Chairman’s statement 06 Chief Executive’s review 09 2016 performance summary 12 Business model and strategy 19
Our approach 26 Our values 26 Our colleagues 28 Our customers 31
Our operating environment 32 Key influences in our operating environment 32 Key economic indicators 37 Risk overview 38
The Strategic Report for the year ended 31 December 2016 set out on pages 3 to 56 was approved by the Board of directors on 23 February 2017.
Non-executive directors Sandy Crombie Frank Dangeard Alison Davis Morten Friis Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes Mike Rogers
RBS reported an operating loss before tax of £4,082 million for 2016 and an attributable loss(1) of £6,955 million, which included litigation and conduct costs of £5,868 million, restructuring costs of £2,106 million, the final Dividend Access Share (DAS) dividend of £1,193 million and Capital Resolution disposal losses and impairments of £825 million. Restructuring costs included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding Williams & Glyn.
Common Equity Tier 1 ratio of 13.4% reduced by 210 basis points during 2016, but remains ahead of our target despite recognising significant charges relating to remaining legacy issues.
(3) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
(4) On 1 October 2015 the LCR became the Prudential Regulation Authority’s (PRA) primary regulatory liquidity standard; UK banks are required to meet a minimum standard of 80% initially, rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretation of the EU LCR Delegated Act, which may change over time and may not be fully comparable with that of other institutions.
(6) Tangible equity is equity attributable to ordinary shareholders less intagible assets.
(7) Gross new mortgage lending in UK PBB, Ulster Bank RoI and RBSI.
(8) Comprises £174 million corporate tax, £660 million irrecoverable VAT, £208 million bank levies and £279 million employer payroll taxes.
£33.7bn Gross new mortgage lending across England, Wales and Scotland (7)
The Economic and Regulatory Environment The UK economy grew by around 2% in 2016, a little less rapidly than in 2015, but still at a healthy rate in what is now a mature recovery. Unemployment remained low, inflation stayed well below the Bank of England’s target rate and house prices rose, on average, by around 5%, though the regional variations were wide. These might, overall, seem to be benign conditions for banks, but the low interest rate environment, and especially a relatively flat yield curve, are challenges to profitability. Some central banks are charging negative interest rates, and while the Bank of England has not followed them, the base rate was reduced from 0.5% to 0.25% in August, after the referendum on European Union (EU) membership.
The core bank performed strongly, and adjusted operating profits were up by around 4%, in a year of political and economic uncertainty. That progress reflects growth in our market share in the mortgage market and a resumption of growth in business lending, after many years of decline. It shows, too, that the strong focus on reducing costs is beginning to pay off.
The vote to leave the EU was widely expected to have a negative impact on the economy. So far, we have seen a significant fall in sterling, but consumer spending has remained robust, and growth has continued. Of course the UK has not yet left the EU, and we do not know the terms of our departure, so the long-term impact remains impossible to predict. The short-term effect on banks was felt primarily through the reduction in interest rates.
There has been much debate about the impact on the City, and on UK financial services in general, if, as now seems likely, we also leave the single market. As I write, the Article 50 negotiations have not yet begun, so it is idle to speculate. RBS as a primarily UK bank will be less affected than most, but we own Ulster Bank in Ireland and have modest presences in major EU corporate markets. We will take steps to protect those assets as the regulatory environment becomes clearer.
The regulatory environment continues to be challenging for banks. The Basel Committee is discussing a new set of proposals which could have the effect of increasing capital requirements materially, though no agreement has yet been reached. In the UK, the Bank of England stress tests are built on very rigorous assumptions about growth and asset prices. RBS failed its stress test in 2016, primarily on the basis of assumptions reflecting the uncertainty of future conduct costs, especially from legacy problems in the US. We agreed measures to strengthen our balance sheet as a result, which are already underway.
Banking. We are implementing our own plans and expect to meet the statutory deadline of 1 January 2019.
In early 2016 we renewed our longterm targets of 50% for the cost to income ratio and 12% for return on tangible equity. Given expected slower economic growth over the mediumterm, we now think we will achieve those objectives in 2020, a year later than previously communicated. That change aligns the timing of our financial targets with our customer service ambitions. It is not yet possible to give a reliable forecast of when the bank will be able to restore a dividend.
The treatment of some of our small business customers has been under scrutiny. Although the Financial Conduct Authority (FCA) review into the historical operation of our former Global Restructuring Group (GRG) continues, I am pleased that with the endorsement of the FCA we were able to announce a new complaints process, led by Sir William Blackburne, a retired High Court judge, alongside an automatic refund for some of the complex fees charged to customers who were in GRG between 2008 - 2013. While we have acknowledged we did not treat all these troubled business customers as well as we should have done, we do not accept that the bank artificially distressed otherwise viable SME businesses or deliberately caused them to fail. The FCA’s skilled person and our independent investigators have also found no evidence that the bank either inappropriately targeted businesses to transfer them into GRG or drove them to insolvency.
Following the Government’s injection of capital into the bank in 2008, RBS undertook to carry out five major divestments as part of the State Aid commitments agreed with the European Commission (EC). Four have been successfully implemented. The fifth entailed a divestment of assets to enhance competition in the UK’s SME banking market. The bank identified a collection of branches and customer relationships, identified as a new bank to be known as Williams & Glyn.
Implementing that divestment has proved extremely difficult, partly for technological reasons. In addition, the lower interest rate environment threatened the viability of the new bank.
In the light of these changed circumstances, on 17 February this year, the EC and HM Treasury announced a consultation on a plan, intended to promote competition in different ways, which can be implemented more easily and rapidly. The plan is not yet firm, but we have prudently provided for its cost to the bank in our accounts. We are grateful to the EC for its willingness to consider alternative means to the same end. If carried through, they will relieve the bank of a major operational burden which has constrained our ability to upgrade and enhance our IT systems in the interests of our customers.
But there are other issues from the past which remain to be resolved, and where it has been frustratingly difficult to make progress. By a distance the most financially significant relates to the bank’s participation in the US subprime mortgage market in the run up to the financial crisis, and especially in 2007. The Massachusetts Attorney General’s Office has been investigating the circumstances of some of the transactions for some years, and we have been in parallel discussions with the Federal Housing Finance Agency. Shareholders will be aware that a number of other banks, both US and European, have settled their claims over the past year, but RBS remains under investigation and as we have said, faces potential criminal and civil action. At this point we cannot say when the issues will be resolved, as the timing is out of our hands.
Board changes Frank Dangeard is the one new face around the boardroom table since last year. He joined the Board in May 2016 and brings a wealth of experience from a number of senior roles and directorships across a range of technology and financial services companies. This knowledge is vital as the bank adapts to increasing customer use of digital channels, and to the need for ever heightened awareness of the risk of cyber attacks.
Conclusion I am uncomfortably aware that the reconstruction and rehabilitation of RBS has taken longer than expected, and is still not complete. We can now see clearly the shape of a profitable bank which serves its customers and communities well. There is still a road to travel before we reach that destination, and of course the competitive environment for banks continues to evolve. I assure you that the Board and management are singlemindedly focused on delivering value for our shareholders, and are grateful for your patience as we proceed.
The bank we were I joined RBS because I could see that underneath all the troubles it faced, there was a strong bank, with excellent brands and great colleagues, doing outstanding things for customers each day. This underlying strength is still evident today.
While Q4 was down from the levels seen earlier this year, our Net Promoter Scores for Commercial and NatWest Personal in 2016 were the highest they have ever been.
We are the largest commercial bank in the UK, and are ranked joint number one by Net Promoter Score. Our ability to generate value here is shown by the scale of support we have provided to the economy in the past year, with almost £9 billion of new net commercial lending.
The bank we are becoming We still have more work to do. In part, that means finishing the restructuring of RBS, resolving the remaining legacy issues, and preparing the bank for ring-fencing. In the main, however, it is about adapting to the changing nature of the UK and Irish banking sectors, and investing to meet our customers’ evolving needs.
Hundreds of separate product databases will be replaced with a single, scalable platform, which will help reduce costs significantly and dramatically increase the speed at which we can deploy new capabilities for our customers. We are also introducing a single dealer platform, an electronic front door, through which we can provide FX and Rates solutions to our clients. These are the kind of changes that will lower costs while protecting revenue and delivering even better customer service at the same time.
Delivering our strategy The decision last summer by UK voters to leave the EU will have wide-reaching consequences. In light of this, we reviewed our plan to ensure that it remained valid in a changed macro and political environment. Following that review, I want to re-iterate our commitment to the strategy we have been pursuing since I became CEO – we firmly believe that our aspiration to reach No.1 for customer service, trust and advocacy will maximise value for our shareholders.
This year we have met all our operating financial targets, though the results of some of our customer NPS and employee engagement surveys show we still have work to do. After the EU referendum result, we promised an update on our targets. We are targeting an unadjusted 12% or greater return on tangible equity, and a below 50% cost to income ratio by 2020, one year later than envisaged when we first set out our plan in 2014.
Our service levels are improving and we believe we can meet our 2020 aspirational customer and colleague targets. Our focus on capital strength remains a cornerstone of our plan. In 2017, we will continue to reduce legacy RWAs, and we will target a CET1 ratio of at least 13%.
We aren’t alone in searching for efficiency gains and investing in digital capability, but the unique strength of this bank lies in the fact that we have a diverse business profile, with scale in all of our chosen markets. Investment in our market leading brands and better customer service will deliver steadier, higher quality earnings. Our focus on service rather than price has also shown that we can continue to grow in areas of strategic opportunity, such as mortgages, without compromising on risk. All of this will deliver a sustainable competitive advantage and a compelling investment case in the longer term.
� RBS reported an attributable loss of £6,955 million compared with £1,979 million in 2015. The loss for the year included; litigation and conduct costs of £5,868 million, restructuring costs of £2,106 million, payment of the final DAS dividend of £1,193 million, Capital Resolution disposal losses and impairments of £825 million and a £300 million deferred tax asset impairment.
� The net interest margin (NIM) of 2.18% for 2016 was 6 basis points higher than 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises.
� Adjusted cost income ratio for 2016 was 66% compared with 72% in 2015.
� Risk elements in lending (REIL) as a % of gross customer loans was 3.1%, 80 basis points lower than 31 December 2015 as RBS continues to de-risk its balance sheet.
� RBS reported an adjusted operating profit of £4,249 million across PBB, CPB and NatWest Markets, 4% higher than 2015 and an average of over £1 billion a quarter.
� Income across PBB and CPB increased by 2% in 2016 compared with 2015, adjusting for transfers (2), as increased lending volumes more than offset reduced margins. NatWest Markets adjusted income of £1,521 million increased by 16% compared with 2015, adjusting for transfers (2), driven by Rates and Currencies.
� PBB and CPB net loans and advances of £272.1 billion have increased by 10% in 2016, compared with a target of 4%, reflecting strong growth across both residential mortgages and commercial lending.
� Adjusted cost income ratio improved to 63% compared with 65% in 2015 as we continue to deliver efficiencies across PBB, CPB and NatWest Markets.
RBS continues to address its remaining legacy issues and drive forward its restructuring programme � Restructuring costs were £2,106 million for 2016, compared with £2,931 million in 2015, and included a £750 million provision in respect of the plan by the Commissioner responsible for EU competition policy to propose to the College of Commissioners to open proceedings to gather evidence on an alternative plan for RBS to meet its remaining State Aid obligations in respect of Williams 2016 performance summary 2016 performance summary
& Glyn. If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017. In addition, £706 million of the remaining restructuring costs related to Williams & Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
� Litigation and conduct costs of £5,868 million included; a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of residential mortgage-backed securities (RMBS), an additional charge in respect of the settlement with the National Credit Union Administration Board to resolve two outstanding RMBS lawsuits, a provision in respect of the UK 2008 rights issue shareholder litigation, additional PPI provisions, a provision in respect of the FCA review of RBS’s treatment of SMEs and a provision in Ulster Bank RoI in respect of an industry wide examination of tracker mortgages.
� A net strategic disposal gain of £164 million includes a £246 million gain on disposal of RBS’s stake in Visa Europe partially offset by losses associated with the sale of our Russian subsidiary and exit of Kazakhstan.
� Commercial Banking adjusted operating profit of £1,273 million was £111 million, or 8%, lower than 2015 primarily reflecting a £137 million increase in net impairment losses, largely driven by a single name charge in respect of the oil and gas portfolio. Adjusting for business transfers, total income increased by £21 million, or 1%, reflecting higher asset and deposit volumes partially offset by asset margin pressure. Net loans and advances increased by 10% in 2016 to £100.1 billion.
� RBS International adjusted operating profit of £195 million was £16 million, or 8%, lower than 2015 largely reflecting a £13 million, or 8%, increase in adjusted operating expenses, driven by a number of one-off charges, and a £10 million net impairment loss in 2016. Partially offsetting, total income increased by £7 million, or 2%, driven by increased asset volumes.
� NatWest Markets adjusted income of £1,521 million was 16% higher than 2015, adjusting for transfers, driven by Rates and Currencies, which benefited from sustained customer activity and favourable market conditions following the EU referendum and subsequent central bank actions. An adjusted operating profit of £201 million compared with a loss of £55 million in 2015.
Supporting sustainable growth Net 4% growth in PBB and CPB customer loans
Employee engagement Raise employee engagement to within two points of the Global Finance Services (GFS) norm
(2) NatWest Markets’ results include the following financials for businesses subsequently transferred to Commercial Banking: total income of £98 million for the year ended 2015.
(5) Cost saving target and progress 2016 calculated using operating expenses excluding restructuring costs £2,106 million (2015 – £2,931 million), litigation and conduct costs £5,868 (2015 – £3,568 million), write down of goodwill nil (2015 – £498 million), write down of other intangible assets of £117 million (2015 – £75 million), the operating costs of Williams and Glyn £393 million (2015 – £359 million) and the VAT recovery £227 million.
� CET1 ratio remains ahead of our 13.0% target at 13.4%, a 210 basis points reduction compared with Q4 2015 principally reflecting the attributable loss, c.300 basis points, partially offset by a £14.4 billion reduction in RWAs, c.100 basis points. During Q4 2016, CET1 ratio reduced by 160 basis points as the benefit of the reduction in RWAs was more than offset by the attributable loss.
� Leverage ratio reduced by 50 basis points during 2016 to 5.1% reflecting the attributable loss for the year partially offset by the AT1 issuance and reduction in leverage exposure.
� RBS issued £4.2 billion equivalent senior debt, which it expects to be eligible to meet its ‘Minimum Requirement for Own Funds and Eligible Liabilities’ (MREL), in line with our targeted £3-5 billion senior debt issuance for the year. €1.5 billion seven year 2.5% notes and $1.5 billion ten year 4.8% notes were issued in Q1 2016 and $2.65 billion seven year 3.875% notes were issued in Q3 2016.
� In addition, RBS successfully completed the cash tender of £2.3 billion of certain US dollar, sterling and euro senior debt securities. The tender offers were part of the ongoing transition to a holding company capital and term funding model in line with regulatory requirements and included securities that RBS considers noncompliant for MREL purposes. In total, during 2016, £10 billion has matured across our funding pools and we have redeemed £8.2 billion though calls and repurchase.
� As part of the 2016 Bank of England stress testing exercise RBS submitted a revised capital plan, incorporating further capital strengthening actions, which was accepted by the PRA Board.
� In June 2016, the triennial funding valuation of the Main scheme of The Royal Bank of Scotland Group Pension Fund was agreed which showed that as at 31 December 2015 the value of liabilities exceeded the value of assets by £5.8 billion. In March 2016, to mitigate this anticipated deficit, RBS made a cash payment of £4.2 billion.
� Risk elements in lending (REIL) of £10.3 billion were £1.8 billion lower than 31 December 2015 and represented 3.1% of gross customer loans, compared with 3.9% as at 31 December 2015 and 3.8% at 30 September 2016.
� RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending of £29.8 billion was 29% higher than 2015. Across 2016, our market share of new mortgages was 12%, supporting a growth in stock share to 8.8% at end 2016 from 8.2% at end 2015. As a result, total UK PBB net loans and advances increased by 10% compared with 2015. Commercial Banking net loans and advances have also grown by 10% over the course of 2016 reflecting increased borrowing across a number of sectors.
� RBS continues to support UK business growth through the launch of 6 new business accelerator hubs in 2016, bringing the total to 12. This included the opening of an Entrepreneurial Centre in our Edinburgh headquarters. In addition, NatWest launched a £1 billion lending fund to support small businesses.
� Nearly 80% of our commercial customers’ interaction with us is via digital channels, with 270,000 payments processed every day.
� In addition to our digital channels, RBS continues to provide multiple physical channels for serving customers, including access to a network of c.11,500 Post Office branches in the UK, c.1,000 An Post branches in the Republic of Ireland, and 41 mobile banking vans, alongside our existing network of 1,425 branches and 4,646 ATMs across PBB.
� Coutts won the best private bank in the UK for the fifth year running, best private bank for philanthropy services and best initiative of the year in client facing technology at the Global Private Banking Awards, and was highly commended for innovation for its ‘Coutts Concierge Online’.
Investing in our people � In 2016, RBS was one of only two banks to achieve formal recognition from the Chartered Banker Professional Standards Board for excellence in implementing, monitoring, reporting and commitment to the Foundation Standard for Professional Bankers.
� RBS has moved up to 13th place, from 32nd last year, in Stonewall’s annual Top 100 employers for lesbian, gay, bi and trans (LGBT) staff, the highest position it has achieved in the index to date.
Looking forward Capital reorganisation It is our intention to implement a capital reorganisation in 2017 in order to increase the distributable reserves of the parent company, RBSG plc, providing greater flexibility for future distributions and preference share redemptions. We intend to seek shareholder approval to reduce the share premium account by around £25 billion and to cancel the capital redemption reserve, around £5 billion. This will, subject to approval by shareholders and regulators, and confirmation by the Court of Session in Edinburgh, increase RBSG plc distributable reserves by around £30 billion.
