 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 368. The following table shows the movements in loan impairment provisions.
Provisions at the beginning of the year Domestic 7,728 8,199 6,670 4,474 3,258 Foreign 12,155 9,983 10,613 6,542 3,194 19,883 18,182 17,283 11,016 6,452 Transfer from/(to) disposal groups Domestic 764 (773) (25) — — Foreign — — (47) (324) (767)
Currency translation and other adjustments Domestic 9 (11) (79) (228) 107 Foreign (319) (272) 122 (302) 1,334 (310) (283) 43 (530) 1,441 Disposals Domestic — — — — (108)
Recoveries of amounts previously written-off Domestic 163 158 151 175 116 Foreign 178 369 260 224 203 341 527 411 399 319 Charged to income statement - continuing operations (1) Domestic 2,102 2,749 3,948 5,370 2,701 Foreign 3,213 4,492 5,196 7,720 3,777 5,315 7,241 9,144 13,090 6,478 Charged to income statement - discontinued operations Domestic — — — — (3) Foreign 4 (8) 42 1,044 616 4 (8) 42 1,044 613 Unwind of discount (recognised in interest income) Domestic (232) (220) (214) (226) (151)
Closing customer provisions as a % of gross loans and advances to customers (3) Domestic 3.2% 3.0% 2.9% 2.2% 1.4% Foreign 5.0% 4.4% 3.4% 2.3% 1.1% Total 4.1% 3.7% 3.2% 2.3% 1.2% Customer charge to income statement as a % of gross loans and advances to customers (3) Domestic 0.8% 1.1% 1.4% 1.8% 0.9% Foreign 1.3% 1.6% 1.8% 2.0% 0.8% Total 1.0% 1.4% 1.6% 1.9% 0.8%
The following table shows additional information in respect of loan impairment provisions. 2012 £m 2009 £m £m
Average loans and advances to customers (gross) 541,588 578,057 610,131 821,155 858,333
Domestic Central and local government — 0.7 — 0.9 — 0.7 — 0.4 — 0.3 Manufacturing 134 1.8 135 1.3 100 1.6 153 1.5 127 1.7 Construction 483 1.4 502 0.9 605 1.1 355 1.0 254 1.1 Finance 34 2.6 40 7.3 98 6.8 26 4.9 67 4.8 Service industries and business activities 1,453 9.6 1,218 6.6 1,073 8.0 962 7.0 778 6.6 Agriculture, forestry and fishing 34 0.5 36 0.5 27 0.5 20 0.4 19 0.3 Property 3,274 8.3 2,657 6.2 2,071 7.3 908 6.6 490 5.9 Residential mortgages 434 20.9 384 18.7 302 17.6 196 12.4 36 9.1 Personal lending 2,146 3.8 1,919 3.7 2,504 4.1 2,527 3.4 2,235 3.0 Finance leases and instalment credit 184 2.0 366 2.1 435 2.3 341 2.2 194 2.0 Accrued interest — 0.1 — 0.1 — 0.1 — 0.1 — 0.3 Total domestic 8,176 51.7 7,257 48.3 7,215 50.1 5,488 39.9 4,200 35.1 Foreign 11,000 48.3 10,517 51.7 8,190 49.9 8,562 60.1 4,745 64.9 Impaired book provisions 19,176 100.0 17,774 100.0 15,405 100.0 14,050 100.0 8,945 100.0
Latent book provisions 1,960 1,986 2,650 3,076 1,944 Total provisions 21,136 19,760 18,055 17,126 10,889
Analysis of recoveries The following table analyses recoveries of amounts written-off by geographical area and type of domestic customer.
Impaired loans are all loans (including renegotiated and forbearance loans) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans.
Gross income not recognised but which would have been recognised under the original terms of impaired loans Domestic 665 636 579 625 393 Foreign 940 964 830 1,032 338 1,605 1,600 1,409 1,657 731
Interest on impaired loans included in net interest income Domestic 232 220 214 226 150 Foreign 244 264 241 182 42 476 484 455 408 192
The Group monitors the geographical breakdown of these exposures based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures exclude exposures to local residents in local currencies.
United States 18,936 1,736 30,983 51,655 12,080 39,575 France 6,563 13,285 6,224 26,072 2,157 23,915 Germany 14,678 4,289 6,812 25,779 1,956 23,823 Netherlands 5,350 2,227 11,200 18,777 1,124 17,653 Japan 4,338 6,822 1,410 12,570 2,326 10,244 Spain 893 4,789 6,328 12,010 515 11,495 Republic of Ireland 217 3,557 3,071 6,845 59 6,786 Italy 3,767 373 1,165 5,305 2,301 3,004
United States 20,932 7,300 38,721 66,953 13,329 53,624 France 11,633 14,800 8,189 34,622 5,903 28,719 Germany 34,615 5,952 9,787 50,354 2,946 47,408 Netherlands 4,466 2,210 10,711 17,387 982 16,405 Japan 8,350 7,505 3,375 19,230 3,141 16,089 Spain 340 3,656 10,282 14,278 973 13,305 Republic of Ireland 665 3,287 2,759 6,711 68 6,643 Italy 5,190 548 1,489 7,227 4,826 2,401
UK Domestic Demand deposits - interest-free 69,067 63,875 66,608 - interest-bearing 126,505 111,274 136,359 Time deposits - savings 79,824 79,310 70,774 - other 55,299 61,651 59,557 Overseas residents Demand deposits - interest-free 4,372 2,965 2,512 - interest-bearing 46,879 20,773 12,530 Time deposits - savings 2,060 1,693 1,512 - other 41,615 59,105 46,023 Total UK offices 425,621 400,646 395,875 Overseas Demand deposits - interest-free 42,250 30,780 29,919 - interest-bearing 34,548 44,413 43,890 Time deposits - savings 26,891 25,296 24,472 - other 93,374 110,624 115,327 Total overseas offices 197,063 211,113 213,608 Total deposits 622,684 611,759 609,483
UK based companies and branches Certificates of deposit 885 692 194 377 2,148 Other time deposits 20,275 2,981 4,567 7,778 35,601
Operating leases 208 260 802 651 1,234 1,480 Contractual obligations to purchase goods or services 111 372 548 93 6 — 319 632 1,350 744 1,240 1,480
Noon Buying Rate High 1.6255 1.6275 1.6142 1.6196 1.6263 1.5882 Low 1.5686 1.6031 1.5849 1.5932 1.5889 1.5500
Noon Buying Rate Period end rate 1.6262 1.5537 1.5392 1.6167 1.4619 Average rate for the year (1) 1.5924 1.6105 1.5415 1.5707 1.8424
Economic and monetary environment It has been noted before that when economies are emerging from recessions rooted in high levels of debt and stresses in the financial system, growth is slower than in the typical recovery. That was the experience again in 2012 in the major markets in which the Group operates.
