Deferred tax liabilities of £262 million (2018 - £257 million; 2017 - £255 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK tax, overseas dividends received on or after 1 July 2009.
Liabilities Deposits Repos 27,885 25,645 Collateral received 21,509 20,187 Other deposits 1,606 1,788 Total deposits 51,000 47,620 Debt securities in issue 1,762 903 Short positions 21,187 23,827 Total 73,949 72,350
RBS – Annual Report and Accounts 2019 228 10 Derivatives Companies within RBS transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
RBS applies hedge accounting to manage the following risks; interest rate, foreign exchange and net investment in foreign operations.
RBS’s interest rate hedging relate to the management of RBS’s nontrading structural interest rate risk, caused by the mismatch between fixed interest rates and floating interest rates. RBS manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges.
Fair value hedges of interest rate risk involve interest rate swaps transforming the fixed interest rate risk in recognised financial assets and financial liabilities to floating. The hedged risk is the risk of changes in the hedged item’s fair value attributable to changes in the benchmark interest rate embedded in the hedged item. The significant embedded benchmarks are LIBOR, EURIBOR and SONIA. This risk component is identified using the risk management systems of RBS. This risk component comprises the majority of the hedged items fair value risk.
Exchange rate risk also arises in RBS where payments are denominated in different currencies than the functional currency.
A number of the current cash flow and fair value hedges of interest rate risk will be directly affected by interest rate benchmark reform; RBS Group currently considers all of these relationships that mature post 31 December 2021 to be directly affected. As at 31 December 2019 the exact transition date of affected hedge accounting relationships is not known. The disclosures are prepared on these assumptions where the amendments made to IAS39 paragraphs 102D-102N and 108G are applied. The disclosures made for the notional of hedging instruments and risk exposures affected by interest rate benchmark reform contain information for both the hedging instrument and hedged risks even if only one of these will be directly impacted by the reform.
 continues to liaise with regulators, standard setters, industry groups and customers on other relevant matters as the transition to risk free rates progresses
RBS – Annual Report and Accounts 2019 229 10 Derivatives continued Included in the table above are derivatives held for hedging purposes as follows: 2019 2018 Changes in fair Changes in fair value used for value used for hedge hedge Notional Assets Liabilities ineffectiveness (1) Notional Assets Liabilities ineffectiveness (1)
Fair value hedging Interest rate contracts 65.1 1,186 2,641 (585) 60.0 965 2,061 (7)
The notional of hedging instruments affected by interest rate benchmark reform is as follows: 2019 £bn
Fair value hedging - LIBOR 40.2 - EURIBOR 11.1 Cash flow hedging - LIBOR 44.2 - EURIBOR 3.4 - SONIA 0.0
Fair value hedging Hedging assets - Interest rate risk 0.6 1.6 8.1 5.5 12.5 4.4 4.3 37.0 Hedging liabilities - Interest rate risk — 0.5 6.3 12.7 6.6 2.0 — 28.1 Cash flow hedging Hedging assets Interest rate risk 4.8 11.4 31.7 10.7 12.2 — — 70.8 Average fixed interest rate (%) 1.10 0.97 1.20 1.78 1.44 3.12 — 1.11 Hedging liabilities Interest rate risk 1.9 22.0 45.2 5.3 2.4 0.8 — 77.6 Average fixed interest rate (%) 0.83 1.01 0.87 1.32 1.12 4.31 — 0.98 Exchange rate risk — 1.9 6.2 3.1 1.1 — — 12.3 Average USD - £ rate — 1.56 1.30 1.30 1.44 — — 1.35 Average INR - £ rate — 88.64 94.01 — — — — 93.11 Net investment hedging Exchange rate risk 0.1 0.3 — — — — — 0.4 Principal currency hedges Average SEK - £ rate 12.27 12.10 — — — — — 12.21 Average DKK - £ rate 8.78 — — — — — — 8.78 Average NOK - £ rate 12.36 — — — — — — 12.36 2018 Fair value hedging Hedging assets - Interest rate risk 1.0 1.8 11.0 4.9 7.8 3.7 3.8 34.0 Hedging liabilities - Interest rate risk — 2.0 7.5 10.0 4.6 1.9 — 26.0 Cash flow hedging Hedging assets Interest rate risk 3.9 10.9 47.8 8.7 10.5 — — 81.8 Average fixed interest rate (%) 1.87 1.44 1.13 2.00 1.43 — — 1.33 Hedging liabilities Interest rate risk 8.6 18.9 34.1 5.1 0.4 0.8 — 67.9 Average fixed interest rate (%) 0.54 0.56 1.07 1.34 3.96 4.31 — 0.94 Exchange rate risk — — 5.8 4.7 2.0 — — 12.5 Average USD - £ rate — — 1.32 1.37 1.50 — — 1.37 Net investment hedging Exchange rate risk 1.2 0.6 0.2 — — — — 2.0
Impact on Changes in fair value Impact on hedged Carrying value hedged items used as a basis to items ceased to be of hedged included in determine adjusted for hedging assets and liabilities carrying value ineffectiveness (1) gains or losses
Fair value hedging - interest rate Loans to banks and customers - amortised cost 6,716 1,023 165 86 Other financial assets - securities 35,796 1,274 1,474 — Total 42,512 2,297 1,639 86
Cash flow hedging - interest rate (2) Bank and customer deposits 75,837 225 Other financial liabilities - debt securities in issue 1,009 14
Cash flow hedging - exchange rate Other financial liabilities - debt securities in issue 5,590 — Subordinated liabilities 6,902 — Total 162,226 658
The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment): Hedged
 Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and
Additional information on cash flow hedging and hedging of net assets can be found in the Statement of Changes in Equity.
Cash and balances at central banks 77,858 77,858 Trading assets 76,745 76,745 Derivatives (3) 150,029 150,029 Settlement balances 4,387 4,387 Loans to banks - amortised cost (4) 10,689 10,689 Loans to customers - amortised cost 326,947 326,947 Other financial assets 715 49,283 11,454 61,452 Intangible assets 6,622 6,622 Other assets 8,310 8,310 31 December 2019 227,489 49,283 431,335 14,932 723,039
Liabilities trading DFV (5) cost liabilities £m £m £m £m £m
Trading reverse repos 52,007 (28,720) 23,287 (562) — (22,262) 463 808 24,095 Trading repos 54,131 (28,720) 25,411 (562) — (24,808) 41 2,474 27,885 Net position (2,124) — (2,124) — — 2,546 422 (1,666) (3,790)
Trading reverse repos 53,148 (31,376) 21,772 (762) — (21,000) 10 2,987 24,759 Trading repos 55,864 (31,376) 24,488 (762) — (23,726) — 1,157 25,645 Net position (2,716) — (2,716) — — 2,726 10 1,830 (886)
Note: (1) The net IFRS offset balance of £811 million (2018 - £1,735 million) relates to variation margin netting reflected on other balance sheet lines.
RBS – Annual Report and Accounts 2019 234 12 Financial instruments - valuation Critical accounting policy: Fair value - financial instruments In accordance with Accounting policies 12 and 20, financial instruments classified as mandatory fair value through profit or loss, held-for-trading or designated as at fair value through profit or loss and financial assets classified as fair value through other comprehensive income are recognised in the financial statements at fair value. All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. It also uses the assumptions that market participants would use when pricing the asset or liability. In determining fair value, RBS Group maximises the use of relevant observable inputs and minimises the use of unobservable inputs.
Where RBS Group manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, it measures the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction at the measurement date under current market conditions.
Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the RBS Group’s own credit standing.
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 £m £m £m £m £m £m
Liabilities Trading liabilities Deposits — 50,944 56 — 47,243 377 Debt securities in issue — 1,703 59 — 791 112 Short positions 15,565 5,622 — 18,941 4,886 — Derivatives — 145,818 1,061 — 127,709 1,188 Other financial liabilities Debt securities in issue — 2,117 141 — 2,348 280 Other deposits — — — — 212 — Subordinated liabilities — 724 — — 867 — Total financial liabilities held at fair value 15,565 206,928 1,317 18,941 184,056 1,957
Notes: (1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. There were no significant transfers between level 1 and level 2. (2) For an analysis of debt securities held at mandatorily fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to
Where measurement differences are identified through the IPV process these are grouped by fair value level and quality of data. If the size of the difference exceeds defined thresholds adjustment to independent levels are made.
