We have met, and in some cases exceeded, the targets for the second year of our Strategic Plan.
This general improvement must be viewed against a backdrop of financial market turbulence at various points in the year, especially in Europe. So while our expectation is that the return of economic growth in 2010 will be sustained in 2011, and that interest rates will gradually start to rise during the year, we are vigilant about the downside risks and the possibility of spill-over effects from political uncertainties in some countries and regions.
On lending, it is important that banks give customers confidence that requests for funds for viable businesses will be met. RBS has been active in support of our customers over the last two years of significant downturn. For example, we are on track to meet our current targets for UK lending availability, agreed in March 2010. In the UK, we lent £52 billion to businesses over the first eleven months of the March 2010 – February 2011 period, well ahead of our full year target of £50 billion. Over the same eleven month period we lent over £15 billion to mortgage customers, resulting in net balance growth of more than £8 billion, in excess of our full year mortgage net lending target of £8 billion.
We made a gross contribution of £3.9 billion to the UK Government in 2010. The bulk of this was taxes, including £1.5 billion paid on behalf of employees, directly or indirectly. We also paid around £1.5 billion fees, including £700 million for the Asset Protection Scheme.
Penny Hughes joined the Board on 1 January, as a Non-executive Director, and took over as Chair of our Remuneration Committee from 1 June 2010. Brendan Nelson was appointed as a Non-executive Director with effect from 1 April, and took over as Chair of the Group Audit Committee following the 2010 AGM.
Archie Hunter left the Board at the 2010 AGM after six years and I would like to thank him for his work as a director and Chair of the Audit Committee. The commitment he provided during a time of major changes on the Board was very professional and valuable.
Finally, Colin Buchan will stand down from the Board in the summer, after nine years. Again, his commitment as a director and, last year, as chairman of the Remuneration Committee, has been greatly appreciated by the Board.
Our goals Our overriding focus is on achieving three things: • to serve customers well; • to restore the Bank to undoubted standalone strength; and
Strategy RBS’s strategy, announced in 2009, remains our best route to achieving these goals. It is serving us well in meeting the twin challenges of continuing change in our external environment and the need for radical internal restructuring at RBS.
The new RBS is built upon customer franchises with substantial competitive strengths in their respective markets, our “Core” businesses. Each is being reshaped to provide improved and enduring performance. The Core businesses all generate strong value in their own right, and a still stronger, balanced and more valuable mix together. The business shape and new management disciplines we are establishing can drive RBS to success as a leading bank in its markets for many years to come.
2010 Results against goals 2010 was a year of good progress and the Group is on or ahead of its published goals for this stage of our Plan. There have been and still are challenges to face into, whether economic, regulatory or political. Our resilience to such events is increasing steadily.
Customers: We are completely clear – success in serving customers is the key to our business future. Overdue investment in service, technology and a changing cultural approach is starting to roll out across RBS. Most of our Core franchises showed gains on a variety of customer measures during the year though we are conscious that much remains to be done. It will take time for our actions to have full effect, in particular where business restructuring has been most marked.
Group Chief Executive’s review made – the “gold standard” we are targeting. Improvements in risk are also evident through reductions in single name and sectoral credit concentrations.
The RBS Core business posted operating profits of £7.4 billion and return on equity of 13%, above its cost of capital. Importantly the quality of results also improved. While still significantly impacted by high credit costs, low interest rates and other economic challenges, our Retail and Commercial businesses increased operating profits by 66% to £3.8 billion with a 10% ROE. Our Irish bank and our Insurance business remained in loss as a result of prior risk exposures which we are working down. Our investment banking arm, despite tough markets, posted £3.4 billion operating profits and a 17% ROE – a competitive result when compared with peers, though down from the record prior year. Adding the related parts of our GTS business gives still stronger returns for our wholesale client activity as a whole.
In Non-Core progress was also pleasing, though losses will continue in this division during the remaining Plan period as assets are sold and run down. Non-Core assets reduced by £63 billion to £138 billion during 2010, beating our targets. Losses narrowed sharply though they are still significant.
Regulation We support the revolution in regulatory standards that, when complete, and coupled with the dramatic industry changes taking place, will make for a safer financial services industry for everyone. But a safer economy also needs global macro-economic imbalances to be successfully addressed.
The Basel-led process seems likely to get to the right place on bank safety and there is good progress in the design of bank resolution and recapitalisation (“bail-in”) mechanisms, which should remove the need for future state capital support. The impact of these measures materially impacts bank costs and return prospects. These in turn impact cost and availability of customer service, including credit provision. There is an important balance to be struck by policy-makers.
Outlook RBS is on track to meet its ambitious goals. These goals set out the path for our recovery period but also establish the foundations for the “new” RBS to enjoy strong and enduring prospects well into the future. For 2011, we target continued progress toward published targets. We continue to prioritise risk reduction, strengthening of customer service and building the quality and quantity of Core profits.
And, as visible exemplars of the financial crisis, RBS remains vulnerable to “public mood”. The journey from “problem” to “opportunity” is important and our progress will aid customer trust, staff stability and investor confidence. In that context we hope that the opportunity to sell part of the UK Government’s shareholding becomes increasingly visible and appealing – a “win win” for the taxpayer and for RBS. That moment will be an emblem of our progress and, in some respects, of progress in the wider UK economy.
In conclusion, I would like to thank all of our staff, our shareholders and other stakeholders for their continued support as we build the new RBS.
x Can you explain the treatment of the APS and fair value of own debt? Our financial performance is affected by two items that do not reflect the day-to-day business of the Group – the Asset Protection Scheme and the fair value of own debt. Both can exhibit counter-cyclical behaviour, in that improving market conditions result in a charge, and vice versa.
The APS is a credit derivative and so must be accounted for at fair value; fluctuations in this value are reflected in the results. If market circumstances are getting better and credit spreads for the assets in the covered portfolio narrow, the value of the protection decreases and a loss is recognised. If spreads widen, the protection is more valuable, giving rise to a gain.
x What has been happening to margins, and why? We need to rebuild net interest margins (NIMs) if we are to produce adequate profits to service the capital our shareholders have invested in RBS. Encouragingly, we made further progress in 2010: the Group NIM
Progress on liability margins has been more difficult. This reflects strong competition for customer deposits, as the banking sector tries to narrow its funding gap, and the low interest rate environment.
x How much progress have you made towards the cost reduction target you set? Our cost reduction programme continues to deliver material savings. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013. This reflects better cost control in our day-to-day operations, as well as a number of business disposals.
These cost savings will help to finance the £6 billion of essential investments we have committed to make as part of our five-year recovery plan. These will strengthen our core businesses. Examples include the provision of an integrated Wealth IT platform and enhanced electronic trading facilities for GBM.
x How much exposure do you have to the sovereign debt crisis? Our exposure to sovereign bonds in the two countries most deeply embroiled in the crisis – Greece and Ireland – is relatively low (£895 million and £104 million, respectively at 31 December 2010). But we clearly have significant exposure to the Republic of Ireland economy through our Ulster Bank subsidiary (total lending was £43.2 billion at 31 December 2010). To help manage this exposure, we placed c.£15 billion of assets in our Non-Core Division, the vast majority of which relates to commercial property. We are managing this down over time and, where assets are currently non-performing, they are being heavily provisioned.
We need to cover our cost of capital in the long-run, and justify our shareholders’ support.
We want to put our balance sheet on a more secure footing by lending only as much as we have in deposits.
We want to reduce our reliance on short-term money market funding to make our balance sheet less volatile.
worst point 2009 2010 worst point 2009 2010 £157bn £250bn £343bn(8)
Serving our customers better must be the foundation of everything we do. We have favourable customer satisfaction scores, but our aspirations are higher still.
We aim to have top five positions in the main customer markets we choose to be in. We will not compete where we cannot succeed for our customers and shareholders.
Notes: (1) Based on indicative Core attributable profit, excluding fair value of own debt, taxed at 28% and Core average tangible equity per the average balance sheet (c.70% of Group tangible equity based on RWAs). The 2009 return is based on Core tangible equity as at 31 December 2009 which included the full amount of the B Share investment by HM Treasury in December 2009.
(7) Amount of unsecured wholesale funding under 1 year (£157 billion) of which bank deposits are currently £63 billion, target £65 billion, other unsecured wholesale funding currently £94 billion, target £85 billion.
Our over-riding focus is on achieving three things: to serve customers well; to restore the Bank to undoubted standalone strength; and to rebuild sustainable value for all shareholders.
There are important inter-dependencies between these goals. We cannot serve customers well if the Bank is not safer and more resilient. We cannot achieve standalone strength without rebuilding shareholder value. And we cannot rebuild shareholder value if we do not serve customers well. So while each of these goals is important on its own, we will succeed only if we consistently achieve them together.
Reputation We conduct ourselves in a way that protects our reputation We work within all relevant laws and regulations
We account for and report our transactions properly 11RBS Group 2010
Restoring the Bank to standalone strength is crucial. The first part of the challenge is fixing the problems of the past. We took a large step towards this goal in 2009, with significant improvements on both capital and liquidity. We made further progress in 2010. The second part of the challenge is to make RBS safer for the future. To achieve this, we launched a new vision for RBS Risk Management in 2010. That vision is about adopting a more holistic approach towards risk – across the business, the risk function and audit – to create a safe, sustainable and valuable bank for our customers, staff and shareholders.
Of our three goals, building the sustainable value for all shareholders will inevitably take the most time to deliver fully. We have a strong foundation in our core businesses, which generated a 13% return on equity in 2010, just short of our 2013 target of greater than 15%. We are confident that our core businesses will generate strong value both in their own right and as a cohesive whole, given cross-business synergies and the balance they bring.
We outline how they are each performing against their own targets, and together to deliver our Strategic Plan, on pages 12-15.
We deliver products and services to millions of customers around the world. So it is important that we are consistent in the way we do business – from how we manage our risks, to how we treat both our customers and our employees.
To achieve this, we have made six statements that describe how we do business. These relate to: our customers, our people, our reputation, the security of our environment, the risks we take, and our finances.
RBS to generate a sustainable 15% return on equity, powered by market-leading businesses in large customer-driven markets
Market-leading franchises Target and measure market positions and customer satisfaction in all core businesses.
Rigorous capital and cost allocation Accurately deploy the Group’s capital and allocate appropriate costs to focus the divisions on returns, as well as on profit growth.
Exit Non-Core business lines Expeditious run-off or sale of businesses and asset portfolios while maximising the value obtained for the Group.
Management change At the centre of its efforts to rebuild standalone strength, RBS is dedicated to building continually the strength of its Board and senior management teams.
We maintained top five positions in the principal markets we compete in. For example: • Top two in UK retail and commercial banking • Top five in US retail and commercial banking in our chosen regional markets • Top five in most principal investment banking markets e.g. foreign exchange. We won't compete where we can't succeed for our customers and shareholders.
The economic environment showed signs of improvement in 2010 but continued volatility and monetary policy interventions in some countries in which the Group operates meant 2010 was still far from a normal year. Our core businesses remain resilient, and, we believe, are strongly positioned to achieve targeted growth levels when the major economies in which they operate fully normalise.
We have already reached our goal of delivering £2.5 billion of annualised cost savings from across the Group. Annual savings are now forecast to exceed £3 billion by 2013. The Core cost:income ratio was 56% for 2010, down from a peak of 97% in 2008, and on track to hit our 2013 target.
We improved our Group loan-to-deposit ratio to 117% by the end of 2010, compared with 135% a year earlier, and, by December 2010, our Core businesses were taking in £1 of deposits for every £1 of loans made. We continued to reduce our reliance on wholesale funding, from £250 billion of short-term wholesale funding in 2009 to £157 billion in 2010. Our liquidity reserves were in line with our 2013 target at the end of 2010, at £155 billion.
Retail and commercial businesses generated around 51% of the Core operating profit for 2010, moving towards the achievement of our 2013 target. In the UK, we exceeded our £8 billion mortgage net lending target and £50 billion gross business lending target for the 12 month period to February 2011.
Target 2013 Becoming the most helpful retail bank in the UK.
Target 2013 Leading provider focused on re-building sustainable value for customers and the bank.
Target 2013 Restructuring to sustainable profitability as the Irish economy recovers.
The new RBS is built upon our Core businesses, which have substantial competitive strengths in their respective markets. Each is being reshaped to provide improved and enduring performance. They will generate attractive value in their own right, and a still stronger, balanced and more valuable mix together.
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 internet channels.
We offer global payments, cash and liquidity management, trade finance, and commercial card products and services. We are able to support and connect customers across 128 countries.
We are a leading retail and commercial bank in Northern Ireland and the Republic of Ireland. We provide a comprehensive range of financial services through our Retail Markets and Corporate Markets divisions.
We provide financial services primarily in the North Eastern United States through the Citizens Bank, Charter One and RBS Citizens brands. We are engaged in retail and corporate banking activities. We rank among the top five banks in New England.
Note: Excluding Fair Value of Own Debt (FVOD), excluding RBS Insurance.
M Keep up with our latest economic research and analysis at www.rbs.com/economics
• Economic growth falters • Sovereign credit risks not controlled • Wholesale funding conditions deteriorate
The economic outlook We expect the global recovery to be maintained, but to remain uneven. The pace of growth in the major developed economies – including the UK and the US – is likely to remain sluggish by historic standards, and volatile. This reflects high levels of indebtedness and the expectation that interest rates will gradually rise. Emerging markets, especially Asia, will continue to outperform as they are less encumbered by balance sheet strains. Moreover, growth in countries like China and India will continue to be underpinned by the process of ‘catch-up’ with industrial nations.
A new vision for RBS Risk Management At RBS, Risk Management plays an integral role in delivering the Strategic Plan by embedding appropriate frameworks. With the need for financial strength and resilience at the heart of this, RBS Risk Management is aligned to support the Group’s stated objective of standalone strength by 2013, as measured by reaching and then retaining credit standing in line with the strongest international peer group. The Group Board agreed in 2009 four risk objectives which are aligned to the Plan. These are to: • maintain capital adequacy; • maintain market confidence; • deliver stable earnings growth; and • ensure stable and efficient access to funding and liquidity.
Operating model The risk and liquidity balance sheet management strategies are owned and set by the Group’s Board of directors, and implemented by executive management led by the Group Chief Executive. A number of committees supports the execution of the business plan and strategy. Interaction between them helps to promote cross-risk linkages. The roles and responsibilities fulfilled by the key risk committees have been reviewed and more clearly defined during the course of 2010 and further enhancements are planned in 2011.
Risk appetite Risk appetite is an expression of the maximum level of risk that we are prepared to accept to deliver our business objectives. Risk and balance sheet management across the Group is based on the Risk Appetite approved by the Board, who ultimately will agree this for each division and regularly reviews the Group’s performance in relation to risk. Risk appetite is defined in both quantitative and qualitative terms, which serve as a way of setting appetite and managing risk performance as we implement an agreed strategy.
Risk architecture A key deliverable on our journey to a standalone credit rating in line with our strongest international peer group by 2013 is the design and building of a risk architecture that will support this, and we are doing this as a partnership between the Risk, Finance and Treasury functions. When fully implemented this will provide RBS with consistent reference data and definitions across our three functions and significantly improve the quality of management information and analytical capability we have to manage our major risks.
• Risk data quality • Analytics and modelling • Risk information and reporting
• Credit risk approval and control • Market risk limits and controls • Risk concentrations • Asset and product class • Country risk • Treasury risk management • Scenario testing
Against a backdrop of further market instability, we made progress in meeting our strategic objectives: reduced reliance on short-term wholesale funding; expanded customer deposit franchise; and increased maturity of term debt issuance.
In our motor business, we increased pricing in response to bodily injury trends and we made significant progress in removing higher-risk business through targeted rating actions.
The economic environment improved but continued to impact the level of operational risk in areas such as the scale of structural change occurring across the Group, increased external scrutiny and external threats (e.g. e-crime).
Our Group Policy Framework (GPF) supports the risk appetite setting process and underpins the control environment.
The three lines of defence model gives assurance to the standards in GPF are being adhered to.
Government support brings heightened public scrutiny of the way we manage our business including: staff remuneration, how we manage our customers, the levels of lending in the UK and our environmental impact.
During 2010, we implemented an enhanced reporting and modelling framework to improve the identification and management of key pension risks. In early 2010 the main scheme increased its bond allocation to better match liabilities.
The risk of loss resulting from inadequate or failed processes, people, systems or from external events.
Risks arising from non-compliance with laws, rules, regulations or other standards applicable to the Group.
Failure of the business to provide an experience which meets customers’, regulators’ and other stakeholders’ expectations.
Volatile funding position caused by the uncertainty of future investment returns and the projected value of schemes’ liabilities.
The balance of the Core business is an asset to our customers, shareholders and risk profile – even before cross-business synergies are taken into account.
• we reshaped our Private Banking business so that we can meet better the needs of our affluent customers.
• sending replacement cards within 24 hours to 97% of customers whose debit cards were lost or stolen, against a target of next working day delivery.
Our goals are stretching and we still have work to do as we missed five of our 20 goals, including: • against a goal of nine out of 10 customers being very satisfied with service, eight out of 10 were very satisfied; and
We will strive to do better, but these first results are a good start and demonstrate our commitment to be a better bank for our customers.
Playing an active role in the communities we serve We know that playing an active role in supporting the communities where we live and work is an important part of rebuilding our reputation. We launched our Community Fund, providing £1.8 million worth of financial support to local charities and community projects nominated by our customers. In addition, all of our employees now have the option of a day’s leave to get involved in local volunteering. Our commitment to financial education remains as important as ever. We delivered 30,653 lessons in schools right across the country through our independently accredited MoneySense programme.
Committing to maintaining local banking services Many of our customers, particularly in Scotland, live in rural areas. Through our Customer Charter, we have made a firm commitment to maintain local banking services in the communities we serve, pledging to stay open if we are the last bank in town and continuing to run our mobile bank service. We have also extended access to our accounts through Post Office counters.
Addressing the legacy of the past In August 2010, we reached an early agreement on the sale of 318 branches to Santander UK Plc. The sale was required as part of the State Aid agreement reached with the European Commission. It provides greater clarity for our staff and customers and represents another significant step forward in our restructuring for the future. We expect the process to be completed by the end of March 2012. RBS Group remains committed to the UK retail banking market and, even after the sale we will continue to operate the second largest retail branch network in the UK.
Striving to become Britain’s Most Helpful and Sustainable Bank We expect 2011 to be another challenging year but we know that we will succeed as a business by helping our customers through good times and bad. Our commitment to becoming Britain’s most Helpful and Sustainable Bank is a long-term one and we are confident we are creating a new kind of retail bank.
We have trained over 10,000 designated complaints handlers to ensure we are resolving customer complaints fairly, consistently and promptly.
We launched our Community Fund, providing £1.6 million of financial support to local charities and community projects nominated by our customers.
We achieved that while boosting operating profit by 30% compared with 2009, a result that reflects strong income growth, as well as lower impairments, partially offset by higher costs.
2013 >15 <35 <130target >5,000 loans to UK businesses each week >4,000 hours spent listening to our customers and people designing Genesis
Management team of over 500 experienced employees continued to provide locally based, hands-on support where needed. In 2010, over 5,600 customers were successfully managed back to financial health.
Giving customers access to finance Getting access to finance is a key concern for many of our customers. We continue to be open for business. In 2010, we provided on average over 5,000 loans to UK businesses each week. Our approval rate remains high: we continue to accept over 85% of the credit applications we receive.
Being fair and transparent in how we treat our customers In our SME charter, we extended our committed overdraft and price promises to cover 2010. This ensured that a customer’s overdraft facility remained in place for the duration of their agreement, unless they breached conditions or there was a significant deterioration in their risk profile. Our price promise ensures that we will not increase overdraft margins at renewal times, unless there is a significant change in the firm’s risk profile. By October 2010, over nine out of 10 small businesses had benefited from overdraft renewals at the same or a lower rate.
Meeting our customer needs Our customers like the steps we have taken and the support we provide. RBS Group is in the top three banks in the UK for business customer satisfaction. The percentage of our corporate customers describing themselves as ‘very satisfied’ has remained consistently high. In March, Lombard won Best Leasing and Asset Finance Provider at the Business Moneyfacts Awards for the second consecutive year. Our Invoice Finance business works closely with customers providing products to meet their changing needs. For example, in October, RBS Invoice Finance finalised its first asset backed lending deal for the retail sector, with a flexible £9 million facility to DM London Limited trading under the brand ‘Time 2’.
Contributing towards the new RBS The progress we made in 2010 contributes to the wider objectives of making RBS a stronger and safer Bank. We increased our customer deposits by 14%, helping to reduce the gap between loans and deposits by 16%. We continued to enhance our risk control systems, including implementing specific new guidance for Real Estate Finance.