Ring-fenced structure As previously announced, on 1 January 2017, RBS made a number of changes to its legal entity structure to support the move towards a ringfenced structure, with further changes planned prior to 1 January 2019. Our new brand strategy is designed to align with our business strategy and future ring-fenced structure. NatWest will be our main customer facing brand in England, Wales and Western Europe, and in Scotland, Royal Bank of Scotland will be our core brand. In addition, our Corporate & Institutional Banking business has been rebranded as NatWest Markets in readiness for our future ring-fenced structure. The ring-fenced banking group is expected to comprise of 80% of RBS risk-weighted assets.(1)
IFRS9 RBS continues to develop its processes to enable IFRS 9 Financial Instruments to be implemented on 1 January 2018; an estimate of the initial impact will be included in 2017 H1 interim reporting.
Williams & Glyn � On 17 February 2017, RBS announced that it had been informed by HM Treasury (“HMT”) that the Commissioner responsible for EU competition policy plans to propose to the College of Commissioners to open proceedings to gather evidence on an alternative plan for RBS to meet its remaining State Aid obligations. If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017 of Williams & Glyn. As previously disclosed, none of the proposals to acquire the business received by RBS can deliver a full separation and divestment before the 31 December 2017 deadline.
� The plan envisages that RBS will deliver the following revised package of remedies to promote competition in the market for banking services to small and medium enterprises (“SMEs”) in the UK: – A fund, administered by an independent body, that eligible challenger banks can access to increase their business banking capabilities; – Funding for eligible challenger banks to help them incentivise SMEs to switch their accounts from RBS paid in the form of “dowries” to eligible challenger banks; – RBS granting business customers of eligible challenger banks access to its branch network for cash and cheque handling, to support the measures above; and
– An independent fund to invest in fintech to support the business banking of the future.
� The 2016 Annual Results include a £750 million restructuring provision as a consequence of this proposal.
� Subject to providing fully for the remaining legacy issues, RMBS exposures in particular, RBS currently expects that 2017 will be its final year of substantive legacy clean up with significant one-off costs. Consequently, we anticipate that the bank will be profitable in 2018.
� We are targeting net loans and advances growth of 3% across PBB and CPB, including taking into account the impact of balance sheet reductions associated with the RWA reduction target. We anticipate that this growth will be largely within PBB as we expect to see moderate growth in some segments in CPB, whilst at the same time selectively reducing exposures with weak returns and continuing to actively manage certain legacy loan exposures.
� RBS plans to reduce adjusted operating expenses by a further £750 million in 2017, in addition to the £3.1 billion achieved across 2014 to 2016, and we expect that the adjusted cost:income ratio will improve across our combined PBB, CPB and NatWest Markets franchises in 2017 compared with 2016.
Saudi Hollandi Bank, £7.9 billion at 31 December 2016), we expect Capital Resolution RWAs to be in the range £15-£20 billion by the end of 2017, at which point we plan to wind up Capital Resolution and transfer the assets back into the rest of the bank.
�Excluding restructuring costs associated with the State Aid obligations relating to Williams & Glyn, we expect to incur restructuring costs of approximately £1 billion in 2017 and approximately a further £1 billion in aggregate during 2018 and 2019. Approximately 40% of this cost is expected to relate to the optimisation of our property portfolio.
�Further to the update on 17 February 2017 in respect of the remaining State Aid obligations regarding the business known as Williams & Glyn, and subject to the alternative plan being finalised and adopted by the European Commission (EC) and further discussions with the EC and HMT, RBS will assess the timing and manner in which it would reincorporate the business into the RBS franchises. This reintegration would likely create some additional restructuring charges during 2017 and 2018.
�We are targeting a CET1 ratio of at least 13% at the end of 2017. As part of the 2016 Bank of England stress testing exercise, RBS submitted a revised capital plan, incorporating further capital strengthening actions, which was accepted by the PRA Board.
� RBS issuance plans for 2017 focus on issuing £3-£5 billion MREL-compliant Senior holding company (RBSG) securities. We do not currently anticipate the need for either AT1 or Tier 2 issuances. In addition, and reflecting our strategic progress, we also target a progressive return to other funding markets to support our lending growth.
� We now target achieving our sub 50% cost:income ratio and 12% return on tangible equity targets in 2020, one year later than originally planned. Our confidence in achieving the targets is underpinned by our ability to protect income and drive cost reductions whilst managing credit and market risk and driving further capital efficiency.
� We expect to be able to grow volumes faster than market growth rates over the coming years in chosen segments across PBB and CPB.
�We are targeting a gross RWA reduction of approximately £20 billion across PBB, CPB and NatWest Markets by the end of 2018, with some offsetting volume growth. We expect that the reduction will be largely achieved through improvements in the quality of our risk models, exiting low return, non strategic and risk intensive asset pools, improved risk metrics in certain portfolios and benefits from data clean-up. We estimate that the income loss associated with this reduction will be in the range £250 million - £300 million on an annualised, pre tax, basis.
2017 targets As we works towards our long-term goals, we have set the following targets for 2017.
Notes: (1) Calculated using (loss)/profit for the period attributable to ordinary shareholders. (2) Tangible equity is equity attributable to ordinary shareholders less intangible assets.
(4) Lending growth target is after including the impact of balance sheet reductions associated with the RWA reduction target across PBB, CPB and NatWest Markets as outlined in the outlook statement.
Headline cost:income ratio <50% Reduce operating expenses by at least £750 million (3)
Leading market positions in every franchise Net 3% growth in total PBB and CPB loans to customers (4)
Employee engagement in upper quartile of Global Financial Services (GFS) norm
Our strategy We are building a better bank for our customers, and one that will deliver sustainable returns for shareholders. Our purpose is to serve customers well, and to do so, we are becoming a safer, simpler, customer-focused UK and Ireland bank.
Our plan Underpinning that ambition is our blueprint for success. This is our plan which drives our strategic decision making.
(2) Lending growth target is after including the impact of balance sheet reductions associated with the RWA reduction target across PBB, CPB and NatWest Markets as outlined in the outlook statement.
Commercial Banking supports our corporate clients by providing comprehensive commercial banking and financing services with sector expertise. This includes specialist finance such as invoice finance, asset finance and leasing.
Our Private Banking business offers high net worth clients private banking, wealth planning and investment management services.
RBS International (RBSI) continues to focus on supporting retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man, Gibraltar and Luxembourg.
NatWest Markets Focusing on our core markets in the UK and Western Europe, NatWest Markets provides financing and risk management to our UK and Western Europe corporate customers and global financial institutions.
Strength and sustainability We remain focused on building a strong and stable bank. We have continued to improve the fundamentals, by increasing our capital strength, building a robust liquidity position and balancing our loan to deposit ratio.
Franchises Our franchises bring together customers determined by the scale and complexity of their financial needs. This groups our business units that have the greatest economies of scale and synergies.
Services Services provide business-aligned technology, operations and property services across the bank.
Product and services Our products and services are designed to ensure that we can create sustainable value for both our shareholders and our customers. We believe that keeping our product range simple and accessible is crucial to our success.
NatWest serves over 14 million customers in England and Wales, supporting them with their banking needs, at all stages in their lives.
Exceptional service sits at the heart of Coutts, a business that has been built on understanding the needs of their private and commercial clients.
Child & Co is one of the oldest private banks in the UK, providing bespoke banking services from the legal heart of London.
RBS International is one of the world’s leading offshore banks, operating under three distinct brands – RBS International, NatWest and Isle of Man Bank.
“I’ve banked with NatWest all my life and when I needed a business account, Khaled, the local NatWest Women in Business specialist, was really supportive. Without his help and advice, I don’t think I’d be here today.”
Through our Chartered Banker accreditation programme in association with Everywoman, we’ve trained 400 Women in Business specialists across the bank. Their knowledge makes them ideally placed to help female business owners and budding entrepreneurs with their banking needs.
Natural 754 GWh of energy consumed and 9,965 tonnes of paper used in 2016.(4)
We make use of shareholder capital and other forms of financial capital, including £353.5 billion in customer deposits.(1)
Our business model Our purpose is to serve our customers well; we earn income by providing lending and deposit services to our customers. We incur operating expenses in providing these services, and accept risk; including credit risk, liquidity risk and currency risk. The operating profit generated by the bank is targeted to compensate shareholders for the cost of these risks. Building a safe and customer-focused bank is central to our ability to create value.
NatWest Markets puts its customers at the centre of the way it does business, making working with the bank easy and rewarding. The bank is organised around providing the right solution to meet its customers’ needs. It anticipates emerging issues and provides depth of insight and innovative ideas.
A capable, caring and motivated workforce of 79,099 (permanent headcount). In 2016, we recruited 254 graduates and 283 apprentices.
Offering lending, advice and services to individuals. Supporting customers with financial life events, including £33.7 billion of gross new mortgage lending (6) to help our customers buy homes.
Supporting local communities, including £2.5 million (8) of grants made by our Skills & Opportunities Fund to 125 organisations, who support people from disadvantaged communities start-up in business or get into employment.
Investing in our people and partners to develop a skilled workforce, including the delivery of leadership training to almost 16,000 leaders through a comprehensive ‘Determined to Lead’ programme.
Payment of £1.32 billion (10) in tax to the UK Government, which supports central government and local authority spending.
Notes: (1) Customer deposits excluding repurchase agreements and stock lending. (2) Number of new Foundation Accounts opened across NatWest Plc,
An Post branches in the Republic of Ireland. (4) For further details refer to page 35. (5) Data relates to reported attempted fraud cases and prevented third party losses in the UK (not including policy declines for debit cards). (6) Gross new mortgage lending across UK PBB, Ulster Bank RoI and
(10) Comprises £174 million corporate tax, £660 million irrecoverable VAT, £208 million bank levies and £279 million employer payroll taxes.
We have over 25 years experience in helping our customers to fund renewable energy and energy efficiency measures. According to InfraDeals, RBS has been the leading lender to the UK renewables sector by number of transactions over the past five years (2012-2016). During 2016 RBS took a lead role in financing the Beatrice Offshore Wind Farm, located 13.5km from the Caithness Coast.
Creating a Healthy Culture Building a healthy culture that embodies Our Values is one of our core priorities. Our Values guide the way we identify the right people to serve our customers well, and how we manage, engage and reward our colleagues. Our Values are at the heart of both Our Standards,the bank-wide behavioural framework and Our Code, the bankwide Code of Conduct.
Our values are integral to the way we behave and do business and we continue to reinforce them in our systems, our policies and processes, our communications and our training and leadership role modelling.
We monitor our progress against our goals and gather feedback from our colleagues. Through metrics and key performance indicators we are able to assess our progress and respond accordingly. We measure our progress through internal reporting and report on progress quarterly. We participate in external benchmarking excercises and fully support the Banking Standards approach.
Performance and Reward Our approach to performance management provides clarity for our colleagues about how their contribution links to our ambition and all our colleagues have goals set across a balanced scorecard of measures. In 2016 we refreshed our behavioural framework to create one framework for all our colleagues (Our Standards).
We strive to pay the right wage to colleagues and continue to exceed the Living Wage Foundation Benchmarks. We have removed sales incentives for front line colleagues so they can concentrate on great customer service. For 2017, we have simplified how we pay our clerical colleagues, consolidating bonuses, making pay fairer and easier to understand.
More information on our remuneration policies can be found on pages 87 to 111 of the 2016 Annual Report and Accounts.
In October, we launched Service Excellence training, our new customer service programme. The first module introduces our Core Service Behaviours and provides an awareness of the tools and techniques that will help us to deliver the best possible service, every time. Since October over 34,000 colleagues have completed this module.
Health and Wellbeing Wellbeing is a fundamental part of creating a great place to work. We offer a wide range of wellbeing initiatives and benefits to help maintain physical and mental health and support our colleagues if they become unwell.
In 2016, we focused on physical, mental health and social wellbeing. More than 50,000 colleagues took part in the Global Corporate Challenge (GCC), helping us to win the GCC World Most Active Organisation Gold Award.
To support our colleagues through change we continue to promote our Employee Assistance Programme, where we have continued to see a high utilisation rate. We have supported Time to Change (the UK’s biggest programme to challenge mental health stigma) since 2014 and launched a number of mindfulness support tools this year.
Inclusion Building a more inclusive RBS is essential for our customers and colleagues. Our inclusion policy applies to all our colleagues globally to make sure everyone feels included and valued, regardless of their background.
� We continue to work towards our goal of having at least 30% senior women in our top three leadership layers across each business by 2020 and to be fully gender balanced by 2030. We have a positive action approach in place, tailored by business, according to the specific challenges they face.
� During 2016, we continued to roll out unconscious bias learning to all our colleagues to create a solid platform for the wider inclusion agenda. Almost 30,000 colleagues participated in unconscious bias training in 2016.
� Our disability plan will support us becoming a disability smart organisation by 2018. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting disability checkpoints into our key processes and practices.
Historically we have reported by grade, which has enabled us to track trend year on year, however as the structure of our business has changed, we have evolved our approach to reflect our organisational (CEO) levels. This method more accurately describes our gender balance at leadership/pipeline levels and is reflective of how work gets done across the bank.
The table below lists all of the businesses for which we have an NPS for 2016. Year-on-year, NatWest Personal and Commercial Banking have improved, along with Ulster Bank Business and Commercial in Northern Ireland and Ulster Bank Business Direct in the Republic of
In recent years, RBS has launched a number of initiatives to make it simpler, fairer and easier for customers to do business with the bank.
Business Direct Ulster Bank (Republic of Ireland) (5) -21 n/a -2 -15
(2) Source: Coyne Research 12 month rolling data. Latest base sizes: Ulster Bank NI (375) Ulster Bank RoI (322) Question: “Please indicate to what extent you would belikely 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”.
(6) Source: Charterhouse Research Business Banking Survey (GB), based on interviews with businesses with annual turnover between £2 million and £1 billion. Latest base size: RBSG Great Britain (935). Weighted by region and turnover to be representative of businesses in Great Britain, 4 quarter rolling data.
Customer trust in NatWest in England & Wales has exceeded its 2016 target, improving from 48% at Q4 2015 to 55%
Customer service Delivering excellent customer service is essential for the banking sector to build trust. Maintaining and growing a loyal and satisfied customer base requires an appropriate digital and physical presence and clear distribution strategy.
Strength and stability Banks need to demonstrate their ability to survive financial stress arising from economic turmoil, and potential large scale fines and legal cases resulting from historic events. They must also demonstrate they have sufficient capital, liquidity and resilience as well as the ability to generate sufficient returns.
Health of the UK and global economy UK and global economic prospects are clouded by elevated uncertainty and lower for longer interest rates. This also impacts other risks including the scale of UK pensions liabilities. Banks have to cope with a historically low interest rate and higher event risk environment, with knock-on impacts to profitability and operations.
Political landscape The political landscape has seen major events such as the EU and Scottish referenda. These may produce uncertainty and knock-on effects to economic confidence and the regulatory environment.
Trust in the banking sector Trust in traditional large UK banks often lags behind smaller competitors and new market entrants. Rebuilding trust remains a key challenge.
UK infrastructure The UK has a significant need for new infrastructure, such as energy, transport and communications systems. Finance is one of the requirements for providing this, meaning banks have a key role.
Changing customer needs Customer needs are changing and different types of customer often have significantly different banking needs. In order to be attractive and useful, financial products and services need to fit in with customers’ lives and be flexible to differing levels of digital and financial understanding.
Climate and environment The transition to a low carbon and resource-efficient future is underway, affecting almost every sector of the economy. Local environmental considerations such as air quality, flooding and natural habitats also remain a major concern. The Paris Agreement provides a framework by which the world will seek to prevent dangerous climate change but further challenges remain.
Baseline year for total reported CO2e emissions (tonnes) (Scope 1*, 2** and 3***) 2014
Location-based CO2e emissions (Scope 1, 2 and Business Travel) (tonnes) 626,851 530,467 464,107 396,133 -37% -25%
Scope 2 Location-based CO2e emissions (tonnes) 442,510 388,918 333,676 275,319 -38% -29%
Scope 1 & Scope 2 Location-based CO2e emissions per FTE (tonnes) 4.91 4.33 4.01 3.38 -31% -22%
Notes: *Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles. **Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises. ***Scope 3: Emissions associated with business travel (air, rail and road) by RBS employees. **** Scope 3 emissions have been restated and rebaselined to include Taxis in India. ***** market-based emissions have been calculated using the GHG Protocol guidelines. RBS has purchased renewable electricity that meets the Good Quality Criteria since March 2016. Paper and business travel targets have a baseline year of 2011.
In 2016 we diverted 96% of waste from landfill in the UK, 70% globally. An increase in waste volume compared with 2015 is partly attributed to the destruction of outdated paper records which are recycled along with all paper waste. Removing paper hand towels from 800 branches and 22 offices has helped keep waste volume down. Sending food waste to anaerobic digestion and coffee waste for bio-fuel improves our recycling rate. Paper usage is linked to use of digital channels with approximately 55% of personal and business banking customers receiving online statements and a reduction in internal print of 20% in 2016.
Our approach to human rights and modern slavery RBS takes a proactive approach to upholding our commitment to respect human rights. This includes regular review of our policies and procedures. Our approach is centred on identifying and mitigating potential human rights risks across our business and our sphere of influence.
We are taking a human rights approach to understand the impacts of our operations and supply chain. We are also working to ensure our employees, suppliers and customers are aware of the risks and are able to address any issues when they arise.
These steps include: reviewing and updating our policy commitments; raising awareness among employees; targeted training to relevant employees, such as supply chain managers and relationship managers; incorporating requirements under the MSA into our supplier sourcing process; and embedding MSA commitments within our Environment, Social and Ethical (ESE) Risk Policy and processes. Modern slavery, forced labour and harmful child labour are prohibited within our reputational and ESE risk framework, and our Sustainable Procurement Code.
RBS’s international human rights’ commitments are set out in our Human Rights Position Statement. Our approach is underpinned by our values and standards. For employees this is via the RBS Code of Conduct – ‘Our Code’ which was updated in 2016. Our Code includes a clear commitment to respect human rights, and the Yes Check, a tool to guide good decision-making. Employees are consulted on key aspects of their working environment, and they can utilise a confidential helpline to discuss any matters of concern. We are an accredited Living Wage employer, and the process of extending the Living Wage to our suppliers continued through 2016.