In the UK, growth weakened. Total economic activity, as measured by gross domestic product (GDP), was flat compared with growth of 0.9% in 2011. At the start of the year, expectations had been more positive, the consensus forecast for growth having been 0.5%. Yet the year ended with the economy contracting.
The Bank of England continued its ultra-loose monetary policy stance. Although inflation remained above target, the Bank kept interest rates at 0.5%. In fact, its greater concern was that the weak economy would cause inflation to be too low and in February and July it increased its asset purchase programme by £50 billion taking the total value of assets purchased to £375 billion. The Government’s decision to transfer the coupon payments from the Asset Purchase Facility to HM Treasury, which will use these proceeds to reduce the stock of Government debt, has a similar effect to further quantitative easing.
However, concerned that the recovery remained too slow to return unemployment to rates consistent with its mandate to foster maximum employment, the Federal Open Market Committee changed policy in two ways. In September it agreed to increase monetary accommodation by purchasing mortgage-backed securities at a pace of $40 billion per month. Second, it announced in December it anticipates the Fed Funds rate remaining exceptionally low as long as the unemployment rate is above 6.5%, inflation one to two years ahead is expected to be no more than 2.5% and inflation expectations are well anchored.
Unemployment averaged more than 14%. At the end of the year house prices were 4.5% lower than 12 months earlier and around 50% below their peak. The rate of decline was slower than at any time since 2008 and there were tentative signs that prices were stabilising.
From 1 April 2013, the FSA’s responsibilities will be split between two bodies: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). At that point, the PRA will become the consolidated supervisor of the Group. The FSA have already anticipated the new structure by creating Prudential and Conduct business units in April 2012 and separating the supervision teams for each dual regulated firm between those units from that time.
The UK authorised banks in the Group include The Royal Bank of Scotland plc, National Westminster Bank Plc, Coutts & Co and Ulster Bank Limited. Wholesale activities, other than Group Treasury activities, are concentrated in the Group's Markets, International Banking and UK Corporate Banking divisions, and are undertaken under the names of The Royal Bank of Scotland plc and National Westminster Bank Plc. UK retail banking activities are managed by the UK Retail division and by Ulster Bank Limited in Northern Ireland. The banking service in the Republic of Ireland is provided by Ulster Bank Ireland Limited, which is supervised by the Central Bank of Ireland.
General insurance business is principally undertaken by U K Insurance Limited.
Description of property and equipment The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2012, the Royal Bank and NatWest had 617 and 1,452 retail branches, respectively, in the UK. Ulster Bank has a foot print of 236 branches and an extensive network of business banking offices across Northern Ireland and the Republic of Ireland. US Retail & Commercial had 1,399 retail banking offices (including in-store branches) covering Connecticut, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. The Group's principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
Total capital expenditure on premises (excluding investment properties), computers and other equipment in the year ended 31 December 2012 was £801 million (2011 - £820 million; 2010 - £656 million).
Material contracts The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: Consortium and Shareholders Agreement (CSA) On 28 May 2007, Fortis Bank Nederland, the company, Santander and RFS Holdings entered into the CSA. Fortis Bank Nederland acceded to the CSA on 26 July 2007. On 3 October 2008, the Dutch State acquired Fortis Bank Nederland. On 24 December 2008 the Dutch State acceded to the CSA following its acquisition of the shares held by Fortis Bank Nederland in RFS Holdings pursuant to a Deed of Accession entered into between RFS Holdings, the company, Fortis Bank Nederland, Santander and the Dutch State. On 1 April 2010 the CSA was restated. It was the subject of a further amendment on 18 July 2011. On 7 November 2012,
Stichting Administratiekantoor Beheer Financiële Instellingen (the Foundation) acceded to the CSA (as amended and restated) as a shareholder following its acquisition of the shares held by the Dutch State in RFS Holdings pursuant to a Deed of Accession entered into between RFS Holdings, the company, Santander, the Dutch State and the Foundation. The Dutch State remains a party to the CSA. The CSA (as amended and restated) governs the relationships amongst the parties thereto in relation to the acquisition by RFS Holdings of ABN AMRO (now RBS Holdings N.V.). The CSA (as amended and restated) details, inter alia, the equity interests in RFS Holdings, the governance of RFS Holdings, the arrangements for the transfer of certain ABN AMRO businesses, assets and liabilities to the Dutch State (previously Fortis Bank Nederland), the company and Santander, further funding obligations of the Dutch State, the company and Santander where funding is required by regulatory authorities in connection with the ABN AMRO businesses, the allocation of taxes and conduct of tax affairs and the steps that the Dutch State, the company and Santander expect to take to enable the company to become the sole shareholder of RFS Holdings.
HM Treasury has agreed to waive its statutory pre-emption rights arising out of the B shares and the Dividend Access Share in respect of any future issue of equity securities by the company other than B shares and has agreed to vote its B shares and the Dividend Access Share, as applicable, in favour of each special resolution to disapply its pre- emption rights under the B shares and/or the Dividend Access Share then held by HM Treasury every time they arise. The pre-emption rights arising out of the B shares and the Dividend Access Share have also been disapplied in the Articles of Association.
For as long as it is a substantial shareholder of the company (within the meaning of the UKLA's Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that its affiliates do not so vote.
Macro-economic and geopolitical risks The Group’s businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions The Group’s businesses and performance are affected by local and global economic conditions, perceptions of those conditions and future economic prospects. The outlook for the global economy over the near to medium-term remains challenging and many forecasts predict at best only stagnant or modest levels of gross domestic product (GDP) growth across a number of the Group’s key markets over that period, including, in particular, the UK, Ireland and the US. Stagnant or weak GDP growth is also expected in the European Monetary Union (EMU) where a relatively robust German economy has been offset by austerity measures in many EMU countries, initiated in response to increased sovereign debt risk, which have resulted in weak economic and GDP growth, particularly in Spain, Italy and France.
The Group’s businesses and performance are also affected by financial market conditions. Although capital and credit markets around the world were more stable during 2012, they remained volatile and subject to intermittent and prolonged disruptions. In particular, increasingly during the second and third quarters of 2012, continuing risk of sovereign default relating to certain EU member states had a negative impact on capital and credit markets.
These challenging economic and market conditions create a difficult operating environment for the Group’s businesses, which is characterised by: downward pressure on asset prices and on credit availability and upward pressure on funding costs, and such conditions continue to impact asset recovery rates and the credit quality of the Group’s businesses, customers and counterparties, including sovereigns; alone or in combination with regulatory changes or actions of market participants, reduced activity levels, additional write-downs and impairment charges and lower profitability, and may restrict the ability of the Group to access funding and liquidity; and central bank actions to engender economic growth which have resulted in a prolonged period of low interest rates constraining, through margin compression and low returns on assets, the interest income earned on the Group’s interest earning assets.
