The Royal Bank of Scotland Group plc Group Headquarters PO Box 1000 Gogarburn Edinburgh EH12 1HQ
RBS is a UK-based banking and financial services company. Headquartered in Edinburgh, RBS operates in the United Kingdom, Europe, the Middle East, the Americas and Asia, serving over 24 million customers worldwide.
Governance report 35 Business review 100 Risk and balance sheet management 174 Financial statements 365 Additional information 508 Shareholder information 537 Abbreviations and acronyms 548 Glossary of terms 549 Index 558 Important addresses 561
Excluding the impact of the creation of RCR, RBS operating profit (1) was £2,520 million, down 15% from 2012: • Retail & Commercial down 4% to £4,078 million, with lower income in UK Corporate and International Banking offsetting improved impairments in Ulster Bank and UK Retail; • Markets down 58% to £638 million, reflecting smaller balance sheet and reduced risk levels; and
In 2013 RBS launched a comprehensive business review, aimed at transforming the bank. The results of this review were announced on 27 February 2014 (see pages 8 to 10).
(2) Ratio calculated under requirements in force at 31 December 2013.
(3) Ratio calculated under requirements in force from 1 January 2014.
(6) Eligible assets held for contingent liquidity purposes including cash, Government issued securities and other eligible securities with central banks.
(8) Cost:income ratio is based on total income excluding own credit adjustments, gain on redemption of own debt, strategic disposals and RFS Holdings minority interest, and operating expenses excluding Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, amortisation of purchased intangible assets, integration and restructuring costs, bank levy, write-down of goodwill and other intangible assets and RFS Holdings minority interest.
(9) Includes the impact of business exits such as Citizens Financial Group and Williams & Glyn; bank levy; restructuring costs; and, from 2015, the EU resolution fund charge.
(£8,243m) Loss before tax £385bn RWAs £32bn Short-term wholesale funding (5)
The Core Tier 1 ratio was 10.9% at 31 December 2013. On a fully loaded Basel III basis, the Common Equity Tier 1 ratio was 8.6%. The impact of the regulatory and redress provisions booked in Q4 2013 was already reflected in our future capital plan, and RBS continues to target a fully loaded Basel III Common Equity Tier 1 ratio of c.11% by the end of 2015 and 12% or above by the end of 2016.
Continued improvement in credit quality, particularly in the UK Retail and NonCore portfolios, saw risk elements in lending fall by 4%. Reflecting the increased impairments associated with the creation of RCR, provision coverage increased from 52% at end 2012 to 64% at end 2013.
The bank will be structured around the needs of its customers, with seven existing operating divisions realigned into three businesses: Personal & Business Banking, Commercial & Private Banking and Corporate & Institutional Banking.
Ulster Bank in Northern Ireland will benefit from a closer integration with our personal, business and commercial banking franchises in Great Britain. We are continuing to explore further opportunities in the Republic of Ireland with a view to being a challenger to the systemic banks.
This simplification is intended to deliver significant improvements to services delivered to our customers while at the same time helping to bring our cost base down from £13.3 billion in 2013 to £8 billion in the medium term(9).
Operating results RBS recorded an operating profit(1) of £2,520 million excluding the impact of the creation of RCR which reduced income by £333 million and increased impairments by £4,490 million. Including these RCR-related impairment and other losses of £4,823 million(10), RBS recorded an operating loss of £2,303 million.
Retail & Commercial operating profit, excluding £1,385 million of impairments and other losses related to the creation of RCR, was down 4% to £4,078 million, with lower income in UK Corporate and International Banking offsetting improved impairments in Ulster Bank and UK Retail.
Markets operating profit, excluding £18 million of impairments related to the creation of RCR, was down 58% to £638 million, reflecting its smaller balance sheet and reduced risk levels.
Tangible net asset value per ordinary and B share was 363p at 31 December 2013.
Delivering our capital plan To deliver our capital plan RBS has formed the Capital Resolution Group (CRG), which is made up of four pillars: exiting the assets in RCR, delivering the IPOs for both Citizens and Williams & Glyn, and optimising the bank’s group-wide shipping business.
On 27 November 2013, RBS announced the sale of its remaining economic interest in the WorldPay global payments business. A gain on sale of £159 million was recognised in Q4 2013.
Williams & Glyn business (formerly known as “Project Rainbow”) has made good progress towards its IPO.
Legacy conduct issues As announced in a trading update on 27 January 2014, RBS has provided £1,910 million in Q4 2013 covering claims and conduct-related matters primarily relating to mortgage-backed and other securities litigation. Regulatory and litigation provisions for the full year amounted to £2,394 million.
A further £500 million provision was made in Q4 2013 for interest rate hedging products redress and administration costs, reflecting higher volumes, higher anticipated redress payments and recalibration of our methodology based on more recent trends. The total charge for the full year was £550 million making a total of £1.25 billion of which £0.2 billion had been utilised by 31 December 2013.
Mortgage balance growth was affected in H1 2013 by advisor training, but application volumes recovered during the second half, helped by RBS’s lead in launching the second phase of the Help to Buy scheme. Gross new lending in 2013 was £14.3 billion, up 3% from 2012. This represented an 8% market share, slightly in excess of RBS’s share of mortgage stock.
UK Corporate will implement all the recommendations of the independent review of its lending standards and practices led by Sir Andrew Large.
Support for SME customers during 2013 included pro-active ‘Statements of Appetite’ sent to over 12,000 customers, resulting in more than £5.9 billion of new loan offers.
SME demand for credit has picked up over the course of the year, with new and increased lending sanctioned in 2013, up 6% from the prior year to £9.9 billion. SMEs drew down £6.4 billion of new loans in 2013, up 2% from 2012. However, businesses’ cash generation remained strong, with SME current account balances up 13% from the end of 2012. Many customers increased their loan repayments and reduced overdraft utilisation, which dropped to 37% at the end of 2013 compared with 42% a year earlier.
Among larger businesses, £12.9 billion of new facilities were made available to new and existing clients. RBS also helped UK companies, universities and housing associations to raise £24.7 billion through bond issues in 2013.
Total net lending flows reported within the scope of the FLS scheme were minus £2,295 million in Q4 2013, with net lending of plus £349 million to households and minus £2,645 million to private sector non-financial corporations, of which minus £671 million was to SMEs.
We are here to serve our customers. From the end of 2008 we have drastically changed as a business – our balance sheet has reduced by £1,191 billion, our capital ratios strengthened, our conduct and risk management framework overhauled. As a result, we are smaller, safer and stronger with a clearer focus. However, there was a clear need to unite the bank behind a single purpose and common set of values.
We have continued to professionalise our customer facing staff, committing to accredit them against professional standards by the end of 2014.
We also changed the way we recognise the best behaviours in the bank. We launched Our Values Awards for all our employees and nominations were submitted of examples where people were living the values and serving customers well.
More information on our progress in 2013 to build an engaged and inclusive workforce will be available in our RBS Sustainability 2013 Report at rbs.com/sustainable.
Our major source of income in our retail and commercial banking businesses is net interest income. This is the difference between the income we earn from the loans and advances we have made to our personal, corporate and institutional customers and on our surplus funds and the interest we pay on deposits placed with us by our customers and our debt securities we have issued. We also earn fees from financial services and other products we provide to our customers as well as rental income from assets we lease to our customers.
Our leading customer franchises serve 24 million customers globally, of which more than 70% are in the UK. We aim to provide them with a comprehensive range of products, delivered through a number of channels, which are increasingly digital.
Strategic review On 1 November 2013 RBS announced a full review of its customer-facing businesses, its IT and operations, and its organisational and decision-making structures. As a result of this review, we have announced a refreshed strategic direction with the ambition of building a bank that earns its customers’ trust by serving them better than any other bank.
• Corporate & Institutional Banking will serve our corporate and institutional clients primarily in the UK and Western Europe, as well as those US and Asian multinationals with substantial trade and investment links in the region, with debt financing, risk management and trade services, focusing on core product capabilities that are of most relevance to our clients.
Ulster Bank in Northern Ireland will benefit from a closer integration with our personal, business and commercial franchises in Great Britain, while continuing to operate under the Ulster Bank brand. We are continuing to review our business in the Republic of Ireland with a view to being a challenger to the systemic banks in Ireland.
• Help eliminate duplication of costs in front and back offices.
• Our property portfolio will be reduced from 25 million square feet to 18 million square feet, including significant reductions in central London.
The costs to achieve this plan will total approximately £5 billion over 2014 to 2017; of this approximately £1 billion has already been committed to previous plans related primarily to Citizens, Williams & Glyn and the previous restructuring announced for Markets. Approximately £0.6 billion relates to the costs of achieving asset reductions and realisations in Markets as we reshape this business over the next three to five years.
• Management hallmarks to include an open, investor-friendly approach; discipline and proven execution effectiveness; strong risk management; and central focus on serving our customers well.
Notes: (1) Based on indicative Core attributable profit taxed at standard rates and Core average tangible equity per the average balance sheet (89% of Group tangible equity based on RWAs at 31 December 2013); (2) Return on tangible equity for 2008; (3) Year ended 31 December 2008; (4) As at 1 January 2008; (5) As at October 2008; (6) As at December 2008; (7) Eligible assets held for contingent liquidity purposes including cash, Government issued securities and other eligible securities with central banks; (8) Funded tangible assets divided by total Tier 1 capital; and
Customer Service (1) <25% of businesses at #1 All businesses at #1
Capital strength Common Equity Tier 1 ratio (5) 8.6% ≥12% ≥12%
Notes: (1) Measured by Net Promoter Score, with the exception of Corporate & Institutional Banking, which will use customer satisfaction. NPS nets the percentage of “promoters” (loyal enthusiasts of the company) and the percentage of “detractors” (unhappy customers) to give a measure of customer advocacy.
(2) Global Financial Services norm currently stands at 82%. (3) Including bank levy, restructuring charges and, from 2015, the EU resolution fund charge. (4) Calculated with tangible equity based on CET1 ratio of 12%. (5) Fully loaded Basel III.
(6) This table contains forecasts with significant contingencies. Please refer to ‘Forward Looking Statements’ and ‘Risk Factors’.
RBS at a glance RBS is rooted in the UK, serving personal, business and institutional customers in the UK and many other countries. Our businesses are strong players in the markets in which we choose to compete. The businesses are stronger together than apart, to the benefit of customers and shareholders.
RBS is now safer and the day when we will be able to offer shareholders a decent return is closer. But making RBS a really good bank demands more. That is why we are still investing more effort in all of our businesses to serve customers well.
“ We must become a company that knows what it means to obsess about our customers. This is a fundamental challenge that will involve the whole organisation.”
We offer a comprehensive range of banking products and related financial services to the personal market. We serve customers through the RBS and NatWest networks of branches and ATMs, and also through telephone and digital channels.
• Mortgage balance growth was affected in H1 2013 by advisor training but recovered during H2 2013.
• Net interest margin held steady, despite tightening margins on new mortgages. Lower income was earned on current account balances, but savings margins improved.
• Net interest income fell in a lower interest rate environment.
• Continued run-off of property and shipping, outweighed growth in other sectors, leaving loan balances down 5%.
To reinforce its commitment to supporting the UK economy, RBS appointed Sir Andrew Large to lead an independent review of its lending standards and practices. UK Corporate has undertaken to implement all the Independent Lending Review’s recommendations and is adopting a revised strategy to accomplish this. Support for SME customers included proactive “Statements of Appetite” sent to over 12,000 customers, resulting in approximately £6 billion of new loan offers.
• Income was 7% lower, with net interest income declining over the year, reflecting tighter deposit spreads. Deposit margins improved in the fourth quarter following a repricing initiative.
• Expenses were 4% lower, partly reflecting reduced headcount and tight discretionary cost management.
Building a better bank that serves customers well 2013 saw a major shake-up of the UK financial advice landscape with the implementation of the Retail Distribution Review. Clients welcomed Coutts’ new fully compliant adviceled model, where advisers must achieve the more stringent Level 6 rating, in excess of the Level 4 minimum required by the Financial Conduct Authority. Work continued to streamline client-facing processes and drive increased technology benefits.
Network connection Every entrepreneur knows the power of networking to build connections and contacts. Taking that network to the next level takes time and effort, things which are often in short supply.
Coutts were able to bring the right people to the table
• Operating profit decreased by 53% to £279 million, with cash management income depressed by the decline in LIBOR interest rates. Excluding impairments of £52 million related to the creation of RCR, operating profit was down 44%.
• Expenses were reduced by 5%, as International Banking kept costs under tight control and achieved timely run-off of discontinued businesses.
With business conditions still challenging as themes of low interest rates and margin compression continue, International Banking remained focused on cost discipline throughout 2013. The division continued to strengthen its balance sheet, reducing risk-weighted assets by 6%, despite the introduction of more severe credit risk models.
RBS received a number of awards for trade finance and cash management services.
Straight ahead TomTom’s navigation and location systems are used by customers in over 35 countries. To comply with finance regulations, they had to implement a standard format for payments across the Single Euro Payments Area.
• Operating loss for 2013 was £1,457 million, including increased impairment losses of £892 million relating to the creation of RCR. Excluding the impact of the creation of RCR, operating loss improved by £494 million or 48%.
• Impairment losses improved significantly, excluding the RCR impact, with a 64% reduction in losses in the mortgage portfolio.
The creation of RCR will expedite the resolution of underperforming, capital intensive assets and allow Ulster Bank to focus on building a stronger core business for the future. Ulster Bank is committed to supporting the Irish economic recovery and £1.7 billion of funding has been made available to support new lending in 2014, £1 billion for business customers and £700 million for personal customers.
A £10 million loan from Ulster Bank will help Apex deliver around 1,000 brandnew social and affordable homes, creating much-needed new homes as well as hundreds of construction jobs.
Note (1) Excludes the litigation settlement and net gain on sale of Visa B Shares in 2012.
On 1 November 2013 RBS announced plans to accelerate the initial public offering of RBS Citizens Financial Group (RBSCFG) into the second half of 2014. It is expected that by the end of 2016 RBSCFG will be a standalone regional bank, wholly owned by public shareholders. RBSCFG commenced a number of actions in 2013 aimed at improving financial performance, driving profitable growth by focusing on the customer and delivering an enhanced experience.
System success Our new Branch Image Capture (BIC) teller system has helped create a much better customer experience. Cheques and documents can now be scanned at the teller window, with transactions being balanced there and then in front of the customer. That means fewer errors and corrections as well as helping to reduce fraud.
• Costs fell by 11%, reflecting a reduction in headcount of 1,000 evenly split between front and back office – and tightly controlled discretionary expenses.
• Risk-weighted assets were down £31 billion, driven by disposals and run-off.
• Operating loss of £5,527 million was £2,648 million higher than in 2012, predominantly due to £3,118 million of 2013 impairments related to the creation of RCR.
While the new RCR is similar in size to Non-Core, the assets have been selected on a different criteria and are not directly comparable.
We work across four business areas: Technology Services, Group Operations, Corporate Services and Strategy & Architecture. Together we connect colleagues and customers, providing the tools and services that help us to serve our customers when and where they need us.
• We issued two million time-saving contactless cards in 2013 allowing customers to make quick and easy payments for everyday items under £20 in less than a second.
• Over two million customers log on to online or mobile banking every day.
• Since 2010, when we launched our mobile app, we have had more than a billion logons.
Conduct and culture have been key areas of focus throughout the year and our 2013 results reflect the impact that conduct related matters continue to have on financial and operating performance. The Board fully supports our new values, which were launched in 2013 and focus on serving customers, working together, doing the right thing and thinking long term. It is vital that the Board continues to set the tone from the top to drive essential cultural change and that our governance framework continues to evolve to support this and our key strategic changes. These will be key priorities for the Board and its Committees in 2014.
For more detail of the operation of the committee please refer to the full committee report on pages 52 to 57.
For more detail of the operation of the committee please refer to the full committee report on pages 58 to 63.
For more detail of the operation of the committee please refer to the full committee report on pages 66 to 90.
Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and membership and chairmanship of Board committees.
Supports the Group Chief Executive in managing the Group’s businesses. It reviews strategic issues and initiatives, monitors financial performance and capital allocations and considers risk strategy, policy and management.
Provides oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles. It reports to the Board on its own activities and recommends changes, where appropriate, to RCR strategy.
There have been a number of other changes to the Board’s composition during the year.
Two of our non-executive directors, Joe MacHale and Art Ryan, also retired from the Board in 2013 and Philip Scott will step down from the Board by 31 October 2014. I thank them all for the hard work and wisdom they have brought as directors. In December 2013, we also welcomed Robert Gillespie as a new non-executive director. I would like to take this opportunity to express my appreciation to all of my fellow directors for their commitment and readiness to deal with the unusual challenges of a government-controlled listed company.
Regrettably, last year brought further reminders that many of our customers and stakeholders do not trust us to do so. In response to persistent criticism of our performance in lending to SMEs the Board commissioned an independent review by Sir Andrew Large; we expect to adopt all of his recommendations.
Issues like this continue to underscore the important role played by culture and values in enabling us to become the trusted bank we aspire to be. The Board fully supports the new values we launched in 2013, and it is vital that we continue to set the tone from the top in the coming year to drive essential cultural change.
Clearly there are issues we are looking at – currency, the application of financial regulation, lender of last resort, credit ratings – which could affect us. But there is real uncertainty about how any of these matters would be settled in the event of a Yes vote and the outcome would depend on negotiations between the two governments. Indeed, there could be a prolonged period of uncertainty over each of the issues so it really is impossible to quantify with any precision what the effects of each might be right now.
We are confident that the actions announced will deliver a customer-focused bank with undoubted capital strength, the potential for attractive returns and an ability to recommence dividends over the medium term.
“ Our focus will be determined by where our customers need us, and where we can serve their needs better than anyone else.”
The potential for RBS is tangible, we have points of brilliance, but these are masked by a heavily damaged reputation, very high cost base and a structure that reflects the bank we are leaving behind, not the one we will become.
We hold many excellent market leading positions across the bank and, despite the distractions of our recovery, there are areas where we have started to excel for our customers. But this remains an inconsistent picture and the returns in our strongest businesses can often be diluted by weaker parts of the franchise, the price of past misconduct and an uncompetitive cost base.
The opportunity cost of our current approach is clear. We have an 18% share of the GB main current account market but less than half our customers have a mortgage with us. The same is true in different forms across all our businesses and paints a clear picture of untapped potential. I know this frustrates our people, all of whom want to prove the worth of this bank through better service to customers.
