Strategic Report 2014 Performance 02 Our progress in 2014 05 Chairman’s statement 06 Chief Executive’s review 08 Business model and strategy 12
Our Structure 12 Our Strategy 13 Our Plan 13 Our Operating Model 17 Our Values 17 Our Customers 18
Personal & Business Banking 24 Commercial & Private Banking 26 Corporate & Institutional Banking 28 Citizens Financial Group 30 RBS Capital Resolution 31 Services 32
Governance report 42 Business review 103 Capital and risk management 168 Financial statements 335 Additional information 459 Shareholder information 493 Abbreviations and acronyms 504 Glossary of terms 505 Index 513 Important addresses 516
The Strategic Report for the year ended 31 December 2014 set out on pages 1 to 41 was approved by the Board of directors on 25 February 2015.
Non-executive directors Sandy Crombie Alison Davis Morten Friis Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes
(5) Based on end-point CRR Tier 1 capital and revised 2014 Basel III leverage ratio framework.
(£3,470m) Attributable loss £2,643m Profit before tax £356bn RWAs £28bn Short-term wholesale funding (4)
2014 was a year of significant progress for the bank, in which we delivered against all our commitments. In line with the new strategy it set out in 2014, RBS has: • Implemented a new organisational design for a more UK-centred bank with focused international capabilities, built around its strongest customer franchises.
• Exceeded its 2014 cost reduction targets with savings of £1.1 billion.
• Strengthened its Common Equity Tier 1 (CET1) ratio by 2.6 percentage points to 11.2% at the end of 2014, assisted by £4.8 billion of net capital release from RCR disposals and run-off.
• Completed much of the orderly run-down and closure of the US asset-backed product business, removing £15 billion of RWAs from the balance sheet.
• Made our products simpler and fairer for customers, ending zero per cent balance transfers, halting teaser rates on savings accounts that penalise existing customers and explaining all charges for personal and business customers on one side of A4 paper.
Note: RWAs at 31 December 2013 are on Basel 2.5 basis and on an end-point CRR basis at 31 December 2014.
(1) Private banking and wealth management activities where the primary relationship management is conducted outside the British Isles.
CIB will reduce its geographical footprint to approximately 13 countries, compared with 38 at the end of 2014, though RBS will also retain its back office operations in Poland and India. In addition to its main distribution and trading hubs in the UK, US and Singapore, RBS will remain present in a number of Western European countries with coverage teams. A small sales team will be retained in Japan. US operations will shrink, while retaining the presence required to support the US dollar needs of RBS’s UK and Western European customers. Priority client sectors will be targeted in infrastructure, transportation, financial institutions, energy and resources.
CIB will continue to reduce its balance sheet and risk profile. RWAs will be reduced by 60% from £107 billion at 31 December 2014 to £35- £40 billion in 2019, with a reduction of more than £25 billion targeted in 2015. Third party assets will be reduced from £241 billion at the end of 2014 to £75-£80 billion in 2019.
• Improve customer net promoter scores in all UK franchises, in line with the long-term goal of becoming the number 1 bank for trust, service and advocacy.
• Deliver lending growth in strategic segments equal to or higher than UK nominal GDP growth.
• Operating profit improved to £3,503 million for 2014 compared with an operating loss of £7,500 million in 2013, benefiting from improved operating results in core businesses together with significant impairment releases in Ulster Bank and RCR.
• Restructuring costs of £1,257 million were up 92% from 2013 but conduct and litigation costs were 43% lower at £2,194 million and included charges relating to foreign exchange trading, Payment Protection Insurance (PPI), customer redress associated with interest rate hedging products, IT incident in 2012 and other costs including packaged accounts and investment products. Excluding restructuring, conduct and litigation costs, operating profit was £6,954 million, compared with a loss of £3,000 million in 2013.
• Operating expenses, excluding restructuring, conduct and litigation costs, were down £1,612 million or 12%. Adjusting for currency movements and intangible assets write-offs, cost savings totalled £1.1 billion, in excess of the bank’s £1 billion target for the year.
Balance sheet and capital • Funded assets totalled £697 billion at 31
• Including Citizens, which has been reclassified to disposal groups, net loans and advances to customers totalled £394 billion at the end of 2014, up £3.0 billion from the end of 2013, despite a significant reduction in RCR. • UK PBB lending rose by £2 billion, with net new mortgage lending of £3.9 billion partially offset by reduced unsecured balances.
• Gross new lending to SMEs totalled £10.3 billion, exceeding RBS’s £9.3 billion target by 10%.
• Including Citizens, which has been reclassified to disposal groups, customer deposits totalled £415 billion at the end of 2014, up £0.4 billion from the end of 2013.
• RWAs declined to £356 billion from £429 billion at the end of 2013, primarily driven by risk and balance sheet reduction in CIB coupled with disposals and run-off in RCR. This contributed to the strengthening of the bank’s capital ratios, with the CET1 ratio strengthening by 260 basis points to 11.2% at the end of 2014 compared with 8.6% at the end of 2013.
Our 2015 targets Capital target Move towards a capital target of 13% CET1 ratio (1).
Lending growth Deliver lending growth in strategic segments equal to or higher than UK nominal GDP growth.
Project reduction So far, we have reduced the number of change projects we are running from 550 to 182.
Resilience We’ve created a mirror bank so customers still have access to our services during a system outage. Already we can process 90% of debit and credit card transactions if there is a system outage.
Small Business Fund RBS and NatWest launch £1 billion fund for both new and existing small business customers across the UK.
Faster processing Our overnight batch processing is now twice as fast, processing 20 million transactions every day.
Transparency RBS scored top in the UK for corporate transparency in a study conducted by Transparency International.
2014 was a year of significant progress for RBS, with a much improved operating profit and major achievements in terms of business reorganisation, cost reduction, capital build and improved IT capability. As Ross McEwan has set out in his letter, the business continues to simplify and improve, focusing on putting its customers at the heart of its activities.
Of course your Board is pleased to see the improved operating performance, which in our view reflects the underlying strength of the business. Looking back, however, we must acknowledge that we did not fully recognise the scale of the challenge that awaited us in 2009. At the time, we assumed that a Core Tier 1 capital ratio of more than 8% by 2013 would be sufficient to constitute undoubted financial strength in the minds of markets and regulators; today we have increased our capital target to 13%. We must also acknowledge that we did not anticipate the more than £9 billion of regulatory fines and customer redress we have borne so far as we paid, and will continue to pay, the price for our past conduct failings. These conduct issues have delayed the re-build of our capital and directly reduced shareholder value. They have also caused continuing reputational damage. I hope as we move beyond these issues we can fully rebuild the trust of our customers, and by doing so win more of their business.
The need to continue to rebuild capital strength means it has taken longer than we had expected to reach a point at which the Government could be in a position to start selling down its stake in RBS. The decision on timing rests with the Government, through UK Financial Investments, which manages its shareholding, but our task is to create the conditions in which it can do so. In working towards that end we are also furthering the interests of RBS’s other shareholders, as we believe that the beginning of the sell-down will be welcomed by investors.
It has been a privilege to serve as Chairman of RBS and I am confident that the Board and the many outstanding people in the bank will continue to work with dedication to restore the bank’s standing.
This is my first letter to you since we launched a new strategy for RBS last year. It is a strategy that sets out to deliver one very simple aim. To make this a great bank for our customers; a bank that will earn back their trust, and in turn win more of their business.
It’s a strategy that provides the fundamental building blocks to make RBS an attractive investment, a great place to work for our people, and a UK focused bank that the country can be proud of.
• We set out a plan to place the bank on a sure capital footing targeting a CET1 ratio of 11% by the end of 2015, and 12% or greater by the end of 2016, so as to remove any doubts about our fundamental strength and stability. This capital plan is on track and we have reached our 2015 target one year ahead of schedule. This improvement was driven by a 52% reduction in riskweighted assets in RCR.
• We made a commitment to fairness with our customers. We said that RBS would no longer compete with other banks in a number of areas and we would use less technical language that our customers find easier to understand. We stopped offering zero per cent balance transfers on credit cards that trap customers in spirals of ever increasing debt, we ended teaser rates that penalise existing customers, and we now explain all of our fees and charges on one side of A4 paper for both our personal and business customers.
We have five ambitious new goals for the second year of our plan and new financial targets so that you, our shareholders, can hold us to account for our performance.
An overarching part of delivering sustainable returns is controlling operating costs. When I announced our cost target last year it was described by some as the most ambitious cost target in Europe. Well, through our drive across the bank for greater simplicity we have over-delivered, and surpassed our target of £1 billion of operating cost savings for the bank. With a cost:income ratio for the year of 68% on an adjusted basis, we are still behind our peers on cost efficiency; and there is work to do to fulfil our desire to take it below 50%. But we have a strong track record on delivery, and there is resolve across this bank to get this done.
I am very pleased with the progress we have made in 2014 against our stated objectives. While that progress is evident in the operating profit line of the results announced, we are still posting an attributable loss to our shareholders. This is an accounting consequence of one of our 2014 achievements - the successful flotation of Citizens on the New York Stock Exchange.
Conduct It has taken far longer than anyone realised to root out all the past problems, practices and related fines, and we still have challenges on the horizon. We are changing the culture of this bank; our aim is that shareholders are not exposed to this scale of conduct risk again.
What you will have seen from me over the last year is the way I will be open and honest with you and our customers when dealing with these issues; the way we continue to approach FX is a good example of this. I will not hide. I will talk openly about the hurt this wrongdoing causes me and the many thousands of people within this bank. I will detail the things we are doing to put things right for our customers, and the challenge and change we are driving through the culture and conduct of our staff.
In last year’s letter, I told you that where a business can’t deliver value to our shareholders in a reasonable time period we will take decisive action. We have put international private banking activities(1) up for sale and we are now going further, faster in reshaping parts of our CIB business.
The investment bank was over-stretched both in range of product and geography. There was too much risk for too little return. Given the increasing regulatory requirements on this business, it was a strategy that now has little hope of delivering acceptable returns to shareholders.
To be a number 1 bank means providing a full service offering to UK and Western European corporate and financial institution clients. It means providing a first class platform to process payments in the UK and Europe. And it means having the expertise to help customers raise finance on the debt capital markets and manage the high level risks they face. Serving customers in these areas is an undisputed area of strength for us - they are our core capabilities, and are essential to us providing a first class service. In addition, trading and distribution hubs in Singapore and the US will ensure the corridors of commerce remain open to allow our customers access to investors in those regions.
In doing so we will be free to grow and improve the services our customers value most. And by serving customers better this franchise can reinforce its competitive position and deliver sustainable returns above the cost of equity for our shareholders.
This is a plan for a smaller, more focused, but ultimately more valuable bank with the vast majority of its assets in the UK, and for RBS marks the end of the standalone global investment bank model.
A better bank for customers Much has been written and discussed about the root causes of the financial crisis. For me it came down to one big problem - a failure to put the customers’ interest at the heart of our business and its culture. For too long market share mattered more than customer care.
It is why over the last year our people have worked hard to embed this ‘customer first’ mentality into everything we do as a bank.
There are some concrete achievements we can call out for 2014 including: faster account opening times, a simplified product range and a clearer pricing structure. And we went against the rest of the industry and took a calculated risk by ending teaser rates, and we now offer our best rates to new and existing customers across our product range. We may have lost customers and income as a result, but we still believe that this was the right thing to do and will deliver long term value for shareholders.
I want to assure our customers that the positive changes we made in 2014 are not one-off. We strive to do better for our customers every day, and when we spot an opportunity to serve customers better, we will act. For example, customers shouldn’t be penalised because they lose track of the date and are hit with an unexpected overdraft
Note: (1) Private banking and wealth management activities where the primary relationship management is conducted outside the British Isles.
But we recognise that these are chipping away at the edges, and more radical change is needed if we are to establish real upward momentum and achieve our targets. We have to be constantly asking ourselves what a really good bank for customers would look like, and to be constantly improving what we do to take us towards that goal. In our financial reporting we will include full details of the progress we have made as well as providing clear, independent measures of the bank’s customer trust and advocacy scores.
We may have started from further back than some, but we are determined to reach our aspiration of being number 1 for customer service, trust and advocacy. It won’t be easy, but I firmly believe it is doable.
There are good businesses within RBS that are capable of delivering real value to their customers. If we do that, our customers will be happy for us to make a fair and sustainable profit.
2015 Goals and revised targets I have set out in the table below five new ambitious business goals for the second year of our strategic plan to simplify and restructure this bank, achieving them will stand us in good stead to reach our goals. We have also published a revised set of financial and business targets. These are consistent with the other changes set out in this letter, and will enable you, our shareholders, to continue to track our progress and hold us to account.
By 2019 RBS intends to be a low cost business focused on effective, efficient delivery for our customers. It will be a bank based in the UK and RoI, with a presence in Western Europe, the US and Singapore. It intends to be a bank with leading market positions in each of our chosen business areas, and a bank that can generate attractive returns for shareholders on a sustainable basis.
Conclusion I would like to take this opportunity to thank our Chairman, Sir Philip Hampton, as he takes part in his final Annual Results with the bank. Philip joined in 2009 amid the global financial crisis and immediately brought a clear sense of purpose and direction for the bank at a time of incredible uncertainty, both for the UK and RBS. His dedication to making this a great bank for the country served him well through the tremendous, but positive, change that RBS has undergone during his tenure. I want to express my personal gratitude to Philip for guiding me during my first year as CEO, and playing a key role in implementing the strategy that will take us forward. There is still work to do, but Philip will leave on a positive note, with RBS firmly focussed on serving its customers, and shareholders.
What you see today is a bank on track and delivering on its plan. A bank that is determined to earn the trust of its customers every day. A bank that helps the smallest enterprises through to the largest companies grow and prosper. A bank that is determined to reward its shareholders for their support. And a bank that is able to deliver on our ambition to be number one for customer service and advocacy in the UK and RoI.
Strength and sustainability CET1 ratio = 13% during the period of CIB restructuring
Customer experience No.1 for service, trust and advocacy Improve NPS in every UK franchise
Employee engagement Employee engagement index ≥ GFS norm(2) Raise employee engagement index to within 8% of GFS norm(2)
Our Corporate & Institutional Banking business earns income from client driven trading activities particularly Rates, Currencies and Credit.
Services Services, led by the Chief Administrative Officer, provides business aligned technology, operations and property services across the bank. It is also accountable for technology risk, payments, data, change and the bank’s fraud and security functions.
Most functions are a mix of control, expertise, advisory and transaction services. All common activities across the organisation are included and nothing else.
We are organised to provide products and services to personal, commercial and large corporate and institutional customers. Our principal customer-facing businesses are supported by a central Services function and other Support and Control Functions.
Our Personal & Business Banking and Commercial & Private Banking franchises provide services to over 17 million personal and business customers in the UK and to over 1 million personal and business customers in the Republic of Ireland. Our Corporate & Institutional Banking business serves our corporate and institutional clients primarily in the UK and Western Europe, as well as those US and Asian multinationals with substantial trade and investment links in the region. This business’s strategy has been further refined in 2015 (see page 14 for Reshaping our CIB business).
After five years spent restoring fundamental soundness to the bank, we have created a strategy and a structure that provides us with an exciting opportunity. Over the next few years, we are going to focus all of our energy on earning back the trust we lost in 2008. And in doing so, RBS is going to change the UK banking sector for the better.
Notes: (1) This table contains forecasts with significant contingencies. Please refer to ‘Forward-looking statements’ and ‘Risk factors’.
(4) Based on end-point CRR basis Tier 1 capital and revised 2014 Basel leverage framework.
We have announced our plans to go further and faster in reshaping parts of our CIB business. The investment bank was overstretched both in range of product and geography. We are building a stronger, safer and more sustainable business, focused mainly on UK and Western European customers, both corporates and financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.
Suitable measures for Private Banking and Corporate & Institutional Banking are in development.
Net Promoter Score (NPS) Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating ‘extremely likely’ and 0 indicating ‘not at all likely’. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. The Net Promoter Score (NPS) is established by subtracting the proportion of detractors from the proportion of promoters.
Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“
Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”.
Survey, based on interviews with businesses with an annual turnover up to £2 million. 12 month rolling data.
Survey, based on interviews with businesses with annual turnover between £2 million and £1 billion. Latest base size: RBSG Great Britain (972). Weighted by region and turnover to be representative of businesses in
We have set out a plan to build our Capital Ratio (CET1) to 13% while we are going through the restructuring of CIB.
Customer orientation; be easy and effective for customers, with decision rights as close as possible to the customer.
One bank; be easy and effective for staff, with a unified culture and leadership.
• Sticking to a long term investment plan to address complex technology environment
Serving customers • We exist to serve customers. • We earn their trust by focusing on their needs and delivering excellent service.
Working together • We care for each other and work best as one team.
Thinking long term • We know we succeed only when our customers and communities succeed.
• We do business in an open, direct and sustainable way.
Progress: Customer letters and emails have been simplified for our personal and business customers so they are straightforward and transparent. We have reduced the number of pages on our personal banking website by over 60%. In branches we have fewer, shorter brochures making it easier for customers to find information.
Progress: All customers applying for a personal current account who have the required ID and pass our fraud and credit checks can complete their application online and where required, are able to upload key ID documents from home.
Progress: All Personal and Business Banking customers now have access to online banking by the next working day. Existing customers with a debit card now have access to mobile banking the next working day.
We will start making small business lending decisions in five days.
Progress: We are processing lending decisions quicker. In almost all cases, lending decisions are made and communicated to the customer in five days or less with two-thirds of business lending decisions made locally and/or by sector specialists.
The bank will begin work to enable bankers to make all but the most complex lending decisions in just five days of receipt of all necessary information.
RBS will ensure two thirds of its lending decisions are made locally and by sector specialists.
RBS will continue to invest in building the capability of its people with at least 90% of Relationship Managers and Credit Managers professionally qualified.
Progress: RBS has a milestone plan to achieve this by the end of 2016. We met our 2014 target with 20% of Relationship Managers and Credit Managers now professionally qualified.
