On a winding-up or liquidation of the company, the holders of the noncumulative preference shares will be entitled to receive, out of any surplus assets available for distribution to the company’s shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
Under the arrangements for the placing and open offer in December 2008, the company issued shares in exchange for shares in Encuentro Limited. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act 2006. The subsequent redemption of these shares gave rise to distributable profits of £14,273 million which have been transferred from merger reserve to retained earnings.
Year in which receipt will occur: £m £m £m £m £m £m £m £m £m
Receivable: After 1 year but within 5 years 5,496 (1,790) (131) 3,575 3,086 (100) (81) 2,905 2,514
Receivable: After 1 year but within 5 years 6,112 (2,004) (128) 3,980 3,731 (284) (34) 3,413 2,479
Receivable: After 1 year but within 5 years 4,968 (1,766) (144) 3,058 3,442 (300) (25) 3,117 3,046
Amounts recognised as income and expense Finance leases – contingent rental income (139) (37) (23) Operating leases – minimum rentals payable 647 566 322
Residual value exposures The tables below give details of the unguaranteed residual values included in the carrying value of finance lease receivables (see pages 270 to 272) and operating lease assets (see pages 304 and 305).
After 1 year After 2 years Within 1 but within but within After 5 year 2 years 5 years years Total
Deposits by banks 12,724 15,429 Customer accounts 3,362 11,050 Debt securities in issue 35,670 58,689 * revised
Of the assets above, £137.3 billion (2008 – £111.3 billion) relates to securitisations. Additionally the Group has assets and liabilities collateralised in respect of derivative collateral arrangements.
A number of subsidiaries and sub-groups within the Group, principally banking and insurance entities, are subject to various individual regulatory capital requirements in the UK and overseas.
31 Capital resources The Group’s regulatory capital resources at 31 December in accordance with Financial Services Authority (FSA) definitions were as follows: Composition of regulatory capital £m £m
Tier 2 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities 207 984 Collective impairment allowances 796 666 Perpetual subordinated debt 4,950 9,829 Term subordinated debt 20,063 23,162 Minority and other interests in Tier 2 capital 11 11 Less deductions from Tier 2 capital (5,532) (2,429) Less APS first loss (5,106) — Total Tier 2 capital 15,389 32,223
Supervisory deductions Unconsolidated investments (4,472) (4,044) Other deductions (93) (111) Deductions from total capital (4,565) (4,155) Total regulatory capital 87,245 98,175
Other commitments – these include documentary credits, which are commercial letters of credit providing for payment by the Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
Contingent liabilities: Guarantees and assets pledged as collateral security 23,995 6,354 2,821 6,838 40,008 49,262 46,441
Commitments: Undrawn formal standby facilities, credit lines and other commitments to lend – less than one year 127,423 — — — 127,423 166,572 181,914
(2) Of which due within 1 year: £370 million (2008 – £3,769 million; 2007 – £713 million)
Contractual obligations for future expenditure not provided in the accounts The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
In July 2007, the Office of Fair Trading (“OFT”) issued proceedings in a test case in the English High Court against the banks which was intended to determine certain issues concerning the legal status and enforceability of contractual terms relating to the Charges. The test case concluded in November 2009 with a judgment of the Supreme Court in favour of the banks. As a result of the court rulings made in the test case, the Group expects substantially all of the customer claims and complaints it has received relating to the Charges to fail. The Group cannot at this stage predict with any certainty the final outcome of all customer claims and complaints. It is unable reliably to estimate any liability that may arise as a result of or in connection with these matters or its effect on the Group’s consolidated net assets, operating results or cash flows in any particular period . Shareholder litigation The company and a number of its subsidiaries and certain individual officers and directors have been named as defendants in a class action filed in the United States District Court for the Southern District of New York. The consolidated amended complaint alleges certain false and misleading statements and omissions in public filings and other communications during the period 1 March 2007 to 19 January 2009, and variously asserts claims under Sections 11, 12 and 15 of the Securities Act 1933, Sections 10 and 20 of the Securities Exchange Act 1934 and Rule 10b-5 thereunder.
The Group considers that it has substantial and credible legal and factual defences to these claims and will defend them vigorously. The Group is unable reliably to estimate the liability, if any, that might arise or its effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Other securitisation and securities related litigation in the United States Group companies have been named as defendants in a number of purported class action and other lawsuits in the United States that relate to the securitisation and securities underwriting businesses. In general, the cases involve the issuance of mortgage backed securities, collateralised debt obligations, or public debt or equity where the plaintiffs have brought actions against the issuers and underwriters of such securities (including Group companies) claiming that certain disclosures made in connection with the relevant offerings of such securities were false or misleading with respect to alleged “sub-prime” mortgage exposure. The Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. The Group cannot at this stage reliably estimate the liability, if any, that may arise as a result of or in connection with the these lawsuits, individually or in the aggregate, or their effect on the Group’s consolidated net assets, operating results or cash flows in any particular period.
Summary of other disputes, legal proceedings and litigation Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, does not expect that the outcome of these other claims and proceedings will have a material adverse effect on the Group’s financial position or profitability in any particular period.
Retail banking In the European Union, regulatory actions included an inquiry into retail banking initiated on 13 June 2005 in all of the then 25 member states by the European Commission’s Directorate General for Competition. The inquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission announced that barriers to competition in certain areas of retail banking, payment cards and payment systems in the European Union had been identified. The European Commission indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition laws where appropriate.
Multilateral interchange fees In 2007, the European Commission issued a decision that while interchange is not illegal per se, MasterCard’s current multilateral interchange fee (“MIF”) arrangement for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIFs (i.e. set these fees to zero) by 21 June 2008.
In the UK, the OFT has carried out investigations into Visa and MasterCard domestic credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeal Tribunal (the “CAT”) in June 2006. The OFT’s investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards. In January 2010 the OFT advised that it did not anticipate issuing a Statement of Objections prior to the European Court’s judgment, although it has reserved the right to do so if it considers it appropriate.
Payment Protection Insurance Having conducted a market study relating to Payment Protection Insurance (“PPI”), on 7 February 2007 the OFT referred the PPI market to the Competition Commission (“CC”) for an in-depth inquiry. The CC published its final report on 29 January 2009 and announced its intention to order a range of remedies, including a prohibition on actively selling PPI at point of sale of the credit product (and for 7 days thereafter), a ban on single premium policies and other measures to increase transparency (in order to improve customers’ ability to search and improve price competition). Barclays Bank PLC subsequently appealed certain CC findings to the Competition Appeal Tribunal (“CAT”). On 16 October 2009, the CAT handed down a judgment quashing the ban on selling PPI at the point of sale of credit products and remitted the matter back to the CC for review. The CC’s current Administrative Timetable is to publish a supplementary report by Summer 2010 and give further consideration to its full range of recommended remedies and a draft order to implement them during Autumn 2010.
In September 2009, the FSA issued a consultation paper on guidance on the fair assessment of PPI mis-selling complaints and, where necessary, the provision of an appropriate level of redress. The consultation also covers proposed rules requiring firms to re-assess (against the new guidance) all PPI mis-selling complaints received and rejected since 14 January 2005. A policy statement containing final guidance and rules is expected in early 2010. Separately, discussions continue between the FSA and the Group in respect of concerns expressed by the FSA over certain categories of historical PPI sales.