The Modelled Product Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure being reviewed by the RBS Model Risk team. Valuation Committees are made up of valuation specialists and senior business representatives from various functions and oversees pricing, reserving and valuations issues. These committees meet monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant matters of including prudential valuation.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, funding and credit risk. These adjustments are presented in the table below: Adjustment
Funding levels are applied to estimated potential future exposures. For uncollateralised derivatives, the modelling of the exposure is consistent with the approach used in the calculation of CVA, and the counterparty contingent nature of the exposure is reflected in the calculation. For collateralised derivatives, the exposure reflects initial margin posting requirements.
Equity Shares Price-based Price GBP — 25,914 — 24,181 Price % — 80 — — Valuation Discount factor % 6 9 8 11 Fund NAV % 80 120 80 120
Trading liabilities and Other financial liabilities Deposits DCF based on recoveries Correlation % — — (45) 99 Interest rate % — — (0.36) 1.74 Price-based Price % — 98 — — Yield analysis Day count Number 65 95 — —
Derivative assets and liabilities Credit derivatives DCF based on recoveries Credit spreads bps 6 500 18 500 Option pricing Correlation % (50) 80 (50) 80 Volatility % 27 80 47 80 Upfront points % — 99 — 100 Recovery rate % 10 40 10 40 Price-based Price % — — 90 110
Equity derivatives Option pricing Correlation % (53) 87 (57) 92 Forward Points — — 864 7,106 Volatility % — — 11 23
Notes: (1) The table above presents the range of values for significant inputs used in the valuation of level 3 assets and liabilities. The range represents the highest and lowest values of the input parameters and therefore is not a measure of parameter uncertainty. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the issuer but unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, their inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
The decision to classify a modelled instrument as level 2 or 3 will be dependent upon the product/model combination, the observability and quality of input parameters and other factors. All these must be assessed to classify the asset. If an input fails the observability or quality tests then the instrument is considered to be in level 3 unless the input can be shown to have an insignificant effect on the overall valuation of the product.
The majority of derivative instruments for example vanilla interest rate swaps, foreign exchange swaps and liquid single name credit derivatives are classified as level 2 as they are vanilla products valued using observable inputs. The valuation uncertainty on these is considered to be low and both input and output testing may be available.
Assets Trading assets Loans 449 10 (10) 120 10 (10) Securities 555 — — 701 20 (10) Derivatives Interest rate 1,015 160 (160) 1,487 120 (120) Foreign exchange 98 10 (10) 130 10 (10) Other 116 10 (10) 219 10 (20) Other financial assets Loans 58 — — 136 10 (20) Securities 263 80 (20) 507 50 (30)
Trading Other financial Total Total Trading Other financial Total Total assets (2) assets (3) assets liabilities assets (2) assets (3) assets liabilities £m £m £m £m £m £m £m £m
Notes: (1) There were £596 million net losses on trading assets and liabilities (2018 – £185 million gains) recorded in income from trading activities. Net gains on other instruments of £15 million (2018 – £190 million) were recorded in other operating income and interest income as appropriate. (2) Trading assets comprise assets held at fair value in trading portfolios. (3) Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through profit or loss.
RBS – Annual Report and Accounts 2019 240 12 Financial instruments: fair value of financial instruments not carried at fair value The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Financial liabilities Bank deposits 4.2 19.1 18.5 — 13.9 4.6 Customer deposits 307.1 53.8 54.6 — 10.4 44.2 Settlement balances 3.1 Other financial liabilities - debt securities in issue 36.9 38.6 — 36.9 1.7 Subordinated liabilities 9.7 10.0 — 9.9 0.1 Other liabilities - notes in circulation 2.2
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. This approach is adopted for lending portfolios in UK Personal Banking, Ulster Bank RoI, Commercial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios.
Debt securities The majority of debt securities are valued using quoted prices in active markets, or using quoted prices for similar assets in active markets. Fair values of the rest are determined using discounted cash flow valuation techniques.
RBS – Annual Report and Accounts 2019 241 13 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Liabilities Bank deposits 9,286 11,207 20,493 7,438 15,859 23,297 Customer deposits 367,098 2,149 369,247 359,148 1,766 360,914 Settlement balances 4,069 — 4,069 3,066 — 3,066 Trading liabilities 53,047 20,902 73,949 50,668 21,682 72,350 Derivatives 41,276 105,603 146,879 29,028 99,869 128,897 Other financial liabilities 11,915 33,305 45,220 8,240 31,492 39,732 Subordinated liabilities 160 9,819 9,979 299 10,236 10,535 Lease liabilities 194 1,629 1,823
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by RBS, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
Assets by contractual maturity Cash and balances at central banks 77,858 — — — — — Settlement balances 4,387 — — — — — Loans to banks - amortised cost 9,659 1,032 5 — — — Other financial assets (1) 4,619 6,644 16,287 9,857 15,766 5,081 Total maturing assets 96,523 7,676 16,292 9,857 15,766 5,081 Loans to customers - amortised cost 48,793 36,108 70,957 51,667 66,453 79,174 Finance lease 72 289 920 646 802 653 Derivatives held for hedging 33 7 63 103 56 42
Liabilities by contractual maturity Bank deposits 7,269 2,017 11,297 38 — — Settlement balance 4,069 — — — — — Other financial liabilities 4,810 7,602 11,849 13,935 9,426 328 Subordinated liabilities 21 541 3,295 5,270 327 1,700 Other liabilities (2) 2,109 — — — — — Total maturing liabilities 18,278 10,160 26,441 19,243 9,753 2,028 Customer deposits 358,359 8,773 2,105 22 23 17 Lease liabilities 54 140 313 249 457 571 Derivatives held for hedging 9 22 50 40 59 46
Loans - amortised cost Stage 1 305,502 285,985 Stage 2 27,868 26,097 Stage 3 6,598 8,174 Of which: individual 2,051 2,860 Of which: collective 4,547 5,314 339,968 320,256 ECL provisions (1) - Stage 1 322 297 - Stage 2 752 772 - Stage 3 2,718 2,782 Of which: individual 796 850 Of which: collective 1,922 1,932 3,792 3,851 ECL provision coverage (2,3) - Stage 1 (%) 0.11 0.10 - Stage 2 (%) 2.70 2.96 - Stage 3 (%) 41.19 34.03 1.12 1.20 Impairment losses ECL charge (4) 696 398 Stage 1 (212) (143) Stage 2 318 292 Stage 3 590 249 Of which: individual 303 94 Of which: collective 287 155 ECL loss rate - annualised (basis points) (3) 20.47 12.43 Amounts written off 792 1,494 Of which: individual 372 272 Of which: collective 420 1,222 *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.
RBS – Annual Report and Accounts 2019 244 14 Loan impairment provisions continued Credit risk enhancement and mitigation For information on Credit risk enhancement and mitigation held as security, refer to Capital and risk management – credit risk.
Critical accounting policy: Loan impairment provisions The loan impairment provisions have been established in accordance with IFRS 9. Accounting policy 13 sets out how the expected loss approach is applied. At 31 December 2019, customer loan impairment provisions amounted to £3,792 million (2018 - £3,851 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes, changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement, significant reduction in the value of any security, breach of limits or covenants, and observable data about relevant macroeconomic measures.
The measurement of credit impairment under the IFRS expected loss model depends on management’s assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. Further information and sensitivity analyses are on Page 140.
The general approach for the IFRS 9 LGD models is to leverage corresponding Basel LGD models with bespoke adjustments to ensure estimates are unbiased and where relevant forward-looking.
For wholesale, while conversion ratios in the historical data show temporal variations, these cannot be sufficiently explained by the CCI measure (unlike in the case of PD and some LGD models) and are presumed to be driven to a larger extent by exposure management practices. Therefore point-in-time best estimates measures for EAD are derived by estimating the regulatory model specification on a rolling five year window.
On 16 June 2019, Alawwal bank and SABB were legally combined as part of a statutory merger. Alawwal bank’s assets and liabilities were absorbed by SABB. The transaction was executed through a share swap, with Alawwal bank’s shareholders receiving SABB shares for each Alawwal bank share. £595 million of the 2019 balance pertains to the transfer of ownership from Alawwal bank to SABB.
Dividends on FVOCI equity shares during the year included approximately £15 million in relation to the equity holding in SABB and certain other dividends which were not individually significant. There were no material dividends received in relation to equity shares disposed during the year.