We are currently opening more than 2,200 start-up accounts per week.
To date, we have led the field in taking applications for the Enterprise Finance Guarantee, accounting for over 40% of all loans drawn under the scheme.
Our Wealth Management business contains some of our most valuable brands, including Coutts, RBS Coutts and RBS International. The depth of relationship they have with our clients is at the heart of everything they do. These businesses have an international presence, offer a proven suite of products, and between them manage over £68 billion of assets for 290,000 clients in jurisdictions around the world.
Operating profit fell in 2010, driven by lower net interest income and higher expenses – as we invested in the future of the businesses – partly offset by lower impairments. Assets under management grew by 5% and deposits were up, too.
Investing to communicate effectively with our clients We try to communicate with our clients in the ways that best suit them. Demand for online access has been growing. In response to client feedback, our Coutts & Co and Adam & Company websites were completely rebuilt, enabling clients to navigate our products and services in a smarter, simpler way.
Wealth Management provides private banking and investment services in the UK through Coutts & Co and Adam & Company; offshore banking through RBS International, NatWest Offshore and Isle of Man Bank; and international private banking through RBS Coutts.
• Total income fell by 5% • Expenses increased by 12%, reflecting additional strategic investment
The team at RBS International led an active sustainability programme in their business and raised more than £160,000 for Macmillan Cancer Support.
The MoneySense for Schools programme is an online, interactive financial education programme to help 11–18 year olds prepare to manage their finances in the future. Specially trained RBS International employees helped to deliver over 100 lessons in schools and colleges during the year.
Looking ahead In 2011, we have a strategy for growth and a desire to develop further a well-balanced business across all of our jurisdictions. The second phase of our IT project will also see us roll out the platform in Coutts. It promises to be a busy and exciting year.
GTS helps our customers manage their cash and liquidity, make and receive payments and support their trade requirements across the world. Our vision is to be the leading transaction bank of choice for the Group’s clients. We have laid the foundations to achieve this, by strengthening our close working relationships with other divisions and offering innovative products based on our customers needs, now and in the future.
Leveraging our global network GTS processes over 4.6 billion worldwide payments per year in 43 different currencies and we administer 4,600 global trade transactions each day. We use our international branch network to help customers do more business in more countries.
We established a new UK exporter initiative which recognises the key role that exports can have in the UK economic recovery. This provides a package of business support for potential exporters, including online training, help and advice, and telephone hotlines.
We partnered with the Government’s UK Trade & Investment initiative, through their Asia Task Force, to present a series of events entitled Doing Business in Asia: Meet the Experts. The events helped British businesses explore opportunities in Asia, and our Global Trade Advisory and Asia experts provided advice. We expect over 1,500 firms to have attended these events by the time they conclude in early 2011, of which around half will be considering doing business in Asia for the first time.
Innovating to enhance customer service In 2010, we embarked on a significant investment programme, designed to drive innovation and deliver new technologies to our customers. Our new products and services provide customers with greater flexibility and transparency, and in many cases help to improve risk management and lower costs.
The launch of the RBS SWIFT Service Bureau throughout our Global Payments network enables us to offer comprehensive, global solutions to large corporate customers. Users can become quickly established on the universal banking platform and with less capital investment than before.
Other innovations included: • PayAway-IP Direct, a remote access web-based payment service for RBS and NatWest customers.
• GTS Salesline, which since its launch in May 2010 has helped more than 1,000 customers to arrange and complete transactions.
• accessMOBILE, introduced by Citizens as an easy-to-use smartphone application enabling clients to manage commercial banking transactions on a convenient and portable basis.
• Our Netherlands investment product, the Yield Call Demand Account, rewards longer-term deposits while also ensuring funds are accessible if needed. It has also been successfully rolled out in Singapore.
Positioning for the future We continued to build upon the foundation of the Group’s 2009 Strategic Plan. Our risk management programmes have been enhanced, with the first phase of a new model for credit risk and portfolio management. This provides a more streamlined credit approval process for customers and strengthens accountability across business divisions.
Our people agenda seeks to align employees with customer needs and our business strategy. In 2010, we identified a set of values for GTS based upon empowered leaders, customer focus, the drive to succeed, connectivity, and risk awareness. Our employees are encouraged to engage fully through discussion forums, focus groups and roadshows. Fostering teamwork throughout our business creates an inclusive workplace and we are active in creating a trusted adviser role with our clients.
These factors lie behind the increase in our impairment losses to £1.2 billion and our operating loss of £761 million. Despite lower income, an impressive 24% reduction in costs contributed to a pre-impairment operating profit of £400 million.
For personal customers this means: • making banking easy, including extended branch opening hours, Saturday openings, less queuing and helpful service; • treating our customers fairly, including text alerts to avoid unnecessary charges and assistance with debt problems; and
• local support, including no branch closures, a community fund and a ‘Give a Day’ volunteering programme.
2013 >15 c.50 <150target increase in customer deposit balances in constant currencies branches opened on
For SME business customers this means: • access to credit and working capital. We will continue to make credit available to viable businesses and maintain overdrafts for their full term, unless there is a breach of terms. An appeals process is available for unsuccessful applications; • clarity about what customers can expect concerning the costs, terms and conditions of credit and the factors that influence the price of a loan; and
We are still at an early stage in the programme, but we are already delivering on these commitments. For example, in 2010 we opened 45 branches on Saturdays for the first time. We now have more branches open on Saturdays across Ireland than any other bank. By opening on Saturdays and extending our weekly opening hours, we are giving our customers an extra 30,000 hours each year to visit our branches.
Investing in our people Our employees are central to our ambition of becoming Ireland’s most helpful bank. Through the Ulster Bank People Plan, we are taking steps to ensure our people feel engaged, motivated and that we give them opportunities to develop to their full potential. In January, we launched the Ulster Bank Academy, with over 3,500 of our people attending learning and development courses throughout the year.
Significant economic and business challenges remain. However, over the last two years we have proven our ability to adapt to change and support our customers. This, combined with the continued strong support of RBS, leaves us very well positioned for the future.
In 2009, we set out our five-year plan to create a stronger, more resilient business. 2010 saw us take significant steps along this path, with investments in products, customer service, infrastructure and people.
Strengthening customer relationships In May, Citizens Bank and Charter One launched the “Good Banking is Good Citizenship” brand platform. The initiative underscores our longstanding heritage and helps to restore trust in the banking industry, and has received a positive response from new and existing customers. It brings to life our central and long-standing belief that a bank should contribute to the growth and vibrancy of its communities, operating through all of the channels in which the bank interacts with its customers and the community.
Our Home Lending Solutions first mortgage business is ranked nationally among the top 20 retail originators by Inside Mortgage Finance, having moved up the rankings in the past two years. In addition, we see wellmanaged home-equity lending as a strategic product, attracting new customers and serving as an anchor for stronger customer relationships. Nearly 90% of home-equity customers also have deposit relationships with us.
Good customer service is at the heart of our ability to attract and retain customers. Citizens’ Contact Centers have made significant improvements in the customer experience, reducing the average time to answer a customer call by 50% over the last two years.
In September, we launched a new Mobile Banking application for the iPhone. It allows retail customers to check account balances, transfer funds, find ATM and branch locations, and make payments. We also
Strengthening risk management Enhancing our risk-management capabilities is a critical business objective within our Strategic Plan. We have created two new Risk Management groups and made several appointments to our risk leadership team, including a Chief Risk Officer for Citizens Financial Group. We’re being swift and strategic as we respond to the changing environment we face.
Leveraging commercial capabilities Through Global Transaction Services (GTS), we introduced accessMOBILE, an easy-to-use smart phone application that enables clients to manage commercial banking transactions on a convenient and portable basis. We were the first bank in our footprint area to offer such a service. We also worked closely with GTS on a fall sales campaign, strengthening our partnership for the benefit of serving our customers.
The Commercial teams are capitalizing on market disruption, as three in five mid-sized companies ($10 million to $500 million in annual sales) are actively seeking a new provider or would consider it if presented with a compelling offer. We are also leveraging strong client loyalty, with 86% of the $5 million to $25 million client segment and 75% of the $25 million to $500 million client segment saying they would continue using Citizens for future banking needs.
Our new Commercial Enterprise Banking division addresses the needs of companies with $5 million to $25 million in annual revenues. CEB’s $10 million in technology and people investments included Citizens’ first shared, uniform credit delivery and portfolio management business model, as well as a larger sales force to improve market coverage and better serve existing clients.
Community response Often we experience events outside our control. A profound example is the historic flooding that occurred in New England in late March and early April. Citizens responded with special financing and grants for local businesses, non-profit agencies and individual customers. We supported our colleagues who suffered damages of their own through the company’s Emergency Assistance Fund. This event was more than a disaster recovery exercise – it was leadership at its finest.
• In Connecticut, we received a Green Business Award from Business New Haven for our Green$ense programme. The RBS Americas Headquarters building in Stamford also received a Climate Change Leadership Award from Connecticut’s Governor.
• Citizens Financial Group was recognised by Conceive magazine, for the third consecutive year, as the top company nationwide for offering family-building benefits to its staff, including fertility treatment and adoption assistance. For the fourth consecutive year, we were also recognised by the Dave Thomas Foundation as the Best AdoptionFriendly workplace in financial services.
New client acquisition in the Commercial Enterprise Banking segment tripled from the prior year.
In 2010, we made good progress implementing the GBM strategy and achieving our ambitions. Our people found ways to work more intelligently to help clients rebuild from the financial downturn at a time when competition was fierce, the regulatory landscape changed and market conditions were subdued.
Focusing on clients We continued to focus on improving our client offering. We refined how we interact with clients to make it more customer focused and efficient, including aligning operations in our core Fixed Income, Currencies & Commodities business. We deployed our expertise to support our customer’s ambitions, leading to notable transactions including: • The World Bank: Joint bookrunner for the first US dollar global benchmark bond launched by The World Bank in 2010, a USD3.5 billion, three-year deal.
• SAS AB: Joint lead manager and joint bookrunner on a SEK5 billion fully underwritten rights issue.
• Scottish and Southern Energy: Structuring advisor and joint lead manager on the GBP750 million and EUR500 million corporate hybrid for SSE. It was the first ever hybrid in sterling from a UK-listed company and reopened the global market.
Our clients valued the work we did for them in 2010 and rewarded us accordingly. They voted us in the global top five for foreign exchange (2010 Euromoney FX Survey) and one of the top five dealers for derivatives (2010 Risk Interdealer Poll). Our debt capital markets business was voted Euromoney Best Debt House in the UK and the Netherlands. The Banker magazine gave us the Deal of the Year award for equities and sovereign bonds in Europe, financial institutions in the Middle East and loans in Asia.
In India, we completed one out of every three foreign-currency bond issues in 2010, including the country’s biggest corporate and financial institutions bond sales. In November, we became the first UK bank given preliminary permission to form a joint venture securities company in China, which will allow us to underwrite equity and bond sales in the domestic market.
In addition, the fundamental strengths of our business enabled us to build on market leading positions, while setting out plans to transform and enhance how we do business in the future.
Restoring profitability We remained the largest personal lines insurer in the UK, built around strong brands such as Direct Line, Churchill and Privilege. We are now the UK’s largest home insurer, adding to the position that we already held as the UK’s largest motor insurer. We continue to provide support and reassurance to millions of UK motorists through our Green Flag breakdown recovery service.
RBS Insurance sells and underwrites retail and SME insurance over the telephone and internet, as well as through brokers and partnerships. Its brands include Direct Line, Churchill and Privilege, which sell general insurance products direct to the customer, as well as Green Flag and NIG. Through its international division, RBS Insurance sells general insurance, mainly motor, in Germany and Italy.
Gross written premiums in our international business grew 25% in Euro terms compared to 2009, with the Italian business reporting 35% growth. Combined, the Italian and German businesses surpassed the landmark 1 million insured vehicles at 1.1 million. Direct Line for Business also accomplished a new landmark, growing rapidly from its launch in 2007 to reach over 250,000 customer policies. It offers insurance products direct to small business customers, providing them with a straightforward way to insure their firm.
Putting customers first Our customer satisfaction ratings remain strong. We scored 85.8% for Sales and Service and received the same result for Claims. In October, our commitment to the highest standards of service and behaviour was affirmed as we signed the Aldermanbury Declaration. It sets out the professional standards we will meet in areas including: Commitment to Excellence; Training and Development; and standards for broking, underwriting, claims and management procedures.
Our dedication to customers, innovative products and hard working employees was recognised through a variety of awards in 2010. We received three ‘Your Money’ awards, with Direct Line winning for the Best Online Travel Insurance, Churchill for Best Pet Insurance and Green Flag for Best Breakdown Cover. For the second consecutive year, Green Flag received the Institute of Transport Management’s award for UK Roadside Assistance Company of the Year. RBS Insurance’s investment in the learning and development of its people was honoured with a prestigious National Training Award. Our vocational training programme supports employees in their jobs and provides the opportunity to gain qualifications and strengthen key skills.
The settlement agreed with the European Commission in 2009 means that RBS must divest, at least, the controlling interest in RBS Insurance by the end of 2013. We continue to explore the available options for meeting this commitment in the most effective way for customers, staff and investors. 2010 has been an important year for RBS Insurance in refocusing the business for an independent future and we will continue to be managed in a way that meets customer and shareholder needs.
Our travel insurance brands assisted over 12,000 customers during the Icelandic volcanic ash cloud episode.
Business Services provides specialist services and expertise for the divisions, helping to provide greater value to our customers and to deliver our Strategic Plan objectives. In 2010, we focused on innovating, managing change, managing operational risk and becoming more efficient.
Central Functions comprises group and corporate functions, such as treasury, funding and finance, risk management, 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.
Becoming more efficient We work closely with the other divisions to identify efficiencies and opportunities to create value through innovation. We’ve played a key role in delivering on the Group’s target of more than £2.5 billion of cost savings by 2011.
In 2010, several programmes helped to improve the service we provide to customers. ‘Intelligent Working’ is designed to improve how we use property and to give our staff flexible working opportunities. Since its 2009 launch, it has allowed us to reduce our property footprint by 389,000m2, more than Heathrow Airport’s Terminal 5. An upgrade to our Building Management Systems enabled us to reduce energy use in our buildings by £2.3 million, which would power 1,584 average UK households for a year.
Technology Services runs a programme to deliver innovative solutions, which includes building its own RBS ‘App Store’ to develop new business applications that boost productivity and enhance customer value.
Investing for the future Business Services offers a range of scale benefits, including purchasing, and specialist knowledge for the Group. Our focus is on improving on these services, whilst managing risk. Together, the actions we took in 2010, and will continue to implement in future years, are designed to make the Group more efficient and enable it to provide a better service to our customers.
Finance Finance is responsible for the external reporting of the Group’s performance and financial position, including regulatory and central bank reporting. As part of our mission to rebuild investor confidence and trust, we have greatly improved the quality and transparency of RBS’s external reporting, and we provide financial information to the market quarterly. Finance has a critical role in partnering with our divisions to monitor performance against the Group Strategic Plan, and is helping the business achieve our strategic aims using enhanced forecasting tools and thoughtful analytics.
Human Resources A new leadership capability framework has been launched to ensure our leaders are assessed and developed against behaviours that support the delivery of our strategic plans and our emerging culture. The behaviours are assessed in a 360-degree feedback tool which is an integral part of how we review our Executives’ performance. The behaviours we focus on include: Strategic Progress, Business Delivery & Financial Performance, Customers' Expectations, Risk, Efficiency and Control, People Management, and Personal Skills. The outputs of 360-degree feedback help to prepare personal development plans and inform leadership development priorities.
But we don’t take further progress for granted. Our Definition to Delivery programme ensured we moved from defining and structuring the division in 2009 to delivering huge strides in reducing assets and managing risk in 2010. Moving into the next stage, we are exploring options for exiting from our assets. The division’s leadership team has been strengthened. We are in a good position to continue the momentum of progress into 2011.
Exiting from Non-Core assets In 2010, we passed the £100 billion milestone in our journey, reducing third party assets (“TPAs”) to £138 billion at year-end, down from the initial December 2008 portfolio of £258 billion. We also reduced our portfolio of derivatives from an initial £85 billion to £16 billion. Despite sometimes challenging market conditions, careful preparation and asset management enabled us to take, and sometimes accelerate, exit opportunities.
• Non-Core Markets achieved significant progress in reducing assets through sales and the unwinding of facilities and risk exposures. Markets TPAs fell from £24.4 billion at the start of the year to £13.6 billion at the end of 2010.
Though the Non-Core Division was established to separately manage and exit from the portfolio of non-core assets, we work closely with other parts of RBS Group in achieving these aims. For example, colleagues in GBM have provided invaluable assistance in structuring and delivering several deals.
Looking ahead The Non-Core Division is central to the strategy that will return RBS to stand-alone strength. The encouraging progress made so far provides a solid foundation for meeting the challenges ahead.
We continue to target an exit from the APS within the last two years of the Strategic Plan (2012-13), subject to regulatory approval.
The APS is a key part of the UK government’s measures to restore stability and confidence in the banking sector. It provides RBS with credit protection in the unlikely, though still possible, event of a severe downturn in the economy. RBS Group’s participation in the APS is managed centrally within the Restructuring & Risk area.
Scheme’s requirements. We continue to work closely with the Asset Protection Agency (APA) with regard to the day-to-day stewardship of assets covered by the Scheme.
The amount of assets covered by the scheme has fallen from an initial £282 billion to £195 billion at the end of 2010. We estimate, on the basis of expected future recoveries, the expected loss on triggered assets at 31 December 2010 to be approximately £25 billion, equivalent to 42% of the £60 billion first loss threshold under the APS. RBS does not currently expect that losses on covered assets will exceed the first loss provision over the lifetime of its participation in the Scheme.
One of the ways we show the world that we take sustainability seriously is by embedding it in the way we run the business, from the highest levels to the responsibilities of individual employees.
The Retail Sustainability Taskforce focuses on the sustainability issues that most affect our Retail division. The Microfinance
Advisory Board comprises senior members from a range of stakeholder groups and provides external oversight and support for microfinance and supporting enterprise programmes across the
“To ensure that we are operating as a sustainable business in every sense of the word, we will have to develop and work to a set of principles which guide our management on social and ethical issues.”
We started to change how we gather our customers’ opinions. We launched a new Public Opinion Survey and we spoke to over 21,000 people through surveys. This work, along with the regular feedback we receive from our customers is a key component in how we shape our business.
Last year the Group engaged with over 1,200 institutional investors. Socially responsible investment continues to grow in importance and last year we took part in regular meetings with analysts on this issue, including meetings with our Chairman and senior executives focused exclusively upon sustainable investment.
In 2010, we substantially increased our dialogue with consumers groups. We met a wide variety of groups to discuss a range of issues from debt advice to our Group Customer Charter.
We regularly consult with NGOs, which in 2010 included direct engagement with both our Chairman and the Group Sustainability Committee.
Supporting enterprise One of our main responsibilities is to provide tailored support to a broad range of businesses. There are a number of ways that we demonstrate our commitment to enterprises: from lending to small and medium enterprises (SMEs), to funding microfinance institutions in India, to making finance available to social enterprises and facilitating youth enterprise through working with partners
Safety and security Protecting the security of our customers’ money and data is a fundamental responsibility of the Group. We have continued to invest heavily in the prevention of financial crime. This theme also includes how we safeguard the safety, health and wellbeing of our employees.
Citizenship and environmental sustainability As a global organisation we have to manage our broader economic, social and environmental impacts. This includes wider citizenship issues such as business and human rights and bribery and corruption as well as environmental concerns. We fully support the transition to the more sustainable use of natural resources.
We received the AA1000 (2008) reporting and assurance accreditation for our 2008 and 2009 annual Sustainability Reports. We were also short-listed for the ICSA/Hermes award for best sustainability and stakeholder disclosure for the Sustainability Report 2009.
We recognise our responsibility to play an active role in the communities we serve. This begins with providing the services our customers want, and operating in a sustainable way. We then go further through our community programmes, which allow us to make more of a difference in areas that we can have an impact. Our efforts centre on our MoneySense, Supporting Enterprise, and Employee and Community Engagement programmes.
Over the last three years our funding to Macmillan cancer support helped them to expand their benefits helpline by 50%. In 2010, three new face to face Macmillan advice services were launched. Together this helped 9,500 people unlock over £20 million of funds to help with the impact of their cancer diagnosis. At the end of 2010, the RBS Group agreed to fund Macmillan for a further three years to increase delivery of face-to-face money guidance for people living with cancer across the UK.