The lack of connectivity for customers is a by-product of our own complexity. Too many customers are forced to bank around us; adapting their behaviour to fit with our processes. It’s frustrating for them and value destructive for us.
Our customers rightly demand that we are competitive, in every setting and in every sector. We currently carry the cost base of a global financial services group when in fact we are now largely a UK–based bank. Our operating model means our customers and shareholders end up paying for parts of the business that cost too much and deliver too little in their interests.
RBS needs a strategy that will address the weakness in our performance for customers, so that we can provide acceptable returns to our shareholders. The business review I have conducted has revealed our key challenges, but it has also given us a clear path to improve the bank.
On every dimension our opportunity to improve the relative and absolute performance of the bank is significant. It is my job to make sure our strategy for customers translates into value for our shareholders.
Even by recent standards, 2013 was a difficult year. Regulatory fines, wide-ranging customer complaints, technology problems and public questioning of our integrity all weighed heavily, and bring into sharp focus the job we have at hand.
For the full year, we reported a pre-tax loss of £8.2 billion. The loss includes £3.8 billion of legacy litigation, conduct and regulatory costs and £4.8 billion of impairments and other losses relating to the establishment of RBS Capital Resolution (RCR).
Looking at underlying performance, total income was down £2.3 billion for the year, primarily reflecting lower revenues from the re-sized Markets business while costs were only down £0.5 billion – pushing the cost:income ratio towards the worse end of our peer group at 67%.
Returns varied across our businesses, but only UK Retail and Wealth delivered returns above the cost of equity. That said, the bank continued to make progress despite our financial performance.
Our business milestones included completing the run-down of another £29 billion of NonCore assets – ahead of plan and taking the total reduction since Non-Core was established to £230 billion – setting up the RCR unit and reducing risk-weighted assets, and hence our risk profile, by £66 billion, on a fully loaded Basel III basis.
We also cancelled the £8 billion Contingent Capital Facility with HM Treasury, reduced our stake in Direct Line Group to 28.5% – in line with our commitment to the EC – and we are in advanced discussions to restructure the Dividend Access Share.
It is clear that the underlying performance over the last year underlines the need for us to shift the emphasis from restoring the balance sheet to recharging our performance.
The capital plan has been designed to allow us to focus without distraction on improving our operating performance.
This complexity shows in our cost:income ratio, which reaches 73% when fully loaded to include the bank levy and restructuring costs. Reducing costs and divesting businesses in the bank will inevitably result in reduced staff levels. We do not yet have detailed plans for implementation and as always we will deal with such matters sensitively, talking to our staff before communicating any such changes.
RBS has earned credibility for the execution of our financial restructuring. The same discipline and focus is now needed on our day-to-day operating performance to better deliver for the customer. The costs that subdue our performance need to be intelligently removed and redirected towards activities that enhance our earnings.
Our new strategy We now have a strategy to deliver a sustainable bank with a clear ambition: we want to be number one for customer service, trust and advocacy, in every one of our chosen business areas by 2020.
Our ambition aims to deliver a bank that is more trusted than others in the UK. We will earn the trust of customers by serving them better than any other bank.
The bank will be structured to deliver this ambition by organising around the needs of our customers.
This will be a highly effective bank and in the medium term we will aim to deliver a cost:income ratio (including bank levy, restructuring charges and, from 2015, the EU resolution fund charge) of around 55%, falling in the long term to around 50%.
The frontline of this bank is where we’ll stand out. Accountable, trusted professionals will staff the perimeter of the bank and drive it forward. They will be supported by simple, effective processes on a sound technology platform.
Only 30% of our people today deal directly with the customer. By 2017 more than half will deal directly with the customer and all our people will be measured against our success in improving customer advocacy.
Our three customer businesses will cover Personal & Business Banking, Commercial & Private Banking, and Corporate & Institutional Banking. Across the businesses we will have one management team, working to one joinedup plan.
The three businesses of the go-forward bank have been designed against a number of goals. Firstly, they will better serve customer needs than the existing operating divisions. Secondly, they will help eradicate duplication of cost in both the front and back office. Thirdly, they will position us to deliver a sustainable return on equity in each business.
Update on capital plan We announced in November that we will target a fully loaded Basel III Common Equity Tier 1 ratio of 12% or greater by the end of 2016 which will principally be delivered through the Capital Resolution Group.
So how do we get to our 12% 2016 target? This will primarily be due to the successful run-down of RCR and the IPO of Citizens, as well as further targeted risk-weighted asset reduction, which will continue to be the main drivers of our plan to deliver our 12% target by the end of 2016.
Citizens Financial Group: The cornerstone of the capital plan is the IPO of Citizens Financial Group in the United States. We have appointed advisers and this is on schedule for later this year.
RCR: The creation of RCR from 1 January 2014 originally identified £38 billion of third party assets that were highly capital intensive. This represented 5% of our funded balance sheet but used up 20% of our capital.
Consumers and businesses across the island of Ireland deserve a better banking service. To achieve this, however, we must change the way we currently organise our business in the Irish market place. We took the first major step at the end of 2013 when we
As outlined in November, we are reviewing our business to make it viable and sustainable into the future. In this regard we are accelerating our strategy for the bank to improve service to our customers, reduce costs and simplify our operating model.
In the Republic of Ireland we will continue to explore further opportunities to transform our business. We have a range of options but we are now clear on the goal; we will build on our position to be a compelling challenger bank to the domestic pillar banks.
These moves are designed to position the bank to do more for our customers and consequently reward our shareholders for their patience.
Measures that matter We will only succeed in delivering our goals if everyone who works in the bank is clear on the measures that matter. It is too easy to be distracted by measures that flatter progress on things that ultimately don’t count towards our ambition.
The measures we use must have credibility with customers and the wider public if we are to regain trust. And they must focus the bank relentlessly on improving returns for shareholders. It is abundantly clear to me that we need to reward our existing shareholders for their patience and attract new ones based on our potential and performance.
Measure 2: Efficiency We will aim to deliver a cost:income ratio (including bank levy, restructuring charges and, from 2015, the EU resolution fund charge) of approximately 55% in the medium term, falling in the long term to around 50%. On the same basis, we target a reduction in our costs to approximately £8 billion in the medium term.
How we’ll do business The scale of the challenge we have faced over the last few years taught us a simple fundamental lesson: you cannot succeed at your customers’ expense. This is why last year we agreed a very simple purpose for the bank: to serve customers well.
Our future is not about us, it’s about our customers. These words greet our employees as they walk into our offices every day. They have come to represent a shorthand for what went wrong, but also what we need to get right.
Serving customers We exist to serve customers. We earn their trust by focusing on their needs and delivering excellent service.
Working together We care for each other and work best as one team. We bring the best of ourselves to work and support one another to realise our potential.
Thinking long term We know we succeed only when our customers and communities succeed. We do business in an open, direct and sustainable way.
These values are the basis for how we lead, how we reward, how we make decisions and how we treat our customers and each other. They are not yet etched in stone, but become stronger the more they are tested. They are core to us succeeding as a bank.
We’ve got to a point of safety and soundness through a steady focus and patient determination. There will be more things from our past that come back to haunt us, but they will be fewer in number.
We will be simple to do business with, free from distractions and supported by a strong capital base.
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 2013 in the major markets in which RBS operates.
Inflation ended the year at the 2.0% target having averaged 2.6% for the year as a whole. The Bank of England continued its ultra-loose monetary policy stance. The Bank Rate remained at 0.5%, although market rates increased towards the end of the year on expectations of tighter monetary policy in the United States. There were no additions to the stock of assets purchased through the quantitative easing programme. In August 2013, the Monetary Policy Committee began offering ‘forward guidance’ on its intentions. It said that it will not consider changing the Bank Rate or the stock of assets purchased until the unemployment rate reaches 7.0%, unless inflation threatens to take off or there are concerns about financial stability.
The Funding for Lending Scheme was adjusted during the course of the year to enhance the incentives for banks to lend to small firms and later to withdraw that support for lending to individuals. The Bank of England’s Credit Conditions Survey suggested that the supply of credit had expanded towards the end of the year.
Ireland was able in early 2014 to exit the adjustment programme it had agreed with the European Central Bank, the European Commission and the International Monetary Fund. However, GDP contracted by 0.7% in the four quarters to Q3 2013. The export sector continued to benefit from the boost to competitiveness delivered by falling real wages, although export performance also reflected the decision of companies with limited local activity to domicile in Ireland.
For Ireland, gross national product (GNP) is a better measure of the performance of Ireland’s domestic economy and people’s material well-being. It reflects the income residents receive rather than the value of the incomes generated in the country, an important distinction where there is a large foreignowned sector that remits profits overseas. GNP increased by 2.7%.
Financial strength and resilience are at the heart of our Strategic Plan.
Conduct risk is one of the most significant issues facing the bank, and the Group continued to suffer from legacy conduct issues during 2013, notably in relation to PPI, Interest Rate Hedging Products and mortgage-backed and other securities litigation. During the year, the Group focused on embedding good conduct at the heart of its business, working to complete the development of its conduct risk framework and promoting staff understanding of conduct issues. It also worked to enhance its assessment of operational risk to identify important vulnerabilities.
Top and emerging risk scenarios RBS identifies and monitors its top and emerging risk scenarios. A number attracted particular attention from senior management during 2013 which are discussed below.
For further information on these and other risks, see pages 179 to 181.
• Increased impairments arising from a more severe-than-expected economic downturn. RBS developed business plans to take into account the possibility of slow economic growth and implemented strategies, such as cost reductions, to reduce its earnings vulnerability.
• Increased costs and reputational damage arising from a failure to demonstrate compliance with existing regulatory requirements regarding conduct, particularly with respect to mis-selling. Although more work needs to be done to mitigate this risk, RBS has simplified some products and stopped offering others. Where appropriate, it has compensated purchasers of some products and services, such as payment protection insurance and certain interest rate hedging products.
• Losses or reputational damage arising from litigation. RBS defends claims against it to the best of its ability and co-operates fully with various governmental and regulatory authorities.
• Increased losses arising from the failure of information technology systems. RBS has launched a major program to improve resilience, enhanced back-up systems and created a ‘shadow bank’ capable of providing basic services in the event of need.
• Were Scotland to become independent, it may also affect Scotland’s status in the EU.
The integral role of risk management Risk management is essential to making RBS safe and sustainable, and is an activity performed throughout all of RBS operations. A strong culture of risk management and control will provide the foundation for improving performance and deliver future success.
Governance The sustainability programme at RBS is built on a robust governance framework that provides direction on our sustainability objectives. The Group Sustainability Committee (the “Committee”) is a Committee of the Board and comprises three independent non-executive directors. The Committee is chaired by our Senior Independent Director, Sandy Crombie, and attended by senior representatives from the customer facing divisions as well as Human Resources, Sustainability, Risk Management, Communications, Legal, Strategy and Corporate Services. The Chairman of the board also regularly attends the meetings. The work of the Committee is essential to ensuring that our approach to issues is managed effectively and debated at the appropriate level.
As part of our wider stakeholder engagement programme, the Committee runs its own programme of structured stakeholder engagement sessions. In 2013, the Committee took part in seven of these stakeholder sessions, open forums where advocacy groups can discuss key areas of concern with the most senior decision-makers in RBS.
External commitments RBS is a signatory to a number of voluntary sustainability commitments and standards. We understand that implementing commitments is an ongoing process, and we are continuously working to integrate these into how we run our business. We are a member of the Equator Principle (EP)
Association Steering Committee. The EPs are a voluntary set of standards adopted by banks for determining, assessing and managing social and environmental responsibilities in project financing. We will not provide project finance where the borrower will not, or cannot, comply with these principles of socially responsible investment.
Transparency and disclosure We are committed to being open and transparent in our reporting of material issues facing our company. Here we present data on our GHG emissions, diversity data, as well as an update on our approach to managing Human Rights issues. To find more sustainability data read our latest Sustainability Report, available at rbs.com/sustainable.
We are reducing the environmental impact of our operations, led by our 2011 Environment Targets that cover our use of energy, water, waste, paper and CO2 emissions from business travel. In order to ensure our targets continue to be stretching, we have re-examined the baseline on which they are set and adjusted for the decrease in headcount the company has experienced since they were set.
Independent assurance Limited assurance provided by Deloitte LLP over all Scope 1* and 2** GHG emissions
Total Scope 2 CO2e emissions (tonnes) 559,389 486,872 434,816 -22.3% -10.7%
Total Scope 1 & Scope 2 CO2e emissions per FTE (tonnes) 4.7 4.3 4.2 -12.1 -3.2
Total Scope 3 CO2e emissions (tonnes) 79,120 67,109 89,164 +12.7% +32.9%
Total number of environment incidents, fines and legal non-compliance 0 0 0 n/a n/a * Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles ** Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises
Diversity at RBS We believe it is important that everyone in RBS feels valued and supported. We appreciate the unique perspective and skills that individual staff can bring to the business. Inclusion is more important to RBS than it’s ever been. Through 2013, we’ve taken time to refresh our focus, step back and think about how we support all our colleagues to reach their full potential and better serve our customers. This is delivering a more ‘joined up’ approach to influencing key organisational processes and practices, achieving better balance and sustainable development. We’ve continued to progress diversity and inclusion initiatives (including Sexual Orientation, Disability, Race and Gender). Our inclusion policy standard applies to all employees, in every part of the business, in every part of the world and is published online. The strategy for diversity and inclusion sits with the Board and Executive Committee.
As at 31 December 2013, of our global population of 118,079 employees, 54,370 (46%) were male and 63,709 (54%) female. We had 1,071 senior managers (of which 915 (85%) were male and 156 (15%) were female), which encompasses our executive employee population and individuals who are directors of our subsidiaries. The Company’s Board of Directors has 11 members, comprising eight male and three female directors.
Our Sustainable Procurement Code sets out our expectations of the companies that we work with. It clearly states that our suppliers should not engage in breaches of human rights or labour rights, or in discrimination. We are also committed to equal opportunities for suppliers, and we recognise that diversity strengthens our supply chain.
Our ESE risk policies include sector-specific human rights risk screenings and are regularly reviewed and updated to ensure best practice. We conduct due diligence on clients relating to human rights standards, and expect our clients to share our commitment to respecting human rights within their operations.
We run a number of targeted programmes focused on providing support to the communities where we operate. In addition to this, we have a well established employee volunteering and giving programme in RBS. As well as matching employee donations and fundraising, we also support volunteering during work time. For more information on our community investment please visit rbs.com/sustainable.
The Strategic Report for the year ended 31 December 2013 set out on pages 1 to 33 was approved by the Board of directors on 26 February 2014.
Non-executive directors Sandy Crombie Alison Davis Tony Di lorio Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes Philip Scott
36 Letter from the Chairman 38 Our governance structure 39 Our Board 43 Executive Committee 45 Corporate governance 50 Report of the Group Nominations Committee 52 Report of the Group Audit Committee 58 Report of the Board Risk Committee 64 Report of the Group Sustainability Committee 66 Directors’ Remuneration Report 87 Other Remuneration Disclosures 91 Compliance report 93 Report of the directors 99 Statement of directors’ responsibilities
I am pleased to introduce our Corporate governance report, which sets out in some detail how our Board and committees have risen to the challenges of another demanding year.
Conduct and culture have been key areas of focus throughout the year and our 2013 results reflect the impact that conduct related matters continue to have on financial and operating performance. The Board fully supports our new values, which were launched in 2013 and focus on serving customers, working together, doing the right thing and thinking long term. It is vital that the Board continues to set the tone from the top to drive essential cultural change and that our governance framework continues to evolve to support this and our key strategic changes. These will be key priorities for the Board and its committees in 2014.
Finally, we have established a new committee to provide board level oversight of RCR.
Board changes There were a number of changes to the Board’s composition during 2013. Stephen Hester stepped down as Group Chief Executive having served for over five years on the Board. Stephen’s achievements in stabilising the Group during a particularly turbulent period in its history were considerable, and the Board is immensely grateful for Stephen’s outstanding leadership and dedication throughout his tenure. Following an extensive internal and external search, Stephen was succeeded by Ross McEwan on 1 October 2013 and Ross now has his sights firmly set on building a bank focused on our customers and shareholders. Also on 1 October 2013, Bruce Van Saun took up his new role as Chairman and Chief Executive of RBS Citizens Financial Group, Inc and has stepped down from the Board. Bruce’s contribution was, again, outstanding. He has been succeeded as Group Finance Director by Nathan Bostock. Nathan has since confirmed his resignation although his leaving date has not yet been agreed and the search for his replacement is underway.
Philip Hampton Chairman of the Board of directors 26 February 2014
Group Board The main decision making forum at Group level, setting the strategic direction of the Group and ensuring that the Group manages risk effectively. The Board is accountable to shareholders for financial and operational performance.
Group Audit Committee Assists the Board in discharging its responsibilities for monitoring the integrity of the financial statements of the Group. It reviews the accounting policies, financial reporting and regulatory compliance practices of the Group and the Group’s system and standards of internal controls, and monitors the Group’s processes for internal audit and external audit.
Group Sustainability Committee Responsible for overseeing and challenging how management is addressing sustainability and reputation issues relating to all stakeholder groups, except where such issues have already been dealt with by other Board committees.
Executive Committee Supports the Group Chief Executive in managing the Group’s businesses. It reviews strategic issues and initiatives, monitors financial performance and capital allocations and considers risk strategy, policy and risk management.
RBS Capital Resolution Board Oversight Committee Provides oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles. It reports to the Board on its own activities and recommends changes, where appropriate, to RCR strategy.
Experience: Previously group chief executive of Standard Life plc. He was also previously a director of the Association of British Insurers, a member of the former Chancellor of the Exchequer’s High Level Group on Financial Services and Chairman of the Edinburgh World City of Literature Trust. In 2007 he was the Prince of Wales’ Ambassador for Corporate Social Responsibility in Scotland.
External appointment(s): • Chairman of Creative Scotland • Member and vice-chairman of the Board of
LLC • Non-executive director and member of the finance and compensation committees of Unisys Corporation
• Non-executive director, and chair of the audit committee of Xoom Corporation
Committee membership(s): • Group Nominations Committee • Group Performance and Remuneration
Experience: Began his career at Peat Marwick (now KPMG) where he worked in the firm’s Financial Institutions Practice in New York and Chicago. After leaving Peat Marwick he worked for several leading financial institutions, including as Co-controller of Goldman Sachs, Chief Financial Officer of the Capital Markets business of NationsBank (now Bank of America), Executive Vice President of Paine Webber and CEO of Paine Webber International. He joined Deutsche Bank in Frankfurt in 2001 and later became the Bank’s Chief Financial Officer and a member of its Board and Group Executive Committee. After retiring in 2008 he served as senior adviser to Ernst & Young working with the firm’s financial services partners in the UK, Europe, the Middle East and Africa. He is a non-executive director of RBS Citizens Financial Group, Inc.