At 1 January 18,164 2,024 20,188 18,039 2,259 20,298 Currency translation and other adjustments (180) 2 (178) 77 9 86 Acquisition of subsidiaries 1 — 1 48 2 50 Additions — 380 380 — 364 364 Disposals and write-off of fully amortised assets (2) (8,005) (113) (8,118) — (610) (610) At 31 December 9,980 2,293 12,273 18,164 2,024 20,188
Accumulated amortisation and impairment At 1 January 12,558 1,014 13,572 12,481 1,274 13,755 Currency translation and other adjustments (180) 1 (179) 77 5 82 Disposals and write-off of fully amortised assets (8,005) (72) (8,077) — (573) (573) Charge for the year — 291 291 — 271 271 Impairment of goodwill and other intangible assets — 44 44 — 37 37 At 31 December 4,373 1,278 5,651 12,558 1,014 13,572
Notes: (1) Principally internally generated software. (2) Goodwill that arose on the acquisition of ABN AMRO Holding N.V..
Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount. The carrying values of the segments reflect the equity allocations made by management which are consistent with RBS Group’s capital targets. In 2018, the methodology was enhanced to reflect legal entity changes in RBS Group. Consequently certain corporate assets, represented primarily by bonds and liquidity assets in Treasury, are no longer considered to be directly attributable or directly available to the CGUs. These assets are, therefore, not included in the carrying value of the CGUs, resulting in an increase in the available headroom for some CGUs.
Dated loan capital 7,775 8,262 Undated loan capital 2,058 2,127 Preference shares 146 146
There are uncertainties as to the eventual cost of redress in relation to certain of the provisions contained in the table above. Assumptions relating to these are inherently uncertain and the ultimate financial impact may be different from the amount provided.
Payment protection insurance An additional provision of £0.9 billion was taken during 2019, reflecting greater than predicted complaints volumes in the lead up to the 29 August 2019 deadline for making new PPI complaints. RBS Group has made provisions totalling £6.2 billion to date for PPI claims, of which £5.0 billion had been utilised by 31 December 2019.
The table below shows the sensitivity of the provision to reasonable changes in the principle assumptions in relation to claims which are still being processed, all other assumptions remaining the same. RBS Group has received 4.9 million claims at the 29 August 2019 deadline.
Claims change in processed as at Claims still Change in provision
Notes: (1) Average redress for PPI (mis-sale) and Plevin (commission) pay-outs. (2) No PPI % relates to those cases where no PPI policy exists. (3) Average uphold rate per customer initiated claims received directly by RBS Group, including those received via claims management companies, to end of timebar for both PPI (mis-sale) and Plevin (commission), excluding those for which no PPI policy exists.
Background information for all material provisions is given in Note 26.
RBS – Annual Report and Accounts 2019 248 21 Share capital and other equity Number of shares
Movement in allotted, called up and fully paid ordinary shares £m shares - 000s
On 6 February 2019 RBS held a General Meeting and shareholders approved a special resolution to give authority for the company to make off-market purchases of ordinary shares from HM Treasury (or its nominee) at such times as the directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting. This authority was renewed at the Annual General Meeting in 2019 and shareholders will be asked to renew this authorisation at the Annual General Meeting in 2020.
Note: (1) Preference shares where distributions are discretionary are classified as equity.
Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the noncumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the most recent dividend payment due on the series U non-cumulative dollar preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
 Exclusion of initial direct costs from the measurement of the right of use asset at the date of initial application.
The lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. The weighted average of lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.3%.
Interest payable (44) Depreciation (1) (224) Rental expense on short term leases (4) Income from subleasing right of use assets 9
Amounts recognised on balance sheet Right of use assets included in property, plant and equipment (2) 1,162 Additions to right of use assets 135 Lease liabilities (3) (1,823)
Acting as a lessor, RBS Group provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
Amounts included in consolidated income statement Finance leases Finance income on the net investment in leases 314
Gross Present value Other Future Present amounts adjustments movements Drawdowns value £m £m £m £m £m
Within 1 year 3,237 (208) (123) (70) 2,836 1 to 5 years 4,566 (370) (100) — 4,096 After 5 years 1,935 (710) (38) — 1,187 Total 9,738 (1,288) (261) (70) 8,119
RBS involvement in client securitisations takes a number of forms. It may: sponsor or administer a securitisation programme; provide liquidity facilities or programme-wide credit enhancement; and purchase securities issued by the vehicle.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on RBS Group balance sheet.
Other credit risk transfer securitisations RBS also transfers credit risk on originated loans and mortgages without the transfer of assets to an SE. As part of this, RBS enters into credit derivative and financial guarantee contracts with consolidated SEs. At 31 December 2019, debt securities in issue by such SEs (and held by third parties) were £673 million (2018 - £596 million). The associated loans and mortgages at 31 December 2019 were £9,001 million (2018 - £8,402 million).
Covered debt programme Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability partnerships to provide security for issues of debt securities. RBS retains all of the risks and rewards of these assets and continues to recognise them. The partnerships are consolidated by RBS and the related covered bonds included within other financial liabilities. At 31 December 2019, £9,630 million (2018 - £9,446) of loans to customers and £280 million (2018 - £478 million) of debt investments provided security for debt securities in issue and other borrowing of £7,241 million (2018 - £6,627 million).
Lending of own issued securities RBS Group has issued, retained, and lent debt securities under securities lending arrangements. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on maturity of the transaction. RBS Group retains all of the risks and rewards of own issued liabilities lent under such arrangements and does not recognise them. At 31 December 2019, £1,704 million secured and £424 million unsecured (2018 - £526 million secured, £424 million unsecured) of own issued liabilities have been retained and lent under securities lending arrangements. At 31 December 2019,£1,745 million (2018 - £551 million) of loans and other debt instruments provided security for secured own issued liabilities that have been retained and lent under securities lending arrangements.
Unconsolidated structured entities RBS’s interests in unconsolidated structured entities are analysed below.
Liquidity facilities/loan commitments 1,619 297 1,916 2,138 213 2,351 Guarantees — — — 3 10 13
RBS – Annual Report and Accounts 2019 254 24 Asset transfers Transfers that do not qualify for derecognition RBS enters into securities repurchase, lending and total return transactions in accordance with normal market practice which includes the provision of additional collateral if necessary. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction.
Trading assets 23,247 14,020 Other financial assets 4,269 9,890 27,516 23,910 Note: (1) Associated liabilities were £27,342 million (2018 – £23,222 million).
25 Capital resources Under Capital Requirements Regulation (CRR), regulators within the European Union monitor capital on a legal entity basis, with local transitional arrangements on the phasing in of end-point CRR.
Shareholders’ equity (excluding non-controlling interests) Shareholders’ equity 43,547 45,736 Preference shares - equity (496) (496) Other equity instruments (4,058) (4,058)
38,993 41,182 Regulatory adjustments and deductions Own credit (118) (405) Defined benefit pension fund adjustment (474) (394) Cash flow hedging reserve (35) 191 Deferred tax assets (757) (740) Prudential valuation adjustments (431) (494) Goodwill and other intangible assets (6,622) (6,616) Expected losses less impairments (167) (654) Foreseeable ordinary and special dividends (968) (1,326) Foreseeable charges (365) — Other regulatory adjustments (2) (105)
It is RBS Group policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS Group has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. RBS Group has complied with the PRA’s capital requirements throughout the year.
RBS – Annual Report and Accounts 2019 255 26 Memorandum items Contingent liabilities and commitments The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2019. Although RBS Group is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of RBS Group's expectation of future losses.
Guarantees – RBS Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that RBS Group will meet a customer's specified obligations to third party if the customer fails to do so. The maximum amount that RBS Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. RBS Group expects most guarantees it provides to expire unused.
Standby facilities and credit lines - under a loan commitment, RBS Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Capital expenditure on property, plant and equipment 20 17 Contracts to purchase goods or services (1) 614 541
Note: (1) Of which due within 1 year: £285 million (2018 – £253 million).
Litigation, investigations and reviews RBSG plc and certain members of RBS Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action (‘Matters’) in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions.
RBS Group recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation.
Litigation Residential mortgage-backed securities (RMBS) litigation in the US RBS Group companies continue to defend RMBS-related claims in the US in which plaintiffs allege that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. The remaining RMBS lawsuits against RBS Group companies consist of cases filed by the Federal Home Loan Bank of Seattle and the Federal Deposit Insurance Corporation that together involve the issuance of less than US$1billion of RMBS issued primarily from 2005 to 2007. A case filed by the Federal Home Loan Bank of Boston was settled during 2019. In addition, NatWest Markets Securities Inc. (‘NWMSI’) previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. for US$55.3 million. This was paid into escrow pending court approval of the settlement, which was granted on 11 March 2019, but which is now the subject of an appeal by a class member who does not want to participate in the settlement.