The Group continued to assist our key partners. We remain to be one of the largest corporate sponsors of the Money Advice Trust and in 2010 provided funding for key projects or areas of research to Mind, RNIB, Gingerbread, Transact, Toynbee Hall, and Citizen’s Advice. We will continue to work with the charities in 2011 to fund projects which will improve access to information, increase the number of quality financial education and training resources available, and meet the specific needs for the members of each charity organisation.
Our Ulster Bank MoneySense for Schools programme was launched in 2007 and is already the largest financial education programme for secondary schools in Northern Ireland and Ireland, with 380 volunteers from Ulster Bank. The Youthbank programme run by Ulster Bank also helps to develop a range of skills in young people by distributing grants for youth-led projects in their communities.
In 2010, we launched a partnership with the British Academy of Film and Television Arts (BAFTA) and its Youth Mentoring Programme, delivered in conjunction with Media Trust. In this programme, BAFTA members, award-winners and leading practitioners volunteer as mentors to disadvantaged young people on media projects, enhancing their knowledge, skills and personal development to give them new opportunities in life.
We also sponsor Youth Business International projects in Russia, Hong Kong and France that provide opportunities for would-be young entrepreneurs in those countries.
As part of our UK Customer Charter we launched the Community Fund in 2010, a way of putting real benefit back into the communities, at the choice of our customers. To date £1.8 million has been given to charities chosen by our customers and employees from their local branch and 7,547 days off have been given to branch staff to help support the causes important to them.
Our volunteering programme provides a range of team activities that our employees can take part in during work time. We run the activities through nine charities so that our employees can deliver the skills, services or fundraising that they need. This year 4,100 employees engaged in 225 activities.
We worked with the National Housing Federation to launch a new affordable credit provider pilot, My Home Finance (MHF) in 2010. MHF provides loans to the financially excluded.
We use a number of third-party organisations to assist with credit checking, helping to ensure that we lend responsibly.
RBS supports the Business Finance Taskforce and its measures to increase investment, provide more business mentors and introduce new lending principles for SMEs.
Our Technical Assistance programme in India facilitated work with 37 MFIs across 13 states in India, increasing the reach of microfinance to more than 100,000 additional poor families.
In order to be able to support a wide selection of different business clients, we work with partners to bridge the gap in funding for organisations such as social enterprises and charities.
We measure engagement through our employee opinion survey and take action in response to employee feedback.
We have nine charity partners: BTCV, Prince's Trust, Oxfam, Barnardo’s, Fairbridge, Marie Curie, Macmillan, Help the Hospices and Cancer Research in the UK.
We work with partners that support our Diversity & Inclusion programme including Stonewall, Employers Forums on Belief; Age; and Disability, Opportunity Now, Working Families and Race for Opportunity in the UK and Asia Network (DIAN).
Our Group Employee Volunteering programme engaged 39,500 employees in 2010 who were given over 24,000 days off to make a contribution to the causes supported by our nine charity partners.
We aim to extend our employee engagement activities as far as possible to temporary employees and contractors working in our organisation.
Customers have access to services such as SMS text alerts to inform them of any activity on their accounts, or when there has been fraudulent activity.
During 2010 we developed a global occupation health programme in partnership with International SOS to review the occupational health service provision across our international business.
Since 2006, we have provided more finance to wind power projects than any other type of energy project.
Our Business Mentor Environmental scheme continues to provide expert environmental advice to customers who need it, 24/7.
Our ethical code for suppliers sets out our commitments to working with openness and integrity, which we also expect from out suppliers.
We also launched a new recognition scheme in 2010 for our employees – Community Stars. We give £65,500 per year to support the fantastic work employees do for the causes they are passionate about and to recognise that they are great ambassadors for the Group. Citizens’ Colleagues in Action also recognises community involvement and provides the opportunity for colleagues to take a three month sabbatical to serve as a volunteer on a longer-term project.
52 Forward-looking statements 53 Description of business 54 Competition 55 Risk factors 56 Key financials 57 Summary consolidated income statement 62 Analysis of results 77 Divisional performance 106 Consolidated balance sheet 111 Cash flow 112 Capital resources 113 Reconciliations of pro forma to statutory income statements and balance sheets 119 Risk and balance sheet management 119 – Introduction 126 Balance sheet management 126 – Capital 134 – Funding and liquidity risk 143 – Interest rate risk 144 – Structural foreign currency exposures 145 – Equity risk 146 Risk management 146 – Credit risk 193 – Market risk 199 – Insurance risk 199 – Operational risk 202 – Regulatory risk 203 – Reputation risk 203 – Pension risk 204 – Other risk exposures 221 Asset Protection Scheme 49RBS Group 2010
Legal separation of ABN AMRO Bank N.V. occurred on 1 April 2010, with the shares in that entity being transferred by ABN AMRO Holding N.V (renamed RBS Holdings N.V. at legal separation) to a holding company called ABN AMRO Group N.V., which is owned by the Dutch State.
Pro forma results The pro forma financial information shows the underlying performance of the Group including the results of the ABN AMRO businesses retained by the Group. This information is prepared using the Group’s accounting policies and is being provided to give a better understanding of the results of RBS operations excluding the results attributable to the other Consortium Members.
Reconciliations between pro forma and statutory results are detailed on pages 113 to 118.
Comparative information Following legal separation of ABN AMRO Bank NV, the results of ABN AMRO attributable to the Consortium Members are classified as discontinued operations, with consequent changes to the presentation of comparative financial information.
In particular, this document includes forward-looking statements relating, but not limited to: the Group’s restructuring plans, capitalisation, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets, return on equity (ROE), cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; the Group’s future financial performance; the level and extent of future impairments and write-downs; the protection provided by the Asset Protection Scheme (APS); and the Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the global economy and instability in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the financial stability of other financial institutions, and the Group’s counterparties and borrowers; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain Non-Core assets and assets and businesses required as part of the EC State Aid restructuring plan; organisational restructuring; the ability to access sufficient funding to meet liquidity needs; the extent of future write-downs and impairment charges caused by depressed asset valuations; the inability to hedge certain risks economically; costs or exposures borne by the Group arising out of the origination or sale of mortgages or mortgagebacked securities in the United States; 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; ineffective management of capital or changes to capital adequacy or liquidity requirements; changes to the valuation of financial instruments recorded at fair value; competition and consolidation in the banking sector; HM Treasury exercising influence over the operations of the Group; 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 United Kingdom, the United States and other countries in which the Group operates or a change in United Kingdom Government policy; changes to regulatory requirements relating to capital and liquidity; changes to the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G7 central banks; impairments of goodwill; pension fund shortfalls; litigation and regulatory investigations; general operational risks; insurance claims; reputational risk; general geopolitical and economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; the ability to achieve revenue benefits and cost savings from the integration of certain of RBS Holdings N.V.’s (formerly ABN AMRO Holding N.V.) businesses and assets; changes in UK and foreign laws, regulations, accounting standards and taxes, including changes in regulatory capital regulations and liquidity requirements; the participation of the Group in the APS and the effect of the APS on the Group’s financial and capital position; the ability to access the contingent capital arrangements with HM Treasury; 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.
Following placing and open offers in December 2008 and in April 2009, HM Treasury owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HM Treasury. This new capital took the form of B shares, which do not generally carry voting rights at general meetings of ordinary shareholders but are convertible into ordinary shares and qualify as core tier one capital. Following the issuance of the B shares, HM Treasury's holding of ordinary shares of the company remained at 70.3% although its economic interest rose to 84.4%.
The divisions discussed above are collectively referred to as Retail & Commercial.
Non-Core Division manages separately assets that the Group intends to run off or dispose of. The division contains a range of businesses and asset portfolios primarily from the GBM division, linked to proprietary trading, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of other portfolios and businesses including regional markets businesses that the Group has concluded are no longer strategic.
Business divestments To comply with EC State Aid requirements the Group has agreed a series of restructuring measures to be implemented over a four year period from December 2009. This will supplement the measures in the strategic plan previously announced by the Group. These include divesting RBS Insurance, 80.01% of Global Merchant Services and substantially all of RBS Sempra Commodities JV business, as well as divesting the RBS branch-based business in England and Wales and the NatWest branches in Scotland, along with the Direct SME customers across the UK.
In the personal banking segment, the Group competes with UK clearing banks and building societies, major retailers and life assurance companies. In the mortgage market, the Group competes with UK clearing banks and building societies. The ambitions of non-traditional players in the UK market remain strong with retailers and new entrants forming aggressive expansion plans. The Group's life assurance businesses compete with Independent Financial Advisers and life assurance companies.
In the UK credit card market large retailers and specialist card issuers, including major US operators are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the internet.
Risk factors Set out below is a summary of certain risks which could adversely affect the Group. These should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included on pages 405 to 422.
RBSG or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures and various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of RBSG’s businesses.
The Group’s businesses, earnings and financial condition have been and will continue to be affected by geopolitical conditions, the global economy, the instability in the global financial markets and increased competition. These have resulted in significant changes in market conditions including interest rates, foreign exchange rates, credit spreads, and other market factors and consequent changes in asset valuations.
The Group requires access to sources of liquidity, which have been constrained in recent years, and a failure to access liquidity due to market conditions or otherwise could adversely affect the Group’s financial condition. In addition, 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.
The Group’s business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements, including those arising out of Basel III implementation (globally or by UK authorities), or if the Group is unable to issue Contingent B Shares to HM Treasury under certain circumstances.
The Group may be required to make contributions to its pension schemes and government compensation schemes, either of which may have an adverse impact on the Group’s results of operations, cash flow and financial condition.
Total income (1) 32,662 29,567 19,367 31,868 33,026 20,730 Operating profit/(loss) before impairment losses and fair value of own debt (2) 11,169 7,809 (738) 8,857 11,252 (18,252)
Loss attributable to ordinary and B shareholders (1,125) (3,607) (24,306) (1,125) (3,607) (24,306) Cost:income ratio (4) 60% 69% 105% 57% 53% 169% Basic loss per ordinary and B share from continuing operations (pence) (0.5p) (6.3p) (146.2p) (0.5p) (6.3p) (146.2p) Adjusted earnings/(loss) per ordinary and B share (pence) (5) 0.6p (13.2p) (43.1p) — — —
Notes: (1) Pro forma total income excludes changes in fair value of own debt, gain on redemption of own debt, strategic disposals and Asset Protection Scheme credit default swap - fair value changes. In the statutory consolidated income statement, these items are included in total income. (2) Pro forma operating profit/(loss) excludes amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, gains on pensions curtailment, Asset Protection Scheme credit default swap - fair value changes and write-down of goodwill and other intangible assets. On a statutory basis, fair value of own debt is included in total income.
(3) Pro forma loss before tax excludes write-down of goodwill and other intangible assets. (4) Pro forma cost:income ratio represents operating expenses excluding amortisation of purchased intangibles, write-down of goodwill and other intangible assets, bonus tax and gains on pensions curtailment expressed as a percentage of total income excluding fair value of own debt, gain on redemption of own debt, strategic disposals, Asset Protection Scheme credit default swap - fair value changes and after netting insurance claims.
(5) Adjusted loss per ordinary and B share is based on earnings from continuing operations adjusted for fair value of own debt, purchased intangibles amortisation, integration and restructuring costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment, bonus tax, write-down of goodwill and other intangible assets and Asset Protection Scheme credit default swap - fair value changes.
Net interest income 14,200 13,567 15,764 14,209 13,388 15,482 Fees and commissions receivable 8,194 8,738 8,845 8,193 8,738 8,855 Fees and commissions payable (2,211) (2,790) (2,411) (2,211) (2,790) (2,444)
Operating profit/(loss) before impairment losses 11,169 7,809 (738) 8,857 11,252 (18,252)
Bonus tax (99) (208) — — — — Gains on pensions curtailment — 2,148 — — — — Asset Protection Scheme credit default swap - fair value changes (1,550) — — — — —
Non-controlling interests (61) (648) (412) 665 (349) 10,832 Other owners’ dividends (124) (935) (596) (124) (935) (596) Loss attributable to ordinary and B shareholders before write-down of goodwill and other intangible assets (1,115) (3,244) (8,110) (1,125) (3,607) (24,306) Write-down of goodwill and other intangible assets, net of tax (10) (363) (16,196) — — — Loss attributable to ordinary and B shareholders (1,125) (3,607) (24,306) (1,125) (3,607) (24,306)
Basic loss per ordinary and B share from continuing operations (0.5p) (6.3p) (146.2p) (0.5p) (6.3p) (146.2p) Amortisation of purchased intangible assets 0.2p 0.4p 2.1p Integration and restructuring costs 0.8p 1.6p 5.9p Gain on redemption of own debt (1.0p) (6.8p) — Strategic disposals (0.1p) (0.2p) (2.7p) Bonus tax 0.1p 0.4p — Gains on pensions curtailment — (3.0p) — Asset Protection Scheme credit default swap - fair value changes 1.1p — — Write-down of goodwill and other intangible assets — 0.7p 97.8p Adjusted earnings/(loss) per ordinary and B share from continuing operations 0.6p (13.2p) (43.1p)
Note: (1) Pro forma operating profit/(loss) excludes amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, gains on pensions curtailment, Asset Protection Scheme credit default swap - fair value changes and write-down of goodwill and other intangible assets.
Net interest income Net interest income increased by 5% to £14,200 million reflecting improvements in net interest margin which more than offset lower interest-earning assets and interest-bearing liabilities. Group net interest margin increased from 1.76% to 2.01% largely reflecting expanding asset margins in UK Retail and UK Corporate divisions as well as in US Retail & Commercial. The run-off of low-yielding Non-Core assets also contributed to this increase. The Group net interest margin was also affected by increased funding costs.
Operating expenses Total operating expenses, excluding amortisation of purchased intangible assets, integration and restructuring costs, bonus tax, gains on pensions curtailment and write-down of goodwill and other intangible assets, fell by 4% to £16,710 million, largely reflecting the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Premises and equipment costs fell by 8% in the year largely driven by efficiency cost savings, significant one-off property impairments recognised in 2009 and country exits following NonCore disposals. The Group cost:income ratio improved by 9 percentage points in 2010 to 60%.
Non-operating items Integration and restructuring costs decreased from £1,286 million to £1,032 million, primarily as ABN AMRO integration activity neared completion, partly offset by restructuring activity following the conclusion of the strategic review.
The Asset Protection Scheme is accounted for as a credit derivative, and movements in the fair value of the contract are taken as non-operating items. The charge of £1,550 million in 2010 reflects improving credit spreads on the portfolio of covered assets, as well as a decrease in covered assets.
Earnings Basic loss per ordinary and B share from continuing operations improved from a loss of 6.3p to a loss of 0.5p. Adjusted loss per ordinary and B share improved from a loss of 13.2p to earnings of 0.6p per share.
Operating loss Operating loss before tax for the year was £399 million compared with a loss of £2,647 million in 2009.
Total income Total income decreased 4% to £31,868 million in 2010.
Non-interest income Non-interest income decreased to £17,659 million from £19,638 million in 2009. This included movements in the fair value of the Asset Protection Scheme - credit default swap resulting in a £1,550 million charge and gain on redemption of own debt of £553 million (2009 - £3,790 million). Excluding these items, non-interest income was up 18% primarily reflecting an increase in income from trading activities.
Net insurance claims Bancassurance and general insurance claims, after reinsurance, increased by 10% to £4,783 million.
Provision coverage of risk elements in lending and potential problem loans was 46% (2009 - 45%).
After fair value of own debt, amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment and bonus tax, the Group recorded a loss before tax of £2,291 million, compared with a loss before tax of £25,207 million in 2008.
After tax, non-controlling interests and preference share and other dividends, the loss attributable to ordinary and B shareholders was £3,607 million, compared with an attributable loss of £24,306 million in 2008.
Total income Total income, excluding the gain on redemption of own debt and strategic disposals, increased by 53% to £29,567 million, primarily reflecting a significant reduction in credit and other market losses. Increased market volatility and strong customer demand in a positive trading environment also contributed to this improvement. While income was down marginally in UK Corporate and held steady in Retail & Commercial and RBS Insurance, a significant improvement occurred in Global Banking & Markets, reflecting the reduced credit and other market losses and a more buoyant trading market during the year compared with 2008.
Operating expenses Total operating expenses, excluding amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gains on pensions curtailment and bonus tax, increased by 7% to £17,401 million, largely resulting from increased staff costs. Staff costs were up 14% with most of the movement relating to adverse movements in foreign exchange rates and some salary inflation. Changes in incentive compensation, primarily in Global Banking & Markets, represented most of the remaining change. The Group cost:income ratio improved to 69%, compared with 105% in 2008.
Impairment losses Impairment losses increased to £13,899 million from £7,432 million in 2008, with Core bank impairments rising by £2,182 million and Non-Core by £4,285 million. Signs that impairments might be plateauing appear to have been borne out in the latter part of the year, and there are indications that the pace of downwards credit rating migration for corporates is slowing. Nonetheless, the financial circumstances of many consumers and businesses remain fragile, and rising refinancing costs, whether as a result of monetary tightening or of increased regulatory capital requirements, could expose some customers to further difficulty.
Pension curtailment gains of £2,148 million were recognised during the fourth quarter of 2009 arising from changes to prospective pension benefits in the defined benefit scheme and certain other subsidiary schemes. A charge related to the UK Government's bonus tax proposals of £208 million was reflected in 2009 with a further £160 million deferred until 2010 and 2011.
Total income Total income increased 59% to £33,026 million in 2009.
Non-interest income Non-interest income increased to £19,638 million from £5,248 million in 2008. This included a gain on redemption of own debt of £3,790 million. Excluding the gain on redemption of own debt, non-interest income increased by £10,600 million primarily due to the increase in income from trading activities.
Impairment losses Impairment losses were £13,899 million, compared with £7,439 million in 2008.
Risk elements in lending and potential problem loans represented 5.5% of gross loans and advances to customers excluding reverse repos at 31 December 2009 (2008 - 2.5%).
- UK 3.40 3.33 5.77 3.40 3.33 5.72 - Overseas 3.14 3.71 5.66 3.13 3.71 5.55 Interest spread (4) - Group 1.81 1.55 1.84 1.81 1.55 1.79 - UK 2.04 1.48 1.88 2.04 1.48 1.94 - Overseas 1.50 1.66 1.79 1.49 1.62 1.64 Net interest margin (5) - Group 2.01 1.76 2.08 2.00 1.74 1.99
The Royal Bank of Scotland plc base rate (average) 0.50 0.64 4.67 0.50 0.64 4.67 London inter-bank three month offered rates (average)
(3) Gross yield is the interest rate earned on average interest-earning assets of the banking business. (4) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (5) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. (6) Interest receivable has been decreased by £90 million in respect of a non-recurring receivable (2009 - nil; 2008 - nil). (7) Interest payable has been increased by £319 million in respect of non-recurring adjustments (2009 - nil; 2008 - nil).