Other investigations In the UK, the OFT has been investigating the Group for alleged conduct in breach of Article 101 of the Treaty on the Functioning of the European Union and/or the Chapter 1 prohibition of the Competition Act 1998 relating to the provision of loan products to professional services firms. The Group is co-operating fully with the OFT's investigation.
In January 2010, the FSA informed the Group that it intended to commence an investigation into certain aspects of the handling of customer complaints. The scope of the proposed investigation (including which businesses and subsidiaries are affected) is not yet clear. The company and its subsidiaries intend to co-operate fully with this investigation.
Notes on the accounts 33 Net cash (outflow)/inflow from operating activities
Net cash inflow/(outflow) from trading activities 15,691 (31,579) (215) 3,419 6,103 2,785 Decrease/(increase) in loans and advances to banks and customers 151,568 (5,469) (90,829) 4,121 (15,542) (8) (Increase)/decrease in securities (5,902) 75,964 (26,167) (1,286) — — (Increase)/decrease in other assets (1,839) (5,845) (384) (10) (73) — Decrease/(increase) in derivative assets 544,744 (708,607) (88,948) (1) (995) (173)
(Decrease)/increase in deposits by banks and customers (131,685) (78,166) 81,645 11,533 (4,064) 4,677 Increase/(decrease) in insurance liabilities 429 (186) 2,706 — — — (Decrease)/increase in debt securities in issue (34,528) 27,222 59,735 (1,828) (1,794) 10,936 Increase/(decrease) in other liabilities 20 (8,869) (1,036) (66) 32 (7) (Decrease)/increase in derivative liabilities (540,540) 699,601 83,466 85 182 137 Increase/(decrease) in settlement balances and short positions 1,769 (37,864) 8,073 (11) — —
Total income taxes (paid)/received (719) (1,540) (2,442) 409 119 6 Net cash (outflow)/inflow from operating activities (992) (75,338) 25,604 16,365 (16,032) 18,353
Debt securities in issue (134,630) 5,937 225 (128,468) Settlement balances and short positions (44,748) 36 — (44,712)
Note: (1) Banca Antonveneta SpA. and ABN AMRO’s asset management business were identified as disposal groups on the acquisition of ABN AMRO and sold during 2008. In addition, under the terms of the Consortium and Shareholders’ Agreement, consortium members other than the Group agreed to acquire, in due course, various ABN AMRO businesses including operations in Brazil (sold 1 July 2008), the commercial and retail businesses in the Netherlands, the private clients business and Interbanca.
34 Analysis of the net investment in business interests and intangible assets (a) Acquisition of ABN AMRO On 17 October 2007, the Group, through its subsidiary RFS Holdings B.V. (RFS), acquired 99% of the ordinary shares of ABN AMRO Holding N.V., the holding company of a major European banking group based in the Netherlands with subsidiaries that undertake commercial banking operations, investment banking and other related financial activities. During 2008, RFS acquired the remaining 1% of the ordinary shares of ABN AMRO.
The fair values of ABN AMRO’s assets and liabilities at the date of acquisition were as follows: GRA_5_FS_Part2_09_300-348.qxp:GRA_5_FS_part2_09 15/3/10 09:35 Page 338
Notes on the accounts continued 36 Analysis of changes in financing during the year
Share capital, Share capital, share premium, paid-in share premium, paid-in equity and merger reserve Subordinated liabilities equity and merger reserve Subordinated liabilities £m £m £m £m £m £m £m £m £m £m £m £m
Issue of ordinary shares — 49 77 — — — — 49 77 — — — Issue of other equity securities — — 4,673 — — — — — 4,673 — — — Redemption of preference shares (5,000) — — — — — (5,000) — — — — — Placing and open offer 5,274 19,741 — — — — 5,274 19,741 — — — — Rights issue — 12,000 — — — — — 12,000 — — — — Issue of B shares 25,101 — — — — — 12,801 — — — — — Redemption of paid in equity (308) — — — — — (308) — — — — — Net proceeds from issue of
Currency translation and 37 Analysis of cash and cash equivalents Group Company £m £m £m £m £m £m
Acquisition of subsidiaries — — 60,098 — — — Disposal of subsidiaries — (3,171) — — — —
The directors manage the Group primarily by class of business and present the segmental analysis on that basis. Segments charge market prices for services rendered to other parts of the Group; funding charges between segments are determined by Group Treasury, having regard to commercial demands.
Wealth provides private banking and investment services in the UK through Coutts & Co and Adam & Company; offshore banking through RBS International, NatWest Offshore and Isle of Man Bank; and international private banking through RBS Coutts.
Ulster Bank is the leading retail and commercial bank in Northern Ireland and the third largest banking group on the island of Ireland. It provides a comprehensive range of financial services through both its Retail Markets division which has a network of branches and operates in the personal and bancassurance sectors, and its Corporate Markets division, which provides services to SME business customers, corporates and institutional markets.
US Retail & Commercial provides financial services primarily through the Citizens and Charter One brands. US Retail & Commercial is engaged in retail and corporate banking activities through its branch network in 12 states in the United States and through non-branch offices in other states. It ranks among the top five banks in New England.
Cost to Cost to Cost to acquire acquire acquire fixed assets fixed assets fixed assets and intangible and intangible and intangible
Transfers to disposal groups — — — — — — — — — (3,692) (3,692) Currency translation and
Rest of UK USA Europe the World Total 2009 £m £m £m £m £m
Net assets attributable to equity owners and minority interests 76,049 15,951 (1,125) 3,756 94,631
Cost to acquire property, plant and equipment and intangible assets 1,974 390 3,252 94 5,710
Net assets attributable to equity owners and minority interests 50,900 15,239 6,700 7,659 80,498
Cost to acquire property, plant and equipment and intangible assets 3,415 445 2,204 186 6,250
Non-executive directors – emoluments 823 1,408 Chairmen and executive directors – emoluments 4,971 7,132
– contributions and allowances in respect of defined contribution pension schemes — 3
Retirement benefits are accruing to one director (2008 – one) under defined benefit schemes. No directors (2008 – nil) are accruing benefits under defined contribution schemes.
The executive directors may also participate in the company’s executive share option and sharesave schemes and details of their interests in the company’s shares arising from their participation are given on page 233. Details of the remuneration received by each director during the year and each director’s pension arrangements are given on pages 232 to 236.
Short-term benefits 29,292 16,813 Post-employment benefits 9,781 13,174 Other long-term benefits — 496 Termination benefits — 345 Share-based payments 8,953 2,078
Loans and advances to customers 11,196 4,217 Customer accounts 11,713 9,572
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the Group Management Committee. The captions in the Group’s primary financial statements include the following amounts attributable, in aggregate, to key management: 41 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government’s shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. As a result the UK Government and UK Government controlled bodies became related parties of the Group.
(including the Local and public 2009 (including the Local and public 2008 Bank of England) government corporations Total Bank of England) government corporations Total £m £m £m £m £m £m £m £m
Notes: (1) In addition to UK Government’s shareholding in the Group, the UK Government and UK Government controlled bodies may hold debt securities, subordinated liabilities and other liabilities or shares issued by the Group in the normal course of their business. It is not practicable to ascertain and disclose these amounts.
• The special liquidity scheme – this was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills, with fees charged based on the spread between 3-month LIBOR and the 3-month gilt repo rate. The scheme will operate for up to three years after the end of the drawdown period (30 January 2009) at the Bank of England’s discretion.