In addition to the above, five other class action complaints were filed against RBS Group companies in the SDNY, each relating to a different reference rate. The SDNY dismissed all claims against NWM Plc in the case relating to Euribor for lack of personal jurisdiction in February 2017. The SDNY dismissed, for various reasons, the case relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate on 26 July 2019, the case relating to Pound Sterling LIBOR on 16 August 2019, and the case relating to Swiss Franc LIBOR on 16 September 2019. Plaintiffs are appealing each of these four dismissals to the United States Court of Appeals for the Second Circuit. In the fifth class action, which relates to the Australian Bank Bill Swap Reference Rate, the SDNY dismissed all claims against RBS Group companies for lack of personal jurisdiction on 26 November 2018, but plaintiffs have filed an amended complaint, which is the subject of a further motion to dismiss.
NWM Plc has also been named as a defendant in a motion to certify a class action relating to LIBOR in the Tel Aviv District Court in Israel. NWM Plc has filed a motion for cancellation of service. If the motion is successful then the current action will be brought to an end, although the claimants may seek to re-raise the claim in the future. If the motion is unsuccessful, or the claimants seek to re-raise the claims at a later date, NWM Plc may seek to file other potentially dispositive motions.
NWM Plc was defending a claim for £446.7 million in the High Court of Justice of England and Wales brought by London Bridge Holdings Ltd and others, which was settled on confidential terms in November 2019 without admission of liability.
Two other FX-related class actions remain pending in the SDNY. First, there is a class action on behalf of ‘consumers and end-user businesses,’ which is proceeding against NWM Plc in the discovery phase following the SDNY’s denial of the defendants’ motions to dismiss in March 2018. Second, there is a class action on behalf of ‘indirect purchasers’ of FX instruments (which plaintiffs define as persons who transacted FX instruments with retail foreign exchange dealers that transacted directly with defendant banks). In January 2020, the parties in this case reached a settlement subject to agreement on non-monetary terms, documentation, and court approval. A provision has been established to cover the amount that NWM Plc would pay pursuant to the settlement.
On 27 May 2019, a class action was filed in the Federal Court of Australia against NWM Plc and other banks on behalf of persons who bought or sold currency through FX spots or forwards between 1 January 2008 and 15 October 2013 with a total transaction value exceeding AUS $0.5 million. RBSG plc has been named in the action as a ‘cartel party’, but is not a defendant. The claim was served on 28 June 2019.
On 29 July and 11 December 2019, two separate applications seeking opt-out collective proceedings orders were filed in the UK Competition Appeal Tribunal (‘the CAT’) against RBSG plc, NWM Plc and other banks. Both applications have been brought on behalf of persons who, between 18 December 2007 and 31 January 2013, entered into a relevant FX spot or outright forward transaction in the EEA with a relevant financial institution or on an electronic communications network. It is anticipated that the CAT will determine which of the two opt-out applications should be permitted to represent the class.
Government securities antitrust litigation NWMSI and certain other US broker-dealers are defendants in a consolidated antitrust class action pending in the SDNY on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options. The plaintiffs allege that defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The defendants’ motion to dismiss this matter remains pending.
Swaps antitrust litigation NWM Plc and other members of RBS Group, including RBSG plc, as well as a number of other interest rate swap dealers, are defendants in several cases pending in the SDNY alleging violations of the US antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by three swap execution facilities (TeraExchange, Javelin, and trueEx). The plaintiffs allege that the swap execution facilities would have successfully established exchange-like trading of interest rate swaps if the defendants had not unlawfully conspired to prevent that from happening through boycotts and other means. Fact discovery in these cases is complete, and the class plaintiffs have filed a motion for class certification, which as of January 2020 is fully briefed.
In addition, in June 2017, TeraExchange filed a complaint against RBS Group companies, including RBSG plc, as well as a number of other credit default swap dealers, in the SDNY. TeraExchange alleges it would have established exchange-like trading of credit default swaps if the defendant dealers had not engaged in an unlawful antitrust conspiracy. On 1 October 2018, the court dismissed all claims against RBS Group companies.
Madoff NWM N.V. is a defendant in two actions filed by Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC, in bankruptcy court in New York. In both cases, the trustee alleges that certain transfers received by NWM N.V. amounted to fraudulent conveyances that should be clawed back for the benefit of the Madoff estate.
US Anti-Terrorism Act litigation NWB Plc is defending lawsuits filed in the United States District Court for the Eastern District of New York by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NWB Plc is liable for damages arising from those attacks pursuant to the US Anti-Terrorism Act because NWB Plc previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
In October 2017, the trial court dismissed claims against NWB Plc with respect to two of the 18 terrorist attacks at issue. In March 2018, the trial court granted a request by NWB Plc for leave to file a renewed summary judgment motion in respect of the remaining claims, and in March 2019, the court granted summary judgment in favour of NWB Plc. The plaintiffs have commenced an appeal of the judgment to the United States Court of Appeals for the Second Circuit.
The attacks at issue in the cases were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the plaintiffs’ allegations, the defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells, in violation of the US Anti-Terrorism Act, by agreeing to engage in ‘stripping’ of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected.
The first of these actions was filed in the United States District Court for the Eastern District of New York in November 2014. On 16 September 2019, the district court dismissed the case, finding that the claims were deficient for several reasons, including lack of sufficient
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS Group, remediation of systems and controls, public or private censure, restriction of RBS Group’s business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on RBS Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
RBS Group is co-operating fully with the investigations and reviews described below.
US investigations relating to fixed-income securities In the US, RBS Group companies have in recent years been involved in investigations relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities and collateralised debt obligations (CDOs). Investigations by the US Department of Justice (DoJ) and several state attorneys general relating to the issuance and underwriting of RMBS were previously resolved. Certain other state attorneys general have sought information regarding similar issues, and RBS Group is aware that at least one such investigation is ongoing.
In October 2017, NWMSI entered into a non-prosecution agreement (NPA) with the United States Attorney for the District of Connecticut (USAO) in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of assetbacked securities. In the NPA, the USAO agreed not to file criminal charges relating to certain conduct and information described in the NPA, conditioned on NWMSI and affiliated companies complying with the NPA’s reporting and conduct requirements during its term, including by not engaging in conduct during the NPA that the USAO
determines was a felony under federal or state law or a violation of the anti-fraud provisions of the United States securities law.
Foreign exchange related investigations In May and June 2019, RBSG plc and NWM Plc reached settlements totalling approximately EUR 275 million in connection with the EC and certain other related competition law investigations into FX trading. The aggregate amount was fully covered by existing provisions in NWM Plc. NWM Plc continues to co-operate with ongoing investigations from competition authorities on similar issues relating to past FX trading. The exact timing and amount of future financial penalties, related risks and collateral consequences remain uncertain and may be material.
RBS – Annual Report and Accounts 2019 260 26 Memorandum items continued Litigation, investigations and reviews an independent third party. The complaints process has since closed to new complaints.
RBS Group’s remaining provisions in relation to these matters at 31 December 2019 were £106 million.
Investment advice review As a result of an FSA review in 2013, the FCA required RBS Group to carry out a past business review and customer contact exercise on a sample of historic customers who received investment advice on certain lump sum products, during the period from March 2012 to December 2012. The review was conducted under section 166 of the Financial Services and Markets Act 2000. Redress was paid to certain customers in that sample group.
RBS Group later agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April 2015. That exercise is now complete. Phase 2 (covering sales in 2010) started in April 2018 and, with the exception of a small cohort of former customers for whom there is an extended completion date, was materially completed by the end of 2019, with full completion and formal closure expected by the end of June 2020.
In addition, RBS Group agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product. Redress was paid to certain customers who took out the structured product. This remediation activity was completed in December 2019.
RBS Group’s remaining provisions in relation to these matters at 31 December 2019 were less than £10 million. During October 2019, the FCA notified RBS Group of its intention to appoint a Skilled Person under section 166 of the Financial Services and Markets Act 2000 to conduct a review of whether RBS Group’s past business review of investment advice provided during 2010 to 2015 was subject to appropriate governance and accountability and led to appropriate customer outcomes. RBS Group is co-operating with the Skilled Person’s review, which is expected to conclude during Q1 2020.
Packaged accounts RBS Group has had dedicated resources in place since 2013 to investigate and resolve packaged account complaints on an individual basis The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of which were published in October 2016. RBS Group made amendments to its sales process and complaints procedures to address the findings from that review.
RBS Group’s remaining provisions in relation to these matters at 31 December 2019 were £23 million.