For suppliers, our Sustainable Procurement Code sets out the international human rights commitments we expect of the companies that we work with, including labour standards and nondiscrimination.
Our commitment to the international progress of human rights includes being a signatory of the United Nations Global Compact since 2003, and we reaffirm our commitment to the ten principles of the Global Compact. We are committed to the implementation of the UN Guiding Principles on Business and Human Rights and participate with our peers in initiatives such as the Thun Group and United Nations Environment Programme Finance Initiative, to understand how these can best be applied. We have adopted the Equator Principles, since their inception in 2003, to manage social and environmental risks, including human rights, in project-related transactions.
An unqualified opinion was issued and is available on rbs.com, along with further details of the scope, respective responsibilities, work performed, limitations and conclusions.
In a healthy job market, the number of people in work increased by 350,000 and unemployment fell below 5% for the first time since 2005. With inflation of 1.6%, wage growth of 2.8% provided a modest boost to consumers’ spending power. Business profitability remained strong and business investment fell by around 2%. House price inflation moderated, but at 5% remained high.
Reflecting continued modest growth 1.6%, rising employment two million, and falling unemployment 4.7%, the US Federal Reserve raised the target range for its main interest rate by 0.25% to 0.50. 75% in December.
Litigation and conduct costs of£5,868 million included a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of residential mortgagebacked securities (RMBS), an additional charge in respect of the settlement with the National Credit Union Administration Board to resolve two outstanding RMBS lawsuits, a provision in respect of the UK 2008 rights issue shareholder litigation, additional PPI provisions, a provision in respect of the FCA review of RBS’s treatment of SMEs and a charge in Ulster Bank RoI in respect of an industry-wide examination of tracker mortgages.
Risks related to the competitive environment: RBS’s target markets are highly competitive, which poses challenges in terms of achieving some strategic objectives. Moreover, changes in technology, customer behaviour and business models in these markets have accelerated. RBS monitors the competitive environment and associated technological and customer developments as part of its strategy development and makes adjustments as appropriate.
An increase in obligations to support pension schemes: If economic growth stagnates and interest rates continue to remain low, the value of pension scheme assets may not be adequate to fund pension scheme liabilities. The actuarial deficit in RBS pension schemes – as determined by the most recent triennial valuations – has increased, requiring
RBS to increase its current and future cash contributions to the schemes. An acceleration of certain previouslycommitted pension contributions was made in Q1 2016 to reduce this risk. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the actuarial deficit may increase at subsequent valuations and is expected to be affected by ring-fencing.
More detail on these issues can be found in the Litigation, Investigations and Reviews and Risk Factors sections of the 2016 Annual Report and Accounts. To prevent future conduct from resulting in similar impacts, RBS continues to embed a strong and comprehensive risk and compliance culture.
Impact of cyber attacks: Cyber attacks are increasing in frequency and severity across the industry. RBS has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a large scale programme to continue to improve controls, enhance protections and educate staff on the threat is underway.
Inability to recruit or retain suitable staff: There is a risk that RBS lacks sufficient capability or capacity at a senior level to deliver – or to adapt to – change. RBS monitors people risk closely and has plans in place to support retention of key roles, with wider programmes supporting engagement and training for all staff.
We’re proud of the work MoneySense does in our communities. By helping young people understand things like budgeting, saving and online security we’re supporting them to become financially independent and confident money managers.
Personal & Business Banking Personal & Business Banking (PBB) serves individual and mass affluent customers together with small businesses (generally up to £2 million turnover). Our principal brands are NatWest in England and Wales, Royal Bank of Scotland in Scotland, and Ulster Bank RoI in the Republic of Ireland. The operations of Ulster Bank in Northern Ireland have been combined with the main UK businesses.
Performance overview � PBB recorded an operating profit of £1,401 million in 2016 compared with £1,292 million in 2015. Adjusted operating profit of £2,431 was in line with 2015 as a reduction in net impairment releases was offset by higher income associated with volume growth.
� Total income increased by £116 million, or 2%, to £5,866 million compared with 2015 as the benefit of asset volume growth has more than offset margin compression. Net interest margin declined by 13 basis points to 2.80% reflecting the impact of the overall portfolio mix being increasingly weighted towards secured lending and mortgage customers switching from standard variable rate (SVR) to lower rate products.
� Net loans and advances of £151.0 billion were £14.5 billion, or 11%, higher than in 2015 principally reflecting mortgage growth.
� Adjusted operating expenses of £3,462 million were in line with 2015.
We’re investing in our apps because increasing numbers of our customers want to be able to do their banking on the move. 4.2 million customers in the UK now use our apps.
� PBB continue to make the bank simpler and fairer for customers by simplifying processes, professional standards training and removing sales based incentives for frontline staff.
� We continued to make better use of our digital channels to make it simpler to serve our customers and easier for them to do business with us. We now have 4.2 million customers in the UK regularly using our mobile app, 19% higher than the end of 2015, and around 60% of our personal customers used a digital channel within the last 90 days. In 2016, we more than doubled the number of customers who purchased a product through our mobile channel compared with 2015. NatWest customers can now apply for personal loans, credit cards and overdrafts via the mobile app, facilitating approximately 8% of total applications. Advocacy amongst our active mobile customers increased significantly over 2016 with NatWest mobile NPS at an all time high of +52.
� In addition to our digital channels, PBB continues to provide multiple physical channels for serving customers, including access to a network of c.11,500 Post Office branches in the UK, c.1,000 An Post branches in the Republic of Ireland, and 41 mobile banking vans alongside our existing network of 1,425 branches and 4,646 ATMs.
� PBB continues to help people manage their money better through; MoneySense, First Saver accounts, offering impartial advice, text alerts to customers and in-house Citizens Advice Bureau advisors to help distressed customers.
� RBS enhanced its support for social enterprises in 2016. In May, RBS launched a new SE100 Social Business Club with communications agency Matter & Co. The partnership offers a package of business support plus a special programme of regional events. In addition, RBS also increased its support to social enterprises through its lending charity Social & Community Capital.
Our Holt’s Military Banking colleagues have specialist knowledge of the armed forces, which helps them to better understand, and serve, our armed forces customers. Many bank colleagues are also associated with the armed forces – whether they are reservists, veterans or family members – and need support too.
Defence Secretary Michael Fallon said: “This commitment is making a real difference to everyone who serves and their families – whether giving Reservists more time to train or supporting veterans or spouses.”
Performance overview � CPB recorded an operating profit of £1,043 million compared with £1,001 million in 2015. Adjusted operating profit of £1,617 million was £91 million lower than 2015 largely reflecting an increase in net impairment losses.
� Total income of £4,446 million was 1% higher than 2015, adjusting for transfers.
� Good growth was achieved in lending to UK businesses, with net loans and advances increasing by £11.3 billion, or 10%, to £121.1 billion, driven by increased borrowing across a number of sectors.
� Adjusted operating expenses, adjusting for transfers, increased by 3% reflecting an intangible asset write down and increased investment spend.
The Dover Western Docks Revival is the port’s biggest ever single investment. RBS acted as financial advisor in raising a £200 million package of funding and provided a £35 million revolving credit facility.
This funding will support improvements to the port, transform Dover’s waterfront and create up to 600 new jobs.
� Nearly 80% of our commercial customers’ interaction with us is via digital channels, with around 270,000 payments processed every day.
� Our customers continue to benefit from the synergies between Commercial and Private Banking, with 1,100 referrals between Commercial and Private Banking in 2016.
� RBS continues to support UK business growth through the launch of 6 new business accelerator hubs in 2016, bringing the total to 12. In addition, NatWest launched a £1 billion lending fund to support small businesses.
Our Structured Finance team helped Calvin Capital fund its £1 billion ‘Project Spark’, which will support the installation of smart meters in seven million homes up and down the country.
NatWest Markets NatWest Markets provides financing and risk management solutions and is built around three product lines: Rates, Currencies and Financing. NatWest Markets puts its customers at the centre of the way it does business.
Performance overview � An operating loss of £386 million compared with an operating loss of £837 million in 2015 and included litigation and conduct costs of £528 million. The adjusted operating profit was £201 million compared with a loss of £55 million in 2015. The increase was driven by lower adjusted operating expenses and increased income.
� Total income increased by £47 million to £1,574 million compared with 2015. Excluding the impact of transfers (2015 – £98 million), adjusted income increased by £212 million, or 16%, to £1,521 million.
� Operating expenses decreased from £2,369 million to £1,960 million in 2016, driven by lower restructuring costs and lower adjusted expenses. Excluding business transfers, adjusted expenses reduced by £116 million, or 8%, reflecting c.£250 million of cost reductions partially offset by higher investment spend.
Simple solutions After buying mobile phone operator EE, telecoms group BT wanted to convert the bank loan it used for the acquisition into a longer-dated format.
We acted as a lead bond arranger as well as a crosscurrency swap market hedge coordinator, and billing and delivery bank on the five-year bond. By focusing on excellent customer service and through our integrated one-team approach, we were able to find the best solution and to make the process as simple as possible.
This helped BT to return to the European bond market for the first time in nearly two years.
- No.1 for GBP Options, GBP Inflation and GBP 2Y – 10Y IRS (Source: Total Derivatives Dealer Rankings 2016)
- Best bank for FX post-trade services (FX Week Best Bank Awards 2016)
- No.1 for all European Issuers in the private placement market (Source: Dealogic Private Placement Review, Full Year 2016)
- NatWest Markets gained or held share in every Rates & FX product category for EMEA and the Americas (Source: Coalition Client Analytics Top 500 FI Wallets: G10 Foreign Exchange, G10 Rates)
Capital Resolution Capital Resolution was established to execute the sale or wind down of most of the global footprint, from 38 countries to 13, and trade finance and cash management outside the UK and Ireland. Additionally non-strategic markets, portfolio and banking assets identified are being sold or wound down.
Performance overview � RWAs decreased by £14.5 billion to £34.5 billion reflecting disposal activity partially offset by an increase due to the weakening of sterling.
� Capital Resolution made an operating loss of £4,870 million, compared with an operating loss of £3,687 million in 2015, including litigation and conduct costs of £3,413 million. The adjusted operating loss was £1,432 million compared with a loss of £412 million in 2015.
The full Governance report is on pages 57 to 111 of the 2016 Annual Report and Accounts.
Group Nominations and Governance Committee Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in future. Its remit also includes governance oversight.
The Board’s assessment is further informed by the application of regulatory standards of capital and liquidity adequacy and stress test thresholds under extreme conditions.
The bank’s base case plan is also tested in a series of extreme stress scenarios as part of internal and external stress testing. Results from the stress scenarios, including management’s response, are used as part of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). These are summarised in the Capital and Risk Management section of the 2016 Annual Report and Accounts on pages 179 and 188.
Assessments of the risks of the greatest concern are captured through the bank’s processes for continuously identifying and effectively managing the principal top and emerging risks, as detailed on page 39 of the Strategic report. These assessments provide a view on the impact of the top risks crystallising, both individually and in combination. These risks are outlined in the Risk Overview and further discussed in the Risk Factors, both contained in the 2016 Annual Report and Accounts on pages 164 to 169 and 432 and 463, respectively, and include political, legal, macroeconomic, regulatory, operational and execution risks.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board of Directors (the “Board” of RBSG (the “bank”)) have assessed the viability of the bank taking into account the current position of the bank, the Board’s assessment of the bank’s prospects, and the bank’s principal risks, as detailed in the Strategic report on pages 38 and 39.
Free to dream Through our partnership with Entrepreneurial Spark, we’re helping entrepreneurs realise their dreams of owning and running their own business. We provide free facilities; free Wi-Fi, access to the bank’s networks and suppliers, and free business advice. They don’t need to bank with us and we take no equity; we simply believe it’s right to support entrepreneurs and in turn help the economy grow.
External appointment(s): Independent director of Prudential plc and chair of the Risk Committee
Credit Suisse for 25 years where he was latterly co-Head of the EMEA Investment Banking Division and co-Head of the Global Financial Institutions
Sandy has had a variety of cultural and community roles, and was previously Chairman of Creative Scotland, Chairman of the Edinburgh
ASA. During his executive career he held various roles at Thomson S.A., including Chairman and
Executive Officer of France Telecom. Prior to that he was Chairman of SG Warburg France and a
Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.
External appointment(s): Non-executive director and member of the compensation and audit committees of Unisys Corporation
Non-executive director and chair of the audit committee of Ooma Inc
Experience: Previously, Morten had a 34 year financial services career and held various roles at
Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank,
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
Non-executive director and member of the audit and nomination committees of
Experience: Baroness Noakes is an experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and
Conservative front bench in various roles including as shadow treasury minister between 2003 and
May 2010. Previously held non-executive roles on the Court of the Bank of England, Hanson, ICI,
Barclays in 1986 where he undertook a variety of roles in the UK and overseas across business banking, wealth management and retail banking.
Aileen is a fellow of the Chartered Institute of Bankers in Scotland and a member of the European Corporate Governance
Transformation agenda were all key strategic challenges deliberated by the Board this year. The Board continues to monitor steps being taken to drive cultural change, including risk culture, and ensuring that the right culture and values are embedded throughout the organisation. The Board has considered the preparations for the implementation of ringfencing and this will be an area of continued focus in 2017.
On 7 March 2016, the PRA and FCA’s Senior Managers’ Regime came into effect which, alongside the PRA and FCA’s new
Certification and Conduct Rules regimes, is aimed at strengthening personal accountability and conduct within banking. The Senior Managers’ Regime required us to identify those senior executives and board members (referred to as
Senior Managers) who would be allocated specific regulatory responsibilities under the Senior Managers’ Regime. The Board has received training and ongoing support to ensure that those members who are Senior Managers are able to demonstrate their compliance with the relevant regulatory requirements.
I and my fellow directors are committed to observing high standards of corporate governance, integrity and professionalism.
I would like to take this opportunity to thank my fellow Directors for their continued commitment and dedication throughout 2016.
Sustainable Banking Committee with effect from 25 April 2016, and a member of the Group Performance and Remuneration
Committee with effect from 1 January 2017. Frank Dangeard was appointed as a non-executive director on 16 May 2016 and as a member of the Board Risk Committee on 4 August 2016.
RBS and delivery of sustainable shareholder value. The Board’s terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. The terms of reference are available at rbs.com>about.
Senior Managers’ Regime. The role profiles of relevant directors have been updated to reflect their regulatory responsibilities and they receive ongoing support to ensure they can demonstrate the reasonable steps they have taken to meet their responsibilities.
The Chairman’s key responsibilities are to: • provide strong and effective leadership to the Board; • ensure the Board is structured effectively, observes the highest standards of integrity and corporate governance, and sets the tone from the top in terms of culture and values; • build an effective and complementary Board with an appropriate balance of skills and personalities, and as
Governance Officer and Board Counsel, ensure that members of the Board receive accurate, timely and clear information to enable the Board to lead RBS, take sound decisions and monitor effectively the performance of executive management; • ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and
The Chief Executive’s key responsibilities are to: • exercise executive accountability for the RBS businesses delivering operational management and oversee the full range of activities of the customer businesses and functions; • develop, drive and deliver the strategy approved by the
The standard terms and conditions of appointment of nonexecutive directors are available on rbs.com or from RBS
GRG. A new US Risk Committee was established to comply with
US enhanced prudential standards and reports key matters discussed to the BRC. The first meeting took place in May 2016.
In addition to the nine scheduled meetings, 11 additional meetings and committees of the Board were held, including meetings to consider and approve financial statements. The
Notes: (1) Appointed to the Board on 16 May 2016. (2) Appointed to the Board on 26 January 2016.
In advance of each Board meeting, the directors are provided with comprehensive papers.
CEOs and the Board Committee Chairmen. An overview of the principal areas of Board focus during 2016 is set out below: Customer
with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of RBS’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area. The Board also benefits from directors with experience in other fields.
Committee and Board Risk Committee schedule (details of which can be found on pages 73 and 80) 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. Directors may also request individual in-depth briefings from time to time on areas of particular interest.
During 2016, the directors received updates on a range of subjects to enhance their knowledge, including: • investor and rating agencies views on RBS; • disruptive technologies; • Market Abuse Regulations (Inside Information and Persons
Discharging Management Responsibility aspects); • corporate investigations; • Senior Managers’ Regime; • The Conduct Rules; • PRA’s final Supervisory Statement on corporate governance and board responsibilities; • Ring-fencing; • board diversity; • The UK Government’s proposals for corporate governance reform; • Institute of Directors 2016 good governance report; • FRC’s report on corporate culture and the role of the board; and
All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Chief Governance Officer and Board Counsel. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.
It is anticipated that non-executive directors will allocate sufficient time to RBS to discharge their responsibilities effectively and will devote such time as is necessary to fulfil their role. Directors have been briefed on the limits on the number of other directorships that they can hold under the requirements of the fourth Capital Requirements Directive (CRD IV). Each director is required to advise RBS as early as possible and to seek the agreement of the Board 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. 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 time commitment currently required of our non-executive directors continues to be significant.
In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at the company’s
Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders.
The 2015 evaluation was conducted externally by a specialist board evaluation consultancy and a number of initiatives were implemented aimed at improving the overall performance and effectiveness of the Board. These included the creation of a
The Chief Governance Officer and Board Counsel undertook a formal and rigorous evaluation by: • preparing surveys that were completed by each director and holding interviews with each director; • discussing the key themes and recommendations for action with the Chairman; and
The 2016 performance evaluation concluded that the Board was strong and operated effectively and within its terms of reference.
• The Board works well together to create effective debate and challenge, and provides effective oversight and challenge to management.
• The Board’s composition has been strengthened during 2016 by the appointments of Mr Rogers and Mr Dangeard.
• The quality of information received by the Board continues to improve.
A summary of the key themes arising from the 2016 performance evaluation is set out below, together with an overview of the key actions proposed: Key themes
The balance of the Board agenda tends towards legacy and internal issues, which reflects the current climate. However, it is also important to ensure continued focus on forward-looking and strategic discussions.
This is largely due to the number of extraordinary items which require to be considered by the Board in the current environment.
• Ensuring Board time is appropriately allocated in response to evaluation feedback, to facilitate the effective use of nonexecutive director time.
• Further developing the Board’s role on culture, to include consideration of how Board time is spent on actions to drive cultural change.
