Directors The names and brief biographical details of the current directors are shown on pages 62 and 63.
Howard Davies, Frank Dangeard, Alison Davis, Morten Friis, Patrick Flynn, Robert Gillespie, Katie Murray, Baroness Noakes, Mike Rogers, Mark Seligman and Lena Wilson all served throughout the year and to the date of signing of the financial statements.
Directors’ interests The interests of the directors in the shares of the company at 31 December 2019 are shown on page 98. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2019 to 13 February 2020.
As at 13 February 2020, there were no changes to the shareholdings shown in the table above.
Listing Rule 9.8.4 The information to be disclosed in the Annual Report and 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 page 296.
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 191 to 201.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of RBS Group and the company. In preparing those accounts, the directors are required to:  select suitable accounting policies and then apply them consistently;  make judgements and estimates that are reasonable and prudent; and
 state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
Howard Davies Alison Rose-Slade Katie Murray Chairman Group Chief Executive Officer Group Chief Financial Officer
Risk management framework Introduction RBS operates an integrated risk management framework, which is centred around the embedding of a strong risk culture. The framework ensures the tools and capability are in place to facilitate risk management and decision-making across the organisation.
Risk appetite, supported by a robust set of principles, policies and practices, defines the levels of tolerance for a variety of risks and provides a structured approach to risk-taking within agreed boundaries.
All RBS colleagues share ownership of the way risk is managed, working together to make sure business activities and policies are consistent with risk appetite.
The methodology for setting, governing and embedding risk appetite is being further enhanced with the aim of revising current risk appetite processes and increasing alignment with strategic planning and external threat assessments.
 Respect risk management and the part it plays in daily work.
 Escalate risks and issues early; taking action to mitigate risks and learning from mistakes and near-misses.
If conduct falls short of RBS’s required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned. The RBS remuneration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any employee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appropriate, the relevant authority would be notified.
Oversees the effective management of the current and future balance sheet in line with
RBSG plc Board Reviews and approves the risk appetite framework and qualitative statements of risk appetite for all key risks. Monitors performance against risk appetite. Considers any material risks and approves, as appropriate, recommended actions escalated by the Group Board Risk Committee.
Committee (1) Responsible for managing strategic, financial, capital, risk and operational issues.
Monitors the implementation of culture change and considers executive succession planning.
Oversees the management of risks that could affect RBS’s businesses and operations. Monitors risk profile, risk appetite and the promotion of a risk-aware culture across RBS. Reviews current and potential risk exposures, future risk strategy and the effectiveness of the risk management framework.
Chief Risk Officers. These services are managed, as appropriate, through service level agreements. (3) The NWH Risk function is independent of the NWH customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk,
Leads the RBS Risk function. Defines and delivers the risk, conduct, compliance and financial crime strategies. Defines overall risk service provision requirements to enable delivery of RBS strategies, including policies, governance, frameworks, oversight and challenge, risk culture and risk reporting. Contributes to the development of strategy, transformation and culture as a member of the Group Executive Committee.
Leads the NWH Risk function. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Delivers risk services across RBS governed by appropriate service level agreements. Contributes to NWH strategy as a member of the NWH
 The first line of defence is empowered to take risks within the constraints of the risk management framework and policies as well as the risk appetite statements and measures set by the Board.
Strategic risks are those that threaten the safety and soundness of RBS and its ability to achieve strategic objectives. For certain strategic risks, 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 helps determine 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 framework The risk appetite framework bolsters effective risk management by promoting sound risk-taking through a structured approach, within agreed boundaries. It also ensures emerging risks and risk-taking activities that would be out of appetite are identified, assessed, escalated and addressed in a timely manner.
RBS’s risk profile is frequently reviewed and monitored and management focus is concentrated on all strategic risks, material risks and emerging risk issues. Risk profile relative to risk appetite is reported regularly to the Board and senior management.
Risk controls and limits Risk controls and their associated limits are an integral part of the risk appetite approach and a key part of embedding risk appetite in day-today risk management decisions. A clear tolerance for material risk types is set in alignment with business activities.
RBS policies directly support the qualitative aspects of risk appetite. They ensure that appropriate controls are set and monitored.
Risk management framework continued Risk treatment and mitigation Risk treatment and mitigation is an important aspect of ensuring that risk profile remains within risk appetite. Risk mitigation strategies are discussed and agreed with the businesses.
When evaluating possible strategies, costs and benefits, residual risks (risks that are retained) and secondary risks (those that are due to risk mitigation actions) are considered. Monitoring and review processes are in place to evaluate results. Early identification, and effective management of, changes in legislation and regulation are critical to the successful mitigation of compliance and conduct risk. The effects of all changes are managed to ensure the timely achievement of compliance. Those changes assessed as having a high or mediumhigh impact are managed more closely. Significant and emerging risks that could affect future results and performance are reviewed and monitored. Action is taken to mitigate potential risks as and when required. Further in-depth analysis, including the stress testing of exposures relative to the risk, is also carried out.
Risk testing and monitoring Targeted credit risk, compliance & conduct risk and financial crime risk activities are subject to testing and monitoring to confirm to both internal and external stakeholders – including the Board, senior management, the customer-facing businesses, Internal Audit and RBS’s regulators – that risk owned policies and procedures are being correctly implemented and operating adequately and effectively. Selected key controls are also reviewed. Thematic reviews and deep dives are also carried out where appropriate.
Anti-money laundering, sanctions, and anti-bribery and corruption processes and controls are also tested and monitored. This helps provide an independent understanding of the financial crime control environment, whether or not controls are adequate and effective and whether financial crime risk is appropriately identified, managed and mitigated.
Stress testing is used widely across RBS. The diagram below summarises areas of focus: Stress testing usage within
 Risk identification – by better understanding the risks that could potentially affect RBS’s financial strength and capital position.
 Risk mitigation – by identifying actions to mitigate risks, or those that could be taken, in the event of adverse changes to the business or economic environment. Key risk mitigating actions are documented in RBS’s recovery plan.
Capital sufficiency – going concern forward-looking view Going concern capital requirements are examined on a forwardlooking basis – including as part of the annual budgeting process – by assessing the resilience of capital adequacy and leverage ratios under hypothetical future states. These assessments include assumptions about regulatory and accounting factors (such as IFRS 9). They are linked to economic variables and impairments and seek to demonstrate that RBS and its operating subsidiaries maintain sufficient CET1 capital. A range of future states are tested. In particular, capital requirements are assessed:  Based on a forecast of future business performance, given expectations of economic and market conditions over the forecast period.
Stress and peak-to-trough movements are used to help assess the amount of CET1 capital RBS needs to hold in stress conditions in accordance with the capital risk appetite framework.
Internal assessment of capital adequacy An internal assessment of material risks is carried out annually to enable an evaluation of the amount, type and distribution of capital required to cover these risks. This is referred to as the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP consists of a point-in-time assessment of exposures and risks at the end of the financial year together with a forward-looking stress capital assessment. The ICAAP is approved by the Board and submitted to the PRA.
Governance Capital management is subject to substantial review and governance. The Board approves the capital plans, including those for key legal entities and businesses as well as the results of the stress tests relating to those capital plans.
Internal assessment of liquidity Under the liquidity risk management framework, RBS maintains the Individual Liquidity Adequacy Assessment Process. This includes assessment of net stressed liquidity outflows under a range of extreme but plausible stress scenarios detailed in the table below.
RBS uses the most severe combination of these to set the internal stress testing scenario which underpins its internal liquidity risk appetite. This complements the regulatory liquidity coverage ratio requirement.
 Detailing a range of options to address different stress conditions.
 Appointing dedicated option owners to reduce the risk of delay and capacity concerns.
Fire drill simulations of possible recovery events are used to test the effectiveness of the RBS and individual legal entity recovery plans. The fire drills are designed to replicate possible financial stress conditions and allow senior management to rehearse the responses and decisions that may be required in an actual stress. The results and lessons learnt from the fire drills are used to enhance RBS’s approach to recovery planning.
Under the resolution assessment part of the PRA rulebook, RBS is required to carry out an assessment of its preparations for resolution, submit a report of the assessment to the PRA and publish a summary of this report. The initial report submission to the PRA is in Q4 2020. RBS has a programme of work in place to carry out these requirements.
 Designed to assess the resilience of major UK banks to tail risk events. The severity of the test is related to policymakers’ assessments of risk levels across markets and regions.
 Under the 2019 Bank of England stress test, on an IFRS 9 transitional basis, the CET1 ratio reached a low point of 9.9%. This was above the hurdle rate of 7.2%.
 The transitional Tier 1 leverage ratio was projected to be 4.7% under stress, again above the leverage ratio hurdle rate of 3.56%.
 The 2019 Bank of England stress test result demonstrated that the balance sheet remains in a safe and sustainable position.
Liquidity and funding risks arise in a number of ways, including through the maturity transformation role that banks perform. The risks are dependent on factors such as:  Maturity profile;  Composition of sources and uses of funding;  The quality and size of the liquidity portfolio;  Wholesale market conditions; and
Liquidity RBS maintains a prudent approach to the definition of liquidity resources. RBS manages its liquidity to ensure it is always available when and where required, taking into account regulatory, legal and other constraints. Following ring-fencing legislation, liquidity is no longer considered fungible across RBS Group. Principal liquidity portfolios are maintained in the UK Domestic Liquidity Sub-Group (UK DoLSub) (primarily in NatWest Bank Plc), UBI DAC, NatWest Markets Plc, RBS International Limited and NWM N.V. Some disclosures in this section where relevant are presented, on a consolidated basis, for RBS, the UK DoLSub and on a solo basis for NatWest Markets plc.
 CRR leverage ratio decreased to 5.1% (2018 – 5.4%) due to lower Tier 1 capital. UK leverage ratio decreased to 5.8% (2018 – 6.2%).
 The reduction in primary liquidity resulted in lower liquidity coverage ratio (LCR) of 152% (2018 – 158%) and lower internal Stressed Outflow coverage ratio of 149% (2018 – 154%).
Capital planning is integrated into RBS Group’s wider annual budgeting process and is assessed and updated at least monthly. Regular returns are submitted to the PRA which include a two-year rolling forecast view. Other elements of capital management, including risk appetite and stress testing, are set out on pages 115 and 116.
 As part of capital planning, RBS will monitor its portfolio of external capital securities and assess the optimal blend and most cost effective means of financing.
The UK DoLSub is PRA regulated and comprises RBS’s four licensed deposit-taking UK banks: National Westminster Bank Plc (NWB Plc), The Royal Bank of Scotland plc (RBS plc), Coutts & Company and Ulster Bank Limited.
RBS International Limited, NWM N.V. and UBI DAC hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
The liquidity value of the portfolio is determined by taking current market prices and applying a discount or haircut, to give a liquidity value that represents the amount of cash that can be generated by the asset.
Asset and liability types broadly match. Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; derivative assets are broadly netted against derivative liabilities.
System wide Pillar 1 minimum requirements 4.5% 6.0% 8.0% Capital conservation buffer 2.5% 2.5% 2.5% Countercyclical capital buffer (1) 0.8% 0.8% 0.8% G-SIB buffer (2) 1.0% 1.0% 1.0%
Notes: (1) The countercyclical capital buffer (CCyB) applied to UK designated assets is set by the Financial Policy Committee (FPC). The UK CCyB is currently 1.0%
increasing to 2.0%, effective December 2020. The Republic of Ireland CCyB is currently 1.0%, following the CBI increase in July 2019. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions. Firm-specific CCyB is based on a weighted average at CCyB rates applicable to countries in which the Bank has exposures.
Minimum ratio 2.4375% 3.2500% Countercyclical leverage ratio buffer (1) 0.2940% 0.2940% Additional leverage ratio buffer (2) 0.3500% 0.3500% Total 3.0815% 3.8940%
Liquidity coverage ratio (LCR) 100% Net stable funding ratio (NSFR) (1) —
RWAs Credit risk 131.0 131.0 137.9 137.9 Counterparty credit risk 12.6 12.6 13.6 13.6 Market risk 13.0 13.0 14.8 14.8 Operational risk 22.6 22.6 22.4 22.4 Total RWAs 179.2 179.2 188.7 188.7
Leverage ratios Tier 1 capital (£bn) 33.1 34.6 34.7 36.2 CRR leverage exposure (£bn) 643.9 643.9 644.5 644.5 CRR leverage ratio (%) 5.1% 5.4% 5.4% 5.6% Average Tier 1 capital (£bn) (2) 33.8 35.3 35.7 37.9 Average leverage exposure (£bn) (2) 685.5 685.5 665.2 665.2 Average leverage ratio (%) (2) 4.9% 5.2% 5.4% 5.7% UK leverage ratio (%) 5.8% 6.1% 6.2% 6.5%
At 1 January 2019 30,639 4,051 6,483 41,173 Profit for the year 1,442 — — 1,442 Own credit 287 — — 287 Share capital and reserve movements in respect of employee share schemes (28) — — (28) Foreign exchange reserve (1,935) — — (1,935) FVOCI reserves (205) — — (205) Goodwill and intangibles deduction (6) — — (6) Deferred tax assets (17) — — (17) Prudential valuation adjustments 63 — — 63 Expected loss less impairment 487 — — 487 Capital instruments issued — — 566 566 Capital instruments redeemed — — (890) (890) Net dated subordinated debt/grandfathered instruments — — (1,059) (1,059) Foreign exchange movements — — (200) (200) Foreseeable ordinary and special dividends (968) — — (968) Foreseeable charges (365) — — (365) Other movements (340) — — (340) At 31 December 2019 29,054 4,051 4,900 38,005
Derivatives - netting and variation margin (157.8) (141.3) - potential future exposures 43.0 42.1 Securities financing transactions gross up 2.2 2.1 Undrawn commitments (analysis below) 42.5 50.3 Regulatory deductions and other adjustments (9.0) (2.9) CRR Leverage exposure 643.9 644.5
Claims on central banks (73.6) (85.0) UK leverage exposure (2) 570.3 559.5 Notes: (1) Based on end-point CRR Tier 1 leverage exposure under the CRR Delegated Act. (2) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims.
Liquidity coverage ratio (1) 152% 145% 158% 153% Stressed outflow coverage (2) 149% 134% 154% 147% Net stable funding ratio (3) 141% 137% 141% 142%
(3) The CRR2 amendments to the CRR will introduce a binding NSFR requirement from 28 June 2021.
Unconditionally cancellable credit cards 2.0 2.0 Other unconditionally cancellable items 3.5 7.1 Unconditionally cancellable items (1) 5.5 9.1
The roll-off profile relating to senior debt and subordinated debt instruments is set out on the next page.
Tier 2 capital: end-point CRR compliant of which: holdco 6.2 6.4 4.8 4.7 6.8 6.7 6.3 5.1 of which: opcos 0.5 0.5 0.1 0.4 0.5 0.5 0.3 0.5
Tier 2 capital: end-point CRR non compliant of which: holdco 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 of which: opcos 1.6 1.8 1.2 1.6 1.9 2.0 1.4 1.6
Senior unsecured debt securities issued by: RBSG plc holdco 18.6 19.2 — 19.2 16.8 16.8 — 15.5 RBSG plc opcos 21.1 20.7 — — 17.1 16.9 — —
RBSG plc - amount (£m) 19,247 2 — — 7 8,457 10,781 - weighted average rate spread (bps) 194 162 — — 224 211 181 NWM Plc - amount (£m) 18,771 5,263 2,294 4,027 2,766 3,114 1,307 - weighted average rate spread (bps) 82 69 82 69 85 106 108 NatWest Bank Plc - amount (£m) 1,517 1,296 221 — — — — - weighted average rate spread (bps) 9 8 12 — — — — NWM N.V. - amount (£m) 204 102 102 — — — — - weighted average rate spread (bps) 23 24 22 — — — — NWM S.I. - amount (£m) 223 — — — 4 81 138 - weighted average rate spread (bps) 129 — — — 64 98 150 Securitisation - amount (£m) 1,142 — — — — — 1,142 - weighted average rate spread (bps) 448 — — — — — 448 Covered bonds - amount (£m) 5,948 1,252 1,753 — — 2,943 — - weighted average rate spread (bps) 113 26 150 — — 129 —
Total notes issued - amount (£m) 47,052 7,915 4,370 4,027 2,777 14,595 13,368 Weighted average rate spread (bps) 139 53 104 69 86 172 203
Subordinated debt instruments roll-off profile (2) RBSG plc (£m) 6,492 81 — — 1,708 4,702 1 NWM Plc (£m) 589 — 96 — 274 147 72 NatWest Bank Plc (£m) 1,123 700 — 333 90 — — NWM N.V. (£m) 546 11 — — — 105 430 UBI DAC (£m) 73 — — — — — 73 Total (£m) 8,823 792 96 333 2,072 4,954 576
At 1 January 2019 34.3 14.7 78.4 9.4 6.9 44.9 0.1 188.7 Foreign exchange movement — (0.6) (0.4) — (0.1) (0.2) (0.2) (1.5) Business movements 2.1 (0.4) (0.4) 0.6 0.1 (2.4) 0.3 (0.1) Risk parameter changes (1) 1.4 (1.1) (0.4) — (0.1) (0.1) — (0.3) Methodology changes — — — — — — — — Model updates — 0.4 (2.1) — — (0.7) — (2.4) Other movements (2) — — (2.6) 0.1 (0.3) (3.6) 1.2 (5.2) At 31 December 2019 37.8 13.0 72.5 10.1 6.5 37.9 1.4 179.2
 The reduction in market risk, primarily under the internal model approach, reflected a reduction in the capital multiplier, changes in interest rate and foreign exchange risks reducing the VaR/SVaR based requirements and a reduction in eurozone bond position risks. Furthermore there was a £0.7 billion decrease due to model update improvements.
Liquidity portfolio The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for LCR or stressed outflow purposes.
Cash and balances at central banks 74,289 51,080 85,723 63,951 AAA to AA- rated governments 46,622 34,585 38,179 27,603 A+ and lower rated governments 1,277 — 1,587 — Government guaranteed issuers, Public sector entities and Government sponsored entities 251 90 254 100 International Organisations and Multilateral development banks 2,393 1,717 2,036 1,437 LCR level 1 bonds 50,543 36,392 42,056 29,140 LCR level 1 Assets 124,832 87,472 127,779 93,091 LCR level 2 Assets — — — — Non-LCR Eligible Assets 88 — — — Primary liquidity 124,920 87,472 127,779 93,091 Secondary liquidity (3) 74,431 73,332 70,231 69,642 Total liquidity value 199,351 160,804 198,009 162,733
Notes: (1) RBS includes UK DoLSub, NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include RBS International
Limited, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (2) UK DoLSub comprises RBS’s four licensed deposit-taking UK banks within the ring-fenced bank: National Westminster Bank Plc, The Royal Bank of Scotland plc, Coutts & Company and Ulster Bank Limited. (3) Comprises assets eligible for discounting at the Bank of England and other central banks. (4) Liquidity portfolio table approach has been aligned to the ILAAP methodology, with 2018 comparative restated.
Capital, liquidity and funding risk continued Funding sources (audited) The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9.
Of which: available in resolution (4) — 26,168 26,168 — 22,909 22,909
Notes: (1) Loans to customers excludes £3.7 billion (2018 - £3.3 billion) of Impairment provisions. (2) Represents notes in circulation.
Less than 1 year 56 3,157 4,872 299 8,328 8,384 1-3 years 374 6,397 3,145 450 9,992 10,366 3-5 years 92 10,536 4,534 15,070 15,162 More than 5 years 381 7,816 2,222 1,375 5,252 16,665 17,046 Total 903 3,157 29,621 5,367 1,375 10,535 50,055 50,958
Funding gap: maturity and segment analysis The contractual maturity of balance sheet assets and liabilities reflects the maturity transformation role banks perform, lending long-term but mainly obtaining funding through short-term liabilities such as customer deposits. In practice, the behavioural profiles of many liabilities show greater stability and longer maturity than the contractual maturity. This is particularly true of many types of retail and corporate deposits which, despite being repayable on demand or at short notice, have demonstrated very stable characteristics even in periods of acute stress.
RBS categorises its assets into three broad groups, those that are:  Already encumbered and used to support funding currently in place through own-asset securitisations, covered bonds and securities repurchase agreements.
 Programmes to manage the use of assets to actively support funding are established within UK DoLSub, UBI DAC and NatWest Markets Plc.
(7) be used (8) Total Total 2019 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Cash and balances at central banks — 4.3 4.3 — — 73.6 — — 73.6 77.9 Trading assets — 51.2 51.2 — — 0.7 0.8 24.0 25.5 76.7 Derivatives — — — — — — — 150.0 150.0 150.0 Settlement balances — — — — — — — 4.4 4.4 4.4 Loans to banks - amortised cost 0.5 — 0.5 — — 9.7 0.2 0.3 10.2 10.7 Loans to customers - amortised cost 11.8 0.5 12.3 115.6 — 53.9 108.5 36.6 199.0 326.9 - residential mortgages - UK 8.5 — 8.5 109.9 — 28.8 12.3 — 41.1 159.5 - RoI 2.2 — 2.2 2.8 — 7.9 — — 7.9 12.9 - credit cards — — — — — 4.0 0.5 — 4.5 4.5 - personal loans — — — — — 5.4 2.5 2.3 10.2 10.2 - other 1.1 0.5 1.6 2.9 — 7.8 93.2 34.3 135.3 139.8 Other financial assets — 9.0 9.0 — 2.4 48.8 0.5 0.8 50.1 61.5 Intangible assets — — — — — — — 6.6 6.6 6.6 Other assets — — — — — — 1.9 6.4 8.3 8.3 Total assets 12.3 65.0 77.3 115.6 2.4 186.7 111.9 229.1 527.7 723.0
Credit risk Definition (audited) Credit risk is the risk that customers and counterparties fail to meet their contractual obligation to settle outstanding amounts.