Progress: In January 2015 RBS announced it is set to give SMEs greater access to finance by formally referring customers to both Funding Circle and Assetz Capital, two alternative finance providers.
RBS aims to become the number one bank for SME customer service in the UK.
Progress: Our ambition is to be #1 for service, trust and advocacy. We made commitments to our customers in 2014 to help us on this road, resulting in faster lending decisions, declining complaints volumes and reshaping the objectives of our people.
None of the bank’s services will be conditional on customers buying another product or service with the bank.
The bank will publicly report on progress against these commitments annually.
UK house prices continued to increase through most of 2014 and in December 2014 they were 11.5% higher than at the pre-crisis peak in
Key economic indicators The key market in which RBS operates is the UK. Lending in the UK is closely linked to GDP and growth in the housing market is highly dependent on the level of interest rates. Falling unemployment may have a positive impact on lending as more people are able to afford loans. The profitability of the banking sector is adversely impacted by low interest rates as they squeeze the margin between borrowing and lending. The level of impairments is affected among other things by GDP growth, movements of unemployment rates and interest rates.
The unemployment rate in October to December 2014 was 5.7%, lower than for July-September 2014 (6.0%) and lower than for a year earlier (7.2%).
UK GDP was up 2.6% on 2013 1. Ireland GDP growth is estimated to have improved to 4.8% from 0.2% in 2013. US GDP is estimated to have grown 2.4%.
Inflation, measured by the CPI 12-month rate between December 2013 and December 2014, stood at 0.5%. The food and motor fuels product groups in total reduced the CPI 12-month rate by approximately 0.6 percentage points in the year to December 2014.
Source: Office for National Statistics, Feb 2015Source: Office for National Statistics, Feb 2015 Central Statistics Office, Mar 2015 Bureau of Economic Analysis, Feb 2015
While UK Bank Rate and Fed Funds remained unchanged throughout 2013 and 2014 at 0.5% and 0.25% respectively, the ECB cut the refinancing rate twice in 2014 to 0.05%.
UK house price inflation increased from 5.5% in December 2013 to 9.8% in December 2014.
Source: BoE, ECB, Fed Source: Office for National Statistics, Feb 2015 Source: Office for National Statistics, Feb 2015
Perfect public sector payments Public sector spending contributes a significant amount to the UK economy. So it’s important that the Government and wider Public Sector have access to a simple, secure and straightforward way of paying for services.
Ways to bank In today’s smartphone, tablet enabled, app driven world, customers are looking for even more choice and flexibility about how, when and where they do their banking.
We’re responding to the changing needs of our customers by investing £1 billion over the next three years to improve our banking services. As part of this investment we’re refurbishing our branch network to create open, bright spaces for customers to talk to us face to face about the things that matter most to them.
And for those customers in more remote communities we’ve invested in a further five mobile banking vans, taking our fleet of vans to 23. They join a long, proud tradition of mobile banking services – our first van was introduced in 1946.
Performance overview • PBB recorded an operating profit of £2,056 million, up £2,846 million.
• Net interest income increased by £210 million or 4% with strong improvements in deposit margins and volume growth. This was partly offset by lower asset margins linked to the continued change in the mix of loan book towards secured lending and lower mortgage margins.
Building a better bank that serves customers well The strategic goal of PBB is to become the number one personal and business bank for customer service, trust and advocacy in the UK. Following completion of a strategic review, Ulster Bank was confirmed as a core part of RBS, offering a good strategic fit with RBS’s retail and commercial strategy.
Throughout 2014, the business has made steady progress in making banking fairer and simpler for its customers through a number of fair banking initiatives and technology investments.
• further developing online and mobile banking services to support the upward trend in digital transaction volumes.
Personal & Business Banking (PBB) serves individual and mass affluent customers together with small businesses (generally up to £2 million turnover), with more business bankers moving back into branches. PBB comprises two segments, UK Personal & Business Banking, including Williams & Glyn, (UK PBB) and Ulster Bank.
At the end of December 2014 we had c.3 million active users of our Personal Mobile App in the UK.
Simple transactions can be done in 11,500 Post Offices across the UK.
Fairer Banking We’ve made a conscious decision to be different from other banks. In 2014, we made a series of customer commitments which aimed to make banking simpler, fairer and clearer for our customers.
In March we stopped offering 0% balance transfer credit cards. This type of card was designed to make it easier for customers to repay existing credit card debt, but our research showed that debt tended to increase, rather than reduce over the term. Stopping these cards meant around 100,000 customers transferred to a low, ongoing rate with no chance of being caught out by a big jump in their interest rate down the line.
We’re making changes for business customers too – 95% of business lending decisions are now made within five days and gross business lending is up 30% from 2013. Plus, we’ve committed an extra £1 billion to support small businesses with fee-free, fixed rate loans.
Commercial & Private Banking (CPB) serves commercial and mid-corporate customers and high net worth individuals, deepening relationships with commercial clients, operating overseas through its market-leading trade and foreign exchange services, while connecting our private banking brands more effectively to successful business owners and entrepreneurs. CPB comprises two reportable segments, Commercial Banking and Private Banking.
• Total expenses were down £304 million or 10% reflecting lower litigation and conduct costs, primarily relating to interest rate swap redress, and lower underlying direct costs.
• RWAs were £2.3 billion lower at £75.5 billion, primarily reflecting net transfers to RCR, effective 1 January 2014, and improving credit quality on the back of UK economic recovery, offset by loan growth.
• Within Commercial Banking over 120 products were removed from sale and over 400 process improvements implemented.
• There has been an improvement in the Net Promoter Score and rating of overall service quality across the business, together with a continuing fall in complaints.
• The first out of eight accelerator hubs opened in February 2015, offering free space, support and advice to high growth business owners.
The first of eight accelerator hubs offering free space, support and advice to high growth business owners opened as part of our plan to support UK entrepreneurs.
Note: RWAs at 31 December 2013 are on Basel 2.5 basis and on the end-point CRR basis at 31 December 2014.
Working with teams across the bank, we were able to provide a short-term seasonal increase to Hertz UK’s core fleet financing facility giving them the flexibility they needed to manage their peak requirements in line with demand.
Rory Cullinan Executive Chairman, Corporate & Institutional Banking and Capital Resolution
Performance overview • CIB recorded an operating loss of £892 million compared with a loss of £2,882 million in 2013.
• Total income declined by 21%, reflecting reduced deployment of resources and difficult trading conditions, characterised by subdued levels of client activity and limited market volatility.
• Operating expenses fell by £2,360 million driven primarily by lower litigation and conduct costs. Adjusted expenses(1)
decreased by £1,006 million, or 22%, reflecting the continued focus on cost savings across both business and support areas.
Building a better bank that serves customers well CIB focused on its strengths in core product areas during 2014, reducing the scale of the business and simplifying the operating model. This allowed CIB to better serve customers while deploying fewer resources.
The drive to concentrate on core products is evidenced by the 27% fall in RWAs (compared with 1 January 2014 on an end-point CRR basis) and the 22% year on year fall in adjusted expenses.
Manchester takes off Manchester Airports Group (MAG) owns and operates four UK airports including Manchester, the UK’s third largest airport, and London Stansted, the fastest growing airport in London. They serve over 45 million passengers and handle more than 600,000 tonnes of freight every year, contributing over £4 billion to the UK economy and directly supporting around 45,000 full-time jobs.
• Net interest income was up $357 million, or 12%, to $3,317 million driven by a larger investment portfolio, loan growth including the transfer of assets from Non-Core, the benefit of interest rate swaps and deposit pricing discipline.
• Excluding restructuring costs of $169 million (2013 - $24 million), total expenses were down $96 million, or 3%, to $3,328 million driven by the removal of indirect costs in 2014 and the impact of the Illinois franchise sale partially offset by lower mortgage servicing rights impairment release and higher consumer regulatory compliance costs.
• Average customer deposits were down 2% with planned run-off of high priced deposits.
Building a better bank that serves customers well The initial public offering of CFG was successfully completed in September 2014 and RBS’s interest in CFG stood at 70.5% of shares outstanding at 31 December 2014.
Note: (1) 2014 results are not directly comparable with prior periods; prior year results exclude Non-Core operations and include indirect expenses. In the context of the planned disposal of Citizens Financial Group, indirect expenses are no longer allocated to the segment.
RBS disposed of 29.5% of its interest in Citizens Financial Group, Inc. during the second half of 2014 primarily through an initial public offering in the USA.
Bruce Van Saun Chairman and Chief Executive Officer, Citizens Financial Group, Inc.
RBS disposed of 29.5% of its interest in Citizens Financial Group, Inc. during the second half of 2014.
RBS intends to fully divest the business by the end of 2016.
• RWA equivalent decreased by £38 billion, or 58%, during 2014. This primarily reflects disposals and repayments, supplemented by methodology changes and lower market risk RWAs.
• Operating profit of £988 million reflects impairment provision releases and higher than anticipated sale prices for assets driven by a combination of strong execution and favourable market conditions particularly in Ireland.
Building a better bank that serves customers well RCR is managed and analysed in four asset management groups - Ulster Bank (RCR Ireland), Real Estate Finance, Corporate and Markets. Real Estate Finance excludes commercial real estate lending in Ulster Bank.
In 2014, RCR reduced its funded assets from £29 billion to £15 billion.
Note: (1) Capital equivalent: £3.8 billion at an internal CET1 ratio of 10%.
• Our mirror bank capability now lets our customers access critical services in the event of a system outage. We can now process 90% of debit and credit card transactions for customers during an outage and they can view mini-statements and balances on mobile and online banking systems.
• We upgraded our service to improve stability and reduce the risk of outages associated with our core international payments infrastructure. This has resulted in a significant reduction in the number of outages we experience.
• We implemented a new operating model for Services, fully aligned to the customer franchises in Personal & Business Banking, Commercial & Private Banking and Corporate & Institutional Banking, and RBS Capital Resolution.
• We reduced the number of properties we use by 200 to 2,500 today, including some major properties in London.
• Through our Simplifying Customer Life programme, we implemented over 4,000 ideas, generating improvements covering more than 2.6 million customer interactions.
• We used data and analytics to simplify pricing for our Instant Access Savings product (reducing from 70 to 2 different price points) - improving the savings rate for 4.5 million customers in the process.
• We contributed around £500 million to the bank’s cost reduction target.
• We refocused and prioritised our investment and transformation plans, reducing the number of projects we run from 550 to 182.
• We reduced the amount of cash spend on third parties by £800 million, a 17% reduction from 2013.
• We have invested in our data and customer technology, allowing us to personalise content presented to customers in over 1.2 billion interactions (across digital, telephony and face to face).
• We teamed up with Silicon Valley-based start-up TokBox, to trial cutting edge video conferencing technology, which increases choice and convenience for customers and entrepreneurs.
• We transformed 127 branches through our Points of Presence programme and installed Wi-Fi in almost 2,000 sites for customers and colleagues.
We transformed 127 branches through our Points of Presence programme and installed Wi-Fi in almost 2,000 sites for customers and colleagues.
We refocused and prioritised our investment and transformation plans, reducing the number of projects we run from 550 to 182.
UK owned and based in Suffolk, the firm uses only British barley to make their malt. To successfully build their business and compete on a bigger stage, they knew they would have to increase their global footprint. A recent joint venture in Thailand has added to their sales presence in the USA and Asia, supported by us.
Earlier this year Muntons invested £5.4 million in an anaerobic digestion plant at their Stowmarket headquarters, partly funded by RBS Invoice Finance with an asset-based lending package. This facility will help them manage the major capital spend they’ll need to meet their ambitious growth targets both at home and abroad.
The terms of reference for each of these committees is available on rbs.com and copies are also available on request from RBS Corporate Governance and Secretariat.
Assists the Board in discharging its responsibilities for monitoring the quality of the financial statements of RBS. It reviews the accounting policies, financial reporting and regulatory compliance practices of RBS. It also exercises oversight over systems and standards of internal controls, and monitors RBS’s processes for internal audit and external audit.
The Group Audit Committee report is set out on pages 57 to 61.
Board and committee activity remained busy during 2014 with a number of key strategic issues taking centre stage including the delivery of the strategic plan agreed in February 2014. Board committees continued to play a crucial role in our governance framework, undertaking their complex work comprehensively and effectively supporting the work of the Board.
The RCR Board Oversight Committee report is set out on pages 69 and 70.
The Sustainable Banking Committee report is set out on pages 71 and 72.
The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the composition of the Executive Committee and biographies of its members can be found at www.rbs.com>about us>corporate governance>ceo and board >executive committee
Capital developments RBS continued to make good progress in reducing risk and strengthening its capital position. The Common Equity Tier 1 (CET1) ratio improved by 260 basis points to 11.2% and the leverage ratio by 80 basis points to 4.2%.
• Disposal of €9 billion of legacy availablefor -sale securities, thereby reducing stressed capital and RWAs.
Despite these and other risk reduction measures, RBS’s capital position was close to thresholds under adverse stress scenarios, as evidenced by the European Banking Authority
(EBA) and Bank of England (BoE) stress test results published in the second half of 2014: • EBA: 2016 CET1 ratio (based on 2013 accounts) under the modelled EBA adverse scenario was 5.7%, marginally above the minimum requirement of 5.5%.
• BoE: CET1 ratio under the hypothetical BoE adverse scenario was 4.6% at the end of 2016, slightly above the 4.5% poststress minimum ratio threshold set by the BoE. After taking account of management actions, the adjusted ratio was 5.2%.
• Operational risk: RBS’s ongoing transformation is complex and wideranging, affecting all business areas and functions. In 2014, a new functional operating model was implemented to embed standardisation and consistency of approach to the management of operational risk. Significant investments were made to improve technology resilience for core banking services. In addition, enhancements were made to cyber security programmes.
• The impact of the 2015 UK general election on performance and strategy: Ahead of the upcoming UK election in May 2015, there is uncertainty around how the policies of a newly elected government may affect RBS. The implementation of new policies could significantly affect the operating employment environment and the fiscal, monetary, legal and regulatory landscape.
• Increased losses arising from a failure to execute major projects successfully: The successful execution of major projects, including the transformation plan, the recently announced restructuring of CIB and the divestment of Williams & Glyn, is essential to meet RBS’s strategic objectives. These projects cover organisational structure, business strategy, information technology systems, operational processes and product offerings. RBS is working to implement change in line with its project plans while assessing the risks to implementation and taking steps to mitigate those risks where possible.
A full description of the principal risks facing RBS is set out on pages 474 to 492.
Governance The sustainability programme at RBS is built on a robust governance framework that provides direction to our sustainability priorities. The Sustainable Banking Committee is a Group Board Committee and membership comprises three independent non-executive directors. The Committee is chaired by independent non-executive director Penny Hughes and attended by senior representatives from the customer-facing businesses as well as Human Resources, Sustainability, Risk, Conduct and Regulatory Affairs, Communications and Marketing, Corporate Services and Strategy. The Chairman of the Board also regularly attends meetings. The work of the Committee is essential to ensuring that our approach to issues is managed effectively and debated at the appropriate level.
Committee runs its own programme of structured stakeholder engagement sessions. In 2014, the Committee took part in six of these stakeholder sessions which act as open forums where advocacy groups and experts can discuss key areas of concern with the most senior decision-makers in RBS.
Boundary summary All entities and facilities either owned or under operational control
Emission factor data source DEFRA (2014), US Environmental Protection Agency eGRID (9th edition)
Total Scope 2 CO2e emissions (tonnes) 576,422 509,572 451,476 437,152 -24% -3%
Total Scope 1 & Scope 2 CO2e emissions (tonnes) 637,536 573,381 513,234 489,429 -23% -5%
The FTSE4Good Index Series measures the performance of companies that meet globally recognised corporate responsibility standards. RBS has been included in the FTSE4Good since it was launched 11 years ago.
The activities of RBS and those of our clients can present a number of Environmental, Social and Ethical (ESE) risks and it is our responsibility to manage these risks. We have a robust ESE policy framework, with sector specific policies relating to high risk sectors including oil and gas, mining and metals and forestry. Data on client assessments against these policies is included in the main RBS Sustainability Report.
This year RBS has been recognised for its work on Equality, Diversity and Inclusion by retaining our Platinum ranking from Opportunity Now (gender) for the second year; increasing our ranking from Silver to Gold for Race for Opportunity (race); retaining a position in the Times Top 50 Employers for Women for the eighth consecutive year; and improving upon our ranking in the Stonewall Workplace Equality Index (LGBT).
As at 31 December 2014, of our global population of 110,027 employees, 50,816 (46%) were male and 59,211 (54%) female. There were 762 ‘senior managers’, which comprises our executive employee population and individuals who are directors of our subsidiaries, of whom 637 (84%) were male and 125 (16%) female. The RBS Board of directors has ten members, consisting of seven male and three female directors.
Our approach to Human Rights RBS recognises our corporate responsibility to respect and uphold human rights. We regularly review our policies and procedures to ensure that we avoid infringing on the human rights of others throughout our sphere of influence. We also participated in projects with our peers through the Thun Group and UNEP FI to better understand and implement the human rights responsibilities of banks as defined by the UN Guiding Principles on Business and Human Rights.
We have adopted and contributed to a number of internationally accepted codes, notably the Equator Principles and the UN Global Compact, which specifically address the management of human rights issues.
Our ESE Risk policies include sector-specific human rights risk screenings and are regularly reviewed and updated to ensure best practice. We conduct due diligence on clients relating to human rights standards, and expect our clients to share our commitment to respecting human rights within their operations. In all sectors, we will not provide financial services to companies involved in harmful child labour or forced labour. In 2014, we continued to strengthen human rights due diligence in our ESE policies as well as public disclosure on the details of these policies. They can be seen at rbs.com/sustainable.
RBS in the Community We run a number of targeted programmes focussed on providing support to the communities where we operate. In addition to this, we have a well established employee volunteering and giving programme in RBS. As well as supporting local causes in our areas of operation and topping up employee fundraising, we also support volunteering during work time.