Government credit guarantee scheme – announced in October 2008, the scheme provides a guarantee on eligible new debt issued by qualifying institutions for a fee. The fee, payable to HM Treasury on guaranteed issues is based on a per annum rate of 50 basis points plus 100% of the institution’s median five-year Credit Default Swap (CDS) spread during the twelve months to 7 July 2008.
As at 31 December 2009, the Group had obtained funding from the Bank of England and issued debt guaranteed by the Government totalling £51.5 billion (2008 – £32.2 billion)
359 Exchange rates 360 Economic and monetary environment 361 Supervision 361 Regulatory developments and reviews 362 Description of property and equipment 363 Major shareholders 363 Material contracts
(Loss)/profit attributable to: Paid-in equity holders 92 57 60 — — —
(3) Includes loss on sale of subsidiaries of £93 million in 2005.
(6) Includes write-down of goodwill and other intangibles assets of £363 million in 2009 (2008 – £32,581 million).
Derivatives, settlement balances and short positions 767,960 475,017 1,025,641 363,073 152,988 128,228
Financial summary The Group’s financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the five years ended 31 December 2009 are presented on pages 350 to 359.
Share price per ordinary share at year end – £ 0.292 0.494 3.72 5.56 4.90 Market capitalisation at year end – £bn 16.5 19.5 44.4 62.8 56.1 Net asset value per ordinary and B share – £ 0.65 1.15 3.74 3.24 2.83 Return on average total assets (3) (0.18%) (1.19%) 0.65% 0.74% 0.73% Return on average ordinary and B shareholders’ equity (4) (7.2%) (50.1%) 18.7% 18.5% 17.5% Adjusted return on average ordinary and B shareholders’ equity (5) (15.0%) (14.8%) 19.8% 18.8% 17.8% Average owners’ equity as a percentage of average total assets 2.8% 2.9% 3.9% 4.4% 4.5%
Notes: (1) The number of ordinary shares in issue in prior years were adjusted retrospectively for the bonus element of the rights issue completed in June 2008 and the capitalisation issue in September 2008. The contingent agreement with HM Treasury enabling it to place up to 16 billion new B shares at 50p each had a dilutive effect in 2009. None of the convertible preference shares had a dilutive effect in 2009 and 2008. All the convertible preference shares had a dilutive effect in 2007, 2006 and 2005 and as such were included in the computation of diluted earnings per share.
(2) Dividend payout ratio represents the interim dividend paid and current year final dividend proposed as a percentage of profit attributable to ordinary and B shareholders before discontinued operations, integration and restructuring costs, amortisation of purchased intangibles and net gain on sale of strategic investments and subsidiaries (net of tax).
(3) Return on average total assets represents profit attributable to ordinary and B shareholders as a percentage of average total assets.
(4) Return on average ordinary and B shareholders’ equity represents profit attributable to ordinary and B shareholders expressed as a percentage of average ordinary and B shareholders’ equity.
Cayman Islands * 18,126 17,099 * Less than 0.75% of Group total assets.
Analysis of loans and advances to customers The following table analyses loans and advances to customers before provisions by remaining maturity, geographical area and type of customer.
Service industries and business activities 18,727 14,384 18,744 51,855 58,638 53,965 43,887 40,687
Loans and advances to customers – gross 244,871 173,630 327,018 745,519 885,611 834,987 470,826 421,110
The table below sets out the Group’s cross border outstandings in excess of 0.75% of Group total assets (including acceptances), which totalled £1,696.5 billion at 31 December 2009 (2008 – £2,401.7 billion; 2007 – £1,840.8 billion). None of these countries has experienced repayment difficulties that have required restructuring of outstanding debt.
Notes: (1) Includes £34 million relating to loans and advances to banks (2008 – £118 million; 2007, 2006 and 2005 – nil).
Loan impairment provisions at end of year: Average loans and advances to customers (gross) 821,155 858,333 567,900 445,766 402,473
As a % of average loans and advances to customers during the year: Total customer provisions charged to income statement 1.72% 0.81% 0.34% 0.42% 0.42%
Amounts written-off (net of recoveries) – customers 0.80% 0.33% 0.29% 0.36% 0.46%
RBS Group Annual Report and Accounts 2009356 £m £m £m £m £m
Closing provisions for impairment as a % of total risk elements in lending 46% 52% 60% 62% 65% Closing provisions for impairment as a % of total risk elements in lending
Risk elements in lending and potential problem loans The Group’s loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the SEC in the US.
Held-for-trading 106,477 137,080 125,917 Designated as at fair value through profit or loss 8,580 8,054 7,505
Commercial paper Outstanding at year end 44,473 78,581 78,612 Maximum outstanding at any month end during the year 74,656 111,108 81,187 Approximate average amount during the year 58,615 98,150 32,498 Approximate weighted average interest rate during the year 1.2% 3.3% 4.8% Approximate weighted average interest rate at year end 1.2% 3.0% 5.5%
Over 3 months Over 6 months Within but within but within Over 3 months 6 months 12 months 12 months Total
Group 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2009 £m £m £m £m £m £m
Contractual obligations to purchase goods or services 180 300 168 16 — 1
Exchange rates Except as stated, the following tables show , for the dates or periods indicated, the Noon Buying Rate in New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York.
Average rate for the period (1) 1.5707 1.8424 2.0073 1.8582 1.8147
Signs of stabilisation began to emerge in the second quarter of 2009. Germany, France and Japan announced a return to economic growth in the three months to June, and the pace of recession abated elsewhere. Strains in money markets began to ease, as evidenced by a gradual decline in inter-bank lending markets towards policy rates and a narrowing of credit spreads. Asset prices began to recover from their first quarter trough, supported by substantial liquidity provision from central banks. Prospects for profitability and employment remained challenging, as workers continued to face difficult labour market conditions and revenues were squeezed. Commodity prices staged a recovery in the second half of 2009, supported by increased optimism for economic prospects and more resilient demand conditions in many emerging markets where growth is more resource intensive.
The UK economy contracted as much in the first quarter of 2009 as during the entire 1990s recession. Activity continued to contract in the second and third quarters, but the pace of decline moderated. Significant slack was evident with businesses operating well below full capacity and the unemployment rate rising to c.8%. Lower consumer spending acted as a significant drag on growth as households grappled with falling employment and weaker average earnings growth. Weak demand conditions at home and abroad, a high level of spare capacity and the uncertain outlook resulted in a sharp decline in business investment. Despite the early recovery in the UK's major trade partners, exports failed to deliver a significant boost. Sterling strengthened modestly from its January low in trade weighted terms, but remained at competitive levels against major currencies compared to the pre-crisis period. Inflation fell back from 5.2% in September 2008 to below the Bank of England’s 2% target in June. Inflation remained above 1% throughout the year – in contrast to bouts of falling prices in the US and euro area – in part the result of a weaker exchange rate.
In the US, the recession was at its most severe in the first quarter of 2009. The economy contracted at 6.4% quarter-on-quarter annualised rate, but stabilised in the second quarter and returned to growth in the third quarter. Additional fiscal stimulus measures in 2009 helped to support spending on autos and encourage a return of buyers to the moribund housing market. Lower house prices also boosted affordability, and as prices bottomed out in the middle of the year, activity gradually picked up. But conditions remain difficult. Between January 2008 and December 2009 payroll employment declined by eight million, sixty percent of which occurred in 2009. Labour market weakness is likely to act as a drag on consumer demand for some time. Continued dollar weakness provided a boost to net exports in the second half of the year.