Experience: Began his career with Price Waterhouse (now PricewaterhouseCoopers) where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989. Following the acquisition of Warburg by UBS in 1995, he then held the roles of Head of UK Corporate Finance, Head of European Corporate Finance and Co-Head of its global business and CEO of the EMEA region. He relinquished his management roles at the end of 2005, and was appointed Vice Chairman of UBS Investment Bank. Robert left UBS to join Evercore Partners, from where he was seconded to the UK Panel on Takeovers and Mergers, as Director General, from 2010 to 2013.
Durham • Chairman of the Somerset House Trust • Chairman of the Boat Race Company
Committee membership(s): • Group Audit Committee (Chair) • Board Risk Committee • Group Nominations Committee • RCR Board Oversight Committee
Experience: An experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and International Government practices and has been President of the Institute of Chartered Accountants in England and Wales. She was appointed to the House of Lords in 2000 and has served on the Conservative front bench in various roles including as shadow treasury minister between 2003 and May 2010. Previously held non-executive roles on the Court of the Bank of England, Hanson, ICI, John Laing and SThree.
External appointment(s): • Non-executive director and chairman of the audit committee of Severn Trent plc • Deputy chairman and senior independent director and chairman of the nominations committee of Carpetright plc
Committee membership(s): • Board Risk Committee (Chair) • RCR Board Oversight Committee (Chair) • Group Audit Committee • Group Nominations Committee
Experience: A qualified solicitor, joined RBS in 2000. She was appointed Deputy Group Secretary and Head of Group Secretariat in 2007, and prior to that held various legal, secretariat and risk roles including Head of External Risk, Retail, Head of Regulatory Risk, Retail Direct and Head of Legal and Compliance at Direct Line Financial Services.
She is a fellow of the Chartered Institute of Bankers in Scotland and a member of the European Corporate Governance Council.
Suneel Kamlani (age 52) Co -Chief Executive, Markets Suneel Kamlani joined the Group in 2010 and is currently Co-Chief Executive Officer of Markets with responsibility for global trading, sales, research and origination across interest rate products, foreign exchange, asset backed securities, emerging markets, credit fixed income and debt capital markets. In this capacity, he oversees businesses which provide financing, risk management and advisory services to major corporations, financial institutions and public sector clients around the world. Based in the Group’s offices in Stamford, Connecticut, Suneel also serves in a regional capacity as Chairman of Markets and International Banking, Americas and Deputy Head of RBS Americas. Suneel has over 30 years of experience in investment banking, having previously served as Chief Operating Officer for UBS’s Investment Bank and as a member of the UBS Group managing board. He has worked in New York, London, Hong Kong and Stamford, leading investment banking and capital markets businesses globally.
Simon McNamara (age 54) Group Chief Administrative Officer Simon McNamara was appointed Group Chief Administrative Officer in September 2013. Prior to joining the Group, Simon was Chief Information Officer of Standard Chartered’s Consumer Bank based in Singapore and has previously held a number of senior Information Technology and Operations positions in the global financial services industry including with Westpac Banking Corporation, Deutsche Bank, BNP Paribas and Midland Bank. He was also a founding partner in a successful software start-up company, CATS INC, in Silicon Valley. Simon holds a Bachelor of Science (Hons) in Economics and Statistics from University College Swansea and a Post Graduate Diploma in Computer Science from the University of Hertfordshire. He has also completed the Executive Programme at Stanford University.
Jon Pain (age 56) Group Head of Conduct & Regulatory Affairs Jon Pain joined the Group on 15 August 2013 as Head of Conduct & Regulatory affairs, from KPMG where he was a partner and Head of the Financial Services Risk Consultancy practice. Jon has over 30 years’ experience in Financial Services including three years as Managing Director of Supervision at the Financial Services Authority (FSA) during the financial crisis (2008 - 2011). Prior to the FSA, Jon’s executive career was with the Lloyds Banking Group (LBG) where he held a range of senior roles including Managing Director of LBG’s C&G mortgage business, the General Insurance Business and the Private Banking Business.
Bruce Van Saun (age 56) Chairman & Chief Executive, RBS Citizens Financial Group, Inc. and Head of RBS Americas Bruce Van Saun was appointed Chairman and Chief Executive Officer of RBS Citizens Financial Group, Inc. and Head of RBS Americas in October 2013. Prior to taking up his current role, Bruce was Group Finance Director and a director of the Company, RBS and NatWest having been appointed to those positions in 2009. Bruce has more than 30 years of financial services experience and has previously held senior positions with Bank of New York, Bank of New York Mellon, Deutsche Bank, Wasserstein Perella Group and Kidder Peabody & Co. Bruce is currently a Director of Lloyd’s of London and is a member of the Financial Services Roundtable and The Clearing House supervisory board and is active in several community organisations.
Philip Hampton Chairman British Ross McEwan Group Chief Executive New Zealand Nathan Bostock Group Finance Director British Sandy Crombie Senior Independent Director British Alison Davis Independent non-executive director British/USA Tony Di Iorio Independent non-executive director USA Robert Gillespie Independent non-executive director British Penny Hughes Independent non-executive director British Brendan Nelson Independent non-executive director British Baroness Noakes Independent non-executive director British Philip Scott Independent non-executive director British
Biographies for each director and details of which Board Committees they are members of can be found on pages 39 to 42. The Board considers that the Chairman was independent on appointment and that all nonexecutive directors are independent for the purposes of the Code.
The Board’s terms of reference include key aspects of the company’s affairs reserved for the Board’s decision and are reviewed at least annually. The terms of reference are available on rbs.com>about us.
The Chairman’s key responsibilities are to: • provide strong and effective leadership to the Board; • ensure the Board is structured effectively and observes the highest standards of integrity and corporate governance; • manage the business of the Board and set the agenda, style and tone of Board discussions to promote effective decision-making and constructive debate; • facilitate the effective contribution and encourage active engagement by all members of the Board; • in conjunction with the Group Chief Executive and Group Secretary, ensure that members of the Board receive accurate, timely and clear information, to enable the Board to lead the Group, take sound decisions and monitor effectively the performance of executive management; • ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and
• ensure the Group maintains effective communication with shareholders and other stakeholders.
Group Chief Executive The Group Chief Executive has responsibility for all Group businesses and acts in accordance with the authority delegated by the Board.
• in conjunction with the Group Chairman and Group Secretary, ensure the Board receives accurate, timely and clear information.
Senior Independent Director Sandy Crombie, as Senior Independent Director, acts as a sounding board for the Chairman and as an intermediary for other directors when necessary. He is also available to shareholders to discuss any concerns they may have, as appropriate.
The standard terms and conditions of appointment of non-executive directors are available on rbs.com or from RBS Secretariat.
The terms of reference for each of these committees is available on rbs.com and copies are also available on request from RBS Secretariat.
Board meetings In 2013, nine Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below. One of the Board meetings took place overseas during the Board’s visit to the Group’s US businesses.
In addition to the nine scheduled meetings, 35 additional meetings of the Board and committees of the Board were held, including meetings to consider and approve financial statements. The Chairman and the nonexecutive directors meet at least once per year without executive directors present.
Philip Hampton 9/9 Ross McEwan (1) 2/2 Nathan Bostock (1) 2/2 Sandy Crombie 9/9 Alison Davis 9/9 Tony Di Iorio 9/9 Robert Gillespie (2) 1/1 Penny Hughes 9/9 Brendan Nelson 9/9 Baroness Noakes 9/9 Philip Scott 9/9
Former directors Stephen Hester (3) 7/7 Joe MacHale (4) 4/4 Art Ryan (3) 7/7 Bruce Van Saun (3) 7/7
Financial Conduct Authority • Good Bank/Bad Bank Review • Board Strategy Offsite • Succession Planning 3rd Quarter 4th Quarter • Good Bank/Bad Bank Review • Parliamentary Commission on
• Interim Results • Lending Updates • Board Evaluation Update • RBS Citizens Deep Dive • Board Session with the
• Launch of Strategic Review • Review of Capital Position • Independent Lending Review • Board Session with the
Prudential Regulatory Authority • Corporate Banking Deep Dive • Q3 Results • Markets Deep Dive
Board effectiveness Skills and experience on the Board The Board is structured to ensure that the directors provide the Group with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of the Group’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area, but the Board also benefits from directors with experience in other fields.
The table below illustrates the breadth of experience on the Board.
• Government & Public Sector • Consulting • Chief Executive • Technology • Retailing • Utilities
Induction and professional development Each new director receives a formal induction on joining the Board, which is co-ordinated by the Group Secretary. This includes visits to the Group’s major divisions and meetings with directors and senior management. Each induction programme has a core element that the director is required to complete with the remainder of the programme tailored to the new director’s specific requirements. An example of an induction programme for a new non-executive director is set out below: Core meetings Tailored elements
During 2013, the directors received updates on a range of subjects to enhance their knowledge, including: • Parliamentary Commission on Banking Standards -
Transparency and Trust; • BIS review of Voluntary Code of Conduct for Executive Search
Time commitment There is an anticipated time commitment in line with the recommendations of the Walker Review in respect of general Board duties and additional time as necessary in respect of committee duties. However, as stated in the Chairman’s introductory letter to his Corporate governance report, the time commitment currently required of our nonexecutive directors is significant. Each director is required to seek the agreement of the Chairman before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director. The Board is aware of the other commitments of the Chairman and the other directors are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively.
Election and re-election of directors In accordance with the provisions of the Code, all directors of the company are required to stand for election or re-election annually by shareholders at the company’s Annual General Meeting. The notice of Annual General Meeting sent to shareholders separately includes details of the proposed resolutions for the election and re-election of directors.
The 2012 evaluation was conducted externally by a specialist board evaluation consultancy, and a number of initiatives were implemented aimed at improving the overall performance and effectiveness of the Board. These included keeping Board and committee composition under review; reviewing board and executive succession planning; introducing further enhancements to Board information packs; and implementing an expanded remit for the Group Sustainability Committee. These topics will be kept under regular review as a matter of good practice. However, the 2013 evaluation concluded that the recommendations from the 2012 evaluation were being appropriately addressed.
In 2013, the Board and committee evaluation process was conducted internally by the Group Secretary.
Amongst the areas reviewed were Board composition (including diversity), strategy, risk management, Board meetings and processes, external relationships, and the quality of support and information provided to the Board.
Outcomes of the 2013 performance evaluation The 2013 performance evaluation concluded that the Board was strong and operated effectively and within its terms of reference throughout 2013. Key strengths identified included the following: • the Board performed strongly during a challenging 2013, both as individuals and collectively; • the dynamic between Board members was good, the Chairman successfully steered the Board through a very difficult and complex agenda, and the directors dedicated a significant amount of time and effort to their role; and
• the Board’s committees undertook their complex work well throughout the year, providing strong support to the Board.
A summary of the key themes arising from the 2013 performance evaluation is set out below, together with an overview of the proposed actions: Key themes included Proposed action
Keep Board and Board committee composition under review during 2014, to ensure balance of skills, experience, independence, knowledge and diversity remains appropriate.
Risk reporting Consideration to be given to the Board Risk Committee leading a review of risk reporting at Board and Board committee level to further enhance the format and content of risk reports.
Relations with investors The Chairman is responsible for ensuring effective communication with shareholders. The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of the Group at any time throughout the year by letter, telephone or email via rbs.com/ir
Shareholders are given the opportunity to ask questions at the Annual General Meeting or can submit written questions in advance. Directors including the chairs of the Board Committees are available to answer questions at the Annual General Meeting. The Senior Independent Director is also available.
• the Chairman independently meets with the Group’s largest institutional shareholders annually to hear their feedback on management, strategy, business performance and corporate governance. Additionally, the Chairman, Senior Independent Director and chairs of the Board committees met with the governance representatives of a number of institutional shareholders during the year.
The Group Nominations Committee is responsible for: • reviewing the structure, size and composition of the Board and making recommendations to the Board on any appropriate changes; • assisting the Board in the formal selection and appointment of directors (executive and non-executive) having regard to the overall balance of skills, knowledge, experience and diversity on the Board; • reviewing membership and chairmanship of Board committees; • considering succession planning for the Chairman and the executive and non-executive directors, taking into account the skills and expertise which will be needed on the Board in the future. No director is involved in decisions regarding his or her own succession; and
• making recommendations to the Board concerning the election and re-election by shareholders of directors under the provisions of the Code. In so doing, they will have due regard to their performance and ability to continue to contribute to the Board in light of the knowledge, skills and experience required and the need for progressive refreshing of the Board.
Principal activity during 2013 The Committee continues to monitor succession planning on an ongoing basis taking into account business requirements and industry developments. In 2013 discussions focused principally on executive director succession and the search for new non-executive directors. The Board also held a separate session on succession planning for the Executive Committee in June 2013.
Board and committee membership The Committee reviewed the membership of the Group Sustainability Committee during 2013 following feedback from the 2012 evaluation. It was agreed that an additional non-executive director should be appointed to the Group Sustainability Committee and Penny Hughes was appointed as a member in July 2013.
Boardroom diversity The Board remains supportive of Lord Davies’ recommendations and currently meets the target of 25 per cent female board representation as set out in Lord Davies’ report.
Further details on the Group’s approach to diversity can be found on page 95.
During 2013, the Committee also scrutinised the disclosures relating to management actions to accelerate the rebuild of capital strength and to focus on core businesses (including the creation of RCR), included in the Group’s Q3 2013 Interim Management Statement.
A key aspect of the Committee’s responsibilities is to satisfy itself that the key accounting decisions, risks and significant management judgements that underlie the financial statements are appropriate through discussion and deliberation with management. The Committee reviewed the conclusions of the External Auditor and, where applicable, other experts and has concluded that disclosures in the financial statements about these judgements and estimates are transparent and appropriate.
The Markets Controls and Culture Remediation Programmes have served to underline the importance of an effective three lines of defence model. This was a priority in 2013 and the Committee received regular reports on embedding the model within divisions and functions and articulating the responsibilities and capabilities of the business. Embedding the model and maintaining standards of internal control will continue to be a key priority for the Group during 2014 as the organisational changes announced following the strategic review are implemented. The Committee will monitor this closely.
The Committee has also monitored the progress of various regulatory investigations and claims based on allegations that the Group had inappropriately tried to influence benchmark interest rates. Working closely with the Group Performance and Remuneration Committee, recommendations were made in relation to individual accountability. The Committee continues to consider the output of the review of certain highrisk rates which were not subject to investigation by external authorities.
As in previous years, the Committee has undertaken a programme of visits to those business areas which it considers merit additional focus. During 2013, the Committee spent a week in Asia to review the Markets, International Banking, Wealth, Business Services and Group Finance operations in the region. Internal Audit management made presentations to the Committee at two separate visits, covering functional strategy, bench-strength and capability. Internal Audit Technology resources and capability were discussed during these meetings and over the course of the year the Committee has monitored progress in strengthening capability through recruitment and co-sourcing strategies. The Committee also spent time in Ireland to gain better insight into the issues facing Ulster Bank and held additional in depth meetings with the Markets, International Banking and Wealth divisions in the UK.
The members of the Group Audit Committee are selected with a view to the expertise and experience of the Committee as a whole. The Board is satisfied that all Group Audit Committee members have recent and relevant financial experience, and that each member of the Group Audit Committee is an ‘Audit Committee Financial Expert' and is independent, each as defined in the SEC rules under the US Securities Exchange Act of 1934 (“Exchange Act”) and related guidance. Full biographical details of the Committee members are set out on pages 39 to 42.
The role and responsibilities of the Group Audit Committee The Group Audit Committee’s primary responsibilities are shown below and are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These terms of reference are available on the Group’s website rbs.com.
Financial reporting and policy The Group Audit Committee focused on a number of salient judgements and reporting issues in the preparation of the 2013 accounts. In particular, the Committee considered: • the evidence (including in relation to the Group’s capital, liquidity and funding position) to support the directors’ going concern conclusion. Further information is set out on page 96; • the adequacy of loan impairment provisions, with special emphasis on exposures in Global Restructuring Group (GRG) and Ulster Bank in light of the creation of RCR which resulted in increased impairment provisions being recognised in the fourth quarter of 2013. The Committee was satisfied that the Group loan impairment provisions and underlying assumptions and methodologies are robust; • the level of provisions held for outstanding litigation and regulatory investigations, including Payment Protection Insurance redress, LIBOR, Interest Rate Hedging Products and US RMBS litigation. Following review, the Committee was satisfied that overall the level of provision held is appropriate and that disclosure is sufficiently transparent. However, these issues will be kept under close review by the Committee in 2014, as matters develop; • valuation methodologies and assumptions for financial instruments carried at fair value including the Group’s credit market exposures; • the appropriateness of the carrying value of goodwill and other intangible assets, placing particular focus on International Banking and RBS Citizens Financial Group, Inc. Following an impairment review at year end, goodwill allocated to International Banking of £1.1 billion was impaired in full; • the judgements that had been made by management in assessing the recoverability of the Group’s deferred tax assets The deferred tax asset relating to tax losses recognised in The Royal Bank of Scotland plc has been written down by £0.7 billion; • valuation of the Group’s main defined benefit pension scheme. The
° Directors are given sufficient time to consider the Annual Report and Accounts.
The Committee has also tracked progress in relation to other mandatory and remedial projects and has challenged individual business areas on the ability to meet regulatory expectations, responsibilities and required resource. The Committee has considered ongoing regulatory reviews and investigations and has monitored the Group’s relationship with its principal regulators. It has received reports from the Sensitive Investigations Unit and has considered the appropriateness of action being taken by management in relation to identified issues. The Committee has considered the Group’s compliance with the requirements of the Sarbanes-Oxley Act of 2002 and was advised of whistle-blowing events which occurred within the Group. The Committee has requested that Internal Audit consider how whistle-blowing processes can be audited and will seek to identify enhancements to the process.