FCA investigation into RBS’s compliance with the Money Laundering Regulations 2007 In July 2017, the FCA notified RBS Group that it was undertaking an investigation into RBS Group’s compliance with the Money Laundering Regulations 2007 in relation to certain customers. There are currently two areas under review: (1) compliance with Money Laundering Regulations in respect of Money Service Business customers; and (2) the Suspicious Transactions regime in relation to the events surrounding particular customers. The investigations in both areas are assessing both criminal and civil culpability. RBS Group is cooperating with the investigations, including responding to information requests from the FCA.
Payment Protection Insurance (PPI) Since 2011, RBS Group has been implementing the FCA’s policy statement for the handling of complaints about the mis-selling of PPI (Policy Statement 10/12). In August 2017, the FCA’s new rules and guidance on PPI complaints handling (Policy Statement 17/3) came into force. The Policy Statement introduced new, so-called ‘Plevin’ rules, under which customers may be eligible for redress if the bank earned a high level of commission from the sale of PPI, but did not disclose this detail at the point of sale. The Policy Statement also introduced a two year PPI deadline for making new PPI complaints, which expired on 29 August 2019.
RBS Group has made provisions totalling £6.2 billion to date for PPI claims, including an additional provision of £900 million taken at 30 September 2019, reflecting greater than predicted complaints volumes in the lead up to the 29 August 2019 deadline. £5.0 billion of these provisions had been utilised by 31 December 2019.
US/Swiss tax programme In December 2015, Coutts & Co Ltd, a member of RBS Group, incorporated in Switzerland, entered into a four-year non-prosecution agreement (the NPA) with the DoJ that required it to pay a penalty of US$78.5 million. This was entered into as part of the DoJ’s programme for Swiss banks, related to its investigations of the role that Swiss banks played in concealing the assets of US tax payers in offshore accounts (US related accounts). On 20 December 2019, Coutts & Co Ltd agreed to pay an additional $US27.9 million penalty relating to additional US related accounts that is had not identified and disclosed to DOJ at the time the NPA was executed in 2015. The additional penalty amount has been paid. The four-year term of the NPA has now expired, though certain document preservation and cooperation obligations continue.
Enforcement proceedings and investigations in relation to Coutts & Co Ltd In February 2017, the Swiss Financial Market Supervisory Authority (FINMA) took enforcement action against Coutts & Co Ltd with regard to failures of money laundering checks and controls on certain client accounts that were connected with the Malaysian sovereign wealth fund, 1MDB, and were held with Coutts & Co Ltd. FINMA accordingly required Coutts & Co Ltd to disgorge profits of CHF 6.5 million. With the exception of one administrative criminal proceeding against a former employee of Coutts & Co Ltd, there are no administrative or regulatory proceedings pending against current or former employees. In addition, the Monetary Authority of Singapore (MAS)’s supervisory examination of Coutts & Co Ltd’s Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016.
As part of an internal review of the wider retail and commercial loan portfolios extending from the tracker mortgage examination programme, UBI DAC identified further legacy business issues. A programme remains ongoing to identify and remediate impacted customers. RBS Group has made provisions totalling €167 million (£142 million), of which €111 million (£94 million) had been utilised by 31 December 2019.
Fair value given for businesses acquired (1) (55) (113) (131) Additional investment in associates (9) — Net outflow of cash in respect of acquisitions (55) (122) (131)
Net assets/(liabilities) sold 351 — 177 Non-cash consideration — — (15) Profit on disposal — — 155 Net cash and cash equivalents disposed — — — Net inflow/(outflow) of cash in respect of disposals 351 — 317
Dividends received from associates — 5 (1) Cash expenditure on intangible assets (380) (364) (384) Net (outflow)/inflow (84) (481) (199)
Share capital, share premium, paid-in equity and merger reserve Subordinated liabilities MRELs
Issue of ordinary shares 17 144 306 Redemption of paid-in equity — — (720) Issue of subordinated liabilities 577 — — Redemption of subordinated liabilities (1,108) (2,258) (5,747) Interest on subordinated liabilities (510) (566) (717) Issue of MRELs 3,640 6,996 3,612 Maturity/redemption of MRELs (1,285) — (774) Interest on MRELs (428) (237) (139) Net cash (outflow)/inflow from financing 17 144 (414) (1,041) (2,824) (6,464) 1,927 6,759 2,699
Transfer to retained earnings — — (25,789) — — Ordinary shares issued in respect of employee share schemes 95 80 71 — — Redemption of debt preference shares — — 748 — — Other adjustments including foreign exchange — — 196 485 637 (233) 501 860 (329) At 31 December 28,127 28,015 27,791 9,979 10,535 12,722 19,249 16,821 9,202
RBS – Annual Report and Accounts 2019 262 29 Analysis of cash and cash equivalents
At 1 January - cash 88,897 98,337 88,414 - cash equivalents 20,039 24,268 10,156 108,936 122,605 98,570 Net cash outflow (8,348) (13,669) 24,035 At 31 December 100,588 108,936 122,605
Comprising: Cash and balances at central banks 77,858 88,897 98,337 Treasury bills and debt securities 1,064 83 427 Net loans to banks 21,666 19,956 23,841 Cash and cash equivalents 100,588 108,936 122,605
Non Executive Directors 1,881 2,001 Chairman and executive directors - emoluments 4,783 4,657 6,664 6,658 Amounts receivable under long-term incentive plans and share option plans 741 — Total 7,405 6,658
Compensation of key management The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 22,067 20,316 Post-employment benefits 401 82 Share-based payments 2,435 —
31 Transactions with directors and key management At 31 December 2019, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in RBS Group, as defined in UK legislation, were £741,550 in respect of loans to seven persons who were directors of the company at any time during the financial period.
Key management have banking relationships with RBS Group entities which are entered into in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features.
In 2015, HM Treasury sold 630 million of RBSG plc’s ordinary shares and a further 925 million in June 2018. At 31 December 2019, HM Treasury’s holding in the company’s ordinary shares was 62.1%.
Bank of England facilities RBS Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
Bank of England amounting to 0.324% of their average eligible liabilities in excess of £600 million. They also have access to Bank of England reserve accounts: sterling current accounts that earn interest at the Bank of England Rate.
Other related parties (a) In their roles as providers of finance, RBS companies provide development and other types of capital support to businesses. These investments are made in the normal course of business. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.
33 Post balance sheet events RBS Group intends to refocus the NatWest Markets business and estimates it will incur exit, restructuring and disposal costs of around £0.6 billion in 2020. This estimate may be revised as plans to refocus the business are finalised.
Assets Derivatives with subsidiaries - designated hedges 976 525 - economic hedges 3 18 Amounts due from subsidiaries - amortised cost 3 10,984 12,036 Amounts due from subsidiaries - MFVTPL 14,029 10,755 Amounts due from subsidiaries - other assets 5 — Investments in Group undertakings 6 55,808 56,747 Other financial assets 277 241 Other assets 1 26 Total assets 82,083 80,348
Liabilities Amounts due to subsidiaries - amortised cost 3 116 596 Amounts due to subsidiaries - held for trading 307 — Amounts due to subsidiaries - other liabilities 16 39 Derivatives with subsidiaries - designated hedges 243 310 - economic hedges 468 135 Other financial liabilities - debt securities in issue - amortised cost 16,654 16,817 - designated as at fair value through profit or loss 2,677 4 Subordinated liabilities 7 7,647 7,941 Other liabilities 168 119 Total liabilities 28,296 25,961 Owners’ equity 53,787 54,387 Total liabilities and equity 82,083 80,348
The accompanying notes on pages 267 to 276 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 13 February 2020 and signed on its behalf by: Howard Davies Alison Rose-Slade Katie Murray The Royal Bank of Scotland Group plc Chairman Group Chief Executive Officer Group Chief Financial Officer Registered No. SC45551
Paid-in equity At 1 January 4,047 4,047 4,478 Redeemed/reclassified (2) — — (431) At 31 December 4,047 4,047 4,047
Capital redemption reserve At 1 January — — 4,542 Capital reduction (3) — — (4,542) At 31 December — — —
Retained earnings At 1 January 37,181 38,042 7,995 Implementation of IFRS 9 on 1 January 2018 — 231 — Profit attributable to ordinary shareholders and other equity owners 2,728 2,491 1,377 Equity preference dividends paid (39) (182) (234) Ordinary dividend paid (3,018) (241) — Paid-in equity dividends paid (367) (355) (483) Capital reduction (3) — — 30,331 Redemption of debt preference shares (4) — — (748) Redemption of equity preference shares (8) — (2,805) — Reclassification of paid-in equity — — (196) At 31 December 36,485 37,181 38,042 *Restated for IAS12 ‘income taxes’. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Operating profit before tax 2,799 2,341 1,471 Write-back/(write-down) of investment in subsidiaries 1,489 293 (562) Interest on subordinated liabilities 419 438 497 Elimination of foreign exchange differences (526) 986 (1,119) Profit on disposal of investments in subsidiaries 1,739 — (47) Charges and releases on provisions (25) — 25 Gain on redemption of own debt — — (239) Change in fair value taken to profit or loss of subordinated liabilities 268 — — Change in fair value taken to profit or loss of MRELs (47) (95) (167) Dividends received from subsidiary undertakings (2,308) — — Other non-cash items (23) 429 562 Net cash flows from trading activities 3,785 4,392 421 Increase in amounts due from subsidiaries 863 12,290 2,087 (Increase)/decrease in derivative assets (436) (380) 210 Increase in other financial assets (36) (131) — Decrease/(increase) in other assets 113 (16) (64) (Increase)/decrease in amounts due to subsidiaries (193) 466 — Increase in derivative liabilities 266 161 24 Decrease in other liabilities — (211) (712) Decrease in other financial liabilities (1) — — Change in operating assets and liabilities 576 12,179 1,545 Income taxes received 15 49 64 Net cash flows from operating activities (1) 4,376 16,620 2,030
Dividends received from subsidiaries 463 — — Sale and maturity of other financial assets — — 264 Net investment in business interests and intangible assets (676) (9,481) (2,461) Disposal of subsidiaries and associates 234 — 119 Net cash flows from investing activities 21 (9,481) (2,078)
Effects of exchange rate changes on cash and cash equivalents (1) 1 (14)
Notes: (1) Includes interest received of £371 million (2018 - £508 million, 2017 - £999 million) and interest paid of £988 million (2018 - £819 million, 2017 - £777 million).