Liabilities Deposits by banks - UK 21,816 334 1.53 24,837 675 2.72 - Overseas 59,542 996 1.67 106,353 2,177 2.05 Customer accounts: demand deposits - UK 120,796 621 0.51 109,756 559 0.51 - Overseas 39,218 609 1.55 38,287 408 1.07 Customer accounts: savings deposits - UK 68,142 935 1.37 54,048 772 1.43 - Overseas 25,587 213 0.83 26,976 473 1.75 Customer accounts: other time deposits - UK 42,818 431 1.01 67,728 807 1.19 - Overseas 45,080 914 2.03 58,168 1,618 2.78 Debt securities in issue - UK 123,729 2,186 1.77 130,002 3,162 2.43 - Overseas 72,247 1,065 1.47 96,075 1,654 1.72 Subordinated liabilities - UK 19,998 480 2.40 25,001 852 3.41 - Overseas 9,336 252 2.70 10,347 458 4.43 Internal funding of trading business - UK (41,451) (140) 0.34 (60,284) (317) 0.53 - Overseas (6,864) (41) 0.60 (14,845) (191) 1.29 Interest-bearing liabilities - UK 355,848 4,847 1.36 351,088 6,510 1.85 - Overseas 244,146 4,008 1.64 321,361 6,597 2.05 Total interest-bearing liabilities - banking business (2,3,6) 599,994 8,855 1.48 672,449 13,107 1.95 - trading business (4) 293,993 331,380 Interest-bearing liabilities 893,987 1,003,829 Non-interest-bearing liabilities: Demand deposits - UK 29,022 16,446 - Overseas 23,994 20,043 Other liabilities (3,4) 599,474 761,975 Owners' equity 76,906 57,303 Total liabilities and owners' equity 1,623,383 1,859,596
Assets Loans and advances to banks - UK 19,049 978 5.13 - Overseas 28,474 1,311 4.60 Loans and advances to customers - UK 321,177 19,085 5.94 - Overseas 275,000 16,030 5.83 Debt securities - UK 36,395 1,679 4.61 - Overseas 57,998 3,114 5.37 Interest-earning assets - UK 376,621 21,742 5.77 - Overseas 361,472 20,455 5.66 Total interest-earning assets - banking business (2,3,5) 738,093 42,197 5.72 - trading business (4) 425,454 Interest-earning assets 1,163,547 Non-interest-earning assets (2,3) 660,628 Total assets 1,824,175
Assets Loans and advances to banks - UK 22,578 223 0.99 21,373 278 1.30 - Overseas 30,146 369 1.22 30,403 554 1.82 Loans and advances to customers - UK 311,060 11,907 3.83 333,408 11,864 3.56 - Overseas 196,453 6,900 3.51 242,204 9,504 3.92 Debt securities - UK 66,735 1,467 2.20 53,955 1,466 2.72 - Overseas 64,011 1,837 2.87 71,152 2,711 3.81 Interest-earning assets - UK 400,373 13,597 3.40 408,736 13,608 3.33 - Overseas 290,610 9,106 3.13 343,759 12,769 3.71 Total interest-earning assets - banking business (2,3,5) 690,983 22,703 3.29 752,495 26,377 3.51 - trading business (4) 276,330 291,092 Interest-earning assets 967,313 1,043,587 Non-interest-earning assets (2,3) 704,891 979,893 Total assets 1,672,204 2,023,480
Assets Loans and advances to banks - UK 18,893 939 4.97 - Overseas 28,534 1,314 4.61 Loans and advances to customers - UK 321,002 19,055 5.94 - Overseas 275,177 16,041 5.83 Debt securities - UK 35,725 1,493 4.18 - Overseas 76,935 3,764 4.89 Interest-earning assets - UK 375,620 21,487 5.72 - Overseas 380,646 21,119 5.55 Total interest-earning assets - banking business (2,3,5) 756,266 42,606 5.63 - trading business (4) 425,454 Interest-earning assets 1,181,720 Non-interest-earning assets (2,3) 858,965 Total assets 2,040,685
Liabilities Deposits by banks - UK 45,684 1,659 3.63 - Overseas 111,697 4,703 4.21 Customer accounts: demand deposits - UK 99,840 2,794 2.80 - Overseas 36,461 681 1.87 Customer accounts: savings deposits - UK 42,870 1,691 3.94 - Overseas 23,753 570 2.40 Customer accounts: other time deposits - UK 95,181 3,998 4.20 - Overseas 101,316 3,908 3.86 Debt securities in issue - UK 111,099 4,617 4.16 - Overseas 115,474 5,149 4.46 Subordinated liabilities - UK 26,799 1,369 5.11 - Overseas 10,577 603 5.70 Internal funding of trading business - UK (85,664) (3,445) 4.02 - Overseas (18,090) (729) 4.03 Interest-bearing liabilities - UK 335,809 12,683 3.78 - Overseas 381,188 14,885 3.90 Total interest-bearing liabilities - banking business (2,3,6) 716,997 27,568 3.84 - trading business (4) 466,610 Interest-bearing liabilities 1,183,607 Non-interest-bearing liabilities: Demand deposits - UK 19,796 - Overseas 17,625 Other liabilities (3,4) 761,113 Owners' equity 58,544 Total liabilities and owners' equity 2,040,685
Net change £m £m £m £m £m £m Interest-earning assets Loans and advances to banks
UK 74 267 341 74 268 342 Overseas 834 347 1,181 832 391 1,223 Customer accounts: demand deposits
UK 264 112 376 269 127 396 Overseas 319 385 704 379 426 805 Debt securities in issue
2009 over 2008 - pro forma 2009 over 2008 - statutory Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average volume
UK 908 2,249 3,157 908 2,263 3,171 Overseas 994 814 1,808 1,326 863 2,189 Debt securities in issue
Fees and commissions receivable 8,194 8,738 8,845 8,193 8,738 8,855 Fees and commissions payable (2,211) (2,790) (2,411) (2,211) (2,790) (2,444) Income/(loss) from trading activities - excluding Asset Protection Scheme credit default swap - fair value changes 6,138 3,999 (9,084) 6,067 3,761 (9,025) - Asset Protection Scheme credit default swap - fair value changes — — — (1,550) — — Gain on redemption of own debt — — — 553 3,790 — Other operating income 1,213 787 544 1,479 873 2,153 Non-interest income (excluding insurance net premium income) 13,334 10,734 (2,106) 12,531 14,372 (461) Insurance net premium income 5,128 5,266 5,709 5,128 5,266 5,709 Total non-interest income 18,462 16,000 3,603 17,659 19,638 5,248
Note: (1) Pro forma excludes fair value of own debt, gain on redemption of own debt, strategic disposals and Asset Protection Scheme credit default swap - fair value changes.
Income from trading activities rose substantially during the year by £2,139 million to £6,138 million. Trading revenues in GBM were lower than 2009, which saw unusually buoyant market conditions as rapidly falling interest rates generated significant revenue opportunities. This was more than offset by much reduced Non-Core trading losses from £5,161 million in 2009 to £31 million in 2010 as underlying asset prices recovered and monoline spreads tightened. The unwinding of some banking book hedges also helped reduce trading losses.
Other operating income increased by £426 million to £1,213 million. This improvement principally reflected a profit on sale of securities of £533 million compared with a loss of £55 million in 2009 and higher profits from associated entities. These were partially offset by declines in the fair value of securities and investment properties.
2010 compared with 2009 - statutory Net fees and commissions increased by £34 million to £5,982 million primarily due to improved performance in GBM (£160 million), driven by higher portfolio management and origination income, and UK Corporate (£94 million), principally reflecting strong refinancing levels and increased operating lease activity This increase was partially offset by reduced fees in UK Retail (£144 million) and Ulster Bank (£72 million) principally reflecting the restructuring of current account overdraft fees.
Income from trading activities rose substantially during the year by £13,083 million, principally due to lower credit market losses reflecting improved underlying asset prices compared with 2008. Increased market volatility and strong customer demand in a positive trading environment also contributed to this improvement.
Insurance net premium income fell by £443 million reflecting lower bancassurance fees, and lower general insurance premiums.
General insurance 4,698 4,223 3,733 4,698 4,223 3,733 Bancassurance 85 134 184 85 134 184 Insurance net claims 4,783 4,357 3,917 4,783 4,357 3,917
2010 compared with 2009 - pro forma The main driver of a 4% decrease in operating expenses is the recognition of benefits from the Group-wide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.
Premises and equipment costs fell by 7% in the year to £2,402 million largely driven by efficiency cost savings, significant one-off property impairments recognised in 2009 and country exits following Non-Core disposals.
Other expenses fell by £454 million to £3,995 million principally reflecting continued savings from the Group’s efficiency programme.
Other expenses fell by £288 million due to integration benefits in GBM partially offset by increased deposit insurance levies in the US.
2009 compared with 2008 - statutory Staff costs, excluding pension schemes curtailment gains, were up £1,095 million with most of the movement relating to adverse movements in foreign exchange rates and some salary inflation. Changes in incentive compensation, primarily in Global Banking & Markets, represented most of the remaining change.
Other expenses fell by £267 million due to integration benefits in GBM partially offset by increased deposit insurance levies in the US.
Staff costs 210 365 503 Premises and equipment 3 78 25 Other administrative expenses 143 398 486 Depreciation and amortisation 20 18 36 376 859 1,050 2010 compared with 2009 Integration costs were £376 million compared with £859 million in 2009. The fall in integration costs primarily relates to RBS N.V. (formerly ABN AMRO), as they migrate onto RBS systems.
2009 compared with 2008 Integration costs in 2009 were £859 million compared with £1,050 million in 2008. Integration costs decreased primarily due to lower RBS N.V. (formerly ABN AMRO) integration activity during the year.
Staff costs - redundancy — 55 (55) — Staff costs - other — 155 (155) — Premises and equipment 40 3 (19) 24 Other 1 163 (164) — 41 376 (393) 24
Staff costs 353 328 251 Premises and equipment 117 48 15 Other administrative expenses 104 51 41 574 427 307 2010 compared with 2009 Restructuring costs were £574 million compared with £427 million in 2009. The increase is a result of the number of restructuring projects being undertaken.
2009 compared with 2008 Restructuring costs were £427 million compared with £307 million in 2008. The number of restructuring projects increased during the year, as a result of ongoing strategic review being undertaken by the Group.
At Charge Utilised At 31 December to income during 31 December 2009 statement the year 2010 £m £m £m £m
Staff costs - redundancy — 28 (6) 22 Staff costs - other — 23 (15) 8 Premises and equipment — 6 (6) — Other — 25 (23) 2 — 82 (50) 32 73RBS Group 2010
New impairment losses 9,667 14,224 7,693 9,667 14,224 7,700 Less: recoveries of amounts previously written-off (411) (325) (261) (411) (325) (261)
Impairments for Ulster Bank Group (Core and Non-Core) increased to £3,843 million compared with £1,927 million in 2009.
2009 compared with 2008 - pro forma Impairment losses were £13,899 million compared with £7,432 million. Impairment losses in the Core divisions increased by £2,182 million, while Non-Core losses increased by £4,285 million.
Asset-backed products 235 (288) (4,778) Other credit exotics 77 (558) (947)
2010 compared with 2009 Tightening credit spreads, a recovery in underlying asset prices and gains on sales of asset-backed products during 2010 contributed to significantly lower losses in 2010. Unwinding of some banking book hedges in 2010 also resulted in lower losses. Monoline losses of £2,387 million in 2009 reflected the widening credit spreads and lower recovery rates. CDPC losses were higher in 2009 due to losses on market risk hedges.
Other losses include credit valuation and other reserves against derivative counterparties other than monolines and CDPCs. Losses increased due to rating downgrades as well as other losses on specific deals.
The credit quality of the monolines has continued to deteriorate and the level of CVA held against exposures to monoline counterparties has increased from 52% to 62% during the year. This was driven by a combination of wider credit spreads and lower recovery rates.
The gross exposure to monoline counterparties has decreased primarily due to a combination of higher prices of underlying reference instruments and restructuring certain exposures.
Losses relating to CDPC exposures were £957 million in 2009 compared with £615 million in 2008.
The credit quality of the CDPCs has continued to deteriorate and the level of CVA held against exposures to CDPC counterparties has increased from 27% to 39% during the year.
Losses relating to asset-backed products were £288 million in 2009 compared with £4,778 million in 2008.
Losses reported in 2009 primarily relate to super senior CDOs. The significant price declines of the underlying predominantly mortgagebacked securities seen in 2008 were not repeated in 2009.
Credit market exposures continued Additional disclosures on these and other related exposures can be found in the following sections: Disclosure Section Sub-section Page Further analysis of credit market exposures Risk and balance sheet management Other risk exposures 204 Valuation aspects Financial statements Note 12 Financial instruments - valuation 310 Financial statements Critical accounting policies 284 Reclassification of financial instruments Financial statements Note 11 Financial instruments - classification 306 £m £m £m £m £m £m
Expected tax credit 67 540 2,364 112 741 7,322 Non-deductible goodwill impairment — — — (3) (102) (3,826)
Items not allowed for tax - losses on strategic disposals and write downs (299) (152) (108) (311) (152) (108)
Non-taxable items - gain on sale of Global Merchant Services 221 — — 221 — — - gain on redemption of own debt 11 693 — 11 693 —
2009 compared with 2008 - pro forma The low tax credit in 2009 reflects profits in high tax regimes and losses in low tax regimes, together with £715 million relating to losses in overseas subsidiaries for which a deferred tax asset has not been recognised, and £152 million mainly in respect of losses on disposal of businesses for which no tax relief is available.
2009 compared with 2008 - statutory The low tax credit in 2009 reflects profits in high tax regimes and losses in low tax regimes, together with £780 million relating to losses in overseas subsidiaries for which a deferred tax asset has not been recognised, and £152 million mainly in respect of losses on disposal of business for which no tax relief is available.
UK Retail 1,372 229 723 UK Corporate 1,463 1,125 1,781 Wealth 304 420 348 Global Transaction Services 1,088 973 1,002 Ulster Bank (761) (368) 218 US Retail & Commercial 306 (113) 528 Retail & Commercial 3,772 2,266 4,600 Global Banking & Markets 3,364 5,758 (2,153) RBS Insurance (295) 58 584 Central items 577 385 150 Core 7,418 8,467 3,181 Non-Core (5,505) (14,557) (11,351) Operating profit/(loss) before fair value of own debt 1,913 (6,090) (8,170) Fair value of own debt 174 (142) 1,232 Operating profit/(loss) 2,087 (6,232) (6,938) Amortisation of purchased intangible assets (369) (272) (443) Integration and restructuring costs (1,032) (1,286) (1,357) Gain on redemption of own debt 553 3,790 — Strategic disposals 171 132 442 Gains on pensions curtailment — 2,148 — Bonus tax (99) (208) — Asset Protection Scheme credit default swap - fair value changes (1,550) — — Loss before tax (239) (1,928) (8,296)
UK Retail 3.91 3.59 3.58 UK Corporate 2.51 2.22 2.40 Wealth 3.37 4.38 4.51 Global Transaction Services 6.73 9.22 8.25 Ulster Bank 1.84 1.87 1.89 US Retail & Commercial 2.85 2.37 2.68 Retail & Commercial 3.14 2.89 3.00 Global Banking & Markets 1.05 1.38 1.34 Non-Core 1.16 0.69 0.87 2010 2009 2008 Risk-weighted assets by division £bn £bn £bn
UK Retail 48.8 51.3 45.7 UK Corporate 81.4 90.2 85.7 Wealth 12.5 11.2 10.8 Global Transaction Services 18.3 19.1 17.4 Ulster Bank 31.6 29.9 24.5 US Retail & Commercial 57.0 59.7 63.9 Retail & Commercial 249.6 261.4 248.0 Global Banking & Markets 146.9 123.7 151.8 Other 18.0 9.4 7.1 Core 414.5 394.5 406.9 Non-Core 153.7 171.3 170.9 Group before benefit of Asset Protection Scheme 568.2 565.8 577.8 Benefit of Asset Protection Scheme (105.6) (127.6) — Group before RFS Holdings minority interest 462.6 438.2 577.8 RFS Holdings minority interest 2.9 102.8 118.0 Group 465.5 541.0 695.8
Net interest income 4,078 3,452 3,187 Net fees and commissions 1,100 1,244 1,524 Other non-interest income (net of insurance claims) 227 251 227 Non-interest income 1,327 1,495 1,751 Total income 5,405 4,947 4,938 Direct expenses
Analysis of impairment by sector Mortgages 177 124 31 Personal 682 1,023 568 Cards 301 532 420 Total impairment losses 1,160 1,679 1,019
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 0.2% 0.1% — Personal 5.8% 7.5% 3.7%
Performance ratios Return on equity (1) 18.0% 3.0% 11.1% Net interest margin 3.91% 3.59% 3.58% Cost:income ratio 52% 60% 62% Adjusted cost:income ratio (2) 53% 61% 65%
Serving our customers better is a key priority for RBS. While our customer satisfaction compares well with our competitors we know we can do more. In June 2010 we launched a Customer Charter setting out 14 commitments to delivering helpful banking.
2010 compared with 2009 Operating profit recovered strongly from the low levels recorded in 2008 and 2009 to £1,372 million. Profit before impairments was up £624 million or 33% and impairments fell by £519 million as the economic environment continued to recover.
Mortgage growth was due to good retention of existing customers and new business, the majority of which comes from the existing customer base. Gross mortgage lending market share remained broadly in line with 2009 at 12%, with the Group on track to meet its Government target on net mortgage lending.
Expenses decreased by 5%, with the cost:income ratio (net of insurance claims) improving from 61% to 53%.
Direct staff costs declined by 8%, largely driven by a clear management focus on process re-engineering enabling a 7% reduction in headcount.
2009 compared with 2008 Operating profit of £229 million was £494 million lower than in 2008. Profit before impairments was up £166 million or 10%, but impairments rose by £660 million as the economic environment deteriorated, albeit with signs of conditions stabilising in the second half of the year.
Mortgage growth was due to good retention of existing customers and new business sourced predominantly from the existing customer base. Gross mortgage lending market share increased to 12% from 7% in 2008, with the Group on track to exceed its Government targets on net lending by £3 billion.
Customer deposits grew 11% on 2008 reflecting the strength of the UK Retail customer franchise, which outperformed the market in an increasingly competitive environment. Savings balances grew by £6 billion or 11% and account acquisition saw a 20% increase, with 2.2 million accounts opened. Personal current account balances increased by 12% on 2008 with a 3% growth in accounts to 12.8 million.
RBS continues to progress towards a more convenient, lower cost operating model, with over 4 million active users of online banking and a record share of new sales achieved through direct channels. More than 5.5 million accounts have switched to paperless statements and 254 branches now utilise automated cash deposit machines.
Analysis of impairment by sector Banks and financial institutions 20 15 9 Hotels and restaurants 52 98 25 House building and construction 131 106 42 Manufacturing 1 51 14 Other 127 150 53 Private sector education, health, social work, recreational and community services 30 59 15 Property 245 259 24 Wholesale and retail trade, repairs 91 76 37 Asset and invoice finance 64 113 100 Total impairment losses 761 927 319
Performance ratios Return on equity (1) 12.1% 9.4% 15.9% Net interest margin 2.51% 2.22% 2.40% Cost:income ratio 43% 43% 44%
UK Corporate performed strongly in the deposit market, with customer deposit balance growth of £12 billion contributing to a 16 percentage point improvement in the loan to deposit ratio in 2010. While customer lending increased only marginally (with gross lending largely offset by customer deleveraging) net interest income rose by £280 million, 12%, and net interest margin rose by 29 basis points driven primarily by the good progress made on loan repricing.
Non-interest income increased 3% reflecting strong refinancing levels and increased operating lease activity, partially offset by lower sales of financial market products.
Return on equity increased from 9.4% to 12.1%, reflecting higher operating profit and lower RWAs as a result of improved risk metrics.
Gross new lending to customers remained resilient in 2009, with a noticeable acceleration of lending activity in the second half of the year. However, as customers have deleveraged and turned increasingly to capital markets, repayments have accelerated even more sharply. Loans and advances to customers, therefore, declined by 5% to £111.6 billion.
Initiatives aimed at increasing customer deposits have been successful, with balance growth of 7%, although margins declined as a result of increased competition for balances.
A reduction in costs of 7% was driven by lower staff expenses as a result of the Group's restructuring programme, together with restraint on discretionary spending levels.
Risk-weighted assets grew 5% despite the fall in customer lending, reflecting the impact of procyclicality, which was most pronounced in the first half of 2009.
Net interest income 609 663 578 Net fees and commissions 376 363 405 Other non-interest income 71 83 76 Non-interest income 447 446 481 Total income 1,056 1,109 1,059 Direct expenses
Operating profit before impairment losses 322 453 364 Impairment losses (18) (33) (16)
Analysis of income Private banking 857 916 819 Investments 199 193 240 Total income 1,056 1,109 1,059
Performance ratios Return on equity (1) 18.9% 30.3% 27.3% Net interest margin 3.37% 4.38% 4.51% Cost:income ratio 70% 59% 66%
£bn £bn £bn Capital and balance sheet Loans and advances to customers (gross) - mortgages 7.8 6.5 5.3 - personal 6.7 4.9 5.0 - other 1.6 2.3 2.1 16.1 13.7 12.4 Customer deposits 36.4 35.7 34.1 Assets under management (excluding deposits) 32.1 30.7 34.7 Risk elements in lending 0.2 0.2 0.1 Loan:deposit ratio (excluding repos) 44% 38% 36% Risk-weighted assets 12.5 11.2 10.8
Income declined by 5% primarily due to lower net interest income. Strong lending and investment income was offset by the impact of a competitive deposit market.
Expenses grew by 12% to £734 million. Direct expenses were up 5%, £23 million reflecting additional strategic investment. Indirect expenses increased by £55 million reflecting a change in allocation of Business Services costs.
2009 compared with 2008 Wealth produced strong growth in operating profit, up 21% to £420 million, reflecting the increased value of the division's healthy deposit base in an increasingly competitive market for funding. Deposit balances increased by 5% from 2008, though the deposit market remains highly competitive.
Net interest income 974 912 937 Non-interest income 1,587 1,575 1,494 Total income 2,561 2,487 2,431 Direct expenses
Analysis of income by product Domestic cash management 818 805 795 International cash management 801 734 722 Trade finance 309 290 241 Merchant acquiring 451 505 527 Commercial cards 182 153 146 Total income 2,561 2,487 2,431
2009 compared with 2008 Operating profit declined by 3%, or 6% at constant foreign exchange rates, largely reflecting pressure on deposit income. The attrition of deposit balances experienced in the first half was reversed in the second, but margins remain compressed due to both a very competitive deposit market as well as the low rate environment.