 Asset quality (AQ) deteriorated slightly with 53% of the lending exposure rated AQ1-AQ4 (2018 – 54%) (equating to an indicative investment rating of BBB- or better).
 The overall personal portfolio increased by £10 billion, largely driven by growth of the UK mortgage portfolio.
 Wholesale portfolio risk appetite was tightened for certain sectors based on leading indicator information, macroeconomic uncertainty and Brexit preparedness.
 The overall expected credit loss (ECL) charge for the year was £696 million, up from £398 million in 2018; primarily this reflected the transitioning from a very benign period towards a more normalised external credit environment as well as the impact of a small number of large individual commercial charges. The cost of risk at 20 basis points remained below RBS’s view of a normalised blended long-term loss rate of 30 to 40 basis points.
Risk governance (audited) RBS operates a Credit Risk function, which provides oversight of frontline credit risk management activities.
Governance activities include:  Defining credit risk appetite for the management of concentration risk and credit policy to establish the key causes of risk in the process of providing credit and the controls that must be in place to mitigate them.
 Oversight of the first line of defence to ensure that credit risk remains within the appetite set by the Board and that controls are being operated adequately and effectively.
∆ Risk appetite RBS’s approach to Wholesale credit is governed by a comprehensive credit risk appetite framework. The framework is monitored and actions are taken to adapt lending criteria as appropriate. Credit risk appetite aligns to the strategic risk appetite set by the Board. The framework has been designed to reflect factors that influence the ability to operate within risk appetite. Tools such as stress testing and economic capital are used to measure credit risk volatility and develop links between the framework and risk appetite limits. The framework is supported by a suite of transaction acceptance standards that set out the risk parameters within which businesses should operate.
For the Wholesale credit risk appetite framework, the four formal frameworks used – and their basis for classification – are detailed in the following table.
Country Risk – based on sovereign default risk, political stability and macroeconomic factors
Risk identification and measurement (audited) Credit stewardship Risks are identified through relationship management and/or credit stewardship of portfolios or customers. Credit risk stewardship takes place throughout the customer relationship, beginning with the initial approval. It includes the application of credit assessment standards, credit risk mitigation and collateral, ensuring that credit documentation is complete and appropriate, carrying out regular portfolio or customer reviews and problem debt identification and management.
A key aspect of credit risk stewardship is monitoring signs of customer stress, and when identified, applying appropriate debt management actions.
Asset quality All credit grades map to an asset quality scale, used for financial reporting. For Wholesale customers, a master grading scale is used for internal management reporting across portfolios. Measures of risk exposure may be aggregated and reported at differing levels of detail depending on stakeholder or business requirements. Performing loans are defined as AQ1-AQ9 (where the PD is less than 100%) and nonperforming loans as AQ10 or Stage 3 under IFRS 9 (where the PD is 100%).
Risk mitigation techniques, as set out in the appropriate credit policies, are used in the management of credit portfolios across RBS. These techniques mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations. Mitigation tools can include structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default swaps, credit-linked debt instruments and securitisation structures, and the use of guarantees and similar instruments (for example, credit insurance) from related and third parties. Property is used to mitigate credit risk across a number of portfolios, in particular residential mortgage lending and commercial real estate (CRE).
Commercial real estate valuations – RBS has a panel of chartered surveying firms that cover the spectrum of geography and property sectors in which RBS takes collateral. Suitable valuers for particular assets are contracted through a single service agreement to ensure consistency of quality and advice. Valuations are generally commissioned when an asset is taken as security; a material increase in a facility is requested; or a default event is anticipated or has occurred. In the UK, an independent third-party market indexation is applied to update external valuations once they are more than a year old and every three years a formal independent valuation is commissioned. In the Republic of Ireland, assets are revalued in line with the Central Bank of Ireland threshold requirements, which permits indexation for lower value assets, but demands regular Red Book valuations for distressed higher value assets.
Personal Personal customers are served through a lending approach that entails making a large number of small-value loans. To ensure that these lending decisions are made consistently, RBS analyses internal credit information as well as external data supplied from credit reference agencies (including historical debt servicing behaviour of customers with respect to both RBS and other lenders). RBS then sets its lending rules accordingly, developing different rules for different products.
The process is then largely automated, with each customer receiving an individual credit score that reflects both internal and external behaviours and this score is compared with the lending rules set. For relatively high-value, complex personal loans, including some residential mortgage lending, specialist credit managers make the final lending decisions.
These decisions are made within specified delegated authority limits that are issued dependent on the experience of the individual.
A credit assessment is carried out before credit facilities are made available to customers. The assessment process is dependent on the complexity of the transaction. Credit approvals are subject to environmental, social and ethical risk policies which restrict exposure to certain highly carbon intensive industries as well as those with potentially heightened reputational impacts.
For all other transactions credit is only granted to customers following joint approval by an approver from the business and the credit risk function or by two credit officers. The joint business and credit approvers act within a delegated approval authority under the Wholesale Credit Authorities Framework Policy. The level of delegated authority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are accountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority.
Transaction Acceptance Standards provide detailed transactional lending and risk acceptance metrics and structuring guidance. As such, these standards provide a mechanism to manage risk appetite at the customer/transaction level and are supplementary to the established credit risk appetite.
Credit grades (PD and LGD) are reviewed and if appropriate reapproved annually. The review process assesses borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refinancing risk.
Problem debt management Personal Early problem identification Pre-emptive triggers are in place to help identify customers that may be at risk of being in financial difficulty. These triggers are both internal, using RBS data, and external using information from credit reference agencies. Pro-active contact is then made with the customer to establish if they require help with managing their finances. By adopting this approach, the aim is to prevent a customer’s financial position deteriorating which may then require intervention from the Collections and Recoveries teams.
Personal customers experiencing financial difficulty are managed by the Collections team. If the Collections team is unable to provide appropriate support after discussing suitable options with the customer, management of that customer moves to the Recoveries team. If at any point in the Collections and Recoveries process, the customer is identified as being potentially vulnerable, the customer will be separated from the regular process and supported by a specialist team to ensure the customer receives appropriate support for their circumstances.
Risk of Credit Loss customers are performing customers that have met the criteria for Heightened Monitoring and also pose a risk of credit loss to RBS in the next 12 months (should mitigating action not be taken or not be successful).
Agreed customer management strategies are regularly monitored by both the business and credit teams. The largest Risk of Credit Loss exposures are regularly reviewed by a Risk of Credit Loss Committee. The committee members are experienced credit, business and restructuring specialists. The purpose of the committee is to review and challenge the strategies undertaken for customers that pose the largest risk of credit loss to RBS.
The Risk of Credit Loss framework does not apply to problem debt management for Business Banking customers. These customers are, where necessary, managed by specialist problem debt management teams, depending on the size of exposure or by the Business Banking recoveries team where a loan has been impaired.
Types of forbearance Personal In the Personal portfolio, forbearance may involve payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears and, in the Republic of Ireland only, temporary interest-only or partial capital and interest arrangements. Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans. This includes instances where forbearance may be provided to customers with highly flexible mortgages.
Additionally for some forbearance types a loan may be transferred to the performing book if a customer makes payments that reduce loan arrears below 90 days (UK Personal Banking collections function).
For ECL provisioning, all forborne but performing exposures are categorised as Stage 2 and are subject to a lifetime loss provisioning assessment.
For non-performing forborne loans, the Stage 3 loss assessment process is the same as for non-forborne loans.
Wholesale Provisions for forborne loans are assessed in accordance with normal provisioning policies. The customer’s financial position and prospects – as well as the likely effect of the forbearance, including any concessions granted, and revised PD or LGD gradings – are considered in order to establish whether an impairment provision is required.
Forbearance may result in the value of the outstanding debt exceeding the present value of the estimated future cash flows. This difference will lead to a customer being classified as non-performing.
Impairment, provisioning and write-offs (audited) In the overall assessment of credit risk, impairment provisioning and write-offs are used as key indicators of credit quality.
RBS’s IFRS 9 provisioning models, which used existing Basel models as a starting point, incorporate term structures and forward-looking information. Regulatory conservatism within the Basel models has been removed as appropriate to comply with the IFRS 9 requirement for unbiased ECL estimates.
o The build of term structures to extend the determination of the risk of loss beyond 12 months that will influence the impact of lifetime loss for assets in Stage 2.
o The determination of asset lifetimes that reflect behavioural characteristics while also representing management actions and processes (using historical data and experience).
Credit risk continued Economic loss drivers (audited) Introduction The most material economic loss drivers for Personal portfolios include national GDP, unemployment rate, house price indices, and base rate for the UK and the Republic of Ireland. In addition to some of these loss drivers, world GDP is a primary loss driver for Wholesale portfolios.
Central base case economic scenario The internal base case scenario is the primary forward-looking economic information driving the calculation of ECL. The same base case scenario is used for financial planning by RBS with the exception of the yield curve, as a result of the different timing of the exercises. The key elements of the current economic base case, which includes forecasts over a five year forecast horizon, are summarised as follows:  United Kingdom – The central base case economic scenario projects modest growth in the UK economy, in line with the consensus outlook. Brexit related uncertainty results in subdued confidence in the near term, placing it in the lower quartile of advanced economies. Business investment is weak at the start of the forecast, improving only gradually. Consumer spending rises steadily as households benefit from falling inflation and rising wage growth, though it is a modest upturn. The central scenario assumes slower job growth than seen in recent years, meaning unemployment edges up from its current historic lows. House price growth slows, extending the current slowdown, before picking up to low single digit growth in later years. Monetary policy follows the market implied path for Bank of England base rate at the time the scenarios were set, therefore it is assumed there are two base rate cuts over the next five years, whereas the yield curve used for financial planning assumes one base rate cut.
Use of the central base case in Personal In Personal the internal base case is directly used as the central scenario for the ECL calculations by feeding the forecasted economic loss drivers into the respective PD and LGD models.
The application of the mean reversion adjustment is based on two empirical observations. Firstly, historic credit loss rates in Wholesale portfolios show pronounced mean reversion behaviour and secondly, the accuracy of economic forecasts tends to drop significantly for horizons beyond one or two years.
Approach for multiple economic scenarios (MES) The response of portfolio loss rates to changes in economic conditions is typically non-linear and asymmetric. Therefore, in order to appropriately take account of the uncertainty in economic forecasts a range of economic scenarios is considered when calculating ECL.
 Wholesale – The approach to MES is a Monte Carlo method that involves simulating a large number of alternative scenarios around the central scenario (adjusted for mean reversion) and averaging the losses and PD values for each individual scenario into unbiased expectations of losses (ECL) and PD.
Credit risk continued Economic loss drivers (audited) The 2019 base case GDP growth and interest rate assumptions are pessimistic compared to 2018 as consensus outlook and market implied interest rate projections worsened over the year. Unemployment rate projections are less extreme in the 2019 downside scenarios as RBS aimed to align the Downside 2 scenario with Office for Budget Responsibility’s analysis of a hard Brexit scenario.
Upside 2 Upside 1 Base case Downside 1 Downside 2 Upside 2 Upside 1 Base case Downside 1 Downside 2
Upside 2 Upside 1 Base case Downside 1 Downside 2 % % % % %
GDP (year-on-year) 4.6 4.0 5.0 4.1 (0.2) (1.8) (0.1) (1.9) Unemployment 3.5 3.8 2.8 3.4 4.9 5.5 5.9 7.4 House Price Inflation (year-on-year) 8.9 6.7 9.1 7.0 (3.5) (8.4) (2.8) (7.3)
GDP (year-on-year) 6.6 6.3 14.0 10.2 0.5 (2.1) (0.2) (3.0) Unemployment 3.6 4.0 3.6 4.1 5.8 7.3 6.5 7.8 House Price Inflation (year-on-year) 10.3 9.1 22.0 16.3 (2.6) (8.4) (2.5) (8.2)
Probability weightings of scenarios RBS’s approach to IFRS 9 MES in Personal involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights to those scenarios. This involves the following steps:  Scenario selection – Two upside and two downside scenarios from Moody’s inventory of scenarios were chosen. The aim is to obtain downside scenarios that are not as severe as stress tests, so typically they have a severity of around one in ten and one in five of approximate likelihood, along with corresponding upsides.
UK economic uncertainty RBS’s approach is designed to capture the historic variability and distribution of economic risks. RBS’s approach to capturing these incremental or skewed forward-looking risks is to apply an overlay to ECL of £170 million (2018 – £127 million). To calculate the value of this overlay, information was used from prevailing downside sensitivity scenario analyses. The underlying economics were broadly aligned to published International Monetary Fund and Office for Budget Responsibility hard Brexit scenarios and management judgement was applied on the likelihood of this alternative path for the economy emerging. The value of the overlay was increased once during the year, in the third quarter, when management judged uncertainty to be more pronounced. The value of the overlay was subsequently reviewed in the fourth quarter, when management concluded that it was appropriate to leave it unchanged reflecting the ongoing elevated economic uncertainty.
Credit risk continued Credit risk modelling (audited) ECLs are calculated using a combination of:  Probability of default.
In addition, lifetime PDs (as at reporting date and at date of initial recognition) are used in the assessment of the significant increase in credit risk criteria.
IFRS 9 ECL model design principles To meet IFRS 9 requirements, PD, LGD and EAD used in ECL calculations must be:  Unbiased – material regulatory conservatism has been removed to produce unbiased model estimates.
 Forward-looking – incorporated into PD estimates and, where appropriate, EAD and LGD estimates.
One year point-in-time PDs are subsequently extended to life-time PDs using a conditional transition matrix approach. The conditional transition matrix approach allows for the incorporation of forwardlooking economic information into the life-time PDs.
Personal Forward-looking information has only been incorporated for the secured portfolios, where changes in property prices can be readily accommodated. Analysis has shown minimal impact of economic conditions on LGDs for the other Personal portfolios. For Ulster Bank RoI, a bespoke IFRS 9 mortgage LGD model is used, reflecting its specific regional market.
EAD estimates Personal The IFRS 9 Personal modelling approach for EAD is dependent on product type.
 There is no EAD model for Personal loans. Instead, debt flow (i.e. combined PD x EAD) is directly modelled.
Wholesale For Wholesale, EAD values are projected using product specific credit conversion factors (CCF), closely following the product segmentation and approach of the respective Basel model. However, the CCFs are estimated over multi-year time horizons to produce unbiased model estimates.
Governance and post model adjustments The IFRS 9 PD, EAD and LGD models are subject to RBS’s model risk policy that stipulates periodic model monitoring, periodic re-validation and defines approval procedures and authorities according to model materiality. Post model adjustments (PMAs) are applied where necessary to incorporate the most recent data available and are made on a temporary basis ahead of the underlying model parameter changes being implemented.
For Wholesale portfolios, PMAs increased ECL by £58 million relating to expected model enhancements to PD and LGD. In addition, judgemental ECL overlays increased ECL by £10 million.
These adjustments were over and above those detailed in the UK economic uncertainty section and are also subject to oversight and governance by the Provisions Committee.
The framework comprises the following elements:  IFRS 9 lifetime PD assessment (the primary driver) – on modelled portfolios the assessment is based on the relative deterioration in forward-looking lifetime PD and is assessed monthly. To assess whether credit deterioration has occurred, the residual lifetime PD at balance sheet date (which PD is established at date of initial recognition (DOIR)) is compared to the current PD. If the current lifetime PD exceeds the residual origination PD by more than a threshold amount deterioration is assumed to have occurred and the exposure transferred to Stage 2 for a lifetime loss assessment. For Wholesale, a doubling of PD would indicate a significant increase in credit risk subject to a minimum PD uplift of 0.1%. For Personal portfolios, the criteria varies by risk band, with lower risk exposures needing to deteriorate more than higher risk exposures, as outlined in the following table:  Qualitative high-risk backstops – the PD assessment is complemented with the use of qualitative high-risk backstops to further inform whether significant deterioration in lifetime risk of default has occurred. The qualitative high-risk backstop assessment includes the use of the mandatory 30+ days past due backstop, as prescribed by IFRS 9 guidance, and other features such as forbearance support, Wholesale exposures managed within the Risk of Credit Loss framework, and for Personal, adverse credit bureau results.
The criteria are based on a significant amount of empirical analysis and seek to meet three key objectives:  Criteria effectiveness – the criteria should be effective in identifying significant credit deterioration and prospective default population.
 Portfolio analysis – the criteria should produce results which are intuitive when reported as part of the wider credit portfolio.
Measurement uncertainty and ECL sensitivity analysis (audited) The recognition and measurement of ECL is complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. The ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Set out on page 141 is the impact of some of the material sensitivities considered for 2019 year end reporting. These ECL simulations are separate to the impact arising from MES and UK economic uncertainty as described earlier in this disclosure, which impacts are embedded in the reported ECL.
The primary focus of the simulations is on ECL provisioning requirements on performing exposures in Stage 1 and Stage 2. The simulations are run on a stand-alone basis and are independent of each other; the potential ECL impacts reflect the simulated impact as at the year end balance sheet date. As default is an observed event as at the balance sheet date, Stage 3 provisions are not subject to the same level of measurement uncertainty, and therefore have not been considered in this analysis, with the exception of a univariate HPI sensitivity. The following common scenarios have been applied across the key Personal and Wholesale portfolios:
 Economic uncertainty – simulating the impact arising from the Downside 2 and Upside 2 scenarios, which are two of the five discrete scenarios used in the methodology for Personal MES. In the simulation, RBS have assumed that the economic macro variables associated with these scenarios replace the existing base case economic assumptions, giving them a 100% probability weighting and thus serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in the analysis below, with the simulation impacting both PDs and LGDs. Modelled overlays present in the underlying ECL estimates are also sensitised. As expected, the scenarios create differing impacts on ECL by portfolio and the impacts are deemed reasonable. In this simulation it is assumed that existing modelled relationships between key economic variables and loss drivers hold but in practice other factors would also have an impact, e.g. potential customer behaviour changes, policy changes by lenders that might impact on the wider availability of credit.
Credit risk continued Measurement uncertainty and ECL sensitivity analysis (audited) These broader economic scenarios were complemented with two specific portfolio simulations:  Wholesale portfolios – simulating the impact of PDs and LGDs moving upwards to the through-the-cycle (TTC) average from their current point-in-time (PIT) estimate. With the current relatively benign economic conditions wholesale IFRS 9 PIT PDs are significantly lower than TTC PD. This scenario shows the increase to ECL by immediately switching to TTC measures providing an indication of long run average expectations. IFRS 9 measures have been used so there remains some differences to Basel TTC equivalent measures, where conservative assumptions are required, such as caps or floors, not permitted under the IFRS 9 best estimate approach.
RBS’s core criterion to identify a significant increase in credit risk is founded on PD deterioration, as discussed above. Under the simulations, PDs increase and result in exposures moving from Stage 1 to Stage 2 contributing to the ECL impact.
Stage 1 and Stage 2 (1) Downside 2 Upside 2 Discrete scenarios (2,3) of which in ECL Exposure in Exposure in HPI (4) / TTC PD (5) Exposure
Potential ECL impact Stage 2 potential ECL impact in Stage 2
Personal and business banking UK 164.5 8.8% 642.6 94.6 14.7% 9.7% (77.8) (12.1%) 8.7% Of which: mortgages Stage 1 and Stage 2 145.8 7.0% 94.7 — — — — — — 28.8 30.5% 7.0%
Accounts for the sensitivity analysis carried out at that time. Key points
 HPI scenario, the impact of a 20% fall in house prices was illustrated for Stage 1 and 2 ECL, where the impacts were relatively modest. Additionally, the HPI reduction impacts on the Stage 3 ECL for both UK and RoI have been shown specifically for this scenario, given the relevance to measurement sensitivity in Stage 3. The relationship between the required ECL and house price movements is expected to be nonlinear should the level of house prices reduce by more material amounts. For the RoI portfolio, a relatively modest increase in ECL is observed for this simulation driven by relatively low LTVs and LGD modelling changes in 2019. MES uplifts are not included in the single scenario simulations.
 The TTC scenario shows a higher ECL impact compared to the Downside 2 scenario given the relative severity of the TTC view. Furthermore, the TTC scenario assumes the higher PDs remain heightened at TTC levels over the simulation period, thus driving higher losses across the latter years of the scenario period compared to Downside 2.
Refer to Accounting policy 13 and Note 14 on the consolidated accounts for revisions to policies and critical judgements relating to impairment loss determination.
RBS Group changed its accounting policy in line with the IFRIC decision. Hence, the carrying amount of the financial assets within the scope of the provisions of the decision as well as the associated ECL allowance on the statement of financial position have been adjusted and the comparative period restated. The coverage ratio for the current and comparative periods have been adjusted and restated accordingly. There has been no restatement of the comparative period in statement of profit or loss on the grounds of materiality.
Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Financial instruments within the scope of the IFRS 9 ECL framework (audited) Refer to Note 11 on the consolidated accounts for balance sheet analysis of financial assets that are classified as amortised cost (AC) or fair value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
In scope of IFRS 9 ECL framework 475.5 464.4 % in scope 98% 99%
Loans - in scope 340.0 320.3 Stage 1 305.5 286.0 Stage 2 27.9 26.1 Stage 3 6.6 8.2
 RBS Group-originated securitisations, where ECL was captured on the underlying loans of £0.4 billion (2018 - £0.4 billion).
 Commercial cards which operate in a similar manner to charge cards, with balances repaid monthly via mandated direct debit with the underlying risk of loss captured within the customer’s linked current account of £0.3 billion (2018 - £0.4 billion).
Contingent liabilities and commitments In addition to contingent liabilities and commitments disclosed in Note 26 on the consolidated accounts – reputationally-committed limits, are also included in the scope of the IFRS 9 ECL framework. These are offset by £2.6 billion (2018 - £3.6 billion) out of scope balances primarily related to facilities that, if drawn, would not be classified as AC or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent liabilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £127.9 billion (2018 - £168.9 billion) comprised Stage 1 £121.7 billion (2018 - £161.4 billion); Stage 2 £5.6 billion (2018 - £6.9 billion) and Stage 3 £0.6 billion (2018 - £0.6 billion).
Credit risk – Banking activities continued Portfolio summary – segment analysis (audited) The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
Loans - amortised cost Stage 1 144,513 18,544 88,100 14,956 14,834 9,273 15,282 305,502 Stage 2 13,558 1,642 11,353 587 545 180 3 27,868 Stage 3 1,902 2,037 2,162 207 121 169 — 6,598 Of which: individual — 68 1,497 207 121 158 — 2,051 Of which: collective 1,902 1,969 665 — — 11 — 4,547 159,973 22,223 101,615 15,750 15,500 9,622 15,285 339,968 ECL provisions (1) Stage 1 114 29 152 7 4 10 6 322 Stage 2 467 53 214 7 6 5 — 752 Stage 3 823 693 1,021 29 21 131 — 2,718 Of which: individual — 22 602 29 21 122 — 796 Of which: collective 823 671 419 — — 9 — 1,922 1,404 775 1,387 43 31 146 6 3,792 ECL provisions coverage (2,3) Stage 1 (%) 0.08 0.16 0.17 0.05 0.03 0.11 0.04 0.11 Stage 2 (%) 3.44 3.23 1.88 1.19 1.10 2.78 — 2.70 Stage 3 (%) 43.27 34.02 47.22 14.01 17.36 77.51 — 41.19 0.88 3.49 1.36 0.27 0.20 1.52 0.04 1.12 Impairment losses ECL charge (4) 393 (34) 391 (6) 2 (51) 1 696 Stage 1 (90) (37) (66) (14) (5) — — (212) Stage 2 256 (35) 99 — 5 (8) 1 318 Stage 3 227 38 358 8 2 (43) — 590 Of which: individual — — 328 8 2 (35) — 303 Of which: collective 227 38 30 — — (8) — 287 ECL loss rate - annualised (basis points) (3)
UK Personal Ulster Commercial Private Central items Banking Bank RoI Banking Banking RBSI NWM & other Total 2018* £m £m £m £m £m £m £m £m
Amounts written-off 445 372 572 7 9 89 — 1,494 Of which: individual — 5 189 7 9 62 — 272 Of which: collective 445 367 383 — — 27 — 1,222 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) Includes £4 million (2018 – £5 million) related to assets classified as FVOCI. (2) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost. (3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. (4) Includes a £2 million charge (2018 – £3 million charge) related to other financial assets, of which a £1 million release (2018 – £1 million charge) related to assets classified as FVOCI; and nil (2018 – £31 million release) related to contingent liabilities. (5)
 UK Personal Banking ECL provisions – The increase in Stage 1 and Stage 2 was a result of a combination of portfolio growth and also slight increases in PD reflective of small uplifts in actual default rates, as well as additional ECL raised due to on-going economic uncertainty. The rise in Stage 3 reflected the steady flow of new defaults which have increased slightly year-on-year, however, in unsecured lending the trend flattened in the second half of the year as a result of risk appetite tightening.
 NatWest Markets ECL coverage reduced primarily driven by lower ECL balances, however, Stage 3 increased significantly following the disposal of one large purchased or originated credit impaired asset with no ECL.
 The impairment charge – for the year was £696 million, up from £398 million in 2018; primarily this reflected the transitioning from a very benign period towards a more normalised external credit environment as well as the impact of a small number of large individual commercial charges. The cost of risk at 20 basis points remained below RBS’s view of a normalised blended long-term loss rate of 30 to 40 basis points.
Credit risk – Banking activities continued Segmental loans and impairment metrics (audited) The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
Gross loans ECL provisions (2) Stage 2 (1) Stage 2 (1)
Not past Not past Stage 1 due 1-29 DPD >30 DPD Total Stage 3 Total Stage 1 due 1-29 DPD >30 DPD Total Stage 3 Total
Not past Total Amounts Stage 1 due 1-29 DPD >30 DPD Total Stage 3 Total charge Loss rate written-off
UK Personal Banking 0.08 3.15 4.35 7.79 3.44 43.27 0.88 393 24.57 235 Ulster Bank RoI 0.16 2.78 5.77 6.02 3.23 34.02 3.49 (34) (15.30) 85 Personal (3) 0.11 2.12 6.25 5.71 2.79 31.49 4.57 (16) (11.53) 69 Wholesale 0.22 4.12 — 7.14 4.23 63.75 1.68 (18) (21.57) 16 Commercial Banking 0.17 1.80 4.72 2.67 1.88 47.22 1.36 391 38.48 450 Private Banking 0.05 1.26 — 2.17 1.19 14.01 0.27 (6) (3.81) 1 Personal 0.03 1.11 — 2.44 1.07 11.98 0.24 5 4.13 1 Wholesale 0.12 1.34 — — 1.31 40.00 0.38 (11) (30.16) — RBS International 0.03 1.15 — — 1.10 17.36 0.20 2 1.29 5 Personal 0.04 3.70 — — 2.00 18.46 0.48 — — 5 Wholesale 0.02 1.01 — — 1.01 16.07 0.14 2 1.59 — NatWest Markets 0.11 2.84 — — 2.78 77.51 1.52 (51) (53.00) 16 Central items and other 0.04 — — — — — 0.04 1 0.65 — Total loans 0.11 2.47 4.27 5.99 2.70 41.19 1.12 696 20.47 792 Of which: Personal 0.08 3.04 4.23 7.15 3.35 35.90 1.10 382 20.23 310 Wholesale 0.14 1.86 4.44 3.04 1.94 49.53 1.13 314 20.78 482 2018*
 UK Personal Banking and Ulster Bank RoI accounted for the vast majority of Personal provisions. In Ulster Bank RoI, Personal provisions were primarily driven by Stage 3 impairments in the legacy mortgage portfolio which continue to reduce reflecting improved customer engagement and the positive effects from the external economic environment. For UK Personal Banking, the year-on-year increase reflected a combination of portfolio growth and also slight increases in PD. This was primarily due to small uplifts in actual default rates, however, in unsecured lending the trend flattened in the second half of the year as a result of risk appetite tightening. Additional ECL was also raised as a result of the ongoing uncertain economic outlook. Provision coverage increased slightly.
Credit risk – Banking activities continued Portfolio summary – sector analysis (audited) The table below shows financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and past due by sector, asset quality and geographical region based on the country of operation of the customer.
Loans by geography 174,003 4,478 10,389 188,870 36,371 71,042 36,266 7,419 151,098 339,968 - UK 160,431 4,383 10,176 174,990 33,644 58,666 22,564 3,479 118,353 293,343 - RoI 13,572 95 213 13,880 1,310 4,169 513 3,167 9,159 23,039 - Other Europe — — — — 921 4,350 5,120 328 10,719 10,719 - RoW — — — — 496 3,857 8,069 445 12,867 12,867 Loans by asset quality (2,6) 174,003 4,478 10,389 188,870 36,371 71,042 36,266 7,419 151,098 339,968 - AQ1 3,837 — 665 4,502 4,474 2,272 17,841 1,931 26,518 31,020 - AQ2 2,866 — — 2,866 2,490 496 1,763 1,780 6,529 9,395 - AQ3 277 — — 277 2,465 5,561 2,939 3,520 14,485 14,762 - AQ4 92,520 375 625 93,520 6,574 14,660 9,979 41 31,254 124,774 - AQ5 58,051 786 1,708 60,545 10,419 19,584 2,027 107 32,137 92,682 - AQ6 5,253 1,211 3,344 9,808 5,809 13,470 811 3 20,093 29,901 - AQ7 5,326 1,531 2,328 9,185 2,853 11,404 867 30 15,154 24,339 - AQ8 1,379 393 792 2,564 302 1,478 20 2 1,802 4,366 - AQ9 1,217 66 284 1,567 90 468 6 — 564 2,131 - AQ10 3,277 116 643 4,036 895 1,649 13 5 2,562 6,598 Loans by stage 174,003 4,478 10,389 188,870 36,371 71,042 36,266 7,419 151,098 339,968 - Stage 1 159,261 3,103 7,436 169,800 32,896 59,689 35,707 7,410 135,702 305,502 - Stage 2 11,465 1,259 2,310 15,034 2,580 9,704 546 4 12,834 27,868 - Stage 3 3,277 116 643 4,036 895 1,649 13 5 2,562 6,598 - Of which: individual 235 — 21 256 646 1,137 7 5 1,795 2,051 - Of which: collective 3,042 116 622 3,780 249 512 6 — 767 4,547 Loans - past due analysis (3,4) 174,003 4,478 10,389 188,870 36,371 71,042 36,266 7,419 151,098 339,968 - Not past due 169,536 4,313 9,473 183,322 35,445 68,730 36,214 7,365 147,754 331,076 - Past due 1-29 days 1,578 43 164 1,785 317 1,339 36 54 1,746 3,531 - Past due 30-89 days 955 36 123 1,114 82 271 7 — 360 1,474 - Past due 90-180 days 495 30 84 609 26 148 — — 174 783 - Past due >180 days 1,439 56 545 2,040 501 554 9 — 1,064 3,104 Loans - Stage 2 11,465 1,259 2,310 15,034 2,580 9,704 546 4 12,834 27,868 - Not past due 9,798 1,204 2,070 13,072 2,466 9,266 534 4 12,270 25,342 - Past due 1-29 days 1,050 29 128 1,207 49 214 5 — 268 1,475 - Past due 30-89 days 617 26 112 755 65 224 7 — 296 1,051 Weighted average life** - ECL measurement (years) 9 2 6 5 6 6 3 1 6 6 Weighted average 12 months PDs** - IFRS 9 (%) 0.31 3.86 2.98 0.54 0.63 0.98 0.13 0.05 0.60 0.56 - Basel (%) 0.81 3.59 3.75 1.03 0.96 1.25 0.20 0.07 0.83 0.94 ECL provisions by geography 964 261 857 2,082 494 1,181 28 7 1,710 3,792 - UK 342 259 846 1,447 424 800 14 4 1,242 2,689 - RoI 622 2 11 635 39 117 3 1 160 795 - Other Europe — — — — 28 130 9 1 168 168 - RoW — — — — 3 134 2 1 140 140 ECL provisions by stage 964 261 857 2,082 494 1,181 28 7 1,710 3,792 - Stage 1 25 40 65 130 45 124 16 7 192 322 - Stage 2 118 132 253 503 47 198 4 — 249 752 - Stage 3 821 89 539 1,449 402 859 8 — 1,269 2,718 - Of which: individual 24 — 11 35 236 521 4 — 761 796 - Of which: collective 797 89 528 1,414 166 338 4 — 508 1,922 ECL provisions coverage (%) 0.55 5.83 8.25 1.10 1.36 1.66 0.08 0.09 1.13 1.12 - Stage 1 (%) 0.02 1.29 0.87 0.08 0.14 0.21 0.04 0.09 0.14 0.11 - Stage 2 (%) 1.03 10.48 10.95 3.35 1.82 2.04 0.73 — 1.94 2.70 - Stage 3 (%) 25.05 76.72 83.83 35.90 44.92 52.09 61.54 — 49.53 41.19 ECL charge 25 104 253 382 33 283 (4) 2 314 696 - UK 28 105 261 394 64 230 (4) 2 292 686 - RoI (3) (1) (8) (12) (2) (16) 1 — (17) (29) - Other Europe — — — — (29) 117 — — 88 88 - RoW — — — — — (48) (1) — (49) (49) ECL loss rate (%) 0.01 2.32 2.44 0.20 0.09 0.40 (0.01) 0.03 0.21 0.20 Amounts written-off 78 76 156 310 250 219 13 — 482 792 **Not within audit scope
Loans by residual maturity 174,003 4,478 10,389 188,870 36,371 71,042 36,266 7,419 151,098 339,968 - <1 year 3,996 2,750 3,480 10,226 7,318 24,539 27,299 5,477 64,633 74,859 - 1-5 year 8,771 1,728 5,769 16,268 19,774 31,215 7,922 1,164 60,075 76,343 - 5 year 161,236 — 1,140 162,376 9,279 15,288 1,045 778 26,390 188,766 Other financial assets by asset quality (2) — — — — — 110 12,185 123,170 135,465 135,465 - AQ1-AQ4 — — — — — 110 11,742 122,906 134,758 134,758 - AQ5-AQ8 — — — — — — 441 264 705 705 - AQ9 — — — — — — 2 — 2 2 Off-balance sheet (5) 14,348 16,686 12,332 43,366 15,383 51,390 16,742 1,022 84,537 127,903 - Loan commitments 14,345 16,686 12,285 43,316 14,739 47,883 15,417 1,021 79,060 122,376 - Financial guarantees 3 — 47 50 644 3,507 1,325 1 5,477 5,527 Off-balance sheet by asset quality (2,5) 14,348 16,686 12,332 43,366 15,383 51,390 16,742 1,022 84,537 127,903 - AQ1-AQ4 13,506 3,818 10,049 27,373 11,364 34,852 15,397 984 62,597 89,970 - AQ5-AQ8 832 12,588 2,271 15,691 3,948 16,228 1,340 38 21,554 37,245 - AQ9 1 4 12 17 11 49 4 — 64 81 - AQ10 9 276 — 285 60 261 1 — 322 607
Credit risk – Banking activities continued Portfolio summary – sector analysis (audited)
Loans by geography 165,302 4,218 9,589 179,109 36,790 72,370 25,020 6,967 141,147 320,256 - UK 150,312 4,114 9,125 163,551 33,921 60,701 11,610 3,090 109,322 272,873 - RoI 14,491 104 236 14,831 1,121 3,762 392 2,497 7,772 22,603 - Other Europe 102 — 67 169 1,400 3,772 5,912 1,087 12,171 12,340 - RoW 397 — 161 558 348 4,135 7,106 293 11,882 12,440 Loans by asset quality (2,6) 165,302 4,218 9,589 179,109 36,790 72,370 25,020 6,967 141,147 320,256 -AQ1 2,324 — 473 2,797 4,854 1,294 7,284 2,753 16,185 18,982 -AQ2 403 — — 403 2,060 1,626 1,751 1,136 6,573 6,976 -AQ3 1,442 — — 1,442 2,196 5,098 2,305 2,884 12,483 13,925 -AQ4 100,820 35 567 101,422 7,023 14,569 11,057 29 32,678 134,100 -AQ5 42,091 1,029 2,509 45,629 9,171 20,056 1,388 121 30,736 76,365 -AQ6 2,699 1,170 2,226 6,095 5,386 12,730 757 12 18,885 24,980 -AQ7 8,663 1,504 2,314 12,481 3,959 13,403 417 27 17,806 30,287 -AQ8 1,686 287 687 2,660 299 1,462 12 1 1,774 4,434 - AQ9 1,287 69 239 1,595 74 359 5 — 438 2,033 - AQ10 3,887 124 574 4,585 1,768 1,773 44 4 3,589 8,174 Loans by stage 165,302 4,218 9,589 179,109 36,790 72,370 25,020 6,967 141,147 320,256 - Stage 1 149,760 2,851 6,942 159,553 33,145 61,844 24,502 6,941 126,432 285,985 - Stage 2 11,655 1,243 2,073 14,971 1,877 8,753 474 22 11,126 26,097 - Stage 3 3,887 124 574 4,585 1,768 1,773 44 4 3,589 8,174 of which: individual 266 — 35 301 1,304 1,232 23 — 2,559 2,860 of which: collective 3,621 124 539 4,284 464 541 21 4 1,030 5,314 Loans - past due analysis (3,4) 165,302 4,218 9,589 179,109 36,790 72,370 25,020 6,967 141,147 320,256 - Not past due 160,222 4,027 8,749 172,998 35,451 69,869 24,397 6,923 136,640 309,638 - Past due 1-29 days 1,727 69 180 1,976 271 1,397 604 42 2,314 4,290 - Past due 30-89 days 1,064 40 105 1,209 273 349 11 2 635 1,844 - Past due 90-180 days 659 30 70 759 57 90 1 — 148 907 - Past due >180 days 1,630 52 485 2,167 738 665 7 — 1,410 3,577 Loans - Stage 2 11,655 1,243 2,073 14,971 1,877 8,753 474 22 11,126 26,097 - Not past due 9,788 1,172 1,843 12,803 1,556 8,196 472 22 10,246 23,049 - Past due 1-29 days 1,126 43 133 1,302 68 244 1 — 313 1,615 - Past due 30-89 days 741 28 97 866 253 313 1 — 567 1,433 Weighted average life** - ECL measurement (years) 8 2 3 5 3 3 4 3 3 4 Weighted average 12 months PDs** - IFRS 9 (%) 0.32 4.03 2.77 0.54 0.75 0.97 0.14 0.06 0.75 0.62 - Basel (%) 0.84 3.52 3.50 1.04 0.95 1.43 0.23 0.06 1.01 1.03 ECL provisions by geography 1,060 233 739 2,032 672 1,085 55 7 1,819 3,851 - UK 316 230 715 1,261 585 665 31 4 1,285 2,546 - RoI 744 3 24 771 50 156 2 1 209 980 - Other Europe — — — — 27 71 19 1 118 118 - RoW — — — — 10 193 3 1 207 207 ECL provisions by stage 1,060 233 739 2,032 672 1,085 55 7 1,819 3,851 - Stage 1 23 38 61 122 43 111 14 7 175 297 - Stage 2 151 120 248 519 40 203 10 — 253 772 - Stage 3 886 75 430 1,391 589 771 31 — 1,391 2,782 of which: individual 27 — 14 41 358 432 19 — 809 850 of which: collective 859 75 416 1,350 231 339 12 — 582 1,932 ECL provisions coverage (%) 0.64 5.52 7.71 1.13 1.83 1.50 0.22 0.10 1.29 1.20 - Stage 1 (%) 0.02 1.33 0.88 0.08 0.13 0.18 0.06 0.10 0.14 0.10 - Stage 2 (%) 1.30 9.65 11.96 3.47 2.13 2.32 2.11 — 2.27 2.96 - Stage 3 (%) 22.79 60.48 74.91 30.34 33.31 43.49 70.45 — 38.76 34.03 ECL charge 57 87 210 354 30 13 3 (2) 44 398 - UK 38 88 207 333 31 9 6 (2) 44 377 - RoI 19 (1) 3 21 (1) (3) (1) — (5) 16 - Other Europe — — — — — 8 (2) — 6 6 - RoW — — — — — (1) — — (1) (1) ECL loss rate (%) 0.03 2.06 2.19 0.20 0.08 0.02 0.01 (0.03) 0.03 0.12 Amounts written-off 368 79 329 776 292 395 31 — 718 1,494 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details. **Not within audit scope.
Mortgages cards personal Total Property Corporate FI Sovereign Total Total 2018* £m £m £m £m £m £m £m £m £m £m
FI Property Sovereign Other corporate Total 2019 £m £m £m £m £m
Forbearance (flow) 35 546 — 2,254 2,835 Forbearance (stock) 35 675 — 3,223 3,933 Heightened Monitoring and Risk of Credit Loss 107 1,209 — 4,207 5,523 2018
 Loans by stage – The percentage of exposures in Stage 2, significantly credit deteriorated, remained broadly unchanged in the year at 8.2% (2018 – 8.1%). Stage 3 assets, which align to AQ10, represented 1.9% of total exposures, and was down in the year (2018 – 2.6%). Similar to 2018, the Personal portfolio had a higher proportion of unsecured lending assets in Stage 2 than the mortgage portfolio. The percentage of the Wholesale portfolio in Stage 2 and Stage 3 was similar to that in the Personal portfolio.
 Loans – Past due analysis – The vast majority of assets overall were not past due, with the Stage 2 classification driven primarily by changes in lifetime PD. (For further detail, refer to the Significant increase in credit risk section). In mortgages, the majority of assets past due by more than 180 days were in Ulster Bank RoI reflecting their legacy mortgage portfolio and the residual effects from the financial crisis. In other Personal, the relatively high level of exposures past due by more than 90 days reflected the fact that impaired assets can be held on balance sheet with commensurate ECL provision for up to six years after default. Similarly, in the Wholesale portfolio, impaired assets can be held on the balance sheet for a significant period of time while restructuring and recovery processes are concluded.