United States The Group is both a bank holding company and a financial holding company within the meaning of the US Bank Holding Company Act of 1956. As such, it is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Among other things, the Group’s direct and indirect activities and investments in the United States are limited to those that are ‘financial in nature’ or ‘incidental’ or ‘complementary’ to a financial activity, as determined by the Federal Reserve. The Group is also required to obtain the prior approval of the Federal Reserve before acquiring directly or indirectly, the ownership or control of more than 5% of any class of the voting shares of any US bank or holding company. Under current Federal Reserve policy, the Group is required to act as a source of financial strength for its US bank subsidiaries. Among other things, this source of strength obligation could require the Group to inject capital into any of its US bank subsidiaries if any of them became undercapitalised.
United Kingdom In the UK, the Group has actively engaged with a large number of legislative and regulatory consultations. Reflecting global developments, financial stability – notably bank prudential requirements and depositor protection – has been a key focus for the UK regulatory authorities.
The Group participated fully in the consultation processes on the Banking Reform Bill and the Financial Services Bill. It also engaged with policymakers on Lord Turner’s Review, ‘A regulatory response to the global banking crisis’, and its associated consultations. These set out a wide range of ideas and proposals, aimed at strengthening the resilience of the banking system and addressing perceived shortcomings in existing regulation, notably with respect to the quantum and quality of bank regulatory capital. Many of these were subsequently reflected in more detailed proposals issued by the Basel Committee on Banking Supervision in December 2009 (see below).
Linked to these issues is the policy debate over systemic banks. The Group has contributed to responses to a number of systemic bank proposals and is participating in the FSA’s pilot for the development of Recovery and Resolution Plans (“Living Wills”). It will be developing suitable Recovery and Resolution Plans in line with forthcoming regulatory requirements.
Finally, the FSA has taken an active lead in implementing the G20’s principles on remuneration structures, introducing a Code on Remuneration Practices which formally took effect on 1 January 2010. During the second half of 2009, the Group engaged with FSA on its Code as it was developed, and put in place new governance processes and policies to deliver compliance. More information on these aspects can be found on page 225.
In addition to the above, the Group continued to comment on other specific regulatory and legal changes that could impact its business. Examples included the FSA’s retail distribution and mortgage market reviews; and the Department for Business, Innovation and Skills and HM Treasury’s consumer reforms, including with respect to credit card markets.
New requirements that took effect during the period under review include the EU’s Payment Services Directive (PSD), which came into force on 1 November 2009, and the FSA’s new liquidity regime for banks, whose systems and controls requirements took effect on 1 December 2009. The PSD provides an extensive regulatory framework for European payments markets, by opening up the provision of payment services to non-bank providers; increasing consumer protection through new rules on execution times, transparency of information, liability and pricing; and regulating providers of payment services through licensing. The new FSA liquidity regime will require much larger liquidity buffers to be held by specified banks, phased in over a number of years.
The FSA, in their 2009/10 Business Plan, emphasised the strengthening of their focus on ‘Treating Customers Fairly’. The Group continues to undertake a process of continuous improvement of management information, and root cause analysis of customer issues, in order to demonstrate its commitment to treating customers fairly throughout the product lifecycle.
The Group also continues to co-operate with the Information Commissioner’s Office, the UK’s independent public body set up to promote access to official information and to protect personal information. The Group continues to improve its processes in line with changing guidelines in order to meet information security requirements.
European Union/Global developments In the EU, the Group has also responded to a number of proposals for regulatory and legislative change, including further proposed amendments to the Capital Requirements Directive and proposals for establishing new EU regulatory authorities, which are aimed at significantly strengthening EU level oversight and coordination of national supervisors. The Group also follows closely the work (and recommendations) of the G7 and G20, as well as international standard setters such as the Basel Committee on Banking Supervision. Of particular note was the Committee’s initial proposals for major changes to the quality and quantum of banks’ regulatory capital, which were published in December 2009. The Group is actively reviewing these, which the Basel Committee is aiming to finalise by end-2010, for implementation from end-2012 onwards.
United States In the US the Group engages constructively with regulators and other bodies on regulatory and legislative change and seeks to ensure proper implementation and compliance. Current issues include mortgage reform and student lending.
Description of property and equipment The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2009, the Royal Bank and NatWest had 649 and 1,612 retail branches, respectively, in the UK. Ulster Bank has a foot print of 238 branches and an extensive network of business banking offices across Northern Ireland and the Republic of Ireland. US Retail & Commercial had 1,512 retail banking offices (including in-store branches) covering Connecticut, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. The Group’s principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
Major shareholders Details of major shareholders of the company’s ordinary, B and preference shares are given on page 213.
Other than detailed above, there have been no significant changes in the percentage ownership of major shareholders of the company’s ordinary, B and preference shares during the three years ended 24 February 2010. All shareholders within a class of the company’s shares have the same voting rights.
As at 31 December 2009, almost all of the company’s US$ denominated preference shares and American Depository Shares representing ordinary shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the US.
Material contracts The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: Consortium and Shareholders Agreement (CSA) On 28 May 2007, Fortis Bank Nederland, the company, Santander and RFS Holdings entered into the CSA. Fortis Bank Nederland acceded to the CSA on 26 July 2007. On 3 October 2008, the Dutch State acquired Fortis Bank Nederland. On 24 December 2008 the Dutch State acceded to the CSA following its acquisition of the shares held by Fortis Bank Nederland in RFS Holdings pursuant to a Deed of Accession entered into between RFS Holdings, the company, Fortis Bank Nederland, Santander and the Dutch State. The CSA governs the relationships amongst the parties thereto in relation to the acquisition by RFS Holdings of ABN AMRO. The CSA details, inter alia, the funding of RFS Holdings in connection with the acquisition of ABN AMRO, the equity interests in RFS Holdings, the governance of RFS Holdings both before and after the acquisition of ABN AMRO, the arrangements for the transfer of certain ABN AMRO businesses, assets and liabilities to the Dutch State (previously Fortis Bank Nederland), the company and Santander post-acquisition of ABN AMRO, further funding obligations of the Dutch State, the company and Santander after the acquisition of ABN AMRO where funding is required by regulatory authorities in connection with the ABN AMRO businesses, the allocation of Core Tier 1 capital and the allocation of taxes and conduct of tax affairs.
Underwriting Agreement On 22 April 2008, the company, Goldman Sachs International, Merrill Lynch International, UBS and the Royal Bank entered into an underwriting agreement, pursuant to which Merrill Lynch International, Goldman Sachs International and UBS agreed to procure subscribers for, or failing which themselves to subscribe for, ordinary shares not taken up under the Rights Issue, in each case at the relevant issue price. Pursuant to the underwriting agreement, the company agreed to pay certain fees and expenses to Merrill Lynch International, Goldman Sachs International and UBS in consideration for their underwriting commitment. The company gave certain representations and warranties and indemnities to those persons defined as underwriters in the Underwriting Agreement. The liabilities of the company were uncapped as to time and amount.
Sale of Angel Trains On 6 August 2008, the company completed the sale of Angel Trains Group to a consortium advised by Babcock & Brown for an enterprise value of £3.6 billion.
Sale of Tesco Personal Finance On 28 July 2008, the company announced that it had agreed to sell its 50 per cent. shareholding in Tesco Personal Finance to its joint venture partner Tesco plc for a cash consideration of £950 million, subject to transaction adjustments. As part of this transaction, the company agreed to continue to provide certain commercial services to Tesco Personal Finance post-completion. The sale completed on 19 December 2008.