As discussed in the report of the Board Risk Committee, changes to the Divisional Risk and Audit Committee structure, designed to enhance the effectiveness and transparency of the consideration of risk and audit issues at a divisional level are currently under consideration. Detailed proposals will be presented to the Committee in the first quarter of 2014.
Internal audit The Group Audit Committee oversaw the work of Internal Audit throughout 2013. Through regular reports and opinions, the Committee obtained insights into Internal Audit’s assessment of the control environment across all divisions and of management’s level of awareness. The reports from Internal Audit enabled the Committee to monitor internal control within the Group by reporting on areas where improvements to the control environment were needed.
In response to Internal Audit findings during the latter half of 2013, the Committee received at its request a presentation from executives of the Markets division on controls relating to trade and transaction reporting and actions underway to address identified weaknesses. The Committee has asked for regular updates on remediation progress to be provided during 2014.
Internal Audit also highlighted that the volume of change underway across the organisation and some specific regulatory remediation efforts, are key risk areas for the Group. The Committee will focus on these areas in 2014, particularly as the recently announced strategic changes are executed.
The Head of Internal Audit continues to report to the Chairman of the Group Audit Committee. In 2013, his secondary reporting line was changed and he now also reports directly to the Group Chief Executive (previously the Group Finance Director). Consideration was given to the presence of the Head of Internal Audit and divisional Heads of Audit at Executive Committee and other senior meetings. The Committee will continue to monitor the participation and influence of Internal Audit at senior level meetings during 2014.
External audit During 2013, the External Auditor provided the Group Audit Committee with reports summarising their main observations and conclusions arising from their year end audit, half year review and work in connection with the first and third quarters’ financial results and their recommendations for enhancements to the Group’s reporting and controls. The External Auditor also presented for approval to the Committee their audit plan and audit fee proposal and engagement letter, as well as confirmation of their independence and a comprehensive report of all non-audit fees.
• the findings of any reviews of the work of the External Auditor by relevant regulators and the actions taken, where appropriate, to address any matters raised.
The Group Audit Committee is responsible for making recommendations to the Board in relation to the appointment, re-appointment and removal of the External Auditor. In order to make a recommendation to the Board, the Group Audit Committee considers and discusses the performance of the External Auditor, taking account of the outcomes of the annual evaluation carried out. The Board submits the Group Audit Committee's recommendations to shareholders for their approval at the Annual General Meeting.
The Group Audit Committee approves the terms of engagement of the External Auditor and also fixes their remuneration as authorised by shareholders at the Annual General Meeting.
The Group Audit Committee reviews the policy annually and prospectively approves the provision of audit services and certain nonaudit services by the External Auditor. Annual audit services include all services detailed in the annual engagement letter including the annual audit and interim reviews (including US reporting requirements) and periodic profit verifications.
• reports and letters providing assurance to the Group in relation to a third party company where the Group is acting as equity/ debt underwriter in a transaction, in the ordinary course of business.
For all other permitted non-audit services, Group Audit Committee approval must be sought, on a case-by-case basis, in advance. The Group Audit Committee reviews and monitors the independence and objectivity of the External Auditor when it approves non-audit work, taking into consideration relevant legislation, ethical guidance and the level of non-audit services relative to audit services. The approval process is rigorously applied to prevent the External Auditor from functioning as management, auditing their own work, or serving in an advocacy role.
A competitive tender process is required for all proposed non-audit services engagements where the fees are expected to exceed £100,000. Engagements below £100,000 may be approved by the Chairman of the Group Audit Committee; as an additional governance control all engagements have to be approved by the Group Chief Accountant and Group Procurement. Where the engagement is tax related, approval must also be obtained from the Head of Group Taxation. Ad hoc approvals of non-audit services are ratified by the Group Audit Committee each quarter. During 2013, the External Auditor were approved to undertake certain significant engagements which are categorised and explained more fully below: Regulatory requests and attestations (three engagements) Regulators, both UK-based and overseas, requested certain work be undertaken by the Group during 2013 to provide assurances and meet certain requirements. In all three such engagements undertaken by the External Auditor, their existing knowledge of the Group was highlighted as a strong benefit. It allowed the work to commence quickly and with minimal disruption in all instances. The benefits of maintaining consistency between similar engagements was also highlighted.
Membership of a company acquired by Deloitte (one engagement) Bersin has provided an annual membership to the RBS Group since 2010. This has allowed our HR and Learning & Talent Practitioners to access extensive online research libraries. Bersin was acquired by Deloitte in December 2012 and so at the point the Group’s Bersin membership was due for renewal ad hoc approval by the Group Audit Committee was sought.
Conduct risk standards continue to be communicated to employees using the four pillars of conduct risk: employee conduct; market conduct; corporate conduct; and conduct towards customers. These standards have been applied in the Committee’s consideration of issues including the review of the sale of interest rate hedging products to SME customers. The Committee has also placed renewed focus on the quality of advice provided to customers, particularly in relation to mortgages, investment products and private client products.
In response to the allegations set out in the Tomlinson Report that the Group’s restructuring division systemically set out to make profit at the expense of distressed customers, an independent review by the law firm Clifford Chance was commissioned to investigate these claims fully. The Group’s regulators will also undertake their own review. While no evidence has been produced that supports the claims set out in the Tomlinson Report, the allegations have damaged our reputation and threaten to undermine our ability to build trust with customers and to increase lending to businesses in the UK economy. Therefore it is essential that the Group verifies the facts as quickly as possible. The Board Risk Committee has undertaken to review the outputs of both investigations, in depth, on behalf of the Board and make recommendations as to action required.
During 2013, the Board Risk Committee has continued to oversee the remediation activity following the major IT incident in 2012 and the ongoing effort to ensure the Group is more resilient in this respect in future. The Committee has also considered other potential single points of failure and how these can be identified and prevented or mitigated. This focus will continue in 2014 and the Committee will continue to liaise with its principal regulators during the first quarter of the year as the investigation of the IT incident concludes.
The Committee has considered reports on data quality, information security and corporate security with a particular focus on cyber security. This continues to be a significant issue for the banking industry as a whole and will remain a priority for the Committee in 2014.
Consideration of the case for RCR and substantiation of the capital plan was a major undertaking for the Group in the latter half of 2013. Given the fundamental strategic importance of this review, consideration, analysis and approval was undertaken collectively by the Group Board rather than at Committee level, which I consider to be appropriate. As a priority in 2014, the Board Risk Committee will monitor the risks in execution of this plan and also execution of the measures announced following the strategic review.
While 2013 has presented significant challenges, there has also been significant progress in the oversight of risk and control in many areas. In particular I would highlight the following: • the Committee has continued to enhance its relationship with other
Committees, in particular the Group Performance and Remuneration Committee. It has advised on matters such as assessing risk performance of both divisions and individuals, reviewing the risk objectives of members of the Executive Committee and considering the accountability of individuals in relation to specific matters; • the role of Divisional Risk and Audit Committees has been reviewed in conjunction with the Group Audit Committee to ensure that they provide more transparency and more effective consideration of risk at a divisional level. Proposed changes to the existing model will be considered by the Committee in Q1 2014;
Philip Scott, Chairman of the Board Risk Committee 26 February 2014
Philip Scott (Chairman) 7/7 Sandy Crombie 7/7 Tony Di Iorio (1) 6/7 Brendan Nelson 7/7 Baroness Noakes 7/7
Philip Scott, Tony Di Iorio, Brendan Nelson and Baroness Noakes are also members of the Group Audit Committee. Sandy Crombie is also a member of the Group Performance and Remuneration Committee. This common membership ensures effective governance across all finance, risk and remuneration issues, and that agendas are aligned and overlap is avoided, where possible.
Together with the Group Audit Committee, throughout 2013, the members placed particular focus on the implementation and embedding of the three lines of defence model across divisions. While progress has been made, the Committee recognises that additional work is required to fully delineate responsibilities across front line management, risk and internal audit. The Committee has emphasised that it considers effective operation of the model to be a priority and will closely monitor progress in 2014 alongside strategic and organisational change.
The Committee also considered management’s plans to deliver a holistic Enterprise Risk Management (ERM) framework, intended to deliver an increase in effectiveness and make risk more relevant to the operation of the business. This would involve rationalising existing risk management tools and making them integral to business as usual. The Committee noted its emphatic support to the accelerated programme of work planned for 2013/2014 which including the development of outcomefocused principles of business and the use of tools such as the “yes check” to align values with customer outcomes based on integrity, safety, soundness, reputation and standards.
The members closely reviewed implementation plans and delivery of solutions to meet the requirements of the Single European Payments Area. The Committee in particular has monitored the relationship with the Central Bank of Ireland in this regard.
Reporting The Committee received a detailed report on key risks and metrics at each meeting and the Group Chief Risk Officer provided a verbal update on the key risks to the organisation. Following his appointment, the Head of Conduct and Regulatory Affairs also provided a verbal update on current pertinent matters to the Committee at each meeting. These reports enabled the Committee to identify the key risk areas where additional focus was required.
The Committee reported to the Board following each meeting on its consideration of the risk profile of the business and made recommendations as appropriate.
Risk Incidents and Regulatory reviews and investigations As in previous years, regulatory risk featured highly on the agenda of the Committee during 2013. Most significantly, as highlighted above, in the letter from the Committee Chairman, the Committee continued to play a central role in the oversight and remediation of the Group’s 2012 IT incident. It received regular reports on the work being undertaken to enhance resilience and address root causes of the issue and has challenged management on the robustness of plans and in relation to capability across the three lines of defence. Significant progress has been made to address the deficiencies highlighted by the incident. However, longer term investment in further enhancement to the Group’s infrastructure is ongoing. The Committee will continue to oversee the remediation activity and wider enhancement required to systems and resilience during 2014. The Committee will also work with its regulators to address findings as their investigation of the incident concludes and will ensure accountability is fully considered and learnings are adopted, across the organisation.
The allegations set out in the Tomlinson Report have been taken very seriously by the Group and while there is no evidence of systemic wrongdoing in the way distressed customers were treated by the Group’s restructuring division, an independent review by Clifford Chance has been commissioned. The FCA has separately appointed a skilled person to undertake a review under section 166 of the Financial Services and Markets Act. The Board Risk Committee will review the outputs of these investigations and will liaise with its regulators as required.
A number of other internal and regulatory investigations arose or continued throughout 2013. During the period, the Committee received reports on; • the investigation of the alleged mis-selling of interest rate hedging products to small and medium sized enterprises and considered the appropriateness of remediation activity; • the investigation of allegations of inappropriate rate setting activity in particular foreign exchange rates; • anti-money laundering remediation including divisional remediation plans, prioritisation and resource requirements; • the sale of complex products and the quality of investment advice to customers. In particular, it received reports on required enhancements to the mortgage sales process. The sales and product design and approvals process were also reviewed; • the status of key litigation cases, in particular the US residential mortgage-backed securities litigation claims; and
Where appropriate, the Committee oversaw liaison with regulators; made recommendations regarding required remediation, training and process controls and enhancements; and made recommendations to the Group Performance and Remuneration Committee in relation to accountability. Progress to address identified weaknesses will be closely monitored throughout 2014.
The risk appetite framework for the Group was reviewed in 2013 to ensure it remained fit for purpose in light of internal restructuring, market positioning and changes to regulation. Consideration was given to how risk appetite linked to strategic objectives and how quantitative risk appetite targets had been set. The Committee discussed earnings volatility, including the impact of diversification benefit on the targets. Following detailed discussion, the Committee recommended the framework to the Board for approval and noted its support to management as the framework was embedded across the Group at divisional level. The Board Risk Committee separately reviewed the country risk appetite and Group Market Risk Control Framework and noted new market risk caps and changes to the existing limits.
In the second half of 2013 the Committee reviewed proposed changes to the Single Name Concentration framework for Banks and a new Single Name Concentration grid for Large Corporates.
The Committee also considered the Economic Capital model, which had been under delivery since 2010. It was noted that the model was now being transitioned to business as usual activity and had been used to assess credit concentration risk for Pillar 2 capital as part of the 2011 ICAAP, resulting in a more accurate capital calculation. The Committee is confident that the model will provide management with a clearer understanding of risk.
As referenced in the Group Audit Committee report on pages 52 to 57, a framework of Divisional Risk and Audit Committees is responsible for reviewing the business of each division and reporting to the Group Audit Committee and Board Risk Committee. During 2013, the Committee reviewed the operation of the committees and requested that management consider alternative mechanisms that could more effectively provide a line of sight into divisional risk issues and activity. The output of that review, will be more fully discussed in Q1 2014.
The Committee reviewed the preparations underway to ensure compliance with the new best practice principles that had been defined by the Basel Committee of Banking Supervision (BCBS) for internal risk reporting and data aggregation practices, which would be effective in 2016. Consideration was given to how these requirements reaffirmed priorities and direction of travel with the Finance and Risk Transformation (FiRST) Programme and it was noted that work was in progress to both accelerate usage of the FiRST strategic solution by Risk and enhance existing capabilities. In conjunction with the Group Audit Committee, the Board Risk Committee will closely monitor delivery of the FiRST programme in 2014 and any required changes as a result of the strategic review.
The Committee recognises that embedding the correct conduct and culture in the organisation requires an emphasis on performance management and conduct standards. The Board Risk Committee has continued to work closely with the Group Chief Executive and Group Performance and Remuneration Committee to consider the risk aspects of Executive Committee members’ objectives and remuneration arrangements as appropriate.
The Committee considered the risk performance of divisions in light of known risk and control issues and under advice from Risk Management and Internal Audit. It made recommendations regarding appropriate adjustments, to the Group Chief Executive and Group Performance and Remuneration Committee.
Philip Scott Chairman of the Board Risk Committee 26 February 2014
While 2013 presented significant challenges, progress was made by the Committee in overseeing and challenging how management was addressing sustainability and reputation issues relating to all stakeholder groups. Key areas of work during the year included: • oversight of the introduction and embedding of the purpose, vision and values work intended to promote behavioural change and strengthen our culture Group-wide. This included the introduction of the Code of Conduct which lays out the standard of conduct that supports the Group’s values of serving customers, working together, doing the right thing and thinking long term; • oversight of how the Group is balancing the needs of all its stakeholder groups including customers, investors, employees, regulators and communities/society and alignment with the Group’s strategic intent; • ongoing commitment to the stakeholder engagement programme through regular face to face sessions with advocacy groups on key issues of concern. This has been a key area of progress for the Committee allowing for challenge and debate in an open and collaborative environment (more details on next page); • oversight of development of Environmental, Social and Ethical
More detailed information on the Committee and the Group’s approach to sustainability is found on pages 31 to 33.
Sandy Crombie Chairman of the Group Sustainability Committee 26 February 2014
These stakeholder engagement discussions help inform decision making across the Group, shape future polices and influence strategic priorities and will continue to play a key role. For more information see pages 31 to 33.
Membership The Group Sustainability Committee comprises three independent nonexecutive directors. The Chairman and members of the Committee, together with their attendance at meetings, are shown below.
Sandy Crombie (Chairman) 6/6 Alison Davis (1) 5/6 Penny Hughes (2) 3/3
Role and responsibilities of the Group Sustainability Committee The Group Sustainability Committee is responsible for overseeing and challenging how management is addressing sustainability and reputation issues relating to all stakeholder groups, except where such issues have already been dealt with by another Board committee.
Authority is delegated to the Group Sustainability Committee by the Board and the Committee will report and make recommendations to the Board as required. The terms of reference of the Group Sustainability Committee are available on the Group’s website rbs.com and these are considered annually by the Group Sustainability Committee and approved by the Board. A report on the activities of the Group Sustainability Committee in fulfilling its responsibilities is provided to the Board following each Committee meeting. The principal responsibilities of the Group Sustainability Committee are shown below aligned to the Group’s values.
Annual Statement from the Chair of the Group Performance and Remuneration Committee Penny Hughes
This year’s remuneration report is published at an important moment for RBS. Five years on from the company’s rescue, RBS is substantially safer and smaller, has a new Group Chief Executive, and has embarked on a new strategy positioning customers at its centre. In this changing environment, the complex challenges surrounding remuneration that I have written about in this space for the last few years, have not gone away.
The Committee is tasked with making decisions on pay that encourage good service to our customers, are fair to all of our employees, and are in the interests of all of our shareholders. These decisions are never easy and are rarely popular in all quarters. Sometimes it would be easier for the Committee to make different decisions, prioritising the needs of one stakeholder group over another. We understand why RBS is subject to public and political scrutiny and has an obligation to the public that goes beyond that of our competitors. But truly living up to our responsibilities means we have to reject easy options which are not in the long-term interests of our stakeholders.
Continuing pay reform There has been a fundamental cultural shift in our approach to pay: • Over the last four years alone, bonus pools have fallen by 58% at a
• The percentage of staff receiving no bonuses has increased over the last year from 40% to 43% as we continue to target high performers.
Our remuneration policy promotes transparency and accountability; pay is clawed back when things go wrong, and awards are suspended when investigations are ongoing. Clawback is a powerful tool and we have put it to use. This year we have suspended awards pending investigations triggered by serious allegations of misconduct. It is important for the company and the executives involved that discretionary awards are put on hold until all the facts are clear.
CRD IV Many of you will be aware that a “bonus cap” has been introduced under the fourth European Capital Requirements Directive (CRD IV). Whilst the actual regulation and setting of a hard cap is not what we would have wished for, it is essentially aligned to our own actions to moderate pay levels and reduce pay leverage. We will therefore seek to comply with the spirit as well as the letter of the regulations.
We are considering whether to ask shareholders to approve a maximum ratio of variable to fixed pay at 2:1, rather than the default ratio of 1:1, at the 2014 AGM. As the legislation is now in force, we are reviewing how best to structure remuneration arrangements that are both compliant and aligned with shareholders’ interests. The Board will agree its final position in light of emerging market practice and details of any proposals will be contained in the Letter to Shareholders prior to the AGM.
Review of year and Group performance Further progress was made in the run down of Non-Core during 2013. Our balance sheet and capital levels indicate how far RBS has come in building a safe and sustainable foundation. From a strategic point of view, progress was also made in re-shaping the Markets business, selling a further stake in Direct Line Group, agreeing a pre-IPO investment of the Williams and Glyn branches and bringing forward the IPO of Citizens. However, I won’t shy away from the fact that overall it’s been a tough year for RBS in terms of financial performance. Results in certain divisions have been disappointing and revenue growth is not what we would like it to be at this point in our recovery.
Resolution (RCR) of £2,520 million, a reduction of 15% on 2012.