 Weighted average 12 months PDs – In Wholesale, Basel PDs, which are based on a through-the-cycle approach, tend to be higher than point-in-time best estimate IFRS 9 PDs, reflecting the current state in the economic cycle, and also an element of conservatism in the regulatory capital framework. In Personal, the Basel PDs, which are point-in-time estimates, tend to be higher, also reflecting conservatism, higher in mortgages than other products, and an element of default rate under-prediction in the IFRS 9 PD models. This has been mitigated by ECL overlays (refer to Governance and post model adjustments on page 139.) The IFRS 9 PD for credit cards was higher than the Basel equivalent and reflected the relative sensitivity of the IFRS 9 model to forward-looking economic drivers. PDs overall remained broadly stable. The rise in other personal was reflective of slight increases in default rates addressed by risk appetite tightening. Overall Wholesale PDs slightly improved compared with the prior year, primarily driven by reductions in the property sector.
 ECL provision by stage and coverage – The majority of ECL by value was in Stage 3 impaired, with similar seen in both Personal and Wholesale. Provision coverage was progressively higher by stage reflecting the lifetime nature of losses in both Stage 2 and Stage 3. In the Personal portfolio, provision coverage was materially lower in mortgages relative to credit cards and other Personal, reflecting the secured nature of the facilities. For Wholesale exposures, security and enterprise value mitigated against losses in Stage 3. At a total Wholesale level, the Stage 3 provision coverage increased versus 2018. In Ulster Bank RoI, the reduction in Stage 3 ECL reflected improved customer engagement and the positive effects from the external economic environment as well as a residual benefit in 2019 from a 2018 debt sale.
 The ECL Impairment charge for the year was £696 million up from £398 million in 2018; primarily this reflected the transitioning from a very benign period towards a more normalised external credit environment as well as the impact of a small number of large individual commercial charges. The cost of risk at 20 basis points remained below RBS’s view of a normalised blended long-term loss rate of 30 to 40 basis points.
 Off-balance sheet exposures by asset quality – For Personal exposures, undrawn exposures were reflective of available credit lines in credit cards and current accounts. Additionally, the mortgage portfolio had undrawn exposure, where a formal offer had been made to a customer but had not yet been drawn down. There was also a legacy portfolio of flexible mortgages where a customer had the right and ability to draw down further funds. The asset quality distribution in mortgages remained heavily weighted to the highest quality bands AQ1-AQ4, with credit card concentrated in the risk bands AQ5-AQ8. In Wholesale, the significant majority of undrawn exposure, relating mainly to loan commitments, was in the AQ1-AQ4 category.
 Forbearance – Completed forbearance flow in 2019 for Wholesale was £2.8 billion (2018 – £2.6 billion). Forbearance granted in the property sector increased to £546 million (2018 – £305 million), driven by individually significant exposures. Retail and Leisure forbearance flow increased to £535 million (2018 – £425 million). Of the forbearance that completed during the year, £1.3 billion (2018 – £1.1 billion) related to payment concessions and £1.5 billion (2018 – £1.4 billion) related to non-payment concessions. Forbearance stock increased by £0.7 billion, from £3.2 billion to £3.9 billion, primarily due to an increase in forborne exposure in the transport, property, services and retail and leisure sectors. Both flow and stock volumes were lower than in 2018.
 Heightened Monitoring and Risk of Credit Loss – Exposure increased to £5.5 billion (2018 – £4.8 billion). Exposure in the property sector increased to £1.2 billion (2018 – £0.5 billion) driven by individually significant exposures. Individual case numbers in the property sector and across the Heightened Monitoring and Risk of Credit Loss portfolio in its entirety were marginally lower, despite the economic uncertainty during the year.
Gross Maximum credit risk CREM by type CREM coverage Exposure post CREM exposure ECL Total Stage 3 Financial (1) Property Other (2) Total Stage 3 Total Stage 3 2019 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Financial assets Cash and balances at central banks 87.2 — 87.2 — — — — — — 87.2 — Loans - amortised cost (3) 320.2 3.8 316.4 5.4 4.1 202.1 27.3 233.5 4.8 82.9 0.6 Personal (4) 179.1 2.0 177.1 3.2 — 164.1 — 164.1 3.0 13.0 0.2 Wholesale (5) 141.1 1.8 139.3 2.2 4.1 38.0 27.3 69.4 1.8 69.9 0.4 Debt securities 57.0 — 57.0 — — — — — — 57.0 — Total financial assets 464.4 3.8 460.6 5.4 4.1 202.1 27.3 233.5 4.8 227.1 0.6
Contingent liabilities and commitments Personal (6,7) 42.1 — 42.1 0.3 — 4.9 — 4.9 — 37.2 0.3 Wholesale 126.8 — 126.8 0.3 0.6 5.9 6.1 12.6 — 114.2 0.3 Total off-balance sheet 168.9 — 168.9 0.6 0.6 10.8 6.1 17.5 — 151.4 0.6 Total exposure 633.3 3.8 629.5 6.0 4.7 212.9 33.4 251.0 4.8 378.5 1.2 *2018 data has been restated for a change to presentation of unrecognised interest, refer to Accounting policy 1, Other amendments to IFRS, for further details. Also restated for the inclusion of non-modelled portfolios, primarily Private Banking and RBS International mortgage portfolios and associated CREM amounts.
Notes: (1) Includes cash and securities collateral. (2) Includes guarantees, charges over trade debtors, other asset finance related physical collateral as well as the amount by which credit risk exposure is reduced through netting arrangements, mainly cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3) RBS holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant and equipment; inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value of the loan.
(5) Stage 3 exposures post credit risk enhancement and mitigation in wholesale mainly represent enterprise value and the impact of written down collateral values; an individual assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
(6) £0.3 billion (2018 – £0.3 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited. (7) The Personal gross exposure value includes £9.6 billion (2018 – £7.9 billion) in respect of pipeline mortgages where a committed offer has been made to a customer but where the funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property.
Credit risk – Banking activities continued Personal portfolio (audited) Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
Other personal lending (3) 12,778 308 1,767 280 15,133 11,633 331 1,678 55 13,697 Impairment provisions (2) 1,087 13 16 1 1,117 920 26 21 1 968 Total personal lending 160,267 13,906 11,722 2,900 188,795 149,883 14,834 10,767 2,742 178,226 Mortgage LTV ratios - Total portfolio 57% 60% 57% 58% 57% 56% 62% 56% 58% 57% - Stage 1 57% 57% 57% 57% 57% 56% 58% 56% 57% 56% - Stage 2 58% 67% 60% 64% 59% 58% 67% 58% 55% 59% - Stage 3 55% 73% 70% 80% 66% 55% 77% 58% 99% 69% - Buy-to-let 53% 61% 54% 53% 54% 53% 64% 53% 53% 54% - Stage 1 52% 57% 54% 53% 52% 53% 58% 53% 52% 53% - Stage 2 57% 69% 57% 51% 59% 57% 72% 53% 57% 60% - Stage 3 59% 75% 58% 66% 67% 58% 78% 68% 75% 72% Gross new mortgage lending (4) 31,857 1,184 2,112 355 35,508 29,555 1,015 1,846 353 32,769 Of which: Owner occupied 30,779 1,175 1,889 248 34,091 28,608 1,005 1,689 241 31,543 0 Forbearance flow 450 177 4 5 636 446 212 11 16 685 Forbearance stock 1,212 2,229 2 11 3,454 1,338 2,778 8 17 4,141 Current 623 1,149 1 9 1,782 724 1,327 6 14 2,071 1-3 months in arrears 338 157 — 1 496 350 268 — 1 619 > 3 months in arrears 251 923 1 1 1,176 264 1,183 2 3 1,452 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details. Notes: (1) Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures. (2) For UK Personal Banking this excludes a non-material amount of provisions held on relatively small legacy portfolios. (3) Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that that are commercial in nature. (4) UK Personal Banking excludes additional lending to existing customers.
 New mortgage lending was higher than in 2018. The existing mortgage stock and new business were closely monitored against agreed risk appetite parameters. These included LTV ratios, buyto -let concentrations, new-build concentrations and credit quality. Underwriting standards were maintained during the period.
 Owner occupied and buy-to-let – Mortgage growth was driven by the owner occupied portfolio. New mortgages in the buy-to-let portfolio remained subdued as tax and regulatory changes in the UK reduced borrower activity.
 LTVs – The new lending and the mortgage portfolio weighted average LTV ratio remained stable, reflecting slower UK house price growth.
 Other lending – UK Personal Banking balances continued to increase, up 9.8%, with growth observed across both credit card and loan portfolios.
 Provisions – The decrease in mortgage provision was primarily due to reduced provisioning requirements in Ulster Bank RoI, reflected improved customer engagement and the continued positive effects from the external environment. In Other personal, the increase was primarily a result of Stage 3 assets and reflected the steady flow of new defaults which increased slightly year-onyear, however, in unsecured lending the trend flattened in the second half of the year as a result of risk appetite tightening.
Stage 1 Stage 2 Stage 3 scope Total lending Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total 2019 £m £m £m £m £m £m £m £m £m £m % % % %
≤50% 47,746 3,375 511 159 51,791 4,661 2 19 90 111 — 0.6 17.6 0.2 >50% and ≤70% 47,224 3,804 463 91 51,582 8,723 3 29 68 100 — 0.8 14.7 0.2 >70% and ≤80% 23,235 1,568 150 39 24,992 8,366 2 14 26 42 — 0.9 17.1 0.2 >80% and ≤90% 14,030 1,111 85 25 15,251 8,675 2 12 18 32 — 1.1 20.5 0.2 >90% and ≤100% 3,401 174 20 15 3,610 1,208 1 4 5 10 — 2.5 25.4 0.3 >100% and ≤110% 42 34 8 1 85 — — 2 2 4 0.1 5.1 25.3 4.4 >110% and ≤130% 47 38 7 1 93 — — 2 2 4 0.1 6.1 33.5 5.0 >130% and ≤150% 19 22 6 1.0 48 — — 1 2 3 0.1 6.3 27.7 6.5 >150% 3 6 3 — 12 — — — 2 2 0.1 6.5 45.7 15.2 Total with LTVs 135,747 10,132 1,253 332 147,464 31,633 10 83 215 308 — 0.8 17.0 0.2 Other 21 3 1 — 25 224 — — 1 1 0.1 4.2 81.2 3.2 Total 135,768 10,135 1,254 332 147,489 31,857 10 83 216 309 — 0.8 17.1 0.2 2018*
≤50% 47,111 3,423 516 153 51,203 4,779 2 16 98 116 — 0.5 19.0 0.2 >50% and ≤70% 44,037 3,632 459 49 48,177 8,535 2 23 60 85 — 0.6 13.0 0.2 >70% and ≤80% 20,345 1,490 135 15 21,985 7,434 1 11 17 29 — 0.7 12.4 0.1 >80% and ≤90% 12,733 1,118 81 12 13,944 7,524 2 12 12 26 — 1.1 15.4 0.2 >90% and ≤100% 2,343 178 24 7 2,552 1,104 1 4 4 9 — 2.4 18.5 0.4 >100% and ≤110% 57 35 8 1 101 — — 2 2 4 0.1 4.6 21.6 3.4 >110% and ≤130% 53 41 9 2 105 — — 2 2 4 0.1 5.4 22.4 4.0 >130% and ≤150% 23 23 6 — 52 — — 1 1 2 0.1 6.2 20.5 5.2 >150% 3 9 3 — 15 — — 1 1 2 0.1 6.2 26.4 9.1 Total with LTVs 126,705 9,949 1,241 239 138,134 29,376 8 72 197 277 — 0.7 15.9 0.2 Other 96 13 4 3 116 179 — 1 3 4 — 4.7 81.9 3.6 Total 126,801 9,962 1,245 242 138,250 29,555 8 73 200 281 — 0.7 16.1 0.2
≤50% 4,107 308 475 — 4,890 107 4 7 97 108 0.1 2.3 20.5 2.2 >50% and ≤70% 3,382 274 409 — 4,065 231 3 7 90 100 0.1 2.6 22.0 2.5 >70% and ≤80% 1,381 151 219 — 1,751 356 2 4 60 66 0.1 3.0 27.5 3.8 >80% and ≤90% 1,132 145 217 — 1,494 484 1 5 76 82 0.1 3.0 35.1 5.5 >90% and ≤100% 381 102 188 — 671 3 1.0 3 72 76 0.2 2.9 38.6 11.3 >100% and ≤110% 167 57 151 — 375 2 — 2 67 69 0.3 3.5 44.0 18.4 >110% and ≤130% 82 36 152 — 270 1 — 2 78 80 0.3 4.9 51.3 29.7 >130% and ≤150% 8 3 46 — 57 — — — 30 30 0.6 4.1 64.7 51.9 >150% 7 3 15 — 25 — — — 11 11 0.3 8.2 71.4 44.6 Total with LTVs 10,647 1,079 1,872 — 13,598 1,184 11 30 581 622 0.1 2.8 31.0 4.6 2018*
≤50% 3,818 374 465 — 4,657 109 1 5 41 47 — 1.4 8.9 1.0 >50% and ≤70% 3,567 365 475 — 4,407 235 2 10 63 75 — 2.7 13.3 1.7 >70% and ≤80% 1,564 190 260 — 2,014 356 1 11 70 82 0.1 5.5 27.0 4.1 >80% and ≤90% 1,059 183 295 — 1,537 306 2 15 106 123 0.2 8.3 35.7 8.0 >90% and ≤100% 570 153 284 — 1,007 3 2 17 121 140 0.4 11.1 42.7 13.9 >100% and ≤110% 197 80 229 — 506 5 2 10 107 119 0.9 12.8 46.6 23.5 >110% and ≤130% 51 35 205 — 291 1 — 6 110 116 0.8 16.6 53.8 40.0 >130% and ≤150% 5 5 46 — 56 — — 1 29 30 0.3 19.1 63.3 53.8 >150% 10 3 15 — 28 — — 1 10 11 2.1 27.2 66.3 40.1 Total with LTVs 10,841 1,388 2,274 — 14,503 1,015 10 76 657 743 0.1 5.4 28.9 5.1 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
 ECL coverage rates increase through the LTV bands with both UK Personal Banking and Ulster Bank RoI having only limited exposures in the highest LTV bands. The relatively high coverage level in the lowest LTV band for UK Personal Banking included the effect of timediscounting on expected recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that are not subject to formal repossession activity.
South East 14,175 19,390 3,920 7 — 37,492 56 7 37,499 25 Greater London 13,199 10,496 1,504 4 — 25,203 49 4 25,207 17 Scotland 3,395 5,946 1,726 3 — 11,070 60 1 11,071 8 North West 4,449 8,420 1,524 4 — 14,397 58 2 14,399 10 South West 4,482 7,374 1,391 5 — 13,252 57 2 13,254 9 West Midlands 3,086 6,109 1,520 5 — 10,720 60 1 10,721 7 Rest of the UK 9,004 18,839 7,276 198 13 35,330 63 8 35,338 24 Total 51,790 76,574 18,861 226 13 147,464 57 25 147,489 100
Investment Residential (2) 4,507 462 27 4,996 4,437 363 54 4,854 Office (3) 2,916 183 83 3,182 2,891 164 651 3,706 Retail (4) 5,277 63 62 5,402 5,173 40 97 5,310 Industrial (5) 2,457 18 115 2,590 2,272 51 176 2,499 Mixed/other (6) 3,672 187 56 3,915 3,229 180 128 3,537
≤50% 8,229 245 54 795 9,323 7 4 16 27 0.1 1.6 29.6 0.3 >50% and ≤70% 4,769 297 80 703 5,849 6 6 16 28 0.1 2.0 20.0 0.5 >70% and ≤80% 394 43 35 6 478 1 1 10 12 0.3 2.3 28.6 2.5 >80% and ≤90% 55 11 26 2 94 — — 7 7 — — 26.9 7.6 >90% and ≤100% 31 7 22 1 61 — — 9 9 — — 40.9 15.0 >100% and ≤110% 53 4 16 — 73 — — 6 6 — — 37.5 8.2 >110% and ≤130% 22 3 116 4 145 — — 27 27 — — 23.3 19.1 >130% and ≤150% 6 10 11 — 27 — 1 5 6 — 10.0 45.5 22.2 >150% 30 6 48 — 84 — 1 35 36 — 16.7 72.9 42.9 Total with LTVs 13,589 626 408 1,511 16,134 14 13 131 158 0.1 2.1 32.1 1.1 Total portfolio average LTV% 45% 56% 114% 48% 47% — — — — — — — — Other (5) 2,655 133 799 185 3,772 4 5 65 74 0.2 3.8 8.1 2.1 Development (6) 2,865 205 196 174 3,440 11 3 98 112 0.4 1.5 50.0 3.4 Total 19,109 964 1,403 1,870 23,346 29 21 294 344 0.2 2.2 21.0 1.6 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
 Overall – The majority of the CRE portfolio was managed in the UK within Commercial Banking and Private Banking. Business appetite and strategy remain aligned across the segments.
 Risk appetite – Lending criteria for commercial real estate are considered conservative, with lower leverage required for new London office originations and most parts of the retail sector.
 Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write-down for debt sale activity.
 There were small ECL flows from Stage 3 to Stage 1. This does not however indicate that accounts returned from Stage 3 to Stage 1 directly. On a similar basis, there were flows from Stage 1 to Stage 3 including transfers due to unexpected default events. The small number of write-offs in Stage 1 and Stage 2 reflect the effect of portfolio debt sales and also staging at the start of the analysis period.
Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL
RBS Group total £m £m £m £m £m £m £m £m
At 1 January 2019 422,541 297 27,360 772 8,251 2,782 458,152 3,851 Currency translation and other adjustments (5,660) (4) (196) (5) (57) (40) (5,913) (49) Transfers from Stage 1 to Stage 2 (28,289) (112) 28,289 112 — — — — Transfers from Stage 2 to Stage 1 20,558 317 (20,558) (317) — — — — Transfers to Stage 3 (441) (3) (3,167) (241) 3,608 244 — — Transfers from Stage 3 411 40 1,306 118 (1,717) (158) — — Net re-measurement of ECL on stage transfer (276) 572 574 870 Changes in risk parameters (model inputs) (43) (187) 304 74 Other changes in net exposure 19,485 107 (4,399) (67) (2,164) (107) 12,922 (67) Other (P&L only items) — — (181) (181) Income statement (releases)/charges (212) 318 590 696 Amounts written-off (1) (1) (5) (5) (786) (786) (792) (792) Unwinding of discount — — (95) (95) At 31 December 2019 428,604 322 28,630 752 7,135 2,718 464,369 3,792 Net carrying amount 428,282 27,878 4,417 460,577 At 1 January 2018 419,038 262 29,637 621 10,595 3,565 459,270 4,448 2018 movements 3,503 35 (2,277) 151 (2,344) (783) (1,118) (597) At 31 December 2018* 422,541 297 27,360 772 8,251 2,782 458,152 3,851 Net carrying amount 422,244 26,588 5,469 454,301 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
2018 movements included transfers from Stage 1 to Stage 2 of £18,416 million (ECL – £52 million), transfers from Stage 2 to Stage 1 of £13,723 million (ECL – £228 million), transfers into Stage 3 of £3,042 million (ECL – £111 million) and transfers from Stage 3 of £2,795 million (ECL – £179 million). An additional ECL of £487 million was recognised as a result of these cumulative transfers. It also included amounts written-off of £1,494 million.
UK Personal Banking - mortgages £m £m £m £m £m £m £m £m
 The increase in ECL in Stage 1 and Stage 2 was reflective of portfolio growth and also due to a slight increase in the portfolio default rate from a low level that included the effect of the natural seasoning of strong business growth in prior years. The rise in Stage 2 also included the effect of a small increase in ECL related to forward-looking economic uncertainty.
 ECL transfers from Stage 3 to Stage 1 and Stage 2 were higher than those in unsecured lending, due to the higher cure activity typically seen in mortgages.
At 1 January 2019 2,632 36 1,226 118 108 73 3,966 227 Transfers from Stage 1 to Stage 2 (1,265) (25) 1,265 25 — — — — Transfers from Stage 2 to Stage 1 1,056 74 (1,056) (74) — — — — Transfers to Stage 3 (20) — (123) (40) 143 40 — — Transfers from Stage 3 — — 9 6 (9) (6) — — Net re-measurement of ECL on stage transfer (53) 154 55 156 Changes in risk parameters (model inputs) (24) (74) 8 (90) Other changes in net exposure 401 30 (75) 16 (39) — 287 46 Other (P&L only items) — — (7) (7) Income statement (releases)/charges (47) 96 56 105 Amounts written-off — — — — (76) (76) (76) (76) Unwinding of discount — — (6) (6) At 31 December 2019 2,804 38 1,246 131 127 88 4,177 257 Net carrying amount 2,766 1,115 39 3,920 At 1 January 2018 2,841 52 997 94 105 75 3,943 221 2018 movements (209) (16) 229 24 3 (2) 23 6 At 31 December 2018* 2,632 36 1,226 118 108 73 3,966 227 Net carrying amount 2,596 1,108 35 3,739 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
At 1 January 2019 5,073 54 1,970 239 503 402 7,546 695 Currency translation and other adjustments (1) (1) (1) (1) 4 4 2 2 Transfers from Stage 1 to Stage 2 (2,527) (42) 2,527 42 — — — — Transfers from Stage 2 to Stage 1 1,292 82 (1,292) (82) — — — — Transfers to Stage 3 (11) — (332) (105) 343 105 — — Transfers from Stage 3 4 1 38 14 (42) (15) — — Net re-measurement of ECL on stage transfer (62) 229 112 279 Changes in risk parameters (model inputs) 9 (46) 79 42 Other changes in net exposure 1,587 22 (660) (38) (61) (9) 866 (25) Other (P&L only items) — — (39) (39) Income statement (releases)/charges (31) 145 143 257 Amounts written-off — — — — (139) (139) (139) (139) Unwinding of discount — — (21) (21) At 31 December 2019 5,417 63 2,250 252 608 518 8,275 833 Net carrying amount 5,354 1,998 90 7,442 At 1 January 2018 4,518 46 1,790 164 705 582 7,013 792 2018 movements 555 8 180 75 (202) (180) 533 (97) At 31 December 2018* 5,073 54 1,970 239 503 402 7,546 695 Net carrying amount 5,019 1,731 101 6,851 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 Write-off occurs once recovery activity with the customer has been concluded and there are no further recoveries expected, but no later than six years after default.