Board and Committee activity during 2014 continued to be extremely busy, focused on the delivery of the strategic plan announced in February
In April 2014, we entered into an agreement with Her Majesty’s Treasury to provide for the future retirement of the Dividend Access Share (DAS).
Among other benefits, the retirement of the DAS will in future allow the
In September, we launched the initial public offering (IPO) of our US
Conduct and regulatory investigations have also been a key area of focus and our 2014 results reflect the huge cost of dealing with these issues.
The announcements made in November 2014 in relation to settlements with certain regulators regarding misconduct in foreign exchange trading were a stark reminder of the importance of culture and integrity in banking. The Board will continue to drive cultural change and it is essential that our governance and risk frameworks continue to evolve to support this.
Board Committees continued to play a crucial role in our governance framework during 2014, undertaking their complex work comprehensively and effectively supporting the work of the Board.
The Group Audit Committee has monitored the quality of RBS’s financial statements and has supported the Board in making its assessment that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, in accordance with the UK Corporate Governance
As announced previously, Penny Hughes stood down as Chairman of the
Group Performance and Remuneration Committee and Sandy Crombie stood down as Chairman of the Sustainable Banking Committee. I would like to thank Penny and Sandy for their outstanding commitment and dedication whilst chairing these Committees.
The RBS Capital Resolution (RCR) Board Oversight Committee chaired by Baroness Noakes since 1 April 2014 was established to oversee the separation and wind-down of RBS’s high capital intensive assets and has implemented a governance structure and delegated authorities for RCR.
Nathan Bostock left RBS. Ewen has extensive experience of working with both governments and boards on the steps needed to restore confidence in financial institutions following the crisis; and his skills and experience have already been of great benefit to the Board.
Board and, in particular, the Board Risk Committee and Group Audit
Committee, and he left with our best wishes for the future. Tony remains a director of CFG in the US.
Philip Scott stood down in October 2014 having served on the Board since 2009. I would like to record my thanks to Philip for his outstanding commitment to the Board having served four years as Chairman of the
In April 2014, we welcomed Morten Friis as a new non-executive director and a member of the Board Risk Committee and Group Audit Committee.
This year, we conducted an internal evaluation of the effectiveness of the
Board and its committees, led by the Chief Governance Officer and
The Board also received support from the Chief Governance Officer and
Board Counsel in a number of other areas related to board effectiveness such as the Prudential Regulation Authority’s review of Board effectiveness, Board process, information flows and operating rhythm between the Board and committees, professional development and induction for new directors.
Howard Davies will join the Board at the end of June and will assume the role of Chairman with effect from 1 September 2015. It has been a privilege to serve as Chairman of RBS since 2009 and it is with sadness that I will leave the Board, but I am confident that the Board will continue to work with dedication to implement our strategy under the new
and delivery of sustainable shareholder value. Its role is to provide leadership of RBS within a framework of prudent and effective controls which enables risks to be assessed and managed.
Responsible for approving remuneration policy and reviewing the effectiveness of its implementation. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.
Responsible for overseeing and challenging how management is addressing sustainable banking and reputation issues, considering the long term interests of all stakeholder groups.
Ross has more than 25 years experience in the finance, insurance and investment industries, and prior to
Institutions Group. Ewen has over 20 years of experience advising the banking sector while at Credit
Administration majoring in Accountancy and a Bachelor of Law from Victoria University of Wellington, New
City of Literature Trust. In 2007 he was the Prince of
National Bank and First Data Corporation and as chair of the board of LECG Corporation. She has also worked at
External appointment(s): • Member of the Board of Directors of The
(now PricewaterhouseCoopers) where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989. Following the acquisition in 1995 of Warburg by Swiss Bank
Corporation (which subsequently merged with UBS), he then held the roles of Head of UK Corporate Finance,
Head of European Corporate Finance and Co-Head of its global business and CEO of the EMEA region. He relinquished his management roles at the end of 2005, and was appointed Vice Chairman of UBS Investment
KPMG including as a member of the KPMG UK board from 1999 to 2006 and as vice-chairman from 2006.
Group Secretariat in 2007, and prior to that held various legal, secretariat and risk roles including Head of
Bostock stepped down from the Board on 28 May 2014. RBS has announced that Philip Hampton will step down from the Board during
Morten Friis was appointed as a non-executive director on 10 April 2014.
On 25 February 2015 the Board approved the appointment of Howard
The Board is collectively responsible for the long-term success of RBS
and delivery of sustainable shareholder value. The Board’s terms of reference include key aspects of RBS’s affairs reserved for the Board’s decision and are reviewed at least annually. The terms of reference are available on rbs.com>about us.
Executive and there is a clear division of responsibilities with the
The Chairman’s key responsibilities are to: • provide strong and effective leadership to the Board; • ensure the Board is structured effectively and observes the highest standards of integrity and corporate governance; • manage the business of the Board and set the agenda, style and tone of Board discussions to promote effective decision-making and constructive debate; • facilitate the effective contribution and encourage active engagement by all members of the Board; • in conjunction with the Chief Executive and Chief Governance
• in conjunction with the Chairman and Chief Governance Officer and
In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities.
Please see the corporate governance structure on page 45 for more details. The work of the Board committees are also discussed in their individual reports as follows: Group Nominations Committee - pages 55 and 56.
The terms of reference for each of these committees is available on rbs.com and copies are also available on request from RBS Corporate
Aileen Taylor is the Chief Governance Officer and Board Counsel and is also the Company Secretary. Reporting directly to both the Chairman and the Chief Executive, she is responsible for delivering commercial corporate governance advice and support to the Board. She acts as a trusted advisor in the effective functioning of the Board, ensuring appropriate alignment and information flows between the Board and its committees, including the Executive Committee. As Board Counsel, she is responsible for the provision of legal advice to the Board. Her responsibilities include: -
The company has procedures in place to ensure that the Board’s powers for authorising actual or potential conflicts of interest are operating effectively. On appointment, each director is provided with RBS’s guidelines for referring conflicts of interest to the Board. Each director is required to notify any actual or potential conflicts of interest to the Board for consideration and to update the Board on an ongoing basis when he or she becomes aware of any changes.
Board and committees of the Board were held, including meetings to consider and approve financial statements. The Chairman and the nonexecutive directors meet at least once per year without executive directors present.
Notes: (1) Appointed to the Board on 19 May 2014. (2) Appointed to the Board on 10 April 2014. (3) Missed one meeting due to family bereavement. (4) Stepped down from the Board on 28 May 2014. (5) Stepped down from the Board on 26 March 2014. (6) Stepped down from the Board 31 October 2014.
Franchise Chief Executives attend each Board meeting to provide an update on the performance of their businesses. Other relevant senior executives including the Chief Risk Officer, the Chief Regulatory Affairs
The table below illustrates the breadth of skills and experience on the
Each new director receives a formal induction on joining the Board, which is co-ordinated by the Chief Governance Officer and Board Counsel. This includes visits to RBS’s major businesses and function and meetings with directors and senior management. Meetings with the external auditors and external counsel are also arranged. Each induction programme has a core element that the director is required to complete with the remainder of the programme tailored to the new director’s specific requirements. An example of an induction programme for a new non-executive director is set out below: Chairman
Committee and Board Risk Committee schedule (details of which can be found on pages 58 and 64) and all non-executive directors are invited to attend. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors.
The Chief Governance Officer and Board Counsel maintains continuing professional development logs. These are reviewed regularly with directors to assist in identifying future training and development opportunities that are specific to the individual director’s requirements.
All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Chief
There is an anticipated time commitment in line with the recommendations of the Walker Review in respect of general Board duties and additional time as necessary in respect of committee duties.
However, as stated in the Chairman’s introductory letter to his Corporate governance report, the time commitment currently required of our nonexecutive directors is significant. Each director is required to seek the agreement of the Chairman before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director of RBS. Directors have also been briefed on the limits on the number of other directorships that they can hold under the requirements of fourth Capital Requirements Directive (CRD IV). The
Board monitors the other commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively.
The 2012 evaluation was conducted externally by a specialist board evaluation consultancy. The 2013 evaluation was conducted internally by the Chief Governance Officer and Board Counsel and a number of initiatives were implemented aimed at improving the overall performance and effectiveness of the Board. These included keeping Board and committee composition under review; ensuring sufficient time on Board agendas for Board oversight of key strategic areas; a review of risk reporting and a focus on regular contact with external stakeholders.
In 2014, the Board and committee evaluation process was conducted internally by the Chief Governance Officer and Board Counsel. A
comprehensive review of the Board’s effectiveness was also carried out by the Prudential Regulation Authority during 2014.
Information Continue to improve and enhance the information presented to the Board and Committees.
Chairman’s performance and canvassed views on the Chairman’s performance from the non-executive directors collectively. The results of the Chairman’s effectiveness review were then discussed by the
The Chairman is responsible for ensuring effective communication with shareholders. The company communicates with shareholders through the
Shareholders are given the opportunity to ask questions at the Annual
General Meeting and any General Meetings held or can submit written questions in advance. The Senior Independent Director and the chairmen of the Board committees are available to answer questions at the Annual
Communication with the company's largest institutional shareholders is undertaken as part of the Investor Relations programme: • the Chief Executive and Chief Financial Officer meet regularly with
Chief Financial Officer also undertake an extensive annual programme of meetings with the company’s largest institutional shareholders.
• the Chairman independently meets with RBS’s largest institutional shareholders annually to hear their feedback on management, strategy, business performance and corporate governance.
Committee consults extensively with major shareholders in respect of the Group’s remuneration policy.
In 2014, RBS continued its programme of UK-based events aimed at individual shareholders. These events provided an opportunity for shareholders to meet with directors and senior management to learn more about the business.
Notes: (1) Appointed to the Committee on 10 April 2014. (2) Stepped down from the Board on 26 March 2014. (3) Stepped down from the Board on 31 October 2014.
In September 2014, it was announced that I would step down as
Egon Zehnder International (EZ) has been engaged to support the search process for the new Chairman. EZ does not provide services to any other part of the RBS. A job specification has been prepared, which includes an assessment of the time commitment expected. The Committee has held a number of discussions on potential candidates (internal and external)
and engaged with RBS’s key stakeholders to seek their views on candidates. On 25 February the Board approved the appointment of
EZ has continued to support the search for new non-executive directors during 2014 following the departure of Art Ryan, Tony Di Iorio and Philip
Scott and to support the future Board succession planning. The search for potential candidates is continuing.
Board and Committee membership was reviewed in 2014 and the following Committee membership changes were made: • Robert Gillespie was appointed a member of the Board Risk
Further details on RBS’s approach to diversity can be found on page 98.
I would also like to extend my gratitude to Tony Di Iorio and Philip Scott who stood down as members of the Board and Committee in March and
Management, the Committee satisfied itself that the key accounting decisions, risks and significant management judgements that underlie the financial statements were appropriate. The Committee reviewed the conclusions of the External Auditor and, where applicable, other experts and concluded that disclosures in the financial statements about these judgements and estimates were transparent and appropriate. A more detailed account of the most material issues considered by the
However, there remains further work to be done within the business to improve controls and to drive cultural change. A wider programme of cultural and control remediation across the former Markets division has commenced in 2015.
An effective three lines of defence model is critical to the success of cultural change and strengthening internal controls across the organisation. The model has been developed further during 2014; it is now more clearly articulated and principles based. However, while the process of embedding the three lines of defence within the new organisational construct has begun, more work is required and this needs to remain a priority for RBS in 2015. In conjunction with the Board Risk
EY also carried out an external review of the effectiveness of Internal
Action plans are in place to address all detailed findings and will be tracked to closure.
During 2014 members of the Group Audit Committee, in conjunction with members of the Board Risk Committee, took part in an annual programme of visits to businesses and control functions in order to gain a closer understanding of the risks and control issues they face. This value adding programme included visits to Commercial and Private Banking; Corporate and Institutional Banking; Technology Services; Finance; Risk Management and Conduct & Regulatory Affairs (twice); Internal Audit (twice).
Notes: (1) Became a member of the Committee on 1 April 2014. (2) Became a member of the Committee on 10 April 2014. (3) Stepped down from the Board on 26 March 2014. (4) Stepped down from the Board on 31 October 2014.
The members of the Audit Committee are selected with a view to the expertise and experience of the Committee as a whole and with proper regard for the key issues and challenges facing RBS.
In addition, the PRA undertook a review of the effectiveness of the Board and its senior committees throughout 2014, including the Group Audit Committee. The outcomes of this evaluation will be reported to the Board in due course and recommendations will be progressed as appropriate.
The Audit Committee focused on a number of salient judgements and reporting issues in the preparation of the 2014 accounts. In particular, the
Committee considered: • The evidence (including in relation to RBS’s capital, liquidity and funding position) to support the directors’ going concern conclusion.
Further information is set out on page 99; • The adequacy of loan impairment provisions, focusing particularly on the judgements and methodology applied to provisions in RCR, given the exit strategy for the business and sensitivity to market conditions. The Committee was satisfied that the overall loan impairment provisions and underlying assumptions and methodologies were reasonable and applied consistently; • Valuation methodologies and assumptions for financial instruments carried at fair value including RBS’s credit market exposures and own liabilities assessed at fair value; • The appropriateness of the carrying value of goodwill and other intangible assets. Particular consideration was given to the classification of Citizens Financial Group (CFG) in light of the Initial
Public Offering (IPO) and planned disposal. Following discussion it was agreed that CFG should be re-classified as a disposal group and as a discontinued operation; • The judgements that had been made by management in assessing the recoverability of deferred tax assets, bearing in mind RBS’s simplification agenda and the potential impact of ICB and ringfencing; • Valuation of the Group’s main defined benefit pension scheme. The
Committee considered the assumptions that had been set in valuing the fund and the sensitivities of those assumptions.
As part of its overall assessment of the Annual Report and Accounts, the
Committee assisted the Board in determining that the Annual Report and
Accounts taken as a whole was fair, balanced and understandable, providing the information necessary for shareholders to assess the company’s performance, business model and strategy. A comprehensive review process supports both the Audit Committee and ultimately the
Executive Committee and other senior executives to provide confirmation following their review of the Annual Report and
Accounts that they consider them to be fair, balanced and understandable.
Committee during 2014. As noted in the letter from the Committee
Audit and commissioned independent assurance that: the remediation programmes were progressing in accordance with plan; issues were being remediated to industry standard; and internal reporting accurately reflected progress. It is anticipated that MCRP will conclude, with delivery of all necessary actions completed, during the first part of 2015.
Notwithstanding the progress achieved in MCRP, the Committee remained concerned about the lack of improvement to the Markets control environment rating, regarding regulatory concerns around the lack of cultural shift and in light of the foreign exchange trading issues.
Committee, this has been a primary area of focus for the Audit
Committee during 2014. The Committee supported management’s proposals to transition the policy to be more principles-based. The governance of the model has been simplified and streamlined. However, further work is required to ensure the revised model is fully embedded and operating effectively in practice. As such, the Committee has requested a clear articulation of end-state and a plan to reach that goal which will be closely monitored during 2015. In addition, the Committee has agreed that each business will report on progress at Committee visits
The Finance and Risk System Transformation (FiRST) was kept under the review of the Committee in 2014. A strategic review of the programme’s aims, progress and deliverables was undertaken by management in light of the new RBS model. A proposal was presented to the Committee under which the programme scope will now be more streamlined with a narrower set of priorities, which should enable delivery. External independent assurances on the suitability of the revised plan were provided. Progress will be monitored closely by the
The Committee received regular reports and opinions from Internal Audit throughout 2014. The audit universe was refreshed during the year to remain aligned with the evolving shape of the bank as the Transformation
Programme progressed. This will continue in 2015. Audit officers are working closely with the businesses to ensure the work undertaken is appropriate in both the short and longer term.
The Committee received regular updates on the progress of implementation of Internal Audit’s strategic plan. It also considered and approved Internal Audit’s annual plan for 2014 and monitored progress against it during the year. Consideration was also given to resourcing levels and the impact of the Transformation Programme and other changes taking place across RBS. During two visits to Internal Audit in 2014, the Committee reviewed external co-sourcing arrangements and recruitment strategies aimed at ensuring any capability gaps were appropriately addressed. Significant progress has been made and the benefits are being observed across the function. Overall the Committee is satisfied that the function is appropriately resourced.
As set out in the terms of reference, the Committee has a responsibility to monitor the relationship with the Financial Conduct Authority (FCA)
and the Prudential Regulation Authority (PRA) and other relevant regulatory bodies.
The Committee also tracked progress in relation to mandatory and remedial projects and challenged the management of individual business areas and functions on the ability to meet regulatory expectations, responsibilities and the level of resource required to do so.
Board in relation to the appointment, re-appointment and removal of the
External Auditors. In order to make a recommendation to the Board, the
Auditor and also fixes their remuneration as authorised by shareholders at the Annual General Meeting.
will reach a point of independence from RBS and will begin to shadow the audit process to ensure it is well informed to commence as the
The Audit Committee has adopted a policy on the engagement of the
Supply Chain Services. Where the engagement is tax related, approval must also be obtained from the Director of RBS Tax. Ad hoc approvals of non-audit services are ratified by the Group Audit Committee each quarter. During 2014, the External Auditor was approved to undertake certain significant engagements which are explained more fully below: • Assurance testing in relation to RBS’s 2013 Sustainability Report.
The External Auditor was selected given its significant experience in specialist sustainability reporting. An improved fee was also negotiated.
• Provision of advice and assistance to RBS Capital Resolution in formulating deleveraging strategies and transaction preparation.
Data gathering, due diligence and information assessment was also undertaken. Following a review of all advisors in this area, Deloitte was selected in recognition of the team’s position as one of the leaders in the European loan portfolio sale market, particularly in the relevant geographies.
External Auditor can be found in Note 5 to the consolidated accounts on
This is my first letter to you as Chairman of the Board Risk Committee, having succeeded Philip Scott on 1 April 2014. I have been a member of the Committee since 1 March 2012. On behalf of the Committee, I would like to thank Philip for his leadership as Chairman over the previous four years. I would also like to thank Sandy Crombie and Tony Di Iorio for their work as members of the Committee: both stood down at the end of
March. In April we welcomed three new members to the Committee: Morten Friis, Robert Gillespie and Penny Hughes who have already made significant contributions.