In addition, a list of 2017 priorities for the Board was prepared following evaluation feedback and has been factored into the 2017 agenda planning process, as appropriate.
The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback provided as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance from the non-executive directors, executive directors and key external stakeholders and discussed it with the Chairman.
Nominations and Governance Committee I am pleased to present our report on the committee's activity during 2016.
The Committee has spent time considering the Group’s arrangements in respect of legal entity governance. This work is ongoing and is complementary to the Group’s preparations for the implementation of ring-fencing legislation.
Governance Committee meetings and individual attendance by directors at these meetings is shown in the table below.
As previously mentioned, Frank Dangeard joined the Board as a non-executive director on 16 May 2016 and was subsequently appointed to the Board Risk Committee on 4 August 2016. Frank has substantial Board level experience across a number of sectors, including technology, telecom and financial services. His change management and transformation experience are a real asset to the Board.
Board Oversight Committee should be discontinued, due to its remit having been superseded.
The Board currently meets the target of 25 per cent female board representation as set out in Lord Davies’ 2011 report on women on Boards. We acknowledge the updated targets published in the
Hampton Alexander and Parker reports and will continue to consider the implications for RBS during 2017.
The Board operates a boardroom diversity policy and a copy of the Board’s diversity statement is available on rbs.com>about us.
RBS understands the importance of diversity and, with regard to gender diversity, recognises the importance of women having greater representation at key decision making points in organisations. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board. However, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board.
The first priority of the GAC is to ensure the integrity and quality of RBS’s financial statements, including its quarterly, interim and full year results and its annual report and accounts. During 2016 the GAC spent considerable time reviewing and discussing
RBS’s financial results in detail, and challenging the material judgements proposed by management, before recommending them to the Board for approval.
In particular, during 2016 the GAC considered judgements relating to the recoverability of deferred tax assets, the carrying value of goodwill, provisions for litigation and conduct charges, loan impairment provisions and the fair value of financial instruments. Additionally, in the stand-alone parent company accounts, the GAC considered judgements relating to the carrying value of RBSG’s investment in subsidiaries.
There were also a number of developments during 2016 which required the GAC’s scrutiny from a disclosure perspective. The divestment of Williams & Glyn was an important issue during 2016 and the GAC was fully engaged on this issue in order to ensure that all developments and risks were transparently disclosed to the market. RBS also continues to work through a number of litigation and conduct issues which the GAC has carefully considered in order to ensure its disclosures remain accurate and up to date.
The GAC also considered significant developments in relation to financial reporting to ensure that RBS is well prepared for legal and regulatory changes which impact its financial results and disclosures. In particular, the GAC has overseen the preparatory work relating to the introduction of IFRS 9 which will take effect
RBS continues to work on the improvement of its control environment, which is key to making RBS a safer and more secure bank. However, the level of change RBS is undergoing presents significant challenges and RBS’s operational risk profile remains heightened. The GAC oversees the arrangements for
Audit detailing Internal Audit’s control ratings for RBS’s businesses and functions. The GAC also received bi-annual updates on the control environment certification process and the material operational risk events which are notified to RBS’s senior management, executives and non-executive directors.
During 2016 RBS made good progress in developing its operational risk management framework with the roll-out of bankwide risk appetite statements for its most material risks, this included financial reporting risk appetite which was considered by the GAC in August 2016. RBS has also developed end to end risk and control assessment for material processes during 2016, and the resulting actions to improve and enhance controls will be taken forward during 2017; this process will be overseen by the
I would like to take this opportunity to thank my fellow GAC
The Group Audit Committee (GAC) is comprised of the following four independent non-executive directors.
This cross committee membership helps facilitate effective governance across all finance, risk and compensation issues. It also helps to ensure that agendas are aligned and that overlap of responsibilities is avoided where possible.
is independent as defined in the SEC rules under the US
Transparency Rules. Full biographical details of GAC members are set out on pages 59 to 61.
GAC. The GAC also met privately with the external auditors and separately with Internal Audit management.
The GAC’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on: rbs.com.
This programme comprised two visits to Risk and Restructuring; Conduct and Regulatory Affairs and Internal Audit plus visits to: Personal & Business Banking; Commercial & Private Banking; NatWest Markets (formerly CIB); Capital Resolution, Services; and Finance.
The performance of the GAC is evaluated annually, and at least once every three years is facilitated by an external party.
GAC; and a management certification process which required members of the Executive Committee and other senior executives to provide confirmation following their review of the annual report and accounts that they considered them to be fair, balanced and understandable. This process was also undertaken in respect of the half year and quarterly results announcements. The External Auditor also considered the Board’s statement as part of its audit requirements.
Committee and are discussed further in the report of the Board Risk Committee. The GAC also considered RBS’s disclosure on internal control matters in conjunction with the related guidance from the Financial Reporting
The GAC received updates on whistleblowing activity and the performance of RBS’s whistleblowing service. It monitored the effectiveness of the whistleblowing framework and enquired as to any trends or themes. It also received updates on communications and awareness activity relating to whistleblowing and testing of the framework. The GAC was also advised of the actions RBS has taken to ensure compliance with the new FCA and
PRA whistleblowing regulations which applied to RBS from 7 September 2016. In March 2016 the GAC Chairman was appointed as Whistleblowing Champion for RBS, in line with the requirements outlined in the PRA and FCA
regulations; this role carries the responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firm’s whistleblowing arrangements.
The GAC received updates in relation to the delivery of the new general ledger, the introduction of which has been overseen by the GAC. The new ledger replaces previous legacy systems and supports new functionality such as discrete legal entity views and multi-currency accounting on a single ledger platform. The GAC was provided with updates on the recommended actions and plans to deliver the programme and the key risks and challenges it presented.
The GAC considered regular reports on most significant legal risks and developments affecting RBS, including relevant updates on ongoing major litigation and investigations, privacy and competition issues, legal risks within structural reform and recovery and resolution planning, as well as material emerging legal risks and/or changes in law or regulation and any recent provisions and settlements or recoveries. Key themes and observations from
Process-related errors were the main root cause of Major notifiable events escalated in 2016. Throughout 2016 senior management has actively promoted an open culture around raising GNEPs and regularly reinforced that these are integral in helping the bank’s employees learn from their mistakes. Under this process all Board directors were alerted to the most significant breaches.
Fraud The GAC reviewed management’s processes for identifying and responding to the risk of fraud.
Management to improve these processes. The GAC has also overseen RBS’s drive to continue to improve its
Abuse Regulation, and escalate these as required to the GAC and Board.
The GAC received quarterly reports and opinions from Internal Audit throughout 2016. These reports and opinions updated the GAC on the effectiveness of the governance, risk management and internal control framework, ongoing issues and the adequacy of remediation activity. The full year and half year reports included Internal
RBS. The GAC also considered Internal Audit’s budget and was satisfied that this was sufficient to allow Internal
To help safeguard the objectivity and independence of the external auditor, the GAC maintains a policy that sets out the circumstances in which the external auditor is permitted to supply audit and non-audit services. EY were appointed RBS’s external auditors in March 2016 but they have been subject to the policy since becoming independent from RBS in 2015 in the lead up to their appointment.
The GAC reviews the non-audit services policy at least annually to ensure it remains fit for purpose. During 2016 the GAC approved a number of amendments to the policy to ensure it met the requirements of the EU Audit
The GAC has also delegated authority to the Director of Finance to approve the provision of services by the external auditor to non-consolidated subsidiaries of RBS within an annual cap and to approve engagements with the external auditor where RBS has limited or no influence in the selection process. All such engagements are reported to the GAC each quarter.
Finance is required. Where the fee is above £5,000 but below £100,000 approval by the GAC Chairman is required. For engagements where the fee is expected to exceed £100,000 a competitive tender process must be held and approval of the full GAC is required. In addition all engagements must be approved by the Director of
Although RBS’s previous external auditors are no longer subject to independence requirements, they do have an ongoing role to consent to the release of its prior period audit opinions for US reporting purposes (statutory and comfort letter related). Given any requirement to perform additional audit work for historic periods would require previous external auditors to re-establish independence, a number of safeguards relating to their appointment remain in place under the policy, including the requirement for engagements with Deloitte to be approve by the
Ulster Bank. This second phase of work involves a review of Ulster Bank Ireland DAC’s 2001-2015 mortgage loan book in line with the Central Bank of Ireland ‘Framework for Conducting the Tracker Mortgage
Further details of the non-audit services that are prohibited and permitted under the policy can be found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the external auditor can be found in Note 5 on the consolidated accounts on page 325.
Committee will also continue to oversee the work being carried out under the bank’s significant change programmes and the impact of those initiatives on the risk profile of the bank. Other areas of focus of the Committee will include cyber risk, IT
The Board Risk Committee (BRC) assumes responsibility on behalf of the Board to provide oversight of current and potential risk exposures and future risk strategy, including the determination of risk appetite and tolerance, and to promote a culture of risk awareness within RBS.
The BRC’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the BRC and approved by the Board. These are available on RBS’s website: rbs.com.
Membership The Board Risk Committee comprises independent nonexecutive directors. Details of the skills and experience of each of the BRC members are set out in their biographies on pages 59 to
Notes: (1) Appointed to the committee on 4 August 2016. (2) Stood down from the committee on 4 August 2016.
Committee. This common membership across Committees helps to ensure effective governance across the committees.
BRC meetings are also attended by the RBS Chairman, relevant executives, including the Chief Executive, Chief Financial Officer,
The BRC also held in-depth sessions on risk reporting and the legal entity framework and associated capital requirements.
Performance Evaluation The annual review of the effectiveness of the Board and its senior
Committees, including the Board Risk Committee, was conducted internally in 2016. The BRC 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. However, certain recommendations for action were recognised including the need to: rebalance the agenda of the BRC to ensure sufficient focus on the most pertinent risks and reduce the length of meetings; place more reliance on executive committees to reduce pressure on the BRC’ agenda; and hold Executives to account for sign-posting key issues and escalating a unified position from all three lines of defence.
Key themes and actions arising from these general recommendations are set out in the Board report on page 67 and will be considered, and addressed as appropriate, at Board level.
Allocation of Board Risk Committee agenda time: Current risk profile and issues 26% Change agenda and large projects 10% Process, policies and risk appetite 15% Regulatory returns and stress testing 15% Accountability and remuneration 6% Risk, conduct and regulatory affairs focus sessions 13% Franchise and function focus sessions 15%
Reporting • Provided oversight of RBS’s risk profile relative to RBS’s strategy and risk appetite through the review of emerging risks and changes in RBS’s most significant portfolios and operations, as presented within the comprehensive Risk Management Report. In order to focus on changes in the RBS’s risk profile and to highlight trends, the BRC transitioned during the year to taking this report on a quarterly basis. A short form risk report was considered at all other meetings.
• Received reports from the Chief Risk Officer at each meeting highlighting external developments with the potential to affect RBS’s ability to meet its strategic objectives or continue its operations. This included updates on the global economic environment, including developments in the US, Europe and China and associated impacts on financial markets; regulatory proposals for potential future capital requirements; and preparation for, and the impact of, the EU referendum result.
• The General Counsel reported to the BRC at each meeting on current and emerging key legal developments and risk and significant litigation risks affecting RBS.
US Risk Committee • Received quarterly reports from the Chairman of the US Risk Committee on the key matters discussed at that forum. The US Risk Committee was established in May 2016 in response to US
regulatory requirements and comprises Morten Friis as Chairman, the Chairman of the Board Risk
• Kept the execution risk of the RBS-wide transformation programme under review, receiving regular updates from the transformation team on progress, including independent opinions from Risk, C&RA
• Considered progress against plan and reviewed interdependencies with other significant change programmes and key threats to delivery. In particular, the impact of the Williams & Glyn programme on transformation was monitored. Reviewed the impact of 2016 cost reductions and the 2017 budget restrictions on the programme.
• In Q1 2016, exercised oversight of the risks and challenges to the planned physical separation of assets in advance of the divestment of Williams & Glyn, confirming appropriate governance and assurance processes were in place for the programme.
• Received independent reports on progress from Risk and Internal Audit, supplemented by independent third party assurance on progress.
• Reviewed the risk appetite governance framework for 2016; provided feedback on the mechanism for managing and escalating breaches of risk appetite; and made suggestions in relation to simplification of the framework, before recommending this to the Board for approval.
• Reviewed work undertaken by RBS to understand its risk culture and approaches to its assessment against a clearly articulated target culture. Considered the proposed Integrated Risk Assessment approach which was designed to provide a single approach to the assessment of risk mindsets and behaviours and risk capabilities leading to a more effective and simplified approach to the assessment of risk culture, the three lines of defence and performance assessments.
Credit Quality Assurance, Market Quality Assurance, Control Assurance and a newly created Stress
• Received reports following challenge by the second line of defence and the Technical Executive Risk
Payments • Received progress reports in relation to the payments transformation programme, designed to remediate weaknesses in the payments infrastructure and provide a platform to support mandatory change.
• Requested updates on compliance with the Payment Card Industry Data Security Standards and Wire
Transfer Regulations (WTR) and considered an Internal Audit report on WTR compliance.
• The BRC received bi-annual reports on security and resilience and requested a separate update on cyber security. This included a report on the controls and defences in place, an update on improvements identified via RBS’s participation in CBEST (a cyber testing initiative led by the Bank of England), and a summary of the alignment of the RBS’s security policy with the ISO standards.
• Oversaw the Executive Credit Group (ECG) receiving a summary of the decisions made by the ECG in the period. Reviewed the most material credit decisions made in 2015 and examined trends in the market.
• In Q3 2016 the BRC reviewed both the scenarios assumptions for the 2016 Internal Liquidity Adequacy
Assessment Process (ILAAP) and the final ILAAP submission and, after due consideration, recommended them to the Board.
• Received an update on proposed regulatory changes to capital requirements and noted the areas most likely to be impacted and the likely implementation timescales.
• Held a detailed session on the internal finance and risk processes relating to subsidiary legal entities in
June 2016 and considered an update on the legal entity operating model later in the year, with a particular focus on specific enhancements being developed to improve the robustness of the legal entity control and risk framework. Supported management’s plans to create an RBS-wide programme to build legal entity capability and deliver a coordinated framework focusing on specific legal entity control and assurance requirements.
• Reviewed the assurance and governance in place to support representations to regulators.
• Reviewed attestations requiring Board level approval, including a US Volcker Rule attestation and representations relating to controls in place within the FX business.
• Assessed the performance of the Chief Risk Officer and Chief Conduct & Regulatory Affairs Officer.
Performance and Remuneration Committee on pages 87 to 111 includes further detail on how risk is taken into account in remuneration decisions. Key matters considered by the BRC included: • accountability recommendations in respect of significant material events; • the risk and control objectives of members and attendees of the RBS’s Executive Committee, with additional focus on underlying objectives for the Chief Risk Officer and the Chief Conduct & Regulatory
“Our brand strategy reflects our drive to build a customer focused bank which our people can be proud of and our customers trust”
The Sustainable Banking Committee (SBC) is primarily concerned with overseeing, supporting and challenging actions taken by management to promote RBS as a sustainable business, capable of generating long term value for its stakeholders.
Despite a challenging year for the Bank in general, we have made progress on our agenda to build a more sustainable bank.
We will earn trust by putting customers first, making RBS a great place to work, supporting our communities, and being mindful of environmental impacts.
Progress made in 2016 includes: • furthering the integration of sustainable banking into our core businesses and increasing transparency of this with the integration of our previously separate Sustainability Report into the main Annual Report; • encouraging the development of the sustainable banking strategy, meeting the needs of all our stakeholders whilst aligning with RBS’s overall strategy; • overseeing how management is embedding culture and
Index with our highest score to date (84) and achieved a leadership category listing in the Carbon Disclosure Project Index
We are also increasingly being recognised as an attractive employer. RBS was shortlisted at the 2016 National Diversity
Network Group of the Year in the European Diversity Awards. We recently came 13th in Stonewall’s top 100 employers, up from 32nd last year.
Over a number of years RBS has experienced a shift by setting out a clear and simple purpose and defining our Values. We have restructured our business, made progress on our service proposition but acknowledge there is more to do, introduced the
My thanks go to the SBC members and attendees for their contribution and support through another challenging year.
• what does sustainable banking mean for our culture, our behaviour, our people and our customers?
Following the sessions we identify opportunities for follow up and further engagement. In December, we welcomed back a number of our past guests to share the progress made and invited further challenge and alternative perspectives.
In particular, during 2016 the Committee focused on being more forward looking and strategic with its time, focusing on priorities of culture, people, customer, brand & communications and ESE
• receive updates on actions to drive the Board approved culture; • oversee progress on standards, competence and capability
• oversee the Employee Value Proposition and initiatives to ensure a diverse workforce which feels clear, capable and motivated; Customer
• oversee the brand strategy in moving to a bank of brands approach focusing on building equity in our customer brands; • oversee actions being taken by management to manage
Key features of the new remuneration policy for executive directors 89
Comparison of the current and new remuneration policy for executive directors 90
Service contracts and policy on payments for loss of office 99
continues to contribute to consultations aimed at strengthening governance and pay arrangements.
Executive and from 125% to 250% for the Chief Financial Officer.
It is also proposed that pro rating of long-term incentive awards will not apply for good leavers under the new policy. The
This aim is achieved through a combination of reduced award levels, performance factors that are designed to be more within the control of management and the removal of pro rating for good leavers. The circumstances that would be considered for good leaver treatment are set out in more detail in this report.
No change is proposed to the quantum of fixed pay, although fixed share allowances will be released over three, rather than five years to create a more even release of value across fixed and variable pay. A further development is that the pension allowance under the recruitment policy for new executive directors will be reduced from 35% to 25%, bringing the rate closer to that of the wider employee population.
The Committee recognises that RBS will only achieve its ambitions if all employees are engaged, motivated and supported by appropriate remuneration structures. Average salaries for our
The restructuring of the business has continued during 2016 but there is a strong business at the heart of RBS, capable of delivering sustainable returns for shareholders. The franchises have performed well with adjusted operating profits of £4,249 million for 2016. The Committee’s decisions aim to strike a balance in rewarding employees for good performance but recognising RBS is not yet in the position that it needs to be.