Commercial Banking - excluding business banking £m £m £m £m £m £m £m £m
At 1 January 2019 81,485 108 9,393 155 2,473 900 93,351 1,163 Currency translation and other adjustments (527) — (73) (1) 58 (18) (542) (19) Inter-group transfers (454) (1) (45) — (1) 16 (500) 15 Transfers from Stage 1 to Stage 2 (12,165) (25) 12,165 25 — — — — Transfers from Stage 2 to Stage 1 7,679 69 (7,679) (69) — — — — Transfers to Stage 3 (233) (1) (1,382) (23) 1,615 24 — — Transfers from Stage 3 315 31 451 15 (766) (46) — — Net re-measurement of ECL on stage transfer (82) 84 298 300 Changes in risk parameters (model inputs) (1) (6) 86 79 Other changes in net exposure 3,150 25 (1,825) (9) (708) (43) 617 (27) Other (P&L only items) — — (20) (20) Income statement (releases)/charges (58) 69 321 332 Amounts written-off — — — — (391) (391) (391) (391) Unwinding of discount — — (7) (7) At 31 December 2019 79,250 123 11,005 171 2,280 819 92,535 1,113 Net carrying amount 79,127 10,834 1,461 91,422 At 1 January 2018 90,999 64 9,651 117 3,861 1,213 104,511 1,394 2018 movements (9,514) 44 (258) 38 (1,388) (313) (11,160) (231) At 31 December 2018* 81,485 108 9,393 155 2,473 900 93,351 1,163 Net carrying amount 81,377 9,238 1,573 92,188 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 ECL decreased overall with write-offs exceeding the level of impairment charges on new into default cases.
 Increases in Stage 1 and Stage 2 ECL were offset by write-offs in Stage 3.
 Stage 3 income statement charges increased compared to 2018. This was primarily due to a small number of individually significant impairment charges which also affected the transfers to Stage 3.
 For loans that are individually assessed for impairment, the timing of write-off is determined on a case-by-case basis. Such loans are reviewed regularly and write-offs are prompted by bankruptcy, insolvency, renegotiation and similar events.
Commercial - business banking £m £m £m £m £m £m £m £m
At 1 January 2019 6,303 22 897 43 245 163 7,445 228 Currency translation and other adjustments — — — — 3 3 3 3 Transfers from Stage 1 to Stage 2 (924) (6) 924 6 — — — — Transfers from Stage 2 to Stage 1 680 20 (680) (20) — — — — Transfers to Stage 3 (17) — (144) (21) 161 21 — — Transfers from Stage 3 7 2 27 7 (34) (9) — — Net re-measurement of ECL on stage transfer (19) 50 60 91 Changes in risk parameters (model inputs) 4 (12) 36 28 Other changes in net exposure 289 5 (257) (8) (60) (13) (28) (16) Other (P&L only items) — — (50) (50) Income statement (releases)/charges (10) 30 33 53 Amounts written-off — — — — (58) (58) (58) (58) Unwinding of discount — — (3) (3) At 31 December 2019 6,338 28 767 45 257 200 7,362 273 Net carrying amount 6,310 722 57 7,089 At 1 January 2018 6,505 29 684 29 268 224 7,457 282 2018 movements (202) (7) 213 14 (23) (61) (12) (54) At 31 December 2018* 6,303 22 897 43 245 163 7,445 228 Net carrying amount 6,281 854 82 7,217 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 The portfolio continued to benefit from cash recoveries post writeoff, which are reported as other (P&L only items).
 Write-off occurs once recovery activity with the customer has been concluded and there are no further recoveries expected, but no later than five years after default.
Note: (1) Reflects the NatWest Markets segment and includes NWM N.V..
 The reduction in Stage 3 exposure was mainly due to the resolution and closure of one significant asset.
 Changes to risk parameters and the reduction in Stage 2 exposure during the year reflected an improvement in underlying credit risk metrics.
 Continued exit from legacy assets resulted in a net release of ECL provision.
Personal Currently in arrears (>30 DPD) 658 10 90 10 3 — 17 6 88 22 856 48 Currently up-to-date 9,612 65 1,292 66 — — 1,226 114 1,985 226 14,115 471 - PD deterioration 3,855 55 680 44 — — 778 85 1,255 177 6,568 361 - Up-to-date, PD persistence 1,448 5 54 1 — — 337 17 440 26 2,279 49 - Other driver (adverse credit, forbearance etc) 4,309 5 558 21 — — 111 12 290 23 5,268 61 Total Stage 2 10,270 75 1,382 76 3 — 1,243 120 2,073 248 14,971 519
Wholesale Currently in arrears (>30 DPD) 255 7 315 5 1 — — — 571 12 Currently up-to-date 1,622 33 8,438 198 473 10 22 — 10,555 241 - PD deterioration 924 23 5,564 139 281 6 8 — 6,777 168 - Up-to-date, PD persistence 57 1 170 5 4 — — — 231 6 - Other driver (adverse credit, forbearance etc) 641 9 2,704 54 188 4 14 — 3,547 67 Total Stage 2 1,877 40 8,753 203 474 10 22 — 11,126 253
 Overall, Stage 2 ECL balances remained broadly stable. Coverage can vary across categories or sectors reflecting the individual characteristics of the customer and exposure type.
Personal trigger (1) PD movement 4,583 44.0 223 20.7 — — 742 59.0 1,538 66.6 7,086 47.1 PD persistence 1,815 17.5 252 23.4 — — 422 33.5 542 23.5 3,031 20.2 Adverse credit bureau recorded with credit reference agency 3,236 31.2 — — — — 59 4.7 102 4.4 3,397 22.6 Forbearance support provided 163 1.6 3 0.3 — — — — 10 0.4 176 1.2 Customers in collections 137 1.3 74 6.9 — — 3 0.2 36 1.6 250 1.7 Other reasons (2) 339 3.3 525 48.7 — — 33 2.6 56 2.4 953 6.3 Days past due >30 115 1.1 — — — — — — 26 1.1 141 0.9
Personal trigger (1) PD movement 4,273 41.6 767 55.6 — — 793 63.8 1,307 63.0 7,140 47.7 PD persistence 1,450 14.1 54 3.9 — — 338 27.2 440 21.2 2,282 15.2 Adverse credit bureau recorded with credit reference agency 2,996 29.2 — — — — 61 4.9 101 4.9 3,158 21.1 Forbearance support provided 206 2.0 2 0.1 — — — — 13 0.6 221 1.5 Customers in collections 144 1.4 57 4.1 — — 5 0.4 36 1.7 242 1.6 Other reasons (2) 982 9.6 502 36.3 — — 46 3.7 151 7.3 1,681 11.2 Days past due >30 219 2.1 — — 3 100.0 — — 25 1.2 247 1.6
Wholesale trigger (1) PD movement 1,416 54.8 6,129 63.1 368 67.4 3 75.0 7,916 61.7 PD persistence 45 1.7 183 1.9 3 0.5 — — 231 1.8 Risk of credit loss 915 35.5 2,394 24.7 69 12.6 — — 3,378 26.3 Forbearance support provided 31 1.2 140 1.4 29 5.3 — — 200 1.6 Customers in collections 10 0.4 47 0.5 — — — — 57 0.4 Other reasons (3) 146 5.7 659 6.8 71 13.0 1 25.0 877 6.8 Days past due >30 17 0.7 152 1.6 6 1.1 — — 175 1.4
Notes: (1) The table is prepared on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD deterioration. (2) Includes customers that have accessed payday lending, interest only mortgages past end of term, a small number of mortgage customers on a highly flexible mortgage significantly behind their repayment plan and customers breaching risk appetite thresholds for new business acquisition. (3) Includes customers where a PD assessment cannot be undertaken due to missing PDs.
Credit risk – Banking activities continued Stage 3 vintage analysis The table below shows estimated vintage analysis of the material Stage 3 portfolios totalling 83% of the Stage 3 loans of £6.6 billion.
Stage 3 loans (£bn) 1.3 1.9 2.3 1.2 2.3 3.4 Vintage (time in default): <1 year 32% 13% 37% 26% 7% 22% 1-3 years 23% 12% 14% 21% 31% 19% 3-5 years 11% 23% 9% 14% 16% 9% 5-10 years 26% 44% 40% 35% 44% 50% >10 years 8% 8% — 4% 2% —
UK mortgages AQ1-AQ4 90,494 2,579 — 93,073 6 7 — 13 0.01 0.27 — 0.01 AQ5-AQ8 58,039 6,939 — 64,978 8 55 — 63 0.01 0.79 — 0.10 AQ9 96 870 — 966 — 25 — 25 — 2.87 — 2.59 AQ10 — — 1,414 1,414 — — 240 240 — — 16.97 16.97 148,629 10,388 1,414 160,431 14 87 240 341 0.01 0.84 16.97 0.21 RoI mortgages AQ1-AQ4 6,215 212 — 6,427 4 4 — 8 0.06 1.89 — 0.12 AQ5-AQ8 4,416 615 — 5,031 7 19 — 26 0.16 3.09 — 0.52 AQ9 1 250 — 251 — 8 — 8 — 3.20 — 3.19 AQ10 (1) — — 1,863 1,863 — — 581 581 — — 31.19 31.19 10,632 1,077 1,863 13,572 11 31 581 623 0.10 2.88 31.19 4.59 Credit cards AQ1-AQ4 364 11 — 375 1 1 — 2 0.27 9.09 — 0.53 AQ5-AQ8 2,734 1,187 — 3,921 39 112 — 151 1.43 9.44 — 3.85 AQ9 5 61 — 66 — 19 — 19 — 31.15 — 28.79 AQ10 — — 116 116 — — 89 89 — — 76.72 76.72 3,103 1,259 116 4,478 40 132 89 261 1.29 10.48 76.72 5.83 Other personal AQ1-AQ4 1,231 59 — 1,290 4 5 — 9 0.32 8.47 — 0.70 AQ5-AQ8 6,127 2,045 — 8,172 59 195 — 254 0.96 9.54 — 3.11 AQ9 78 206 — 284 2 53 — 55 2.56 25.73 — 19.37 AQ10 — — 643 643 — — 539 539 — — 83.83 83.83 7,436 2,310 643 10,389 65 253 539 857 0.87 10.95 83.83 8.25 Total personal AQ1-AQ4 98,304 2,861 — 101,165 15 17 — 32 0.02 0.59 — 0.03 AQ5-AQ8 71,316 10,786 — 82,102 113 381 — 494 0.16 3.53 — 0.60 AQ9 180 1,387 — 1,567 2 105 — 107 1.11 7.57 — 6.83 AQ10 — — 4,036 4,036 — — 1,449 1,449 — — 35.90 35.90
UK mortgages AQ1-AQ4 95,618 3,621 — 99,239 6 11 — 17 0.01 0.30 — 0.02 AQ5-AQ8 42,771 5,845 — 48,616 6 47 — 53 0.01 0.80 — 0.11 AQ9 32 804 — 836 — 17 — 17 — 2.11 — 2.03 AQ10 — — 1,621 1,621 — — 230 230 — — 14.19 14.19 138,421 10,270 1,621 150,312 12 75 230 317 0.01 0.73 14.19 0.21 RoI mortgages AQ1-AQ4 5,164 226 — 5,390 4 5 — 9 0.08 2.21 — 0.17 AQ5-AQ8 5,668 717 — 6,385 7 32 — 39 0.12 4.46 — 0.61 AQ9 12 439 — 451 — 39 — 39 — 8.88 — 8.65 AQ10 (1) — — 2,265 2,265 — — 656 656 — — 28.96 28.96 10,844 1,382 2,265 14,491 11 76 656 743 0.10 5.50 28.96 5.13 Other mortgages (1) AQ1-AQ4 359 1 — 360 — — — — — — — — AQ5-AQ8 136 2 — 138 — — — — — — — — AQ10 — — 1 1 — — — — — — — —
495 3 1 499 — — — — — — — — Credit cards AQ1-AQ4 34 1 — 35 — — — — — — — — AQ5-AQ8 2,810 1,180 — 3,990 38 103 — 141 1.35 8.73 — 3.53 AQ9 7 62 — 69 — 17 — 17 — 27.42 — 24.64 AQ10 — — 124 124 — — 75 75 — — 60.48 60.48 2,851 1,243 124 4,218 38 120 75 233 1.33 9.65 60.48 5.52 Other personal AQ1-AQ4 997 43 — 1,040 4 5 — 9 0.40 11.63 — 0.87 AQ5-AQ8 5,889 1,847 — 7,736 55 187 — 242 0.93 10.12 — 3.13 AQ9 56 183 — 239 2 56 — 58 3.57 30.60 — 24.27 AQ10 — — 574 574 — — 430 430 — — 74.91 74.91 6,942 2,073 574 9,589 61 248 430 739 0.88 11.96 74.91 7.71 Total personal AQ1-AQ4 102,172 3,892 — 106,064 14 21 — 35 0.01 0.54 — 0.03 AQ5-AQ8 57,274 9,591 — 66,865 106 369 — 475 0.19 3.85 — 0.71 AQ9 107 1,488 — 1,595 2 129 — 131 1.87 8.67 — 8.21 AQ10 — — 4,585 4,585 — — 1,391 1,391 — — 30.34 30.34 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) AQ10 includes £0.6 billion (2018 - £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3. (2) In 2019, other mortgages are reported as UK, reflecting country of lending origination.
 The relatively high level of Stage 3 impaired assets (AQ10) in RoI mortgages reflected their legacy mortgage portfolio and the residual effects from the financial crisis. The year-on-year reduction was due to improved customer engagement and the positive effects from the external environment, as well as a residual benefit in 2019 from a 2018 debt sale.
 In Other Personal, the relatively high level of exposures in AQ10 reflected that impaired assets can be held on the balance sheet, with commensurate ECL provision for up to six years after default. The year-on-year increase included the effect of a modest rise in the rate of default, however, the trend flattened in the second half of the year as a result of risk appetite tightening.
 In addition, the sale of Stage 3 impaired debt in 2018 reduced the ongoing business-as-usual flow of write-offs, with the actual value of debts sales in 2019 also lower than the prior year.
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Property AQ1-AQ4 15,590 413 — 16,003 7 6 — 13 0.04 1.45 — 0.08 AQ5-AQ8 17,268 2,115 — 19,383 38 36 — 74 0.22 1.70 — 0.38 AQ9 38 52 — 90 — 5 — 5 — 9.62 — 5.56 AQ10 — — 895 895 — — 402 402 — — 44.92 44.92 32,896 2,580 895 36,371 45 47 402 494 0.14 1.82 44.92 1.36 Corporate AQ1-AQ4 22,373 616 — 22,989 12 11 — 23 0.05 1.79 — 0.10 AQ5-AQ8 37,133 8,803 — 45,936 111 169 — 280 0.30 1.92 — 0.61 AQ9 183 285 — 468 1 18 — 19 0.55 6.32 — 4.06 AQ10 — — 1,649 1,649 — — 859 859 — — 52.09 52.09 59,689 9,704 1,649 71,042 124 198 859 1,181 0.21 2.04 52.09 1.66 Financial institutions AQ1-AQ4 32,297 225 — 32,522 7 1 — 8 0.02 0.44 — 0.02 AQ5-AQ8 3,406 319 — 3,725 9 2 — 11 0.26 0.63 — 0.30 AQ9 4 2 — 6 — 1 — 1 — 50.00 — 16.67 AQ10 — — 13 13 — — 8 8 — — 61.54 61.54 35,707 546 13 36,266 16 4 8 28 0.04 0.73 61.54 0.08 Sovereign AQ1-AQ4 7,268 4 — 7,272 7 — — 7 0.10 — — 0.10 AQ5-AQ8 142 — — 142 — — — — — — — — AQ10 — — 5 5 — — — — — — — —
Property AQ1-AQ4 15,740 393 — 16,133 8 9 — 17 0.05 2.29 — 0.11 AQ5-AQ8 17,397 1,418 — 18,815 35 27 — 62 0.20 1.90 — 0.33 AQ9 8 66 — 74 — 4 — 4 — 6.06 — 5.41 AQ10 — — 1,768 1,768 — — 589 589 — — 33.31 33.31 33,145 1,877 1,768 36,790 43 40 589 672 0.13 2.13 33.31 1.83 Corporate AQ1-AQ4 21,814 773 — 22,587 14 14 — 28 0.06 1.81 — 0.12 AQ5-AQ8 40,004 7,647 — 47,651 96 174 — 270 0.24 2.28 — 0.57 AQ9 26 333 — 359 1 15 — 16 3.85 4.50 — 4.46 AQ10 — — 1,773 1,773 — — 771 771 — — 43.49 43.49 61,844 8,753 1,773 72,370 111 203 771 1,085 0.18 2.32 43.49 1.50 Financial institutions AQ1-AQ4 22,150 247 — 22,397 6 5 — 11 0.03 2.02 — 0.05 AQ5-AQ8 2,352 222 — 2,574 8 4 — 12 0.34 1.80 — 0.47 AQ9 — 5 — 5 — 1 — 1 — 20.00 — 20.00 AQ10 — — 44 44 — — 31 31 — — 70.45 70.45 24,502 474 44 25,020 14 10 31 55 0.06 2.11 70.45 0.22 Sovereign AQ1-AQ4 6,780 22 — 6,802 7 — — 7 0.10 — — 0.10 AQ5-AQ8 161 — — 161 — — — — — — — — AQ10 — — 4 4 — — — — — — — —
6,941 22 4 6,967 7 — — 7 0.10 — — 0.10 Total AQ1-AQ4 66,484 1,435 — 67,919 35 28 — 63 0.05 1.95 — 0.09 AQ5-AQ8 59,914 9,287 — 69,201 139 205 — 344 0.23 2.21 — 0.50 AQ9 34 404 — 438 1 20 — 21 2.94 4.95 — 4.79 AQ10 — — 3,589 3,589 — — 1,391 1,391 — — 38.76 38.76 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
 Across the Wholesale portfolio, the asset quality band distribution differed, reflecting the diverse nature of the sectors. 52% (2018 – 48%) of Wholesale lending exposure was in the AQ1-AQ4 band.
 The relatively low provision coverage for Stage 3 loans in the property sector reflected the secured nature of the exposures.
Credit risk – Trading activities This section details the credit risk profile of RBS’s trading activities.
Securities financing transactions and collateral (audited) The table below shows securities funding transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all classifications under IFRS 9.
Of which: netting Of which: netting Total can be offset arrangements Total can be offset arrangements
Gross 74,156 73,348 808 71,494 69,020 2,474 IFRS offset (39,247) (39,247) — (39,247) (39,247) — Carrying value 34,909 34,101 808 32,247 29,773 2,474
Master netting arrangements (762) (762) — (762) (762) — Securities collateral (24,548) (24,548) — (28,441) (28,441) — Potential for offset not recognised under IFRS (25,310) (25,310) — (29,203) (29,203) — Net 2,997 10 2,987 1,157 — 1,157
The table below shows derivatives by type of contract. The master netting agreements and collateral shown do not result in a net presentation on the balance sheet under IFRS 9. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets. The table also includes hedging derivatives in Treasury.
Gross exposure 160,942 158,603 138,390 135,673 IFRS offset (10,913) (11,724) (5,041) (6,776) Carrying value 3,311 5,048 4,710 1,994 15,063 150,029 146,879 13,979 133,349 128,897 Of which: Interest rate (1) Interest rate swaps 89,646 86,123 81,855 74,004 Options purchased 15,300 — 14,481 — Options written — 13,198 — 16,371 Futures and forwards 11 10 74 69 Total 2,911 3,306 4,120 956 11,293 104,957 99,331 10,536 96,410 90,444 Exchange rate Spot, forwards and futures 30,348 30,728 17,904 18,610 Currency swaps 8,795 10,296 11,322 12,062 Options purchased 5,649 — 7,319 — Options written — 6,117 — 7,558 Total 399 1,733 580 1,038 3,750 44,792 47,141 3,426 36,545 38,230 Credit 1 6 10 — 17 280 359 16 346 208 Equity and commodity — 3 — — 3 — 48 1 48 15 Carrying value 15,063 150,029 146,879 13,979 133,349 128,897
Banks (2) 621 857 362 443 Other financial institutions (3) 1,020 4,088 1,054 1,144 Corporate (4) 2,452 639 2,510 1,817 Government (5) 262 26 255 38 Net exposure 4,355 5,610 4,181 3,442
Notes: (1) The notional amount of interest rate derivatives include £7,090 billion (2018 – £5,952 billion) in respect of contracts cleared through central clearing counterparties. (2) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
Credit risk – Trading activities continued Derivatives: settlement basis and central counterparties (audited) The table below shows the third party derivative notional and fair value by trading and settlement method.