RBS – Annual Report and Accounts 2019 267 1 Presentation of accounts The accounts are prepared on a going concern basis (refer to the Report of the directors, page 108) and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (together IFRS) and are presented in accordance with the Companies Act 2006.
2 Critical accounting policies and sources of estimation uncertainty The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are those involved in assessing the impairment, if any, in its investments in subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a subsidiary is impaired. If any such indication exists, the company undertakes an impairment test by comparing the carrying value of the investment in the subsidiary with its estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the higher of its fair value less cost to sell and its value in use. Impairment testing inherently involves a number of judgments: the choice of appropriate discount and growth rates; and the estimation of fair value.
Notes: (1) Fair value hierarchy level 2 - £6.1 billion (2018 - £5.0 billion) and level 3 - £5.2 billion (2018 - £7.0 billion). (2) Fair value hierarchy level 3. (3) Fair value hierarchy level 2.
Liabilities Amounts due to subsidiaries - amortised cost 2 114 116 479 117 596 Amounts due to subsidiaries - held for trading 307 — 307 — — — Derivatives with subsidiaries - designated hedges 52 191 243 58 252 310 - economic hedges (14) 482 468 3 132 135 Other financial liabilities - debt securities in issue - amortised cost 177 16,477 16,654 1,322 15,495 16,817 - designated as at fair value through profit or loss 26 2,651 2,677 2 2 4 Subordinated liabilities 33 7,614 7,647 55 7,886 7,941
Liabilities by contractual maturity Amount due to subsidiaries - amortised cost 3 7 18 18 45 91 Other financial liabilities - amortised cost 196 346 4,601 6,748 7,161 — - designated at fair value through profit or loss 35 74 213 1,696 1,136 — Subordinated liabilities 21 405 2,558 4,987 387 1,301 Total maturing liabilities 255 832 7,390 13,449 8,729 1,392 Derivatives held for hedging 1 56 117 66 7 —
Liabilities by contractual maturity Amount due to subsidiaries - amortised cost 482 5 19 19 46 211 Other financial liabilities - debt securities in issue - amortised cost 158 1,744 1,109 9,611 6,270 1,451 - designated at fair value through profit or loss 2 — 2 — — — Subordinated liabilities 113 340 905 6,872 1,334 808 Total maturing liabilities 755 2,089 2,035 16,502 7,650 2,470 Derivatives held for hedging 38 27 192 40 20 —
Fair value hedging - interest rate contracts 25.2 953 243 25.5 419 310 Cash flow hedging - exchange rate contracts 8.4 23 — 12.5 106 — Total 976 243 525 310
National Westminster Bank Plc (1,3) Banking Great Britain 100% The Royal Bank of Scotland plc (3) Banking Great Britain 100% Coutts & Company (2, 3) Banking Great Britain 100% Ulster Bank Ireland Designated Activity Company (3) Banking Republic of Ireland 100% Ulster Bank Limited (3) Banking Northern Ireland 100% NatWest Markets Plc Banking Great Britain 100% NatWest Markets Securities Inc. (4) Broker dealer US 100% NatWest Markets N.V. (4) Banking Netherlands 100% The Royal Bank of Scotland International Limited (5) Financial Institution Jersey 100%
For full information on all related undertakings, refer to Note 10.
Dated loan capital 6,980 7,253 Undated loan capital 666 687 Preference shares 1 1 7,647 7,941 Note: (1) Table excludes amounts due to fellow subsidiaries of £116 million (2018 - £119 million).
Share capital, share premium, and paid-in equity Subordinated liabilities £m £m £m £m £m £m
Issue of ordinary shares 17 144 306 — — — Issue of Additional Tier 1 capital notes — — — — — — Issue of subordinated liabilities — — — 577 — — Redemption of paid-in equity — — (627) — — — Redemption of subordinated liabilities — — — (855) (267) (1,665) Interest on subordinated liabilities — — — (441) — — Issue of MRELs Interest on MRELs Net cash inflow/(outflow) from financing 17 144 (321) (719) (267) (1,665)
RBS – Annual Report and Accounts 2019 271 10 Related undertakings Legal entities and activities at 31 December 2019 In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. RBS Group interest refers to ordinary shares of equal values and voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital Requirements (Country-by-Country) Reporting Regulations 2013 will be published on the RBS Group’s website.
The following table details active related undertakings incorporated in the UK which are 100% owned by RBS Group and fully consolidated for accounting purposes
Regulatory Entity name Activity treatment Notes 280 Bishopsgate Finance Ltd INV FC (1)
RBS – Annual Report and Accounts 2019 273 10 Related undertakings continued
The RBS Group Ireland Retirement Savings Trustee Ltd TR DE (26)
The Royal Bank of Scotland International (Holdings) Ltd BF FC (15)
The following table details related undertakings which are 100% owned by RBS Group ownership but are not consolidated for accounting purposes
JCB Finance (Leasing) Ltd BF FC FC 75 (34) JCB Finance Ltd BF FC FC 75 (34) Land Options (East) Ltd BF EAJV DE 50 (5) Landpower Leasing Ltd BF FC FC 75 (34) London Rail Leasing Ltd BF EAA PC 50 (39) Natwest Covered Bonds (LM) Ltd BF IA PC 20 (11) Natwest Covered Bonds LLP BF FC FC 73 (14) Natwest Markets Secured Funding (LM) Ltd BF FC PC 20 (69) Pollinate International Ltd OTH EAA DE 35 (87) RBS Sempra Commodities LLP BF FC FC 51 (5) Silvermere Holdings Ltd BF FC FC 95 (5) Vizolution Ltd OTH EAA DE 5 (86)
Celtic Issuer Holdings Limited BF FC DE 0 (90) Celtic Residential Irish Mortgage Securitisation No 14 DAC BF FC DE 0 (21) Celtic Residential Irish Mortgage Securitisation No 15 DAC BF FC DE 0 (21) Cesium Structured Funding Ltd BF FC FC 0 (21) CITIC Capital China Mezzanine Ltd BF IA PC 33 (16) Dunmore Securities No.1 DAC BF FC DE 0 (81) Eris Finance S.R.L. BF IA PC 45 (42) Förvaltningsbolaget Klöverbacken Skola KB BF FC FC 51 (6) Foundation Commercial Property Ltd OTH EAJV PC 50 (15)
Adam & Company Group Ltd FC FC 100 (5) Adam & Company Second General Partner Ltd IA DE 50 (3) Alsecure Life Insurance PCC Ltd FC DE 100 (9) Alsecure US PCC Ltd FC DE 100 (10) Arran Cards Funding Plc FC FC 0 (11) Arran Residential Mortgages Funding 2010-1 Plc FC FC 0 (11) Arran Residential Mortgages Funding 2011-1 Plc FC FC 0 (11) Arran Residential Mortgages Funding 2011-2 Plc FC FC 0 (11) Celtic Residential Irish Mortgage Securitisation No 09 Plc FC DE 0 (20) Celtic Residential Irish Mortgage Securitisation No 10 Plc FC DE 0 (21) Celtic Residential Irish Mortgage Securitisation No 11 Plc FC DE 0 (21) Celtic Residential Irish Mortgage Securitisation No 12 DAC FC DE 0 (21) Celtic Residential Irish Mortgage Securitisation No 16 DAC FC DE 0 (21) First Active Holdings Ltd FC FC 100 (26) First Active Insurances Services Ltd FC FC 100 (26) First Active Investments No. 4 Ltd FC FC 100 (26) First Active Treasury Ltd FC FC 100 (26) Greenock Funding No 5 Plc FC FC 0 (11) Heartlands (Central) Ltd FC DE 100 (5) Hume Street Nominees Ltd FC FC 100 (26) KUC (Public Houses) Ltd FC DE 100 (14) Lombard Ireland Group Holdings Unlimited Company FC FC 100 (26) Lombard Ireland Ltd FC FC 100 (26)