The company also bore all costs and expenses relating to the First Placing and Open Offer and the preference share issue, including (but not limited to) the fees and expenses of its professional advisers, the cost of preparation, advertising, printing and distribution of the First Placing and Open Offer prospectus and all other documents connected with the First Placing and Open Offer and the preference share issue, the listing fees of the FSA, any charges by CREST and the fees of the London Stock Exchange and Euronext.
The company gave certain undertakings to HM Treasury in relation to such matters as mortgage lending, lending to SMEs and Board remuneration. These undertakings were aimed at ensuring that any State aid involved in the potential acquisition of new shares and the company’s potential participation in the Credit Guarantee Scheme to be promoted by HM Treasury as part of its support for the UK banking industry was compatible with the common market under EU law. These constraints will cease to apply when, broadly, it is determined that RBS is no longer in receipt of State aid.
The undertakings the company gave to HM Treasury included the following: (i) no bonus would be awarded to any director for 2008 and any bonuses earned by directors in respect of 2009 will be paid in restricted shares, remuneration will seek to reward long-term value creation and not encourage excessive risk taking (short-term indicators will be taken into account only where fully consistent with long-term value creation and not encouraging excessive risk taking) and directors who are dismissed will receive a severance package which is reasonable and perceived as fair; (ii) to work with HM Treasury on the appointment of up to three new independent non-executive directors; (iii) to maintain its SME and mortgage lending availability to at least 2007 levels until the end of 2011 with the active marketing of competitively priced loan products; (iv) to increase its support to shared equity projects until the end of 2009 in order to assist those in difficulties with their mortgage payments to stay in their homes, either through individual bank schemes or paid into a central fund run by industry; and
(v) to publish an annual report, for each year until 2011, on its lending to SMEs and establish transparent public reporting on both SME and mortgage lending as agreed with HM Treasury.
Second Placing and Open Offer Agreement Pursuant to a placing and open offer agreement dated 19 January 2009 entered into between the company, UBS, Merrill Lynch International and HM Treasury, (i) the company agreed to invite qualifying shareholders to apply to subscribe for new shares at the issue price of 31.75 pence per new share by way of the Second Open Offer, (ii) UBS and Merrill Lynch International were appointed as joint sponsors, joint bookrunners and joint placing agents and agreed to use reasonable endeavours to procure placees to subscribe for the new shares on such terms as may be agreed by the company and HM Treasury at not less than the issue price of 31.75 pence per new share on the basis that the new shares placed will be subject to clawback to the extent they are taken up under the Second Open Offer and (iii) HM Treasury agreed that, to the extent not placed or taken up under the Second Open Offer and subject to the terms and conditions set out in the Second Placing and Open Offer Agreement, HM Treasury will subscribe for such new shares itself at the issue price of 31.75 pence per new share.
Qualifying shareholders were not party to these arrangements and so did not acquire any direct right against Merrill Lynch International, UBS and Computershare pursuant to these arrangements. The company was responsible for enforcing the other parties’ obligations thereunder.
Pre-accession Commitments Letter On 26 February 2009, the Royal Bank entered into a deed poll in favour of HM Treasury, pursuant to which the Royal Bank gave a series of undertakings on behalf of each member of the Group, with immediate effect unless otherwise agreed, in relation to the provision of information and the management of the assets, commitments and exposures (the “Proposed Assets”) in the period prior to the Royal Bank’s proposed accession to and participation in the UK Government’s Asset Protection Scheme (APS).
(vii) use best endeavours (giving regard to reasonable operational requirements) to maintain regular, adequate and effective monitoring, reporting, risk management and audit controls and procedures in order, among other things, to ensure that risks relating to key business processes which affect the Proposed Assets are identified, assessed and reported and are managed and mitigated appropriately.
Lending Commitments Letter On 26 February 2009, the company entered into a deed poll in favour of certain UK Government departments under which it undertook to support lending to creditworthy borrowers in the UK in a commercial manner with effect from 1 March 2009. On 18 May 2009, the company entered into an amendment to this deed poll which took effect from 29 May 2009 and on 20 November 2009, the company executed a further amendment to this deed poll. This lending commitment was a pre-requisite to the company’s participation in the APS and other Government backed schemes, the objective of which was to reinforce the stability of the financial system and support the recovery of the economy.
Pursuant to this lending commitment, the company agreed to increase its lending in the 12 months commencing 1 March 2009 from its UK banking operations to UK businesses by, in aggregate, £16 billion above the amount previously budgeted .
The company has also made a commitment to increase lending to homeowners, including first time buyers, in the United Kingdom. The company has undertaken to increase its residential mortgage lending by at least £9 billion above the amount previously budgeted in the 12 months commencing 1 March 2009.
Such additional lending is subject to the company’s ordinary course pricing and other terms, and certain commercial, risk, credit and regulatory considerations.
The company has also made a commitment to increase lending to homeowners, including first time buyers, in the United Kingdom. The company has undertaken to increase its residential mortgage lending by at least £9 billion above the amount previously budgeted in the 12 months commencing 1 March 2009 and to maintain in the 12 months commencing 1 March 2010 similar levels of residential mortgage lending as in the 12 months commencing 1 March 2009 subject to adjustment of the commitments by the UK Government departments from time to time.
The company’s compliance with its lending commitments is monitored by the UK Government, and is subject to a reporting process.
The company has also made certain undertakings as regards marketing in support of its lending commitments and certain other matters relating to its business and residential lending practices and policies. The lending commitments made in the deed poll supersede the commitments given by the company in the First Placing and Open Offer Agreement and the Second Placing and Open Offer Agreement.
The company and HM Treasury further agreed the terms of the £8 billion Contingent Subscription of the Contingent B Shares in the Acquisition and Contingent Capital Agreement. For a period of five years from 22 December 2009 or, if earlier, until the occurrence of a termination event or until the company decides (with FSA consent) to terminate such Contingent Subscription (the “Contingent Period”), if the Core Tier 1 ratio of the company falls below five per cent. (and if certain other conditions are met) HM Treasury has committed to subscribe for
367RBS Group Annual Report and Accounts 2009 the Contingent B Shares in no fewer than two tranches of £6 billion and £2 billion (or such smaller amounts as the company and HM Treasury may agree). Any unused portion of the £8 billion may be subscribed in one or more further tranches.
The company gave certain representations and warranties to HM Treasury on the date of the Acquisitions and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company has agreed to give such representations and warranties again on each date (if any) a Contingent Subscription is triggered and on each date (if any) on which B shares are issued pursuant to a Contingent Subscription.
The company agreed to a number of undertakings, including with respect to: (i) restrictions on the payment of dividends or other distributions on, and the redemption of, certain securities; (ii) expectations regarding the repurchase of the B shares by the company; (iii) renegotiations of the terms of the Contingent Subscription as a result of future legislative or regulatory changes; (iv) negotiating in good faith to maintain the status of the B shares and Dividend Access Share as Core Tier 1 capital; and (v) restrictions in relation to the company’s share premium account.
HM Treasury has agreed that it shall not be entitled to exercise its option to convert B shares into ordinary shares to the extent that it holds more than 75 per cent. of the ordinary shares of the company or to the extent that the exercise of such option would result in it holding more than 75 per cent. of the ordinary shares of the company.