Interest rate 1,642 5,952 2,942 10,536 — 96,410 — 90,444 Exchange rate 4 — 3,422 3,426 — 36,545 — 38,230 Credit — — 16 16 — 346 — 208 Equity and commodity — — 1 1 — 48 — 15 Total 1,646 5,952 6,381 13,979 — 133,349 — 128,897
Debt securities (audited) The table below shows debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest of Standard & Poor’s, Moody’s and Fitch. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets.
Credit risk – Cross border exposure Cross border exposures comprise both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and advances, including finance leases and instalment credit receivables, and other monetary assets, such as debt securities. The geographical breakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local currency claims of overseas offices on local residents but exclude exposures to local residents in local currencies. The table shows cross border exposures greater than 0.5% of RBS’s total assets.
 Non-traded market risk is managed separately on both sides of the ring-fence. It continues to be aggregated and monitored against risk appetite at RBS level.
 Interest rates remained low in 2019, reflecting partly uncertainty over Brexit but also broader uncertainty. The Bank of England base rate remained unchanged at 0.75% but market expectations were for lower interest rates in the longer term. The five-year swap rate fell to 0.81% at 31 December 2019 compared to 1.22% at 31 December 2018, which contributed to slightly lower returns on the structural hedge.
Responsibility for identifying, measuring, monitoring and controlling market risk arising from non-trading activities lies with the relevant business. Oversight is provided by the independent Risk function.
Risk measurement (audited) Non-traded internal VaR (1-day 99%) The following table presents one-day internal banking book Value-at-Risk (VaR) at a 99% confidence level, split by risk type. RBS’s VaR metrics are explained on page 176. Each of the key risk types are discussed in greater detail in their individual sub-sections following this table.
Key points  Since June 2019, total VaR has included an equity component reflecting the equity exposure to SABB following the merger with Alawwal. However, given the offsetting diversification benefit, average VaR was at similar levels to the previous year.
 Structural foreign exchange VaR fell on a period-end basis driven by the merger.  Interest rate VaR decreased mainly due to the disposals of the
NTIRR comprises the following three primary risk types:  Gap risk – arises from the timing of rate changes in non-trading book instruments. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (nonparallel risk).
To manage exposures within its risk appetite, RBS aggregates interest rate positions and hedges its residual exposure, primarily with interest rate swaps.
Structural hedging RBS has a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets (such as fixed-rate mortgages or UK government gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a consistent and predictable revenue stream.
The table below presents the incremental income allocation above three-month LIBOR, total income allocation including three-month LIBOR, the period-end and average notional balances, and the total yield including three-month LIBOR associated with the structural hedges managed by RBS.
2019 2018 Incremental Total Period end Average Total Incremental Total Period end Average Total income income notional notional yield income income notional notional yield £m £m £bn £bn % £m £m £bn £bn %
Equity structural hedging 399 644 25 27 2.36 469 672 29 29 2.33 Product structural hedging 183 1,094 111 111 0.99 368 1,104 110 108 1.02 Other structural hedges 61 166 21 21 0.79 89 167 22 22 0.77 Total 643 1,904 157 159 1.20 926 1,943 161 159 1.22
At 31 December 2019, approximately 90% of structural hedges were sterling-denominated. A significant proportion of other structural hedges, around 33%, were euro-denominated, mainly in UBI DAC.
 The overall yield of the structural hedge fell in 2019. Five-year and ten-year sterling swap rates were 0.81% and 0.93% respectively at 31 December 2019, down from 1.22% and 1.35% at 31 December 2018. At 1.20%, the overall yield was higher than swap rates at 31 December 2019.
Value-at-risk VaR is a statistical estimate of the potential change in the market value of a portfolio (and, thus, the impact on the income statement) over a specified time horizon at a given confidence level.
It also includes any mismatch between the maturity profile of external hedges and RBS’s target maturity profile for the hedge.
Reported sensitivities should not be considered a forecast of future performance in these rate scenarios. The projections do not capture potential management action in response to unexpected changes in the interest rate environment. Actions that could reduce interest earnings sensitivity include changes in pricing strategies on customer loans and deposits as well as hedging. Management action may also be taken to stabilise total income also taking into account non-interest income.
Parallel shifts in yield curve +25 basis points -25 basis points +100 basis points -100 basis points
Euro 25 (2) 129 (3) Sterling 172 (158) 716 (706) US dollar 16 (11) 66 (52) Other (1) 1 (3) 5 Total 212 (170) 908 (756)
Euro 29 (3) 114 (1) Sterling 152 (201) 651 (717) US dollar 15 (8) 63 (42) Other 1 2 2 3 Total 197 (210) 830 (757)
 The increased sensitivity to upward shifts and the reduced sensitivity to a downward 25-basis-point shift partly reflect changes to estimates of how product pricing will respond to interest rate shocks. These estimates are reviewed regularly and are influenced by the overall level of interest rates, RBS’s competitive position and other strategic considerations.
FVOCI reserves (55) 55 (220) 216 Cash flow hedge reserves (318) 323 (1,250) 1,315 Total (373) 378 (1,470) 1,531
RBS’s bond portfolios primarily comprise high-quality securities maintained as a liquidity buffer to ensure it can continue to meet its obligations in the event that access to wholesale funding markets is restricted. Additionally other high-quality bond portfolios are held for collateral purposes and to support payment systems.
Net investments in Net Structural foreign Residual structural Net investments in Non-controlling foreign operations investment currency exposures Economic foreign currency foreign operations interests (NCI) (1) excluding NCI hedges pre-economic hedges hedges (2) exposures
 The decrease in net investments in foreign operations mainly reflected the merger of Alawwal bank with SABB, which was followed by the liquidation of RFS Holdings B.V., as a result of which non-controlling interests decreased to nil. The decrease in residual structural foreign currency exposures was due to lower equity investment in eurozone businesses following dividend payments and increased hedging of non-sterling businesses other than Alawwal bank.
 Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposures pre-economic hedges. For example, at 31 December 2019, a 5% strengthening in foreign currencies against sterling would result in a gain of £0.4 billion in equity while a 5% weakening in foreign currencies against sterling would result in a loss of £0.4 billion in equity.
Non-traded market risk continued Equity risk (audited) Non-traded equity risk is the potential variation in income and reserves arising from changes in equity valuations. Equity exposures may arise through strategic acquisitions, venture capital investments and restructuring arrangements.
Exchange-traded equity 627 41 Private equity 249 303 Other 76 87
Net realised gains arising from disposals 114 23 Unrealised gains included in Tier 1 or Tier 2 capital (40) 153
Accounting volatility can be mitigated through hedge accounting. However, residual volatility will remain in cases where accounting rules mean that hedge accounting is not an option, or where there is some hedge ineffectiveness. Accounting volatility risk is reported to the Asset & Liability Management Committee monthly and capitalised as part of the Internal Capital Adequacy Assessment Process.
Traded market risk Definition (audited) Traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments in trading portfolios as a result of fluctuations in market prices.
Risk governance (audited) Market risk policy statements set out the governance and risk management framework. Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the relevant trading business. The Market Risk function independently advises on, monitors and challenges the risk-taking activities undertaken by the trading business ensuring these are within constraints of the market risk framework, policies, and risk appetite statements and measures.
RBS’s qualitative appetite for traded market risk is set out in the traded market risk appetite statement. Quantitative appetite is expressed in terms of exposure limits. The limits at RBS level comprise value-at-risk (VaR) and stressed value-at-risk (SVaR). More details on these are provided on the following pages.
Risk measurement RBS uses VaR, SVaR and the incremental risk charge to measure traded market risk. Risks that are not adequately captured by VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework to ensure that RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses.
Traded VaR (1-day 99%) (audited) The table below shows one-day 99% internal VaR for RBS’s trading portfolios, split by exposure type.
Average Maximum Minimum Period end £m £m £m £m £m £m £m £m
Key points  Despite market volatility driven by geopolitical risk throughout the year, traded VaR remained well within appetite.
 The decrease in the average VaR compared to 2018 is attributed to peaks in H1 2018 due to long euro rates positioning and bond syndication activity.
Two types of profit and loss (P&L) are used in back-testing comparisons: Actual P&L and Hypothetical (Hypo) P&L. For more details on the back-testing approach, refer to the Pillar 3 report.
 The exceptions in the Currencies business were mainly driven by volatility in the foreign exchange market, including movements in the euro/sterling and sterling/US dollar exchange rates.
Key point  The decrease in period-end SVaR was driven by a reduction of SVaR tail risk due to hedging undertaken to address market volatility.
For further qualitative and quantitative disclosures on RNIVs, refer to the Market Risk section of the Pillar 3 Report.
Incremental risk charge (IRC) The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) held in the trading book. It further captures basis risk between different instruments, maturities and reference entities. For further qualitative and quantitative disclosures on the IRC, refer to the Market Risk section of the Pillar 3 Report.
The FCA, which regulates the London Interbank Offered Rate (LIBOR) in the UK, has announced that it will not compel panel banks to contribute to LIBOR after 2021. The EU regulation on benchmark interest rates imposed conditions under which only compliant benchmarks may be used in new contracts after 2021.
Following this decision, the Bank of England announced that all LIBOR-linked financial instruments should be transitioned to SONIA by the end of 2021. Transition mechanisms have been established and market participants are in the process of converting their LIBOR-linked contracts into RFR contracts.
 has been actively engaged in the discussions which led to the transition relief being provided by the International Accounting Standards Board (IASB) in relation to hedge accounting under both IAS 39 – ‘Financial instruments – Recognition and Measurement’ (IAS 39) and IFRS 9 – ‘Financial Instruments’ (IFRS 9).
Based on our current assessment the chart and tables below provide an overview of the proportion of the key line items in the balance sheet that are sensitive to IBOR-based rates and associated contractual maturities.
The graph above excludes capital instuments as these are not sensitive to IBOR-based rates.
Other financial liabilities < 1 year 11% — 1% 22% 66% 100% 1-2 years — 10% — 20% 70% 100% 3-5 years — 5% — 14% 81% 100% > 5 years — — 6% 2% 92% 100%
Subordinated liabilities < 1 year — 8% 34% 54% 4% 100% 1-2 years — — — — 100% 100% 3-5 years — — — 2% 98% 100% > 5 years — 26% — — 74% 100%
The table below analyses RBS’s balance sheet by non-trading and trading business. 2019 2018
Non-trading Trading Non-trading Trading Total business business Total business business £bn £bn £bn £bn £bn £bn Primary risk factor
Cash and balances at central banks 77.9 77.8 0.1 88.9 88.8 0.1 Interest rate
Derivatives 150.0 2.4 147.6 133.3 0.4 132.9 Interest rate, credit spreads, equity
Loans to banks 10.7 10.5 0.2 12.9 12.8 0.1 Interest rate
Loans to customers 326.9 326.7 0.2 305.1 304.7 0.4 Interest rate
Short positions 21.2 — 21.2 23.8 — 23.8 Interest rate, credit spreads
Derivatives 146.9 4.1 142.8 128.9 0.1 128.8 Interest rate, credit spreads
Other financial liabilities 45.2 44.2 1.0 39.7 38.4 1.3 Interest rate
(2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by RBS to measure market risk are detailed in the traded market risk section above.
Pension risk Definition Pension risk is the risk to RBS caused by its contractual or other liabilities to, or with respect to, a pension scheme (whether established for its employees or those of a related company or otherwise). It is also the risk that RBS will make payments or other contributions to, or with respect to, a pension scheme because of a moral obligation or because RBS considers that it needs to do so for some other reason.
Sources of risk RBS has exposure to pension risk through its defined benefit schemes worldwide. The Main section of The Royal Bank of Scotland Group Pension Fund (the Main section) is the largest source of pension risk with £46.5 billion of assets and £39.7 billion of liabilities at 31 December 2019 (2018 – £43.8 billion of assets and £35.5 billion of liabilities). Further detail on RBS’s pension obligations, including sensitivities to the main risk factors, can be found in Note 5 on the consolidated accounts.
Pension scheme liabilities vary with changes in long-term interest rates and inflation as well as with pensionable salaries, the longevity of scheme members and legislation. Pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates, and equity and property prices. RBS is exposed to the risk that the schemes’ assets, together with future returns and additional future contributions, are estimated to be insufficient to meet liabilities as they fall due. In such circumstances, RBS could be obliged (or might choose) to make additional contributions to the schemes, or be required to hold additional capital to mitigate this risk.
Risk appetite RBS maintains an independent view of the risk inherent in its pension funds. RBS has an annually reviewed pension risk appetite statement incorporating defined metrics against which risk is measured. RBS undertakes regular pension risk monitoring and reporting to the Board, the Board Risk Committee and the Group Pension Committee on the material pension schemes that RBS has an obligation to support.
Risk monitoring and measurement Pension risk is monitored by the Executive Risk Committee and the Board Risk Committee by way of the quarterly Risk Management Report.
RBS also undertakes stress tests on its material defined benefit pension schemes each year. These tests are also used to satisfy the requests of regulatory bodies such as the Bank of England.
The stress testing framework includes pension risk capital calculations for the purposes of the Internal Capital Adequacy Assessment Process as well as additional stress tests for a number of internal management purposes. The results of the stress tests and their consequential impact on RBS’s balance sheet, income statement and capital position are incorporated into the overall RBS stress test results.
Risk mitigation Following risk mitigation measures taken by the Trustee in recent years, the Main section is now well protected against interest rate and inflation risks and is being run on a low risk basis with relatively small equity risk exposure. The Main section also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes.
The potential impact of climate change is one of the factors considered in managing the assets of the Main section. The Trustee monitors the risk to its investments from changes in the global environment and invests, where return justifies the risk, in sectors that reduce the world’s reliance on fossil fuels, or that may otherwise promote environmental benefits. Further details regarding the Main section Trustee’s approach to managing climate change risk can be found in its Responsible Ownership Policy.
Conduct risk is the risk that the conduct of RBS and its subsidiaries and its staff towards customers – or in the markets in which it operates – leads to unfair or inappropriate customer outcomes and results in reputational damage, financial loss or both.
 Enhanced operational capabilities to cope with unprecedented volumes of PPI mis-selling claims.
Compliance & conduct risk continued Risk appetite Risk appetite for compliance and conduct risks is set at Board level. Risk appetite statements articulate the levels of risk that legal entities, businesses and functions work within when pursuing their strategic objectives and business plans.
Sources of risk Financial crime risk may be presented if RBS’s employees, customers or third parties undertake or facilitate financial crime, or if RBS’s products or services are used to facilitate such crime. Financial crime risk is an inherent risk across all of RBS’s lines of business.
 Financial crime policies were refreshed and updated to reflect changes to the regulatory environment and industry best practice.
Risk governance The Financial Crime Risk Executive Committee, which is chaired by the Group Chief Financial Crime Risk Officer, is the principal financial crime risk management forum. The committee reviews and, where appropriate, escalates material financial crime risks and issues across RBS to the Executive Risk Committee and the Board Risk Committee.
Risk monitoring and measurement Financial crime risks are identified and reported through continuous risk management and regular monthly reporting to RBS’s senior risk committees and the Board. Quantitative and qualitative data is reviewed and assessed to measure whether financial crime risk is within RBS’s risk appetite.
Risk mitigation Through the financial crime framework, RBS employs relevant policies, systems, processes and controls to mitigate financial crime risk. This would include the use of dedicated screening and monitoring controls to identify people, organisations, transactions and behaviours which might require further investigation or other actions. RBS ensures that centralised expertise is available to detect and disrupt threats to RBS and its customers. Intelligence is shared with law enforcement, regulators and government bodies to strengthen national and international defences against those who would misuse the financial system for criminal motives.
Climate-related financial risk Definition Climate-related financial risk is the threat of financial loss associated with the impact of climate change and the political, economic and environmental responses to it.
 RBS developed a multi-phase, multi-year plan to build out capabilities across governance, risk management, scenario analysis & stress testing, and disclosures.
 In Q4 2019, a pilot project was launched with a consortium of partners to assess physical risk to elements of RBS’s retail and commercial portfolios.
The management of climate-related threats requires a strategic approach that considers how decisions today affect future financial risks. A Board-approved plan has been developed to integrate the management of climate-related risks within the risk management framework.
RBS Group continues to participate in several industry-wide initiatives to develop consistent risk measurement methodologies. RBS Group is a founding signatory of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Responsible Banking, which aims to promote sustainable finance around the globe. Through UNEP-FI, RBS Group is participating in three thematic modules exploring how climate change will affect real estate, agriculture and land use. It is also represented on the Climate Financial Risk Forum, established by the PRA and FCA to shape the financial service industry’s response to the challenges posed by climate risk.
For further detail, please see Strategic Report from page 37 to 41.
 A focus remained on maintaining operational resilience and ensuring preparedness for external threats and challenges such as cyber attacks and Brexit.
 The threat landscape continued to evolve during 2019 and RBS invested in control enhancements to keep pace. This included new anti-malware controls and improved security testing to quickly detect and remediate vulnerabilities.
 Progress was made in embedding an innovation framework to help deliver innovative solutions to customers safely and at pace.
 Following the introduction of ring-fencing and Operational Continuity in Resolution requirements, a consistent approach was introduced to identify and capture the risk associated with service provision of service between its legal entities.
 There was an increased focus on ensuring the security and business strategies were aligned. Security is considered at the outset of new business projects to ensure they are delivered in a safe and secure manner. The number of critical customer impacting incidents continued to reduce year-on-year. There were 14 criticality 1 incidents in 2019 compared to 19 in 2018.
The Operational Risk function, which is the second line of defence, delivers a robust operational risk management framework and culture across RBS.
A subset of the most material risk appetite measures are defined as board risk measures, which are those that align to strategy and should the limit be breached, would impact on the ability to achieve business plans and threaten stakeholder confidence.
RBS uses the standardised approach to calculate its Pillar 1 operational risk capital requirement. This is based on multiplying three years’ average historical gross income by coefficients set by the regulator based on business line. As part of the wider Internal Capital Adequacy Assessment Process an operational risk economic capital model is used to assess Pillar 2A, which is a risk-sensitive add-on to
Progress also continues on the response to the EBA Guidelines on Outsourcing Arrangements which were issued on 25 February 2019. This ensures that increases in outsourcing (as seen across the industry), to increase efficiency and further embrace new technologies, is managed safely.
Percentage and value of events At 31 December 2019, events aligned to the clients, products and business practices (CBPB) event category accounted for 94% of RBS’s operational risk losses (2018 – 98%), with fraud accounting for 5% (2018 – 2%).
Note: (1) Based on the volume and value of events (the proportion and cost of operational risk events to RBS) where the associated loss is more than or equal to £10,000.
Model risk Definition Model risk is the risk that a model is specified incorrectly (not achieving the objective for which it is designed), implemented incorrectly (an error in translating the model specification into the version actually used), or being used incorrectly (correctly specified but applied inappropriately).
Governance A governance framework is in place to ensure policies and processes relating to models are appropriate and effective. Issues are escalated to senior management, through the Model Risk Forum, and the relevant business and function risk committees. The committees also consider whether a model can be approved for use. Models used for regulatory reporting may additionally require regulatory approval before implementation.
Risk controls Validation for material models is conducted by an independent risk function. Validation also ensures models are developed and implemented appropriately and that their operational environment is fit for purpose. Reviews of relevant models are carried out for new models or amendments to existing models and as part of an ongoing programme to assess model performance. Reviews may test and challenge the logic and conceptual soundness of the methodology or the assumptions underlying a model. Reviews may also test whether or not all appropriate risks have been sufficiently captured as well as checking the accuracy and robustness of calculations.
Reputational risk Definition Reputational risk is the threat to RBS’s public image from a failure to meet stakeholders’ expectations in relation to performance, conduct or business profile. Stakeholders include customers, investors, employees, suppliers, government, regulators, special interest and consumer groups, media and the general public.
Sources of risk Reputational risk can arise from the conduct of employees; customer activities and the sectors and countries in which they operate; provision of products and transactions; as well as operations and infrastructure. Unexpected external events can also pose a reputational risk to RBS.
 Updated existing environmental, social and ethical risk acceptance criteria to reflect changes in the wider external environment.
 Enhanced existing escalation processes for businesses and improved reputational risk management in functions.
 Consideration of climate change issues within the reputational risk framework.
Risk governance A reputational risk policy supports reputational risk management across RBS. Reputational risk committees review relevant issues at an individual business or entity level, while the Reputational Risk Committee – which has delegated authority from the Executive Risk Committee – opines on cases, issues, sectors and themes that represent a material reputational risk to RBS. The Board Risk Committee oversees the identification and reporting of reputational risk. The Sustainable Banking Committee has a specific focus on environmental, social and ethical issues.
Risk controls Standards of conduct are in place across RBS requiring strict adherence to policies, procedures and ways of working to ensure business is transacted in a way that meets – or exceeds – stakeholder expectations.
The most material threats to RBS’s reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of regulators and governmental authorities, some of which have resulted in fines, settlements and public censure. Refer to the Litigation, investigations and reviews section of Note 26 on the consolidated accounts.