• RBS offered £58.5 billion of loans and facilities to UK businesses in 2013 of which £31.5 billion was to SMEs. RBS also helped UK companies, universities and housing associations to raise £24.7 billion through bond issues in 2013.
• Employee engagement is strong and clear evidence that key values are being embedded across the Group.
• Nathan Bostock has announced his departure and all outstanding share awards will lapse.
• Total variable compensation reduced again for 2013, down 15% at a
• The proportion of deferred variable compensation delivered in shares has increased significantly for 2013, representing 63% for Group and 81% for Markets. Further details on the bonus pool can be found in Note 3 to the accounts on page 397.
In conclusion, I believe our decisions on pay take account of performance while giving us the flexibility to attract and retain the expertise needed to build for the future. The Committee continues to receive valuable and independent advice from PwC and I would like to thank my fellow Committee members and those who support the Committee for their insight and guidance during another eventful year. I am also greatly encouraged by the willingness of shareholders to engage constructively in the pay debate and grateful for their support.
Following the publication of the Parliamentary Commission on Banking Standards report in June 2013 and the announcement from the Prudential Regulation Authority (PRA) that they intend to consult on a revised Remuneration Code in 2014, it is likely that remuneration will continue to be an important part of the agenda facing banks in the year ahead. We welcome any developments that help to make banks safer and ensure fair returns for both shareholders and employees.
RBS is a major UK employer and, as a bank playing a key role in the economic recovery, we understand the importance of getting our pay decisions right. We are committed to a high level of transparency and I believe the new reporting and voting requirements that apply to this year’s remuneration report can add to this process.
Fixed pay elements To provide a level of competitive remuneration for performing the role with less reliance on variable pay in order to discourage excessive risk-taking and with partial delivery in shares to align with long-term shareholder value.
To provide fixed pay that reflects the skills and experience required for the role. This will be delivered in shares and held for the long term.
A fixed allowance, paid entirely in shares. Individuals will receive shares that vest immediately subject to any deductions required for tax purposes and a retention period will apply. Shares will be released in equal tranches over a five year period. The fixed share allowance will be paid in arrears, initially at six monthly intervals, and in the event of termination, only in respect of service completed(1).
Also entitled to use of a car and driver on company business and standard benefits such as holiday and sick pay.
Further benefits such as relocation allowances and other benefits (e.g. tax advice, housing and flight allowances and payment of legal fees) may be offered in line with market.
The value of benefits paid will be disclosed each year in the annual report on remuneration.
Variable pay To further incentivise superior long-term performance, with rewards aligned with shareholders and adjusted for risk, based on the achievement of stretching performance measures.
Element of pay Purpose and link to strategy Operation Maximum potential value Performance metrics and period
To support a culture where good performance against a full range of measures will be rewarded. To incentivise the delivery of stretching targets in line with the Strategic Plan. The selection of performance metrics will be closely aligned with Key Performance Indicators.
Delivery in shares with the ability to clawback further supports longerterm alignment with shareholders.
The maximum level of award is subject to any limit on the ratio of variable to fixed pay as required by regulators. If shareholder approval is sought and obtained at the 2014 AGM, this will be 200% of fixed pay (i.e. base salary, fixed share allowance, benefits and pension). For these purposes awards will be valued in line with the European Banking Authority rules, including any available discount for long-term deferral.
Typical measures may fall under the following categories (weighted 25% each): • Economic Profit • Relative Total Shareholder
Return (TSR) • Safe and Secure Bank • Customers and People
A financial and risk performance underpin provides discretion to vary the vesting outcome if the Committee considers this does not reflect underlying performance.
To ensure EDs build and continue to hold a significant shareholding to align interests with shareholders.
Group Chief Executive - 250% of salary. Other EDs - 125% of salary.
To ensure RBS can continue to honour payments due to EDs.
In approving this policy, authority is given to honour any previous commitments or arrangements entered into with current or former directors, including share awards granted under the 2010 Deferral Plan and 2010 Long Term Incentive Plan (LTIP) and awards granted prior to appointment as an executive director that may have different performance conditions aligned with divisional performance.
• The new structure outlined in the policy table introduces a fixed share allowance for EDs which will be released in equal tranches over a five year period. However, the Group Chief Executive will not receive a fixed share allowance for 2014.
• The new structure results in a reduction of 16% of maximum remuneration opportunity, maintaining significant exposure to shares and clawback but with increased holding periods.
No variable pay is provided so that non-executive directors can maintain appropriate independence, focus on long-term decision making and constructively challenge performance of the executive directors.
Recruitment remuneration policy • The approach to recruitment of directors is to consider both internal and external candidates and to pay no more than is required to attract the most suitable candidate for the role.
• The policy on the recruitment of new directors aims to structure pay in line with the framework and quantum applicable to current directors, competitive in a market context and including the components detailed in the policy table, taking into account that some variation may be necessary to secure the preferred candidate.
• Consideration will be given to the skills and experience held by the individual being recruited as well as the incumbent’s position. The present circumstances of the company will also be taken into account.
• In the event of an internal promotion, existing contractual commitments can continue to be honoured.
• Any awards granted on recruitment may be made as part of the company’s share plans from time to time or under the provisions provided by Section 9.4.2 of the Listing Rules and will need to comply with the requirements of the PRA Remuneration Code. No sign-on awards or payments will be offered over and above the normal buy-out policy to replace awards forfeited or payments foregone. The Committee will seek to minimise buy-outs wherever possible and will seek to ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
• The maximum level of variable pay which may be granted to new executive directors is the same as that applicable to existing executive directors, excluding any buy-out arrangements. Nonexecutive directors do not receive variable pay. Full details will be disclosed in the next remuneration report following recruitment.
Discretion The Committee has certain discretions that allow it, in appropriate circumstances, to vary the remuneration provided to directors. For example, under the LTIP rules and also the proposed RBS 2014 Employee Share Plan, the Committee can determine: whether a leaver would fall into circumstances that would allow awards to vest following leaving; to decide to vest earlier than the normal vesting date; and to vary the pro-rating for time elapsed that would normally apply. Such discretions would only be used in exceptional circumstances to ensure a fair outcome for the director and for shareholders, taking into account the circumstances of departure, the performance of the director and the need to ensure an orderly transition. If discretion is applied in these circumstances then it will be disclosed.
In addition, the Committee retains discretion to apply clawback to awards and also adjust the vesting outcome in relation to certain long-term incentive awards through the application of a risk underpin. This allows the Committee to reduce or lapse awards if it considers that the vesting outcome does not reflect underlying financial results or if it considers that the results have been achieved with excessive risk.
While employees are not directly consulted on setting directors’ remuneration, consultation on remuneration generally takes place with our social partners, including representatives from UNITE. We continue to pay our permanent employees in the UK at or above the “Living Wage” benchmarks (National and London), and intend to apply for full accreditation. An annual employee opinion survey takes place which includes a number of questions on pay and culture. This includes questions as to whether employees believe they are paid fairly for the work they do, how remuneration at RBS compares to other financial services organisations and how good a job the organisation is doing in matching reward to performance.
Around 34,000 of our employees are shareholders through incentive and all-employee share plans and have the ability to express their views through voting on the Directors’ Remuneration Report.
Service contracts and policy on payments for loss of office – directors Provision Policy Details Payments for loss of office
The service contracts do not contain any pre-determined provisions for compensation on termination. The service contracts give RBS the discretion to make a payment in lieu of notice, which is on base salary only (with no payment in respect of any other benefits, including pension) and is released in monthly instalments. During the period when instalments are being paid, the executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
Existing annual incentive awards under the Deferral Plan will not normally lapse on termination, unless termination is for Cause (as defined in the rules of the Deferral Plan). The awards will normally continue to vest on the original vesting dates, subject to provisions regarding clawback, competitive activity and detrimental activity.
Existing long-term incentive awards normally lapse on leaving unless the termination is for one of a limited number of specified ‘good leaver’ reasons or the Committee exercises its discretion to prevent lapsing. The Committee may exercise this discretion where it believes this is an appropriate outcome in light of the contribution of the participant and shareholders’ interests. Where awards do not lapse on termination, any vesting will normally take place on the original vesting dates, subject to the performance conditions being met and pro-rating to reflect the proportion of the period that has elapsed at the date of termination. Clawback provisions will also apply. These provisions will also apply to variable remuneration delivered under the RBS 2014 Employee Share Plan, subject to shareholder approval at the 2014 AGM.
Treatment in line with the plan rules as approved by shareholders
NEDs do not have service contracts or notice periods although they have letters of engagement reflecting their responsibilities and time commitments. No compensation would be paid to any NED in the event of termination of appointment.
• Maximum = Fixed remuneration and assuming full payout of longterm incentive vesting at 300% of salary.
• The graphs above illustrate the application of policy to executive directors for the first full year as the Group Chief Executive will not receive a fixed share allowance in 2014.
Shareholders views and their impact on remuneration policy An extensive consultation is undertaken every year with major shareholders including UKFI and other stakeholders on our remuneration approach. The consultation process typically involves inviting our largest shareholders to attend either one-to-one meetings or roundtable sessions with relevant shareholder bodies. A range of topics are discussed including intended remuneration policy for the year ahead and any significant changes. The process takes place in sufficient time for shareholder views to be considered prior to the Committee making any final decisions on remuneration and variable pay awards. Details of shareholder voting on the resolution to approve the last remuneration report can be found in the annual report on remuneration.
In late 2013 and early 2014, meetings took place involving around 20 institutional shareholders and shareholder bodies representing a substantial portion of the non-UKFI shareholding. The topics discussed during the latest consultation included financial performance, determination of pay outcomes for the 2013 performance year, the Board changes, the impact of CRD IV and possible pay arrangements going forward. Shareholders asked wide-ranging questions including the ability to remain market competitive, the accountability review process, retaining and motivating employees through periods of change and the use of performance measures for long-term incentive awards.
(3) Ross McEwan and Nathan Bostock were appointed to the Board on 1 October 2013 and the table reflects their pay for the period as Group Chief Executive and Group Finance Director respectively since appointment.
(4) Benefits figure includes standard benefit funding of £26,250 per annum with the remainder being relocation expenses provided to Bruce Van Saun (housing allowance) and Ross McEwan (housing and flight allowances).
Notes (1) Philip Hampton is entitled to private medical cover and the value is shown in the benefits column. (2) Tony Di Iorio became a non-executive director of RBS Citizens Financial Group, Inc on 15 January 2014, the fees for which will be reported in future years. (3) Robert Gillespie was appointed to the Board with effect from 2 December 2013. (4) Joe MacHale retired from the Board with effect from 14 May 2013. Board Committee fee included membership of the Asset Protection Scheme Senior Oversight Committee. (5) Art Ryan is a non-executive director of RBS Citizens Financial Group, Inc. for which he received fees of US$131,000 for the period to 30 September 2013, the date he retired from the Group Board.
There have been no payments made to non-executive directors for loss of office.
Total Pension Entitlements – Bruce Van Saun (audited) Mr Van Saun's UURBS operates as a cash balance plan. The rate of return on the accrued fund is determined annually by the Committee to reflect a long-term low risk investment return on an unsecured basis. For 2013 this rate was 4.7%. His accrued entitlement at the year end is shown below. There is no provision for any additional benefit on early retirement.
Aggregate contributions that would have been made if funded 306 408 Investment return 42 28 Total value of fund at 31 December 2013 1,030 682
Executive directors’ annual bonus for 2013 (audited) The normal maximum that could be paid to executive directors under the annual bonus arrangements for 2013 is 200% of salary. The table below sets out the outcome for the 2013 performance year.
Ross McEwan Ross McEwan indicated he did not wish to be considered for an annual bonus in respect of his Group Chief Executive role in 2013 or 2014. As announced on 27 January 2014, no bonus award will be payable in respect of the UK Retail role that Mr McEwan undertook during 2013.
Nathan Bostock Following announcement of his departure, no annual bonus is payable to Nathan Bostock.
Executive directors’ LTIP awards granted in 2010 – final assessment of performance outcome (audited) Performance measure Performance requirements Vesting outcome
Number of shares awarded % that would vest at threshold and maximum Performance requirements
Bruce Van Saun 8 March 2013 2,250 727,685 20% - 25% vesting at threshold
Performance measure Weighting Rationale Vesting 2011 LTIP Current assessment of performance 2012 and 2013 LTIP Current assessment of performance
Core Bank economic profit 25% Ensures that performance reflects risk adjusted enduring earnings.
Excluding the impact of the 2013 RCR action performance is currently broadly in line with expectations. The Committee notes the impact of the RCR impairment and will determine at the point of vesting how this should be taken into account.
Vesting will be qualified by Committee discretion. Indicative vesting levels are: • Over half of objectives not met: 0%; • Half of objectives met: 25%; • Two-thirds of objectives met: • Objectives met or exceeded in all material respects: 100%.
Majority of Balance Sheet and Risk measures are currently on track or ahead of target.
Stephen Hester also received payment in lieu of five days accrued holiday, a nominal amount (£100) in respect of an undertaking to provide ongoing assistance to RBS with any investigations or claims and a commitment to pay directly to his lawyers legal fees of £23,000 + VAT incurred in connection with his departure. He did not receive any annual bonus award for 2013.
Bruce Van Saun Bruce Van Saun stepped down from the Board on 30 September 2013 and became CEO and Chairman of RBS Citizens Financial Group and Head of RBS Americas. He continues to be employed within RBS and therefore no termination payment was made in connection with this change of role.
Directors’ interests in shares and shareholding requirements (audited) The target shareholding level for the Group Chief Executive is 250% of salary and 125% of salary for other executive directors and members of the Executive Committee, in each case excluding any unvested share awards in the calculation. A period of five years is allowed in which to build up shareholdings to meet the required levels.
As at 31 December 2013 (or date of cessation if earlier)
(£) % of shareholding requirement met Unvested LTIP awards (subject to performance conditions) Unvested Deferral Plan awards
Philip Hampton 27,630 n/a Sandy Crombie 20,000 n/a Alison Davis 20,000 n/a Tony Di lorio (2) 30,000 n/a Robert Gillespie nil n/a Penny Hughes 562 n/a Joe MacHale 28,431 n/a Brendan Nelson 12,001 n/a Baroness Noakes 21,000 n/a Art Ryan 5,000 n/a Philip Scott 50,000 n/a
In line with the requirements of the PRA Remuneration Code and the RBS Staff Dealing Rules, executive directors must not engage in any personal hedging strategies to lessen the impact of a reduction in value of unvested share awards, for example if the RBS share price goes down. No other current director had an interest in the company's ordinary shares during the year or held a non-beneficial interest in the shares of the company at 31 December 2013, at 1 January 2013 or date of appointment if later. The interests shown above include connected persons of the directors. As at 26 February 2014, there were no changes to the directors' interests in shares shown in the table above.
Directors’ interests under the Group’s share plans (audited) Long-Term Incentive Plan (LTIP) awards Awards to executive directors under the LTIP are structured as conditional rights to receive shares and are subject to performance conditions and clawback provisions prior to vesting.
Options held at 1 January 2013 (or date of appointment if later)
Nathan Bostock (5) Executive Share Option Plan 207,467 — 4.62 207,467 17.08.12 – 16.08.19
at 1 January 2013 (or date of appointment if later) Award price £
For the notes to this table refer to the previous page.
Note: (1) Stephen Hester (SH) stepped down from the Board on 30 September 2013 and Ross McEwan (RM) became Group Chief Executive with effect from 1 October 2013.
Change in Group Chief Executive pay compared to employees The table below shows the percentage change in remuneration for the Group Chief Executive between 2013 and 2012 compared with the percentage change in the average remuneration of RBS employees on a global basis. In each case, remuneration is based on salary, benefits and annual bonus. The Group Chief Executive remuneration reflects the change in remuneration arrangements for the new Group Chief Executive with effect from 1 October 2013 compared to the previous Group Chief Executive.
Note: (1) No bonus was paid to the Group Chief Executive in respect of 2012 or 2013 performance. Standard benefit funding for executive directors remained unchanged between 2012 and 2013. The benefits for the Group Chief Executive excludes the relocation expenses provided to Ross McEwan as part of his recruitment as CEO UK Retail in 2012 and which will last for a set three year period other than an entitlement to two return business class flights which applies from year three onwards. The value of relocation benefits will be disclosed each year in the total remuneration table.
Executive directors Salary Benefits Pension Fixed Share Allowance (1) LTIP award
Chairman and non-executive directors’ fees Chairman £750,000 Non-executive Director Group Board £72,500 Senior Independent Director £30,000 Membership of Group Audit Committee, Board Risk Committee, Group Performance and Remuneration Committee or Group Sustainability Committee £30,000 Additional fee to Chair the Group Audit Committee, Board Risk Committee, Group Performance and Remuneration Committee or Group Sustainability Committee £30,000 Membership of Group Nominations Committee £5,500
The non-executive directors do not receive any annual bonus payments or variable remuneration.
• Customer Strategy and Experience - clearly articulate customer strategy; effective customer experience framework and measurement approach.
• Corporate reputation - enhance and support the company’s reputation with all stakeholders.
• Common Equity Tier 1 Ratio - deliver fully loaded Common Equity Tier 1 ratio in line with strategic targets, including successful execution of RCR reduction.
• Return on Equity (2) - improve return on equity in line with strategic targets.
• Cost:Income Ratio (2) - reduce cost:income ratio in line with strategic targets.
• Governance & Control - maintain an effective governance and control environment and deliver key systems and processes.
Notes: (1) Details of targets that are deemed to be commercially sensitive will be disclosed retrospectively. (2) Excluding RBS Capital Resolution.
LTIP awards granted in 2014 – Performance criteria In line with previous practice, awards granted to executive directors in March 2014 will be subject to four equally weighted performance categories, each of which can vest up to 100% of base salary subject to an overall cap of 300% of salary. The performance targets have been reviewed by the Committee and reflect the outcome of the Group’s strategic review. In future years, long-term incentive awards will be made under the RBS 2014 Employee Share Plan on the basis of equally stretching measures following consultation with major shareholders and disclosed in the annual report on remuneration. A minimum three year performance period will apply. Any awards that vest will be subject to a minimum six month retention period in line with the PRA Remuneration Code.