The backdrop throughout 2014 for RBS has been one of significant change. In February, the bank announced its new strategy to be a smaller, simpler UK focused bank. It mobilised a transformation programme with the objective of implementing the future bank-wide operating model and required process and technology changes. The
Board Risk Committee assumed responsibility for monitoring execution risk. It received regular reports on progress, including independent opinions from Risk Management, Internal Audit and HR. Monitoring the risks associated with the transformation programme will continue throughout 2015 and beyond.
continued to deal with certain significant conduct issues that have hindered the speed of RBS’s recovery and damaged its reputation. Of particular concern were the issues associated with manipulation of foreign exchange markets. The Committee oversaw the internal and regulatory investigations which ultimately led to the imposition of a substantial fine in November 2014, by the FCA and US Commodity
The outcome was a stark reminder of the importance of culture and integrity in banking. On behalf of the Board, the Committee monitored the resulting disciplinary and accountability processes and made recommendations to the Group Performance and Remuneration
It is always disappointing to have to consider behaviour which falls below expected standards. While the Committee plays a key role in ensuring appropriate action is taken when things go wrong, it is important to instil values that will eliminate this conduct at the outset. Driving a strong and healthy risk culture is fundamental to this. During 2014, RBS has commenced a programme of work to benchmark its risk culture both against peers and heightened regulatory expectations. The Committee has supported this programme wholeheartedly and will review a plan in early 2015 which will articulate how the bank can define and embed a stronger risk culture and evidence that this is effective.
Equally important is ensuring that the accountabilities of our staff are clear and transparent. In conjunction with the Group Audit Committee, the members have reviewed progress in embedding the three lines of defence model across RBS. While progress has been made to develop definition and design principles, significant work is still required to articulate and embed the operating model within businesses. This will be a priority in 2015.
systems. During the year, the Board Risk Committee has continued to oversee the remediation activity following the IT incident, which occurred in 2012. It has also considered accountability. Independent assurance has been provided by PwC that the work undertaken by the business has been appropriate and addresses the key areas requiring remediation.
Banking Authority (EBA) and the Bank of England (BoE) and approved the reverse stress test trigger framework. Unfortunately, in November 2014 an error was identified in the calculation of the modelled Common
Other material areas of Committee focus during the year have included: • consideration of the risk appetite framework of RBS to ensure it remains fit for purpose in light of internal restructuring, market positioning and regulatory changes; • planned improvements to the Operational Risk Management
would like to extend my thanks to my fellow members and to RBS’s senior leadership team for the additional time they have dedicated to the business of the Committee.
In addition to the members, Board Risk Committee meetings are also attended by relevant executive directors, including representatives from Risk Management, Conduct and Regulatory Affairs (C&RA), Finance and Internal Audit. External advice is also sought by the Board Risk Committee, where appropriate. A standing invite has been issued to the lead partner of the External Auditor to attend all meetings from January 2015 onwards.
During 2014, in conjunction with members of the Group Audit Committee, members of the Board Risk Committee took part in an annual programme of visits to businesses and control functions in order to gain a deeper understanding of the risks and issues they face. This value adding programme included visits to Commercial and Private Banking; Corporate and Institutional Banking; Technology Services; and Finance. In addition, the Committee made two visits to Risk and C&RA; and Internal Audit. In addition, an in-depth session on risk reporting was undertaken by the Committee in 2014.
Baroness Noakes (Chairman) (1) 9/9 Morten Friis (2) 6/6 Robert Gillespie (3) 5/6 Penny Hughes (3) 6/6 Brendan Nelson 9/9
Former members Sandy Crombie (4) 3/3 Tony Di Iorio (5) 3/3 Philip Scott (6) 8/8
Baroness Noakes, Morten Friis and Brendan Nelson are also members of the Group Audit Committee. Philip Scott was a member of the Group Audit Committee until he stood down from the Group Board on 31 October 2014. Robert Gillespie is also a member of the Group Performance and Remuneration Committee and the Sustainable Banking Committee, and Penny Hughes chairs the Sustainable Banking Committee. This common membership across Committees ensures effective governance across all risk, finance, reputational and remuneration issues and that agendas are aligned and overlap of responsibilities is avoided where possible.
Role of the Board Risk Committee The Board Risk Committee’s primary responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on the bank’s website: www.rbs.com.
Performance Evaluation The annual review of the effectiveness of the Board and its senior Committees, including the Board Risk Committee, was conducted internally in 2014. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings. Overall the review concluded that the Board Risk Committee continued to operate effectively. The composition of the Committee was considered to be wellbalanced, with the skills and perspectives required to respond to the challenges faced. The quality of debate at Committee meetings was also noted to be of a high standard. Some areas where further enhancements to Committee performance could be made were identified, these included: the development of a specific technical training programme to complement the members’ knowledge; review of the thresholds for reporting and escalation of issues to ensure Committee focuses on the key issues; and continued improvements to reporting to the Committee so that there are more focussed and higher quality papers which clearly articulate the key issues for debate.
In February 2014, RBS announced its refreshed strategic direction to become a smaller UK centric bank with a focus on placing customers at the fore. A transformation programme was established to implement the required changes, with both short term and longer term objectives.
During 2014, the Board Risk Committee, on behalf of the Board, dedicated significant time to regularly reviewing the execution risks and issues arising from the implementation of such fundamental change across the organisation. The Committee has received regular progress updates from the project team. Risk Management has been fully involved in the transformation programme and has provided an independent opinion to the Committee at each meeting on the risks in the programme. In addition, the Committee receives independent opinions from HR and Internal Audit. On a rolling basis, the Committee has held focus sessions on the key workstreams under the programme which are aligned to the priority areas of Reshaping the Bank, Cost,
Customer, Control & IT execution. In 2014, the Committee received reports on the customer workstream, the control transformation programme and technology. The Committee also commissioned a detailed review of the people risks facing the organisation. Detailed 2015-17 plans were presented to the Board in December 2014 and the
Risk is engaged in the programme and has provided the Committee with opinion on key risks and execution. The Committee will continue to oversee delivery throughout 2015, being particularly mindful of the challenging timescales; • considered the potential impacts on RBS’s mortgage book in the event of a sharp fall in property prices in the short to medium term, should concerns over rising London house prices crystallise; • received regular reports on the threats to RBS and its customers’
Affairs Officer also provided a verbal update on current matters pertinent to the Committee at each meeting. This has been a useful means of ensuring the Committee receives the latest information on current and emerging risk and conduct matters. Reports are made to the Committee at each meeting on the most recent discussions at the Executive Risk
The allegations of misconduct within RBS’s Restructuring business, which were set out in the Tomlinson Report, were also given detailed consideration at the Committee. In response to the report, RBS
commissioned Clifford Chance to undertake an independent review into the most serious allegations. The Committee played a key role in monitoring developments and overseeing the publication of the report, in
Following the IT incident in June 2012, a significant amount of work has been undertaken to strengthen the resilience of RBS’s technology systems and this continued to be an area of focus for the Committee in 2014. It received quarterly reports on the work being undertaken to enhance resilience and to address the findings of the section 166 regulatory review. Reports have included independent assurance from
Committee appraised of progress. Lessons have been gained from liaison with peers and benchmarking. The Committee will review management’s plan to embed risk culture across RBS and the proposed measures to assess and validate its effectiveness during 2015. This topic is of keen regulatory interest will remain a priority for the
In 2014, the Committee also received reports on other conduct and regulatory issues, including: • quarterly updates from the oversight committee established to monitor the status of current open investigations in the former
Committee reviewed key market risk issues and hot topics including remediation and compliance with CRD IV requirements. Plans to enhance the management of exposures across Credit and Market Risk were considered.
Committee, including a report on activities to address current and emerging risks, and an update on the credit risk appetite frameworks.
Steps taken to de-risk certain portfolios, including commercial real estate, and to improve overall asset quality were considered.
Working closely with the Group Audit Committee, the Committee reviewed the updated three lines of defence design principles (across front line management, risk and internal audit). In the second half of 2014, implementation has been focussed on publication and dissemination of the principles, and application in both organisational structures and individual role profiles. During 2015, the focus will be on driving these principles deeper into the organisation, supported by the planned activity on risk culture outlined above. Effective operation of the three lines of defence model is critical to the success of the bank’s transformation and the Committee will carefully consider plans in early next year and monitor delivery against agreed objectives.
An effective first line of defence with a clear understanding and ownership, is fundamental to the success of the Operational Risk
should look like to this approach. The Board Risk Committee has received reports on progress and will consider detailed plans in the first quarter of 2015.
The Board Risk Committee reviewed the risk appetite framework of RBS
This review will also focus on how the detailed risk appetite processes within the individual businesses fit within the enterprise wide appetite set by the Board.
Committees, chaired by business Chief Executives, should be responsible for the consideration of all risk issues and escalation to the business ExCo and ERF. These Committees also consider finance and audit issues on a quarterly basis and provide reports to the Board Risk
The Board Risk Committee considered model risk management across the organisation and this will remain a key area of focus of the
The Committee reviewed the preparations underway to ensure compliance with the new Basel Principles on Effective Risk Data
January 2016. Detailed plans will be reviewed and the Committee will receive reports on delivery through 2015.
Committee members’ objectives, performance and remuneration arrangements. The committee makes recommendations as appropriate to the Group Performance and Remuneration Committee.
Committee’s report on pages 73 to 93 includes more detail on how risk is taken into account in remuneration decisions.
Given the importance of delivery of the RCR objectives for RBS's future plans, the Committee’s role is an important one. I was appointed
Chairman of the Committee on 1 April 2014 and am pleased to present the report on the Committee’s activity during 2014.
(criteria for taking decisions on the reduction of capital and assets); • agree in consultation with the Group Performance and
Remuneration Committee specific incentives for RCR management, aligned to the objectives of RCR; • consider financial disclosures in respect of RCR; and
• report to the Board on the Committee’s activities and recommend changes to RCR strategy.
Committee. The Senior Independent Director, the Chairman of RBS and the Chairman of the Group Audit Committee are members. Attendance at meetings is shown below.
Notes: (1) Baroness Noakes took over from Philip Scott as Chairman of the Committee on 1 April 2014.
At each scheduled meeting during the remainder of the year, the
framework and operating principles to satisfy itself that management were managing these risks appropriately.
Remuneration Committee, has approved RCR remuneration principles, and RCR related annual objectives for the CEO of Capital Resolution
As explained on page 154, RCR now expects substantially to complete its work by the end of 2015. The Committee will continue to oversee the activities of RCR throughout this period.
Overall, the review concluded that the Committee operated effectively and exercised appropriate oversight and challenge of management.
Our strategy is clear – our success as a company is dependent on the success and fortune of our customers and the communities we live and work in. When they succeed, so do we.
The Sustainable Banking Committee is primarily concerned with overseeing how well management is running the bank sustainably for its stakeholders and dealing with matters of reputation and trust, including cultural change. In fulfilling this responsibility, we try to consider the long term interests of all stakeholder groups which include customers, employees, shareholders, government, regulators, society and advocacy groups.
• Assessing performance on delivery of customer commitments on trust, advocacy and service including simple, transparent and fair banking.
Also during 2014, the opportunity was taken to refocus the strategic direction of the Committee to ensure greater alignment with the customer ambition of the bank. Our work will concentrate on three core themes: Bank-wide Reputation and Trust, Serving Customers and
Sustainability/Emerging issues. More detail on these themes is provided on pages 38 to 41. Previously known as the Group Sustainability
Committee, we felt the new name of Sustainable Banking Committee better reflected our purpose and underlined the importance of sustainable banking being a core part of our strategy.
Although there is still much to be done to rebuild trust, it is pleasing that the efforts to build a responsible and sustainable business are being recognised through independent and external measures. These include having recently been ranked as the top scoring UK company in
Both were attended by senior representatives from the customer-facing divisions as well as Human Resources, Sustainability, Risk, Conduct and
In addition to ongoing engagement which takes place across our business each day, the Sustainable Banking Committee runs a proactive engagement programme to which we invite external stakeholders to meet with, and challenge, the most senior decision makers in RBS. These discussions help shape future policies, influence strategic priorities and inform decision making across RBS and will continue to play a key role.
To date we have met with over 40 different groups of NGOs, civil society groups, government bodies, consumer groups and investors in this way.
In particular, in 2014 we held six such stakeholder engagement sessions covering the following topics: • Fair Banking with particular emphasis on how well RBS serves low income customers
• Development of brand strategy in line with, RBS’s purpose, vision and values
• Sustainable growth of business and measures taken to support economic development and how banks can better serve society
• Engage with key internal and external stakeholder groups on emerging sustainability issues
Banking Authority (EBA). For the majority of these employees, no changes have been required to their remuneration arrangements.
Role-based allowances have been introduced as an additional element of fixed pay for some MRTs in line with market practice. Allowances for members of the Executive Committee are delivered entirely in shares and are subject to a retention period. Increases in fixed pay have been balanced by longer vesting periods for long term incentives and an overall reduction in the maximum compensation available.
In accordance with Prudential Regulation Authority (PRA) requirements, we have updated our clawback policy. Any variable pay awarded to
has operated malus for a number of years. The new clawback requirements, together with malus, provide greater scope for the
Committee to recover remuneration where new information indicates we should change the pay decisions made in previous years and it is no longer appropriate to make payments at the level originally awarded.
The Committee fully appreciates the impact such events have on shareholders and customers. It is only right that this should be reflected in remuneration outcomes for those whose conduct fell short of our standards.
LIBOR, the IT incident and for the FX events. The Committee believes this process strikes an appropriate balance with a significant adjustment being made to bonus pools as a targeted measure to change behaviour, while not disproportionately penalising employees who are not responsible for these events.
It has taken much longer than anyone anticipated to turn the corner on past problems, practices and related fines but a significant amount of remedial action has already been undertaken. A clear message has been sent to employees that there is no place for any misconduct at RBS and wrongdoers will be dealt with. There is a determination to develop and maintain a culture that reflects our commitment to the customer and ethical market practices.
• Staff compensation has reduced year on year at both the total and per employee levels
• CET1 ratio has improved over the year from 8.6% to 11.2%
• RBS Total Shareholder Return (TSR) performance in 2014 has been ahead of other UK banks and the FTSE100 index
• In 2014, we have seen some positive Net Promoter Score movements in some of our franchises and there are early signs that customer trust in RBS is stabilising and starting to improve
The Committee has an important role in helping to create a compelling employee proposition. During 2014, RBS became a fully accredited
• The bonus pool has fallen from a total of £576 million last year (£536 million excluding CFG) to £421 million excluding CFG in 2014, a reduction of 21% excluding CFG or a 27% overall reduction. Over 90% of this pool will be directed to those below the most senior RBS
and before variable compensation expense, conduct, litigation and restructuring charges and other one-off items).
• Where employees do receive a bonus, the average amounts remain relatively modest with 51% of employees receiving £2,000 or less and a further 22% receiving less than £5,000.
• Reflecting a desire from shareholders for longer timescales, the overall vesting period for future long-term incentive awards has been extended from three to five years.
Committee also intends to undertake a review of the broader aspects of employee remuneration at RBS during the course of the year.
I would like to conclude by thanking my fellow Committee members and those who support the Committee for their guidance and commitment over the year. I have no doubt we will be responding in 2015 to further developments in remuneration principles and practices. Shareholders continue to have a vital role in developing responsible pay practices and I
Notes: (1) Joined on 19 May 2014. (2) Amount for Ross McEwan includes standard benefit funding and relocation benefits. (3) Amount relates to a share award made to replace awards forfeited on leaving
• LTI performance conditions will be assessed over three years with any vesting taking place in equal tranches in years four and five.
• Malus and clawback provisions will apply for an overall period of seven years from the date of grant.
The rates for 2015 are as follows: Chief Financial Officer - £800,000
A fixed allowance, paid entirely in shares. Individuals will receive shares that vest immediately subject to any deductions required for tax purposes and a retention period will apply. Shares will be released from the retention period in equal tranches over a five year period. The fixed share allowance will broadly be paid in arrears, currently in two instalments per year. For 2015, the instalments will be paid in August and
Note: (1) The company believes that delivery in shares is the most appropriate construct for a fixed allowance to executive directors, qualifying as fixed remuneration for the requirements imposed under CRD
IV. If regulatory requirements emerge that prohibit allowances being delivered in shares, or deem that such allowances will not qualify as fixed remuneration, then the company reserves the right to provide the value of the allowance in cash instead in order to comply with the requirements.
Variable pay is intended to incentivise superior long-term performance and promote the success of RBS, with rewards aligned with shareholders and adjusted for risk, based on the achievement of stretching performance measures.
Purpose and link to strategy Operation Maximum potential value Performance metrics and period
Strategic Plan. The selection of performance metrics will be closely aligned with Key
Delivery in shares with the ability to apply malus adjustments and clawback further supports longer-term alignment with shareholders.
Provisions for malus adjustment of unvested awards and clawback of vested awards.
The long-term incentive award will be delivered under the RBS 2014
This currently limits variable pay to the level of fixed pay
(i.e. base salary, fixed share allowance, benefits and pension). A higher ratio, up to 200% of fixed pay, is possible with shareholder approval.
For these purposes awards will be valued in line with the
In addition to the regulatory ratio which currently limits variable pay to the level of fixed pay, awards for executive directors are subject to a maximum of 300% of base salary (1).
An underpin gives the Committee discretion to reduce vesting amounts in light of underlying financial results, or conduct and risk management effectiveness.
Details of the performance measures for awards to be granted in 2015 are set out as part of the implementation of remuneration policy on page 83.
Note: (1) Adjustments will be made to award levels where necessary to ensure that executive directors remain within the variable to fixed limit.