Maja Finance S.R.L. FC FC 98 (42) Mulcaster Street Nominees Ltd FC FC 100 (15) NatWest Nominees Ltd FC FC 100 (14) Nevis Derivatives No. 3 LLP FC FC 100 (11) Norgay Property Ltd FC FC 100 (26) Qulpic Ltd FC DE 67 (51) RB Investments 2 Ltd FC FC 100 (1) RB Investments 5 Ltd FC FC 100 (1) RBDC Administrator Ltd FC FC 100 (5) RBS Asset Management Ltd FC FC 100 (1) RBS Bank (Polska) S.A. FC FC 100 (54) RBS Group (Australia) Pty Ltd FC FC 100 (63) RBS Holdings III (Australia) Pty Ltd FC FC 100 (63) RBS Investments Holdings (UK) Ltd FC FC 100 (1) RBS Invoice Finance (Holdings) Ltd FC FC 100 (1) Riossi Ltd FC DE 100 (1) RoboScot Ventures Ltd FC FC 100 (5) RoyScot Financial Services Ltd FC FC 100 (1) Style Financial Services Ltd FC FC 100 (5) The Royal Bank of Scotland Berhad FC FC 100 (85) The Royal Bank of Scotland Finance (Ireland) FC FC 100 (26) Total Capital Finance Ltd FC FC 100 (14) UB SIG (ROI) Ltd FC FC 100 (26) Ulster Bank Group Treasury Ltd FC FC 100 (78) Ulster Bank Wealth Unlimited Company FC FC 100 (26) Walter Property Ltd FC FC 100 (26) West Register (Hotels Number 1) Ltd FC DE 100 (5) West Register (Land) Ltd FC DE 100 (5) West Register (Project Developments) Ltd FC DE 100 (5) West Register Hotels (Holdings) Ltd FC FC 100 (5) Zrko Ltd FC DE 67 (51)
Adam & Company (Nominees) Ltd FC FC 100 (5) Atlas Nominees Ltd FC FC 100 (46) Blydenstein Nominees Ltd FC FC 100 (1) British Overseas Bank Nominees Ltd FC FC 100 (1) Buchanan Holdings Ltd FC FC 100 (14) Dixon Vehicle Sales Ltd FC FC 100 (14) Dunfly Trustee Ltd FC FC 100 (14) FIT Nominee 2 Ltd FC FC 100 (1) FIT Nominee Ltd FC FC 100 (1) Freehold Managers (Nominees) Ltd FC FC 100 (1) Glyns Nominees Ltd FC FC 100 (1) HPUT A Ltd NC DE 100 (1) HPUT B Ltd NC DE 100 (1) JCB Finance Pension Ltd FC DE 88 (35) Marigold Nominees Ltd FC FC 100 (14) N.C. Head Office Nominees Ltd FC FC 100 (5) National Westminster Bank Nominees (Jersey) Ltd FC FC 100 (47) National Westminster Ltd FC FC 100 (14) NatWest FIS Nominees Ltd FC FC 100 (1) NatWest PEP Nominees Ltd FC FC 100 (14)
Nextlinks Ltd FC FC 100 (1) Nordisk Renting A/S FC FC 100 (49) Nordisk Renting HB FC FC 100 (6) Project & Export Finance (Nominees) Ltd FC FC 100 (14) R.B. Leasing (March) Ltd FC FC 100 (1) RBOS Nominees Ltd FC FC 100 (1) RBS Cards Securitisation Funding Ltd FC FC 100 (15) RBS Investment Executive Ltd NC DE 100 (5) RBS Nominees (Hong Kong) Ltd FC FC 100 (46) RBS Pension Trustee Ltd NC DE 100 (14) RBS Retirement Savings Trustee Ltd FC FC 100 (14) RBS Secretarial Services Ltd FC FC 100 (5) RBSG Collective Investments Nominees Ltd FC FC 100 (5) Sixty Seven Nominees Ltd FC FC 100 (14) Strand Nominees Ltd FC FC 100 (17) Syndicate Nominees Ltd FC FC 100 (14) TDS Nominee Company Ltd FC FC 100 (5) The Royal Bank of Scotland (1727) Ltd FC FC 100 (5) W G T C Nominees Ltd FC FC 100 (1) Williams & Glyn's Bank Ltd FC FC 100 (14)
Natwest Markets N.V. France, Germany, Hong Kong, Italy, Republic of Ireland, Spain, Sweden,
RBS – Annual Report and Accounts 2019 276 10 Related undertakings continued
Loan:deposit ratio Net customer loans held at amortised cost divided by total customer deposits. Table V Tangible net asset value (TNAV)
Return on tangible equity (%) 9.4% 4.8% Return on tangible equity adjusting for impact of: - Adjustment for FX recycling gain (%) 4.7% —
Year ended 31 December 2019 Banking RoI Banking Banking International Markets
Operating profit (£m) 855 49 1,327 297 344 (25) Adjustment for tax (£m) (236) — (372) (83) (48) 7 Preference share cost allocation (£m) (74) — (163) (18) (11) (64) Adjustment for Alawwal bank merger gain (£m) — — — — — (150) Adjusted attributable profit (£m) 545 49 792 196 285 (232) Average RWAe (£bn) 37.7 14.0 78.2 9.8 6.9 48.0 Equity factor 15.0% 15.0% 12.0% 13.0% 16.0% 15.0% RWAe applying equity factor (£bn) 5.7 2.1 9.4 1.3 1.1 7.2 Return on equity 9.6% 2.3% 8.4% 15.4% 25.7% (3.2%)
Year ended 31 December 2018* Operating profit (£m) 1,848 12 1,968 303 336 (70) Adjustment for tax (£m) (510) — (549) (85) (47) 20 Preference share cost allocation (£m) (80) — (188) (23) (18) (108) Adjusted attributable profit (£m) 1,258 12 1,231 195 271 (158) Average RWAe (£bn) 34.0 17.0 85.0 9.4 7.0 53.8 Equity factor 15.0% 14.0% 12.0% 13.5% 16.0% 15.0% RWAe applying equity factor (£bn) 5.1 2.4 10.2 1.3 1.1 8.1 Return on equity 24.7% 0.5% 12.1% 15.4% 24.4% (2.0%)
Year ended 31 December 2017* Operating profit (£m) 1,834 (132) 1,687 143 167 (977) Adjustment for tax (£m) (510) — (472) (40) (17) 274 Preference share cost allocation (£m) (83) — (230) (22) (24) (171) Adjusted attributable profit (£m) 1,241 (132) 985 81 126 (874) Average RWAe (£bn) 40.5 19.0 85.8 9.0 9.3 64.5 Equity factor 15.0% 14.0% 12.0% 14.0% 12.0% 15.0% RWAe applying equity factor (£bn) 6.1 2.7 10.3 1.3 1.1 9.7 Return on equity 20.4% (5.0%) 9.6% 6.4% 11.2% (9.0%)
UK Ulster Personal Bank Commercial Private RBS NatWest Central items RBS Banking RoI Banking Banking International Markets & other Group
Year ended 31 December 2019 £m £m £m £m £m £m £m £m
Year ended 31 December 2018* Operating expenses (2,867) (583) (2,487) (478) (260) (1,604) (1,366) (9,645) Operating lease depreciation — — 121 — — — — 121 Adjusted operating expenses (2,867) (583) (2,366) (478) (260) (1,604) (1,366) (9,524) Total income 5,054 610 4,602 775 594 1,442 325 13,402 Operating lease depreciation — — (121) — — — — (121) Adjusted total income 5,054 610 4,481 775 594 1,442 325 13,281 Cost:income ratio 56.7% 95.6% 52.8% 61.7% 43.8% 111.2% nm 71.7%
Strategic risk The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes. On 14 February 2020 the RBS Group announced a new strategy, focused on becoming a Purpose-led business, designed to champion potential and to help individuals, families and businesses to thrive. This strategy is intended to reflect the rapidly shifting environment and backdrop of unprecedented disruption in society driven by technology and changing customer expectations. The strategy has three areas of focus – climate change, enterprise and learning – where RBS Group believes it can have the greatest positive impact. Together, these strategic initiatives are referred to as the RBS Group’s ‘Purpose-led Strategy’. As a Purpose-led Strategy, it is intended to balance the interests and changing needs of all RBS Group stakeholders and to focus on building relationships that create mutual value across customers’ lives. It will require an internal cultural shift across the RBS Group as to how performance is perceived and how the RBS Group conducts its business. The changes required are substantial and will take many years to fully embed and may not result in the expected outcome within the timeline and in the manner currently contemplated.