Relative TSR Comparator Group Weighting 1 Barclays 2 Lloyds Banking Group 3 HSBC 4 Standard Chartered 5 to 13 BBVA, BNP Paribas, Credit Agricole, Credit Suisse Group, Deutsche Bank, Santander, Societe Generale, UBS, Unicredito
• 100% of the award will vest if TSR is at the upper quartile of the companies in the comparator group
Safe & Secure Bank (25%) The Safe & Secure Bank measures have a particular focus on risk reduction and the building of a safer, sustainable franchise. The key measures in this category are Core Tier 1 ratio and Cost Income ratio.
Customers & People (25%) These measures reward management for building a customer-focussed franchise with strength in terms of efficiency, reputation and the engagement of employees. Net Promoter Score will be used as the primary bank-wide measure for the improvement in customer service, measured versus each segment’s defined peer group. Employee engagement will be measured against the Global Financial Services norm.
Commentary will be provided on an annual basis in relation to progress against the targets, where these are not commercially sensitive.
Risk underpin and clawback The Committee will also review financial and operational performance against the business strategy and risk performance prior to agreeing vesting of awards. In assessing this, the Committee will be advised independently by the Board Risk Committee. If the Committee considers that the vesting outcome calibrated in line with the performance conditions outlined above does not reflect underlying financial results or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the awards allow for an underpin to be used to reduce vesting of an award, or to allow the award to lapse in its entirety. All awards are subject to clawback.
Consideration of matters relating to directors’ remuneration The role and responsibilities of the Committee The Committee is responsible for setting the policy on remuneration and overseeing its implementation. It reviews performance and makes recommendations to the Board in respect of variable incentive pools and the remuneration arrangements of the executive directors. No director is involved in decisions regarding his or her own remuneration.
The Committee is also responsible for approving remuneration and severance arrangements for members of the Group’s Executive and Management Committees and overseeing arrangements for PRA ‘Code Staff’. Details of the PRA Remuneration Code can be found at www.bankofengland.co.uk/pra. A definition of RBS Code Staff along with details of how risk is taken into account in the remuneration process is provided on pages 88 and 89.
• Approval of Group and Divisional variable pay pools and Directors’
• Presentations from Markets, Corporate and Ulster Bank on business and strategic priorities and people plans.
Third quarter • Half year performance reviews for members of the Group’s Executive and Management Committees.
• Update on Group Internal Audit’s review of Code Staff processes.
• Update on shareholder consultation undertaken in December 2013 and planned for January 2014.
Performance evaluation process A thorough internal review of the effectiveness of the Group Performance and Remuneration Committee was conducted during 2013 involving questionnaires and follow-up interviews. The Committee considered the outcomes of the evaluation and is satisfied with the way in which the evaluation has been conducted.
Note: (1) Art Ryan stepped down from the Committee on 30 September 2013
Advisers to the Group Performance and Remuneration Committee The advisers are appointed independently by the Committee, which reviews its selection of advisers annually. The Committee Chair oversees the fees for the advisers. PricewaterhouseCoopers LLP (PwC) were appointed as the Committee’s remuneration advisers on 14 September 2010 following a review of potential advisers, and their appointment was reconfirmed by the Committee in July 2013 after an annual review of the quality of the advice received and fees charged. PwC are signatories to the voluntary code of conduct in relation to remuneration consulting in the UK.
Annual incentives — — — — — — — — Long-term incentive awards (vested value) 983 978 407 — — 56 — 114
Element of pay Objective Operation Base salary To attract and retain employees by being competitive in the specific market in which the individual works.
From 2014 onwards, allowances will be provided to certain employees in key roles and reviewed at appropriate intervals, to reflect the skills, experience and competencies required for the role. They will be delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares will be subject to an appropriate retention period, not less than six months.
To provide a range of benefits and give employees an opportunity to provide for their retirement.
Guaranteed awards are only used in very limited circumstances in accordance with the PRA Remuneration Code. Immediate cash awards are limited to a maximum of £2,000. Under the deferral arrangements a significant proportion of annual incentive awards for our more senior employees are deferred over a three year period. Deferred awards are subject to clawback. For Code Staff, a minimum 50% of any annual incentive is delivered in the form of RBS shares and subject to an additional six month retention period post vesting. Under the deferral arrangements for the 2013 performance year, the vast majority of any annual incentive award to Code Staff is delivered in shares.
To encourage the creation of value over the long term and to align further the rewards of the participants with the returns to shareholders.
The amount of the award that vests may vary between 0-100% depending on the performance achieved. All awards are subject to clawback and an additional six month retention period applies to Code Staff post vesting.
The RBS Staff Dealing Rules and the conditions attaching to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards.
A robust process is used to assess risk performance. A range of measures are considered, specifically the overall Risk Profile, Credit, Regulatory Risk & Conduct Risk, Operational Risk, Enterprise Risk and Market Risk. The steps we take to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the FCA.
Variable pay pool determination The process for determining variable pools is discretionary, to avoid the unintended consequences of formulaic systems. However, the Committee's discretion is applied within a structured framework which starts with an assessment of risk adjusted financial performance measured against budget, prior year capital position and long-term strategic plans. This analysis is used to adjust for performance and then consider outcomes in the context of competitive variable pay funding levels.
Finally, variable pay proposals are reviewed against our capital adequacy framework to ensure that regulatory requirements are met.
A summary of the accountability review process is as follows: • Exists to enable RBS to respond in instances where current and/or new information would change the annual bonus and/or LTIP decisions made in previous years, and/or the decisions to be made in the current year.
• The process for review assessments (which consider material risk management, control and general policy breach failures, accountability for those events and appropriate action against individuals) is operated across divisions and functions.
• Clawback may be up to 100% of unvested awards and can be applied regardless of whether or not disciplinary action has been undertaken.
• A key principle is that clawback quantum should not be formulaic.
How have we applied this in practice? Variable pay is subject to deferral allowing the Committee scope to apply clawback. The accountability review process is fully embedded and is operated throughout the year. During 2013 a number of issues and events were considered under the accountability review framework.
The outcomes for the 2013 performance year cover a range of actions and have included: forfeiture of unvested awards through clawback; reduction of current year variable pay awards; dismissal; and suspended vesting pending further investigation. The Board Risk Committee concluded that all known key material events had been considered.
The RBS 2014 Employee Share Plan, subject to approval at the 2014 AGM, will allow RBS to apply post-vesting clawback to future awards. The policy for any post-vesting clawback will be considered in light of emerging regulatory requirements and shareholder best practice.
Fixed remuneration Consisted of salaries, pensions and benefits paid during the year.
Others £m 3. Outstanding deferred remuneration through 2013 The table below includes deferred remuneration awarded or paid out in 2013. Deferred remuneration reduced during the year relates to long-term incentives lapsing when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and clawback of prior year deferred awards and long-term incentives.
Unvested from prior year 110.0 131.7 Awarded during the financial year 47.9 57.6 Paid out 33.0 59.4 Reduced from prior years 16.8 28.6 Unvested at year end 107.8 98.2 4. Sign-on and severance payments Sign-on awards for guaranteed variable remuneration of £2.6 million are included in the tables above. These relate to commitments on recruitment made in respect of three new employees. No severance payments were made outside of contractual payments related to termination of employment such as pay in lieu of notice and benefits.
These employees include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows: • The CEOs responsible for each division. • Employees directly reporting to the CEO including those managing our functions and other activities of strategic importance. • Employees managing large businesses within a division such as our
Retail and Commercial Businesses in the US or our UK Corporate and Institutional Banking clients.
• Employees managing the successful disposal of Non-Core assets and reducing RBS’s capital requirements.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures apply to companies with securities registered in the US. The company complies with all applicable sections of the US Sarbanes-Oxley Act of 2002.
The effectiveness of the Group’s internal controls is reviewed regularly by the Board, the Group Audit Committee and the Board Risk Committee. Group Internal Audit provides independent assurance to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving the Group’s objectives. Executive management committees or boards of directors in each of the Group’s businesses also receive regular reports on significant risks facing their business and how they are being controlled. In addition, the Board receives monthly risk management reports. Details of the Group’s approach to risk management are given on pages 29 and 30 of the Strategic Report. The Group Audit Committee has received confirmation that management has taken, or is taking, the necessary action to remedy any material failings or weaknesses identified through the operation of the Group framework of controls.
The Group’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control matters which they have identified. The system of internal controls of the authorised institutions and other regulated entities in the Group is also subject to regulatory oversight in the UK and overseas. Additional details of the Group’s regulatory oversight are given in the Supervision section on page 520.
Internal control over financial reporting The Group is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2013.
Based on its assessment, management has concluded that, as of 31 December 2013, the Group's internal control over financial reporting is effective.
The New York Stock Exchange As a foreign issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the “NYSE”), the company is not required to comply with all the NYSE standards applicable to US domestic companies (the “NYSE Standards”) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards. As a foreign private issuer, the company must, however, comply fully with the provisions of the NYSE Standards that relate to the composition, responsibilities and operation of audit committees. These provisions incorporate the relevant rules concerning audit committees of the Exchange Act.
At 31 December 2013, HMT’s holding in the company’s ordinary shares was 63.9% and its economic interest was 80.2%.
Risk factors The Group’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Certain risk factors the Group faces are summarised in the Business review on pages 107 and 108. Fuller details of these and other risk factors are set out on pages 523 to 536.
The reported results of the Group are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of the Group’s critical accounting policies and key sources of accounting judgments are included in Accounting policies on pages 386 to 389.
The Group’s approach to risk management, including its financial risk management objectives and policies and information on the Group’s exposure to price, credit, liquidity and cash flow risk, is discussed in the Business review:risk and balance sheet management.
Financial performance A review of the Group's performance during the year ended 31 December 2013, including details of each division, and the Group's financial position as at that date is contained in the Business review on pages 109 to 168.
On 26 February 2014 the Group announced that it had entered into a placing agreement to complete the sale of its remaining interest in DLG (except for 4.2 million shares held to satisfy long term incentive plan awards granted by the Group to DLG management). Accordingly, on settlement of the placing, the Group will have completed the disposal of DLG as required by the European Commission.
Strategic plan Citizens Financial Group In February 2013, the Group announced that it would commence work on a partial flotation of RBS Citizens Financial Group, Inc and in November 2013 confirmed that a partial initial public offering is now planned for 2014. The Group intends to fully divest the business by the end of 2016. The sale of RBS Citizens Financial Group, Inc is the cornerstone of the Group’s new capital plan. The Group has appointed advisers and this is on schedule for later this year.
RBS Capital Resolution In November 2013, the Group announced the creation of RBS Capital Resolution (RCR), to manage a pool of assets with particularly high long term capital intensity and/or potentially volatile outcomes in stressed environments. RCR became operational on 1 January 2014 with a portfolio of £29 billion assets. The RCR Board Oversight Committee has been established to provide oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles. It reports to the Board on its own activities and recommends changes, where appropriate, to RCR strategy.
Strategic review In November 2013, the Group announced that it was undertaking a comprehensive business review of its customer-facing businesses, IT and operations and organisational and decision making structures. As described on pages 8 and 9, the Group has announced the results of its Strategic review, resulting in it being realigned into three businesses: Personal & Business Banking, Commercial & Private Banking, and Corporate & institutional Banking. In addition, the Group will be rationalising and simplifying its systems, based on a target architecture with improved resilience.
Employees As at 31 December 2013, the Group employed 118,600 (full-time equivalent basis) throughout the world. Details of employee related costs are included in Note 3 on the consolidated accounts.
Employee learning and development The Group maintains a strong commitment to providing all its employees with the opportunity to grow through learning and development, which in turn helps to achieve business objectives and drive excellent customer service. Supporting the professionalisation of our front line staff, just over 18,000 customer facing employees are now part of accreditation programmes aligned to the Chartered Banker professional standards. This helps our employees deliver the best service to our customers whilst working towards a recognised professional standard.
Employee communication Employee engagement is encouraged through a range of communication channels, at both local and Group level. These channels provide access to news and information in a number of ways, including the intranet, magazines, video, team meetings led by line managers, briefings held by senior managers and regular dialogue with employees and employee representatives.
Employee consultation The Group recognises employee representatives such as trade unions and work councils in a number of businesses and countries.
The Group has a European Employee Council that provides an opportunity for elected representatives and management to discuss developments in the Group's European operations.
Diversity and inclusion During 2013, the Group executive continued its commitment to making workplace policies, processes and experiences inclusive for staff, customers and stakeholders.
Performance on gender diversity is monitored and reviewed at Group and local level and RBS remains supportive of the recommendations of Lord Davies’ Report. There are currently three female directors on the Board out of a total of eleven, which exceeds Lord Davies’ aspirational target of 25 per cent female Board representation. Further information on male/female representation at various levels of employment in the Group is included in the Strategic report on page 33.
Further details on the Board diversity policy can be found at rbs.com>about us.
This year the business has been recognised for its work on Equality, Diversity and Inclusion by achieving platinum ranking from Opportunity Now (gender), one of only a few organisations to achieve this; achieving Silver for Race for Opportunity (race); and securing a position in the Working Families Top 10.
Wellbeing Ensuring the wellbeing of employees is an important responsibility for the Group.
A wide range of health benefits and services is in place to help employees maintain good physical and psychological health, and support them if they do become unwell. We continue to enhance and promote these services, targeting those issues that we know affect our employee's ability to bring the best of themselves to work. In 2013, we made Lifematters, the Group's Employee Assistance Programme, even more accessible with the introduction of our Lifematters mobile App.
Code of conduct The code of conduct was fundamentally revised in 2013. How we behave forms the character of our company and dictates how others see us. "Our Code" reflects our values and applies to everyone who works for RBS. It lets everyone know what to expect of each other, what to do when unsure of a decision, and where to go for advice when needed.
The Group Sustainability Committee is responsible for overseeing and challenging how management is addressing sustainability and reputation issues relating to all stakeholder groups and reports to the Board. For more information on the Committee, see pages 64 and 65.
Having reviewed the Group’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that the Group and the company will continue in operational existence for the foreseeable future. Accordingly, the financial statements of the Group and of the company have been prepared on a going concern basis.
BBA disclosure code The Group’s 2013 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers' Association in 2010.The Code sets out five disclosure principles together with supporting guidance. The principles are that the Group and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
During 2013, the company allotted and issued a total of 78.6 million new ordinary shares of £1 each for the purposes of ensuring 2013 coupon payments on discretionary hybrid capital securities were partly neutralised from a Core Tier 1 capital perspective. The shares were allotted to UBS AG at the subscription prices and determined by reference to the average market prices during the sale periods set out below.
The rights and obligations attaching to the company’s ordinary shares and preference shares are set out in the company’s Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at rbs.com>about us.
Under the rules of certain employee share plans, eligible employees are entitled to acquire shares in the company, and shares are held in trust for participants by The Royal Bank and Ulster Bank Dublin Trust Company as Trustees. Voting rights are exercised by the Trustees on receipt of participants’ instructions. If a participant does not submit an instruction to the Trustee no vote is registered.
Joe MacHale and Art Ryan stepped down from the Board on 14 May 2013 and 30 September 2013 respectively.
Stephen Hester and Bruce Van Saun stepped down from the Board on 30 September 2013.
Ross McEwan and Nathan Bostock were appointed to the Board on 1 October 2013. Nathan has since confirmed his resignation although his leaving date is still to be agreed.
All directors of the company are required to stand for election or reelection annually by shareholders at the Annual General Meeting.
Post balance sheet events Other than those matters detailed in Note 42 on the consolidated accounts, there have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
Shareholdings The table below shows shareholders that have notified the Group that they hold more than 3% of the total voting rights of the company at 31 December 2013.
On 8 January 2014, the Group was notified that Her Majesty’s Treasury’s shareholding of ordinary shares as at 31 December 2013 represented 63.9% of the total voting rights. The decrease was as a result of a change in the total voting rights.
Political donations At the Annual General Meeting in 2013, shareholders gave authority under Part 14 of the Companies Act, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2013, the Group made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that the Group’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2014.
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 366 to 369.
In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.
Board of directors Chairman Executive directors Non-executive directors Philip Hampton Ross McEwan
101 Presentation of information 103 Forward-looking statements 104 Description of business 106 Competition 107 Risk factors 109 Key financials 110 Summary consolidated income statement 111 Results summary 115 Analysis of results 129 Divisional performance 160 RBS Capital Resolution 164 Consolidated balance sheet 167 Cash flow 168 Capital resources 169 Reconciliations of managed to statutory income statements 172 Analysis of balance sheet pre and post disposal groups 174 Risk and balance sheet management
In the Report and Accounts, and unless specified otherwise, the term ‘company’ or ‘RBSG’ means The Royal Bank of Scotland Group plc, ‘RBS’, ‘RBS Group’ or the ‘Group’ means the company and its subsidiaries, ‘the Royal Bank’ or ‘RBS plc’ means The Royal Bank of Scotland plc and ‘NatWest’ means National Westminster Bank Plc.
The geographic analysis in the Business Review, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas – unless indicated otherwise. ‘UK’ in this context includes transactions conducted through the offices in the UK which service international banking transactions.
International Financial Reporting Standards As required by the Companies Act 2006 and Article 4 of the European Union IAS Regulation, the consolidated financial statements of the Group are prepared 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 (together ‘IFRS’). They also comply with IFRS as issued by the IASB.
The ceding of control following the partial disposal of the Group’s shareholding in Direct Line Group (DLG) has resulted in the Group no longer treating DLG as an operating segment. Consequently, prior period data for 2012 and 2011 on a managed basis (including disclosures relating to our Core business and segmental analysis) have been restated to exclude DLG. These restatements resulted in a decrease in Group operating profit of £398 million for the year ended 31 December 2012 and £477 million for the year ended 31 December 2011. They have no impact on the Group's statutory results.
Revisions Direct Line Group The Group sold the first tranche of ordinary shares representing 34.7% of the share capital of DLG in October 2012 via an Initial Public Offering. On 13 March 2013, the Group sold a further 16.8% of ordinary shares in DLG and ceded control. This fulfilled the Group’s plan to cede control of DLG by the end of 2013. On 20 September 2013, the Group sold a further 20% of ordinary shares in DLG which is a step toward complete disposal by the end of 2014, as required by the European Commission. At 31 December 2013, the Group held 28.5% of the share capital in DLG.
In accordance with IFRS 5, DLG was classified as a discontinued operation in 2012. From 13 March 2013, DLG was classified as an associate and at 31 December 2013, the Group’s interest in DLG was transferred to disposal groups.