Net interest income 761 780 773 Net fees and commissions 156 228 238 Other non-interest income 58 26 28 Non-interest income 214 254 266 Total income 975 1,034 1,039 Direct expenses
Analysis of income by business Corporate 521 580 618 Retail 465 412 396 Other (11) 42 25 Total income 975 1,034 1,039
Analysis of impairment by sector Mortgages 294 74 17 Corporate - property 375 306 37 - other corporate 444 203 7 Other lending 48 66 45 Total impairment losses 1,161 649 106
Non-interest income was 14% lower on a constant currency basis reflecting a non-recurring gain in 2009.
Impairment losses increased by £512 million to £1,161 million reflecting the deteriorating economic environment in Ireland and rising default levels across both personal and corporate portfolios. Lower asset values, particularly in property-related lending together with pressure on borrowers with a dependence on consumer spending have resulted in higher corporate loan losses, while higher unemployment, lower incomes and increased taxation have driven mortgage impairment increases.
2009 compared with 2008 Operating results were in line with expectations but deteriorated during 2009 as economic conditions across the island of Ireland worsened, with an operating loss for the year of £368 million.
At constant exchange rates loans to customers decreased by 4% from the prior year as new business demand weakened. Customer deposits reduced by 5% in 2009 in constant currency terms, reflecting an increasingly competitive Irish deposit market and reductions in wholesale funding during Q1. During the second half of the year the market stabilised and the division recorded strong growth in customer balances resulting in an improved funding profile.
Total costs for the year were flat on a constant currency basis. Direct expenses were down 12% in constant currency terms during 2009, driven by the bank's restructuring programme, which incorporates the merger of the First Active and Ulster Bank businesses. The rollout of the programme has resulted in a downward trend in direct expenses throughout 2009. The reduction in direct expenses has been offset by a 17% increase in indirect expenses primarily reflecting provisions relating to the bank's own property recognised in the fourth quarter.
Customer account numbers increased by 3% during 2009, with growth fuelled by strong current account activity and new-to-bank savings customers.
Analysis of impairment by sector Residential mortgages 90 113 76 58 72 41 Home equity 194 261 125 126 167 67 Corporate and commercial 312 510 335 202 326 181 Other consumer 150 215 275 97 137 148 Securities 53 — — 34 — — Total impairment losses 799 1,099 811 517 702 437
Note: (1) Divisional return on equity is based on divisional operating profit/(loss) after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions).
Capital and balance sheet Total third party assets 110.5 122.3 129.5 71.2 75.4 88.7 Loans and advances to customers (gross)
- residential mortgages 9.4 10.6 13.9 6.1 6.5 9.5 - home equity 23.6 25.0 27.2 15.2 15.4 18.7 - corporate and commercial 31.7 31.6 34.7 20.4 19.5 23.8 - other consumer 10.6 12.1 14.3 6.9 7.5 9.8 75.3 79.3 90.1 48.6 48.9 61.8 Customer deposits (excluding repos) 91.2 97.4 93.4 58.7 60.1 63.9 Risk elements in lending - retail 0.7 0.6 0.3 0.4 0.4 0.2 - commercial 0.7 0.4 0.2 0.5 0.2 0.2 1.4 1.0 0.5 0.9 0.6 0.4 Loan:deposit ratio (excluding repos) 81% 80% 96% 81% 80% 96% Risk-weighted assets 88.4 96.9 93.2 57.0 59.7 63.9 2010 compared with 2009 Operating profit of $473 million represented a marked improvement from an operating loss of $174 million with income up 7%, expenses down 2% and impairment losses down 27%.
Non-interest income was up 7% reflecting higher mortgage banking and debit card income, commercial banking fees and higher gains on securities realisations. This was partially offset by lower deposit fees which were impacted by Regulation E legislative changes in 2010. In addition, gains of $330 million were recognised on the sale of availablefor -sale securities as part of the balance sheet restructuring exercise, but these were almost wholly offset by losses crystallised on the termination of swaps hedging fixed-rate funding.
The division achieved very strong growth in mortgage origination volumes, with significantly higher penetration through the branch network and improved profitability, particularly on recent origination vintages. Cross-selling of card, deposit and checking account products has increased substantially, with over 65% of new mortgage customers also taking out a checking account. The division has also increased commercial banking market penetration, with lead bank share within its footprint increasing from 6% to 7% in the $5 million to $25 million segment and from 6% to 8% in the $25 million to $500 million segment.
Operating profit/(loss) before fair value of own debt 3,364 5,758 (2,153) Fair value of own debt 139 (49) 357 Operating profit/(loss) 3,503 5,709 (1,796)
2010 2009 2008 £bn £bn £bn Capital and balance sheet Loans and advances to customers 75.1 90.9 168.7 Loans and advances to banks 44.5 36.9 55.5 Reverse repos 94.8 73.3 88.8 Securities 119.2 106.0 127.5 Cash and eligible bills 38.8 74.0 20.2 Other 24.3 31.1 38.0 Total third party assets (excluding derivatives mark-to-market) 396.7 412.2 498.7 Net derivative assets (after netting) 37.4 68.0 121.0 Customer deposits (excluding repos) 38.9 46.9 87.8 Risk elements in lending 1.7 1.8 0.9 Loan:deposit ratio (excluding repos) 193% 194% 192% Risk-weighted assets 146.9 123.7 151.8 2010 compared with 2009 A fall in operating profit, excluding fair value of own debt, of 42% year on year reflects sharply reduced revenue partially offset by lower costs and a significant improvement in impairments.
The Credit Markets business remained broadly flat, supported by strong Mortgage Trading income where customer demand remained buoyant during 2010.
2009 compared with 2008 Operating profit, excluding the fair value of own debt, improved to £5,758 million in 2009, compared with an operating loss of £2,153 million in 2008. Although the buoyant market conditions experienced in the first quarter levelled off over the course of the year, the refocusing of the business on its core franchises was successful. GBM has tightened its balance sheet management over the course of the year, with disciplined deployment of capital to support its targeted client base.
Income grew significantly, reflecting a very strong first quarter benefiting from market volatility, client activity and a marked improvement from credit and mortgage markets. Rates flow business, up 127%, benefited from good client activity, while strong equity capital markets drove a fourfold increase in Equities.
Despite quarterly movement in the Group's credit spreads, overall spreads remained broadly flat over the year resulting in a small loss from movements in the fair value of own debt compared with a £357 million gain in 2008.
2009 compared with 2008 continued Staff costs represented 26% of income. The Group introduced new deferral policies in 2009, which have led to changes in accrual patterns. Adjusting for both 2008 and 2009 deferrals, GBM's compensation ratio in 2009 would have been 28%.
Analysis of income by product Personal lines motor excluding broker - own brands 1,787 1,783 1,674 - partnerships 272 301 320 Personal lines home excluding broker - own brands 474 443 415 - partnerships 378 381 385 Personal lines other excluding broker - own brands 192 191 185 - partnerships 144 212 173 Other - commercial 299 305 319 - international 316 288 267 - other (1) 230 251 310 Total income 4,092 4,155 4,048
In-force policies (000's) Personal lines motor excluding broker - own brands 4,162 4,762 4,396 - partnerships 645 844 951 Personal lines home excluding broker - own brands 1,758 1,717 1,516 - partnerships 1,850 1,918 1,993 Personal lines other excluding broker - own brands 2,005 2,319 1,938 - partnerships 8,177 7,335 7,814 Other - commercial 284 273 266 - international 1,082 944 949 - other (1) 644 1,123 1,246 Total in-force policies (2) 20,607 21,235 21,069 Gross written premiums (£m) 4,298 4,480 4,384
Notes: (1) Other is predominantly made up of the discontinued personal lines broker business. (2) Total in-force policies include travel and creditor policies sold through RBS Group. These comprise travel policies included in bank accounts e.g. Royalties Gold Account, and creditor policies sold with bank products including mortgage, loan and card repayment payment protection. (3) Divisional return on equity is based on divisional operating (loss)/profit after tax, divided by divisional average notional equity (based on regulatory capital). (4) Loss ratio is based on net claims divided by net premium income for the UK businesses. (5) Commission ratio is based on fees and commissions divided by gross written premium income for the UK businesses. (6) Expense ratio is based on expenses (excluding fees and commissions) divided by gross written premium income for the UK businesses. (7) Combined operating ratio is expenses (including fees and commissions) divided by gross written premium income, added to the loss ratio, for the UK businesses.
Income was down 2% (£63 million) against 2009, driven by a managed reduction in the risk of the UK motor book, largely offset by significant price increases: This de-risking was achieved by a combination of rating action to reduce the mix of higher-risk drivers, and the partial or total exit of higher risk business lines (significantly scaling back the fleet and taxi business and the exit of personal lines business sold through insurance brokers). As a result in-force motor policies fell 14% compared with 2009.
Total in-force policies declined by 3%, driven by a fall of 14% in motor policies. This was partly offset by higher travel policies, up 64% with new business from a partnership with Nationwide Building Society commencing in Q4 2010. The personal lines broker segment overall declined by 43%, in line with business strategy.
2009 compared with 2008 Operating profit was severely affected by the rising costs of bodily injury claims, declining to £58 million. Significant price increases were implemented in the latter part of the year to mitigate the industry trend of rising claims costs.
In-force policies grew by 1%, driven by the success of own brands, up 12%. Churchill and Privilege have benefited from deployment on selected price comparison websites, with motor policy numbers up 19% and 3% respectively, and home policies up 32% and 109% respectively, compared with prior year. Direct Line motor and home policies grew by 4% and 2% respectively. The partnerships and broker segment declined by 10% in line with business strategy.
The UK combined operating ratio, including business services costs, was 106% compared with 94% in the previous year, with the impact of the increase in reserves for bodily injury claims and the bad weather experience only partially mitigated by commission and expense ratio improvement.
Central items not allocated before fair value of own debt 577 385 150 Fair value of own debt 35 (93) 875 Central items not allocated 612 292 1,025
2009 compared with 2008 Items not allocated during the year amounted to a net credit of £292 million. The Group's credit spreads have fluctuated over the course of the year, but ended the year slightly tighter, resulting in an increase in the carrying value of own debt. This was offset by a net credit on unallocated Group Treasury items, including the impact of economic hedges that do not qualify for IFRS hedge accounting. 2008 results included some significant disposal gains.
Analysis of income by business Banking & portfolios 550 (1,338) 2,324 International businesses & portfolios 1,922 2,262 2,980 Markets 561 (3,225) (8,336)
Total third party assets (excluding derivatives) 137.9 201.0 257.9 Total third party assets (including derivatives) 153.9 220.9 342.9 Loans and advances to customers (gross) 108.4 149.5 191.4 Customer deposits 6.7 12.6 27.4 Risk elements in lending 23.4 22.9 11.1 Risk-weighted assets 153.7 171.3 170.9
Notes: (1) Includes losses on disposals of £504 million for the year ended 31 December 2010. (2) Includes disposal groups. (3) Includes RBS Sempra Commodities JV: 2010 third party assets (TPAs) £6.7 billion; RWAs £4.3 billion (2009 TPAs £14.2 billion; RWAs £10.2 billion).
£m £m £m UK Retail Mortgages 5 6 1 Personal 8 47 42 Other — — 62 Total UK Retail 13 53 105
UK Corporate Manufacturing and infrastructure 26 87 42 Property and construction 437 651 281 Transport 3 10 (3) Banks and financials 69 102 4 Lombard 129 95 61 Invoice finance (3) 3 —
Ulster Bank Mortgages 42 42 6 Commercial investment and development 699 303 9 Residential investment and development 1,690 716 229 Other 251 217 60 Other EMEA 52 106 116 Total Ulster Bank 2,734 1,384 420
UK Retail Mortgages 1.6 1.9 2.2 Personal 0.4 0.7 1.1 Total UK Retail 2.0 2.6 3.3
UK Corporate Manufacturing and infrastructure 0.3 0.3 0.3 Property and construction 11.4 14.1 11.3 Lombard 1.7 2.9 3.7 Invoice finance — 0.4 0.7 Other 13.6 17.2 22.1 Total UK Corporate 27.0 34.9 38.1
Other Wealth 0.4 2.6 3.6 Global Transaction Services 0.3 0.8 1.4 RBS Insurance 0.2 0.2 0.2 Central items (1.0) (3.2) — Total Other (0.1) 0.4 5.2
2010 compared with 2009 By the end of 2010 third party assets (excluding derivatives) had decreased to £138 billion, £5 billion lower than the end of year target, as a result of a successful disposal strategy, managed portfolio run-off and impairments.
Staff costs decreased by 14% over the year, or by 20% at constant exchange rates, due to headcount reductions and business divestments, notably Linea Directa and Tesco Personal Finance. Lower depreciation charges followed the 2008 sale of the Angel Trains business.
Deposits by banks declined £55.0 billion, 36%, to £98.7 billion, with reduced inter-bank deposits, down £49.7 billion, 43%, to £65.9 billion and lower repurchase agreements and stock lending (‘repos’), down £5.3 billion, 14%, to £32.7 billion.
Customer accounts rose £28.1 billion, 6%, to £510.7 billion. Within this, repos increased £13.7 billion, 20%, to £82.1 billion. Excluding repos, customer deposits were up £14.3 billion, 3%, to £428.6 billion, reflecting growth in UK Corporate, £12.2 billion, Global Transaction Services £7.8 billion, UK Retail, £7.0 billion, Ulster Bank, £1.7 billion and Wealth, £0.8 billion, together with exchange rate and other movements of £3.0 billion. This was partially offset by decreases in Global Banking & Markets, £8.3 billion, US Retail & Commercial, £4.0 billion and Non-Core, £5.9 billion.
The Group’s non-controlling interests decreased by £0.8 billion, 36%, to £1.4 billion, primarily reflecting the disposal of the majority of the RBS Sempra Commodities JV business, £0.6 billion, and the life assurance business, £0.2 billion.
2010 compared with 2009 Total assets of £1,453.6 billion at 31 December 2010 were down £242.9 billion, 14%, compared with 31 December 2009. This principally reflects the disposal of the RFS minority interest, the continuing planned disposal of Non-Core assets, together with a reduction in the level of debt securities and the mark-to-market value of derivatives.
Deposits by banks declined £43.4 billion, 31%, to £98.8 billion or £55.0 billion, 36% following the disposal of the RFS minority interest, with reduced inter-bank deposits, down £49.7 billion, 43%, to £65.9 billion and lower repurchase agreements and stock lending (‘repos’), down £5.3 billion, 14%, to £32.7 billion.
Customer accounts decreased £103.5 billion, 17%, to £510.7 billion but were up £28.1 billion, 6%, excluding the disposal of the RFS minority interest. Within this, repos increased £13.7 billion, 20%, to £82.1 billion. Excluding repos, customer deposits were up £14.3 billion, 3%, to £428.6 billion, reflecting growth in UK Corporate, £12.2 billion, Global Transaction Services, £7.8 billion, UK Retail, £7.0 billion, Ulster Bank, £1.7 billion and Wealth, £0.8 billion, together with exchange rate and other movements of £3.0 billion. This was partially offset by decreases in Global Banking & Markets, £8.3 billion, US Retail & Commercial, £4.0 billion and Non-Core, £5.9 billion.
Cash and balances at central banks were up £39.7 billion to £51.5 billion due to the placing of short-term cash surpluses, including the proceeds from the issue of B shares in December, with central banks.
Loans and advances to banks decreased by £45.6 billion, 35%, to £83.9 billion with reverse repurchase agreements and stock borrowing ('reverse repos') down by £23.7 billion, 40% to £35.1 billion and lower bank placings, down £22.0 billion, 31%, to £48.8 billion, largely as a result of reduced wholesale funding activity in Global Banking & Markets.
Loans and advances to customers were down £135.6 billion, 19%, at £595.7 billion. Within this, reverse repos increased by 4%, £1.8 billion to £41.0 billion. Excluding reverse repos, lending decreased by £137.3 billion to £554.7 billion or by £131.6 billion, 19%, before impairment provisions. This reflected reductions in Global Banking & Markets of £71.4 billion, and planned reductions in Non-Core of £30.1 billion, including a £3.2 billion transfer to disposal groups in respect of RBS Sempra Commodities JV and the Asian and Latin American businesses. There were also reductions in US Retail & Commercial, £7.4 billion; UK Corporate, £5.4 billion; Ulster Bank, £1.8 billion; and the effect of exchange rate movements, £22.8 billion, following the strengthening of sterling during the year, partially offset by growth in UK Retail of £9.2 billion, and in Wealth of £1.4 billion.
Subordinated liabilities were down £12.1 billion, 28% to £31.5 billion, reflecting the redemption of £5.0 billion undated loan capital, £1.5 billion trust preferred securities and £2.7 billion dated loan capital, together with the effect of exchange rate movements and other adjustments, £2.9 billion.
Owners' equity increased by £18.9 billion, 32% to £77.7 billion. The issue of B shares to HM Treasury in December 2009 raised £25.1 billion, net of expenses, and was offset in part by the creation of a £1.2 billion reserve in respect of contingent capital B shares. The placing and open offer in April 2009 raised £5.3 billion to fund the redemption of the £5.0 billion preference shares issued to HM Treasury in December 2008. Actuarial losses, net of tax, of £2.7 billion, the attributable loss for the period, £2.7 billion, exchange rate movements of £1.9 billion, the payment of other owners' dividends of £0.9 billion including £0.3 billion to HM Treasury on the redemption of preference shares, and partial redemption of paid-in equity, £0.3 billion, were partly offset by increases in available-for-sale reserves, £1.8 billion, cash flow hedging reserves, £0.6 billion, and the equity owners gain on withdrawal of non-controlling interests, net of tax, of £0.5 billion arising from the redemption of trust preferred securities.
2009 compared with 2008 Total assets of £1,696.5 billion at 31 December 2009 were down £705.2 billion, 29%, compared with 31 December 2008, principally reflecting substantial repayments of customer loans and advances as corporate customer demand fell and corporates looked to deleverage their balance sheets. Lending to banks also fell in line with significantly reduced wholesale funding activity. There were also significant falls in the value of derivative assets, with a corresponding fall in derivative liabilities.
Cash and balances at central banks were up £39.9 billion to £52.3 billion due to the placing of short-term cash surpluses, including the proceeds from the issue of B shares in December, with central banks.
Loans and advances to customers were down £146.3 billion, 17%, at £728.4 billion. Within this, reverse repos increased by 4%, £1.7 billion to £41.0 billion. Excluding reverse repos, lending decreased by £148.0 billion, 18%, to £687.4 billion or by £141.8 billion, 17%, before impairment provisions. This reflected reductions in Global Banking & Markets of £71.4 billion, and planned reductions in Non-Core of £30.1 billion, including a £3.2 billion transfer to disposal groups in respect of RBS Sempra Commodities JV and the Asian and Latin American businesses. Reductions were also experienced in US Retail & Commercial, £7.4 billion; UK Corporate, £5.4 billion; Ulster Bank, £1.8 billion; and the effect of exchange rate movements, £33.1 billion, following the strengthening of sterling during the year, partially offset by growth in UK Retail of £9.2 billion, and in Wealth of £1.4 billion.
Net cash flows from investing activities of £3,351 million relate to the net inflows from sales of securities of £4,119 million and investments in business interests and intangibles of £3,446 million. This was partially offset by the outflow of £4,112 million from investing activities of discontinued operations.
Net cash outflow from financing activities of £14,380 million primarily arose from the redemption of non-controlling interests of £5,282 million, dividends paid of £4,240 million, repayment of subordinated liabilities of £1,588 million and the redemption of preference shares of £2,359 million.
The major factors contributing to the net cash outflow from operating activities of £75,338 million were the net operating loss before tax of £36,628 million from continuing and discontinued operations, the decrease of £42,219 million in operating liabilities less operating assets, and the elimination of foreign exchange differences of £41,874 million, partly offset by the write down of goodwill and other intangible assets, £32,581 million and other non-cash items, £8,772 million.
Net cash flows from financing activities of £15,102 million primarily arose from the capital raised from the placing and open offer of £19,741 million and the rights issue of £12,000 million, the issue of subordinated liabilities of £2,413 million and proceeds of non-controlling interests, £1,427 million. This was offset in part by the cash outflow on redemption of noncontrolling interests of £13,579 million, repayment of subordinated liabilities of £1,727 million, dividends paid of £3,193 million and interest paid on subordinated liabilities of £1,967 million.