The Group bonus pool has fallen from £373 million in 2015 to £343 million in 2016, a reduction of 8%. Over 93% of this pool will be paid to those below the executive level. Where employees do receive a bonus, the average amounts remain relatively modest with 50% of employees receiving £2,000 or less and a further 23% receiving less than £5,000. The amount of any immediate cash bonuses continues to be limited to £2,000.
The report sets out further information and I hope shareholders will support the resolutions on remuneration arrangements at the forthcoming AGM. I am very grateful for the guidance and support provided by my fellow Committee members as well as those who assist the Committee over the year. I would also like to thank shareholders for their constructive input as we discussed how best to shape the remuneration policy for the years ahead.
The intent is a policy that aligns executives with shareholders predominantly through holding shares rather than formulaic and unpredictable performance conditions.
The maximum quantum will be reduced in line with a growing consensus on the need to restrain executive pay.
The intention is to create a construct that is more highly valued by executives, by assessing performance on factors considered to be more within the control of management and therefore providing greater certainty of outcomes.
Longer vesting and retention periods will apply to LTI awards, with the release of shares over an eight year period, helping to ensure decisions and outcomes reflect a truly long-term timeframe and are even further aligned with the experience of shareholders.
The Committee will review performance against factors (examples are set out below) relevant to RBS’s strategic objectives in each area, but will apply its judgement without reference to formulaic targets. Performance will be assessed taking into account circumstances applying over the period of assessment which may have affected the achievability of performance objectives. The majority of the performance variation will take place under a pre-grant test, with a pre-vest assessment representing a final check that, taking all circumstances into account, overall performance has been satisfactory. The achievement of reasonable or ‘target’
performance expectations will deliver full, or nearly full, payout of the LTI awards, reflecting the significantly reduced level of awards.
Each year, the performance factors will be determined in light of RBS’s priorities for that year. The first awards will not be made under the proposed LTI construct until early 2018 and further details will be disclosed in the 2017 annual remuneration report.
The aim is to reward sustained performance and, following the application of both the pre-grant and pre-vest assessment, executive directors should expect to receive 80% of the award on average over time provided that they deliver on the performance factors as determined by the Committee. Awards may be reduced, potentially down to zero, further to the application of either the pre-grant or prevest tests where there has been significant underperformance or risk management failings.
Supported by Risk & Control and Stakeholder Perception underpins to consider whether there are any other factors that would lead to a downwards adjustment
(for example if the achievements within the areas above were not considered sustainable, or were achieved through excessive risk taking)
Comparison of the current and new remuneration policy for executive directors
Salary £1,000,000 for the Chief Executive £800,000 for the Chief Financial Officer
No change to the fixed share allowance amount but shares will be released over a three year retention period, to create a more even release structure between fixed and variable pay.
Policy for new executive directors to be reduced to 25% of salary.
Underlying award of 400% of salary but with payout capped by regulatory maximum which for performance year 2016 equates to 287% of salary.
A three year performance period and the award vests in equal amounts in years four and five.
A six month retention period applies after vesting and the clawback period is seven years from the date of grant.
Pre-grant and pre-vest tests, to consider performance in the round, against what would reasonably have been expected in the areas of Finance, Risk & Operations, Customers and our People.
Extension of the deferral period with vesting taking place in equal amounts over years three to seven.
Shareholding requirement 250% of salary for the Chief Executive 125% of salary for the Chief Financial Officer
A period of five years is allowed in which to build up shareholdings to the required level. Any unvested share awards are excluded from the calculation.
400% of salary for the Chief Executive 250% of salary for the Chief Financial Officer.
Executive directors will continue to hold significant shareholdings after leaving and a post-employment shareholding requirement is therefore not considered necessary. Depending on leaver circumstances, it would take between three and eight years for an executive director to fully dispose of RBS shares due to the long vesting and retention periods.
Future LTI awards held by good leavers will not be subject to pro rating for time. Removal of pro rating is a key part of the construct in order to achieve the reduction in maximum opportunity while broadly maintaining expected value to executive directors over their typical tenure in role. It also helps to ensure that individuals retain an appropriate long-term focus right up to the point of departure, as well as providing greater shareholder alignment post employment.
While the maximum and expected value of pay from a single year’s remuneration is being reduced, the policy aims broadly to maintain the expected value of pay to executive directors over their typical tenure in role. The combination of reduced LTI award levels, offset by performance based on factors that the executive would reasonably be expected to achieve and the removal of pro rating for good leavers ensures this aim is achieved.
Timing of remuneration payments – based on the Chief Executive for the 2017 performance year 20% reduction in max. total pay 40% reduction in max. variable pay 17% reduction in max. total pay 30% reduction in max. variable pay
Salary Pension and benefits Fixed share allowance (FSA) LTI award £
During 2016, the Committee reviewed the current policy against a range of factors including the latest guidance from shareholders, regulatory requirements, the external environment and wider social considerations in determining executive pay.
• Keeping the current construct with changes limited to those required to comply with regulatory requirements.
• The pension allowance under the recruitment policy for new executive directors will be reduced from 35% to 25% of salary, with a corresponding increase to other elements of fixed pay.
• The clawback period is extended to ten years from grant if events are still under investigation after seven years.
The new policy takes into account the significant reduction in maximum opportunity and the regulatory restriction which has the effect of preventing the granting of LTI awards in the first year of employment. The Committee believes that removal of time pro rating for good leavers is fair in order to broadly maintain the expected value of pay over time and is appropriate in RBS’s particular circumstances.
RBS is unusual in having no annual bonus element of pay and bonus awards would typically not be subject to pro rating. Under an LTI only construct, removal of pro rating helps to ensure that executive directors are motivated and retain an appropriate longterm focus right up to the point of departure, and also provides greater shareholder alignment and continued accountability for decisions post employment. The departing good leaver retains exposure to RBS shares for up to eight years post leaving due to the long vesting and retention periods that continue to apply.
The removal of pro rating places additional focus on good leaver definitions and further details on the circumstances that will qualify for good leaver treatment are set out on page 99.
awards under the new policy will be made in early 2018.
• RBS has set a target for each Executive Committee member to have at least 30% women in senior roles (the top three leadership layers) by 2020.
• Gender targets are one of three People measures, together with engagement and leadership, which are considered when assessing performance for some of our senior leaders.
• Employees are motivated by good leadership and almost 16,000 employees undertook our ‘Determined to Lead’
• In Personal & Business Banking, pay for frontline roles is linked to supporting customers, rather than short-term incentive schemes, and this was extended to employees in
The Committee must ensure that good behaviours are encouraged and that conduct issues are accounted for.
• RBS continues to operate as a fully accredited living wage employer.
(reduction or cancellation of awards prior to payment) or clawback (recovering awards that have already been paid).
RBS, aligned with the restructuring that has taken place and the actions taken by the Committee.
• Pay levels reflect the progress made in 2016 and the bank that RBS is becoming, while ensuring our people are fairly and appropriately rewarded for the work they do.
A new Directors’ Remuneration Policy is being proposed to shareholders at the forthcoming Annual General Meeting (AGM). Subject to approval being received, the policy will be effective from the date of the 2017 AGM. The policy will apply for three years, until the AGM
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.
employees over the period of the policy. Other than in exceptional circumstances, the salary will not increase by more than 15% over the course of this policy.
To provide fixed pay that reflects the skills and experience required and responsibilities for the role. This will be delivered in shares subject to a retention period.
A set level of funding is provided and executive directors can select from a range of standard benefits including, but not limited to: • company car
may also put in place certain security arrangements for executive directors where that is deemed appropriate.
The maximum potential value of benefits will depend on the type of benefit and cost of its provision, which will vary according to market rates.
Variable pay is intended to incentivise the delivery of sustainable long-term performance, with rewards aligned to shareholders’ interests and adjusted for risk. The first awards under the new policy will be made in early 2018.
To support a culture where individuals are rewarded for the delivery of sustained, target performance, taking into account RBS’s strategic objectives.
Financial Officer, or such higher amount which represents such value rounded up to the nearest whole share.
The regulatory limit is currently higher than the level under the proposed new policy.
Customers and our People to determine whether the executive has achieved what would reasonably have been expected in the circumstances.
The Committee will consider relevant factors (e.g. CET1 ratio under the
• The performance factors for variable pay awards have been chosen to reward sustained performance and are complemented by increased long-term shareholding requirements. Any targets will be set in line with RBS’s strategic priorities.
• The fixed share allowance is part of fixed remuneration and is therefore not subject to any performance adjustment.
• Further details on the remuneration policy for all employees, including details on how malus and clawback can be applied, can be found on pages 109 to 110.
Executive directors are required to build up a shareholding equivalent to a percentage of salary. Unvested shares from LTI awards will count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place, at the end of the three year period.
Opportunity to elect to contribute from salary and acquire shares under any of the company’s all-employee share plans in operation from time to time, such as the RBS Sharesave and Buy As You Earn
Statutory limits imposed by HMRC or the applicable limits under the relevant plans.
In approving this policy, authority is given to honour any previous commitments or arrangements entered into with current or former directors, including share awards granted under the 2014 Employee
Notes: (1) The charts above are for illustration only and do not take into account any share price movement over the period. (2) The benefits figure includes standard benefit funding as outlined in the policy but excludes exceptional or business related items such as relocation allowances and travel assistance in connection with company business, the value of which will be disclosed in the total remuneration table each year. (3) Subject to the performance assessment, LTI awards will vest between years three to seven from award and be subject to a 12 month retention period post vesting. (4) The total maximum opportunity represents a 20% reduction for the Chief Executive and a 17% reduction for the Chief Financial Officer from that available under the current policy.
The level of remuneration reflects the responsibility and time commitment required and the level of fees paid to directors of comparable major UK companies.
No variable pay is provided so that the Chairman and non-executive directors can maintain appropriate independence, focus on long-term decision making and constructively challenge performance of the executive directors.
Following a review of the size of the Board against comparable companies and the relative time commitment for individual nonexecutive directors at RBS, it is proposed to increase the basic Board fee for nonexecutive directors in 2017 from the date of the AGM. This would be the first change in the basic Board fee since the policy was last approved in 2014. There is no change at this time to the Chairman’s composite fee.
Any future increases to fees will be considered against fees paid to directors of comparable companies and will not normally be greater than the average inflation rate over the period under review, taking into account that any change in responsibilities, role or time commitment may merit a larger increase.
The Chairman and non-executive directors are entitled to travel assistance in connection with company business including the use of a car and driver. RBS will meet the cost of any tax due on the benefit. On rare occasions where they are accompanied by their spouse / partner to business events, RBS may also meet the costs and any associated tax liability. Other benefits may be offered in line with market practice.
The value of the private medical cover provided to the Chairman and any other benefits will be in line with market rates and disclosed in the annual report on remuneration.
The Committee has certain discretionary powers under the company’s employee share plan rules. For example, the Committee has discretion to determine whether an individual would qualify as a good leaver on departure and also to decide that awards held by good leavers should vest earlier than the normal vesting date. Such discretions would only be used to ensure a fair outcome for the director and for shareholders, taking into account the circumstances of departure, the performance of the director and the need for an orderly transition. If discretion is applied in these circumstances then it will be disclosed.
Further discretions include the ability to: treat LTI awards in a range of ways in the event of a change of control, including the ability for
Pay is generally set at no more than is required to attract the most suitable candidate for the role; • The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the framework applicable to current directors, based on the elements of pay detailed in the policy table, recognising that some adjustment to quantum within that framework may be necessary to secure the preferred candidate; • The pension allowance for new executive directors will be reduced from 35% to 25% of salary, to bring the rate more in line with that of other employees, with a corresponding increase to other elements of fixed pay; • Consideration will be given to the skills and experience held by the individual being recruited, as well as the incumbent’s position; • In the event of an internal promotion, existing contractual commitments can continue to be honoured; • A buy-out policy exists to replace awards forfeited or payments foregone. The buy-out policy is in line with regulatory requirements, including the PRA rules that apply to buy-outs concluded on or after 1 January 2017; • The Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing. No sign-on awards or other payments will be offered on joining; • Any awards granted following the recruitment of a candidate may be made under the company’s employee share plans from time to time or under the relevant provisions in the
remuneration policy, around 24,000 of our employees are shareholders through the company’s employee share plans and have the ability to express their views through voting on the
An extensive consultation is undertaken every year with major shareholders, including UKFI and other stakeholders, on our proposed remuneration approach. The consultation process typically involves inviting our largest shareholders to attend either one-to-one meetings or roundtable discussions.
A range of topics are discussed including the remuneration policy for the year ahead and any significant changes. The process takes place in sufficient time for shareholders’ views to be considered prior to the Committee making any final decisions on remuneration and variable pay awards.
In late 2016, meetings took place involving a number of institutional shareholders and shareholder bodies representing a substantial portion of the non-UKFI shareholding. The reaction to the consultation process was positive and allowed the Committee to gain valuable insight into any areas of concern. Shareholders and other stakeholders indicated they were supportive of the new remuneration construct, highlighting the reduction in maximum potential variable pay and increased shareholding requirements as favourable features.
There are no pre-determined provisions for compensation on termination. There is discretion for RBS to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. 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.
reasons or the Committee exercises its discretion to prevent lapsing. LTI awards held by good leavers will continue to be subject to pro rating, to reflect the proportion of the performance period that has elapsed at the date of termination, unless the Committee exercises its discretion to determine otherwise. LTI awards held by good leavers will normally vest on the original vesting dates, subject to the performance conditions being met.
With respect to the ‘retirement’ category above, and recognising the typical length of tenure for executive director roles, retirement good leaver treatment for executive directors will typically be considered taking all circumstances into account. Factors the Committee would expect to be present before agreeing to good leaver treatment under retirement include: whether the individual has been in role for at least five years, or otherwise qualifies for retirement criteria under RBS’s policy, has demonstrated satisfactory performance, is not leaving to work in a capacity considered to be competing directly and materially with RBS, and is leaving at a time and in a manner that is agreed with the Board.
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 AGM.
Note: (1) Fixed share allowance will be payable broadly in arrears, currently in two instalments per year, and the shares will be released in equal tranches over a three year period. (2) The LTI that can be awarded in 2017 is limited to the level of fixed remuneration, taking into account the EBA discount rules for long-term deferral. The discount factor is a mechanism to take account of opportunity costs and inflation risk for the value being provided over time and can be applied if the deferral period is at least five years. By incorporating the current discount factor, LTI awards can be granted in March 2017 with a face value of approximately 121% of fixed remuneration. For example, the Chief Executive received fixed remuneration of £2,376,250 in 2016 (based on standard benefits only) which allows an LTI award to be made at £2,870,000. Performance measures and targets are set out on page 103.
(3) Amount shown relates to standard benefit funding. Executive directors are also entitled to benefits in line with the stated policy including travel assistance and the Chief Executive is entitled to a flight allowance as part of his relocation arrangements. The value of benefits will be disclosed each year in the total remuneration table.
The basic Board fee for non-executive directors has been unchanged since the current remuneration policy was approved by shareholders in 2014. During 2016, the Group’s Nominations and Governance Committee considered how Board fees for non-executive directors compared to peer companies. RBS has a smaller number of Board members than most, meaning that the relative time commitment for individual non-executive directors is likely to be greater. Non-executive directors have also absorbed a number of incremental responsibilities arising out of matters considered to be unique to RBS. It is proposed that the basic Board fee is increased from £72,500 to £80,000 per annum and, subject to shareholder approval being obtained, the change will take effect from the date of the AGM. A summary of the proposed annual fees payable is set out below.
Total remuneration paid to executive directors for 2016 (audited) Ross McEwan Ewen Stevenson
Notes: (1) The value of the fixed share allowance is based on 100% of salary and, as part of fixed remuneration, it is not subject to any performance conditions. It is delivered in shares and released over a retention period. (2) Includes standard benefit funding of £26,250 per annum with the remainder being travel assistance in connection with company business (£74,621) and relocation expenses
Shareholder Return (TSR) performance against a peer group of comparator banks.
The vesting within the Safe & Secure Bank and Customers & People categories has been qualified by Committee discretion, taking into account the margin by which targets have been missed or exceeded and any other relevant factors. The CET1 ratio target was exceeded and the cost:income ratio was deemed to have been substantially met, reflecting the significant progress from the 2013 base year of 69% and recognising the significant headwinds in the external environment since that time. This resulted in 100% and 75% vesting respectively for these elements and a combined vesting outcome under the Safe & Secure category of 88%.
On the Customers measure, whilst absolute performance on the customer position had improved over the period, the target on closing the gap had been missed and in the circumstances the Committee concluded performance was not sufficient in order to justify vesting. On the People measure, the Committee recognised that engagement scores had been impacted by a number of unforeseen factors and difficult decisions required by management during the year but again it was felt that the level of vesting for this element should be nil.
2014 LTI vesting amount included in the total remuneration table (audited)
Ross McEwan was granted an LTI award in March 2014. The performance conditions as set out on the previous page ended on 31
(2) Based on a RBS share price of £2.01, the average over the three month period from October to December 2016.
Details of the performance measures and the Committee’s rationale for selecting them are set out below.
Reason: Economic Profit, being a risk-adjusted financial measure, is consistent with regulatory requirements and provides a balance between measuring growth and the cost of capital employed in delivering that growth.
Measure: Economic Profit for RBS defined as profit after tax less preference share charges less tangible net asset value multiplied by the cost of equity.
Reason: The Safe & Secure Bank measures have a particular focus on risk reduction and the building of a safe, sustainable business.
Directors’ Remuneration Report, to the extent permitted by commercial sensitivity. Details of all targets and performance against these will be disclosed retrospectively after any vesting has been determined, in the annual report on remuneration for
Stephen Hester and Bruce Van Saun received shares in March 2016 on the vesting of the LTI award granted in 2013 as set out below.
(3) Based on a RBS share price of £2.303 and Citizens Financial Group, Inc. share price of $21.53 on the date of vesting.
Total remuneration paid to the Chairman and non-executive directors for 2016 (audited)
Nominations Committee, with an expanded remit and a reduced number of members. The RCR BOC and CIB BOC were stood down at the end of January and February 2016 respectively. The US steering group was stood down in 2016 and a new US Risk Committee was established to comply with US Enhanced Prudential Standards and the first meeting took place in May 2016. The total fees paid during 2016 are set out below.