There are a number of trigger events under which malus and clawback will be considered including: • the individual participating in or being responsible for conduct which results in significant losses for RBS; • the individual failing to meet appropriate standards of fitness and propriety; • reasonable evidence of an individual’s misbehaviour or material error; and
The Committee retains oversight of remuneration policy for all employees to ensure there is a fair and consistent approach throughout the organisation. The broader policy uses deferral, malus and clawback to promote effective risk management and alignment with shareholders.
Any salary increases for EDs will not normally be greater than the average increase for RBS employees. While employees are not directly consulted on setting directors’ remuneration, consultation on remuneration generally takes place with our social partners, including representatives from UNITE. In November 2014, RBS became a fully accredited Living Wage employer. RBS has been an accredited Living
Wage employer in London since 2010 and this commitment has been extended to our operations and suppliers in the rest of the UK.
An annual employee opinion survey takes place which includes a number of questions on pay and culture. This includes questions on how pay is determined and evaluated, including the need to consider both ‘what’ and
Around 30,000 of our employees are shareholders through our incentive and all-employee share plans and have the ability to express their views through voting on the Directors’ Remuneration Report.
• The approach to recruitment of directors is to consider both internal and external candidates and to pay no more than is required to attract the most suitable candidate for the role.
• Consideration will be given to the skills and experience held by the individual being recruited as well as the incumbent’s position.
Ewen Stevenson was appointed to the Board as Chief Financial Officer on 19 May 2014. His annual remuneration arrangements on appointment were as follows: Salary
An award over 584,506 shares was made on Ewen’s appointment to replace awards he forfeited on leaving Credit Suisse. The award is eligible to vest between March 2015 and March 2017 on terms that are no more generous than the terms of the awards they have replaced.
The service contracts do not contain any pre-determined provisions for compensation on termination.
The service contracts give RBS the discretion to make a payment in lieu of notice, which is based on salary only (with no payment in respect of any other benefits, pension or fixed share allowances) and is released in monthly instalments. During the period when instalments are being paid, the executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
Any shares already received under fixed share allowances will not be forfeited on termination but must continue to be held for the original retention periods. The fixed share allowance will continue to accrue for the period up to cessation of employment.
Other payments Discretionary The Committee retains the discretion to make payments (including but not limited to professional and outplacement fees) to mitigate against legal claims, subject to any payments being made pursuant to a settlement or release agreement.
In accordance with the provisions of the UK Corporate Governance Code, all directors of the company stand for election or re-election annually by shareholders at the company’s Annual General Meetings. Neither of the current executive directors hold a non-executive director role at another company.
The sections audited by the company's auditors, Deloitte LLP, are as indicated.
Notes: (1) Ross McEwan’s remuneration for 2013 reflected his service from appointment to the Board on 1 October to 31 December 2013. (2) Ewen Stevenson was appointed to the Board on 19 May 2014 and the table reflects his remuneration for the period since appointment. (3) Nathan Bostock joined the Board on 1 October 2013 and stepped down from the Board on 28 May 2014. See page 84 for details of termination arrangements. (4) Benefits figure includes standard benefit funding of £26,250 per annum with the remainder being relocation expenses provided to Ross McEwan. (5) The value for Ross McEwan relates to an award made on appointment to his previous role as CEO UK Retail to replace awards forfeited on leaving Commonwealth Bank of Australia. This element of the award was subject to RBS performance conditions which ended on 31 December 2014 and have been assessed as set out below. (6) The amount shown for Ewen Stevenson relates to an award made on appointment to replace the value of awards forfeited on leaving Credit Suisse. The award was delivered entirely in shares and subject to deferral, on terms that are no more generous than the terms of the awards replaced.
Ross McEwan was granted an award on joining RBS in 2012 to replace part of the awards forfeited on leaving Commonwealth Bank of Australia. This element was subject to RBS performance conditions over a three year period. Given his change in role over the period, this has resulted in a weighting of 50% being based on the performance of the Retail franchise and 50% based on RBS-wide measures. As the award does not vest until August 2015, an indicative share price has been used to estimate the vesting value.
Ewen Stevenson (2) 19 May 2014 1,911 584,506 Award made on appointment to replace the value of awards forfeited on leaving Credit Suisse. The shares are deferred over a similar time period as the awards replaced and subject to employment, malus and clawback provisions. No threshold vesting applies.
Remuneration of non-executive directors, excluding the Chairman, was reviewed in 2014. In light of the increased activity of the Nominations
Committee, and after consideration of comparable fees paid to directors of other major UK banks, it was agreed that fees for membership of the
(5) Philip Scott stepped down from the Board on 31 October 2014.
The information below sets out how RBS intends to implement the policy in 2015. No changes have been made to the underlying policy.
Sandy Crombie Alison Davis Morten Friis Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes
The performance measures are designed to be stretching and to support delivery of the business strategy. The measures are discussed each year with major shareholders. A three year performance period will apply which will end, in normal circumstances, on 31 December 2017. Subject to the achievement of the performance conditions, shares will then vest in equal tranches in years four and five.
Reason: Economic Profit, being a risk-adjusted financial measure, is consistent with the PRA/FCA Remuneration Code and also provides a balance between measuring growth and the cost of capital employed in delivering that growth.
The economic profit target will be consistent with the achievement of RBS’s strategic long term return on equity target of 12%+.
Reason: Relative TSR provides a direct connection between executive directors’ awards and relative returns delivered to shareholders.
Measure: The measure compares performance against a group of comparator banks. The group and respective weightings were changed in 2014 to be more in line with the new strategy and the same comparator group will apply to awards made in 2015.
Relative TSR Comparator Group Weighting 2 Lloyds Banking Group 4 Standard Chartered
Reason: These measures reward management for building a customerfocussed franchise with strength in terms of reputation and the engagement of employees. In February 2014, RBS committed to targeting both trust and advocacy which is reflected in this category.
Measure: Net Promoter Scores (NPS) and Net Trust Scores (NTS) will be used, measured against a defined peer group. Employee engagement will be measured against the Global Financial Services (GFS) norm.
Note: (1) The NPS metric adopted is a bank-wide measure of the gap to #1 bank, which RBS plans to close to zero by 2020. It is calculated using the gap to #1 leading competitor in each customer segment, weighted by the revenue contribution of each segment.
Committee’s discretion taking into account changes in circumstances over the performance period, the margin by which individual targets have been missed or exceeded, and any other relevant factors. Details of performance against targets will be disclosed once the awards vest.
August 2014). No payment was made for loss of office and all outstanding share awards were lapsed. There have been no payments made to departing non-executive directors for loss of office.
Executive directors’ LTIP awards granted in 2011 – final assessment of performance outcome (audited)
Performance ahead of the Strategic Plan 100% The minimum target was not met 0%
Balance Sheet & Risk 25% Half objectives met 25% Objectives met or exceeded in all material respects 100% 9/10 targets met or
Notes: (1) Targets relating to non-core assets, cumulative non-core loss, Core Tier 1 capital, wholesale funding, liquidity, leverage ratio, loan to deposit ratio, risk appetite and funded assets were met or exceeded. While the credit rating condition was not met, given the over-achievement on other measures, the Committee determined that the Balance Sheet & Risk element should vest in full. (2) The cost:income ratio target was not achieved within the Strategic Scorecard and taking into account the extent of the shortfall, the Committee determined that this element should not vest.
Aggregate contributions that would have been made if funded — 306
Performance Measure Weighting Threshold performance Vesting at threshold Performance for maximum vesting
Notes: (1) Targets relating to non-core assets (<=£40 billion), cumulative non-core loss (<=£6.8 billion), Core Tier 1 capital (>10%), leverage ratio (<18x), wholesale funding (<10%), liquidity reserves (>1.5x short-term wholesale funding), loan to deposit ratio (<=100%) and earnings volatility (<100%) were uniformly met or exceeded resulting in 100% vesting for this element of the award. (2) Targets relating to customer franchise, cost:income ratio, lending targets, sustainability performance, employee engagement, leadership index and succession. The cost:income ratio and employee engagement index were both behind target and overall it was determined that half of the Strategic Scorecard measures had been met satisfactorily resulting in a 25% vesting outcome. (3) The Committee also considered recommendations from the Board Risk Committee in determining the outcome above.
A strong start has been made in 2014. The Committee notes that strategic decisions have been taken in 2014 and will monitor the impact of these in the remaining performance period.
Maximum: 100% vesting if TSR is at upper quartile of the comparator group. Pro-rata vesting in between.
For 2014 awards, target ranges have been set for each measure and vesting will be qualified by Committee discretion taking into account the margin by which targets have been missed or exceeded.
The target shareholding level is 250% of salary for the Chief Executive and 125% of salary for the Chief Financial Officer, in each case excluding any unvested share awards in the calculation. A period of five years is allowed in which to build up shareholdings to meet the required levels. Shareholding requirements will be considered when relevant individuals request permission to sell shares, recognising the timeframe allowed to achieve the target level. The Committee receives annual updates on progress towards meeting these requirements.
Board. During the year ended 31 December 2014, the share price ranged from £2.96 to £4.04. (2) Stepped down from the Board on 28 May 2014. (3) Interest is 10,000 American Depository Receipts representing 20,000 ordinary shares. (4) Interest is 15,000 American Depository Receipts representing 30,000 ordinary shares. Stepped down from the Board on 26 March 2014. (5) Stepped down from the Board on 31 October 2014.
No other director had an interest in the company's ordinary shares during the year or held a non-beneficial interest in the shares of the company at 31
December 2014, at 1 January 2014 or date of appointment if later. The interests shown above include connected persons of the directors. As at 25
February 2015, there were no changes to the directors' interests in shares shown in the table above.
Awards held at 1 January 2014 (or date of appointment if later)
The graph below shows the performance of RBS over the past six years in terms of TSR compared with that of the companies comprising the FTSE 100
Taxation and other charges recognised in the income statement: - Social security and other payments 379 422 (10%)
- Irrecoverable VAT and other indirect taxes incurred by RBS (4) 665 703 (5%)
2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE
The Committee held nine scheduled meetings in 2014 and a further seven ad hoc meetings.
The Committee considered issues under the accountability review process at every meeting and CRD IV implementation at the majority of meetings. Consideration was also given to various remuneration issues for CFG in the run up to its IPO. Set out below is a summary of other key activities considered by the Committee.
• Presentation from Compliance and Risk on business and strategic priorities and people plans.
• Response to FCA letter in relation to Malus Performance Adjustment.
• Group Sales and Service Incentives Committee 2013 annual incentive report and FCA Incentives Thematic Review Report.
• The Committee undertook a ‘Masterclass’ in July 2014 where indepth consideration was given to pay construct and people proposition; the role & scope of the Committee; and stakeholder engagement.
A thorough internal review of the effectiveness of the Committee was conducted during 2014 involving questionnaires and follow-up interviews.
The review concluded that the Committee continued to operate effectively and the Masterclass was viewed as a positive development in building the future agenda. Themes emerging from the evaluation included using the time of the Committee more effectively and the need to focus on higher level strategic performance and remuneration priorities. The importance of concise papers highlighting key issues was also raised and a roll out of board paper training is already underway in Q1 2015 to address some of these concerns. Other priorities that were identified for 2015 included: alignment of remuneration strategy to the business strategy; creating a compelling employee proposition; and considering performance trajectory and the pay construct for the future business.
for advising the Committee in relation to directors’ remuneration are charged on a time/cost basis and in 2014 amounted to £137,749
The table below sets out the voting by shareholders on the resolutions to approve the Directors’ Remuneration Policy and the 2013 Remuneration
An extensive consultation is undertaken every year with major shareholders including UKFI and other stakeholders on our remuneration approach. The consultation process, led by the Chairman of the
In late 2014 and early 2015, meetings took place with a number of institutional shareholders and shareholder bodies representing a substantial portion of the non-UKFI shareholding. The topics discussed during the latest consultation included strategic direction and financial performance, determination of pay outcomes for the 2014 performance year, and developments that may impact pay arrangements going forward.
(including the B share capital), leaving an available dilution headroom of 5.3%. The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares.
The remuneration policy supports the business strategy and is designed to promote the long-term success of RBS. It aims to reward employees for delivering good performance against targets provided this is achieved in a manner consistent with our values and within acceptable risk parameters.
The remuneration policy applies the same principles to all employees including Material Risk Takers (MRTs) subject to the PRA/FCA Remuneration
Code (1). The current key elements underpinning the remuneration policy are set out below.
Base salary To aid recruitment and retention of high performing individuals whilst paying no more than is necessary. To provide a competitive level of fixed cash remuneration, reflecting the skills and experience required, and to discourage excessive risk taking.
Base salaries are reviewed annually and should reflect the talents, skills and competencies that the individual brings to the business.
Allowances are provided to certain employees in key roles in line with market practice, structured to qualify as fixed remuneration for regulatory requirements. They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are subject to an appropriate retention period, not less than six months.
PRA/FCA Remuneration Code. Immediate cash awards are limited to a maximum of £2,000. Under the deferral arrangements a significant proportion of annual bonus awards for our more senior employees are deferred over a three year period. Deferred awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in RBS shares and subject to a minimum six month retention period post vesting.
In certain circumstances, formulaic short-term incentive arrangements are used to align the objectives of employees with the strategy of the relevant area in which they work.
RBS provides certain employees in senior roles with long-term incentive awards.
Note: (1) The EBA has issued criteria for identifying MRT roles i.e. staff whose professional activities have a material influence over RBS’s performance or risk profile. The criteria for identifying MRTs are both
Qualitative (based on the nature of the role) and Quantitative (i.e. those who exceed the stipulated total remuneration threshold based on the previous year’s total remuneration). The Qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; and staff, individually or as part of a Committee, with authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The Quantitative Remuneration criteria are: individuals earning €500,000 or more in the previous year; or individuals in the top 0.3% of earners in the previous year; or individuals who earned more than the lowest paid identified staff per the Qualitative criteria, subject to specific exceptions in the criteria.
The RBS remuneration policy explicitly aligns remuneration with effective risk management. Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pools and incentive plan design as well as the application of malus and clawback.
A robust process is used to assess risk performance. A range of measures are considered, specifically the overall Risk Profile, Credit,
The process considers a balanced scorecard of performance assessments at the level of each franchise or support function. The assessments are made across financial, customer and people measures.
Risk and conduct assessments at the same franchise or functional level are then conducted to ensure that performance that is achieved without appropriate risk and conduct controls or culture is not inappropriately rewarded.
summary of the accountability review process is as follows: • Exists to enable RBS to respond in instances where current and/or new information would change variable pay decisions made in previous years and/or the decisions to be made in the current year.
• The process for review assessments (which consider material risk management, control and general policy breach failures, accountability for those events and appropriate action against individuals) is operated across RBS.
• Malus provisions apply to any unvested variable pay awards and can be applied to reduce awards (if appropriate to zero) regardless of whether or not disciplinary action has been undertaken.
• In addition to malus provisions that RBS has operated for a number of years, any variable pay awarded from 1 January 2014 was subject to clawback and this policy was updated for MRTs from 1
CFG). The tables below show remuneration details for the population excluding CFG.
Consisted of deferred awards payable over a three year period. Cash awards were limited to a maximum of £2,000 per employee.
Long-term incentive awards vest subject to the extent to which performance conditions are met and can result in zero payment.
Directive, the variable component of total remuneration for MRTs at RBS
shall not exceed 100% of the fixed component. Based on the information disclosed above, the average ratio between fixed and variable remuneration for 2014 is approximately 1:0.5.
In the relevant tables above, assumptions have been made for the notional value of LTIP (verified by external advisors) and forfeitures through resignation for deferred awards. In addition, the share price relevant to the date of the event or valuation point has been used.
Notes: (1) Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay (including actual value of LTIP vesting in 2014) after the application of clawback. (2) Executive directors and 16 employees of CFG are not included in the table. (3) An illustration of a comparable population from 2013 is shown for ease of reference. The table is based on an exchange rate where applicable of €1.241 to £1
• Employees managing the successful disposal of assets in RCR and reducing RBS’s capital requirements.
Throughout the year ended 31 December 2014, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the
Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board and this is an approach RBS has adopted for a number of years. Remuneration for the executive directors is first considered by the Group Performance and Remuneration Committee which then makes recommendations to the
Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group Performance and
RBS has also implemented the recommendations arising from the Walker Review and complied in all material respects with the Financial Reporting
The Board has established a process for the identification, evaluation and management of the significant risks faced by RBS, which operated throughout the year ended 31 December 2014 and to 25 February 2015, the date the directors approved the Report and Accounts. This is confirmed by a semi-annual Control Environment Certification process which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control framework and certify that their business or function is compliant with the requirements of
Management, Internal Control and Related Financial and Business Reporting” issued by the Financial Reporting Council in September 2014.
Enhancements have been made to the Risk Management framework throughout 2014 and further improvements will be made in 2015.
Committee. Internal Audit provides independent assurance to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving RBS’s objectives. Executive management committees or boards of directors in each of the RBS businesses also receive regular reports on significant risks facing their business and how they are being controlled. In addition, the Board receives monthly risk management reports. Details of the approach to risk management are given in the
Capital and risk management section. The Group Audit Committee has received confirmation that management has taken, or is taking, the necessary action to remedy any material failings or weaknesses identified through the operation of RBS’s framework of controls.
RBS is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2014.
Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of ‘Internal Control - Integrated Framework'.
As a foreign issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York
Stock Exchange (the “NYSE”), RBS is not required to comply with all of the NYSE standards applicable to US domestic companies (the “NYSE
As a foreign private issuer, the company must, however, comply fully with the provisions of the NYSE Standards that relate to the composition, responsibilities and operation of audit committees. These provisions incorporate the relevant rules concerning audit committees of the Exchange
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) the Chairman of the Board is also the Chairman of the Group Nominations Committee, which is permitted under the Code
RBS’s Group Audit, Board Risk, Sustainable Banking and Group Nominations Committees are otherwise composed solely of non-executive directors deemed by the Board to be independent.
The directors present their report together with the audited accounts for the year ended 31 December 2014.
HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT. 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 1 capital. Following the issuance of the B
shares, HMT’s holding of ordinary shares of the company remained at 70.3%, although its economic interest rose to 84.4%.