Implementation of IAS 19 ‘Employee Benefits’ (revised) The Group implemented IAS 19 with effect from 1 January 2013. IAS 19 requires: the immediate recognition of all actuarial gains and losses; interest cost to be calculated on the net pension liability or asset at the long-term bond rate, such that an expected rate of return will no longer be applied to assets; and all past service costs to be recognised immediately when a scheme is curtailed or amended. Implementation of IAS 19 resulted in an increase in the loss after tax of £84 million for the year ended 31 December 2012 and £154 million for the year ended 31 December 2011. This also resulted in an increase in the loss per ordinary and B share of 0.8p for the year ended 31 December 2012 and 1.4p for the year ended 31 December 2011. Prior periods have been restated accordingly.
Implementation of IFRS 10 ‘Consolidated Financial Statements’ The Group implemented IFRS 10 with effect from 1 January 2013. IFRS 10 adopts a single definition of control: a reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity so as to vary returns for the reporting entity. IFRS 10 requires retrospective application. Following implementation of IFRS 10, certain entities that have trust preferred securities in issue are no longer consolidated by the Group. As a result there has been a reduction in noncontrolling interests of £0.5 billion with a corresponding increase in Owners’ equity (Paid-in equity); prior periods have been restated accordingly.
United Kingdom (UK), the European Union (EU) and the United States (US); the implementation of key legislation and regulation including the UK Financial Services (Banking Reform Act) 2013 and the proposed EU Recovery and Resolution Directive; the ability to access sufficient sources of capital, liquidity and funding when required; deteriorations in borrower and counterparty credit quality; litigation, government and regulatory investigations including investigations relating to the setting of LIBOR and other interest rates and foreign exchange trading and rate setting activities; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgage-backed securities in the US; the extent of future write-downs and impairment charges caused by depressed asset valuations; the value and effectiveness of any credit protection purchased by the Group; unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices and basis, volatility and correlation risks; changes in the credit ratings of the Group; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; the ability of the Group to attract or retain senior management or other key employees; regulatory or legal changes (including those requiring any restructuring of the Group’s operations) in the UK, the US and other countries in which the Group operates or a change in UK Government policy; changes to regulatory requirements relating to capital and liquidity; changes to the monetary and interest rate policies of central banks and other governmental and regulatory bodies; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; impairments of goodwill; pension fund shortfalls; general operational risks; HM Treasury exercising influence over the operations of the Group; reputational risk; the conversion of the B Shares in accordance with their terms; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; and the success of the Group in managing the risks involved in the foregoing.
In February 2013, the Group announced that it would commence work on a partial flotation of RBS Citizens and in November 2013 confirmed that a partial initial public offering is now planned for 2014. The Group intends to fully divest the business by the end of 2016.
A new strategy for the Markets division was announced in June 2013 enabling RBS to concentrate on its core customers’ needs where the Markets business is strongest. Markets is now focused on our core fixed income capabilities across rates, foreign exchange, asset backed products, credit and debit capital markets, while de-emphasising some more capital intensive structured product areas.
Central Functions comprises Group and corporate functions, such as treasury, finance, risk management, compliance, legal, communications and human resources. The Centre manages the Group's capital resources and Group-wide regulatory projects and provides services to the operating divisions.
Non-Core Division managed separately assets that the Group intended to run off or dispose of. The division contained a range of businesses and asset portfolios primarily from the legacy GBM businesses, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also included a number of other portfolios and businesses including regional markets businesses that the Group had concluded were no longer strategic.
Business Services supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. Business Services drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group's purchasing power and is the Group's centre of excellence for managing large-scale and complex change. For reporting purposes, Business Services costs are allocated to the divisions above. It is not deemed a reportable segment.
Business divestments To comply with the European Commission State Aid requirements the Group agreed a series of restructuring measures to be implemented over a four year period from December 2009. These include the divestment of Direct Line Insurance Group plc, the sale of 80.01% of the Group’s Global Merchant Services business (completed in 2010) and the sale of substantially all of the RBS Sempra Commodities joint venture business (largely completed in 2010), as well as the divestment of the RBS branchbased business in England and Wales and the NatWest branches in Scotland, along with the direct SME customers across the UK (“UK branch-based businesses”).
In March 2013 and September 2013, the Group sold a further 16.8% and 20% respectively of the total issued share capital in Direct Line Insurance Group plc (DLG). This followed the sale in October 2012 via an initial public offering of 520.8 million ordinary shares representing 34.7% of the total issued share capital. At 31 December 2013, the Group held 28.5% of the issued ordinary share capital of DLG.
The review concluded that the effort, risk and expense involved in the creation of an external bad bank could not be justified and consequently RBS decided to create an internal ‘bad bank’, RBS Capital Resolution (RCR), to manage these assets down so as to release capital. RCR brings assets under common management and increases focus on the run down.
Strategic review In November 2013, the Group announced that it was undertaking a comprehensive business review of its: Customer-facing business, IT and operations and Organisational and decision making structures.
As described on pages 8 and 9, the Group has announced the results of its Strategic review, resulting in it being realigned into three businesses: Personal & Business Banking, Commercial & Private Banking, and Corporate & institutional Banking. In addition, the Group will be rationalising and simplifying its systems, based on a target architecture with improved resilience.
Competition for corporate and institutional customers in the UK and abroad is from UK banks and from large foreign universal banks that offer combined investment and commercial banking capabilities. In addition, the Group’s Markets division faces strong competition from dedicated investment banks. In asset finance, the Group competes with banks and specialist asset finance providers, both captive and non-captive. In European and Asian corporate and institutional banking markets the Group competes with the large domestic banks active in these markets and with the major international banks.
In the United States, RBS Citizens competes in the New England, MidAtlantic and Mid-West retail and mid-corporate banking markets with local and regional banks and other financial institutions. The Group also competes in the US in large corporate lending and specialised finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US. The economic recovery in the US is proving weaker than expected and loan demand is weak in Citizens’ markets.
• The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees, and it may suffer if it does not maintain good employee relations.
• The Group’s ability to meet its obligations including its funding commitments depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a reasonable cost due to increased regulatory constraints, could adversely affect the Group’s financial condition and results of operations. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government’s credit ratings which would be likely to be negatively impacted by political events, such as an affirmative outcome of the referendum for the independence of Scotland.
• Operational and reputational risks are inherent in the Group’s businesses.
Risk factors continued • The Group is highly dependent on its information technology systems and has been and will continue to be subject to cyber attacks which expose the Group to loss of customer data or other sensitive information, and combined with other failures of the Group’s information technology systems, hinder its ability to service its clients which could result in long-term damage to the Group’s business and brand.
Group it may be able to exercise a significant degree of influence over the Group including on dividend policy, the election of directors or appointment of senior management or limiting the Group’s operations. The offer or sale by the UK Government of all or a portion of its shareholding in the company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the Group from the Official List.
• Recent developments in regulatory or tax legislation and any further significant developments could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.
Key financials Managed Statutory 2013 2012* 2011* 2013 2012* 2011* for the year ended 31 December £m £m £m £m £m £m
Basic loss per ordinary and equivalent B share from continuing operations (pence) (81.3p) (54.5p) (22.7p) (81.3p) (54.5p) (22.7p) Adjusted (loss)/earnings per ordinary and equivalent B share from continuing operations (pence) (5) (38.3p) 4.3p (2.7p) n/a n/a n/a *Restated – see page 102.
Managed and Statutory 2013 2012 2011 At 31 December £m £m £m
(3) Impairment losses on a managed basis excludes sovereign debt impairment and related interest rate hedge adjustments. (4) Cost:income ratio on a managed basis represents operating expenses excluding PPI costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, write-down of goodwill and other intangible assets, amortisation of purchased intangible assets, bank levy, bonus tax and RFS MI, expressed as a percentage of total income as defined in (1) above. On a statutory basis, cost:income ratio represents operating expenses expressed as a percentage of total income.
Managed Statutory 2013 2012* 2011* 2013 2012* 2011* £m £m £m £m £m £m
Profit/(loss) from discontinued operations, net of tax - Direct Line Group 127 (184) 301 127 (184) 301
Profit/(loss) from discontinued operations, net of tax 148 (172) 348 148 (172) 348
Loss attributable to ordinary and B shareholders (8,995) (6,055) (2,151) (8,995) (6,055) (2,151)
Basic loss per ordinary and equivalent B share from continuing operations (81.3p) (54.5p) (22.7p) (81.3p) (54.5p) (22.7p)
Note: (1) Adjusted earnings per ordinary and equivalent B share excludes the participation rights of the dividend access share.
Total income Total income declined by 12% to £19,442 million, principally driven by lower income in Markets reflecting the smaller balance sheet, reduced risk levels and the uncertain market environment.
Non-interest income Non-interest income decreased by 21% to £8,450 million in 2013 principally driven by lower income from trading activities in Markets as the division managed down the scale of the balance sheet and reduced risk. This was partially offset by a £506 million improvement in Non-Core trading losses. Operating lease and rental income fell by £392 million, largely reflecting the disposal of RBS Aviation Capital in 2012.
Operating expenses Total operating expenses fell by 4% to £13,313 million, with staff costs down 7% as headcount fell by 4,300 to 114,900, principally in UK Retail, Markets and Non-Core. Markets operating expenses decreased by 11% to £2,610 million and Non-Core by 36% to £605 million, driven by exiting staff and lower central support requirements on run-down. Group cost: income ratio was up at 68%.
Impairment losses Impairment losses increased by 60% to £8,432 million from £5,279 million in 2012 primarily due to increased charges resulting from the establishment of RCR. Excluding the impact of RCR (£4,490 million), impairment losses fell by 25% to £3,942 million with significant improvements in Non-Core, Ulster Bank and UK Retail partially offset by increases in International Banking, US Retail & Commercial and Markets.
Loan impairments represented 2.0% of gross loans and advances to customers excluding reverse repos compared with 1.2% in 2012.
Results summary continued Non-operating items The continuing, albeit modest, strengthening of RBS’s credit profile resulted in a £120 million accounting charge in relation to own credit adjustments versus £4,649 million in 2012.
The gain on strategic disposals of £161 million primarily relates to the disposal of the Group’s remaining interest in WorldPay. In 2012 the gain of £113 million primarily related to the disposal of RBS Aviation Capital.
Interest Rate Hedging Products redress and related costs Following an industry-wide review in 2012 conducted in conjunction with the Financial Services Authority, a charge of £700 million was booked for redress in relation to certain interest-rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. In 2013, a further charge of £550 million was booked reflecting both higher volumes and anticipated redress payments, recalibration of our methodology based on experience during 2013, and additional administration charges.
Regulatory and legal actions Charges relating to regulatory and legal actions totalled £2,394 million compared with £381 million in 2012. These charges primarily relate to various claims and conduct related matters affecting Group companies, primarily those related to mortgage-backed securities and securities related litigation, following recent litigation settlements and regulatory decisions.
Tax The tax charge was £382 million in 2013 compared with £441 million in 2012. The tax charge for the year reflects losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), a reduction in the carrying value of the deferred tax asset in respect of UK losses and the effect of the reduction of 3% in the rate of UK corporation tax enacted in July 2013.
Total income Total income increased 10% to £19,757 million in 2013 primarily reflecting a lower accounting charge for own credit partially offset by lower income in Markets.
Net interest income Net interest income decreased by 4% to £10,981 million largely reflecting lower interest-earning asset balances partially offset by re-pricing initiatives.
Provision coverage of risk elements in lending was 64% (2012 - 52%).
Tax The tax charge for 2013 was £382 million (2012 - £441 million).
Loss per share Basic loss per ordinary and equivalent B share from continuing operations was 81.3p per share compared with 54.5p per share in 2012.
2012 compared with 2011 - managed Operating profit Group operating profit, was £2,952 million compared with £1,141 million in 2011. The improvement was driven by lower costs in Markets, reflecting reduced headcount and lower levels of variable compensation, and a better operating performance in Non-Core, where losses fell by 32%. These improvements were partially offset by weaker performance in Retail & Commercial, as economic conditions remained difficult.
Net interest income Group net interest income declined by 7% to £11,417 million largely reflecting lower interest-earning asset balances. Group net interest margin (NIM) increased slightly, despite very low interest rates and strong deposit competition.
Impairments represented 1.2% of gross loans and advances excluding reverse repos compared with 1.5% in 2011.
Non-operating items The continuing strengthening RBS’s credit profile resulted in a £4,649 million accounting charge in relation to own credit adjustments versus a gain of £1,914 million in 2011. This reflected a tightening of more than 340 basis points in the Group’s credit spreads over the year.
The Asset Protection Scheme, which the Group exited from during the year, was accounted for as a credit derivative and movements in the fair value of the contract were taken as non-operating items. The APS fair value charge was £44 million in 2012 bringing the cumulative charge for the APS to £2.5 billion.
Integration and restructuring costs of £1,415 million increased by £394 million versus £1,021 million in 2011, primarily driven by costs incurred in relation to the strategic restructuring of Markets and International Banking (M&IB) that took place during 2012.
Results summary continued Tax The tax charge was £441 million in 2012, compared with £1,075 million in 2011. The high tax charge in the year reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), the reduction in the carrying value of deferred tax assets in Ireland in view of continuing losses, the reduction in the carrying value of deferred tax assets in Australia following the strategic changes to the Markets and International Banking businesses announced in January 2012 and the effect of the two reductions of 1% in the rate of UK corporation tax enacted in March 2012 and July 2012 on the net deferred tax balance.
Total income Total income decreased 27% to £17,941 million in 2012.
Loss per share Basic loss per ordinary and equivalent B share from continuing operations was 54.5p per share compared with 22.7p per share in 2011.
Analysis of results Net interest income Managed Statutory 2013 2012* 2011* 2013 2012 2011 £m £m £m £m £m £m
Gross yield on interest-earning assets of the banking business (6) 3.07 3.12 3.24 3.07 3.12 3.23 Cost of interest-bearing liabilities of the banking business (1.38) (1.49) (1.63) (1.38) (1.50) (1.62) Interest spread of the banking business (7) 1.69 1.63 1.61 1.69 1.62 1.61 Benefit from interest-free funds 0.32 0.29 0.28 0.31 0.30 0.28 Net interest margin of the banking business (8) 2.01 1.92 1.89 2.00 1.92 1.89
Total interest-earning assets - banking business (1,2,3,4,5) 650,448 21,051 3.24 - trading business (10) 278,975 Interest-earning assets 929,423 Non-interest-earning assets 605,732 Total assets 1,535,155
Liabilities Deposits by banks - UK 7,997 144 1.80 18,276 196 1.07
Customer accounts: demand deposits - UK 123,707 501 0.40 121,541 643 0.53
Customer accounts: savings deposits - UK 93,245 1,266 1.36 84,972 1,479 1.74
Total interest-earning assets - banking business (1,2,3,5) 651,338 21,044 3.23 - trading business (10) 278,975 Interest-earning assets 930,313 Non-interest-earning assets 604,842 Total assets 1,535,155
Analysis of change in net interest income - volume and rate analysis Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements. 2013 over 2012 - managed 2013 over 2012 - statutory Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average Average Net Average Average Net volume rate change volume rate change £m £m £m £m £m £m
Loans and advances to customers UK (873) 569 (304) (873) 569 (304)
Total interest receivable of the banking business UK (1,032) 346 (686) (1,032) 346 (686)
Customer accounts: demand deposits UK (12) 154 142 (12) 154 142
Customer accounts: other time deposits UK 112 (23) 89 112 (23) 89
Internal funding of trading business UK (39) (45) (84) (39) (45) (84)
Movement in net interest income UK (554) 707 153 (554) 707 153
2012 over 2011 - managed 2012 over 2011 - statutory Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average Average Net Average Average Net volume rate change volume rate change £m £m £m £m £m £m
Interest-earning assets Loans and advances to banks UK 33 (62) (29) 33 (62) (29)
Loans and advances to customers UK (633) (14) (647) (633) (14) (647)
Customer accounts: demand deposits UK (50) 73 23 (50) 73 23
Customer accounts: savings deposits UK (134) (168) (302) (134) (168) (302)
Non-interest income Managed (1) Statutory 2013 2012* 2011* 2013 2012 2011 £m £m £m £m £m £m
Note: (1) Managed basis excludes movements in own credit adjustments, Asset Protection Scheme, gain on redemption of own debt, strategic disposals and RFS MI.
A £392 million reduction in operating lease income largely reflects the disposal of RBS Aviation Capital in Q2 2012. This was partially offset by lower depreciation.
2013 compared with 2012 - statutory Non-interest income increased by £2,237 million to £8,776 million primarily due to the lower accounting charge for improved own credit of £120 million compared with £4,649 million in 2012.
Net fees and commissions fell by 7% principally reflecting declines in Markets, UK Corporate, International Banking and Non-Core.
Income from trading activities increased by £1,010 million to £2,685 million principally due the lower charge in relation to own credit adjustment and increase in Non-Core partially offset by a decline in Markets, where income from trading activities declined by £1,001 million as the division managed down the scale of the balance sheet and reduced risk.
2012 compared with 2011 - managed Non-interest income was down 4% at £10,668 million with higher profits on available-for-sale bond disposals in Group Treasury more than offset by a 10% decline in fees and commissions, largely due to a decline in UK Retail fees as a result of weaker consumer spending volumes,.
Operating expenses Managed (1) Statutory 2013 2012* 2011* 2013 2012* 2011* £m £m £m £m £m £m
Write-down of goodwill — — — 1,059 18 80 Write-down of other intangible assets — — — 344 106 —
Staff costs as a percentage of total income 35% 33% 34% 36% 46% 35%
Note: (1) Managed basis excludes PPI costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, bank levy, bonus tax and RFS MI.
2013 compared with 2012 - managed Operating expenses decreased by £541 million, 4%, to £13,313 million. Markets decreased by £327 million, 11%, to £2,610 million and Non-Core by £339 million, 36%, to £605 million, driven by lower staff numbers and reduced central support requirements on run-down.
Staff expenses were down by 7%, at £6,882 million, with headcount down by 4,400, principally in UK Retail, Non-Core and Markets.
Charges of £2,394 million of regulatory and litigation provisions were recorded during the year primarily relating to mortgage-backed and other securities litigation in the US.
Write-down of goodwill and other intangible assets was £1,403 million and includes £1,059 million relating to the International Banking division following an impairment review.
Charges of £550 million were booked for Interest Rate Hedging Product redress and administration costs, down £150 million from 2012. The cumulative provision was £1.25 billion at 31 December 2013.