Under the APS, HM Treasury is liable to make payments to the company in respect of a pre-defined pool of assets and exposures (the “Covered Assets”) in respect of which a specified failure to pay, bankruptcy or restructuring trigger occurs or is deemed to occur. Payments under the APS are intended to protect the company, over time, for 90% of the amount by which cumulative losses on the whole portfolio of Covered Assets (as reduced by cumulative recoveries on the portfolio) exceed a fixed first loss threshold of £60 billion. Cumulative losses (as reduced by cumulative recoveries) below the first loss threshold, and a 10% vertical slice of any cumulative losses (as reduced by cumulative recoveries) exceeding the first loss threshold, are for the account of the company.
Protection under the APS is, subject to various requirements under the Scheme Conditions, provided in respect of the Covered Assets on the company’s consolidated balance sheet as at 31 December 2008 with an aggregate covered amount of £282 billion. Protection under the APS may be lost or limited in certain specified circumstances, including the failure of a Covered Asset to satisfy certain asset eligibility criteria set out in the Scheme Conditions.
The company has the right, in certain circumstances, to withdraw from the APS permanently all or part of a Covered Asset. In addition, the company contractually has the right to terminate the APS exercisable at any time provided that the FSA has confirmed in writing to HM Treasury that it has no objection to the proposed termination. An exit fee and, potentially, a refund of HM Treasury’s net payments under the APS are payable by the company upon such termination. The Scheme Conditions also contain various provisions and restrictions on the management and administration of the Covered Assets and certain related assets. The company is obliged to manage such assets in accordance with the asset management objective, which is to maximise the expected net present value of such assets (discounted at an HM Treasury rate), including by minimising losses and potential losses and maximising recoveries and potential recoveries. The company also has monitoring and reporting obligations under the Scheme Conditions which are aimed at the transparency in respect of the Covered Assets to enable HM Treasury to manage and assess its exposure under the APS. In addition, the company has to establish a separate governance structure for the purposes of the APS. Further, the Scheme Conditions and the Accession Agreement also contain requirements for the development of a remuneration policy for the Group and specific remuneration requirements for certain officers and employees of the company.
Certain Scheme Conditions are subject to modification at any time with retrospective effect at the discretion of HM Treasury without the company’s consent. The modification rights arise broadly and subject to certain conditions where the operation, interpretation or application of such Scheme Conditions conflicts with any of the overriding general principles set out in the Scheme Conditions.
Accordingly, instead of receiving cash as consideration for the issue of the B shares, at the conclusion of the B share issue the company owned the entire issued ordinary and redeemable preference share capital of Aonach Mor Limited whose only assets are its cash reserves, which represent an amount equivalent to the proceeds of the B share issue. The company is able to utilise this amount equivalent to the B share issue net proceeds by exercising its right of redemption over the redeemable preference shares it holds in Aonach Mor Limited.
State Aid Commitment Deed As a result of the State aid granted to the company, it was required to work with HM Treasury to submit a State aid restructuring plan to the European Commission, which has now been approved under the State aid rules. The company has agreed a series of measures to be implemented over a four year period, which supplement the measures in the company’s strategic plan.
The Group entered into a State Aid Commitment Deed with HM Treasury which provides that the Group will comply or procure compliance with these measures and behavioural commitments. The Group agreed to do all acts and things necessary to ensure HM Treasury’s compliance with its obligations under any European Commission decision approving State aid to the Group.
The State Aid Commitment Deed also provides for the Group’s undertakings in respect of State aid to be modified in certain limited circumstances. However, HM Treasury has undertaken that it will not, without the consent of the Group, agree modifications to the Group’s undertakings with respect to State aid which are significantly more onerous to the Group than those granted in order to obtain the State aid approval.
Exchange Offers and Tender Offers Pursuant to two Dealer Management Agreements dated 26 March 2009 entered into between (i) RBS Financing Limited, the Royal Bank, UBS Limited and HSBC Bank plc and (ii) the company, RBS Financing Limited, Greenwich Capital Markets Inc., UBS Securities LLC and HSBC Securities (USA) Inc. and related offering memoranda dated the same date, RBS Financing Limited, a wholly-owned subsidiary of the company, invited (1) holders of certain existing Tier 1 capital and upper Tier 2 capital securities of the Group to offer to exchange any or all of such securities for new senior unsecured notes of the company and (2) holders of certain existing Tier 1 capital and upper Tier 2 capital securities of the Group to tender any or all of such securities for purchase for cash. As a result of the exchange offers and tender offers, the Group realised an aggregate pre-tax gain of £4.6 billion (including gains from associated hedges).
Ex-dividend dates: Cumulative preference shares 28 April 2010 Record dates: Cumulative preference shares 30 April 2010
You may also check your shareholding by contacting our Registrar: Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ
Braille and audio Annual Review and Summary Financial Statement Shareholders requiring a Braille or audio version of the Annual Review and Summary Financial Statement should contact the Registrar on +44 (0)870 702 0135.
Warning to shareholders – boiler room scams Over the last few years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based ‘brokers’ who target UK shareholders, offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. These operations are commonly known as ‘boiler rooms’. These ‘brokers’ can be very persistent and extremely persuasive, and a 2006 survey by the Financial Services Authority (FSA) has reported that the average amount lost by investors is around £20,000.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme. The FSA can be contacted by completing an online form at www.moneymadeclear.fsa.gov.uk/contactus
Pension trusts 39 2.7 — Other corporate bodies 99 304.3 0.5
Capital gains tax For shareholders who held RBS ordinary shares at 31 March 1982, the market value of one ordinary share held was 103p. After adjusting for the following: • the 1 March 1985 rights issue; • the 1 September 1989 capitalisation issue; • the bonus issue of Additional Value Shares on 12 July 2000; • the 8 May 2007 bonus issue; • the 6 June 2008 rights issue; and
Further adjustments to the adjusted 31 March 1982 value will be necessary for shareholders who took up their basic entitlement under the 1 December 2008 and/or 14 April 2009 open offers.
Trading market Non-cumulative dollar preference shares On 26 March 1997, 8 February 1999, 30 September 2004, 26 August 2004, 19 May 2005, 9 November 2005, 25 May 2006, 27 December 2006, 28 June 2007, 27 September 2007 and 4 October 2007 the company issued the following American Depository Shares (ADSs) representing noncumulative dollar preference shares of the company, in the United States, which were outstanding at 31 December 2009: 8,000,000 Series F (“Series F ADSs”) representing 8,000,000 non-cumulative dollar preference shares, Series F; 12,000,000 Series H (“Series H ADSs”) representing 12,000,000 non-cumulative dollar preference shares, Series H; 34,000,000 Series L (“Series L ADSs”) representing 34,000,000 non-cumulative dollar preference shares, Series L; 37,000,000 Series M (“Series M ADSs”) representing 37,000,000 non-cumulative dollar preference shares, Series M; 40,000,000 Series N (“Series N ADSs”) representing 40,000,000 non-cumulative dollar preference shares, Series N; 22,000,000 Series P (“Series P ADSs”) representing 22,000,000 non-cumulative dollar preference shares, Series P; 27,000,000 Series Q (“Series Q ADSs”) representing 27,000,000 non-cumulative dollar preference shares, Series Q; 26,000,000 Series R (“Series R ADSs”) representing 26,000,000 non-cumulative dollar preference shares, Series R; 38,000,000 Series S (“Series S ADSs”) representing 38,000,000 non-cumulative dollar preference shares, Series S; 64,000,000 Series T (“Series T ADSs”) representing 64,000,000 non-cumulative dollar preference shares, Series T; and 15,000 Series U (“Series U ADSs”) representing 15,000 non-cumulative dollar preference shares, Series U.