Notes: (1) Howard Davies joined the Board on 14 July 2015 and became Chairman with effect from 1 September 2015. The Benefits column includes private medical cover. (2) In line with market practice, non-executive directors are reimbursed expenses incurred in connection with their attendance at Board meetings. To the extent that HMRC
determines that any amounts are taxable, RBS will settle the associated tax liability on behalf of the non-executive director. (3) Under the ‘Other’ column, Sandy Crombie received fees as the Senior Independent Director and Morten Friis received fees for his work on the US steering group until April 2016. The US Risk Committee was established with Morten Friis and Baroness Noakes receiving fees as Chairman and member of the Committee respectively. Robert Gillespie received fees for his role as an advisor to the NatWest Markets (formerly CIB) CEO and senior management.
The current shareholding requirement is to hold shares to the value of 250% of salary for the Chief Executive and 125% of salary for the
The graph below shows the performance of RBS over the past eight years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The
Chief Executive pay over same period 2009 2010 2011 2012 2013 (1) 2014 2015 2016
Notes: (1) 2013 remuneration includes Stephen Hester (SH) as CEO for the period to 30 September and Ross McEwan (RM) for the period from 1 October to 31 December 2013. (2) Figures have been amended where appropriate to reflect any restatement of prior year amounts, for example, to reflect the actual rather than estimated value of LTI vestings as part of the total remuneration figure and any revisions to the value of benefits provided.
The table below shows the percentage change in remuneration for the Chief Executive between 2015 and 2016 compared with the percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary, benefits and annual bonus. Salary Benefits Annual Bonus 2015 to 2016 change 2015 to 2016 change 2015 to 2016 change
Chief Executive excludes other benefits such as travel assistance in connection with company business and relocation benefits, the value of which is disclosed each year in the total remuneration table. In 2016, Ross McEwan also received a fixed share allowance as part of his fixed pay.
(2) The size of the percentage increase for fixed pay elements to 2016 is partly due to the one-off impact of removing incentives for certain frontline roles. The data represents full year salary costs of the UK based employee population, which covers the majority of RBS employees and is considered to be the most representative comparator group.
All members of the Committee are independent non-executive directors. The Committee held seven scheduled meetings in 2016 and a further two ad hoc meetings.
The Committee is responsible for: • approving the remuneration policy for all employees and reviewing the effectiveness of its implementation; • reviewing performance and making recommendations to the
• Stakeholder engagement and feedback on new remuneration policy for executive directors.
The Committee has considered the findings of the annual review of the effectiveness of the Committee which was conducted internally by the Chief Governance Officer and Board Counsel.
Potential areas were identified for future focus by the Committee including absolute pay levels, competitiveness and internal fairness.
Committee’s remuneration advisers on 14 September 2010 following a review of potential advisers, and the appointment was reconfirmed by the Committee in May 2016 after an annual review of the quality of the advice received and fees charged.
Governance Officer and Board Counsel; the Chief Risk Officer; and the Chief Conduct and Regulatory Affairs Officer. The fees paid to PwC for advising the Committee in relation to directors’
AGM held in May 2016 and the resolution at the AGM in June 2014 when the Directors’ Remuneration Policy was last approved.
Directors’ Remuneration Policy – 2014 AGM For Against Total votes cast Withheld
Executive 1 Executive 2 Executive 3 Executive 4 Executive 5 Executive 6 Executive 7 Executive 8
Long-term incentive awards (vested value) 175 175 412 261 167 — 250 —
A robust process is used to assess risk performance. A range of measures are considered, specifically the overall Risk Profile; Credit, Regulatory and Conduct Risk; Operational Risk; Enterprise Risk; and Market Risk. The steps we take to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the FCA.
Any variable pay awarded to Material Risk Takers from 1 January 2015 onwards is subject to clawback for seven years from the date of grant. For awards made in respect of the 2016 performance year onwards, this period has been extended to ten years for executive directors and other Senior Managers under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal seven-year clawback period. Malus and clawback can be applied to current and former employees.
During 2016 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including: reduction and forfeiture of unvested awards through malus; reduction of current year variable pay awards; dismissal with forfeiture of unvested awards; and suspension of awards pending further investigation.
In most jurisdictions, employee benefits or a cash equivalent are provided from a flexible benefits account.
The annual bonus pool is based on a balanced scorecard of measures including Customer, Financial, Risk and People measures. Allocation from the pool depends on performance of the franchise or function and the individual. Individual performance assessment is supported by a structured performance management framework.
For awards made in respect of the 2016 performance year, vesting will take place over a three to seven year period.
depending on the performance achieved. Awards are subject to malus and clawback provisions and a minimum six month retention period applies to MRTs post vesting.
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; 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 criteria are: individuals earning €500,000 or more in the previous year; individuals in the top 0.3% of earners in the previous year; individuals who earned more than the lowest paid identified staff per the qualitative criteria, subject to specific exceptions in the criteria.
Article 450 of the EU Capital Requirements Regulation in relation to 665 employees who have been identified as MRTs.
Aggregate remuneration expenditure in respect of 2016 performance was as follows: Franchises PBB, CPB and NatWest Markets (formerly CIB)
Variable remuneration consisted of a combination of annual bonus and long-term incentive awards, deferred over a three to seven year period in accordance with regulatory requirements.
Under the RBS bonus deferral structure, cash awards are limited to £2,000 per employee.
shall not exceed 100% of the fixed component. Based on the information disclosed above, the average ratio between fixed and variable remuneration for 2016 is approximately 1 to 0.6.
No severance payments were made during the financial year in excess of contractual payments, local policies, standards or statutory amounts, other than one payment of £219,500 made in commercial settlement of legal proceedings related to the early termination of a contract of employment.
Notes: (1) Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay (including actual value of LTI vesting in 2016) after the application of malus.
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 Remuneration Committee, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the
Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US.
The Board of Directors is responsible for the system of internal controls that is designed to maintain effective and efficient operations, compliant with applicable laws and regulations. The system of internal controls is designed to manage, or mitigate, risk to an acceptable residual level rather than eliminate it entirely. Systems of internal control can only provide reasonable and not absolute assurance against material misstatement, fraud or loss.
RBS operates a three lines of defence model, which provides a framework for responsibilities and accountabilities across the organisation. As part of its second line of defence role, the Risk function oversees and challenges the firm-wide management of risk and the efficacy of the related controls. In addition, the Risk function is responsible for developing material risk policies and strategic frameworks for the business to use.
Committee during 2016. For further information on their oversight of remediation of the most significant issues, please refer to the
While not being part of the bank’s system of Internal control, the bank’s independent auditors present to the Group Audit
RBS is required to comply with Section 404 of the US Sarbanes-
Commission as part of the 2016 Annual Report on Form 20-F.
RBS is not required to comply with all of the NYSE standards applicable to US domestic companies (the “NYSE Standards”)
Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards.
Standards require non-management directors to hold regular sessions without management present and that independent directors meet at least once a year. The Code requires the
Chairman’s performance and RBS complies with the requirements of the Code. (iii) The NYSE Standards require that the nominating/corporate governance committee of a listed company be composed entirely of independent directors.
The Chairman of the Board is also the Chairman of the Group
Nominations and Governance Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). The terms of reference of the
Group Nominations and Governance Committee differ in certain limited respects from the requirements set out in the NYSE
standards require that the compensation committee of a listed company be composed of entirely of independent directors.
Remuneration Committee are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group
The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief
Compliance Report, in the case of RBS, the Board, rather than the Group Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Chief Executive (v) The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines. Throughout the year ended 31 December 2016, RBS
has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require RBS
This Compliance report forms part of the Corporate governance report and the Report of the directors.
The directors present their report together with the audited accounts for the year ended 31 December 2016.
Details of the principal subsidiary undertakings of the company are shown in Note 7 on pages 396 and 397. A full list of subsidiary undertakings of the company is shown in Note 15 on
Limited (RBSI Holdings) will also be placed outside the ringfence, both as direct subsidiaries of RBSG.
Finance (Holdings) Limited from RBS plc and some smaller companies from other members of the Group.
(CIB), serves UK and Western Europe corporate customers, and global financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.
UK. During the periods presented W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not include certain portfolios that were intended to be divested such as the Scottish branch based activity of
The loss attributable to the ordinary shareholders of the Group for the year ended 31 December 2016 amounted to £6,955 million compared with a loss of £1,979 million for the year ended 31
June 2014. The first dividend payment on the DAS of £320 million was made in the third quarter of 2014. The balance of £1.2 billion was paid to HMT in March 2016, effecting the immediate retirement of the DAS which was redesignated as a single B share and subsequently cancelled, further normalising the capital structure of RBS and removing an obstacle toward the resumption of capital distributions.
RBS is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of RBS, including the products and services provided by each of its operating segments and the competitive markets in which they operate are contained in the
December 2016, including details of each operating segment, and RBS’s financial position as at that date is contained in the
To comply with the European Commission State Aid requirements RBS agreed a series of restructuring measures.
Services business (completed in 2010), the sale of substantially all of the RBS Sempra Commodities joint venture business
Insurance Group plc (completed in 2014), as well as the divestment of the RBS branch-based business in England and
Wales and the NatWest branches in Scotland, along with the direct SME customers across the UK (“UK branch-based businesses”).
During 2016 work has continued to explore means to achieve separation and divestment of the business previously described as Williams & Glyn. On 17 February 2017, RBS announced that it had been informed by HM Treasury (HMT) that the
Commissioner responsible for EU competition policy plans to propose to the College of Commissioners to open proceedings to gather evidence on an alternative plan for RBS to meet its remaining State Aid obligations. If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017 of the business previously described as Williams & Glyn.
Corsair, was redeemed on 21 October 2016 in accordance with the terms of the bond.
Our most recent survey, in which almost 63,000 colleagues took part, showed that we are changing the culture of RBS for the better. We remain above the global financial services norm for wellbeing, our inclusion scores continue to improve and there is a strong sense that managers act consistently with Our Values.
However, the choices we’ve had to make as we move RBS
forward have taken a toll on our colleagues. The scaling down of
RBS and the impact of dealing with some difficult legacy issues have contributed to a decline in the improvements in engagement, pride and leadership that we saw in 2015.
Our approach to performance management provides clarity for our colleagues about how their contribution links to our ambition.
It recognises behaviour that supports our values and holds individuals to account for behaviour and performance that does not. In 2016 we refreshed our behavioural framework to create one framework for all our colleagues.
We remain focused on our goals in relation to gender equality and have played an active role in the consultation process for upcoming Gender Pay Gap Reporting regulations. We intend to comply fully with the regulations and to make a public disclosure
In October 2016 we launched Service Excellence training, our new customer service programme. The first module introduces our Core Service Behaviours and provides an awareness of the tools and techniques that will help us to deliver the best possible service, every time. Service Excellence gives us a shared service language and the behaviours to help us achieve our ambition.
In 2016 we welcomed over 500 people across our Graduate and
We offer a wide range of health benefits and services to help maintain physical and mental health, and support our colleagues if they become unwell.
(GCC) - more than 50,000 colleagues took part helping us to win the GCC World Most Active Organisation Gold Award. We also continued to promote Lifeworks (RBS’s Employee Assistance
Building a more inclusive RBS is essential for our customers and colleagues. Our inclusion policy standard applies to all our colleagues globally.
We continue to work towards our goal of having at least 30%
Our disability plan will support us becoming a disability smart organisation by 2018. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting disability checkpoints into our key processes and practices.
Our LGBT agenda continues to deliver a better experience for our LGBT colleagues and customers. We have processes in place to support updating gender and title on customers’ banking records and to support colleagues undergoing gender transition.
(gender), our Gold ranking for Race for Opportunity (race); retaining a position in the Times Top 50 Employers for Women; becoming a Top Ten Global Employer in Stonewall’s Global
Forum and being rated a Top 10 Employer by Working Families.
Our purpose is to serve customers well. We will rebuild our reputation and earn our customers’ trust by putting customers first, making RBS a great place to work, supporting our communities and being mindful of environmental impacts. The
Sustainable Banking Committee’s role is to support the Board in overseeing, supporting and challenging actions being taken by management to run RBS as a sustainable business.
Disclosures relating to greenhouse gas emissions are included in the Strategic Report on page 35.
Having reviewed RBS’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS
RBS’s 2016 financial statements have been prepared in compliance with the principles set out in the Code for Financial
The EDTF established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012. All EDTF recommendations are reflected in the 2016
The company is committed to high standards of corporate governance. Details are given in the Corporate governance report on pages 57 to 111. The Corporate governance report and compliance report (pages 112 to 114) form part of this Report of the directors.
During 2016, the company allotted and issued a total of 142.2 million new ordinary shares of £1 each for the purposes of ensuring 2016 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 determined by reference to the average market prices during the sale periods set out below.
In the three years to 31 December 2016, the percentage increase in issued share capital due to non-pre-emptive issuance
At the Annual General Meeting in 2016 shareholders authorised the company to make market purchases of up to 1,166,108,903 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2017.
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
Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
The cumulative preference shares represent less than 0.008% of the total voting rights of the company, the remainder being represented by the ordinary shares.
The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company.
A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. All of the company’s employee share plans contain provisions relating to a change of control.
Nelson, Baroness Noakes and Ewen Stevenson all served throughout the year and to the date of signing of the financial statements.
“Companies Act”), Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Executive Committee, individuals authorised by the
Other than the matter disclosed on page 390, there have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
Shareholder complies with the independence provisions set out in the UK Listing Rules. The company has complied with the independence provisions in the relationship agreement and as far as the company is aware the independence and procurement provisions in the relationship agreement have been complied with in the period by the controlling shareholder.
The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company
As at 23 February 2017, there were no changes to the shareholdings shown in the table above.
Accounts under LR 9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR
9.8.4. (10) and (11) given in Additional Information on pages 430
At the Annual General Meeting in 2016, shareholders gave authority under Part 14 of the Companies Act, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2016, RBS made no political donations, nor incurred any political expenditure in the
Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
In the Report and Accounts, and unless specified otherwise, the term ‘company’ or ‘RBSG’ means The Royal Bank of Scotland
Group plc, ‘RBS’, ‘RBS Group’ or the ‘Group’ means the company and its subsidiaries, ‘the Royal Bank’ or ‘RBS plc’
RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. On 5 December 2016 the Corporate & Institutional Banking (CIB) business was re-branded as NatWest Markets (NWM) in readiness for the future ring-fenced structure. This included the renaming of the reportable operating segment as NatWest Markets. NatWest
During 2016 RBS’s activities were organised on a franchise basis as follows: Personal & Business Banking (PBB) comprises two reportable segments: UK Personal & Business Banking (UK PBB) and
Commercial & Private Banking (CPB) comprises three reportable segments: Commercial Banking, Private Banking and RBS
RBSI serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution customers in Luxembourg.
Capital Resolution was established to execute the sale or wind down of most of the global footprint, from 38 countries to 13, and trade finance and cash management outside the UK and Ireland.
Williams & Glyn (W&G) refers to the business formerly intended to be divested as a separate legal entity and comprises RBS
Balances in relation to Citizens and the international private banking business are included in Central items in the relevant periods.
Citizens RBS sold the final tranche of its interest in Citizens Financial
Citizens was classified as a disposal group at 31 December 2014 and presented as a discontinued operation until October 2015.
The final ring-fenced legal structure and the actions to be taken to achieve it, remain subject to, amongst other factors, additional regulatory, Board and other approvals as well as employee information and consultation procedures. All such actions and their respective timings may be subject to change, or additional actions may be required, including as a result of external and internal factors including further regulatory, corporate or other developments.
Summary consolidated income statement for the year ended 31 December 2016 £m £m £m
Analysis of results Net interest income 2016 2015 2014 £m £m £m
Gross yield on interest-earning assets of the banking business (3) 2.80 2.88 3.02
Net interest margin of the banking business (2,5,6) 2.18 2.12 2.13
The Royal Bank of Scotland plc base rate (average) 0.40 0.50 0.50
(6) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business. (7) For the purpose of calculating gross yields and interest spread, interest receivable and interest payable have both been decreased by £76 million in respect of negative interest relating to financial assets that attracted negative interest. (8) The analysis into UK and overseas has been compiled on the basis of location of office.
Net interest income of £8,708 million reduced by £59 million compared with 2015 principally driven by a £126 million reduction in Capital Resolution, in line with the planned shrinkage of the balance sheet.
NIM was 2.18% for 2016, 6 basis points higher than 2015 as the benefit associated with reductions in low yielding ‘non-core’
assets has been partially offset by modest asset margin pressure and mix impacts across PBB and CPB.
CPB increased by 11% on 2015, compared with a 3% decline for
RBSI NIM fell by 12 basis points to 1.36% reflecting asset and liability margin pressures, partially offset by mitigating pricing actions.
Structural hedges of £123 billion generated a benefit of £1.3 billion through net interest income for the year. Around 73% of these hedges are part of a five year rolling hedge programme
(with around 27% as part of a ten year hedge) that will progressively roll-off over the coming years.
Net interest income declined by £491 million, or 5% to £8,767 million compared with £9,258 million, driven principally by a 46%
IFRS was recorded, which represented a gain of £15 million in 2015 compared with a charge of £501 million in 2014.
A loss of £263 million was recognised on redemption of own debt, from a liability management exercise to repurchase certain
Other operating income reduced by £435 million, or 45%, to £528 million compared with £963 million, principally due to the reduced scale of NatWest Markets together with the run down of Capital
Resolution and the impact of disposal losses. A loss of £67 million on the disposal of available-for-sale securities in Treasury was recorded compared with a gain of £149 million in 2014.