The effects on the UK, European and global economies of the potential dissolution of the EMU, exit of one or more EU member states from the EMU and the redenomination of financial instruments from the euro to a different currency, are impossible to predict fully. However, if any such events were to occur they would likely: result in significant market dislocation; heighten counterparty risk; result in downgrades of credit ratings for European borrowers, giving rise to increases in credit spreads and decreases in security values; disrupt and adversely affect the economic activity of the UK and other European markets; and adversely affect the management of market risk and in particular asset and liability management due, in part, to redenomination of financial assets and liabilities and the potential for mismatch.
In particular, the Group has significant exposure to customers and counterparties in the Eurozone (at 31 December 2012 principally Germany (£48 billion), The Netherlands (£26 billion), Ireland (£40 billion), France (£19 billion) and Spain (£12 billion)) which includes sovereign debt exposures that have been, and may in the future be, affected by restructuring of their terms, principal, interest and maturity. The Group’s Eurozone sovereign debt exposures resulted in the Group recognising an impairment loss of £1,099 million in 2011 in respect of its holding of Greek government bonds. Similar write downs may occur in future periods. At 31 December 2012, the Group’s Eurozone sovereign debt exposure amounted to £678 million including aggregate exposure of £51 million to Greece, Ireland, Italy, Spain and Portugal.
The Group operates in markets that are highly competitive and its business and results of operations may be adversely affected The competitive landscape for banks and other financial institutions in the UK, the US and throughout the rest of Europe is subject to rapid change and recent regulatory and legal changes are likely to result in new market participants and changed competitive dynamics in certain key areas, such as in retail banking in the UK. The competitive landscape in the UK will be particularly influenced by the recommendations on competition included in the final report of the Independent Commission on Banking (ICB), and the UK Government’s implementation of the recommendations. In order to compete effectively, certain financial institutions may seek to consolidate their businesses or assets with other parties. This consolidation, in combination with the introduction of new entrants into the markets in which the Group operates is likely to increase competitive pressures on the Group.
The Group and its UK bank subsidiaries may face the risk of full nationalisation Under the Banking Act 2009, substantial powers have been granted to HM Treasury, the Bank of England and the FSA (together, the “Authorities”) as part of a special resolution regime. These powers enable the Authorities to deal with and stabilise certain deposit-taking UK incorporated institutions that are failing, or are likely to fail, to satisfy the threshold conditions (within the meaning of section 41 of the FSMA, which are the conditions that a relevant entity must satisfy in order to obtain its authorisation to perform regulated activities). The special resolution regime consists of three stabilisation options: (i) transfer of all or part of the business of the relevant entity and/or the securities of the relevant entity to a private sector purchaser, (ii) transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly owned by the Bank of England and (iii) temporary public ownership (nationalisation) of the relevant entity. If HM Treasury decides to take the Group into temporary public ownership pursuant to the powers granted under the Banking Act, it may take various actions in relation to any securities without the consent of holders of the securities.
Market and credit related risks The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions Severe market events have resulted in the Group recording large writedowns on its credit market exposures in recent years; particularly early in the financial crisis (£10.1 billion in 2008 and £6.2 billion in 2009). Any deterioration in economic and financial market conditions or continuing weak economic growth could lead to further impairment charges and write-downs. Moreover, market volatility and illiquidity (and the assumptions, judgements and estimates in relation to such matters that may change over time and may ultimately not turn out to be accurate) make it difficult to value certain of the Group’s exposures. Valuations in future periods, reflecting, among other things, then prevailing market conditions and changes in the credit ratings of certain of the Group’s assets, may result in significant changes in the fair values of the Group’s exposures, even in respect of exposures, such as credit market exposures, for which the Group has previously recorded write-downs. In addition, the value ultimately realised by the Group may be materially different from the current or estimated fair value. As part of the Group’s strategy it has materially reduced the size of its balance sheet mainly through the sale and run-off of non-core assets. The Group’s assets that remain in its Non-Core division may be more difficult to sell and could be subject to further write-downs or, if sold, realised losses. Any of these factors could require the Group to recognise additional significant writedowns or realise increased impairment charges, which may have a material adverse effect on its financial condition, results of operations and capital ratios. In addition, steep falls in perceived or actual asset values have been accompanied by a severe reduction in market liquidity, as exemplified by losses arising out of asset-backed collateralised debt obligations, residential mortgage-backed securities and the leveraged loan market. In dislocated markets, hedging and other risk management strategies may not be as effective as they are in normal market conditions due in part to the decreasing credit quality of hedge counterparties.
The financial performance of the Group has been, and continues to be, materially affected by deteriorations in borrower and counterparty credit quality and further deteriorations could arise due to prevailing economic and market conditions and legal and regulatory developments The Group has exposure to many different industries and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and counterparties are inherent in a wide range of the Group’s businesses. In particular, the Group has significant exposure to certain individual counterparties in weakened business sectors and geographic markets and also has concentrated country exposure in the UK, the US and across the rest of Europe (principally Germany, The Netherlands, Ireland and France) (at 31 December 2012 credit risk assets in the UK were £316 billion, in North America £101 billion and in Western Europe (excluding the UK) £147 billion); and within certain business sectors, namely personal finance, financial institutions and commercial real estate (at 31 December 2012 residential and personal lending amounted to £182 billion, lending to financial institutions was £114 billion and commercial real estate lending was £63 billion). The Group expects its exposure to the UK to increase proportionately as its business becomes more concentrated in the UK, with exposures generally being reduced in other parts of its business as it implements its strategy.
A further deterioration in economic and market conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and also impact the Group’s ability to enforce contractual security rights. In addition, the Group’s credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced in recent years. This has been particularly the case with respect to large parts of the Group’s commercial real estate portfolio. Any such losses could have an adverse effect on the Group’s results of operations and financial condition.
In certain jurisdictions in which the Group does business, particularly Ireland, there has been disruption during recent years in the ability of certain financial institutions to complete foreclosure proceedings in a timely manner (or at all), including as a result of interventions by certain states and local governments. This disruption has lengthened the time to complete foreclosures, increased the backlog of repossessed properties and, in certain cases, has resulted in the invalidation of purported foreclosures.
While the Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed, it is difficult, particularly in the current environment, to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on the Group’s financial performance and business operations.
In addition, to the extent that other jurisdictions where the Group operates have introduced or plan to introduce similar compensation, contributory or reimbursement schemes (such as in the US with the Federal Deposit Insurance Corporation), the Group may make further provisions and may incur additional costs and liabilities, which may have an adverse impact on its financial condition and results of operations.
The Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations The Group maintains a number of defined benefit pension schemes for past and a number of current employees. Pension risk is the risk that the assets of the Group’s various defined benefit pension schemes which are long-term in nature do not fully match the timing and amount of the schemes’ liabilities, as a result of which the Group is required or chooses to make additional contributions to the schemes. Pension scheme liabilities vary with changes to long-term interest rates, inflation, pensionable salaries and the longevity of scheme members as well as changes in applicable legislation. The schemes’ assets comprise investment portfolios that are held to meet projected liabilities to the scheme members. Risk arises from the schemes because the value of these asset portfolios, returns from them and any additional future contributions to the schemes, may be less than expected and because there may be greater than expected increases in the estimated value of the schemes’ liabilities. In these circumstances, the Group could be obliged, or may choose, to make additional contributions to the schemes, and during recent periods, the Group has voluntarily made such contributions to the schemes. Given the recent economic and financial market difficulties and the prospect that they may continue over the near and medium term, the Group may experience increasing pension deficits or be required or elect to make further contributions to its pension schemes and such deficits and contributions could be significant and have an adverse impact on the Group’s results of operations or financial condition. The most recent funding valuation, at 31 March 2010 was agreed during 2011. It showed the value of liabilities exceeded the value of assets by £3.5 billion at 31 March 2010, a ratio of assets to liabilities of 84%.
In order to eliminate this deficit, the Group will pay additional contributions each year over the period 2011 until 2018. Contributions started at £375 million per annum in 2011, will increase to £400 million per annum in 2013 and from 2016 onwards will be further increased in line with price inflation. These contributions are in addition to the regular annual contributions of around £250 million for future accrual of benefits.
Funding, liquidity and capital related risks The Group’s ability to meet its obligations including its funding commitments depends on the Group’s ability to access sources of liquidity and funding Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of factors, including an over reliance on a particular source of wholesale funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide, including interbank markets, have experienced severe reductions in liquidity and term-funding during prolonged periods in recent years. Although credit markets generally improved during 2012 (in part as a result of measures taken by the ECB), and the Group’s overall liquidity position remained strong, certain European banks, in particular from the peripheral countries of Spain, Portugal, Greece, Italy and Ireland, remained reliant on central banks as one of their principal sources of liquidity and central banks increased their support to banks with the ECB providing significant short and long-term liquidity in the last few months of 2011 and in 2012. Although these efforts had a positive impact, global credit markets remain volatile.
The market perception of bank credit risk has changed significantly as a result of the financial crisis and banks that are deemed by the market to be riskier have had to issue debt at a premium. Any uncertainty regarding the perception of credit risk across financial institutions may lead to reductions in levels of interbank lending and associated term maturities and may restrict the Group’s access to traditional sources of liquidity or increase the costs of accessing such liquidity.
Risk factors continued The Group’s business performance could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements Effective management of the Group’s capital is critical to its ability to operate its businesses, and to pursue its strategy of returning to standalone strength. The Group is required by regulators in the UK, the US and other jurisdictions in which it undertakes regulated activities to maintain adequate capital resources. The maintenance of adequate capital is also necessary for the Group’s financial flexibility in the face of continuing turbulence and uncertainty in the global economy and specifically in its core UK, US and European markets.
The ICB recommendations and the UK Government’s response supporting such recommendations include proposals to increase capital and loss absorbency to levels that exceed the proposals under Basel III/CRD IV. These requirements, as well as the other recommendations of the ICB, are expected to be phased in between 2015 and 2019. The US Federal Reserve has also proposed changes in how it will regulate the US operations of foreign banking operations such as the Group that may affect the capital requirements of the Group’s operations in the US. As the implementation of the ICB recommendations are the subject of draft legislation not yet adopted and the Federal Reserve’s recent proposals are in a comment period, the Group cannot predict the impact such rules will have on the Group’s overall capital requirements or how they will affect the Group’s compliance with applicable capital and loss absorbency requirements.
The Group’s borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its and the UK Government’s credit ratings The credit ratings of RBSG, the Royal Bank and other Group members have been subject to change and may change in the future, which could impact their cost of, access to and sources of financing and liquidity. A number of UK and other European financial institutions, including RBSG, the Royal Bank and other Group members, were downgraded during the course of 2011 and 2012 in connection with a review of systemic support assumptions incorporated into bank ratings and the likelihood, in the case of UK banks, that the UK Government is more likely in the future to make greater use of its resolution tools to allow burden sharing with bondholders, and in connection with a general review of rating agencies’ methodologies. Rating agencies continue to evaluate the rating methodologies applicable to UK and European financial institutions and any change in such rating agencies’ methodologies could materially adversely affect the credit ratings of Group companies. Any further reductions in the long-term or short-term credit ratings of RBSG or one of its principal subsidiaries (particularly the Royal Bank) would increase its borrowing costs, require the Group to replace funding lost due to the downgrade, which may include the loss of customer deposits, and may also limit the Group’s access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. At 31 December 2012, a simultaneous one notch long-term and associated short-term downgrade in the credit ratings of RBSG and the Royal Bank by the three main ratings agencies would have required the Group to post estimated additional collateral of £9 billion, without taking account of mitigating action by management.
Any downgrade in the UK Government’s credit ratings could adversely affect the credit ratings of Group companies and may have the effects noted above. In December 2012, Standard & Poor’s placed the UK’s AAA credit rating on credit watch, with negative outlook and, in February 2013, Moody’s downgraded the UK’s credit rating one notch to Aa1. Credit ratings of RBSG, the Royal Bank, RBS N.V., Ulster Bank Limited and RBS Citizens Financial Group, Inc. are also important to the Group when competing in certain markets, such as over-the-counter derivatives. As a result, any further reductions in the Group’s long-term or short-term credit ratings or those of its principal subsidiaries could adversely affect the Group’s access to liquidity and its competitive position, increase its funding costs and have a material adverse impact on the Group’s earnings, cash flow and financial condition.
The regulatory capital treatment of certain deferred tax assets recognised by the Group depends on there being no adverse changes to regulatory requirements There is currently no restriction in respect of deferred tax assets recognised by the Group for regulatory purposes. Changes in regulatory capital rules may restrict the amount of deferred tax assets that can be recognised and such changes could lead to a reduction in the Group’s Core Tier 1 capital ratio. In particular, on 16 December 2010, the Basel Committee published the Basel III rules setting out certain changes to capital requirements which include provisions limiting the ability of certain deferred tax assets to be recognised when calculating the common equity component of Tier 1 capital. CRD IV which will implement Basel III in the EU includes similar limitations. The implementation of the Basel III restrictions on recognition of deferred tax assets within the common equity component of Tier 1 are subject to a phased-in deduction starting on 1 January 2014, to be fully effective by 1 January 2018.