ADSs representing ordinary shares In October 2007, the company listed ADSs, each representing one ordinary share nominal value 25p each (or a right to receive one ordinary share), and evidenced by an ADR or uncertificated securities, on the NYSE. With effect from 7 November 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares. As of 31 December 2009, 14.2 million ADSs were outstanding. The ADSs were issued in connection with the company’s bid for the outstanding share capital of ABN AMRO Holding N.V.
2009: Fourth quarter High 0.5055 Low 0.2841 2009: Third quarter High 0.5765 Low 0.3546 2009: Second quarter High 0.4800 Low 0.2510 2009: First quarter High 0.5500 Low 0.1030 2008: Fourth quarter High 1.8620 Low 0.4140 2008: Third quarter High 2.4293 Low 1.6098 2008: Second quarter High 3.2156 Low 2.0707 2008: First quarter High 3.7054 Low 2.5540
With effect from 7 November 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares. The prices in the table have been adjusted accordingly.
Subordinated Subordinated Subordinated Subordinated Subordinated liabilities Equity liabilities Equity liabilities Equity liabilities Equity liabilities Equity
Non-cumulative preference shares of US$0.01 – Series D (redeemed March 2006) — — — — 0.21 1.13
– Series I (redeemed March 2006) — — — — 0.20 1.10 – Series J (redeemed November 2005) — — — — — 1.06
Non-cumulative convertible preference shares of US$0.01 – Series 1 91.18 60.33 49.66 45.58 50.26 50.33 – Series 2 (redeemed March 2005) — — — — — 11.60 – Series 3 (redeemed December 2005) — — — — — 43.03
Non-cumulative convertible preference shares of €0.01 – Series 1 (redeemed March 2005) — — — — — 11.54
Non-cumulative preference shares of €0.01 – Series 1 79.96 49.46 46.53 39.63 37.18 41.14
Non-cumulative convertible preference shares of £0.01 – Series 1 119.43 73.87 73.87 73.87 73.87 73.87
The Group has undertaken that, unless otherwise agreed with the European Commission, neither the company nor any of its direct or indirect subsidiaries (excluding companies in the ABN AMRO Group) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from a date starting not later than 30 April 2010 and for a period of two years thereafter (“the deferral period”), or exercise any call rights in relation to these capital instruments between 24 November 2009 and the end of the deferral period, unless there is a legal obligation to do so. Hybrid capital instruments issued after 24 November 2009 will generally not be subject to the restriction on dividend or coupon payments or call options.
The statements and practices set forth below regarding US and UK tax laws, including the US/UK double taxation convention relating to income and capital gains which entered into force on 31 March 2003 (the Treaty), and the US/UK double taxation convention relating to estate and gift taxes (the Estate Tax Treaty), are based on those laws and practices as in force and as applied in practice on the date of this report. This summary is not exhaustive of all possible tax considerations and holders are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US federal, state, local and other laws, and possible changes in taxation law, of the acquisition, ownership and disposition of ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs by consulting their own tax advisers.
The following discussion assumes that the company is not, and will not become, a passive foreign investment company (PFIC) – see ‘Passive Foreign Investment Company considerations’ on page 382.
Ordinary dividends Ordinary dividends per share for prior years in the table below were restated for the effect of the rights issue in June 2008 and the capitalisation issue in September 2008.
Notes: (1) Each American Depository Share represents 20 ordinary shares. The historical amounts listed in the table apply to the ordinary shares, as the American Depositary Shares were not issued until October 2007 as described above under Trading Market.
(2) In 2008, the company issued new ordinary shares by way of a capitalisation issue rather than paying an interim dividend.
(3) Final dividends for each year were proposed in the indicated year and paid in the following year.
Ordinary shares, preference shares, ordinary ADSs and preference ADSs Taxation of dividends For the purposes of the Treaty, the Estate Tax Treaty and the US Internal Revenue Code of 1986 as amended (the Code), US Holders of ordinary ADSs and preference ADSs should be treated as owners of the ordinary shares and the non-cumulative dollar preference shares underlying such ADSs.
Distributions by the company (other than certain pro rata distributions of ordinary shares or rights to receive such shares) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders.
Dividends will be included in a US Holder’s income on the date of the US Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividend. The amount of any dividend paid in pounds sterling or euros to be taken into income by a US Holder will be the US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is not converted into US dollars on the date of receipt, the US Holder may have foreign currency gain or loss.
A US Holder will, upon the sale or other disposition of an ordinary share, a non-cumulative dollar preference share, an ordinary ADS or a preference ADS, or upon the redemption of a non-cumulative dollar preference share or preference ADS, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption of a non-cumulative dollar preference share or a preference ADS, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding in the case of a redemption any amount treated as a dividend for US federal income tax purposes, which will be taxed accordingly) and the US Holder’s tax basis in such share or ADS. This capital gain or loss will be long-term capital gain or loss if the US Holder held the share or ADS so sold, disposed or redeemed for more than one year.
PROs United States Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividendsreceived deduction generally allowed to corporate US holders. A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to such tax.
Disposal (including redemption) A disposal (including redemption) of PROs by a non-corporate US Holder will not give rise to any liability to UK taxation on capital gains unless the US Holder carries on a trade (which for this purpose includes a profession or a vocation) in the UK through a branch or agency and the PROs are, or have been, held or acquired for the purposes of that trade, carried on through such branch or agency.
Inheritance tax In relation to PROs held through DTC (or any other clearing system), the UK inheritance tax position is not free from doubt in respect of a lifetime transfer, or death of, a US Holder who is not domiciled nor deemed to be domiciled in the UK for inheritance tax purposes; HM Revenue & Customs is known to consider that the situs of securities held in this manner is not necessarily determined by the place where the securities are registered. In appropriate circumstances, there may be a charge to UK inheritance tax as a result of a lifetime transfer at less than market value by, or on the death of, such US Holder. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. However, exemption from, or a reduction of, any such UK tax liability may be available under the Estate Tax Treaty (see below). US Holders should consult their professional advisers in relation to such potential liability. PROs beneficially owned by an individual, whose domicile is determined to be the United States for the purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of the PRO, except in certain cases where the PRO (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the PRO is subject to both UK inheritance tax and US federal estate or gift tax.
Passive Foreign Investment Company considerations A foreign corporation will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable ‘look-through rules’, either (i) at least 75% of its gross income is ‘passive income’ or (ii) at least 50% of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income. The company does not believe that it was a PFIC for its 2009 taxable year. Although interest income is generally passive income, a special rule allows banks to treat their banking business income as nonpassive.
To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The company believes that it currently meets these requirements. The company’s possible status as a PFIC must be determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US Holder holds ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs. If the company were to be treated as a PFIC in any year during which a US Holder holds ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs, US Holders would generally be subject to adverse US federal income tax consequences. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company’s ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs.
Code of conduct As discussed on page 210, the Group has adopted a code of conduct applicable to all Group employees, which will be provided to any person without charge, upon request, by contacting Group Secretariat at the telephone number listed on page 388.
Glossary of terms Adjustable rate mortgage (ARM) – in the US a variable-rate mortgage. ARMs include: hybrid ARMs which typically have a fixed-rate period followed by an adjustable-rate period; interest-only ARMs where interest only is payable for a specified number of years, typically for three to ten years; and payment-option ARMs that allow the borrower to choose periodically between various payment options.