At 31 December 2014, HMT’s holding in the company’s ordinary shares was 62.3% and its economic interest was 79.1%.
RBS is now structured to deliver this ambition by organising itself around the needs of its customers, so as to combine customer groups with similar needs into franchises able to deliver co-ordinated services.
The reorganised bank will be a UK-focused retail and corporate bank with an international footprint to drive its corporate business. The previously reported operating divisions are now realigned into three franchises: • Personal & Business Banking (PBB), comprising two reportable segments, UK Personal & Business Banking, including Williams &
• Commercial & Private Banking (CPB), comprising two reportable segments, Commercial Banking and Private Banking.
brings these assets under common management and increases focus on managing these assets down so as to release capital.
The company did not pay a dividend on ordinary shares in 2013 or 2014.
Core Tier 1 impact of Group hybrid capital instruments. It is expected that £300 million of new equity will be issued during the course of 2015 to achieve this aim.
December 2015, if the balance is not paid by this point then interest begins to accrue on the balance outstanding at 5% per annum until 1
Details of the strategy for delivering the company’s objectives can be found in the Strategic report.
RBS’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Certain risk factors RBS faces are summarised in the
Business review on page 108 to 110. Fuller details of these and other risk factors are set out on page 474 to 492.
In 2007, RFS Holdings B.V., which was jointly owned by RBS, the Dutch
Netherlands and EMEA businesses were transferred to the Royal Bank in
In September 2014, RBS completed a partial IPO of Citizens Financial
As at 31 December 2014, RBS employed 108,700 people (full-time equivalent basis, including temporary workers) throughout the world.
Details of related costs are included in Note 3 on the consolidated accounts.
Team Effectiveness sessions for new executive teams to help them role model our values and lead the transition to a new RBS.
For RBS, building an engaged, healthy and inclusive workforce is crucial.
RBS. The survey enables our people leaders to monitor levels of engagement and work with their teams to make improvements to the working environment. It also provides a mechanism for RBS to track employee perception of our culture and the progress we’re making.
The ways that we recruit, promote, reward, and manage our people are all aligned to our values, and this coherent approach is making a difference within the organisation – with more people (year on year)
believing our values are making a difference to the way we work.
Our approach to performance management allows us to provide clarity for our people about how their individual contribution links to our ambition, reward the behaviour that supports our values, and hold individuals to account for behaviour and performance that does not. In 2014 we completed alignment of our approach to performance management across RBS, so that in 2015 there is consistent bank-wide use of our balanced scorecard, People standards, Leadership standards, and online system.
We’ve moved from seven divisions to three customer franchises, redesigning our supporting functions and services to remove duplication and unnecessary management layers. In addition to supporting our strategic direction, this work has strengthened accountabilities across
RBS, with robust governance in place to ensure future organisation designs are in line with these principles, positioning us to respond to ongoing regulatory requirements.
RBS recognises employee representatives such as trade unions and work councils in a number of businesses and countries. Our European
Supporting the professionalisation of our front line staff, all of our customer-facing employees are aware of the professional standards expected of them, and as at the end of 2014, 86% have completed related professional development programmes, giving colleagues the skills they need to do their job and serve customers well. Building the capability of our people is also crucial to ensure effective compliance behaviour. RBS has mandatory training modules for all employees to improve their understanding of the processes and controls required to properly manage key risks.
Our approach during 2014/15 focuses on building inclusion into all stages of the employee lifecycle. In 2014 we started rolling out bank-wide unconscious bias learning for all employees, which will continue across 2015. We’ve introduced a gender target to increase the number of women in senior roles across RBS. And we continue to support our employee-led networks, with membership across RBS at over 15,000 people.
Ensuring and supporting the wellbeing of our people is an important responsibility for RBS. A wide range of health benefits and services is in place to help them maintain good physical and psychological health, and support them if they do become unwell, including Lifematters, RBS’s
Having reviewed RBS’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS and the company will continue in operational existence for the foreseeable future.
RBS’s 2014 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers' Association in 2010.The Code sets out five disclosure principles together with supporting guidance. The principles are that RBS and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
During 2014, the company allotted and issued a total of 89 million new ordinary shares of £1 each for the purposes of ensuring 2014 coupon payments on discretionary hybrid capital securities were partly neutralised from a Core Tier 1 capital perspective. The shares were allotted to UBS AG at the subscription prices and determined by reference to the average market prices during the sale periods set out below.
Where not provided elsewhere in the Report of the directors, the following additional information is required to be disclosed by Part 6 of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and
The rights and obligations attached to the company’s ordinary shares and preference shares are set out in the company’s Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at rbs.com>about us.
General Meeting that the directors be granted authorities to allot shares under the Companies Act 2006. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
The Royal Bank of Scotland plc 1992 Employee Share Trust, The Royal
The names and brief biographical details of the current directors are shown on pages 46 to 49.
Hughes, Ross McEwan, Brendan Nelson and Baroness Noakes all served throughout the year and to the date of signing of the financial statements.
Tony di lorio stepped down from the Board on 26 March 2014.
Morten Friis was appointed to the Board on 10 April 2014.
All directors of the company are required to stand for election or reelection annually by shareholders at the Annual General Meeting and, in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders.
Act”), Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Executive Committee,
As at 25 February 2015, there were no changes to the shareholdings shown in the table above.
In accordance with the UK Financial Conduct Authority’s Listing Rules the information to be included in the Annual Report and Accounts under LR
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation
(European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and
The directors confirm that to the best of their knowledge: • the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• the Strategic Report and Directors’ report (incorporating the Business review) include a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
‘RBS’, ‘RBS Group’ or the ‘Group’ means the company and its subsidiaries, ‘the Royal Bank’ or ‘RBS plc’ means The Royal Bank of
The company publishes its financial statements in pounds sterling (‘£’ or
The results, assets and liabilities of individual business units are classified as trading or non-trading based on their predominant activity.
As required by the Companies Act 2006 and Article 4 of the European
In addition, RBS will continue to manage and report Citizens Financial
Group and RBS Capital Resolution (RCR) separately until disposal or wind-down. No business lines were moved to RCR so comparative data has not been restated. Non-Core was dissolved on 31 December 2013.
accounting policies, shows the underlying performance of RBS which excludes certain reconciling items. Information is provided in this form to give a better understanding of the results of RBS operations.
and includes the results of Citizens that are included in discontinued operations in the statutory results.
In addition, during 2014 RBS also made changes to the method of allocating costs relating to Services and Functions, the basis of allocation of RBS Treasury costs and the calculation of segment return on equity.
Reconciliations between the non-statutory and statutory results are detailed on pages 163 to 165.
RBS disposed of 29.5% of its interest in Citizens in 2014. In accordance with IFRS 5 ’Non-current Assets Held for Sale and Discontinued
Operations’, Citizens has been recognised as a discontinued operation with consequent changes to the presentation of comparative financial information. The assets and liabilities relating to Citizens are included in disposal groups at 31 December 2014.
A glossary of terms is provided on pages 505 to 511.
States, RBS's subsidiary Citizens Financial Group Inc. is a large commercial banking organisation. Globally, RBS has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers.
Following the 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 1 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%.
At 31 December 2014, HM Treasury’s holding in the company’s ordinary shares was 62.3% and its economic interest was 79.1%.
Ireland and the Republic of Ireland. It provides a comprehensive range of financial services through both its Retail Banking division, which provides loan and deposit products through a network of branches and direct channels, and its Corporate Banking division, which provides services to businesses and corporate customers.
• Private Banking provides banking and wealth management services in the UK through Coutts & Co and Adam & Company, offshore through RBS International and Isle of Man Bank and internationally through Coutts & Co Ltd.
Corporate & Institutional Banking (CIB) serves our corporate and institutional clients primarily in the UK and Western Europe, as well as those US and Asian multinationals with substantial trade and investment links in the region, with debt financing, risk management and trade services, focusing on core product capabilities that are of most relevance to our clients. CIB is a single reportable segment.
agreed a series of restructuring measures. These included the sale of 80.01% of RBS Global Merchant Services business (completed in 2010)
and the sale of substantially all of the RBS Sempra Commodities joint venture business (largely completed in 2010), as well as the divestment of Direct Line Insurance Group plc (completed in 2014, following earlier disposals of 34.7% of DLG shares in 2012 and 36.8% of DLG shares in
subsidiaries of major international banks. In the mortgage market, the bank competes with UK banks, building societies and specialist lenders.
Increasingly, the ambitions of non-traditional players in the UK market are gaining credibility, with new entrants active and seeking to build their platforms either through organic growth or in some cases by acquiring businesses made available through restructuring of incumbents. Entrants with new business models such as peer-to-peer lending platforms, while currently small, have shown rapid growth and are emerging as significant competitors. Such competitors often target specific elements of the value chain or customer segments. RBS distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.
In UK, European, Asian and the US corporate and institutional banking markets the bank competes with the large domestic banks active in these markets, the major international banks and a number of investment banks. Future competition in these markets, especially in Asia and the
With continued pressure on margins and fees, market participants stay focused on optimising core businesses, principally through reallocation of resources to areas generating economic returns where client opportunities are greater. In some cases this means closing part of overseas operations and focusing on home countries, while in others, notably among Japanese banks, competitors are searching for growth opportunities beyond home markets.
In the United States, following a successful initial public offering, RBS
Mid-Atlantic and Mid-West retail and mid-corporate banking markets with local and regional banks and other financial institutions. CFG’s mortgage lending, auto lending, student lending and commercial banking businesses operate in select additional markets. CFG Commercial
in RCR as well as a significant restructuring of the Group’s
Group’s business as a result of the implementation of the regulatory ring-fencing of retail banking operations (the “ring-fence”). Together, these initiatives are referred to as the “Transformation Plan” and present significant risks for the Group, including the following: ° The Transformation Plan, and in particular the restructuring of the Group’s CIB business and the divestment of certain of the
° The changes to the Group resulting from the implementation of the Transformation Plan will result in major changes to the
Group to emerge as a less complex and safer bank, there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer focused and profitable bank at the end of this long period of restructuring.
° The level of structural change required to implement the Group’s
Transformation Plan and its revenues may also be impacted by lower levels of customer retention and revenue generation following the restructuring of its business and activities. Further, the competitive landscape in which the Group operates is constantly evolving and recent regulatory and legal changes, including ring-fencing, are likely to result in new market participants. These changes, combined with the changes to the
Investment Plan. Any failure by the Group to realise the benefits of this IT and Operational Investment Plan, whether on time or at all, could have a material adverse effect on the Group’s business and its ability to retain or grow its customer business and remain competitive.
• The Group’s ability to implement its Transformation Plan and its future success depends on its ability to attract and retain qualified personnel. The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees. The Group’s changing strategy has led to the departure of many talented staff. Implementation of the Group’s
Transformation Plan, and in particular of the ring-fence and restructuring of the Group’s CIB business, as well as increased legal and regulatory supervision, including the implementation of the new responsibility regime introduced under the Financial Services
• The Group has been, and continues to be, subject to litigation and regulatory and governmental investigations that may impact its business, reputation, results of operations and financial condition.
• Ahead of the upcoming election in May 2015 in the UK, there is uncertainty around how the policies of the newly elected government may impact the Group, including a possible referendum on the UK’s membership of the EU. The implementation of these policies, including the outcome of the EU referendum, could significantly impact the environment in which the Group operates and the fiscal, monetary, legal and regulatory requirements to which it is subject.
• Operational and reputational risks are inherent in the Group’s businesses, but are heightened as a result of the implementation of the Transformation Plan. Employee misconduct may also result in regulatory sanctions and serious reputational or financial harm to the
• Despite the improved outlook for the global and UK economy over the near to medium-term, actual or perceived difficult global economic conditions, potential volatility in the UK housing market as well as increased competition, particularly in the UK, may create challenging economic and market conditions and a difficult operating environment for the Group’s businesses, as it continues to refocus its operations on the UK. These factors, together with continuing uncertainty relating to the recovery of the eurozone economy and volatile financial markets, in part due to the monetary and fiscal policies and measures carried out by central banks, have adversely affected and may continue to adversely affect the Group’s businesses, earnings, financial condition and prospects.
Maintaining adequate capital resources and meeting the requisite capital adequacy requirements may prove increasingly difficult and costly and will depend on the Group’s continued access to funding sources, including following the implementation of the ring-fence, as well as the effective management of its balance sheet and capital resources.
UK by the Banking Reform Act 2013 and implemented in line with the provisions of the Bank Recovery and Resolution Directive. In the event of the failure of the Group, 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 the Group’s businesses.
• The Group is highly dependent on its IT systems, which are currently subject to a significant investment and rationalisation programme. The Group has been and expects to continue to be subject to cyber-attacks which expose the Group to loss of customer data or other sensitive information and which, combined with other failures of the Group’s information technology systems, may hinder its ability to service its customers which could result in long-term damage to the Group’s reputation, businesses and brands.
Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the
Compensation Scheme). Pension contributions may be increased to meet pension deficits or to address additional funding requirements, including those which may arise in connection with the restructuring of the Group’s pension plan as a result of the implementation of the ring-fence. The Group may also be required to make further contributions under resolution financing arrangements applicable to banks and investment firms. Additional or increased contributions may have an adverse impact on the Group’s results of operations, cash flow and financial condition.
Group and could continue to adversely affect the Group if, due to a deterioration in economic and financial market conditions or continuing weak economic growth, it were to recognise or realise further write-downs or impairment charges. Changes in interest rates, foreign exchange rates, oil and other commodity prices also impact the value of the Group’s investment and trading portfolios and may have a material adverse effect on the Group’s financial performance and business operations.
• Developments in regulatory or tax legislation could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.
Profit/(loss) before impairment losses (2) 2,348 932 4,166 1,291 (729) (1,042)
In the non-statutory income statement set out below, own credit adjustments, gain on redemption of own debt, write down of goodwill, Asset Protection
(Loss)/profit from discontinued operations, net of tax (3,445) 558 318 (3,445) 558 318
Loss attributable to ordinary and B shareholders (3,470) (8,995) (6,055) (3,470) (8,995) (6,055)
Citizens related activities in Central items and related one-off and other items.
On a non-statutory basis, total income was £18,197 million, down 6%
from 2013, with improvements in net interest income in PBB and CPB
On a statutory basis, total income was £15,150 million, down 9% from 2013, including the impact of lower gains from the redemption of own debt of £20 million in 2014 compared with £175 million in 2013.
On a non-statutory basis, net interest margin was 2.23% (statutory basis 2.13%), up from 2.01% (statutory basis - 1.88%) in 2013, with improved liability margins partially offset by pressure on mortgage and corporate lending margins and by the continuing shift in mix towards lower margin secured lending.
On a non-statutory basis, operating expenses decreased by £2,661 million or 14% to £15,849 million. Operating expenses excluding restructuring costs of £1,257 million and litigation and conduct costs of £2,194 million declined by £1,612 million, or 12%, to £12,398 million, mainly reflecting cost savings of £1.1 billion.
Litigation and conducts costs totalled £2,194 million compared with £3,844 million in 2013. This included additional provisions for PPI redress
(£650 million) in PBB, provisions relating to investigations into the foreign exchange market (£720 million) in CIB, Interest Rate Hedging Product redress (£185 million), the fine relating to the 2012 IT incident (£59 million) booked in Centre and other costs (£580 million) including provisions relating to packaged accounts and investment products.
On a non-statutory basis, net impairment releases were £1,155 million compared with a net impairment charge of £8,432 million in 2013, which included £4,490 million provisions related to the creation of RCR.
Releases were recorded principally in RCR (£1,306 million) and in Ulster
On a statutory basis, net impairment releases of £1,352 million were recorded in 2014 compared with a net impairment charge of £8,120 million and excluded the impact of Citizens.
Liability management exercises undertaken during 2014 resulted in a net gain of £20 million (2013 - £175 million).
The tax charge of £1,909 million included a net write-off of deferred tax assets of £1.5 billion relating to the UK (£850 million) and the US (£775 million), reflecting the impact of scaling back the CIB operations, partially offset by write-backs relating to Ulster Bank.
On a non-statutory basis, total income decreased by 12% to £19,442 million principally driven by lower income in CIB reflecting the smaller balance sheet, reduced risk levels and the uncertain market environment.
On a non-statutory basis, non-interest income decreased by 21% to £8,450 million in 2013 principally driven by lower income from trading activities in CIB as the segment managed down the scale of the balance sheet and reduced risk. This was partially offset by a £506 million improvement in Non-Core trading losses. Operating lease and rental income fell by £392 million, largely reflecting the disposal of RBS Aviation
On a statutory basis, operating expenses increased 11% to £17,466 million from £15,757 million in 2012, including write down of goodwill of
On a non-statutory basis, impairment losses increased by 60% to £8,432 million from £5,279 million in 2012 primarily due to increased charges resulting from the establishment of RCR. Excluding the impact of RCR
On a statutory basis, net impairment losses were £8,120 million compared to £5,010 million.
Non-operating items shown separately on a non-statutory basis included a £120 million accounting charge in relation to own credit adjustments versus £4,649 million in 2012 reflecting the continuing, albeit modest, strengthening of RBS’s credit profile
The tax charge was £186 million in 2013 compared with £156 million in 2012. The tax charge for the year reflects losses in low tax regimes
(principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), a reduction in the carrying value of the deferred tax asset in respect of UK losses and the effect of the reduction of 3% in the rate of UK corporation tax enacted in
Adjusted loss per ordinary and equivalent B share from continuing operations was 77.7p per share compared with 30.2p per share in 2012.