Notes on the consolidated accounts 1 Net interest income 213 2 Non-interest income 213 3 Operating expenses 214 4 Segmental analysis 216 6 Auditor’s remuneration 224 8 Earnings per share 227 9 Trading assets and liabilities 227 11 Financial instruments - classification 232 12 Financial instruments - valuation 234 13 Financial instruments - maturity analysis 241 14 Loan impairment provisions 243 15 Other financial assets 244 16 Intangible assets 245 17 Other assets 246 18 Other financial liabilities 246 19 Subordinated liabilities 246 20 Other liabilities 247 21 Share capital and other equity 248 23 Structured entities 253 24 Asset transfers 254 25 Capital resources 254 26 Memorandum items 255 27 Analysis of the net investment in business interests and intangible assets 261 28 Analysis of changes in financing during the year 261 29 Analysis of cash and cash equivalents 262 30 Directors’ and key management remuneration 262 31 Transactions with directors and key management 262 32 Related parties 263 33 Post balance sheet events 263
 the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements, as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Future profitability estimates impacting the recognition of deferred tax and the impairment of goodwill and, in the parent company accounts, investments in subsidiaries. At 31 December 2019, the Group had reported goodwill of £5.6 billion (2018: £5.6 billion) and deferred tax assets of £0.7 billion (2018: £1.0 billion). The parent company has reported investments in subsidiaries of £55.8 billion (2018: £56.7 billion).
Judgements and especially challenging, complex and subjective assumptions that are difficult to audit due to the forward-looking nature and inherent uncertainties associated with such assumptions include:  Revenue and cost forecasts which are also impacted by the Group’s strategic review;  Assumptions used in the recoverability and valuation assessments (discount rates, growth rates, macroeconomic assumptions, etc.); and
We evaluated the design and operating effectiveness of controls over the preparation and review of the forecasts, the significant assumptions (such as discount rate and long-term growth rate) used in the value in use model, inputs, calculations, methodologies and judgements. This included testing controls over the macroeconomic assumptions in addition to the overall revenue and cost projections, as well as the precision applied to these. With the support of our internal economic specialists, we tested whether macroeconomic assumptions, including Brexit and other geopolitical considerations, used in the Group’s forecasting process were reasonable by comparing to external sources, as well as EY internally developed forecasts. Considering the recent developments on Brexit and the continued uncertainty relating to the macroeconomic environment and its consequential impact on the forecasts, we evaluated the adequacy of disclosures in the financial statements.
We tested how previous management forecasts, including the impact of cost reduction programmes, compared to actual results to evaluate the accuracy of the forecasting process. We assessed the achievability of future cost reduction plans by evaluating the details of the underlying initiatives and how cost ratios compared to peer banks and commentaries from external analysts.
We evaluated how management considered alternative assumptions and performed our own sensitivity and scenario analyses on certain assumptions such as discount rate and long-term growth rate.
With the support of our taxation specialists, we assessed the recoverability of deferred tax assets recognised considering management’s estimate of future taxable profits, including an assessment of the time horizon used for the recoverability of losses and other temporary differences.
Relevant references in the Annual Report and Accounts Accounting policies Note 7 and Note 16 on the Group financial statements and Note 6 on the Parent company financial statements.
Provisions for conduct, litigation and regulatory matters, customer remediation and claims At 31 December 2019, the Group has reported £2.7 billion (2018: £3.0 billion) of provisions for liabilities and charges, including £1.9 billion (2018: £2.0 billion) for conduct and litigation claims, including Payment Protection Insurance (PPI) as detailed in Note 26 of the financial statements.
The most significant areas of judgement are:  Auditing provisions for Payment Protection Insurance (PPI) is complex considering the large number of complaints that remain unprocessed following the significant number of complaints received in the run up to the 29 August 2019 FCA deadline and considering the judgement required by management to estimate the portion of Information Requests (“IR”s) and complaints that will ultimately require PPI redress payments along with the costs associated with doing so;  Auditing the adequacy of these provisions is complex because judgement is involved in the selection and use of assumptions in the estimation of material provisions and there is a risk of management bias in the determination of whether an outflow in respect of identified material conduct or legal matters is probable and can be estimated reliably; and
Among other procedures, we assessed the appropriateness of the PPI provision assumptions, which included the complaint conversion, uphold and average redress rates assumed for unprocessed complaints. In assessing these assumptions, we considered the Group’s recent experience, our own expectations, sensitivities, our industry knowledge, the Group’s historical forecasting accuracy in this area and correspondence during the year with regulators. We also tested the clerical accuracy of the provision calculation. We also independently determined a range of future PPI claims and compared it to management’s estimate.
For significant legal matters, we received confirmations from the Group’s external legal counsel for significant matters to evaluate the existence of the obligation and management’s estimate of the outflow at year-end. We assessed management’s conclusion by evaluating the underlying information used in estimating the provisions including consideration of alternate sources. We also conducted inquiries with internal legal counsel over the existence of the legal obligations and related provision.
We evaluated the disclosures provided on conduct, litigation, regulatory, customer remediation and claims provisions to assess whether they complied with accounting standards.
Key observations communicated to the Group Audit Committee We are satisfied that provisions for conduct, litigation and regulatory matters, customer remediation and claims are reasonable and recognised in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  The PPI provision remains sensitive to variations in key assumptions, the most significant of which are the conversion, uphold and average redress rates assumed for complaints not yet examined. The director’s estimate was within our independent range of reasonable outcomes based on reasonably possible alternative assumptions. We were satisfied with the PPI disclosures; and
 We concurred with the recognition, measurement and level of disclosures of other conduct and litigation provisions. We did not identify any material unrecorded provisions.
Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Accounting policies Note 20 on the financial statements
Management’s judgements and estimates which are especially subjective to audit due to significant uncertainty associated with the assumptions used in the estimation in respect of the timing and measurement of expected credit losses (ECL) include:  Allocation of assets to stage 1, 2, or 3 using criteria in accordance with the accounting standard;  Accounting interpretations, modelling assumptions and data used to build and run the models that calculate the ECL;  Inputs and assumptions used to estimate the impact of multiple economic scenarios;  Completeness and valuation of post model adjustments considering the risk of management override; and
Among other procedures, we observed the executive finance and risk committee meetings where the inputs, assumptions and adjustments to the ECL were discussed and approved. We performed an overall assessment of the ECL provision levels by stage to determine if they were reasonable by considering the overall credit quality of the Group’s portfolios, risk profile, credit risk management practices and the macroeconomic environment by considering trends in the economy and industries to which the Group is exposed.
We involved valuation specialists to recalculate a sample of individual provisions including the alternative scenarios and evaluating probability weights assigned. The sample was based on a number of factors, including higher risk sectors and materiality. We assessed the adequacy of disclosures for compliance with the accounting standards and regulatory considerations.
 Considerable improvements were made to the control environment throughout the year, with previously identified control deficiencies remediated by year-end. We also performed additional testing in response to those deficiencies.
Valuation of financial instruments with higher risk characteristics including related income from trading activities At 31 December 2019 the Group reported level 3 assets of £2.6 billion (2018: £3.3 billion) and level 3 liabilities of £1.3 billion (2018: £2.0 billion).
The valuation of financial instruments with higher risk characteristics involves both significant judgement and the risk of inappropriate revenue recognition through incorrect pricing as outlined below. The judgement in estimating fair value of these instruments can involve complex valuation models and significant fair value adjustments, both of which may be reliant on data inputs where there is limited market observability. Management’s estimates which required significant auditor judgement include:  Complex model-dependent valuations, which include interest rate swaps linked to prepayment behaviour and interest rate and foreign exchange options with exotic features such as those having multiple call dates and variable notional amounts;  Pricing inputs and calibrations for illiquid instruments, including rarely traded debt securities. Additionally, derivative instruments whose valuation is dependent upon discount rates associated with complex collateral arrangements are complex; and
Under IAS21, disposals or partial disposals of interests in foreign operations may trigger the reclassification of foreign currency translation differences that have been accumulated in equity reserves (“FX reserves”) to profit and loss. In the year ended 31 December 2019, the Group reclassified £1,480m from FX reserves to profit and loss.
In 2019, a merger between Alawwal and SABB and the liquidation of RFS Holdings BV both triggered reclassification of FX reserves. The recycling amounts were calculated based on the proportion of Group FX reserves which were attributable to those investments. Auditing these judgements was involved complex auditor judgement because of the judgements involved in assessing the timing and amount of recognition.
The accounting judgements were:  Whether these 2019 transactions met the concept of disposal or partial disposals under IAS 21 and were therefore appropriate trigger events for reclassifying FX reserves to profit and loss;  Whether the Group’s accounting approach has been consistently applied over the years, by comparison to historical distributions made by RFS Holdings BV; and
We evaluated the design and operating effectiveness of controls over the recognition of FX reserves including management’s determination that the transaction met the applicable criteria for disposals and the calculations of the amounts reclassified into profit and loss and analytical review performed by management.
 Considerable improvements were made to the control environment throughout the year, with previously identified control deficiencies remediated by year-end. We also performed additional testing over FX reserves in response to those deficiencies.
Pension valuation and net pension balance The Group operates a number of defined benefit schemes which in aggregate are significant in the context of the overall balance sheet. At 31 December 2019, the Group reported a net pension asset of £495 million (2018: £355 million) comprising £614 million of schemes in surplus and £119 million of schemes in deficit (2018: £520 million and £165 million respectively). The net pension asset is sensitive to changes in the key judgements and estimates, which include:  Actuarial assumptions and inputs including discount rate, inflation, pension payment and longevity to determine the valuation of retirement benefit liabilities;  Pricing inputs and calibrations for illiquid or complex model-dependent valuations of certain investments held by the schemes;  Quantification of trustee’s rights to unilaterally augment benefits (Augmentation cap) to determine the recognition of surplus; and
We evaluated the design and operating effectiveness of controls over the actuarial assumptions setting process, the data inputs used in the actuarial calculation and the measurement of the fair value of the schemes’ assets.
We involved valuation specialists to assess the appropriateness of management’s valuation methodology including the judgements made in determining significant assumptions used in the valuation of complex and illiquid pension assets. We tested the fair value of scheme assets by independently calculating fair value for a sample of the assets held. Our sample included cash, equity and debt instruments, derivative financial instruments and illiquid assets.
 Management’s estimate of the impact of the GMP liability and Augmentation Cap was materially consistent with our independent estimate using our own model.
Relevant references in the Annual Report and Accounts Accounting policies Note 5 on the financial statements
IT systems and controls impacting financial reporting The IT environment is complex and pervasive to the operations of the Group due to the large volume of transactions processed in numerous locations daily and the reliance on automated and IT dependent manual controls. Appropriate IT controls are required to ensure that applications process data as expected and that changes are made in an appropriate manner. This risk is also impacted by the greater dependency on third-parties, increasing use of cloud platforms, decommissioning of legacy systems, and migration to new systems. Such controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applications and data.
Our audit approach relies upon IT applications and the related control environment including:  User access management across application, database and operating systems;  Changes to the IT environment, including transformation that changes the IT landscape including the general ledger and human resource system migrations;  IT operational controls;  IT application or IT dependent controls; and
We assessed automated controls within business processes and the reliability of relevant reports used as part of a manual control. This included assessing the integrity of system interfaces, the completeness and accuracy of data feeds, automated calculations and specific input controls.
Key observations communicated to the Group Audit Committee We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were reported to the Group Audit Committee:  We have seen a reduction in the number of IT control deficiencies identified compared to prior year;  Improvements were made to user access management controls, where we noted the consolidation of access processes. Control deficiencies previously identified around access management, were remediated by year end or mitigated by compensating controls. We also performed additional testing in response to deficiencies identified, where required;  Where IT transformation or change occurred within the year, particularly around outsourcing and the use of third parties, we updated our audit approach accordingly and tested relevant controls. Where we identified control deficiencies these were remediated by year end or mitigated by compensating controls; and
An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each component of the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each component.
In the current year, we have updated our scoping strategy to align with the new legal entity structure of the Group following implementation of the ICB ring-fencing rules. Consequently, we have performed our scoping based on legal entities as opposed to franchises and functions as done in prior year.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the five reporting components of the Group, we selected three components, which represent the principal reporting legal entities within the Group.
The scoping for the current year is as follows: Component Scope Key locations
We determined materiality for the Group and parent company to be £160 million (2018 materiality: £210 million), which is 5% of adjusted profit before tax of the Group, which removes the disproportionate effect of certain matters, and 0.3% of equity of the parent company. The basis used for Group materiality is consistent with the basis from the prior year, with the wider industry, and is the standard for listed and regulated entities and we believe it reflects the most useful measure for users of the financial statements. The materiality of the parent company is based on equity as we consider this to be the most appropriate factor to the users of the financial statements.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% of our planning materiality, namely £80 million (2018: £100 million). We have set performance materiality at this percentage (which is at the lowest end of the range of our audit methodology) based on various considerations including the past history of misstatements, the effectiveness of the control environment and other factors affecting the entity and its financial reporting.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:  Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial statements taken as a whole are fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the Report of the directors.
 we have not received all the information and explanations we require for our audit.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and have a direct impact on the preparation of the financial statements. We determined that the most significant are:  The regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
 Financial Reporting Council (FRC) and the UK Corporate Governance Code
We understood how the Group is complying with those frameworks by reviewing the RBS Policy Framework, holding discussions with the Group’s general counsel, external counsel compliance group, regulatory group, internal audit, amongst others. We inquired as to any known instances of non-compliance or suspected non-compliance with laws and regulations. We also reviewed the Group’s Complaints Management Policy and Whistleblowing Policy. We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by holding discussions with senior management, including the Chief Executive, Chief Financial Officer, Chief Risk Officer, Head of Internal Audit and Group Audit Committee Chairman. We also reviewed the Group’s fraud-related policies and mandates of different governance forums assessing fraud. Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved inquiring of key management, reviewing the key policies and reports on the aforementioned regulatory frameworks as well as reviewing the correspondence exchanged with the Regulators. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at This description forms part of our auditor’s report.
(2) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Assets Cash and balances at central banks 11 77,858 88,897 Trading assets 9 76,745 75,119 Derivatives 10 150,029 133,349 Settlement balances 4,387 2,928 Loans to banks - amortised cost 11 10,689 12,947 Loans to customers - amortised cost 11 326,947 305,089 Securities subject to repurchase agreements 4,269 9,890 Other financial assets excluding securities subject to repurchase agreements 57,183 49,595 Other financial assets 15 61,452 59,485 Intangible assets 16 6,622 6,616 Other assets 17 8,310 9,805 Total assets 723,039 694,235
Capital redemption reserve - at 1 January — — 4,542 Capital reduction (3) — — (4,542) At 31 December — — —
Own shares held - at 1 January (21) (43) (132) Shares issued under employee share schemes 39 87 161 Own shares acquired (60) (65) (72) At 31 December (42) (21) (43) Owners’ equity at 31 December 43,547 45,736 48,330 Non-controlling interests - at 1 January 754 763 795 Currency translation adjustments and other movements (11) 25 17 Profit/(loss) attributable to non-controlling interests 261 (8) 35 Dividends paid (5) (5) (25) Equity raised (12) 45 — — Equity withdrawn and disposals (13) (1,035) (21) (59) At 31 December 9 754 763
Notes: (1) Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017) and the call of RBS Capital Trust D in March 2017 (redeemed in June 2017). (2) During 2017, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million was credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings.
(12) Capital injection from RFS Holdings B.V. consortium members. (13) Distribution to RFS Holdings B.V. consortium members on completion of the Alawwal bank merger.
Cash flows from operating activities Operating profit before tax 4,232 3,359 2,239 Interest on subordinated liabilities 483 461 572 Interest on treasury bills and debt securities (854) (534) (330) Impairment losses /(releases) on loans to customers 366 (496) (647) Profit on sale of subsidiaries and associates (2,224) — (155) Loss/(gain) on sale of other financial assets 22 (34) (226) (Gain)/loss on sale of property, plant and equipment (58) (50) (75) Defined benefit pension schemes 188 308 375 Charges and releases on provisions 1,243 1,333 1,930 Depreciation, amortisation and impairment of assets 1,489 768 837 Change in fair value taken to profit or loss of subordinated liabilities 317 (243) (144) Change in fair value taken to profit or loss of MRELs 539 (59) (167) Interest on MRELs 645 415 244 Loss on redemption of own debt — — 7 Change in fair value taken to profit or loss of other financial assets (280) 585 — Elimination of foreign exchange differences 949 415 (832) Other non-cash items (272) 1,872 (9) Net cash flows from trading activities 6,785 8,100 3,619 Decrease/(increase) in net loans to banks 3,563 (1,923) (206) (Increase)/decrease in net loans to customers (22,312) 4,675 2,672 (Increase)/decrease in trading assets (659) 7,543 — (Increase)/decrease in derivative assets (16,680) 27,494 86,138 (Increase)/decrease in settlement balance assets (1,459) (411) 3,009 Decrease/(increase) in other financial assets 924 518 (1,319) Decrease/(increase) in other assets 707 541 (31) (Decrease)/increase in banks deposits (2,804) (7,099) 8,341 Increase/(decrease) in customer deposits 8,333 (1,064) 17,108 Increase/(decrease) in trading liabilities 1,599 (9,630) — Increase/(decrease) in derivative liabilities 17,982 (25,609) (81,969) Increase/(decrease) in settlement balance liabilities 1,003 222 5,649 Increase/(decrease) in other financial liabilities 2,871 2,366 956 (Decrease)/increase in other liabilities (2,677) (12,080) (7,735) Changes in operating assets and liabilities (9,609) (14,457) 32,613 Income taxes paid (278) (466) (520) Net cash flows from operating activities (1) (3,102) (6,823) 35,712
Cash flows from investing activities Sale and maturity of other financial assets 19,990 11,832 11,656 Purchase of other financial assets (21,345) (19,516) (17,212) Interest on other financial assets 854 534 330 Sale of property, plant and equipment 428 264 405 Purchase of property, plant and equipment (559) (619) (1,132) Net investment in business interests and intangible assets 27 (84) (489) (199) Net cash flows from investing activities (716) (7,994) (6,152)
Net (decrease)/increase in cash and cash equivalents (8,348) (13,669) 24,035 Cash and cash equivalents at 1 January 108,936 122,605 98,570 Cash and cash equivalents at 31 December 29 100,588 108,936 122,605
The Royal Bank of Scotland Group plc (RBSG plc) is incorporated in the UK and registered in Scotland. Its accounts are presented in accordance with the Companies Act 2006.
Other amendments to IFRS IAS 12 ‘Income taxes’ was revised with effect from 1 January 2019. The income statement now includes any tax relief on the servicing cost of instruments classified as equity. Relief of £67 million was recognised in the statement of changes in equity for the year ended 31 December 2018; this and prior years have been restated.
IAS 19 ‘Employee Benefits’ was amended by the IASB in February 2018 to clarify the need to update assumptions whenever there is a plan amendment, curtailment or settlement. This amendment has not affected the accounts.
Presentation of interest in suspense recoveries - In March 2019 the IFRS Interpretations Committee (IFRIC) issued an agenda decision on the presentation of unrecognised interest when a credit-impaired financial asset (commonly referred to as a ‘Stage 3’ financial asset) is subsequently paid in full or is no longer creditimpaired. This concluded that the difference arising from the additional interest recovered must be recognised as a reversal of impairment rather than within interest revenue. This affects both recognition and the reversal of the expected credit loss (ECL) allowance.
RBS Group changed its accounting policy in line with the IFRIC decision. Hence, the gross carrying amount of the financial assets within the scope of the provisions of the decision, as well as the associated ECL allowance on the balance sheet have been adjusted by £460 million and the comparative period restated by £455 million with no effect on equity. The coverage ratio for the current and comparative periods have been adjusted and restated accordingly.
In addition, until 1 January 2019, interest in suspense recoveries were presented as a component of interest receivable within Net interest income. From 1 January 2019 interest in suspense recoveries are presented within Impairment losses and amounted to £64 million for the year ended 31 December 2019. Comparatives have not been restated on the grounds of materiality.
The amendments provide relief on key areas of hedge accounting most notably the hedge effectiveness assessment and the ability to identify LIBOR-based cash flows for the purpose of designation (re-designation) during the period of the Reform. Additional disclosures are shown in Note 10.
IFRIC decision - Disclosure of change in liabilities arising from financing activities (IAS 7 statement of cash flows) – Following the IFRIC decision on how changes in liabilities should be presented in the cash flow statement, RBS has revised its presentation of financing activities and applied this to the cash flow statement.
2. Basis of consolidation The consolidated accounts incorporate the financial statements of RBSG plc and entities (including certain structured entities) that give access to variable returns and that are controlled by RBS Group. Control is assessed by reference to our ability to enforce our will on the other entity, typically through voting rights.
3. Revenue recognition Interest income or expense relates to financial instruments measured at amortised cost and debt instruments classified as fair value through OCI using the effective interest rate method, the effective part of any related accounting hedging instruments, and finance lease income recognised at a constant periodic rate of return before tax on the net investment on the lease. Negative effective interest accruing to financial assets is presented in interest payable.
5. Employee benefits Short-term employee benefits, such as salaries, paid absences, and other benefits are accounted for on an accruals basis over the period in which the employees provide the related services. Employees may receive variable compensation satisfied by cash, by debt instruments issued by RBS Group or by RBSG plc shares. RBS Group operates a number of share-based compensation schemes under which it awards RBSG plc shares and share options to its employees. Such awards are generally subject to vesting conditions.
Variable compensation that is settled in cash or debt instruments is charged to profit or loss on a straight-line basis over the vesting period, taking account of forfeiture and clawback criteria.