Alt-A (Alternative A-paper) are mortgage loans with a higher credit quality than sub-prime loans but with features that disqualify the borrower from a traditional prime loan. Alt-A lending characteristics include limited documentation; high loan-to-value ratio; secured on nonowner occupied properties; and debt-to-income ratio above normal limits.
Asset-backed securities (ABS) are securities that represent interests in specific portfolios of assets. They are issued by a special purpose entity following a securitisation. The underlying portfolios commonly comprise residential or commercial mortgages but can include any class of asset that yields predictable cash flows. Payments on the securities depend primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as guarantees or other credit enhancements. Collateralised bond obligations, collateralised debt obligations, collateralised loan obligations, commercial mortgage backed securities and residential mortgage backed securities are all types of ABS.
Collateralised bond obligations (CBOs) are asset-backed securities for which the underlying asset portfolios are bonds, some of which may be sub-investment grade.
Collateralised debt obligations (CDOs) are asset-backed securities for which the underlying asset portfolios are debt obligations: either bonds (collateralised bond obligations) or loans (collateralised loan obligations) or both. The credit exposure underlying synthetic CDOs derives from credit default swaps. The CDOs issued by an individual vehicle are usually divided in different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are borne first by the equity securities, next by the junior securities, and finally by the senior securities; junior tranches offer higher coupons (interest payments) to compensate for their increased risk.
Collateralised debt obligation squared (CDO-squared) is a type of collateralised debt obligation where the underlying asset portfolio includes tranches of other CDOs.
Commercial paper (CP) comprises unsecured obligations issued by a corporate or a bank directly or secured obligations (asset-backed CP), often issued through a commercial paper conduit, to fund working capital. Maturities typically range from two to 270 days. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. Commercial paper is issued in a wide range of denominations and can be either discounted or interest-bearing.
Commercial real estate – freehold and leasehold properties used for business activities. Commercial real estate includes office buildings, industrial property, medical centres, hotels, retail stores, shopping centres, agricultural land and buildings, warehouses, garages etc.
Constant proportion portfolio insurance notes (CPPI notes) – CPPI is the name given to a trading strategy that is designed to ensure that a fixed minimum return is achieved either at all times or more typically, at a set date in the future. Essentially the strategy involves continuously rebalancing the portfolio of investments during the term of the product between performance assets and safe assets using a pre-set formula. CPPI notes provide investors with a return linked to a CPPI portfolio.
Contractual maturity is the date in the terms of a financial instrument on which the last payment or receipt under the contract is due for settlement.
Cost:income ratio – operating expenses as a percentage of total income.
Credit enhancements are techniques that improve the credit standing of financial obligations; generally those issued by an SPE in a securitisation. External credit enhancements include financial guarantees and letters of credit from third-party providers. Internal enhancements include excess spread – the difference between the interest rate received on the underlying portfolio and the coupon on the issued securities; and over-collateralisation – on securitisation, the value of the underlying portfolio is greater than the securities issued.
Credit risk assets – loans and advances (including overdraft facilities), instalment credit, finance lease receivables and other traded instruments across all customer types.
Credit risk spread is the difference between the coupon on a debt instrument and the benchmark or the risk-free interest rate for the instrument’s maturity structure. It is the premium over the risk-free rate required by the market for the credit quality of an individual debt instrument.
Debt securities are transferable instruments creating or acknowledging indebtedness. They include debentures, bonds, certificates of deposit, notes and commercial paper. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities can be secured or unsecured.
Debt securities in issue comprise unsubordinated debt securities issued by the Group. They include commercial paper, certificates of deposit, bonds and medium-term notes.
Deferred tax asset – income taxes recoverable in future periods as a result of deductible temporary differences – temporary differences between the accounting and tax base of an asset or liability that will result in tax deductible amounts in future periods – and the carryforward of tax losses and unused tax credits.
Defined benefit obligation – the present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service.
Defined benefit plan – pension or other post-retirement benefit plan other than a defined contribution plan.
Derivative – a contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options.
First/second lien – a lien is a charge such as a mortgage held by one party, over property owned by a second party, as security for payment of some debt, obligation, or duty owed by that second party. The holder of a first lien takes precedence over all other encumbrances on that property i.e. second and subsequent liens.
Freddie Mac (Federal Home Loan Mortgage Corporation) is a US Government Sponsored Enterprise. It buys mortgages, principally issued by thrifts, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government.
Ginnie Mae (Government National Mortgage Association) is a US Government Agency that guarantees investors the timely payment of principal and interest on mortgage-backed securities for which the underlying asset portfolios comprise federally insured or guaranteed loans – mainly loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Ginnie Mae obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the US Government.
Government Sponsored Enterprises (GSEs) are a group of financial services corporations created by the US Congress. Their function is to improve the efficiency of capital markets and to overcome statutory and other market imperfections which otherwise prevent funds from moving easily from suppliers of funds to areas of high loan demand. They include Fannie Mae and Freddie Mac.
Individually assessed loan impairment provisions – impairment loss provisions for individually significant impaired loans assessed on a case-by-case basis, taking into account the financial condition of the counterparty and any guarantor and the realisable value of any collateral held.
International Accounting Standards Board (IASB) is the independent standard-setting body of the IASC Foundation. Its members are responsible for the development and publication of International Financial Reporting Standards (IFRS) and for approving Interpretations of IFRS as developed by the International Financial Reporting Interpretations Committee (IFRIC).
Latent loss provisions – loan impairment provisions held against impairments in the performing loan portfolio that have been incurred as a result of events occurring before the balance sheet date but which have not been identified as impaired at the balance sheet. The Group has developed methodologies to estimate latent loss provisions that reflect historical loss experience (adjusted for current economic and credit conditions) and the period between an impairment occurring and a loan being identified and reported as impaired.
Leveraged loans – funding (leveraged finance) provided to a business resulting in an overall level of debt that exceeds that which would be considered usual for the business or for the industry in which it operates. Leveraged finance is commonly employed to achieve a specific, often temporary, objective: to make an acquisition, to effect a buy-out or to repurchase shares.
Liquidity enhancements make funds available to ensure that the issuer of securities, usually a commercial paper conduit, can redeem the securities at maturity. They typically take the form of a committed facility from a third-party bank.
Loan-to-value ratio – the amount of a secured loan as a percentage of the appraised value of the security e.g. the outstanding amount of a mortgage loan as a percentage of the property’s value.
Net interest margin is net interest income as a percentage of average interest-earning assets.
Option - an option is a contract that gives the holder the right but not the obligation to buy (or sell) a specified amount of the underlying physical or financial commodity, at a specific price, at an agreed date or over an agreed period. Options can be exchange-traded or traded over-thecounter.
Past due – a financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due.
Private equity investments are equity investments in operating companies not quoted on a public exchange. Capital for private equity investment is raised from retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Retail loans are loans made to individuals rather than institutions. The loans may be for car purchases, home purchases, medical care, home repair, holidays and other consumer uses.
Structured notes are securities that pay a return linked to the value or level of a specified asset or index. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency.
Student loan related assets are assets that are referenced to underlying student loans.
Subordinated liabilities are liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer.
Super senior CDO is the most senior class of instrument issued by a CDO vehicle. They benefit from the subordination of all other instruments, including AAA-rated securities, issued by the CDO vehicle.
Tier 1 capital ratio – Tier 1 capital as a percentage of risk-weighted assets.
VaR is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels.
Wrapped security – a wrapped security is a debt security where the holder benefits from credit protection provided by a third party, typically a financial guarantor or monoline insurer.