Risks to implementation of Group strategy The Group’s ability to implement its strategic plan depends on the success of the Group’s refocus on its core strengths and its balance sheet reduction programme As a result of the global economic and financial crisis that began in 2008 and the changed global economic outlook, the Group is engaged in a financial and core business restructuring which is focused on achieving appropriate risk-adjusted returns under these changed circumstances, reducing reliance on wholesale funding and lowering exposure to capitalintensive businesses. A key part of this restructuring is the programme announced in February 2009 to run-down and sell the Group’s non-core assets and businesses and the continued review of the Group’s portfolio to identify further disposals of certain non-core assets and businesses. Assets identified for this purpose and allocated to the Group’s Non-Core division totalled £258 billion, excluding derivatives, at 31 December 2008. At 31 December 2012, this total had reduced to £57.4 billion (31 December 2011 - £93.7 billion), excluding derivatives, as further progress was made in business disposals and portfolio sales during the course of 2012. This balance sheet reduction programme continues alongside the disposals under the State Aid restructuring plan approved by the European Commission. As part of its core business restructuring, during 2012 the Group implemented changes to its wholesale banking operations, including the reorganisation of its wholesale businesses and the exit and downsizing of selected existing activities (including cash equities, corporate banking, equity capital markets, and mergers and acquisitions).
Risk factors continued The Group may be liable for any deterioration in businesses or portfolios being sold between the announcement of the disposal and its completion, which period may be lengthy and may span many months. In addition, the Group may be exposed to certain risks, including risks arising out of ongoing liabilities and obligations, breaches of covenants, representations and warranties, indemnity claims, transitional services arrangements and redundancy or other transaction related costs.
The Group is subject to a variety of risks as a result of implementing the State Aid restructuring plan The Group was required to obtain State Aid approval for the aid given to the Group by HM Treasury as part of the placing and open offer undertaken by the Group in December 2008, the issuance to HM Treasury of £25.5 billion of B shares in the capital of the Group which are, subject to certain terms and conditions, convertible into ordinary shares in the share capital of the Group and a contingent commitment by HM Treasury to subscribe for up to an additional £8 billion of B Shares if certain conditions are met in addition to the Group’s participation in the Asset Protection Scheme (APS) (which has now been terminated). In that context, as part of the terms of the State Aid approval, the Group, together with HM Treasury, agreed the terms of a restructuring plan.
The Group is subject to a variety of risks as a result of implementing the State Aid restructuring plan, including required asset disposals. In particular, the Group agreed to undertake a series of measures to be implemented over a four year period from December 2009, including the disposal of a number of businesses now completed (or substantially completed) as well as the disposal of all or a controlling portion of Direct Line Group (DLG, formerly known as RBS Insurance) (with disposal of its entire interest in DLG required by 31 December 2014), and the Royal Bank branch-based business in England and Wales and the NatWest branches in Scotland, along with the direct and other small and mediumsize enterprise (SME) customers and certain mid-corporate customers across the UK. While the initial sale of 34.7% of DLG through an IPO was completed in October 2012, in respect of the Royal Bank and NatWest branch-based business, the sale process continues to progress following the withdrawal of its original buyer in October 2012.
The disposal of Global Merchant Services and RBS Sempra Commodities reduced the Group’s assets by approximately £13.0 billion and £2.4 billion, respectively (based on total assets immediately prior to disposal). The quantum of assets and deposits that would be included in a divestment of the Royal Bank branch-based business in England and Wales and the NatWest branches in Scotland is not certain. However, at 31 December 2012, this business included approximately £18.8 billion of assets, £21.5 billion of deposits and two million customers.
Although it is difficult to predict with certainty the effect that recent regulatory developments and heightened levels of public and regulatory scrutiny will have on the Group, the enactment of legislation and regulations in the UK and the EU, the other parts of Europe in which the Group operates and the US (such as the bank levy in the UK, the EU Recovery and Resolution Directive (the “RRD”) or the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US) is likely to result in increased capital and liquidity requirements and changes in regulatory requirements relating to the calculation of capital and liquidity metrics or other prudential rules relating to capital adequacy frameworks, and may result in an increased number of regulatory investigations and proceedings. Any of these developments could have an adverse impact on how the Group conducts its business, applicable authorisations and licences, the products and services it offers, its reputation, the value of its assets, its funding costs and its results of operations and financial condition.
FSA to the Financial Conduct Authority for conduct of business supervision and the Prudential Regulatory Authority for capital and liquidity supervision in 2013; the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies; requirements to separate retail banking from investment banking; restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank; restructuring certain of the Group’s non-retail banking activities in jurisdictions outside the UK in order to satisfy local capital, liquidity and other prudential requirements; the design and potential implementation of government mandated recovery, resolution or insolvency regimes; the imposition of government imposed requirements with respect to lending to the UK SME market and larger commercial and corporate entities and residential mortgage lending; requirements to operate in a way that prioritises objectives other than shareholder value creation; changes to financial reporting standards (including accounting standards), corporate governance requirements, corporate structures and conduct of business rules; the imposition of restrictions on the Group’s ability to compensate its senior management and other employees; regulations relating to, and enforcement of, anti-bribery, anti-money laundering, anti-terrorism or other similar sanctions regimes; rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets; other requirements or policies affecting the Group’s profitability, such as the imposition of onerous compliance obligations, further restrictions on business growth, product offering, capital, liquidity or pricing; the introduction of, and changes to, taxes, levies or fees applicable to the Group’s operations (such as the imposition of financial activities taxes and changes in tax rates that reduce the value of deferred tax assets); and the regulation or endorsement of credit ratings used in the EU
Risk factors continued The Group is subject to resolution procedures under current and proposed resolution and recovery schemes which may result in various actions being taken in relation to any securities of the Group, including the write off, write-down or conversion of the Group’s securities As a result of its status as a GSIFI and in accordance with current and proposed resolution and recovery schemes, the Group was required to meet certain resolution planning requirements by the end of 2012 and is required to meet others in 2013 contemplating its possible failure. The Group made the required submissions in 2012 to the FSA and its US business will make its required submissions in 2013. Similar to other major financial institutions, both the Group and its key subsidiaries remain engaged in a constructive dialogue on resolution and recovery planning with key national regulators and other authorities.