Analysis of results Net interest income Non-statutory Statutory £m £m £m £m £m £m
Interest spread of the banking business (7) 1.91 1.69 1.63 1.79 1.57 1.50
The Royal Bank of Scotland plc base rate (average) 0.50 0.50 0.50 0.50 0.50 0.50
Notes: (1) Interest receivable has been increased by £11 million (2013 - £4 million; 2012 - £8 million) and interest payable has been increased by £58 million (2013 - £83 million; 2012 - £152 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (2) Interest receivable has been decreased by nil (2013 - £38 million; 2012 - nil) and interest payable has been decreased by nil (2013 - £31 million; 2012 - £138 million) in respect of non-recurring adjustments. (3) Interest payable has been decreased by £3 million (2013 - £11 million; 2012 - £15 million) to exclude RFS Holdings minority interest. (4) Interest receivable includes £794 million (2013 - £798 million; 2012 - £565 million) in respect of loan fees forming part of the effective interest rate of loans and receivables. (5) Interest receivable has been increased by £2,204 million (2013 - £2,252 million; 2012 - £2,447 million) and interest payable has been increased by £191 million (2013 - £288 million; 2012 - £401 million) to include the discontinued operations of Citizens. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (6) Gross yield is the interest earned on average interest-earning assets of the banking book. (7) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (8) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. (9) The analysis into UK and overseas has been compiled on the basis of location of office. (10) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (11) Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.
Customer accounts: demand deposits - UK 118,628 470 0.40 123,707 501 0.40
Customer accounts: other time deposits - UK 18,866 278 1.47 31,714 433 1.37
Debt securities in issue - UK 38,801 1,042 2.69 50,684 1,244 2.45
Internal funding of trading business - UK (15,426) 89 (0.58) (24,041) 348 (1.45)
Total interest-earning assets - banking business (1,2,4) 432,508 13,090 3.03 475,526 14,454 3.04
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements.
Gain on redemption of own debt — — — 20 175 454
On a non-statutory basis, income from trading activities decreased by £1,229 million, or 46%, to £1,422 million, in line with CIB’s smaller balance sheet and reduced risk profile and reflecting lower gains on the disposal of available-for-sale securities in RBS Treasury, down £575 million to £149 million for 2014.
On a statutory basis, income from trading activities declined by £1,286 million, or 50%, and included higher charges in relation to own credit adjustments of £40 million (2013 - £35 million gain).
On a non-statutory basis, net fees and commissions fell by 7% principally reflecting declines in CIB, Non-Core, UK PBB and Commercial Banking.
On a non-statutory basis, income from trading activities decreased by £882 million, or 25%, to £2,651 million as increases in Non-Core were partially offset by a reduction in CIB, where income from trading activities declined by £969 million as the segment managed down the scale of the balance sheet and reduced risk.
Note: (1) Non-statutory basis excludes write down of goodwill and RFS MI and includes Citizens which is classified as a discontinued operation on a statutory basis.
On a non-statutory basis, staff expenses declined by 7% (statutory basis - 5%) and by 1% on a per capita basis against average full time employees. Average full time employees, rounded to the nearest hundred, for continuing operations was 95,600 (2013 - 102,000).
Restructuring costs increased by £601 million to £1,257 million, including £378 million in relation to Williams & Glyn and a £247 million write-off of intangible assets.
Litigation and conducts costs totalled £2,194 million compared with £3,844 million in 2013. This included additional provisions for Payment
Banking and CIB, the IT incident fine (£59 million) booked in Centre and other costs (£580 million) primarily relating to packaged accounts and investment products.
On a statutory basis, operating expenses decreased by £3,607 million or 21% to £13,859 million, including a write down of goodwill of £130 million in 2014 compared with £1,059 million in 2013.
On a non-statutory basis, staff expenses were down 7% at £6,882 million as staff numbers (FTEs) fell by 4% to 118,400, principally in Ulster Bank,
PPI of £900 million and charges of £550 million for redress in relation to certain interest-rate hedging products sold to small and medium sized businesses classified as retail clients under FSA rules.
Impairment losses Non-statutory (1) Statutory £m £m £m £m £m £m
Less: recoveries of amounts previously written-off (205) (256) (341) (205) (126) (193)
Bank (£365 million) supported by rising Irish property values and proactive debt management. Excluding these releases, the underlying charge was low at just over £500 million, primarily in UK PBB (£268 million) and Citizens (£194 million).
On a non-statutory basis, loan impairment losses rose by 58% to £8,412 million reflecting the increased provisions recognised in connection with the creation of RCR. Adjusting for this, impairment losses fell by £1,393 million (26%) to £3,922 million, driven by significant improvements in
Non-Core, UK PBB and Ulster Bank, partially offset by increases in CFG
Additional loan impairments arising from the RCR accelerated asset recovery strategy totalled £4,490 million, of which £3,118 million related to Non-Core, £892 million to Ulster Bank, £123 million to Commercial
Excluding the impact of the creation of RCR, Ulster Bank excluding Non-
On a statutory basis, net impairment losses were £8,120 million compared to £5,010 million and include £4,490 million provisions related to the creation of RCR.
The tax charge for the year ended 31 December 2014 reflects a reduction in the carrying value of the deferred tax asset in respect of UK tax losses
Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, restructuring costs, amortisation of purchased intangible assets, write-down of other intangibles and bank levy) have now been allocated to the reportable segments. Only the following will now be reported as reconciling items: • Own credit adjustments; • Gain on redemption of own debt; • Write down of goodwill; • Asset Protection Scheme; • Strategic disposals; and
The basis of allocation of RBS Treasury costs has been amended to align the recovery of funding and hedging costs across RBS and for the transfer of certain assets and their associated costs out of RBS Treasury.
For the purposes of computing segmental return on equity, notional equity is calculated as a percentage of the monthly average of segmental
(full time equivalents rounded to the nearest hundred) 2014 2013 2012
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs); RWAs in 2012 and 2013 are on a Basel 2.5 basis. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (4) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £77.9 billion.
Personal & Business Banking (PBB) comprises the former UK Retail and business banking elements of former UK Corporate (UK Personal & Business
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £49.7 billion.
Simpler and fairer products supported by the launch of the ‘Goodbye-
• Service charges have been reviewed and made simpler and fairer for customers. The business re-introduced access to the LINK ATM
network for all basic account customers, reduced its daily overdraft fees for all customers, placed a 60 day cap on overdraft charges and improved credit card late fee terms.
(e.g. branch, telephony or digital). With just five personal savings products now on sale the range is the simplest on the high street both for customers and for front line staff. Teaser savings rates have been removed and the business is committed to helping customers save for the long term rather than luring them in for the short term.
• UK PBB continued with its commitment to invest in technology to make things better for the customer. As its award winning mobile banking application celebrated 5 years, the business received another gold award for the “Pay your Contacts” service, which was named “Best new service of the year” in July at the ‘Best in Biz’
Pay-m has already enrolled over 1.8 million customers in the service since its launch at the end of April 2014. WiFi in branches has also been a great success with customers already using the free service over 1 million times since it started in May.
UK PBB recorded an operating profit of £1,450 million, up £631 million, while adjusted operating profit totalled £2,470 million compared with £1,906 million in the prior year. This reflected higher income, up 4% to £6,037 million and lower adjusted expenses, down 3% to £3,299 million, together with substantially lower impairments, down £233 million to £268 million.
Non-interest income increased by £31 million or 2%, largely reflecting the transfer of the commercial cards business to UK PBB from CPB in
The net impairment charge was down by 47% to £268 million driven by a further decrease in new default charges together with releases of provisions and recoveries on previously written off debt.
Mortgage balances increased by £3.9 billion or 4%, to £103.2 billion driven by strong performance as advisor capacity increased. Gross new mortgage business increased by 37% to £19.7 billion, representing a market share of 10% with our stock share of 8% continuing to grow.
Operating profit increased by 22% to £819 million driven by a 32%
decline in impairment losses. Net interest income was broadly stable, though investment advice income was adversely impacted following changes introduced by the Retail Distribution Review (RDR). Within UK
H2 2013. Customer deposits increased by 7%, above the UK market average of 4% due to strong growth in current accounts (12%), personal instant access savings accounts (5%) and business banking deposits
• Mortgage new business margins reduced in line with market conditions, overall book margins improved.
• Deposit margins declined reflecting the impact of continued lower rates on current account hedges. Savings margins, however, have increased over 2013 with improved market pricing.
Impairments declined by 32% to £501 million due to lower customer defaults across all product areas reflecting continued improvement in asset quality.
Risk-weighted assets declined by 4% to £51.2 billion largely reflecting balance reductions across the unsecured portfolios and quality improvements.
Loan impairment (release)/charge as a % of gross customer loans and advances
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Includes £892 million in 2013 pertaining to the creation of RCR and related strategy. (3) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs; RWAs in 2013 and 2012 are on a Basel 2.5 basis). (4) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £22.3 billion and the return on equity 17.2%.
Following completion of a strategic review, Ulster Bank was confirmed as a core part of RBS reflecting its fit with RBS’s retail and commercial strategy; 2014 saw a return to profitability with significant progress made addressing legacy issues and the strengthening of its core business for the future.
Ulster Bank recorded an operating profit of £606 million in 2014, the first annual profit since 2008. This represented a major turnaround from 2013 largely due to impairment releases supported by enhanced collections performance and an improvement in key macroeconomic indicators. Net interest margin also improved and operating expenses were reduced.
Northern Ireland recently launched its ‘Bank on Wheels’ service and extended its partnership with the Post Office which provides customers with 484 new points of presence.
There has been a significant increase in new lending activity during 2014 following the launch of the ‘Big Yes’ mortgage and ‘Ahead for Business'
campaigns. New mortgage lending increased by over 40% in 2014 while over £1 billion of new lending was made available to business customers, despite a challenging business environment.
Ulster Bank recorded an operating profit of £606 million in 2014 compared with a loss of £1,609 million in 2013. The turnaround was driven by £365 million net impairment releases compared with impairment losses of £1,774 million in 2013. Adjusted operating profit was £609 million compared with a loss of £1,480 million.
The continued focus on costs resulted in a reduction in staff numbers and the bank’s property footprint. Litigation and conduct costs decreased by £109 million reflecting the outcome of reviews relating to provisions on
The loan:deposit ratio decreased from 120% to 107% during 2014 mainly due to a 15% reduction in net loan balances to £22 billion reflecting the transfer of assets to RCR and continued customer deleveraging partly offset by growth in new lending. Customer deposits declined by 5%
Total income increased by £28 million or 3% to £859 million primarily reflecting hedging gains on the mortgage portfolio. Net interest margin for 2013 increased by 4 basis points to 1.88% although net interest income was £16 million lower at £619 million, largely driven by lower interest earning assets and a higher cost of funding.
Total expenses increased by £94 million or 16% to £694 million driven by the costs of mandatory change programmes such as the Single Euro
The loan:deposit ratio reduced from 130% to 120% during 2013 reflecting continued customer deleveraging and low levels of demand for new lending. Retail and SME deposit balances increased by 2% during 2013, offset by a reduction in wholesale customer balances, resulting in a 2%
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs; RWAs in 2013 and 2012 are on a Basel 2.5 basis). (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (4) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £73.5 billion.
Corporate, Wealth and International Banking divisions. It is committed to supporting the bank’s ambition to be the number one bank for customer service, trust and advocacy in its chosen markets by 2020. Commercial
Aligning the Private Banking business with Commercial Banking will enable the bank to better serve and connect those who own and run businesses. With a set of strong brands including RBS, NatWest,
Banking business provides its customers with dedicated relationship management and access to sophisticated products and services including lending, speciality finance, transaction banking, risk management and wealth management.
Private sector education, health, social work, recreational and community services (8) 125 33
Private sector education, health, social work, recreational and community services (0.1%) 1.6% 0.4%
Notes: (1) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs; RWAs in 2013 and 2012 are on a Basel 2.5 basis). (2) Excluding restructuring costs and litigation and conduct costs. (3) December 2014 includes £15 billion third party assets and £12 billion risk-weighted asset equivalents in relation to the run-down legacy book. (4) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (5) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £61.5 billion. (6) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £69.8 billion and the return on equity 9.5%.
Promoter Score and rating of overall service quality across the business, together with a continuing fall in complaints.
A series of customer campaigns were launched, proactively engaging customers on their international and asset finance needs.
Significant progress has been made to drive connectivity across the bank, with a focus on providing employees with the skills and tools they need to serve customers better. This has included investment in professional qualifications as well as the development of a suite of banking tools to be rolled out in 2015. The alignment of Commercial &
Non-interest income was down £26 million or 2% as lower Corporate &
Banking in August 2014 were only partially offset by higher fair value gains and operating lease income, along with lower close out costs of interest rate products associated with impaired loans.
Operating expenses were down £131 million or 7%, as a result of lower litigation and conduct costs, primarily relating to interest rate swap redress, and lower underlying direct costs reflecting the continued focus on cost saving. These reductions were partially offset by higher restructuring costs, as the business aligns itself to better support customers, and growth in operating lease depreciation. Operating expenses excluding restructuring costs and litigation and conduct costs declined by £34 million.
increase in net loans and advances, as reductions in the commercial real estate and restructuring portfolio were offset by growth across other businesses.
RWAs were £1.8 billion lower at £64.0 billion, primarily reflecting net transfers to RCR, effective 1 January 2014, and improving credit quality on the back of UK economic recovery, offset by loan growth.
Non-interest income decreased by 12% primarily from lower CIB revenue share income, a decline in operating lease income (offset by an associated reduction of operating lease depreciation in expenses), lower lending fees and higher costs arising from closing out interest rate hedging products associated with impaired loans.
Total expenses declined by 3% or £52 million, driven by lower restructuring, litigation and conduct costs partially offset by higher indirect expenses. Direct costs were down £12 million from reduced staff costs, a decline in operating lease depreciation and lower CIB revenue share related costs.
Impairments increased by £107 million primarily relating to higher commercial real estate impairment losses. Full year impairments include the additional impact of increased impairments losses related to the creation of RCR (£123 million) in Q4 2013.
Risk-weighted assets decreased by 3% as net movements into default more than offset increases resulting from the implementation of risk model changes.
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Private banking and wealth management activities outside of the British Isles, broadly indicative of the businesses being exited. (3) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs; RWAs in 2013 and 2012 are on a Basel 2.5 basis). (4) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £11.5 billion and the return on equity 6.1%.
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis at 1 January 2014 were £12.0 billion. (3) Private banking and wealth management activities outside of the British Isles, broadly indicative of the businesses being exited.
Coutts and Adam & Company will focus on growing the UK based high net worth client franchise. All private banking and wealth management activities where the primary relationship management is conducted outside the British Isles will be exited to align better with RBS’s stated UK
The ambition of the business is to be the leading UK based private bank and wealth manager for wealthy individuals seeking exceptional private banking and wealth management. Private Banking has gathered significant momentum behind its ambition, supported by a straightforward plan centred around five key priorities: an improved banking proposition; a refocused advice and wealth management model; an enhanced proposition for international clients managed from the UK; an integrated client approach across RBS; and increased client engagement.
Private Banking recorded an operating profit of £150 million compared with a loss of £61 million in the prior year. This was driven by reduced operating expenses, down £173 million, net impairment releases of £4 million compared with a net £29 million loss in 2013, and higher income, up £5 million. Adjusted operating profit increased by £86 million to £258 million.
Net impairment releases of £4 million, compared with a net impairment loss of £29 million in the prior year reflected the non-repeat of a single £20 million provision, coupled with improved economic conditions and higher UK property prices.
Client deposits decreased by £1.1 billion or 3% reflecting the rebalancing of the bank’s liquidity position.
Total income declined by 4% to £1,077 million, with a full year reduction in net interest income reflecting the lower spread earned on deposits as a result of the lower interest rate environment.
Loans and advances to customers (gross, excluding reverse repos) 73.0 69.1 80.2
Notes: (1) Excludes disposal groups. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (3) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £147.1 billion.
Corporate & Institutional Banking (CIB) focused on its strengths in core product areas during 2014, reducing the scale of the business and simplifying the operating model. This allowed CIB to better serve customers while deploying fewer resources. The commitment to customers was demonstrated by the award of The Banker’s Most
Innovative Bank in Risk Management in Q3 2014 and by winning IFR
CIB recorded an operating loss of £892 million compared with a loss of £2,882 million in 2013. This included litigation and conduct costs of £994 million compared with £2,441 million a year before. The adjusted operating result improved from a loss of £239 million in 2013 to a profit of £397 million in 2014. This movement was primarily driven by substantial reductions in expenses, partially offset by lower income. Net impairment releases totalled £9 million compared with a net impairment charge of
• Credit reduced RWAs by 61% in 2014, including the wind-down of
Operating loss increased by £2,635 million, driven by litigation and conduct costs of £2,441 million (2012 - £723 million). Income fell by 22%, reflecting the strategic reduction in trading products and challenging market conditions. De-risking resulted in a 24% reduction in risk-weighted assets.
Credit income reduced, reflecting the de-risking of Flow Credit Trading and lower income from Asset Backed Products which was affected by investor concerns regarding tapering of the Federal Reserve’s programme of quantitative easing and a reduction in the balance sheet and risk resources deployed by the business.
(2012 - £1,705 million) costs decreased by £157 million, or 3%, primarily reflecting a reduction in headcount and tightly controlled discretionary expenses. This was partially offset by a higher level of legal costs, primarily related to legacy issues in the US asset backed products business.
Reducing risk and refocusing the trading business on core fixed income and currencies products drove the substantial reduction in both balance sheet and risk capital. Funded assets were £77.1 billion lower than
Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment.
This has been principally driven by higher unallocated Treasury and funding costs, including volatile items under IFRS and lower gains on
Total loans and advances to customers (gross) 93.9 83.6 82.9 60.1 50.6 51.3
Total risk elements in lending 2.1 1.7 1.9 1.3 1.0 1.1
In accordance with a commitment to the EC to sell Citizens by 31
Financial Group, Inc. during the second half of 2014 primarily through an initial public offering in the USA. In accordance with IFRS 5 ‘Non-current
Although CFG has been reclassified as a discontinued operation it continues to be a reportable operating segment.
Illinois franchise. The former Non-Core portfolio is now included and indirect expenses are no longer allocated on a prospective basis from 1
January 2014. On a comparable basis, operating profit excluding the impact of the Illinois sale, £170 million ($283 million) net gain, and restructuring costs, £103 million ($169 million) (FY 2013 - £16 million
Higher rates led to investment security purchases resulting in average portfolio growth of £3.3 billion ($5.4 billion) over the year.