Capital resources The following table analyses the Group's regulatory capital resources on a fully consolidated basis at 31 December as monitored by the FSA for regulatory purposes. 2010 2009 2008 2007 2006 £m £m £m £m £m Capital base Tier 1 capital 60,124 76,421 69,847 44,364 30,041 Tier 2 capital 9,897 15,389 32,223 33,693 27,491 Tier 3 capital — — 260 200 — 70,021 91,810 102,330 78,257 57,532 Less: Supervisory deductions (4,732) (4,565) (4,155) (10,283) (10,583)
Banking book: On-balance sheet 480,200 318,600 Off-balance sheet 84,600 59,400 Trading book 44,200 22,300 609,000 400,300
Basis of preparation of pro forma results The pro forma financial information shows the underlying performance of the Group including the results of the RBS Holdings N.V. businesses retained by RBS. This information is being provided to give a better understanding of what the results of the operations might have looked like had the acquisition of ABN AMRO as well as the transfers of businesses to the other Consortium Members occurred on 1 January 2008.
Loss from continuing operations (912) (121) — (1,033) Loss from discontinued operations, net of tax (28) (605) — (633) Loss for the year (940) (726) — (1,666) Non-controlling interests (61) 726 — 665 Preference share and other dividends (124) — — (124) Loss attributable to ordinary and B shareholders (1,125) — — (1,125)
Net interest income 13,567 (179) — 13,388 Non-interest income (excluding insurance net premium income) 10,734 (142) 3,780 14,372 Insurance net premium income 5,266 — — 5,266 Non-interest income 16,000 (142) 3,780 19,638 Total income 29,567 (321) 3,780 33,026 Operating expenses (17,401) (35) 19 (17,417) Profit before other operating charges 12,166 (356) 3,799 15,609 Insurance net claims (4,357) — — (4,357) Operating profit before impairment losses 7,809 (356) 3,799 11,252 Impairment losses (13,899) — — (13,899) Operating loss before fair value of own debt (6,090) (356) 3,799 (2,647) Fair value of own debt (142) — 142 — Operating loss (6,232) (356) 3,941 (2,647) Amortisation of purchased intangible assets (272) — 272 — Integration and restructuring costs (1,286) — 1,286 — Gain on redemption of own debt 3,790 — (3,790) — Strategic disposals 132 — (132) — Bonus tax (208) — 208 — Gains on pensions curtailment 2,148 — (2,148) — Write-down of goodwill and other intangible assets (363) — 363 — Loss before tax (2,291) (356) — (2,647) Tax credit 339 90 — 429 Loss from continuing operations (1,952) (266) — (2,218) Loss from discontinued operations, net of tax (72) (33) — (105) Loss for the year (2,024) (299) — (2,323) Non-controlling interests (648) 299 — (349) Preference share and other dividends (935) — — (935) Loss attributable to ordinary and B shareholders (3,607) — — (3,607)
Net interest income 15,764 (282) — 15,482 Non-interest income (excluding insurance net premium income) (2,106) (29) 1,674 (461) Insurance net premium income 5,709 — — 5,709 Non-interest income 3,603 (29) 1,674 5,248 Total income 19,367 (311) 1,674 20,730 Operating expenses (16,188) (166) (18,711) (35,065) Profit/(loss) before other operating charges 3,179 (477) (17,037) (14,335) Insurance net claims (3,917) — — (3,917) Operating loss before impairment losses (738) (477) (17,037) (18,252)
Balance sheet as at 31 December 2009 Pro forma Transfers (1) Statutory £m £m £m Assets Cash and balances at central banks 51,548 713 52,261 Net loans and advances to banks 48,777 7,879 56,656 Reverse repurchase agreements and stock borrowing 35,097 — 35,097 Loans and advances to banks 83,874 7,879 91,753 Net loans and advances to customers 554,654 132,699 687,353 Reverse repurchase agreements and stock borrowing 41,040 — 41,040 Loans and advances to customers 595,694 132,699 728,393 Debt securities 249,095 18,159 267,254 Equity shares 15,960 3,568 19,528 Settlement balances 12,024 9 12,033 Derivatives 438,199 3,255 441,454 Intangible assets 14,786 3,061 17,847 Property, plant and equipment 17,773 1,624 19,397 Deferred tax 6,492 547 7,039 Prepayments, accrued income and other assets 18,604 2,381 20,985 Assets of disposal groups 18,432 110 18,542 Total assets 1,522,481 174,005 1,696,486
Balance sheet as at 31 December 2008 Pro forma Transfers (1) Statutory £m £m £m Assets Cash and balances at central banks 11,830 570 12,400 Net loans and advances to banks 70,728 8,698 79,426 Reverse repurchase agreements and stock borrowing 58,771 — 58,771 Loans and advances to banks 129,499 8,698 138,197 Net loans and advances to customers 691,976 143,433 835,409 Reverse repurchase agreements and stock borrowing 39,289 24 39,313 Loans and advances to customers 731,265 143,457 874,722 Debt securities 253,159 14,390 267,549 Equity shares 22,198 4,132 26,330 Settlement balances 17,812 20 17,832 Derivatives 991,495 1,064 992,559 Intangible assets 16,415 3,634 20,049 Property, plant and equipment 17,181 1,768 18,949 Deferred tax 5,786 1,296 7,082 Prepayments, accrued income and other assets 21,573 2,829 24,402 Assets of disposal groups 480 1,101 1,581 Total assets 2,218,693 182,959 2,401,652
Risk and balance sheet management In this section (pages 119 to 224) of the Business review certain information has been audited and is part of the Group’s financial statements as permitted by IFRS 7. Other disclosures are unaudited and labelled with an asterisk (*). Key points within this section relate to the Group before RFS Holdings minority interest (RFS MI) for 2009 and 2008 data.
Introduction* All the disclosures in this section (pages 119 to 125) are unaudited as indicated by an asterisk (*). Risk Management has an integral role to play in the delivery of the strategic plan through the creation and management of appropriate frameworks as illustrated below: With the need for financial strength and resilience at the heart of this and in order to support the Group’s stated objective of standalone strength by 2013, the Group Board agreed in 2009 the key strategic risk objectives which are aligned to all other elements of the plan. These are: maintain capital adequacy; maintain market confidence; deliver stable earnings growth; and stable and efficient access to funding and liquidity.
Risk appetite is defined in both quantitative and qualitative terms and serves as a way of tracking risk management performance in implementing the agreed strategy.
quantitative: encompassing scenario stress testing, risk concentrations, VaR, liquidity and credit related metrics, operational, business risk and regulatory measures.
A key part of the Group’s risk appetite is the macro reshaping of the balance sheet through the downsizing of Non-Core. The Group will manage down previous concentrations in line with the strategic objectives for 2013. This will be discharged by Non-Core but with Risk Management playing an integral role in executing the plan. Non-Core assets and their movements are shown separately in the pages which follow.
Deliver 5 year plan with strong risk and balance sheet management
The role and remit of these committees is set out below. These committees are supported at a divisional level by a risk governance structure embedded in the businesses. During 2010, Risk Management has been enhanced by the appointment of a Deputy Chief Risk Officer to whom the Divisional CROs and the functional risk heads now report.
This committee is responsible for managing Group-wide issues and those operational issues material to the broader Group.
The Group Audit Committee is responsible for assisting the Group Board in carrying out its responsibilities relating to accounting policies, internal control and financial reporting functions. It assists on such other matters as may be referred to it by the Group Board and acts as the Audit Committee of the Group Board. The Group Audit Committee also identifies any matters within its remit which it considers that action or improvement is needed and makes recommendations as to the steps to be taken.
At least three independent non-executive directors, at least one of whom is a financial expert as defined in the SEC Rules under the US Exchange Act
Group B members Group Chief Executive Chief Executive Officers: UK Retail, Wealth and Ulster; US Retail & Commercial and Head of Americas; Global Banking & Markets; RBS Insurance; UK Corporate President, Global Banking & Markets Group Finance Director 121RBS Group 2010
Recommends and approves limits, policies, processes and procedures to enable the effective management of risk across the Group.
These committees play a key role in ensuring that the Group's risk appetite is supported by effective risk management through limit approval and setting, monitoring and maintenance, reporting and escalation.
Risk coverage The main risk types facing the Group which are covered by the risk appetite framework and managed by the above committees are shown below: Risk type Definition Features Key developments in 2010 Risk mitigation
The risk that the Group does not have sufficient financial resources to meet its commitments when they fall due, or can secure them only at excessive cost.
Asset quality has broadly stabilised, resulting in total loan impairments 33% lower than in 2009. However, weakness in the Irish economy and falling property values have resulted in the doubling of Ulster Bank Group impairments (Core and Non-Core) in 2010.
There have been significant losses as a result of bodily injury claims across the UK motor insurance industry, including RBS Insurance.
In response to this, the industry has increased pricing on motor insurance business and the Group has made significant progress in removing higher-risk business through targeted rating actions.
The level of operational risk remains high due to the scale of structural change occurring across the Group; increased government and regulatory scrutiny; and external threats (e.g. e-crime).
The Group Policy Framework (GPF) supports the risk appetite setting process and underpins the control environment.
The three lines of defence model gives assurance that the standards in GPF are being adhered to.
Risk type Definition Features Key developments in 2010 Risk mitigation Regulatory risk
The Group manages regulatory change through active engagement with the FSA, other regulators and governments.
Risks arising from noncompliance with laws, rules, regulations or other standards applicable to the Group.
Breach or alleged breach could result in public or private censure or fine, could have an adverse impact on the Group’s business model (including applicable authorisations and licenses), reputation, results of operations and/or financial condition.
The triennial funding valuation for the Main scheme was undertaken in 2010 with a schedule of contributions to be agreed with the Trustees.
During 2010, the Group implemented an enhanced reporting and modelling framework to improve the identification and management of key pension risks. In early 2010 the Main scheme increased its bond allocation to better match liabilities.
Each of these risk types map into our risk appetite framework and contribute to the overall achievement of our strategic objectives with underlying frameworks and limits. The key frameworks and developments this year are described in the relevant section of the following pages.
Stress testing Stress testing commonly describes the evaluation of a bank’s financial position under severe but plausible stress scenarios. The term stress testing is used to refer not only to the application of individual stress tests but also to the wider economic environment within which these tests are developed, evaluated and used within the decision making process.
Many regulatory documents and initiatives have emerged which require strong involvement of senior management in the design and evaluation of scenarios, an emphasis on plausible events and a shift from the assessment of instant shocks to multi-period analysis of capital adequacy over a prolonged period of stress.
It is important to note that the tests are theoretical in nature and none of the data published represent a forecast or prediction by RBS of what would actually happen in any of the modelled scenarios. Furthermore, the results are FSA calculations impacting revenues, impairments and balance sheet items and assume an unchanged balance sheet from the end of 2009.
During 2011, RBS is planning to take part in forthcoming International Monetary Fund, European Banking Federation and FSA stress testing exercises.
Other stress testing In addition to industry wide stress tests, Group standards for stress testing allow for a combination of various stress testing methods in order to provide a comprehensive view of the Group’s risk profile. Depending on the complexity and materiality of the portfolio, techniques may range from sensitivity analyses performed on an individual product or an individual portfolio to the evaluation of complex stress scenarios performed at Group-wide level.
Stress testing techniques applied within the Group are: sensitivity analysis; scenario analysis; and reverse stress testing.
The stress testing programme implemented aims to provide a comprehensive view of the Group’s risk profile. Stress tests are performed at the following levels of aggregation: firm-wide level; division level; portfolio level; and transactional or sub-portfolio level.
Balance sheet management All the disclosures in this section (pages 126 to 145) are audited unless otherwise indicated by an asterisk (*).
Group Treasury in conjunction with the divisions and Risk Management, in respect of risk-weighted assets (RWAs), manage and control the Group’s balance sheet risks and consequent impact on the Group’s capital, funding, liquidity, interest rate and currency risks.
Credit risk 383.0 410.4 433.4 385.9 513.2 551.3 Counterparty risk 68.1 56.5 61.1 68.1 56.5 61.1 Market risk 80.0 65.0 46.5 80.0 65.0 46.5 Operational risk 37.1 33.9 36.8 37.1 33.9 36.9 568.2 565.8 577.8 571.1 668.6 695.8 Asset Protection Scheme relief (105.6) (127.6) n/a (105.6) (127.6) n/a 462.6 438.2 577.8 465.5 541.0 695.8
During the year the Group increased Core Tier 1 capital by £0.8 billion through the issue of ordinary shares on the conversion of sterling and US dollar non-cumulative convertible preference shares.
Pillar 3 The Group publishes its Pillar 3 (Market disclosures) on its website, providing a range of additional information relating to Basel II and risk and capital management across the Group. The disclosures focus on capital resources and adequacy, discuss a range of credit risk approaches and their associated RWAs under various Basel II approaches such as credit risk mitigation, counterparty credit risk and provisions. Detailed disclosures are also made on equity, securitisation, operational and market risk, and interest rate risk in the banking book.
Tier 1 Ordinary and B shareholders' equity 70,388 69,890 45,525 Non-controlling interests 1,424 2,227 5,436 Adjustments for: - goodwill and other intangible assets - continuing businesses (14,448) (14,786) (16,386) - goodwill and other intangible assets - discontinued businesses — (238) — - unrealised losses on available-for-sale (AFS) debt securities 2,061 1,888 3,687 - reserves arising on revaluation of property and unrealised gains on AFS equities (25) (207) (984) - reallocation of preference shares and innovative securities (548) (656) (1,813) - other regulatory adjustments (1) (1,097) (950) 9 Less excess of expected losses over provisions net of tax (1,900) (2,558) (770) Less securitisation positions (2,321) (1,353) (663) Less APS first loss (4,225) (5,106) — Core Tier 1 capital 49,309 48,151 34,041 Preference shares 5,410 11,265 16,655 Innovative Tier 1 securities 4,662 2,772 6,436 Tax on the excess of expected losses over provisions 758 1,020 308 Less material holdings (310) (310) (316)
Tier 2 Reserves arising on revaluation of property and unrealised gains on AFS equities 25 207 984 Collective impairment provisions 764 796 666 Perpetual subordinated debt 1,852 4,200 9,079 Term subordinated debt 16,681 18,120 20,282 Non-controlling and other interests in Tier 2 capital 11 11 11 Less excess of expected losses over provisions (2,658) (3,578) (1,076) Less securitisation positions (2,321) (1,353) (663) Less material holdings (310) (310) (316) Less APS first loss (4,225) (5,106) — Total Tier 2 capital 9,819 12,987 28,967
Balance sheet management: Capital* continued Capital resources - statutory The Group's regulatory capital resources on a full consolidation basis, in accordance with the FSA definitions, were as follows: Composition of regulatory capital - statutory 2010 £m £m £m
At beginning of the year 48,151 Attributable loss net of movements in fair value of own debt (1,250) Gain on redemption of equity preference shares recorded in equity 651 Foreign currency reserves 610 Issue of ordinary shares 804 Impact of disposals - reduction in non-controlling interests (729) - reduction in intangibles 754 Decrease in capital deductions including APS first loss 571 Other movements (253) At end of the year 49,309
Risk-weighted assets by division Risk-weighted assets by risk category and division on a proportional basis are set out below: Credit risk
Balance sheet management: Capital* continued Asset Protection Scheme The Group acceded to the Asset Protection Scheme (‘APS’ or ‘the Scheme’) in December 2009.
national implementation of increased capital requirements will begin on 1 January 2013; there will be a phased five year implementation of new deductions and regulatory adjustments to Core Tier 1 capital commencing 1 January 2014; the de-recognition of non-qualifying non common Tier 1 and Tier 2 capital instruments will be phased in over 10 years from 1 January 2013; and requirements for changes to minimum capital ratios, including conservation and countercyclical buffers, as well as additional requirements for Systemically Important Financial Institutions, will be phased in from 2013 to 2019.
The focus will now be on the EU’s implementation of the Basel framework. The Commission’s legislative proposal - the Capital Requirements Directive (CRD) IV - is expected to appear in summer 2011.
CRD3 (Basel 2.5): Published rules for market risk and re-securitisations. Proposed implementation date 31 December 2011 The estimated impact on pro-forma at the end of 2011 on RWAs post mitigation is an increase of £25 billion to £30 billion, split equally between GBM and Non-Core.
The impact referenced above would lower the Core Tier 1 ratio by approximately 1.3%, assuming RWAs of £600 billion and a Core Tier 1 ratio of 10%.
Basel III capital deductions and regulatory adjustments In addition to the changes outlined above, Basel III will also result in revisions to regulatory adjustments and capital deductions. These will be phased in over a five year period from 1 January 2014. The initial deduction is expected to be 20%, rising 20 percentage points each year until full deduction by 1 January 2018. However, this is subject to final implementation rules determined by the FSA. The proportion not deducted in the transition years will continue to be subject to existing national treatments.
The major categories of deductions include: expected loss net of provisions; deferred tax assets not relating to timing differences; unrealised losses on available-for-sale securities; and significant investments in non-consolidated financial institutions.
The EU Commission Consultation Crisis management proposals The EU Commission issued a consultation paper on crisis management measures in January 2011. It covers prevention tools (such as recovery planning requirements, supervisory powers and new ideas on intra-group financial support mechanisms), as well as resolution tools (including partial transfer powers and possible approaches to debt write-down. The consultation will inform draft implementing legislation expected this summer, and is intended to help shape the global framework for SIFIs.
Structure of prudential regulation in the UK Following the consultation by HM Treasury on ‘A new approach to financial regulation’ in 2010, the government subsequently published further detailed proposals to give the Bank of England responsibility for prudential regulation, and to create a new Consumer Protection and Markets Authority to protect the interests of bank customers.
Increase in the level of customer protection under Financial Services Compensation Scheme The European Commission has introduced a uniform compensation level of €100,000 across Member States from 1 January 2011. The sterling equivalent was confirmed by HM Treasury as £85,000.
FSA Code on remuneration In July 2009 the European Commission adopted a proposal to further amend the Capital Requirements Directive (CRD) which included proposals on remuneration policies. This was subsequently voted for and approved (CRD III).
The FSA amended its Remuneration Code to take into account the Guidelines and published its policy statement on remuneration on 17 December 2010.
Bank levy In his 22 June 2010 budget statement, the Chancellor announced that the UK Government will introduce an annual bank levy. The Finance Bill 2011 contains details of how the levy will be calculated and collected. The levy will be collected through the existing quarterly corporation tax collection mechanism starting with payment dates on or after the date the Finance Bill 2011 receives Royal Assent. Further information is included on page 368.
Stress and scenario testing Stress testing forms part of the Group’s risk and capital framework and is an integral component of Basel II. As a key risk management tool, stress testing highlights to senior management potential adverse unexpected outcomes related to a mixture of risks and provides an indication of how much capital might be required to absorb losses, should adverse scenarios occur. Stress testing is used at both a divisional and Group level to assess risk concentrations, estimate the impact of stressed earnings, impairments and write-downs on capital. It determines the overall capital adequacy under a variety of adverse scenarios. The principal business benefits of the stress testing framework include: understanding the impact of recessionary scenarios; assessing material risk concentrations; and forecasting the impact of market stress and scenarios on the Group’s balance sheet liquidity.
A series of stress events are monitored on a regular basis to assess the potential impact of an extreme yet plausible event on the Group. There are four core elements of scenario stress testing: macroeconomic stress testing considers the impact on both earnings and capital for a range of scenarios. They entail multi-year systemic shocks to assess the Group’s ability to meet its capital requirements and liabilities as they fall due in a downturn in the business cycle and/or macroeconomic environment; enterprise-wide stress testing considers scenarios that are not macroeconomic in nature but are sufficiently broad to impact across multiple risks or divisions and are likely to affect earnings, capital and funding; cross-divisional stress testing includes scenarios which have impacts across divisions relating to sensitivity to a common risk factor(s). This would include, for example, sector based stress testing across corporate portfolios and sensitivity analysis to stress in market factors. These stress tests are discussed with senior divisional management and are reported to senior committees across the Group; and divisional and risk specific stress testing is undertaken to support risk identification and management. Examples include the daily product based stress testing using a hybrid of hypothetical and historical scenarios within market risk.
Introduction The Group’s balance sheet composition is a function of the broad array of product offerings and diverse markets served by its Core divisions. The structural integrity of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise liquidity transformation in normal business environments while ensuring adequate coverage of all cash requirements under extreme stress conditions.
Diversification of the Group’s funding base is central to the liquidity management strategy. The Group’s businesses have developed large customer franchises, the largest being in the UK, US and Ireland but extend into Europe, Asia and Latin America. Customer deposits provide large pools of stable funding to support the majority of the Group’s lending. It is a strategic objective to improve the Group’s loan to deposit ratio to 100%, or better, by 2013.