In addition to the powers provided by the Banking Act 2009, further resolution powers are expected to be provided as part of the RRD and the reforms implementing the recommendations of the ICB. Such resolution powers are expected to include a bail-in mechanism, pursuant to which losses would be imposed on shareholders and, as appropriate, creditors of the Group (through write-down or conversion into equity of liabilities including debt securities) in order to recapitalise and restore the Group to solvency as well as other options, including those as set forth in the Banking Act 2009. The implementation of any resolution and recovery scheme is the subject of significant debate, particularly for GSIFIs with complex cross border activities. Such debate includes whether resolution and recovery powers may be exercised through a single point of entry at the holding company or at various levels of the corporate structure of a GSIFI.
The potential impacts of these resolution and recovery powers may include the total loss of value of securities issued by the Group and, in addition for debt holders, the possible conversion into equity securities, and under certain circumstances the inability of the Group to perform its obligations under its securities.
The measures in relation to the promotion of competition are already largely in train, including the development of an industry mechanism to make it easier for customers to switch their personal current accounts to a different provider, which is due to be completed by September 2013.
The UK Government published in October 2012 a draft bill intended to enable the implementation of these reforms. This draft bill is subject to pre-legislative scrutiny by the UK Parliamentary Commission on Standards in Banking (PCBS), which may recommend changes to the bill. The UK Government published its response to the PCBS in February 2013 and agreed to amend the bill to include provisions giving the regulator the power to enforce full separation between retail and wholesale banking in a specified group. The Government is expected to introduce the bill, which will provide primary enabling legislation in the short term. This is with a view to completing the legislative framework by May 2015, requiring compliance as soon as practicable thereafter and setting a final deadline for full implementation of 2019.
It is also possible that the UK’s implementation of a ring-fence may conflict with any EU legislation to implement the recommendations of the High-level Expert Group on Reforming the Structure of the EU Banking Sector, whose report, published in October 2012, proposed, inter alia, ring-fencing the trading and market-making activities of major European banks. This could affect the Group’s position relative to some competitors. However, it is not yet clear whether the EU will implement ring-fencing proposals and whether they will apply to UK banks, in addition to the UK’s own ring-fencing measures.
The Group is involved in ongoing class action litigation, LIBOR related litigation and investigations, securitisation and securities related litigation, and anti-money laundering, sanctions, mis-selling and compliance related investigations, in addition to a number of other matters. In respect of the LIBOR investigations, the Group reached a settlement on 6 February 2013 with the Financial Services Authority, the Commodity Futures Trading Association and the US Department of Justice. In addition to this settlement, the Group continues to cooperate with these and other governmental and regulatory authorities, including in the US and Asia, into its submissions, communications and procedures relating to the setting of LIBOR and other trading rates, and the probable outcome is that it will incur additional financial penalties. For more detail on the
Group’s ongoing legal and regulatory proceedings, see page 455. Legal and regulatory proceedings and investigations are subject to many uncertainties, and their outcomes, including the timing and amount of fines or settlements, which may be material, are often difficult to predict, particularly in the early stages of a case or investigation. Adverse regulatory proceedings or adverse judgments in litigation could result in restrictions or limitations on the Group’s operations or have a significant effect on the Group’s reputation or results of operations.
The Group may be required to increase provisions in relation to ongoing legal proceedings, investigations and regulatory matters. In 2012, provisions were required to cover costs of redress in respect of past sales of interest rate hedging products to the Group’s small and medium sized businesses, having regard to the FSA report issued in January 2013 outlining the principles to which it wishes the Group and other UK banks to adhere in conducting the review and redress exercise. Additional provisions were required in 2012 to cover increased costs associated with Payment Protection Insurance sales practices. Provision was also required in respect of the redress paid to customers following the June 2012 technology incident which resulted in delays in the processing of certain customer accounts and payments. Significant increases in provisions may harm the Group’s reputation and may have an adverse effect on the Group’s financial condition and results of operations.
Financial reporting related risks The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate Under International Financial Reporting Standards (IFRS), the Group recognises at fair value: (i) financial instruments classified as held-fortrading or designated as at fair value through profit or loss; (ii) financial assets classified as available-for-sale; and (iii) derivatives. Generally, to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In such circumstances, the Group’s internal valuation models require the Group to make assumptions, judgements and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain. These assumptions, judgements and estimates will need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments has had and could continue to have a material adverse effect on the Group’s earnings and financial condition.
Risk factors continued The Group’s results could be adversely affected in the event of goodwill impairment The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost and subsequently at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for impairment annually, or more frequently when events or circumstances indicate that it might be impaired. An impairment test involves comparing the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31 December 2012, the Group carried goodwill of £11.3 billion on its balance sheet. The value in use and fair value of the Group’s cash generating units are affected by market conditions and the performance of the economies in which the Group operates. Where the Group is required to recognise a goodwill impairment, it is recorded in the Group’s income statement, although it has no effect on the Group’s regulatory capital position. Any significant write-down of goodwill could have a material adverse effect on the Group’s results of operations.
The Group’s operations have inherent reputational risk Reputational risk, meaning the risk to earnings and capital from negative public opinion, is inherent in the Group’s business. Negative public opinion can result from the actual or perceived manner in which the Group conducts its business activities, from the Group’s financial performance, from the level of direct and indirect government support or from actual or perceived practices in the banking and financial industry. Modern technologies, in particular online social networks and other broadcast tools which facilitate communication with large audiences in short time frames and with minimal costs, may significantly enhance and accelerate the impact of damaging information and allegations. Negative public opinion may adversely affect the Group’s ability to keep and attract customers and, in particular, corporate and retail depositors. The Group cannot ensure that it will be successful in avoiding damage to its business from reputational risk, which may result in a material adverse effect on the Group’s financial condition, results of operations and prospects.
The Group continues to be exposed to its insurance business which is subject to inherent risks involving claims Future claims in the insurance business may be higher than expected as a result of changing trends in claims experience resulting from catastrophic weather conditions, demographic developments, changes in the nature and seriousness of claims made, changes in mortality, changes in the legal and compensatory landscape and other causes outside the Group’s control. Because the Group will continue to consolidate DLG’s results with its own for as long as required under accounting rules, any adverse impact on DLG due to these trends or insufficient or improper risk management by DLG could have an adverse effect on the Group’s financial condition and results of operations.
Financial calendar Annual General Meeting 14 May 2013 RBS Conference Centre
For further information on the payment of dividends, see page 522.
Listed below are the most commonly used features on the website: holding enquiry - view balances, values, history, payments and reinvestments; address change - change your registered address; e-Comms sign-up - choose to receive email notification when your shareholder communications become available instead of paper communications; outstanding payments - reissue any uncashed payments using our online replacement service; and downloadable forms - including stock transfer and change of address forms.