Operating expenses of £16,194 million were £159 million, or 1%, lower than 2015 reflecting a £1,136 million, or 12%, reduction in adjusted operating expenses and a £825 million, or 28%, reduction in restructuring costs. In addition, 2015 included a £498 million write down of goodwill relating to Private Banking. Partially offsetting the above, litigation and conduct costs increased by
Adjusted operating expenses reduced by £1,136 million, or 12%, compared with 2015 to £8,220 million. Excluding expenses associated with Williams & Glyn, write down of intangibles and a £227 million VAT recovery, adjusted expenses reduced by £985(1) million, or 11%, in excess of our £800 million target. RBS
State Aid obligation regarding Williams & Glyn. In addition, £706 million of the remaining restructuring costs relate to Williams &
Litigation and conduct costs of £5,868 million included; a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of residential mortgage-backed securities (RMBS), £601 million of additional
review of RBS’s treatment of SMEs, an additional £169 million charge in respect of the settlement with the National Credit Union
Administration Board to resolve two outstanding RMBS lawsuits in the United States relating to residential mortgage backed securities, a £172 million provision in Ulster Bank RoI, principally in respect of remediation and programme costs associated with an industry wide examination of tracker mortgages, and a provision in respect of the UK 2008 rights issue shareholder litigation.
2015 compared with 2014 Total operating expenses of £16,353 million included significantly higher litigation and conduct costs of £3,568 million (2014 - £2,194 million), restructuring costs of £2,931 million (2014 - £1,154 million) and a goodwill impairment of £498 million attributed to Private Banking (2014 - £130 million in Capital
Staff costs were 9% lower totalling £4,896 million compared with £5,376 million, reflecting reduced headcount in NatWest Markets
Restructuring costs totalled £2,931 million compared with £1,154 million in 2014, as the transformation of the bank accelerated, particularly re-engineering the NatWest Markets business. This is in line with prior guidance for total restructuring costs of c.£5 billion from 2015 to 2019. NatWest Markets restructuring costs totalled £524 million, including software and property write downs. Capital Resolution restructuring costs were much higher totalling £1,307 million as the business continues its planned rundown. Williams & Glyn separation costs totalled £630 million.
Private Banking also recorded a £91 million asset write down related to software.
Note: (1) Operating expenses excluding restructuring costs £2,106 million (2015 - £2,931 million; 2014 - £1,154 million), litigation and conduct costs £5,868 million (2015 - £3,568 million; 2014 - £2,194 million), write down of goodwill nil (2015 - £498 million; 2014 - £130 million), write down of other intangible assets of £117 million (2015 - £75 million; 2014 - £146 million), the operating costs of Williams and Glyn £393 million (2015 - £359 million; 2014 - £330 million) and the VAT recovery £227 million in 2016.
A net impairment loss of £478 million, 15 basis points of gross customer loans, compared with a net impairment release of £727 million in 2015.
Capital Resolution reported a net impairment loss of £253 million in 2016 compared with a release of £725 million in 2015. The loss for the year included a charge of £424 million in respect of the shipping portfolio reflecting difficult conditions in some parts of the sector.
REIL reduced by £1,847 million during 2016 to £10,310 million reflecting Capital Resolution run-down and a portfolio sale in
at 31 December 2015. Provision coverage was 43% compared with 59% at 31 December 2015, with the reduction largely driven by Ulster Bank RoI and Capital Resolution.
The tax charge for the year ended 31 December 2015 reflects the impact of non-deductible goodwill and bank levy charges, conduct charges for which no tax relief has been recognised, the impact of UK tax rate changes on the carrying value of deferred tax balances and the release of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations.
‘Determined to Lead’, and a simple but powerful set of service excellence behaviours. Along with our continued investment in technology, this has helped us deliver strong growth in key areas whilst at the same time making our business simpler and more efficient.
Gross new business lending to small and medium-sized enterprises of £1.6 billion was up 43% compared with 2015, supported by our business loan application process reducing from 11 days to less than 24 hours on average. Our new business banking ‘Online Account Opening’ service allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour. RBS was awarded a Moneyfacts 5 star rating for Business
Personal unsecured loan gross new lending of £2.3 billion was up 24% versus 2015 supported by the launch of functionality for a customer to apply via the mobile app. Over 2016, the personal loan mobile application process has been significantly simplified making it even easier for our customers.
The Reward account continued to show positive momentum and now has 1,149,000 fee-paying customers compared with 202,000 at 31 December 2015. We have seen positive evidence of increased levels of engagement, with overall current account attrition levels falling by 7% in the year. This is particularly evident across our Private and Premium customer, with attrition 12% lower. We continue to embed the product across our population of valuable main bank customers.
We continued to make better use of our digital channels to make it simpler to serve our customers and easier for them to do business with us. We now have 4.2 million customers regularly using our mobile app, 19% higher than the end of 2015, and around 60% of our personal customers used a digital channel within the last 90 days. In 2016, we more than doubled the number of customers who purchased a product through our mobile channel compared with 2015. NatWest customers can now apply for personal loans, credit cards and overdrafts via the mobile app, facilitating approximately 8% of total applications.
Advocacy amongst our active mobile customers increased significantly over 2016 with NatWest mobile NPS at an all time high of +52.
The additional choice, flexibility and convenience provided to customers has, in turn, given our colleagues more time to focus on helping over 750,000 of our customers with a Financial Health
In addition to our digital channels UK PBB continues to provide multiple physical channels for serving customers, including access to a network of c.11,500 Post Office branches and 39 mobile banking vans alongside our existing network of 1,315 branches and 4,437 ATMs
Operating profit was £1,381 million, compared with £1,030 million in 2015, and included a £634 million litigation and conduct charge, principally in respect of additional PPI provisions.
Non-interest income reduced by £45 million, or 4%, principally reflecting lower credit card interchange fees, following regulatory changes introduced in 2015. In addition, cash back payments on the Reward account have impacted fee income, however, we have seen increased levels of customer engagement. Partially offsetting, we recognised a £19 million debt sale gain in 2016.
Adjusted operating expenses decreased by £33 million, or 1%, to £3,005 million. Direct staff costs were £111 million, or 14%, lower driven by an 18% reduction in headcount reflecting the continued movement to digital channels, exiting of business lines with returns below required levels and some centralisation of administrative activities. This was partially offset by additional investment costs of £102 million, including one-off intangible asset write-downs of £56 million in 2016, together with a £21 million increase in regulatory charges.
Net loans and advances of £132.1 billion increased by £12.3 billion, or 10%, compared with 2015 principally driven by mortgage growth of 12%. We continue to see positive momentum across business and personal unsecured lending, up by 6%, excluding transfers(1), and 7% respectively.
We continue to build on our strong mortgage market position with gross balances increasing by 12% to £117.1 billion compared with 3% growth for the overall mortgage market. Gross new lending in 2016 was £29.8 billion, representing a market share of approximately 12% compared with a stock share of approximately 8.8% at 31 December 2016, up from 8.2% in 2015.
Deposit balances performed strongly, increasing by £8.0 billion, or 6%, to £145.8 billion driven by 13% growth in personal current account balances. Personal savings balances increased 3%
RWAs decreased by £0.6 billion, or 2%, to £32.7 billion due to asset mix benefits and overall improved credit quality, largely reflecting the current benign credit conditions, partly offset by increased lending.
due to customer redress provisions, primarily relating to PPI, to £972 million, whilst higher restructuring costs were up £56 million, to £167 million. This was principally offset by a reduction in staff and other costs. Adjusted operating expenses totalled
Net impairment releases totalled £7 million, compared with a net charge of £154 million in 2014, driven by decreased charges from bad debt flows and benefit of provision releases and recoveries.
Customer deposit balances increased £5.2 billion to £137.8 billion due to growth in personal savings, current accounts and business banking. RWAs fell £3.3 billion to £33.3 billion due to the improved quality of portfolio.
Operating (loss)/profit before impairment releases (114) 168 226 (93) 121 183
Performance ratios Return on equity (3) 0.7% 10.6% 18.6% 0.7% 10.6% 18.6%
Net loans and advances to customers 22.1 22.7 23.3 18.9 16.7 18.1
Ulster Bank ROI continued to strengthen and reshape its balance sheet in 2016, whilst also delivering a number of positive changes to the customer proposition.
Performance in personal lending was also positive, growing 44%, while commercial lending increased 19% year on year.
Ulster Bank RoI continued to make progress on its cost saving programme supported by process automation and an acceleration of digital adoption balanced with investments to support business growth in opportunities.
Net interest income was stable year on year. Net interest margin increased by 5 basis points to 1.62%, compared with 2015, driven by a continued reduction in the cost of deposits and a reduced volume of low yielding liquid assets, partly offset by reduced income on free funds.
Non interest income decreased by €52 million, or 20%, principally reflecting a one-off €33 million gain realised on the closure of a foreign exchange exposure in 2015 and a €13 million interim adjustment to the pricing of FX transactions between Ulster Bank
RoI and NatWest Markets in 2016, pending completion of a detailed pricing review.
This was partially offset by a widening of the definition of loans which are considered to be impaired to include multiple forbearance arrangements and probationary mortgages. The provision coverage ratio reduced from 55% in 2015 to 34% in 2016 largely reflecting a further de-risking of the balance sheet following recent asset sales of largely non-performing loans.
RWAs reduced by €5.3 billion or 20% during 2016 to €21.1 billion driven by the sale of a portfolio of loans combined with adjustments to the mortgage modelling approach and an improvement in the macro economic environment. RWAs on the tracker mortgage portfolio reduced by €3.3 billion, or 31%, during
Ulster Bank RoI recorded an operating profit of €362 million compared with an operating profit of €606 million in 2014,with the decline primarily due to considerably lower net impairment releases in 2015. Adjusted operating profit was €365 million, a decrease of €233 million from 2014. Return on equity was 10.6%, down from 18.6% in 2014.
Net impairment releases reduced by €186 million to €194 million, and although at lower levels, continued to reflect the improving economic conditions and the benefits of proactive debt management.
The low yielding tracker mortgage portfolio balances reduced from €12.7 billion in 2014 to €11.8 billion, but continues to make up a significant part of the overall mortgage book.
RWAs reduced 6% from €28.0 billion to €26.4 billion due to improved credit metrics while RWA intensity reduced by 2 percentage points to 104%. RWAs on the tracker mortgage portfolio reduced from €12.0 billion in 2014 to €10.6 billion.
A continuing focus on end to end business performance aimed at improving customer service, trust and advocacy continues to show signs of success, reporting the largest, and only significant, year on year improvement in NPS amongst major UK banks.
Commercial Banking made progress towards improving customer experience by becoming easier and simpler to do business with through operational investment and process simplifications.
Continued enhancements within the business contributed to commercial lending growth in 2016.
We continued to support UK business growth through the launch of 6 new business accelerator hubs in 2016, bringing the total to 12. In addition, NatWest launched a £1 billion lending fund to support small businesses.
We launched several innovative products for our customers. Firstly, Nift a new digital solution that helps encourage increased engagement and understanding of contracts by customers. Secondly, we are supporting business through ESME, an automated lending platform that enables eligible SMEs to borrow up to £150k, with capability to process and fund within an hour.
Banking customers can now be automatically assessed against our business appetite.
Nearly 80% of our commercial customers’ interaction with us is via digital channels, with around 270,000 payments processed every day.
Excluding the impact of transfers(1), income increased by £21 million, or 1%, reflecting higher asset and deposit volumes. Net interest margin fell by 12 basis points to 1.76% driven by asset margin pressure in a competitive market and low rate environment.
Total income was £3,254 million, compared with £3,305 million in 2014. Net interest income was £1,997 million, a 1% increase from 2014, driven largely by higher asset and deposit volumes.
growth through an enhanced product proposition, including a range of execution only funds as well as the launch of an investment backed lending product and a market leading multicurrency debit card.
Private Banking Awards, and was highly commended for innovation for its ‘Coutts Concierge Online’.
Significant progress made to refocus the business and invest for growth with a reduced office footprint, creation of a Jersey booking platform to support on-going customer base following the sale of International Private Banking, and a centralised investment management proposition. This has contributed to a significant improvement in NPS during 2016, from +9 at the start of the year to +18.
Incorporated behavioural biometric technology to protect customers and reduce fraud, becoming the first UK bank to allow a client’s smart phone to act as the authentication device.
Launch of Coutts Concierge service, an industry first service which allows customers to manage restaurant bookings, purchase tickets, hotels and flights online, 24 hours a day.
Total income was £644 million, a reduction of £45 million from 2014. Net interest income was £436 million, down 4% primarily due to lower net interest margin. Non-interest income totalled £208 million, a decrease of 11% driven by lower investment and transactional income as the business adjusted pricing to reflect a more competitive market.
Notes: (1) Excluding restructuring costs. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12% of the monthly average of segmental RWAes, assuming 10% tax rate. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
RBS International (RBSI) continues to focus on supporting retail, commercial, corporate and financial institution customers in
Jersey, Guernsey, Isle of Man, Gibraltar and Luxembourg by leveraging a strong multi-currency banking platform combined with a comprehensive product suite: Continued to support personal and non-personal businesses with lending growth of 21% during 2016. Meeting customer needs, through improved end to end customer experience, has resulted in Funds sector growth of £0.7 billion and gross new mortgage lending of £0.5 billion.
Licencing remains on track as we received our banking licence to operate in Luxembourg, and the application to open a London branch has been submitted with technical build underway thus providing the foundations for growth while supporting the legal entity transfers as part of the Group’s ring-fencing programme.
We’ve made it easier for our customers to do their banking with us through investment in our multi-currency banking platform for
Adjusted operating expenses of £169 million were £13 million, or 8%, higher than 2015, reflecting a number of one-off charges.
RWAs were £9.5 billion, an increase of £1.2 billion compared with 2015 reflecting asset growth.
2015 compared with 2014 RBSI reported an operating profit of £207 million, £31 million lower than 2014, largely due to lower income from deposits which in turn drove return on equity down to 18.5%, from 24.2%.
Total income decreased 6% to £367 million, mainly due to reductions in net interest income, falling £20 million to £303 million, principally reflecting lower deposit margins and lower return on free funds partly offset by higher asset volumes. Noninterest income declined £4 million to £64 million as a result of a lower NatWest Markets revenue share and lower net lending fees.
Loans and advances to customers (gross, excluding reverse repos) 17.4 16.1 26.5
Loans and advances to banks (excluding reverse repos) (1) 3.3 5.7 2.5
Currencies and Financing. NatWest Markets puts its customers at the centre of the way it does business.
The NatWest Markets brand was introduced on 5 December 2016. The new brand is an important step towards our ambition to become #1 for customers.
NatWest Markets started a multi-year transformation in February 2015 and real progress is being made towards building a technology-led business with ongoing investment to improve efficiency and reduce costs while sustaining a well-controlled end-to-end model. The business’s progress against its transformation plan is already being recognised externally: • #1 for Gilts by Market Share – EMEA FIs (Source: Greenwich Associates, European Fixed Income 2016 -
• Best bank for FX post-trade services (FX Week Best Bank
• NatWest Markets gained or held share in every Rates & FX
An operating loss of £386 million compared with an operating loss of £837 million in 2015 and included litigation and conduct costs of £528 million. The adjusted operating profit was £201 million compared with a loss of £55 million in 2015. The increase was driven by lower adjusted operating expenses and increased income.
Excluding the impact of transfers(1), adjusted income increased by £212 million, or 16%, to £1,521 million. The increase was driven by Rates and Currencies, reflecting sustained customer activity throughout the year and favourable market conditions following the EU referendum and subsequent central bank actions.
Operating expenses decreased from £2,369 million to £1,960 million in 2016, driven by lower restructuring costs and lower adjusted expenses. Excluding business transfers(1), adjusted expenses reduced by £116 million, or 8%, reflecting c.£250 million of cost reductions partially offset by higher investment spend.
NatWest Markets are currently in the middle of a substantial investment programme which will equip the franchise for new regulatory requirements and provide opportunity to reduce back office support costs. We expect that NatWest Markets adjusted operating expenses will reduce by around £500 million over the next four years.
Funded assets decreased by £2.4 billion compared with 2015 to £100.9 billion, as the business continues to work through reshaping, despite the headwind from foreign exchange movements following the EU referendum and the substantial weakening of sterling.
NatWest Markets (formerly CIB) reported an operating loss of £837 million in 2015, compared with an operating loss of £710 million in 2014. This included restructuring costs of £524 million and litigation and conduct costs of £378 million. The adjusted operating loss was £55 million, compared with a profit of £233 million in 2014. The reduction was driven by lower income partially offset by the continued reduction in adjusted expenses, down £249 million, or 15%, to £1,467 million as the business continues to take costs out and move towards a more sustainable cost base.
Operating expenses fell by £281 million, or 11%, to £2,369 million in 2015. This includes £31 million relating to the transfer of portfolio businesses to Commercial Banking. Expenses remaining in NatWest Markets were £2,338 million. Adjusted operating expenses fell by £249 million or 15% to £1,467 million as the business reshaped, including a considerable reduction in headcount. Litigation and conduct costs fell by £454 million, or 55%, to £378 million, primarily relating to foreign exchange settlements in the US. This reduction was offset by an increase in restructuring costs of £422 million to £524 million, primarily relating to property and intangible asset write downs.
Capital Resolution continues to run down and dispose of nonstrategic assets and remove risk from the balance sheet and good progress has been made in 2016 with RWAs falling by £14.5 billion to £34.5 billion. Key highlights include: Completion of the sale of our Russia and Kazakhstan subsidiaries.
Funded assets decreased by £25.8 billion to £27.6 billion with the most significant reductions across Markets and GTS.
An operating loss of £4,870 million compared with a loss of £3,687 million in 2015 and included litigation and conduct costs of £3,413 million. The adjusted operating loss was £1,432 million compared with £412 million in 2015.
A net impairment loss of £253 million compared with a net impairment release of £725 million in 2015 and principally comprised charges relating to a number of shipping assets (£424 million).
to £1,539 million, principally reflecting a fall in headcount of approximately 1,100. Net impairment releases of £725 million were recorded driven by the disposal strategy and favourable market and economic conditions.
Notes: (1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity. (2) Excluding restructuring costs.
This view of W&G, as it stands as a reportable segment within
RBS Group, reflects the contribution made by W&G’s ongoing business to RBS, as distinct to the financial effects of any disposal transaction itself. These figures do not reflect the cost base, funding, liquidity and capital profile of W&G as a standalone bank and do not contain certain customer portfolios which are currently reported through other segments within RBS.
England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the
Following the announcement to discontinue the programme to create a cloned banking platform, a further restructuring programme commenced in Q4 2016 resulting in an additional reduction in headcount.