6. Intangible assets and goodwill Intangible assets acquired by RBS Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets' estimated useful economic lives using methods that best reflect the pattern of economic benefits and is included in Depreciation and amortisation. These estimated useful economic lives are: Computer software 3 to 12 years Other acquired intangibles 5 to 10 years
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on nonmonetary financial assets classified as fair value through OCI, for example equity shares, which are recognised in other comprehensive income unless the asset is the hedged item in a fair value hedge.
As lessor Finance lease contracts are those which transfer substantially all the risks and rewards of ownership of an asset to a customer. All other contracts with customers to lease assets are classified as operating leases.
As lessee On entering a new lease contract, RBS Group recognises a right of use asset and a lease liability to pay future rentals. The liability is measured at the present value of future lease payments discounted at the applicable incremental borrowing rate. The right of use asset is depreciated over the shorter of the term of the lease and the useful economic life, subject to review for impairment.
Short term and low value leased assets are expensed on a systematic basis.
10. Provisions and contingent liabilities RBS Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably.
Provision is made for restructuring costs, including the costs of redundancy, when RBS Group has a constructive obligation to restructure. An obligation exists when RBS Group has a detailed formal plan for the restructuring and has raised a valid expectation in those affected by starting to
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent their recovery is probable.
Most financial assets are within ‘held to collect’ business models, and have contractual cash flows that comprise solely payments of principal and interest and therefore measured at amortised cost. Certain financial assets are managed under a business model of both ‘held to collect and sell’ and have contractual cash flows comprising solely of payments of principal and interest, and are measured at fair value through other comprehensive income (‘FVOCI’).
The contractual terms of a facility; any leverage features; prepayment and extension terms; and triggers that might reset the effective rate of interest; are considered in determining whether cash flows comprise solely payments of principal and interest.
All liabilities not subsequently measured at fair value are measured at amortised cost.
13. Impairment: expected credit losses At each balance sheet date each financial asset or portfolio of loans measured at amortised cost or at fair value through other comprehensive income, issued financial guarantee and loan commitment is assessed for impairment and presented as impairments in the income statement. Loss allowances are forward-looking, based on 12 month expected credit losses where there has not been a significant increase in credit risk rating, otherwise allowances are based on lifetime expected losses.
Expected credit losses are a probabilityweighted estimate of credit losses. The probability is determined by the risk of default which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is a reduction in the net present value of expected cash flows. On a significant increase in credit risk, allowances are recognised without a change in the expected cash flows, although typically expected cash flows do change also; and expected credit losses are adjusted from 12 month to lifetime expectations.
Where, in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where RBS Group’s interest in equity shares following the exchange is such that RBS Group controls an entity, that entity is consolidated.
Impaired loans are written off and therefore derecognised from the balance sheet when RBS Group concludes that there is no longer any realistic prospect of recovery of part, or all, of the loan. For loans that are individually assessed for impairment, the timing of the write off is determined on a case by case basis. Such loans are reviewed regularly and write off will be prompted by bankruptcy, insolvency, renegotiation and similar events.
The typical time frames from initial impairment to write off for RBS Group’s collectivelyassessed portfolios are:  Retail mortgages: write off usually occurs within five years, or when an account is closed, if earlier.
 Commercial loans: write offs are determined in the light of individual circumstances; the period does not exceed five years.
Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
19. Capital instruments RBS Group classifies a financial instrument that it issues as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms and as equity if it evidences a residual interest in the assets of RBS Group after the deduction of liabilities. The components of a compound financial instrument issued by RBS Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate. Incremental costs and related tax that are directly attributable to an equity transaction are deducted from equity.
The consideration for any ordinary shares of RBSG plc purchased by RBS Group (treasury shares) is deducted from equity. On the cancellation of treasury shares their nominal value is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance provisions of the Companies Act 2006.
21. Associates and joint ventures An associate is an entity over which RBS Group has significant influence. A joint venture is one which it controls jointly with other parties. Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for postacquisition changes in RBS Group’s share of net assets.
Future accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2019 that would affect RBS Group from 1 January 2020 or later:  The amendments to IAS 1 ‘Presentation of Financial Statements’ and IAS 8 ‘Accounting Policy, Changes in Accounting Estimates and Errors’ on the definition of material were issued in October 2018 and are effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. The amendments are aimed at improving the understanding of the existing requirements rather than to significantly impact current materiality judgements. They provide a new definition of material which shall be used to assess whether information, either individually or in combination with other information, is material in the context of the financial statements.
 The amendments to IFRS 3 ‘Business Combinations’ which clarify the definition of a Business were issued in October 2018, are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively with earlier application permitted. They clarify the minimum requirements for a business; remove the assessment of whether market participants are capable of replacing any missing elements; add guidance to help entities assess whether an acquired process is substantive; narrow the definitions of a business and of outputs; and introduce an optional fair value concentration test.
 Effective in 2022 - IFRS 17 ‘Insurance contracts’ was issued in May 2017 to replace IFRS 4 and to establish a comprehensive standard for inceptors of insurance policies. The effective date is 1 January 2021, subject to IASB’s approval of a deferral until 1 January 2022.
Notes: (1) Includes a gain of £444 million (€523 million), a legacy liability release of £256 million and an FX recycling gain of £290 million on completion of the Alawwal bank merger in June 2019; £1,102 million of FX recycling gains arising on the liquidation of RFS Holdings BV and £67 million in relation to the capital repayment in UBI DAC. The recycling gains and capital repayment have been calculated using the step-by-step method in IFRIC 16 and by reference to the proportion of equity applied to the FX translation reserve.
Effective from 1 January 2019, Business Banking was transferred from UK Personal & Business Banking (UK PBB) to Commercial Banking. Concurrent with the transfer, UK PBB was renamed UK Personal Banking. Comparatives have been re-stated.
Notes: (1) All awards have vesting conditions and therefore some may not vest. (2) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Employee Share Plan.
Options are exercisable within six months of vesting; 3.2 million options were exercisable at 31 December 2019 (2018 – 4.9 million; 2017 – 3.7 million). The weighted average share price at the date of exercise of options was £2.49 (2018 - £2.13; 2017 - £2.77). At 31 December 2019, exercise prices ranged from £1.68 to £2.91 (2018 - £1.68 to £3.43; 2017 - £1.68 to £4.34) and the remaining average contractual life was 2.7years (2018 - 2.9 years; 2017 – 2.9 years). The fair value of options granted in 2019 was £11 million (2018 - £21 million; 2017 - £21 million).
Value at Shares grant awarded grant awarded grant awarded £m (million) £m (million) £m (million)
At 1 January 233 92 264 101 296 102 Granted 110 42 156 59 152 63 Forfeited (10) (4) (21) (8) (11) (4) Vested (137) (54) (166) (60) (173) (60) At 31 December 196 76 233 92 264 101
The awards granted in 2019 vest in equal tranches on their anniversaries, predominantly over three years.
Value at Shares Options grant awarded over shares grant awarded over shares grant awarded over shares £m (million) (million) £m (million) (million) £m (million) (million)
The market value of awards vested/exercised in 2019 was £10 million (2018 - £5 million; 2017 - £22 million). There are no vested options of shares exercisable up to 2020 (2018 - 2 million; 2017 - 2 million).
Bonus awards The following tables analyse RBS Group's bonus awards for 2019.
Reconciliation of bonus awards to income statement charge 2019 2018 2017 £m £m £m
Year in which income statement charge is expected to be taken for deferred bonus awards £m £m £m £m £m
Bonus awards deferred from 2017 and earlier 96 86 31 14 5 Bonus awards deferred from 2018 — — 96 16 14 Less: forfeiture of amounts deferred from prior years (7) (66) (25) — — Bonus awards for 2019 deferred — — — 78 32 89 20 102 108 51 Notes: (1) Cash awards are limited to £2,000 for all employees. (2) Excludes other performance related compensation. (3) Operating profit before tax and bonus expense.
Reportable operating segments The reportable operating segments are as follows: UK Personal Banking serves individuals and mass affluent customers in the UK and includes Ulster Bank customers in Northern Ireland.
RBS – Annual Report and Accounts 2019 217 4 Segmental analysis continued Net Net fees Other Depreciation Impairment interest and non-interest Total Operating and (losses)/ Operating income commissions income income expenses amortisation releases profit/(loss)
UK Personal Banking 4,283 692 79 5,054 (2,867) — (339) 1,848 Ulster Bank RoI 444 91 75 610 (583) — (15) 12 Commercial Banking 2,855 1,283 464 4,602 (2,362) (125) (147) 1,968 Private Banking 518 228 29 775 (476) (2) 6 303 RBS International 466 101 27 594 (254) (6) 2 336 NatWest Markets 112 (33) 1,363 1,442 (1,589) (15) 92 (70) Central items & other (22) (5) 352 325 (783) (583) 3 (1,038) Total 8,656 2,357 2,389 13,402 (8,914) (731) (398) 3,359 *2018 and 2017 data has been restated for the business re-segmentation.
UK Personal Banking 6,161 62 6,223 6,188 63 6,251 6,406 39 6,445 Ulster Bank RoI 616 6 622 668 — 668 676 (4) 672 Commercial Banking 4,347 139 4,486 4,576 89 4,665 4,532 79 4,611 Private Banking 703 241 944 681 195 876 585 143 728 RBS International 639 19 658 506 148 654 309 119 428 NatWest Markets 2,516 558 3,074 1,882 916 2,798 1,408 809 2,217 Central items & other 3,447 (1,025) 2,422 2,155 (1,411) 744 2,147 (1,185) 962 Total 18,429 — 18,429 16,656 — 16,656 16,063 — 16,063 *2018 and 2017 data has been restated for the business re-segmentation.
UK Personal Banking 4,834 32 4,866 5,021 33 5,054 5,265 17 5,282 Ulster Bank RoI 562 5 567 613 (3) 610 609 (5) 604 Commercial Banking 4,814 (496) 4,318 5,079 (477) 4,602 5,051 (372) 4,679 Private Banking 631 146 777 655 120 775 594 84 678 RBS International 603 7 610 469 125 594 281 108 389 NatWest Markets 1,664 (322) 1,342 1,510 (68) 1,442 1,077 (27) 1,050 Central items & other 1,145 628 1,773 55 270 325 256 195 451 Total 14,253 — 14,253 13,402 — 13,402 13,133 — 13,133 *2018 and 2017 data has been restated for the business re-segmentation.
RBS – Annual Report and Accounts 2019 218 4 Segmental analysis continued UK Personal Ulster Commercial Private RBS NatWest Central items
Fees and commissions payable (471) (7) (62) (33) (1) (423) 136 (861) Net fees and commissions 692 91 1,283 228 101 (33) (5) 2,357 *2018 and 2017 data has been restated for the business re-segmentation.
RBS – Annual Report and Accounts 2019 219 4 Segmental analysis continued Segmental analysis of goodwill is as follows: UK Personal Commercial Private RBS Banking Banking Banking International Total £m £m £m £m £m
Interest receivable 10,923 — 417 35 11,375 Interest payable (3,255) — (70) (3) (3,328) Net fees and commissions 2,191 37 211 72 2,511 Income from trading activities 727 148 49 8 932 Other operating income 2,305 13 436 9 2,763 Total income 12,891 198 1,043 121 14,253
Operating profit/(loss) before tax 3,543 186 421 82 4,232 Total assets 648,056 33,121 40,010 1,852 723,039 Total liabilities 613,151 31,715 33,539 1,078 679,483 Net assets attributable to equity owners and non-controlling interests 34,905 1,406 6,471 774 43,556 Contingent liabilities and commitments 114,422 — 10,571 2 124,995
Operating profit/(loss) before tax 3,805 (718) 150 122 3,359 Total assets 624,228 32,573 34,441 2,993 694,235 Total liabilities 588,185 31,329 27,183 1,048 647,745 Net assets attributable to equity owners and non-controlling interests 36,043 1,244 7,258 1,945 46,490 Contingent liabilities and commitments 121,267 — 5,408 208 126,883 2017*
Interest receivable 10,556 7 435 36 11,034 Interest payable (1,945) (11) (89) (2) (2,047) Net fees and commissions 2,192 97 113 53 2,455 Income from trading activities 570 83 (24) 5 634 Other operating income 806 22 121 108 1,057 Total income 12,179 198 556 200 13,133
The schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and are contributory for current members. These have been closed to new entrants for over ten years, although current members continue to build up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by RBS Group.
Investment strategy The assets of the Main section, which is typical of other group schemes, represent 90% of plan assets at 31 December 2019 (2018 - 90%) and are invested in a diversified portfolio as shown below.
Major classes of plan assets as a percentage of total plan assets of the Main section 2019 2018 Quoted Unquoted Total Quoted Unquoted Total
The Main section’s holdings of derivative instruments are summarised in the table below: 2019 2018 Notional Fair value
Inflation rate swaps 16 909 1,094 13 347 502 Interest rate swaps 57 6,407 2,992 55 8,132 5,362 Currency forwards 9 215 42 10 22 164 Equity and bond call options 1 122 — 1 277 — Equity and bond put options 5 3 1 4 3 1 Other 3 124 13 4 1,027 1,092
At 1 January 2018 44,652 37,937 6,715 — 49,746 42,378 7,105 (263) Currency translation and other adjustments — — — — 20 17 (1) (4) Income statement 1,123 1,143 171 191 1,242 1,371 179 308 Statement of comprehensive income (1,891) (1,396) 1,532 2,027 (2,090) (1,630) 1,507 1,967 Contributions by employer 2,218 — — (2,218) 2,363 — — (2,363) Contributions by plan participants and other scheme members 7 7 — — 12 12 — — Liabilities extinguished upon settlement — — — — (259) (259) — — Transfer of pension assets and liabilities from Main section (276) (198) (78) — — — — — Benefits paid (2,027) (2,027) — — (2,282) (2,282) — — At 1 January 2019 43,806 35,466 8,340 — 48,752 39,607 8,790 (355) Currency translation and other adjustments — — — — (85) (76) — 9 Income statement Net interest expense 1,245 1,003 242 — 1,374 1,109 255 (10) Current service cost — 140 — 140 — 193 — 193 Past service cost — 13 — 13 — 15 — 15 Gain on curtailments or settlements — — — — — (10) — (10)
Net assets of schemes in surplus (included in Other assets, Note 17) 614 520 Net liabilities of schemes in deficit (included in Other liabilities, Note 20) (119) (165)
RBS – Annual Report and Accounts 2019 222 5 Pensions continued Funding and contributions by RBS Group In the UK, the trustees of defined benefit pension schemes are required to perform funding valuations every three years. The trustees and the sponsor, with the support of the Scheme Actuary, agree the assumptions used to value the liabilities and a Schedule of Contributions required to eliminate any funding deficit. The funding assumptions incorporate a margin for prudence over and above the expected cost of providing the benefits promised to members, taking into account the sponsor’s covenant and the investment strategy of the scheme. Similar arrangements apply in the other territories where the RBS Group sponsors defined benefit pension schemes. The last funding valuation of the Main section was at 31 December 2017 and next funding valuation is due at 31 December 2020, to be agreed by 31 March 2022.
The triennial funding valuation of the Main section as at 31 December 2017 determined the funding level to be 96%, pension liabilities to be £47 billion and the deficit to be £2 billion, which was eliminated by a £2 billion cash payment in October 2018. The average cost of the future service of current members is 44% of salary before administrative expenses and contributions from those members.
Assumptions Placing a value on RBS Group’s defined benefit pension schemes’ liabilities requires RBS Group’s management to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the defined benefit obligations depends upon actual future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be higher or lower than expected.
Discount rate 2.1 2.9 Fixed interest swap yield curve plus 0.8% per annum
Rate of increase in pensions in payment 2.8 2.9 Modelled allowance for relevant caps and floors
Future pensioners, currently aged 40 Males 28.2 28.4 29.3 Females 30.2 30.5 31.5
RBS – Annual Report and Accounts 2019 223 5 Pensions continued The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most recent formal actuarial valuation, effective 31 December 2017.
in value of assets in value of liabilities (obligations) 2019 £m £m £m 0.25% increase in interest rates/discount rate (2,330) (1,973) (357) 0.25% increase in inflation 1,923 1,394 529 0.25% increase in credit spreads (5) (1,973) 1,968 Longevity increase of one year — 1,706 (1,706) 0.25% additional rate of increase in pensions in payment — 1,326 (1,326) Increase in equity values of 10% (1) 430 — 430 0.25% increase in interest rates/discount rate (2,214) (1,644) (570) 0.25% increase in inflation 1,487 1,199 288 0.25% increase in credit spreads (5) (1,644) 1,639 Longevity increase of one year — 1,414 (1,414) 0.25% additional rate of increase in pensions in payment — 1,215 (1,215) Increase in equity values of 10% (1) 419 — 419
Change in credit spreads +50 bps 6.9 5.4 3.9 2.3 0.8 No change 3.6 1.7 — (1.7) (3.6) -50 bps (0.2) (2.3) (4.4) (6.5) (8.7)
RBS – Annual Report and Accounts 2019 224 5 Pensions continued The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions: Active members 13.6 12.9 Deferred members 49.7 48.6 Pensioners and dependants 36.7 38.5
Notes: (1) The 2019 audit fee was approved by the Group Audit Committee. At 31 December 2019, £16 million has been billed in and paid in respect of the 2019 RBS
Current tax Charge for the year (673) (1,025) (925) Over provision in respect of prior years 122 125 227
Judgment: Tax contingencies RBS Group’s income tax charge and its provisions for income taxes necessarily involve a degree of estimation and judgement. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions. RBS Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect current and deferred income tax charges in the period when the matter is resolved.
RBS – Annual Report and Accounts 2019 226 7 Tax continued Tax
At 1 January 2018 (393) 192 (266) 198 (939) 51 (1,157) Implementation of IFRS 9 on 1 January 2018 — — — 16 — — 16 (Credit)/charge to income statement (40) 22 121 154 5 46 308 (Credit)/charge to other comprehensive income (95) 1 — (23) — 33 (84) Currency translation and other adjustments — 5 (14) 4 (2) (34) (41) At 1 January 2019 (528) 220 (159) 349 (936) 96 (958)
Critical accounting policy: Deferred Tax RBS Group has recognised a deferred tax asset of £1,011 million (31 December 2018 - £1,412 million) principally comprises losses that arose in the UK, temporary differences, and a deferred tax liability of £266 million (31 December 2018 - £454 million). This includes amounts recognised in respect of UK trading losses of £770 million (31 December 2018 - £675 million). Deferred tax assets are recognised to the extent that it is probable that there will be future taxable profits to recover them.
Judgment - RBS Group has considered the carrying value of deferred tax assets and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets.
NWM Plc – NWM Plc expects that the balance of recognised deferred tax asset at 31 December 2019 of £75 million (2018 - £151 million) in respect of tax losses amounting to approximately £400 million will be recovered by the end of 2025. The movement in the current financial year reflects a £76 million decrease in the carrying value of the deferred tax asset, driven primarily by a decrease in forecast future taxable profits as a result of the strategic review of the NWM franchise. During the year, agreement was reached to transfer tax losses of £5,438 million to NWB Plc and RBS plc, as a consequence of the ring fencing regulations. Of the losses remaining, £5,109 million have not been recognised in the deferred tax balance at 31 December 2019; such losses will be available to offset 25% of future taxable profits in excess of those forecast in the closing deferred tax asset.
NWB Plc – A deferred tax asset of £530 million has been recognised in respect of total losses of £3,109 million. The losses arose principally as a result of significant impairment and conduct charges between 2009 and 2012 during challenging economic conditions in the UK banking sector. NWB Plc returned to tax profitability during 2015 and expects the deferred tax asset to be consumed by future taxable profits by the end of 2025. During the year, losses of £881 million were transferred from NWM Plc as a consequence of the ring fencing regulations. These losses have not been recognised in the deferred tax balance at 31 December 2019.
RBS plc – A deferred tax asset of £206 million was recognised in respect of losses transferred of £1,161 million from NatWest Markets Plc as a consequence of the ring fencing regulations, with £56 million of the deferred tax asset utilised to reduce current tax expense, leaving a balance of recognised deferred tax asset at 31 December 2019 of £150 million recovered by the end of 2025. The remaining losses transferred of £3,396 million have not been recognised in the deferred tax balance at 31 December 2019; such losses will be available to offset 25% of future taxable profits.
RBS – Annual Report and Accounts 2019 227 7 Tax continued Overseas tax losses
UBI DAC – A deferred tax asset of £181 million has been recognised in respect of losses of £1,447 million of total losses of £8,334 million carried forward at 31 December 2019. The losses arose principally as a result of significant impairment charges between 2008 and 2013 during challenging economic conditions in the Republic of Ireland. The movement in the current financial year reflects a £67m reduction in the carrying value of the deferred tax asset and £:€ exchange differences. As UBIDAC continues to operate in a small open economy subject to short term volatility and extended non-performing loan realisation periods the company expects, in assessing its deferred tax asset on tax losses, that they will be consumed by future taxable profits by the end of 2028.
NatWest Market N.V. (NWM N.V.) – NWM N.V. Group management has considered that there are significant changes to NWM N.V. Group’s activities compared to prior years as NWM N.V. has repurposed its banking licence and new business was transferred to NWM N.V. during 2019. NWM N.V. Group management did not recognise deferred tax asset in respect of losses carried forward at 31 December 2019 due to the implications from the wider strategic review of the NWM franchise and the uncertainty in respect of Brexit.