Protect yourself If you are offered unsolicited investment advice, discounted shares, a premium price for shares you own, or free company or research reports, you should take these steps before handing over any money; get the name of the person and organisation contacting you; check the FSA Register at www.fsa.gov.uk/fsaregister to ensure they are authorised; use the details on the FSA Register to contact the firm; call the FSA Consumer Helpline on 0845 606 1234 if there are no contact details on the Register or you are told they are out of date; search the FSA’s list of unauthorised firms and individuals to avoid doing business with; and remember if it sounds too good to be true, it probably is.
If you use an unauthorised firm to buy or sell shares or other investments, you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) if things go wrong.
Individuals 206,589 128.8 2.1 Banks and nominee companies 13,320 5,837.9 96.2 Investment trusts 117 3.9 0.1 Insurance companies 136 0.5 — Other companies 851 24.7 0.4 Pension trusts 32 2.1 — Other corporate bodies 395 72.9 1.2 221,440 6,070.8 100.0
Range of shareholdings: 1 - 1,000 191,185 48.5 0.8 1,001 - 10,000 28,382 65.1 1.1 10,001 - 100,000 1,212 33.0 0.5 100,001 - 1,000,000 444 150.3 2.5 1,000,001 - 10,000,000 179 559.6 9.2 10,000,001 and over 38 5,214.3 85.9 221,440 6,070.8 100.0
At 31 December 2012, there were 61 registered shareholders of Series F ADSs, 37 registered shareholders of Series H ADSs, 20 registered shareholders of Series L ADSs, 7 registered shareholders of Series M ADSs, 16 registered shareholders of Series N ADSs, 28 registered shareholders of Series P ADSs, 12 registered shareholders of Series Q ADSs, 4 registered shareholders of Series R ADSs, 1 registered shareholder of Series S ADSs, 14 registered shareholders of Series T ADSs and 1 registered shareholder of Series U ADSs.
At the Annual General Meeting on 30 May 2012, shareholders approved a sub-division and consolidation of the Group’s ordinary shares which resulted in new ordinary shares of 100 pence each being admitted to trading in London and New York with effect from 6 June 2012. The ratio of one ADS representing 20 ordinary shares changed to one ADS representing two ordinary shares with effect from 6 June 2012. As at 31 December 2012, 16.9 million ADSs were outstanding.
January 2013 High 3.678 2012: Q4 High 3.250 2012 High 3.250 Low 3.245 Low 2.573 Low 1.966 December 2012 High 3.250 2012: Q3 High 2.790 2011 High 4.900 Low 2.926 Low 1.966 Low 1.734 November 2012 High 2.990 2012: Q2 High 2.775 2010 High 5.804 Low 2.701 Low 1.998 Low 3.125 October 2012 High 2.870 2012: Q1 High 2.917 2009 High 5.765 Low 2.573 Low 2.007 Low 1.030 September 2012 High 2.790 2011: Q4 High 2.727 2008 High 37.054 Low 2.207 Low 1.734 Low 4.140 August 2012 High 2.375 2011: Q3 High 3.980 Low 2.045 Low 1.967 2011: Q2 High 4.443 Low 3.509 2011: Q1 High 4.900 Low 3.950
Following the ordinary share sub-division and consolidation which took effect from 6 June 2012, the ratio of one ADS representing 20 ordinary shares changed to one ADS representing two ordinary shares.
On 4 May 2012, RBS determined that it was in a position to recommence payments on RBS Group instruments. Discretionary dividends on RBSG non-cumulative preference shares and discretionary distributions on RBSG innovative securities payable after 4 May 2012 have been paid. Future coupons and dividends on RBSG hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
The statements and practices set forth below regarding US and UK tax laws, including the US/UK double taxation convention relating to income and capital gains which entered into force on 31 March 2003 (the “Treaty”) and the US/UK double taxation convention relating to estate and gift taxes (the “Estate Taxation Treaty”), are based on those laws and practices as in force and as applied in practice on the date of this report. This summary is not exhaustive of all possible tax considerations and holders are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US federal, state, local and other laws, and possible changes in taxation law, of the acquisition, ownership and disposition of ordinary shares, ordinary ADSs, preference ADSs or PROs by consulting their own tax advisers.
The following discussion assumes that the company was not for the taxable year ended 31 December 2012, and will not become in the foreseeable future, a passive foreign investment company - see ‘Passive Foreign Investment Company (PFIC) considerations’ on page 526.
Ordinary shares, ordinary ADSs and preference ADSs Taxation of dividends For the purposes of the Treaty, the Estate Taxation Treaty and the US Internal Revenue Code of 1986 as amended (the “Code”), US Holders of ordinary ADSs and preference ADSs should be treated as owners of the respective ordinary shares and the non-cumulative dollar preference shares underlying such ADSs.
Subject to applicable limitations that may vary depending upon a holder's particular circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to longterm capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
A US Holder will, upon the sale or other disposition of an ordinary share, an ordinary ADS or a preference ADS, or upon the redemption of preference ADS, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption of a preference ADS, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding in the case of a redemption any amount treated as a dividend for US federal income tax purposes, which will be taxed accordingly) and the US Holder's tax basis in such share or ADS. This capital gain or loss will be long-term capital gain or loss if the US Holder held the share or ADS so sold, disposed or redeemed for more than one year. The deductibility of capital losses is subject to limitations.
UK stamp duty and stamp duty reserve tax (SDRT) The following is a summary of the UK stamp duty and SDRT consequences of transferring an ADS (otherwise than to the custodian on cancellation of the ADS) or of transferring an ordinary share. A transfer of an ADS executed and retained in the United States will not give rise to stamp duty and an agreement to transfer an ADS will not give rise to SDRT. Stamp duty or SDRT will normally be payable on or in respect of transfers of ordinary shares and accordingly any holder who acquires or intends to acquire ordinary shares is advised to consult their own tax advisers in relation to stamp duty and SDRT.
PROs United States Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders. A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to the refundable tax. Subject to applicable limitations that may vary depending upon a holder's particular circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to long-term capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
A US Holder will, upon the sale, exchange or redemption of a PRO, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding any amount in respect of mandatory interest and any missed payments which are to be satisfied on a missed payment satisfaction date, which would be treated as ordinary income) and the US Holder's tax basis in the PRO.
Taxation for US Holders continued A transfer of PROs by a US Holder will not give rise to a charge to UK tax on accrued but unpaid interest payments, unless the US Holder is an individual or other non-corporate taxpayer and at any time in the relevant year of assessment or accounting period carries on a trade, profession or vocation in the UK through a branch or agency to which the PROs are attributable.
Memorandum and Articles of Association The company's Memorandum and Articles of Association as in effect at the date of this annual report are registered with the Registrar of Companies of Scotland. The Articles of Association were last amended on 30 May 2012. Copies can be obtained from Companies House in the UK or from the Group’s website (www.rbs.com).