2012 compared with 2011 - managed Operating expenses fell by £992 million, or 7%, with staff costs down 9% (but broadly stable as a percentage of total income) as headcount fell by 8,300 to 119,200. The decline in expenses was largely driven by NonCore run-down and lower variable compensation (particularly in Markets), including bonus award reductions and clawbacks following the settlements reached with UK and US authorities in relation to attempted LIBOR manipulation. The run-off of exited businesses in Markets and International Banking, following the restructuring announced in January 2012, and simplification of processes and headcount reduction in UK Retail also yielded cost benefits.
Business Services costs were down 6% in the year, reflecting increased benefits from earlier cost saving programmes as a number of initiatives reached their full run rate. Technology Services costs were 8% lower and Corporate Services costs 4% lower. Headcount was 2% down on 2011.
2012 compared with 2011 - statutory Operating expenses increased by £599 million, or 3% primarily due to charges resulting from legacy conduct issues partially offset by Non-Core run-down and run-off of exited businesses in Markets and International Banking, following the restructuring announced in January 2012. Simplification of processes and headcount reduction in UK Retail also yielded cost benefits.
Integration costs of £106 million in 2011 primarily relate to RBS N.V. (formerly ABN AMRO) integration activity during the year, which is now largely complete.
Premises and equipment 9 1 (10) — Other administrative expenses 5 1 — 6 14 2 (10) 6
2013 compared with 2012 Restructuring costs were £489 million compared with £1,244 million in 2012. These costs primarily relate to the Retail transformation and the reduction in the size of Markets.
2012 compared with 2011 Restructuring costs were £1,244 million compared with £765 million in 2011. The increase was primarily driven by costs incurred in relation to the strategic restructuring of Markets and International Banking announced in January 2012.
Accruals in relation to restructuring costs are set out below. At Currency Charge Utilised At 1 January translation to income during 31 December 2013 adjustments statement the year 2013 £m £m £m £m £m
Staff costs - redundancy 434 4 137 (396) 179 Staff costs - other 111 1 57 (125) 44 Premises and equipment 289 — 112 (97) 304 Other administrative expenses 264 1 177 (228) 214 Depreciation and amortisation — — 6 (6) — 1,098 6 489 (852) 741
Premises and equipment 2 (2) 11 Other administrative expenses 77 62 50 *Restated - see page 102.
Accruals in relation to divestment costs are set out below. At Charge Utilised At 1 January to income during 31 December 2013 statement the year 2013 £m £m £m £m
Staff costs - redundancy 87 34 (104) 17 Staff costs - other 46 52 (96) 2 Premises and equipment — 2 (2) — Other administrative expenses 73 77 (137) 13 206 165 (339) 32
New impairment losses 8,688 5,620 7,964 8,688 5,620 9,234 Less: recoveries of amounts previously written-off (256) (341) (527) (256) (341) (527)
Notes: (1) Managed basis excludes sovereign debt impairment and related interest rate hedge adjustments. (2) Pertaining to the creation of RCR and related strategy.
Additional loan impairments arising from the RCR accelerated asset recovery strategy totalled £4,490 million, of which £3,118 million related to Non-Core, £892 million to Ulster Bank, £410 million to UK Corporate, £52 million to International Banking and £18 million to Markets.
Excluding the impact of the creation of RCR, Core Ulster Bank loan impairments fell by £482 million (35%) to £882 million, mainly as a result of continued improvement in retail mortgage debt-flow and in recovery trends. UK Retail loan impairments fell by £210 million (40%), primarily from lower default levels.
The actual tax charge differs from the expected tax credit computed by applying the standard rate of UK corporation tax as follows: Managed and statutory 2013 2012* 2011* £m £m £m
Expected tax credit 1,916 1,293 370 Sovereign debt impairment where no deferred tax asset recognised — — (275) Other losses in year where no deferred tax asset recognised (879) (511) (530) Foreign profits taxed at other rates (196) (383) (417) UK tax rate change impact (313) (149) (112) Unrecognised timing differences (8) 59 (20) Non-deductible goodwill impairment (247) — — Items not allowed for tax - losses on disposals and write-downs (20) (49) (72)
Non-taxable items - gain on sale of RBS Aviation Capital — 26 — - gain on sale of WorldPay (Global Merchant Services) 37 — 12 - other non-taxable items 171 104 242 Taxable foreign exchange movements (25) (1) 4 Losses brought forward and utilised 36 2 2 Reduction in carrying value of deferred tax asset in respect of losses in - UK (701) — —
Adjustments in respect of prior years 251 (47) 199 Actual tax charge (382) (441) (1,075)
2013 compared with 2012 - managed and statutory The tax charge in the year ended 31 December 2013 reflects losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), a reduction in the carrying value of the deferred tax asset in respect of UK losses and the effect of the reduction of 3% in the rate of UK corporation tax enacted in July 2013.
Divisional performance The results of each division on a managed basis are set out below. The results are stated before movements in own credit adjustments, Payment Protection Insurance (PPI) costs, Interest Rate Hedging Products (IRHP) redress and related costs, regulatory and legal actions, sovereign debt impairment and related interest rate hedge adjustments, integration and restructuring costs, gain on redemption of own debt, write-down of goodwill, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals, bank levy, bonus tax, write-down of other intangible assets and RFS MI. The impact of the establishment of RBS Capital Resolution is included within the ‘managed basis’ results.
Business Services directly attributable costs have been allocated to the operating divisions, based on their service usage. Where services span more than one division an appropriate measure is used to allocate the costs on a basis which management considers reasonable. Business Services costs are fully allocated and there are no residual unallocated costs.
As discussed on page 102, following a share sale in March 2013, Direct Line Group is no longer an operating segment. Prior periods have been restated accordingly.
Group Centre directly attributable costs have been allocated to the operating divisions, based on their service usage. Where services span more than one division, the costs are allocated on a basis management considers reasonable. The residual unallocated costs remaining in the Group Centre relate to volatile corporate items that do not naturally reside within a division.
Operating (loss)/profit - managed basis (2,303) 2,952 1,141 Own credit adjustments (120) (4,649) 1,914 Payment Protection Insurance costs (900) (1,110) (850) Interest Rate Hedging Products redress and related costs (550) (700) — Regulatory and legal actions (2,394) (381) — Sovereign debt impairment and related interest rate hedge adjustments — — (1,268) Integration and restructuring costs (656) (1,415) (1,021) Gain on redemption of own debt 175 454 255 Write-down of goodwill (1,059) (18) — Asset Protection Scheme — (44) (906) Amortisation of purchased intangible assets (153) (178) (222)
Write-down of other intangible assets (344) (106) — RFS Holdings minority interest 100 (20) (7) Operating loss before tax - statutory basis (8,243) (5,277) (1,396)
Divisional performance continued 2013 2012 2011 Impairment losses/(recoveries) by division £m £m £m
UK Retail 324 529 788 UK Corporate 1,188 838 793 Wealth 29 46 25 International Banking 229 111 168 Ulster Bank 1,774 1,364 1,384 US Retail & Commercial 156 91 326 Retail & Commercial 3,700 2,979 3,484 Markets 92 37 38 Central items 64 40 (2)
UK Retail 3.57 3.58 3.95 UK Corporate 3.07 3.06 3.06 Wealth 3.56 3.73 3.23 International Banking 1.59 1.64 1.73 Ulster Bank 1.91 1.88 1.87 US Retail & Commercial 2.95 2.97 3.03 Retail & Commercial 2.94 2.92 2.96 Non-Core (0.19) 0.31 0.60
Note: (1) Pertaining to the creation of RCR and related strategy.
Employee numbers at 31 December (full time equivalents rounded to the nearest hundred) 2013 2012 2011
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages — 0.1% 0.2%
Risk elements in lending 3.6 4.6 4.6 Provision coverage (2) 59% 58% 58%
Customer deposits - current accounts 32.6 28.9 26.8 - savings 82.3 78.7 75.1 Total customer deposits 114.9 107.6 101.9
In March 2013 UK Retail announced its strategy to become a simpler and more customer-focused business. Investment of £700 million over the next 3-5 years has been committed to build the best retail bank in the UK. Good progress has been made with £180 million of investment during 2013 through a number of initiatives directed at enhancing customer service and simplification of products and services. These have included: • Improvements to Mobile and Digital Banking which continue to evolve in line with how customers prefer to conduct their business. One example of this is the enhancements in the mobile application allowing customers to pay their mobile phone contacts and obtain cash without using their debit card with the award winning ‘Get Cash’. Investment in digital products and services continued in 2013, with 50% of eligible customers now banking online or on mobile. We currently have 5.6 million online users and 2.9 million customers using our mobile app with over 100 million transactions made in 2013. Branch counter transactions were 31 million or 11% lower across the same period. In addition, UK Retail now has over 2.5 million active mobile users, using the service 28 times a month on average. Mobile net promoter scores continued to increase in 2013.
• During the year UK Retail invested in the introduction of a new integrated telephony system, increased training and the professional development of our staff. We spent more time on each call to support excellent customer service and to promote relevant offerings, including self service.
• During Q1 2013 mortgage advisors attended extensive training courses to help ensure customers receive the best possible outcome to meet their needs. The training affected balance growth during H1 2013; however, application volumes have rebounded quickly with the launch of competitively priced products and the ‘NatYes’ and ‘RBYES’ advertising campaigns leading to H2 2013 applications being 30% higher than H1 2013. RBS was the first bank to be ready to deliver the second phase of the UK Government’s Help To Buy scheme, launched in early October 2013. Extended opening hours in branches helped to deliver more than 3,000 approvals assisting young people and families across Britain buy their home. Gross mortgage lending increased 3% year-on-year to £14.3 billion with Q4 2013 25% higher than Q4 2012.
• A major branch refurbishment programme is under way with over one quarter completed. 350 branches now have a digital banking zone where customers can use in-branch technology to access online banking. Wi-Fi in-branch allows customers to access their account via their own devices.
In 2014, UK Retail will aim to maintain a leading position in digital banking, launching new capability and customer proposition through mobile devices.
2013 compared with 2012 Operating profit increased by 3% to £1,943 million driven by a 39% decline in impairment losses. Net interest income was broadly stable, though investment advice income was adversely impacted following changes introduced by the Retail Distribution Review (RDR). Costs increased primarily because of a higher FSCS levy and other regulatory charges totalling £116 million in the year, conduct-related provisions of £63 million and additional technology investment of £45 million.
Impairments declined by 39% to £324 million due to lower customer defaults across all products reflecting continued improvement in asset quality.
Risk-weighted assets declined by 4% to £43.9 billion largely reflecting balance reductions across the unsecured portfolio and quality improvements.
2012 compared with 2011 Operating profit fell by 6% as a 10% decline in income was only partly offset by lower costs, down 6%, and improved impairment losses, down 33%.
• lower investment income as a result of weak customer demand and less advisor availability due to restructuring and retraining in preparation for regulatory changes in 2013.
Risk-weighted assets continued to improve over the year as the portfolio mix adjusted, with increases in lower-risk secured mortgages, decreases in unsecured lending and further quality improvements across the book.
Net interest income 2,874 2,974 3,092 Net fees and commissions 1,310 1,365 1,375 Other non-interest income 283 384 396 Non-interest income 1,593 1,749 1,771
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Financial institutions 0.2% 0.3% 0.3% Hotels and restaurants 1.1% 0.9% 1.0% Housebuilding and construction 1.3% 4.2% 2.6%
Loans and advances to customers (gross) - financial institutions 5.5 5.8 5.8 - private sector education, health, social work, recreational and community services 8.5 8.7 8.7 - wholesale and retail trade, repairs 8.2 8.5 8.7 - asset and invoice finance 11.7 11.2 10.4
Notes: (1) Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions). (2) Provision coverage percentage represents loan impairment provisions as a percentage of risk elements in lending.
As part of this commitment the Bank appointed Sir Andrew Large to undertake a thorough and independent review of the lending standards and practices used by RBS and NatWest. UK Corporate will implement all of the Independent Lending Review’s recommendations and is adopting a revised strategy and capabilities to enhance support to SMEs and the wider UK economic recovery while maintaining sound lending practices.
Expenses, increased 6% to £2,219 million, primarily as a result of remediation provisions of £68 million, an increased share of branch network costs and an uplift in investment spend. This was offset by the reduction in operating lease depreciation, a decline in Markets revenue share related costs and lower staff incentive expenditure.
Whilst full year impairments include the additional impact of increased impairment losses related to the creation of RCR (£410 million), underlying impairments improved by £60 million, or 7%, to £778 million due to lower individual and collectively assessed provisions in the SME business, partially offset by higher individual cases in the mid-to-large corporate business.
2012 compared with 2011 With economic factors continuing to suppress business confidence, 2012 saw lower income and operating profit. Nonetheless, the business delivered a return on equity of 14.5%, slightly below the prior year and comfortably ahead of the cost of capital.
Core lending balances were up £200 million, excluding the property, housebuilding and construction sectors. The loan:deposit ratio decreased by 400 basis points, principally reflecting deposit growth and portfolio derisking, particularly in commercial real estate. The Group took part in a number of Government initiatives, seeking responsibly to stimulate additional credit demand in the face of continued customer deleveraging and low business confidence levels.
Net interest income 674 720 645 Net fees and commissions 355 366 375 Other non-interest income 64 84 84 Non-interest income 419 450 459
Performance ratios Return on equity (1) 12.0% 13.1% 12.8% Net interest margin 3.56% 3.73% 3.23% Cost:income ratio 77% 75% 76%
Notes: (1) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions). (2) Provision coverage percentage represents loan impairment provisions as a percentage of risk elements in lending.
Following the deposit re-pricing strategy implemented in the second half of 2013 deposit margins have significantly improved. Lending volumes have remained resilient despite pay-downs in line with best-advice policy under RDR. In addition, a new international trust strategy was announced, strengthening the client offering by positioning it as a marketleading, client-centric trust business. This was achieved by the creation of a centre of excellence in Jersey, accompanied by withdrawal from the Cayman Islands and restructuring of the Geneva trust business.
2013 compared with 2012 Operating profit was 9% lower at £221 million, driven by lower income partially offset by a decrease in expenses and impairment losses.
Non-interest income fell by 7% to £419 million due to the disposal of the Latin American, Caribbean and African businesses for a profit of £15 million in H1 2012 together with a decline in fee income in the International business.
Expenses were 4% lower at £843 million as a result of reduced headcount, tight discretionary cost management and the non-recurrence of two regulatory fines totalling £26 million incurred during 2012. This was partially offset by a one-off UK tax treaty charge in the International business.
Expenses were £44 million or 5% higher at £881 million, with significant investment in change programmes, including the development of new products and services capability and the implementation of RDR in the UK.
Net interest income 713 922 1,199 Non-interest income 1,135 1,200 1,356
Analysis of impairments/(recoveries) by sector Manufacturing and infrastructure 147 42 254 Property and construction 15 7 17 Transport and storage 55 (3) 11 Telecommunications, media and technology (7) 12 — Banks and financial institutions (15) 43 (42)
Capital and balance sheet Loans and advances to customers (gross) (1) 36.0 42.2 57.7 Loan impairment provisions (0.3) (0.4) (0.8) Net loans and advances to customers 35.7 41.8 56.9 Loans and advances to banks 8.0 4.8 3.4
Customer deposits (excluding repos) 39.3 46.2 45.1 Bank deposits (excluding repos) 6.5 5.6 11.4 Loan:deposit ratio (excluding repos and conduits) 91% 91% 126%
International Banking provides for the needs of its customers through its offering of debt financing, risk management and transaction services across its network. Business conditions remain challenging as themes of low interest rates and margin compression continue. International Banking remained focused on cost discipline throughout 2013 and continued to strengthen its balance sheet. Despite credit model uplifts, risk-weighted assets reduced 6% year on year.
Survey, particularly in Europe, ranking #1 in the Netherlands, #2 in the UK and #2 in Western Europe. International Banking improved on last year’s performance in APAC, achieving a #8 ranking, and retained a #9 ranking in North America and a #6 ranking globally.
The Banker Investment Banking Awards 2013 providing a further indication that RBS is putting customers at the heart of its business.
• Loan portfolio decreased by 6%, in line with a smaller balance sheet.
Customer deposits declined by 15% in line with a change in Group funding strategy.
Return on equity was 4% or 5% excluding the impact of the accelerated RCR asset recovery strategy compared with 9% in 2012.
2012 compared with 2011 Operating profit decreased by £161 million as a decline in income was only partially mitigated by lower expenses and impairment losses.
• Cash management was broadly in line with the previous year.
• The restructuring in 2012 led to a reduction in activities undertaken in the division, which contributed to a decline in income.
Net interest income 631 649 736 Net fees and commissions 141 145 142 Other non-interest income 99 51 69 Non-interest income 240 196 211 Total income 871 845 947 Direct expenses - staff (239) (214) (225)
Profit before impairment losses 317 324 400 Impairment losses (1,774) (1,364) (1,384)
Analysis of income by business Corporate 315 360 435 Retail 408 360 428 Other 148 125 84 Total income 871 845 947
Analysis of impairments by sector Mortgages 235 646 570 Commercial real estate - investment 593 221 225 - development 153 55 99 Other corporate 771 389 434 Other lending 22 53 56 Total impairment losses 1,774 1,364 1,384
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 1.2% 3.4% 2.9% Commercial real estate - investment 17.4% 6.1% 5.8%
The creation of RCR will expedite the resolution of underperforming, capital intensive assets and allow Ulster Bank to focus on building a stronger core business for the future. The creation of RCR resulted in additional charges of £911 million in Ulster Bank’s results in Q4 2013.
Simplifying Banking Ulster Bank delivered a number of improvements for personal and business customers in 2013: • The launch of initiatives such as “Get Cash”, “Pay Your Contacts”
and “Emergency Cash” provided a new range of simple and convenient services for customers to access their cash and make payments online and via mobile.
• Further development of online and mobile banking for business customers focused on providing an efficient and effective day-to-day banking service. Enhancements during 2013 included a speedy and simplified account application process; registration for Anytime Banking via telephone; ability to manage personal and business accounts together and access to extended transaction history.
• The efficiency and effectiveness of Ulster Bank’s digital offering was evidenced by a 55% increase in mobile app registrations and more than 100 million transactions were carried out via digital channels during 2013. Over 315,000 customers regularly use mobile app banking services and 640,000 customers make regular use of online Anytime banking services.
• The ‘One Week in June’ initiative raised £430,000 for a number of
Committee, Ulster Bank ATMs, branches and online banking facilitated donations to the Philippines Typhoon emergency appeals.