Average loans and advances were up 17% driven by the £2.1 billion
Average customer deposits were up 4%. On a US dollar basis average customer deposits were down 2% with planned run-off of high priced deposits.
Excluding restructuring costs of £103 million ($169 million) (2013 - £16 million ($24 million)), total expenses were down £168 million ($96 million), or 8%, to £2,020 million ($3,328 million) driven by the removal of indirect costs in 2014 and the impact of the Illinois franchise sale partially offset by lower mortgage servicing rights impairment release and higher consumer regulatory compliance costs.
($324 million) due to charge-offs related to assets transferred from Non-
($258 million), or 20%. The operating environment and market conditions remained challenging, with intense competition for loans. An extended period of low short-term rates limited net interest margin expansion and the rise in long-term rates dramatically slowed mortgage refinance volumes.
Net interest income was down 2% at £1,892 million ($2,960 million) due to a smaller investment portfolio, consumer loan run-off and the effect of prevailing economic conditions on asset yields partially offset by the benefit of interest rate swaps, commercial loan growth and favourable funding costs.
Average customer deposits were flat, with planned run-off of high priced time deposits and lower wholesale deposits offset by growth achieved in checking and money market balances. Consumer checking balances grew by 3% while small business checking balances grew by 7% over the year.
shares in 2012, non-interest income was down £39 million ($83 million), or 4% at £1,073 million ($1,679 million), reflecting lower mortgage banking fees as refinancing volumes have slowed, and lower deposit fees. This was partially offset by higher securities gains and commercial banking fee income.
Impairment losses increased by £65 million ($99 million) to £156 million
($244 million) for the year and represented 0.3% of loans and advances to customers.
RCR is managed and analysed in four asset management groups - Ulster Bank (RCR Ireland), Real Estate Finance, Corporate and Markets. Real
Loan impairment charge as a % of gross customer loans and advances (3)
Notes: (1) Asset disposals contributed £904 million to RCR’s operating profit: impairment provision releases of £874 million; £87 million gain in income from trading activities and £57 million loss in other operating income. (2) Excluding restructuring costs. (3) Includes disposal groups.
Gross Net RWAe RWA deducts Gross Net RWAe RWA deducts Gross Net RWAe (2) RWA deducts (3)
Capital deductions 1 January Risk 31 December 2014 Repayments Disposals (1) parameters (2) Impairments Other (3) 2014 £bn £bn £bn £bn £bn £bn £bn
RWA equivalent decreased by £38 billion, or 58%, during 2014. This primarily reflects disposals and repayments, supplemented by methodology changes and lower market risk RWAs.
Operating profit of £988 million reflects impairment provision releases and higher than anticipated sale prices for assets driven by a combination of strong execution and favourable market conditions particularly in
The net effect of the £988 million operating profit and RWA equivalent reduction of £38 billion(1) was CET1 accretion of £4.8 billion.
Strategic Plan target, reducing third party assets from the opening £258 billion position to end 2013 significantly below the original c.£40 billion target at £28 billion. Over the life of Non-Core this represented an overall reduction of £230 billion, or 89%. This was achieved through a mixture of disposals, run-off and impairments. By the end of 2013, the Non-Core funded balance sheet was c.4% of the Group’s funded balance sheet compared with 21% when the division was created. RWAs had reduced from £171 billion to £29 billion, or 83%, over the life of Non-Core.
Third party assets declined by £29 billion, or 51%, reflecting run-off of £15 billion, disposals of £11 billion and impairments of £5 billion, of which £3.1 billion is driven by the new RCR strategy to exit these assets over a shorter timeframe than previous plans.
The reduction in net interest income of £343 million was driven by a 31% fall in interest earning assets driven by run-off and disposals.
Headcount declined by 1,700, or 55% to 1,400 of which 1,000 relates to operations in India and Romania, reflecting divestment activity and run-off.
Loans and advances to banks decreased by £10.3 billion, 19%, to £43.7 billion. Excluding reverse repurchase agreements and stock borrowing
Debt securities were down £27.0 billion, 24%, to £86.6 billion, driven mainly by the transfer of £15.3 billion of Citizens’ debt securities to assets of disposal groups and reductions within CIB and Treasury in holdings of
Movements in the value of derivative assets, up £65.6 billion, 23%, to £353.6 billion, and liabilities, up £64.3 billion, 23% to £349.8 billion, primarily reflects significant mark-to-market increases on interest rate contracts driven by significant downward shifts in major yield curves.
The increase in assets and liabilities of disposal groups, up £79.0 billion to £82.0 billion, and £67.9 billion to £71.3 billion respectively, primarily reflects the transfer to disposal groups of Citizens at 31 December 2014.
Excluding repos, customer deposits were down £60.1 billion, 15%, at £354.3 billion, primarily reflecting the transfer to disposal groups of £60.6 billion (equivalent 2013 - £55.1 billion) of customer accounts relating to
Debt securities in issue decreased £17.5 billion, 26%, to £50.3 billion due to the buy-back and maturity of medium term notes in issue given the lower funding requirements of a reduced balance sheet.
Retirement benefit liabilities decreased by £0.6 billion, 20%, to £2.6 billion primarily driven by additional employer contributions of £0.7 billion to the
Subordinated liabilities decreased by £1.1 billion, 5% to £22.9 billion, primarily as a result of the net decrease in dated loan capital with redemptions of £3.5 billion being partially offset by issuances of £2.2 billion and the effects of exchange rate and other movements of £0.2 billion.
Owner’s equity decreased by £1.5 billion, 3%, to £57.2 billion, driven by the £3.5 billion attributable loss for the year. Partially offsetting this reduction were movements in cash flow hedging reserves, £1.1 billion, and available-for-sale reserves, £0.6 billion, share issuances of £0.5 billion, and other reserve movements, £0.2 billion.
Loans and advances to banks decreased by £9.9 billion, 15%, to £54.1 billion. Excluding reverse repurchase agreements and stock borrowing
Financial Group, £0.2 billion and Commercial Banking, £0.1 billion, which included the impact of £0.7 billion of customer loans being transferred to assets of disposal groups at 31 December 2013, and the effect of exchange rate and other movements, £0.4 billion.
Debt securities were down £43.8 billion, 28%, to £113.6 billion, driven mainly by reductions within CIB and RBS Treasury in holdings of UK and
Equity shares decreased by £6.4 billion, 42%, to £8.8 billion due to the targeted run-down of CIB’ equities business.
Excluding repos, customer deposits were down £18.8 billion, 4%, at £414.4 billion, primarily reflecting decreases in CIB, £15.6 billion, Citizens
Subordinated liabilities decreased by £2.8 billion, 10% to £24.0 billion, primarily as a result of the net decrease in dated loan capital with redemptions of £3.4 billion and the effects of exchange and other movements of £1.2 billion being partially offset by issuances of £1.8 billion.
Non-controlling interests decreased by £1.3 billion, 73%, to £0.5 billion, predominantly due to the deconsolidation of Direct Line Group following the further sale of shares and ceding of control in 2013.
The major factors contributing to the net cash outflow from operating activities of £20,387 million were the decrease of £17,948 million in operating assets and liabilities, loans and advances written-off net of recoveries of £5,073 million, other provisions utilised of £3,528 million and the loss before tax of £564 million from continuing and discontinued operations. These were partially offset by the loss on reclassification to disposal groups of £3,994 million and other provisions charged net of releases of £2,711 million.
CRR basis transitional basis 2013 2012 2011 2010 £m £m £m £m £m £m
Common Equity Tier 1/Core Tier 1 (1) 11.2 11.1 10.9 10.3 10.6 10.7
basis was 11.2% (2013 - 13.1% on a Basel 2.5 basis). For further information refer to Capital and risk management: Capital management on pages 195 to 215.
Loss attributable to ordinary and B shareholders (3,470) — — (3,470)
Reconciliations of non-statutory to statutory income statements continued Income statement for the year ended 31 December 2013
Profit from discontinued operations, net of tax 318 — — 318
Loss attributable to ordinary and B shareholders (6,055) — — (6,055)
Cash and balances at central banks 74,872 622 75,494 82,659 2 82,661 79,290 18 79,308
Net loans and advances to banks 23,027 1,745 24,772 27,555 22 27,577 29,168 2,112 31,280
Net loans and advances to customers 334,251 60,550 394,801 390,825 1,765 392,590 430,088 1,863 431,951
Other financial assets — — — — — — — 924 924
Gross loans and advances to banks 23,067 1,745 24,812 27,618 22 27,640 29,282 2,112 31,394
Net loans and advances to banks (4) 23,027 1,745 24,772 27,555 22 27,577 29,168 2,112 31,280
Institutional Banking (CIB) customers, in its main market of the UK. By delivering only services that meet their needs, it aims to achieve an appropriate return. Accordingly, RBS plans to simplify its services as well as the processes it uses to deliver them, enabling RBS to provide customers with better value services. It aims to become the number one bank in the UK for customer service, trust and advocacy by 2020.
UK PBB offers individuals and small businesses a variety of traditional retail banking products, including current and savings accounts, residential mortgages and credit cards, while CPB provides both businesses and high-net-worth individuals with loan products and investment services. Both are focused on the UK. CIB offers wholesale banking services, including debt financing and fixed income trading, to corporations and financial institutions across a wide range of countries.
The main sources of earnings are interest income from lending and fee income from transactional and other services. Given the low interest rate environment in both the UK and the US, its net interest margin, that is, the difference between the interest it earns from lending and the interest it pays on deposits, has been under pressure. In order to offset this pressure, work is underway to reduce costs and increase non-interest income.
RBS is reducing costs through rationalisation, integration and simplification. For example, PBB is rationalising its service delivery channels and simplifying the operations that support them. The other franchises are taking similar steps.
RBS also owns a number of businesses which it is divesting as it seeks to refocus on its UK customers and reduce its risk profile as well as to comply with regulatory requirements. It is in the process of selling its stake in Citizens Financial Group Inc (CFG), a subsidiary offering loan and investment products, together with transactional services, to customers in the US. Similarly, it is committed to selling Williams & Glyn, which provides retail and commercial banking services in the UK, in the next few years. Other businesses identified for divestment and winddown include the international private banking activities of CPB and RBS
Securities Inc respectively. Finally, RBS continues to reduce the assets held in RCR (refer to page 150 for further details). These divestment and rationalisation projects expose it to execution and strategic risk.
Conduct risk can result in fines and reputational damage if customers are not treated in line with their and other stakeholders’ expectations.
RBS continued to remediate historical conduct issues, while also restructuring its customer-facing businesses and support functions around the needs of its customers. Actions taken by RBS to address underlying control deficiencies included strengthening significantly the systems and controls governing RBS’s
The impact of conduct issues resulted in litigation and conduct costs remaining high at £2.2 billion in 2014, albeit lower than the £3.8 billion recorded in 2013.
Regulatory risk Regulatory risk arises from RBS’s regulatory, business or operating environments and from how
Operational risk Operational risk may arise from a failure to manage operations, transactions and assets appropriately. It may arise from human error, an inability to deliver change on time or adequately, or the unavailability of technology services or the loss of customer data.
Fraud and theft are sources of operational risk, as is the impact of natural and man-made disasters. It may also arise from a failure to take appropriate measures to protect assets or take account of changes in law.
CFG; run down of the RCR and CIB assets; and the sell down of the RBS N.V.
CET1 capital reflected profit of £0.7 billion from continuing operations, £0.6 billion gains on available-for-sale securities, share issuance of £0.5 billion and lower regulatory deductions primarily relating to deferred tax assets (£1.0 billion) and prudential valuation adjustment (£0.4 billion).
RBS’s current Pillar 2A requirement is 3.5% of RWAs at 31 December 2014.
Based on capital that is required to be held to meet the overall financial adequacy rule, including holding current estimates of Pillar 2A constant, RBS
Liquidity and funding risk arise through the maturity transformation role that RBS performs. It is exposed to capital adequacy risk if it manages its capital resources inefficiently.
Liquidity metrics remained strong reflecting balance sheet and risk reduction as well as growth in UK PBB deposits: the liquidity coverage ratio improved to 112%; the net stable funding ratio was 121%; and the liquidity portfolio of £151 billion covered short-term and total wholesale funding of £28 billion and £90 billion by more than five and 1.5 times respectively. Based on its assessment of the Financial Stability
Reputational risk Reputational risk can arise from the conduct of either RBS as a whole or that of the individuals it employs; from the activities of customers and the countries in which they operate; from the products
RBS offers and the transactions it supports; and from its operations and infrastructure.
Credit risk The most significant source of credit risk is lending. RBS offers a number of lending products where it has an obligation to provide credit facilities to a customer. A further significant source of credit risk arises from activities in the derivatives and securities financing transaction markets, which result in counterparty credit risk (the risk of financial loss arising from the failure of a customer to meet obligations that vary in value by reference to a market factor). RBS
holds some debt securities generally for liquidity management purposes, and is exposed to credit risk as a result. It is also exposed to credit risk from off-balance sheet products such as trade finance activities and guarantees.
and Ireland, better liquidity and increased collateral values, and also reflected improvements in credit risk measurement.
Impairment provisions of £18.0 billion, down £7.2 billion, covered risk elements in lending of £28.2 billion, down £11.2 billion, by 64%. Commercial real estate lending fell by £9.3 billion to £43.3 billion, of which £13.3 billion was in risk elements in lending with a provision coverage of 68%.
RCR through transactions in financial instruments including debt securities, loans, deposits and equities, as well as securities financing and derivatives.
decreased significantly during the year to £27.8 million, 35% of the 2013 average, reflecting risk reductions in CIB and RCR, as well as the effect of a more comprehensive economic view of risk from the incorporation of credit and funding valuation adjustments in the VaR calculation. Market risk RWAs also decreased by £6.3 billion to £24.0 billion.
Pension risk RBS is exposed to pension risk through its defined benefit schemes worldwide and the variations in their value. The five largest schemes represent around 96% of pension liabilities. The largest is the Royal
The triennial actuarial funding valuation of the Main scheme was agreed in May 2014 and showed an excess in the value of liabilities over the value of assets of £5.6 billion at 31 March 2013; a ratio of 82%. In 2014, various pension stress-testing initiatives were undertaken, both on internally defined scenarios and those to meet integrated Prudential Regulation
The activities of several customer businesses, particularly CIB but also Ulster Bank and CFG, expose RBS to country risk.
Italy. Total exposure to Greece was £0.4 billion but only £120 million after the effect of collateral and guarantees. Limits for
Business risk Business risk exists at all levels of the organisation and is generated at the transaction level. It is affected by other risks RBS faces, which could contribute to any adverse changes in the bank’s revenues or costs.
and the retail and commercial banking segments, with the aim of a lower risk profile. The year saw good progress, with results in general exceeding targets and run-down or sell-off of noncore assets ahead of schedule. Capital ratios increased considerably, a significant step towards targeted levels of financial strength which, when attained, will provide RBS with more strategic options. However, RBS continued to work through the impact of tougher regulatory regime on banks.
(ii) The effect of the run-up to, and the result of, the UK general election on performance and strategy
Achievement of strategic objectives in general, more specifically its ability to generate income and retain high quality personnel, and its strategy, structure and attractiveness to investors, may all be affected to varying degrees in a range of election-related scenarios.
RBS actively monitors, and considers responses to, varying UK election outcomes to ensure that it is well prepared for all eventualities.
RBS risks increased capital requirements, reduced income or raised costs due to business model changes and fines, remediation costs or legal action if it fails to comply with regulatory requirements. Its reputation may also suffer.
RBS risks fines, remediation costs, legal action and reputational damage, but also lower income or higher expenses due to business model changes.
(i) Increased losses arising from a failure to execute successfully major projects
RBS increased its cash contributions to the schemes to address the increased deficit. Similarly, additional contributions required if the deficit widened further would depend on the size of the deficit. RBS undertakes a number of stress tests and scenario analyses on its material defined benefit pension schemes each year as part of its risk measurement framework.
A successful cyber attack could lead to fraudulent activity or the loss of customer data. RBS could experience significant losses as a result of the need to reimburse customers, pay fines or both. Further, a successful cyber attack could cause significant damage to its reputation.
A major investment programme has significantly improved the resilience of the systems and more benefits are expected. It has improved back-up system sustainability and created a ‘shadow bank’ able to provide basic services if needed. It is also improving the documentation of critical business functions.
• Ensuring appropriate controls are in place to mitigate risk: balancing control, cost, customer service and competitive advantage.
• Ensuring that the business has effective mechanisms for identifying, reporting and managing risk and controls.
Responsibilities include: • Owning and developing the risk and control policies, limits and tools for the business to use to discharge its responsibilities.
• Leading the design, development and communication of the bank's risk culture and appetite.
• Providing expert support and advice to the business on risk management.
The RBS Chief Risk Officer (CRO) leads RBS Risk Management. The CRO reports directly to the Chief Executive and the Board Risk Committee, with a right of access to the Chairman of the Board Risk Committee.
Risk appetite is both a key business tool and an integral part of risk management. It is aligned with RBS’s strategic objectives, aiming to strike an optimal balance between building a sustainable risk profile and creating long-term value for customers, investors and wider stakeholders.
The Board reviews and approves the risk appetite framework and targets annually, which establishes the level and types of risks RBS is able and willing to take in order to meet its: • Strategic objectives - The strategic plan is built on the core foundations of serving customers well, building a sustainable risk profile and creating long-term value for its shareholders; and
Risk appetite is cascaded and embedded across RBS. The risk appetite framework provides each business with a greater understanding of acceptable risk levels, aligning commercial strategies with the most effective use of financial resources, such as capital and funding. The risk appetite framework allows RBS to focus on its key business strengths and competitive advantages over the long term.
The implementation of a stronger and more effective culture of risk management and control provides the platform necessary to address vulnerabilities, rebuild on core strengths and position RBS on a sustainable and profitable path for future growth.
• Deliver stable earnings growth. To ensure that strategic growth is based around a longer-term risk-versus reward consideration, with significantly lower volatility in underlying profitability than was seen during the financial crisis.