Bank levy - a levy that applies to UK banks, building societies and the UK operations of foreign banks from 1 January 2011. The levy is payable based on a percentage of the chargeable equity and liabilities of the bank as at the balance sheet date.
Collateralised bond obligations (CBOs) - asset-backed securities for which the underlying asset portfolios are bonds, some of which may be sub-investment grade.
Collateralised loan obligations (CLOs) - asset-backed securities for which the underlying asset portfolios are loans, often leveraged loans.
Compression trades - portfolio compression reduces the overall notional size and number of outstanding contracts in credit derivative portfolios without changing the overall risk profiles of these portfolios. This is achieved by terminating existing trades on single name reference entities and on indices and replacing them with a smaller number of new trades with substantially smaller notionals that carry the same risk profile and cash flows as the initial portfolio.
Coverage ratio - impairment provisions as a percentage of impaired loans.
CRD IV - in July 2011, the European Commission published its proposed legislation for a Capital Requirements Directive and a Capital Requirements Regulation, which together form the CRD IV package. The package implements the Basel III capital proposals and also includes new proposals on sanctions for non-compliance with prudential rules, corporate governance and remuneration. CRD IV has yet to be enacted into European law and its implementation date remains uncertain.
Credit grade - a rating that represents an assessment of the credit worthiness of a customer. It is a point on a scale representing the probability of default of a customer.
Credit valuation adjustments (CVA) - the CVA is the difference between the risk- free value of a portfolio of trades and its market value, taking into account the counterparty’s risk of default. It represents the market value of counterparty credit risk, or an estimate of the adjustment to fair value that a market participant would make to reflect the creditworthiness of its counterparty.
Economic capital - an internal measure of the capital required by the Group to support the risks to which it is exposed.
Forbearance - forbearance takes place when changes to the contractual payment terms of a retail loan are agreed in response to the borrower's financial difficulties.
Forward contract - a contract to buy (or sell) a specified amount of a physical or financial commodity, at an agreed price, at an agreed future date.
Freddie Mac (Federal Home Loan Mortgage Corporation) - a US Government Sponsored Enterprise. It buys mortgages, principally originated by thrifts, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government.
Gross yield - the interest rate earned on average interest-earning assets i.e. interest income divided by average interest-earning assets.
Interest spread - the difference between the gross yield and the interest rate paid on average interest-bearing liabilities.
Level 1: quoted price - level 1 financial instruments are valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain US agency securities.
Own credit adjustment - the effect of the Group’s own credit standing on the fair value of financial liabilities.
Payment concession - an agreed temporary reduction in, or elimination of, the periodic (usually monthly) repayment on a loan. At the end of the concessionary period, the principal amount and accrued interest outstanding are scheduled for repayment over an agreed period.
Pillar 2 - the part of the Basel II that sets out the process by which a bank should review its overall capital adequacy and the processes under which the supervisors evaluate how well financial institutions are assessing their risks and take appropriate actions in response to the assessments.
Renegotiated loan - a wholesale loan for which changes to its contractual payment terms have been agreed in response to the borrower's financial difficulties.
Return on equity - profit attributable to ordinary and B shareholders divided by average shareholders’ equity as a percentage.
Sale and repurchase agreements - in a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, at the same time the seller agrees to reacquire and the buyer to resell the asset at a later date. From the seller's perspective such agreements are repurchase agreements (repos) and from the buyer's reverse repurchase agreements (reverse repos).
Settlement balances - payables and receivables that result from purchases and sales of financial instruments recognised on trade date. Asset settlement balances are amounts owed to the Group in respect of sales and liability settlement balances are amounts owed by the Group in respect of purchases.
Stressed value-at-risk (SVaR) - a VaR measure using historical data from a one year period of stressed market conditions. For the purposes of calculating regulatory SVaR, a time horizon of ten trading days is assumed at a confidence level of 99%. (Refer to Value-at-risk definition below).
Sub-prime - mortgage loans to customers with one or more high risk characteristics, such as: unreliable or poor payment histories; high loanto -value ratios; high debt-to-income ratio; the loan is not secured on the borrower's primary residence; or a history of delinquencies or late payments on the loan.
Accounting Accounting developments 371 Accounting policies 360 Critical accounting policies 368
Available-for-sale financial assets Accounting policies 364 Notes on the consolidated accounts 388
Business divestments Business review 38 Notes on the consolidated accounts 427
Capital adequacy Capital ratios 101, 129 Capital resources 101, 130 Notes on the consolidated accounts 451
Cash flow statement Business review 100 Consolidated 359 Notes on the consolidated accounts 462, 463 Parent company 478 Parent company notes 485, 486
Consolidated financial statements Consolidated balance sheet 355 Consolidated cash flow statement 359 Consolidated income statement 353 Consolidated statement of changes in equity 356 Consolidated statement of comprehensive income 354 Notes on the consolidated accounts 373
Debt securities Risk and balance sheet management 209 Notes on the consolidated accounts 419 Parent company notes 482
Derivatives Risk and balance sheet management 220 Notes on the consolidated accounts 417
Directors Biographies 298 Interests in shares 339 Remuneration 332 Remuneration policy 325 Report of the directors 345 Service contracts and exit payment policy 330
Financial instruments Accounting policies 364 Critical accounting policies 371 Notes on the consolidated accounts 388 Parent company notes 480
Goodwill Critical accounting policies 369 Notes on the consolidated accounts 421
Insurance claims Accounting policy 363 Business review 59 Critical accounting policies 369
Interest Rate Hedging Products redress and related costs Notes on the consolidated accounts 375 Critical accounting policies 469
Net interest income Business review 50 Notes on the consolidated accounts 373
Non-interest income Business review 57 Notes on the consolidated accounts 374
Parent company Balance sheet 475 Cash flow statement 478 Income statement 479 Statement of changes in equity 476 Statement of comprehensive income 479 Notes 479
Payment Protection Insurance Notes on the consolidated accounts 375 Critical accounting policies 369
Pensions Accounting policies 361 Critical accounting policies 368 Notes on the consolidated accounts 380 Pension risk 292
Securitisations, asset transfers and other collateral Notes on the consolidated accounts 447
Share-based payments Accounting policies 368 Notes on the consolidated accounts 377
The Royal Bank of Scotland Group plc PO Box 1000 Gogarburn Edinburgh EH12 1HQ Telephone: +44 (0)131 626 0000
Direct Line Group Churchill Court Westmoreland Road Bromley Kent BR1 1DP
RBS Holdings N.V. Gustav Mahlerlaan 350 1082 ME Amsterdam PO Box 12925 The Netherlands
This report is printed on Edixion uncoated paper. This paper has been independently certified according to the rules of the FSC.