Net impairment losses remained low at £42 million compared with a loss of £15 million in 2015. The 2015 charge benefited from a number of releases, totalling £28 million, in the commercial business.
Customer deposits were broadly stable at £24.2 billion, a £1.2 billion increase in retail deposits was offset by a £1.1 billion reduction in commercial deposits.
Net impairment losses were £15 million, lower than the £55 million loss incurred in 2014 due to portfolio provision releases and reduced levels of defaults in portfolios reflecting a benign UK
Excluding the transfer of £0.3 billion of Commercial lending back to CPB, lending grew £0.7 billion, or 4%, driven by good growth in both mortgage lending and commercial loans. Customer deposits rose £2.1 billion, or 10%, to £24.1 billion with growth in both transactional accounts and savings accounts.
Central items not allocated represented a charge of £1,615 million in 2016, compared with a £903 million charge in 2015, and included restructuring costs of £1,482 million and litigation and conduct costs of £697 million. Restructuring costs included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding Williams &
Total assets of £798.7 billion as at 31 December 2016 were down £16.8 billion, 2%, compared with 31 December 2015. This was primarily driven by decreases in derivative assets, primarily reflecting Capital Resolution run-down, partly offset by loan growth in UK PBB and Commercial Banking.
Loans and advances to banks decreased by £0.5 billion, 2%, to £30.1 billion. Excluding reverse repurchase agreements and stock borrowing (‘reverse repos’), up £0.6 billion, 5%, to £12.9 billion, bank placings declined £1.1 billion, 6%, to £17.3 billion, mainly reflecting Capital Resolution run-down.
Debt securities were down £9.6 billion, 12%, to £72.5 billion, mainly due to reductions in held-for-trading government and financial institution securities in RBS Treasury.
Assets and liabilities of disposal groups, decreased £3.5 billion to £13 million and £3.0 billion to £15 million respectively, primarily reflecting the sale of the international private banking business.
Repurchase agreements and stock lending (‘repos’), decreased by £5.0 billion, 49%, to £5.2 billion, primarily driven by reductions in NatWest Markets.
Within this, repos were stable at £27.1 billion. Excluding repos, customer deposits were up £10.7 billion, 3%, to £353.9 billion, primarily reflecting growth in UK PBB, Commercial Banking, and
Debt securities in issue decreased £3.9 billion, 13%, to £27.2 billion reflecting a decrease in Capital Resolution and RBS
Owners’ equity decreased by £4.1 billion, 8%, to £49.4 billion, primarily driven by the £4.5 billion loss for the year.
Net cash outflows from financing activities of £940 million relate primarily to the redemption of subordinated liabilities of £3,047 million, redemption of preference shares of £1,214 million and interest paid on subordinated liabilities of £975 million partly offset by the proceeds of non-controlling interests issued of £2,537 million and the issue of Additional Tier 1 capital notes of
Total income - adjusted 5,290 573 3,415 657 374 1,521 (415) 837 120 12,372 Operating expenses - statutory (3,826) (669) (2,467) (549) (174) (1,960) (4,255) (450) (1,844) (16,194) Restructuring costs - direct 51 38 25 7 2 19 56 57 1,851 2,106 - indirect 136 2 83 30 3 93 22 — (369) — Litigation and conduct costs 634 172 423 1 — 528 3,413 — 697 5,868
Restructuring costs - direct 38 12 52 7 — 44 380 28 2,370 2,931 - indirect 129 3 17 66 4 480 927 — (1,626) — Litigation and conduct costs 972 (13) 51 12 — 378 2,105 — 63 3,568 Write down of goodwill — — — 498 — — — — — 498
Return on equity (1) 11.7% 10.6% 9.8% (27.7%) 18.5% (11.1%) nm nm nm (4.7%) Return on equity - adjusted (1,2) 26.2% 10.6% 10.9% 4.9% 18.9% (2.0%) nm nm nm 11.0% Cost income ratio 80% 78% 59% 171% 44% 155% nm 46% nm 127% Cost income ratio - adjusted (2) 58% 78% 55% 80% 43% 104% nm 43% nm 72%
Additional information Return on equity (1) 11.9% 18.6% 10.2% 4.1% 24.2% (7.9%) nm nm nm (8.2%) Return on equity - adjusted (1,2) 23.7% 18.4% 12.2% 9.1% 24.9% 1.3% nm nm nm (1.5%) Cost income ratio 76% 70% 59% 86% 41% 137% nm 39% nm 91% Cost income ratio - adjusted (2) 57% 71% 53% 73% 39% 88% nm 39% nm 69%
(2) Excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
Cash and balances at central banks 74,250 — 74,250 79,404 535 79,939
Loans and advances to banks 30,138 13 30,151 30,646 709 31,355
Loans and advances to customers 351,950 — 351,950 333,892 1,639 335,531 Debt securities 72,522 — 72,522 82,097 419 82,516 Equity shares 703 — 703 1,361 24 1,385 Settlement balances 5,526 — 5,526 4,116 — 4,116 Derivatives 246,981 — 246,981 262,514 30 262,544 Intangible assets 6,480 — 6,480 6,537 — 6,537 Property, plant and equipment 4,590 — 4,590 4,482 19 4,501 Deferred tax 1,803 — 1,803 2,631 — 2,631 Prepayments, accrued income and other assets 3,700 — 3,700 4,242 111 4,353 Assets of disposal groups 13 (13) — 3,486 (3,486) —
Bank deposits 33,317 — 33,317 28,030 32 28,062 Repurchase agreements and stock lending 5,239 — 5,239 10,266 — 10,266
Customer deposits 353,872 — 353,872 343,186 2,805 345,991 Repurchase agreements and stock lending 27,096 — 27,096 27,112 — 27,112
Balance Disposal disposal Balance Disposal disposal sheet groups groups sheet groups (1) groups £m £m £m £m £m £m
Gross loans and advances to customers 327,478 — 327,478 313,452 1,659 315,111 Customer loan impairment provisions (4,455) — (4,455) (7,118) (20) (7,138) Net loans and advances to customers (2) 323,023 — 323,023 306,334 1,639 307,973
Gross loans and advances to banks 17,278 13 17,291 18,362 642 19,004 Bank loan impairment provisions — — — (1) — (1) Net loans and advances to banks (2) 17,278 13 17,291 18,361 642 19,003
Customer REIL 10,310 — 10,310 12,136 20 12,156 Bank REIL — — — 1 — 1 REIL 10,310 — 10,310 12,137 20 12,157
Gross unrealised gains on debt securities 1,431 — 1,431 876 4 880 Gross unrealised losses on debt securities (198) — (198) (140) — (140)
Except as otherwise indicated by an asterisk (*), information in the Capital and risk management section (pages 163 to 276) is within the scope of the Independent auditor’s report. Unless otherwise indicated, disclosures in this section include disposal groups in relevant exposures and measures. Refer to page 162 for the Analysis of the balance sheet pre and post disposal groups.
RBS has measured and benchmarked its risk culture across all functions and businesses. It has set a risk culture target, making risk simply part of the way that employees work and think.
Such a culture must be built on strong risk capabilities, with robust risk practices and appropriate risk behaviours embedded across the organisation.
RBS’s target risk culture behaviours have been embedded into a statement of “Our Standards”, which are clearly aligned to the core values of “serving customers”, “working together”, “doing the right thing” and “thinking long term”. They act as a clear starting point for a strong and effective risk culture, as “Our Standards”
They are also consistent with the people management and remuneration processes and support a positive and strong risk culture through appropriate incentive structures.
The Group Performance and Remuneration Committee also considers risk performance and conduct when determining overall bonus pools. The Committee’s decisions on pay aim to reinforce the need for good behaviours by all employees.
Risk capacity defines the maximum level of risk RBS can assume before breaching constraints determined by regulatory capital and liquidity needs, the operational environment, and from a conduct perspective. Articulating risk capacity is helpful in determining where risk appetite should be set, ensuring there is a buffer between internal risk appetite and RBS’s ultimate capacity to absorb losses.
Risk appetite for our strategic risks is tested using a variety of stress tests.
Risk appetite is communicated across RBS through risk appetite statements. Each statement provides clarity on the scale and type of activities permitted, in a manner that is easily conveyed to staff. Risk appetite statements consist of qualitative statements of appetite supported by risk limits and triggers that operate as a defence against excessive risk-taking.
The effective communication of risk appetite is essential in embedding appropriate risk-taking into RBS’s culture.
Acts on all material and/or enterprise wide risk and control matters across the Group.
Executive Risk Forum subcommittees, and annual deep-dives on significant risk frameworks.
Risk committees review and monitor all risks, providing guidance, recommendations and decisions on risks affecting the businesses. Business provisions committees approve individual specific provisions up to defined levels.
Oversees the effective management of the current and future balance sheet in line with Board-approved strategy and risk appetite.
The risk governance structure in 2016 and the main purposes of each of the committees are illustrated below.
Information. Responsibilities include: • Owning, managing and supervising, within a defined risk appetite, the risks which exist in business areas and support functions.
• Ensuring appropriate controls are in place to mitigate risk, balancing control, customer service and competitive advantage.
Management and Conduct & Regulatory Affairs (refer below for further information), Legal, and the financial control aspects of
Director of Risk Assurance Credit quality assurance, market risk assurance, risk culture and model risk management
In 2016, the RBS Chief Risk Officer (CRO) led RBS Risk Management (since 1 January 2017 it has been known as Risk, Conduct & Restructuring). The CRO reported directly to the Chief Executive and had an indirect reporting line to the Chairman of the Board Risk Committee and had a right of access to the Committee’s chairman. RBS Risk Management was a function independent of the franchises, structured by risk discipline to facilitate the effective management of risk. Risk Management was organised into six functional areas: Credit Risk; Enterprise-Wide Risk; Risk Infrastructure; Operational Risk; Risk Assurance; and Market Risk. There were also directors of risk for each of the franchises and for Services. The directors of risk functions were responsible for RBS-wide risk appetite and standards within their respective disciplines and reported to the CRO. CROs were in place for certain jurisdictions and legal entities to meet local regulatory and governance requirements. The key CRO roles reported directly to the RBS CRO. Risk committees in the customer businesses and key functional risk committees oversaw risk exposures arising from management and business activities and focused on ensuring that they were adequately monitored and controlled.
Risk Assurance is an independent second line of defence function which provides assurance to both internal and external stakeholders including the Board, senior management, risk functions, franchises, Internal Audit and regulators. Teams within
Franchise Risk Assurance: These teams focus on credit risk and market risk assurance in the customer-facing franchises. The teams undertake qualitative reviews which assess various aspects of risk as appropriate, including: the quality of risk portfolios; the accuracy of the Basel Input and related probability of default/loss given default classification, the quality of risk management practices, policy compliance and adherence to risk appetite. This includes testing the bank’s credit portfolios and market risk exposures to assist in early identification of emerging risks, as well as undertaking targeted reviews to examine specific concerns raised either by these teams or by their stakeholders.
Controls Assurance: This team tests the adequacy and effectiveness of key controls owned and operated by the Risk function (with a particular focus on credit risk and market risk controls). The team’s remit includes controls within the scope of
Model Risk Governance is responsible for setting policy and providing a governance framework for all of RBS’s modelling processes. It is also responsible for defining and monitoring risk appetite in conjunction with model owners and model users, monitoring the model risk profile and reporting on the model population as well as escalating issues to senior management, through the Model Risk Forum, and the respective franchise and function risk committees.
Model Risk Management (MRM) performs independent model validation for material models where necessary. It works with individual businesses and functions to set appropriate model standards and monitor adherence to these, ensure that models are developed and implemented appropriately and that their operational environment is fit for purpose.
MRM performs reviews of relevant risk and pricing models in two instances: (i) for new models or amendments to existing models and (ii) as part of its ongoing programme to assess the performance of these models.
A new model is typically introduced when an existing model is deemed no longer fit for purpose or when exposure to a new product requires a new approach to ensure that risks are appropriately quantified. Amendments are usually made when a weakness is identified during use of a model or following analysis either by the model developers or by MRM.
Based on the review and findings from MRM, the bank’s model or risk committees with appropriate delegated authority consider whether a model can be approved for use and whether any conditions need to be imposed, including those relating to the remediation of material issues raised through the review process.
MRM also monitors the performance of RBS’s portfolio of models to ensure that they appropriately capture underlying business rationale.
For specific information relating to market risk models and pricing models, refer to Model Validation in the Market Risk section.
Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stresstesting purposes also play a key role in ensuring the bank holds sufficient capital, even in stressed market scenarios.
Management actions to normalise the ownership structure and improve the long-term resilience of RBS also contributed to the reduction. These actions included the final
• The leverage ratio reduced by 50 basis points to 5.1% at 31
December 2016, primarily reflecting CET1 capital erosion, partially offset by additional AT1 issuance.
• The UK leverage ratio reflecting the post EU referendum measures announced by the Bank of England in Q3 2016 was estimated at 5.6%.
• RBS successfully completed a cash tender for £2.3 billion senior debt securities, including those considered non-
trigger in 2019 is 2.9%, based on our target CET1 ratio of 13.0% and MDA requirement of 10.1%. This remains subject to change.
England (BoE). Technically, the Group would have to fail or be likely to fail the BoE’s threshold conditions for authorisation in a way that justifies the withdrawal of that authorisation and it must not be reasonably likely that action will be taken that will result in the Group no longer failing or likely to fail.
This determination of capital sufficiency is made on the basis of prevailing actual positions and exposures.
This determination of capital sufficiency is made on the basis of positions, balance and exposures under a forward looking view of the balance sheet in line with the Group’s planning horizons and parameters. This analysis examines both base and stress views.
Regulation may be set by rule-making bodies in the UK and at
European level. Individual legal entities within the Group may be subject to requirements set by local regulators in jurisdictions outside of the UK and the EU.
This framework includes risk appetite in relation to the amount and quality of the Group’s capital on both a risk and balance sheet measurement basis. This includes setting management buffers on top of regulatory minima such that the Group operates with sufficient cushioning against those minimum regulatory requirements.
• AT1 capital. This is the second form of loss absorbing capital and must be capable of absorbing losses on a going concern basis. These instruments are either written down or converted into CET1 capital when a pre-specified CET1 ratio is reached. Coupons on AT1 issuances are discretionary and may be cancelled at the discretion of the issuer at any time. AT1 capital may not be called, redeemed or repurchased for five years from issuance.
• Tier 2 capital. Tier 2 capital is the Group’s supplementary capital and provides loss absorption on a gone concern basis. Tier 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt securities with a minimum maturity of five years.
Details of regulatory minimal applicable to the Group are set out below
In order for liabilities to be eligible for MREL a number of conditions must be met including the BoE being able to apply its stabilisation powers to them, including the use of bail-in provisions.
The Group has to hold a minimum amount and quality of capital to satisfy capital adequacy ratio regulatory requirements.
RWAs. The percentage comprises of system-wide requirements that apply to all banks and a component where the percentage is specific to the Group. This is summarised as follows: Type Name Description
These minimum requirements are explained in more detail on the next page. These ratios apply in full from 1 January 2019. Before this date there are transitional rules in place that mean that the minimum capital requirements that the Group has to comply with are lower although the Group, in line with other UK banks, has been reporting on a fully implemented basis since 2014.
The Group is subject to system wide minimum capital adequacy ratio requirements that apply to all banks under applicable regulation. There are two broad categories of capital requirements: Category Description
Represents the minimum amount of capital that all banks must hold at all times
Capital buffers Comprises of: • Capital required to be held by banks that may be used in periods of stress
• PRA buffer: covers risks that the Group may become exposed to across a forward-looking planning horizon (for example due to changes to the economic environment).
The leverage exposure is broadly aligned to the accounting value of the Group’s on and off-balance sheet exposures but subject to certain adjustments for trading positions, repurchase agreements and off balance sheet exposures.
Notes: (1) The countercyclical capital buffer (CCyB) applied to UK designated assets is set by the Financial Policy Committee (FPC). The UK CCyB may be set between 0% and 2.5% and is linked to the state of the UK economy. On 5 July 2016, the FPC reduced the UK CCyB from 0.5% to 0%. Foreign exposures may be subject to different CCyBs depending on the CCyB rate set in the jurisdiction of the foreign exposure. The net CCyB for the Group is non-zero but rounds to 0.00%.
(3) The Group will be subject to a systemic risk buffer (SRB) of between 0% and 3%. The SRB will apply from 1 January 2019 and will apply at the ring-fenced bank sub-group level rather than at the consolidated group level. The SRB may require the Group to hold a minimum amount of capital at the consolidated group level beyond the levels set out in the table above.
(5) The Group may be subject to a PRA buffer requirement as set by the PRA. The PRA buffer consists of two components: - A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could range between 10% and 40%. - A buffer relating to the results of the BoE concurrent stress testing results.
The table below summarises the minimum ratios of capital to leverage exposure under the PRA UK leverage framework that the Group must meet. In November 2016, the European Commission published a proposal for the adoption of a legally binding 3% of Tier 1 capital minimum leverage ratio with consideration of a leverage buffer ratio for G-SIBs once a final international agreement had been reached.
Different minimum requirements may apply to individual legal entities or sub-groups.
The Group examines its going concern capital requirements on a forward looking basis through assessing the resilience of capital adequacy and leverage ratios under hypothetical future states of the world, including as part of its annual budgeting process.
A range of future states of the world are examined. In particular: • The Group will assess capital requirements based on a forecast of the Group’s future business performance under its expectations of economic and market conditions over the forecast period
The examination of capital requirements under adverse economic and market conditions is assessed through stress testing. Stress testing is used to quantify, evaluate and understand the potential impact of the financial strength of the Group, including its capital position, given specified changes to risk factors. This is described in more detail on page 178.
The results of stress tests are not only used widely across the
In 2016, the Group participated in two regulatory stress tests set by the EBA and BoE. These scenarios are hypothetical in nature and do not represent a forecast of the Group’s future business or profitability. The results of the regulatory stress tests are carefully assessed by the Group and form part of the wider risk management of the Group.
• Designed to evaluate impact over three years of an adverse macro financial scenario that examines four systemic risks identified by the