The Group also accesses professional markets funding by way of public and private debt issuances on an unsecured and secured basis. These debt issuance programmes are spread across multiple currencies, and maturities to appeal to a broad range of investor types, and preferences around the world. This market based funding supplements the Group’s structural liquidity needs and in some cases achieves certain capital objectives.
Regulatory oversight The Group operates in multiple jurisdictions and is subject to a number of regulatory regimes.
In the US, the Group’s operations are required to meet liquidity requirements set out by the US Federal Reserve Bank, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Financial Industry Regulatory Authority. In the Netherlands, the Group is subject to the De Nederlandsche Bank liquidity oversight regime.
Funding sources The table below shows the composition of the Group’s primary funding sources, excluding repurchase agreements.
The Group was able to reduce short-term wholesale borrowing by £93 billion to £157 billion (including £63 billion of deposits from banks) during the year. Short-term wholesale funding excluding derivative collateral decreased from £216 billion at 31 December 2009 to £129 billion at 31 December 2010.
Balance sheet management: Funding and liquidity risk continued The tables below show the Group’s debt securities in issue and subordinated liabilities by maturity.
Less than one year 94,048 964 95,012 38.7 1-5 years 71,955 9,230 81,185 33.1 More than 5 years 52,369 16,859 69,228 28.2 218,372 27,053 245,425 100.0
Less than one year 136,901 2,144 139,045 50.0 1-5 years 70,437 4,235 74,672 26.9 More than 5 years 38,991 25,159 64,150 23.1 246,329 31,538 277,867 100.0
Less than one year 170,240 1,994 172,234 55.0 1-5 years 56,109 5,733 61,842 19.8 More than 5 years 43,109 35,951 79,060 25.2 269,458 43,678 313,136 100.0
Key points The Group has improved its funding and liquidity position by extending the average maturity of debt securities in issue.
Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certification of deposit. Derivative collateral received from financial institutions is excluded from the table below as are long-term borrowings by US Retail & Commercial from Federal Home Loan Banks.
During the year - maximum balance (£bn) 157 78 37 57 329 357 594 - average balance (£bn) 137 62 34 50 283 292 486 - weighted average interest rate 0.6% 0.8 % 0.9% 1.0% 0.7% 1.9% 4.2%
Balances are generally based on monthly data. Average interest rates during the year are computed by dividing total interest expense by the average amount borrowed. Average interest rates at year end are average rates for a single day and as such may reflect one-day market distortions which may not be indicative of generally prevailing rates.
The table below shows the original maturity and currency breakdown of long-term debt securities issued in 2010.
Key points Term debt issuances exceeded the Group’s original plans of £20 - £25 billion as investor appetite for both secured and unsecured funding allowed the Group to accelerate plans to extend the maturity profile of its wholesale funding.
Liquidity portfolio The table below shows the composition of the Group’s liquidity portfolio. The Group has refined the presentation of this portfolio. Treasury bills and other government bonds which were previously reported under the central Group Treasury portfolio, as well as unencumbered collateral and other liquid assets are now included in their respective asset classes.
Cash and balances at central banks 53,661 51,500 Treasury bills 14,529 30,010 Central and local government bonds (1) - AAA rated governments (2) 41,435 30,140 - AA- to AA+ rated governments 3,744 2,011 - governments rated below AA 1,029 1,630 - local government 5,672 5,706 51,880 39,487 Unencumbered collateral (3) - AAA rated 17,836 20,246 - below AAA rated and other high quality assets 16,693 29,418
The Group has maintained its liquidity portfolio at or near its strategic target of £150 billion. The final level of the reserves will be influenced by balance sheet size, maturity profile and regulatory requirements.
2010 2009 2008 ASF(1) ASF(1) ASF(1) Weighting £bn £bn £bn £bn £bn £bn %
Cash 57 — 52 — 12 — — Inter-bank lending 58 — 49 — 71 — — Debt securities: - < 1year 43 — 69 — 69 — — - central and local governments AAA to AA- > 1 year 89 4 84 4 68 3 5 - other eligible bonds > 1 year 75 15 87 17 101 20 20 - other bonds > 1 year 10 10 9 9 15 15 100 Derivatives 427 — 438 — 991 — — Reverse repurchase agreements 95 — 76 — 98 — — Customer loans and advances - < 1 year 125 63 153 77 190 95 50 - residential mortgages > 1 year 145 94 137 89 170 111 65 - retail loans < 1year 22 19 24 20 30 25 85 - other > 1year 211 211 241 241 298 298 100 Other (3) 96 96 103 103 106 107 100 Total assets 1,453 512 1,522 560 2,219 674
Undrawn commitments 267 13 289 14 347 17 5 Total assets and undrawn commitments 1,720 525 1,811 574 2,566 691
Notes: (1) Available stable funding. (2) Deferred tax, insurance liabilities and other liabilities. (3) Prepayments, accrued income, deferred tax and other assets. (4) Prior periods have been revised to reflect the Basel III guidance.
Key points* The Group’s estimated NSFR improved to 101% at 31 December 2010 from 89% at 31 December 2009, primarily due to a decrease in wholesale funding with maturity of less than one year and a reduction in customer loans.
The Group’s NSFR calculation will continue to be refined over time in line with regulatory developments.
Balance sheet management: Funding and liquidity risk continued Funding and liquidity metrics continued The table below shows the Group’s loan to deposit ratio and customer funding gap.
Key points The Group’s loan to deposit ratio improved significantly by 1800 basis points to 117% at 31 December 2010 and the funding gap narrowed by £68 billion over the year to £74 billion at 31 December 2010, due primarily to a reduction in Non-Core customer loans and increased customer deposits.
The loan to deposit ratio for the Group’s Core business at 31 December 2010 improved to 96% from 104% at 31 December 2009.
It is a strategic objective to improve the Group’s loan to deposit ratio to 100%, or better, by 2013.
Liabilities by contractual maturity Deposits by banks 43,396 4,417 1,243 304 651 374 Debt securities in issue 89,583 43,032 31,862 22,569 24,209 6,697 Subordinated liabilities 2,485 2,611 6,570 8,691 8,672 4,607 Settlement balances and other liabilities 12,423 59 136 177 385 25 Total maturing liabilities 147,887 50,119 39,811 31,741 33,917 11,703 Customer accounts 402,457 18,580 8,360 4,651 4,393 2,384 Derivatives held for hedging 608 936 2,103 969 681 253 550,952 69,635 50,274 37,361 38,991 14,340
Liabilities by contractual maturity Deposits by banks 65,966 15,541 3,934 2,301 632 12 Debt securities in issue 100,220 49,300 56,869 25,915 27,326 3,819 Subordinated liabilities 1,929 1,892 3,654 4,963 20,157 6,105 Settlement balances and other liabilities 12,048 100 139 104 239 83 Total maturing liabilities 180,163 66,833 64,596 33,283 48,354 10,019 Customer accounts 521,400 15,619 5,944 4,221 8,490 4,392 Derivatives held for hedging 660 1,566 3,232 1,264 1,674 1,508 702,223 84,018 73,772 38,768 58,518 15,919
Guarantees and commitments notional amount Guarantees (1) 39,952 — — — — — Commitments (2) 291,634 — — — — —
Maturity gap (183,012) (34,793) (22,888) (21,817) (6,924) 5,938 Cumulative maturity gap (183,012) (217,805) (240,693) (262,510) (269,434) (263,496)
Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by the Group. Financial liabilities are included at the earliest date on which the counterparty can require repayment regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band which contains the latest date on which it can be repaid regardless of early repayment. The liability is included in the time band which contains the earliest possible date that the conditions could be fulfilled without considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by the Group, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayment of assets and liabilities are linked, the repayment of assets in securitisations are shown on the earliest date that the asset can be prepaid as this is the basis used for liabilities.
Assets and liabilities with a contractual maturity of greater than twenty years - the principal amounts of financial assets and liabilities that are repayable after twenty years or where the counterparty has no right to repayment of the principal are excluded from the table, as are interest payments after twenty years.
The Group provides financial products to satisfy a variety of customer requirements. Loans and deposits are designed to meet customer objectives with regard to repricing frequency, tenor, index, prepayment, optionality and other features. These characteristics are aggregated to form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market rates. Mismatches in these sensitivities give rise to net interest income (NII) volatility as the level of interest rates rise and fall. For example, a bank with a floating rate loan portfolio and largely fixed rate deposits will see its NII rise as interest rates rise and fall as rates decline. Due to the long-term nature of many banking book portfolios, layered repricing characteristics and maturities, it is likely the NII will vary from period to period even with no change in market rate level. New business volumes originated in any period will alter the interest rate sensitivity of a bank if it differs from portfolios originated in prior periods.
Interest rate risk in the banking book (IRRBB) is assessed using a set of standards to define, measure and report the market risk. It is the Group’s policy to minimise interest rate sensitivity in banking book portfolios and where interest rate risk is retained to ensure that appropriate measures and limits are applied. Key conventions in evaluating IRRBB are subjected to approval of divisional ALCOs and GALCO. Limits on IRRBB are proposed by the Group Treasurer for approval by ERF annually. IRRBB is measured using a version of the same VaR methodology that is used for the Group’s trading portfolios. Net interest income exposures are measured in terms of sensitivity over time to movements in interest rates. Additionally, Citizens measures the sensitivity of the market value of equity to changes in forward interest rates.
Divisions with the exception of Citizens and GBM are required to manage banking book exposures through internal transactions with Group Treasury to the greatest extent possible. Residual risks in divisions must be measured and reported as described.
Key points Interest rate exposure at 31 December 2010 was slightly lower than at the end of 2009. The average exposure in 2010 was 33% below the average for 2009.
+100bp shift in yield curves 232 510 139 - 100bp shift in yield curves (352) (687) (234) Steepener (30) Flattener (22)
Key points The Group executed transactions in 2010 to reduce the exposure to rising rates related to capital raised in December 2009.
The Group seeks to limit the sensitivity to its Core Tier 1 ratio to 20 basis points in a 10% rate shock scenario. The Group’s structural foreign exchange position is reviewed by GALCO regularly.
The table below sets out the Group's structural foreign exchange exposures.
US dollar 17,137 2 17,135 (1,820) 15,315 (4,058) 11,257 Euro 8,443 33 8,410 (578) 7,832 (2,305) 5,527 Other non-sterling 5,320 244 5,076 (4,135) 941 — 941
Changes in foreign currency exchange rates will affect equity in proportion to the structural foreign currency exposure. A 5% strengthening in foreign currencies against sterling would result in a gain of £1,200 million (2009 - £930 million; 2008 - £1,010 million) recognised in equity, while a 5% weakening in foreign currencies would result in a loss of £1,150 million (2009 - £880 million; 2008 - £960 million) recognised in equity.
Outlook for 2011* Whilst there have been improvements in the state of the global economy over the course of 2010, the outlook for 2011 remains uncertain. In line with meeting the objectives of the strategic plan, the Group is actively focusing on closing the customer funding gap, continuing to exit Non-Core businesses and reducing undrawn and contingent commitments. These actions will result in a reduction in the need for short-term wholesale funding; the Group is targeting £150 billion by 2013 compared with £157 billion at the end of 2010. The Group will continue to reduce reliance on government supported schemes and be governed by the state of the markets and economies in which it operates. These strategies are aimed at insuring that the Group is more resilient to any further disruptions in the market and better placed to take advantage of favourable trading conditions as they return.
Credit risk is the risk of financial loss owing to the failure of customers or counterparties to meet payment obligations. The quantum and nature of credit risk assumed across the Group's different businesses varies considerably, while the overall credit risk outcome usually exhibits a high degree of correlation to the macroeconomic environment.
Credit risk organisation The existence of a strong credit risk management organisation is vital to support the ongoing profitability of the Group. The potential for loss through economic cycles is mitigated through the embedding of a robust credit risk culture within the business units and through a focus on the importance of sustainable lending practices. The role of the credit risk management organisation is to own the credit approval, concentration and risk appetite frameworks and to act as the ultimate authority for the approval of credit. This, together with strong independent oversight and challenge, enables the business to maintain a sound lending environment within risk appetite.
Credit risk appetite Credit risk appetite is managed and controlled through a series of frameworks designed to limit concentration by sector, counterparty, country or asset class. These are supported by a suite of Group-wide and divisional policies setting out the risk parameters within which business units may operate. Information on the Group’s credit portfolios is reported to the Board via the divisional and Group level risk committees detailed in the Governance section on page 120.
Country Country risk arises from sovereign events (default or restructuring); economic events (contagion of sovereign default to other parts of the economy, cyclical economic shock); political events (convertibility restrictions and expropriation or nationalisation); and natural disaster or conflict. Such events have the potential to impact elements of the Group’s credit portfolio that are directly or indirectly linked to the affected country and can also give rise to market, liquidity, operational and franchise risk related losses.
Variation in margin: contractual margin may be amended to bolster the customer’s day-to-day liquidity, with the aim of helping to sustain the customer’s business as a going concern. This would normally be accompanied by the Group receiving an exit payment, payment in kind or deferred fee.
As discussed above, GRG will consider a range of possible restructuring strategies. At the time of execution, the ultimate outcome of the strategy adopted is unknown and highly dependent on the cooperation of the borrower and the continued existence of a viable business. The customer’s financial position, its anticipated future prospects and the likely effect of the restructuring including any concessions are considered by the GRG relationship manager to establish whether an impairment provision is required, subject to divisional and Group governance.
During 2010, GRG completed corporate loan restructurings totalling £6.2 billion (exposures of more than £5 million) of which £2.7 billion were classified as impaired. Of these restructurings £2.4 billion related to commercial real estate and £2.1 billion to manufacturing. The incidence of the main types of arrangements is analysed below: % of loans (by value)
Term extensions 54 Debt forgiveness 25 Debt for equity 23 Interest rate concessions and payment moratoriums 36
Retail collections and recoveries There are collections and recoveries functions in each of the consumer businesses. Their role is to provide support and assistance to customers who are currently experiencing difficulties in meeting their financial obligations. Where possible, the aim of the collections and recoveries teams is to return the customer to a satisfactory position, by working with them to restructure their finances. If this is not possible, the team has the objective of reducing the loss to the Group.
Reduced repayments 59 Payment moratoriums 20 Roll up of arrears 19 Interest reductions 6 Term extensions 3
The total exceeds 100% as an individual case can involve more than one type of arrangement.
Of the forbearance arrangements agreed in the performing book during 2010, less than 15% were impaired as at 31 December 2010.
Wholesale businesses: as part of the credit assessment process, each counterparty is assigned an internal credit grade derived from a default probability. There are a number of different credit grading models in use across the Group, each of which considers risk characteristics particular to that type of customer. The credit grading models score a combination of quantitative inputs (for example, recent financial performance) and qualitative inputs, (for example, management performance or sector outlook).
Counterparty credit risk exposure measurement models are used for derivative and other traded instruments where the amount of credit risk exposure may be dependent upon one or more underlying market variables such as interest or foreign exchange rates. These models drive internal credit risk activities such as limit and excess management.
Reverse repurchase agreements and issuer risk (primarily debt securities - see page 176) are excluded. Where relevant, and unless otherwise stated, the data reflects the effect of credit mitigation techniques.
Global Transaction Services 35,462 32,428 Ulster Bank 40,750 42,042 US Retail & Commercial 51,699 52,104 Retail & Commercial 360,974 356,165 Global Banking & Markets 171,891 205,588
A notable exception is Ulster Bank where weakness in the Irish property sector continues to impact portfolio trends and the stock of defaulted assets (AQ10) continues to grow. Refer to section on Ulster Bank on pages 161 to 165 for more details.
Non-Core exposure has reduced across all AQ bands with the exception of AQ10, where the transfer of additional property assets from Ulster Bank and defaults within the property sector in Ireland and globally have led to an increase over 2009. Credit migration for the remaining Non-Core portfolio has been neutral since the end of the first quarter of 2010.
RRM and contingent obligations 2010 £m £m £m £m £m £m £m £m £m
Additional selected eurozone countries Spain 19 5 258 6,962 407 7,651 3,130 4,521 2,447
Additional selected eurozone countries Spain 30 17 373 7,658 438 8,516 2,957 5,559 2,325 *unaudited
For selected eurozone countries, the general trend in lending was lower, due in part to a depreciation of the euro against sterling by 3% over the year.
Global Banking & Markets (GBM) accounts for a further £0.6 billion of the Core lending exposure, largely relating to domestic and foreign owned financial institutions. In addition, overall limits to the major Irish domestic banks have halved since 31 December 2008 to £1.2 billion, with the majority representing collateralised RRM or guarantees for third-party obligations. Overall credit quality remains acceptable with a majority of the exposure to investment grade entities.
Spain: lending fell by £0.9 billion, due to a reduction in corporate activity. During the fourth quarter, this reduction accelerated. NonCore represents 59% of the Group’s total exposure to Spain in 2010 (2009 - 65%). In the course of 2010, progress was made towards increased collateralisation of the portfolio.
Italy: lending decreased by £1.7 billion, as a result of a net reduction in corporate lending of £2.0 billion and an increase to financial institutions of £0.3 billion. In addition, there was an increase in RRM exposure to financial institutions by £0.7 billion; the non-lending portfolio is comprised predominantly of collateralised trading activity.
Greece: lending fell by £0.1 billion, due to a reduction in corporate activity. Continuous close scrutiny of the portfolio throughout the year and divestment of selected assets have improved the overall quality of the portfolio, available-for-sale (AFS) debt securities represent the primary concentration.
Portfolio by industry and geography Industry analysis plays an important part in assessing the potential for concentration risk in the loan portfolio. Particular attention is given to industry sectors where the Group believes there is a high degree of risk or potential for volatility in the future.
The table below analyses credit risk assets by industry sector and geography.
Modest growth in North America is attributable to the weakening of sterling against the US dollar during the period and higher shortterm exposures to central banks.
At 9.6% of total exposure, the banks sector is one of the largest in the Group, although it is geographically diversified with activities conducted in the Group's key markets across the world. Exposure is predominantly to major global banks (23% of sector exposure), defined as those with diversified domestic and international activities. The product range is diverse and includes loans and advances, treasury and capital markets products. Overall there has been a gradual downward trend in exposures to banks, but exposures have fluctuated markedly due to lines being drawn and repaid over short periods and mark to market movements associated with trading activity. Overall asset quality has stabilised in line with improving economic conditions, although the sovereign crisis affecting several eurozone countries has placed downward pressure on the asset quality of banks in these countries (11% of sector exposure).
Sovereigns comprise activities with central governments, central banks and sub sovereigns such as local authorities in the Group's key markets in the UK, Western Europe and USA. The Group’s exposure to sovereigns fluctuates according to the Group's liquidity requirements and cash positions which determine the level of cash placed with sovereign entities. The asset quality of the portfolios has been impacted by the sovereign crisis in several eurozone countries and the resultant multiple downgrading of these countries.
The Group’s exposure to the property sector totals £114 billion, a reduction of 11% in the period, of which 76% is commercial real estate (further detail on pages 156 and 157). The remainder comprises lending to property-related sectors including housing associations, estate agents and management companies. The majority of property (with the exception of Non-Core) is within the UK Corporate division (33%) and Ulster Bank (6%).
The transport sector accounts for 6% of exposure and primarily comprises loans and advances to borrowers in the shipping, automotive and aviation segments in the Core bank. Aviation Capital and a portfolio of shipping loans are held within Non-Core. Core bank exposure resides primarily in Corporate Banking and Global Banking & Markets and the portfolio is well diversified geographically. In aggregate, the exposure within and asset quality of the Core portfolio remained stable over the year. Global economic conditions and related trends in trade flows and discretionary consumer spending continue to inform the Group’s cautious stance. Transport exposure in default totals of £1.7 billion (2009 - £1 billion).
Whilst there have been no material impairment charges for shipping to date, the exposure that is subject to a heightened level of monitoring currently stands at approximately £2.8 billion out of a total portfolio of £13 billion, which reflects the continued difficult market conditions that have been experienced during 2010. Recent quarterly vessel valuations undertaken by external shipbrokers show that the majority of our exposures remain fully secured. Conditions will remain challenging for the foreseeable future.
The definition of commercial real estate was revised during 2010 to include commercial investment properties, residential investment properties, commercial development properties and residential development properties (including house builders); 2009 data are presented on a consistent basis.
By geography (1) Commercial £m Residential £m Commercial £m Residential £m Total £m Commercial £m Residential £m Commercial £m Residential £m Total £m 2010 2009 Investment Development Investment Development
Key points The decrease in exposure occurred primarily in the UK and Europe in the development and investment books. The asset mix remains relatively unchanged.
The Ulster Bank Non-Core increase relative to 2009 reflects the swapping of the residual mortgage portfolio for the Commercial real estate portfolio with Ulster Bank Core in the third quarter of 2010.
Residential 15,551 7,726 753 1,755 549 26,334 17,197 7,352 1,065 2,134 505 28,253 Office 8,551 1,402 4,431 1,311 891 16,586 9,381 1,536 5,034 1,614 975 18,540 Retail 4,928 674 711 529 106 6,948 5,760 686 998 492 700 8,636 Industrial 10,413 1,780 3,309 2,193 284 17,979 11,378 2,599 3,592 2,053 402 20,024 Mixed/Other 10,607 3,985 1,933 2,519 479 19,523 12,087 4,047 3,125 3,243 231 22,733 50,050 15,567 11,137 8,307 2,309 87,370 55,803 16,220 13,814 9,536 2,813 98,186
Personal credit risk assets (1) 2010 £m £m £m - cards, loans and overdrafts 18,072 20,316 22,475 Ulster Bank
Refer to the section on Ulster Bank group on page 164 for discussion on Ulster Bank residential mortgages.
Total portfolio average LTV at 31 December 58.2 59.1 54.5 75.3 74.5 69.1
Notes: (1) LTV averages are calculated by transaction volume. (2) Revised to reflect updated data and analysis completed after the reporting date. (3) Analysis covers the main mortgage brands in each of the Group’s three consumer markets and covers 96% of total mortgage portfolio.
The table below details residential mortgages which are three months or more in arrears (by volume). 2010 2009 2008
A number of initiatives aimed at supporting customers experiencing temporary financial difficulties remain in place. Forbearance activities include offering reduced or deferred payment terms on a temporary basis for a period of up to 12 months during which arrears continue to accrue on the account. Forbearance activities in the performing book amounted to £0.6 billion during 2010. It is Group policy not to initiate repossession proceedings for at least six months after arrears are evident. The number of properties repossessed in 2010 was 1,392 compared to 1,251 in 2009.
Citizens total residential real estate portfolio totalled $38.2 billion at 31 December 2010 (2009 - $42.5 billion). The real estate portfolio comprises $9.7 billion (Core: $8.6 billion; Non-Core: $1.1 billion) of first lien residential mortgages and $28.5 billion (Core: $23.7 billion; Non-Core: $4.8 billion) of home equity loans and lines (first and second lien). Home Equity Core consists of 46% first lien position while Non-Core consists of 97% second lien position. The Core business comprises 84% of the portfolio and Non-Core comprising 16%, with the serviced by others (SBO) portfolio being the largest component at 75% of the Non-Core portfolio.
Citizens continue to focus primarily on the ‘footprint states’ of New England, Mid-Atlantic and Mid-West targeting low risk products and maintaining conservative risk policies. Loan acceptance criteria were tightened during 2009 to address deteriorating economic and market conditions. As at 31 December 2010, the portfolio consisted of $31.5 billion (82% of the total portfolio) in these footprint states.
The cumulative effect of these arrangements has helped the Group’s customers. Modified loan balances were $566 million at 31 December 2010 (2009 - $235 million).
Outstanding balances for the Citizens credit card portfolio totalled $1.53 billion at 31 December 2010. This figure excludes the Kroger Personal Finance portfolio, which was sold on 27 May 2010. Core assets comprised 86.3% of the portfolio.
Citizens is a leading regional provider of retail auto financing to US consumers through a network of 3,433 auto dealers located in 23 US states. Citizens maintain a conservative, prime indirect auto lending credit programme with loss rates that have historically been below national averages. Current outstanding retail auto loan balances totalled $7.9 billion (includes Core and Non-Core) at 31 December 2010 of which 96% of the portfolio is in the Core business. The $324 million of Non-Core auto assets are anticipated to run-off by 2013. The tightening of credit parameters in 2008-09, along with enhanced collection activities and seasonal factors, has resulted in improved credit performance. The net charge-off rate on the total auto portfolio fell to 0.34% at 31 December 2010, down from 1.3% at 31 December 2009. The 30+ DPD delinquency rate fell from 2.6% as of 31 December 2009 to 1.6% at 31 December 2010 even as balances fell by $917 million. The 1.7% 30+ DPD delinquency rate on the total auto loan portfolio at 30 September 2010 Citizens was favourable to the 2.6% nationwide bank indirect auto delinquency rate as reported by Experian.
Ulster Bank Group (Core and Non-Core)* Ulster Bank Group accounts for 8% of the Group’s total credit risk assets or 7% of the Group’s Core credit risk assets. The Irish economy has experienced severe economic headwinds resulting in a substantial rise in unemployment and a steep property value correction over the last two years. Ulster Bank Group has not been immune to the downturn which has resulted in a significant migration of credit quality to lower grades and a substantial increase in loan impairments. Ulster Bank Group’s commercial real estate and mortgage portfolios have been acutely affected and these account for 81% of the 2010 impairment charges (2009 - 75%).
In the third quarter of 2010, £6.1 billion of residential mortgages and some corporate exposures were transferred from Non-Core to Core; at the same time £5 billion of commercial real estate loans were transferred from Core to Non-Core.
Credit risk assets by industry and geography Credit risk assets include £51 billion and £3 billion of lending to customers and financial institutions respectively, with the remaining exposure company RRM and contingent obligations.
Notes: (1) In the third quarter of 2010, £6.1 billion of residential mortgages and some corporate exposures were transferred from Non-Core; at the same time £5 billion of commercial real estate loans were transferred from Core to Non-Core. (2) Includes central bank exposures.
Ulster Bank Group Mortgages 21,162 1,566 439 7.4 28.0 2.1 336 7 Personal unsecured 1,282 185 158 14.4 85.4 12.3 48 30 Commercial real estate - investment 8,138 2,989 1,332 36.7 44.6 16.4 889 — - development 9,850 6,406 2,820 65.0 44.0 28.6 1,875 — Other corporate 11,009 2,515 1,228 22.8 48.8 11.2 695 11 51,441 13,661 5,977 26.6 43.8 11.6 3,843 48 Core Mortgages 21,162 1,566 439 7.4 28.0 2.1 294 7 Personal unsecured 1,282 185 158 14.4 85.4 12.3 48 30 Commercial real estate - investment 4,284 598 332 14.0 55.5 7.7 259 — - development 1,090 65 37 6.0 56.9 3.4 116 — Other corporate 9,039 1,205 667 13.3 55.4 7.4 444 11 36,857 3,619 1,633 9.8 45.1 4.4 1,161 48 Non-Core Mortgages — — — — — — 42 — Commercial real estate - investment 3,854 2,391 1,000 62.0 41.8 25.9 630 — - development 8,760 6,341 2,783 72.4 43.9 31.8 1,759 — Other corporate 1,970 1,310 561 66.5 42.8 28.5 251 —
39,707 2,260 962 5.7 42.6 2.4 649 34 Non-Core Mortgages 6,002 324 51 5.4 15.7 0.8 42 — Commercial real estate - investment 2,061 1,498 308 72.7 20.6 14.9 286 — - development 6,271 3,840 822 61.2 21.4 13.1 732 — Other corporate 1,373 1,126 322 82.0 28.6 23.5 217 —
Provisions increased from £2.5 billion to £6.0 billion and the coverage ratio increased to 44% from 27% at 31 December 2009. 69% of the provision at 31 December 2010 related to commercial real estate.
Average LTV on new originations during the year 75.9 72.8 71.1
Ulster Bank Group has a number of initiatives in place aimed at increasing the level of support to customers experiencing temporary financial difficulties. At 31 December 2010, forbearance arrangements had been agreed in respect of 5.8% (£1.2 billion) of Ulster Bank Group’s residential mortgage portfolio. The majority (79%) relates to customers in the performing book. Loans in respect of which forbearance arrangements were agreed during 2010 amounted to £1.7 billion in the performing book and £0.5 billion in the impaired book.
Commercial real estate The Commercial real estate lending portfolio for Ulster Bank Group totalled £18 billion at 31 December 2010 and decreased by 2% during the year. The Non-Core portion of the portfolio totalled £12.6 billion (70% of the portfolio). Of the total Ulster commercial real estate portfolio, 24% is in Northern Ireland, 63% is in the Republic of Ireland and 13% is in the UK.
The definition of commercial real estate was revised during 2010 to include commercial investment properties, residential investment properties, commercial development properties and residential development properties which include house builders.
Industry analysis The table below analyses total financial assets by industry.
Total Central and local government 6,388 1,532 7,920 142,812 6,998 205 157,935 1,725 Finance - banks 81,695 1,937 83,632 — — — 83,632 — - other (3) 88,617 11,957 100,574 99,284 409,452 12,110 621,420 372,343 Residential mortgages 127,975 12,932 140,907 717 11 — 141,635 7 Personal lending 35,313 6,358 41,671 1 38 40 41,750 21 Property 49,054 50,372 99,426 4,497 4,184 108 108,215 1,114 Construction 9,502 5,258 14,760 615 923 63 16,361 1,450 Manufacturing 30,454 14,402 44,856 1,954 5,353 116 52,279 3,184 Service industries and business activities 100,729 33,662 134,391 14,519 11,180 794 160,884 5,811 Agriculture, forestry and fishing 3,726 553 4,279 254 44 9 4,586 76 Finance lease and instalment credit 8,147 11,956 20,103 306 16 — 20,425 39 Interest accruals 1,667 555 2,222 1,571 — — 3,793 — Total gross of provisions 543,267 151,474 694,741 266,530 438,199 13,445 1,412,915 385,770 Provisions (15,173) (1,475) — — (16,648) n/a Group before RFS MI 679,568 265,055 438,199 13,445 1,396,267 385,770 RFS MI gross of provisions 142,688 21,730 3,255 9 167,682 55 RFS MI provision (2,110) (3) — — (2,113) n/a Group 820,146 286,782 441,454 13,454 1,561,836 385,825
Loans and advances to banks and customers by geography The table below analyses loans and advances gross of provisions by geography (location of office). 2010 2009 2008 £m £m £m
Loans and advances to banks (1) - UK 70,400 59,348 106,913 - US 9,810 8,537 5,830 - Europe 10,655 5,535 7,670 - RoW 9,778 10,611 9,213 Group before RFS MI 100,643 84,031 129,626 RFS MI 2 7,879 8,698 100,645 91,910 138,324
Note: (1) Loans and advances to banks includes £36 million of accrued interest (2009 - £399 million; 2008 - £2,339 million).
Exposure to the manufacturing sector is concentrated in industrial agriculture and food & consumer subsectors. The overall reduction in exposure in the year was partly due to the run off and restructuring of assets in Europe and in the Non Core portfolio.
Service industries and business activities comprise transport, retail & leisure, telecommunications, media and technology and business services. Transport primarily comprises loans to borrowers in the shipping, automotive and aviation segments. Aviation capital and a portfolio of shipping loans are held within Non-Core. Core portfolios in UK Corporate and GBM are well diversified geographically. Global economic conditions and related trends in trade flows and discretionary consumer spending continue to inform the Group’s cautious stance.*
Shipping continued to experience difficult market conditions in 2010. Whilst there have been no material shipping impairments to date, the exposures subject to a heightened level of monitoring currently stand at £2.8 billion (out of a total portfolio of £13 billion). Recent quarterly vessel valuations undertaken by external shipbrokers show that the majority of the Group’s exposures remain fully secured. Conditions are expected to remain challenging for the foreseeable future.*
UK Central and local government 6,339 173 6,512 72,428 7,300 173 86,413 3,916
Service industries and business activities 58,265 11,742 70,007 2,993 7,940 337 81,277 6,306
US Central and local government 263 53 316 25,741 5 112 26,174 —
Service industries and business activities 17,538 6,071 23,609 900 99 1 24,609 92
Netting and offset (2) 2010 £m £m £m £m £m £m £m £m RoW Central and local government 459 428 887 14,073 189 6 15,155 — Finance - banks 9,559 219 9,778 — — — 9,778 — - other (3) 8,840 22 8,862 3,888 27,531 1,792 42,073 22,575 Residential mortgages 410 203 613 — — — 613 — Personal lending 1,460 2 1,462 — 6 — 1,468 — Property 735 1,205 1,940 318 68 — 2,326 — Construction 183 91 274 16 22 — 312 — Manufacturing 2,185 686 2,871 4 448 — 3,323 — Service industries and business activities 5,251 1,846 7,097 899 1,482 8 9,486 2 Agriculture, forestry and fishing 6 — 6 — 2 — 8 — Finance lease and instalment credit 47 — 47 — — — 47 — Interest accruals 90 6 96 82 — — 178 — Group 29,225 4,708 33,933 19,280 29,748 1,806 84,767 22,577 2009 UK Central and local government 4,482 276 4,758 79,663 6,752 4 91,177 1,725 Finance - banks 58,141 979 59,120 — — — 59,120 — - other (3) 56,429 8,093 64,522 45,513 257,109 5,492 372,636 238,926 Residential mortgages 90,688 1,896 92,584 653 11 — 93,248 7 Personal lending 24,613 1,137 25,750 1 9 22 25,782 21 Property 36,407 35,387 71,794 3,761 4,086 104 79,745 1,114 Construction 6,964 3,640 10,604 354 849 62 11,869 1,450 Manufacturing 14,644 3,255 17,899 1,643 4,222 102 23,866 3,184 Service industries and business activities 62,756 15,877 78,633 10,279 7,849 742 97,503 5,810 Agriculture, forestry and fishing 2,946 138 3,084 252 39 9 3,384 76 Finance lease and instalment credit 5,343 10,843 16,186 294 16 — 16,496 39 Interest accruals 1,032 180 1,212 457 — — 1,669 — Group before RFS MI 364,445 81,701 446,146 142,870 280,942 6,537 876,495 252,352 RFS MI 444 49 1 — 494 — Group 446,590 142,919 280,943 6,537 876,989 252,352
Netting and offset (2) 2009 £m £m £m £m £m £m £m £m
UK Central and local government 6,106 36,466 5,798 14 48,384 1,987 Finance - banks 105,100 — — — 105,100 — - other (3) 92,030 84,601 532,857 6,257 715,745 480,762 Residential mortgages 80,967 — 14 — 80,981 52 Personal lending 27,469 250 36 25 27,780 5 Property 74,010 2,008 5,094 71 81,183 1,026 Construction 13,426 144 754 26 14,350 1,485 Manufacturing 25,999 1,080 11,208 180 38,467 6,279 Service industries and business activities 88,334 10,154 13,278 1,471 113,237 7,624 Agriculture, forestry and fishing 3,118 93 34 15 3,260 87 Finance lease and instalment credit 17,363 3 25 — 17,391 119 Interest accruals 4,293 774 — — 5,067 — Group before RFS MI 538,215 135,573 569,098 8,059 1,250,945 499,426
US Central and local government 482 24,996 45 33 25,556 — Finance - banks 5,814 — — — 5,814 — - other (3) 24,618 37,344 355,502 5,754 423,218 323,910 Residential mortgages 34,235 — — — 34,235 — Personal lending 14,368 — — — 14,368 — Property 6,579 5 97 — 6,681 — Construction 885 63 122 6 1,076 — Manufacturing 13,127 102 1,809 128 15,166 217 Service industries and business activities 27,914 1,498 8,535 907 38,854 2,346 Agriculture, forestry and fishing 30 — 3 1 34 — Finance lease and instalment credit 3,066 — — — 3,066 — Interest accruals 498 466 — — 964 — Group before RFS MI 131,616 64,474 366,113 6,829 569,032 326,473 RFS MI 491 2 — — 493 — Group 132,107 64,476 366,113 6,829 569,525 326,473
RoW Central and local government 7,079 16,708 311 145 24,243 — Finance - banks 9,099 — — — 9,099 — - other (3) 11,955 4,267 42,620 407 59,249 31,732 Residential mortgages 795 — — — 795 — Personal lending 4,592 — 5 — 4,597 29 Property 2,918 480 96 — 3,494 41 Construction 756 6 17 — 779 3 Manufacturing 6,196 178 771 — 7,145 — Service industries and business activities 13,152 949 1,257 — 15,358 108 Agriculture, forestry and fishing 153 1 7 — 161 — Finance lease and instalment credit 111 5 — — 116 — Interest accruals 384 — — — 384 — Group before RFS MI 57,190 22,594 45,084 552 125,420 31,913 RFS MI 2,223 58 55 — 2,336 13 Group 59,413 22,652 45,139 552 127,756 31,926
Asset quality The asset quality analysis presented below is based on the Group’s internal asset quality ratings which have ranges for the probability of default, as set out below. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across the Group map to both a Group level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Debt securities are analysed by external ratings agencies and are therefore excluded from the table below and are set out on pages 176 and 177.
Core AQ1 56,637 91,298 103,645 6,814 396,419 366 71,091 9,651 735,921 AQ2 14 550 10,534 1,271 2,243 3 24,923 1,728 41,266 AQ3 48 2,165 22,851 155 3,132 — 23,546 4,268 56,165 AQ4 10 539 85,779 571 3,017 6 36,909 5,070 131,901 AQ5 99 2,247 100,051 64 3,988 15 35,302 4,924 146,690 AQ6 3 138 53,498 34 805 — 24,050 2,140 80,668 AQ7 2 154 38,438 1 595 69 17,605 2,309 59,173 AQ8 — 15 13,290 14 257 — 8,617 9,434 31,627 AQ9 — 107 9,898 2 237 50 3,442 886 14,622 AQ10 5 300 2,777 2 368 — 1,500 250 5,202 Past due — 3 10,744 2,629 — — — — 13,376 Impaired — 144 13,367 — — 375 — — 13,886 Impairment provision — (126) (7,740) — — (29) — — (7,895)
Risk management: Credit risk continued Balance sheet analysis: Asset quality continued
Other financial instruments Commitments Contingent liabilities Total 2008 £m £m £m £m £m £m £m £m £m
AQ1 9,314 93,845 141,636 8,468 837,899 475 122,075 10,268 1,223,980 AQ2 506 6,380 18,440 1,229 27,207 31 23,113 2,129 79,035 AQ3 1,005 12,556 62,235 1,938 35,719 62 26,267 2,843 142,625 AQ4 1,005 11,041 129,292 1,422 46,057 62 63,966 13,196 266,041 AQ5 — 1,048 160,605 252 26,799 — 63,599 17,738 270,041 AQ6 — 673 99,765 217 6,581 222 17,771 11,254 136,483 AQ7 — 201 56,762 248 4,452 — 17,740 7,602 87,005 AQ8 — 292 23,449 — 1,362 — 14,120 1,170 40,393 AQ9 — 343 12,265 9 2,022 — 5,814 1,061 21,514 AQ10 — 274 5,844 — 3,386 — 1,827 435 11,766 Accruing past due — — 13,262 4,029 11 — — — 17,302 Impaired — 129 17,034 — — — — — 17,163 Impairment provision — (127) (9,324) — — — — — (9,451) Group before RFS MI 11,830 126,655 731,265 17,812 991,495 852 356,292 67,696 2,303,897 RFS MI 570 8,676 143,457 20 1,064 — 5,432 3,841 163,060 Group 12,400 135,331 874,722 17,832 992,559 852 361,724 71,537 2,466,957
Core AAA 13,110 33,535 44,761 2,205 47,441 807 16 141,875 70 AA to AA+ — — 18,025 2,908 3,656 775 — 25,364 13 A to AA- — — 9,138 4,007 1,879 1,223 5 16,252 8 BBB- to A- — — 2,843 1,297 1,108 1,956 6 7,210 4 Non-investment grade — — 1,460 1,638 3,052 2,428 2 8,580 4 Unrated — — 52 297 978 1,077 212 2,616 1 13,110 33,535 76,279 12,352 58,114 8,266 241 201,897 100
Non-Core AAA 376 311 23 169 3,794 39 1 4,713 30 AA to AA+ — — — 128 2,679 4 — 2,811 18 A to AA- — — — 178 1,365 80 — 1,623 11 BBB- to A- — — — 26 2,277 73 — 2,376 15 Non-investment grade — — 306 128 1,871 358 2 2,665 17 Unrated — — — 13 725 645 12 1,395 9 376 311 329 642 12,711 1,199 15 15,583 100 For the note to this table refer to page 177.
Holdings of debt securities issued by non-investment grade governments comprised: Greece £1.0 billion; Romania £0.3 billion; Turkey £0.2 billion; and Indonesia £0.2 billion.
Risk management: Credit risk continued Balance sheet analysis: Debt securities continued The table below analyses debt securities by issuer and measurement classification. Net numbers below are illustrative only and do not reflect net presentation under IFRS.
Banks and building societies ABS Corporate Other Total 2010 £m £m £m £m £m £m £m £m