As part of its new Purpose-led Strategy, the RBS Group has set a number of financial, capital and operational targets and expectations, both for the short term and throughout the implementation period. Over the medium to long term, the RBS Group intends to achieve a 9-11% return on tangible equity and a CET1 ratio of 13–14%, with a sustained pay-out ratio of around 40% of attributable profit. In addition to making significant reductions in RWAs, achieving these targets will require further significant reductions to the RBS Group’s cost base, with c. £250 million of reductions targeted in 2020. Realising these cost reductions will result in material strategic costs, which may be more than currently expected. The continued focus on meeting cost reduction targets may also mean limited investment in other areas which could affect the RBS Group’s long-term prospects, product offering or competitive position and its ability to meet its other targets, including those related to customer satisfaction and its capacity to respond to climate change in line with its ambition. RBS Group’s commitment to align its lending and financing to the objectives of the Paris Agreement, drive significant reductions in its climate impact and develop sustainable finance products could materially affect the RBS Group’s business and operations. See also ‘The RBS Group’s new Purpose-led Strategy includes one area of focus on climate change which entails significant execution risk and is likely to require material changes to the business model of the RBS Group over the next ten years’. This impact, and any of the other factors above, could jeopardise the RBS Group’s ability to achieve its associated financial targets and generate sustainable returns.
The implementation of the new Purpose-led Strategy is highly complex and will take many years to fully embed. The RBS Group may not be able to successfully implement all aspects of this strategy or reach any or all of the related targets or expectations in the time frames contemplated or at all. In addition, the RBS Group’s ability to serve its target customers, scale certain ventures, deliver growth in new markets and restructure the NWM franchise may be impacted or lower than expected and previously anticipated revenue, profitability and cost reduction levels may not be achieved in the timescale envisaged or at any time. In particular, the Purpose-led Strategy entails a group-wide strategic cultural shift which involves a large number of concurrent and interdependent actions and initiatives, including a refocussing of the NWM franchise, any of which could fail to be implemented in the manner and to the extent currently contemplated, due to operational, legal, execution or other issues. In addition, the successful implementation of the Purpose-led Strategy in part depends on initiatives and growth in ventures that are new to the RBS Group or to the market and therefore there is a risk that some or all such initiatives will not succeed, or may be limited in scope or scale, including due to its current ownership structure.
Hostile attempts are made by third parties to gain access to and introduce malware (including ransomware) into the RBS Group’s IT systems, and to exploit vulnerabilities. The RBS Group has information and cyber security controls in place, which are subject to review on a continuing basis but given the nature of the threat, there can be no assurance that such measures will prevent all attacks in the future. See also, ‘The RBS Group’s operations are highly dependent on its complex IT systems, and any IT failure could adversely affect the RBS Group’.
(particularly of critical services) to cyberattacks, and to provide timely notification of them, as appropriate.
The RBS Group operations and strategy are highly dependent on the effective use and accuracy of data. The RBS Group relies on the effective use of accurate data to support and improve its operations and deliver its strategy. Failure to produce underlying high quality data and/or the ineffective use of such data could result in a failure to satisfy its customers’ expectations including by delivering innovative products and services. This could place RBS Group at a competitive disadvantage, inhibit its efforts to reduce costs and improve its systems, controls and processes, and result in a failure to deliver the RBS Group’s strategy. The use of unethical or inappropriate data and/or noncompliance with customer data and privacy protection could give rise to conduct and litigation risks and could also increase the risk of an operational event or losses or other adverse consequences due to inappropriate models, systems, processes, decisions or other actions.
Individually or collectively, any critical system failure, material loss of service availability or material breach of data security could cause serious damage to the RBS Group’s ability to provide services to its customers, which could result in reputational damage, significant compensation costs or regulatory sanctions (including fines resulting from regulatory investigations) or a breach of applicable regulations. In particular, such issues could cause long-term damage to the RBS Group’s reputation and could affect its regulatory approvals, competitive position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as the RBS Group outsources certain functions and continues to innovate and offer new digital solutions to its customers as a result of the trend towards online and mobile banking.
The RBS Group relies on attracting, retaining and developing senior management and skilled personnel, and is required to maintain good employee relations. The RBS Group’s current and future success depends on its ability to attract, retain and develop highly skilled and qualified personnel,
The RBS Group’s operations are subject to inherent reputational risk. Reputational risk relates to stakeholder and public perceptions of the RBS Group arising from an actual or perceived failure to meet stakeholder expectations, including with respect to the RBS Group’s Purpose-led Strategy and related targets, due to any events, behaviour, action or inaction by the RBS Group, its employees or those with whom the RBS Group is associated. This includes brand damage, which may be detrimental to the RBS Group’s business, including its ability to build or sustain business relationships with customers, and may cause low employee morale, regulatory censure or reduced access to, or an increase in the cost of, funding. Reputational risk may arise whenever there is a material lapse in standards of integrity, compliance, customer or operating efficiency and may adversely affect the RBS Group’s ability to attract and retain customers. In particular, the RBS Group’s ability to attract and retain customers (and, in particular, corporate and retail depositors) may be adversely affected by, amongst others: negative public opinion resulting from the actual or perceived manner in which the RBS Group conducts or modifies its business activities and operations, media coverage (whether accurate or otherwise), employee misconduct, the RBS Group’s financial performance, IT systems failures or cyberattacks, data breaches, financial crime, the level of direct and indirect government support, or the actual or perceived practices in the banking and financial industry in general, or a wide variety of other factors. See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’.
Modern technologies, in particular online social networks and other broadcast tools which facilitate communication with large audiences in short time frames and with minimal costs, may also significantly increase and accelerate the impact of damaging information and allegations.
Economic and political risk Prevailing uncertainty regarding the terms of the UK’s withdrawal from the European Union has adversely affected and will continue to affect the RBS Group. Following the EU Referendum in June 2016, and pursuant to the exit process triggered under Article 50 of the Treaty on European Union in March 2017 and the ratification of the withdrawal agreement by the UK government and the EU (through the Council of Ministers), the UK ceased to be a member of the EU and the European Economic Area (‘EEA’) on 31 January 2020 (‘Brexit’) and entered a transition period, currently due to expire on 31 December 2020. During this transition period, the UK retains the benefits of membership of the EU’s internal market and the customs union, but loses its representation in the EU’s institutions and its role in EU decision-making.
The UK and EU are currently seeking to determine the terms of their future relationship by the end of the transition period, and the resulting economic, trading and legal relationships with both the EU and other counterparties currently remain unclear and subject to significant uncertainty. If the UK and EU do not agree a new comprehensive trade agreement by the end of the transition period and the transition period is not extended, then, subject to separate agreements being made with third countries, the UK would be expected to operate on basic
The direct and indirect effects of the UK’s exit from the EU and the EEA are expected to affect many aspects of the RBS Group’s business and operating environment, including as described elsewhere in these risk factors, and may be material and/or cause a near-term impact on impairments. See also, ‘The RBS Group faces increased political and economic risks and uncertainty in the UK and global markets’. As a result of such anticipated effects, the RBS Group has engaged in significant and costly Brexit planning and contingency planning and expects to continue to do so. The direct and indirect effects of the UK’s exit from the EU and the EEA may also impede the RBS Group’s ability to deliver its Purpose-led Strategy and refocusing of its NatWest Markets franchise. See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’ and ‘Over the next three years, the RBS Group intends to re-focus its NatWest Markets franchise to the RBS Group’s CIB customer offering and realise significant reductions in risk weighted assets, cost base and complexity. This entails significant commercial, operational and execution risks and the intended benefits for RBS Group may not be realised within the timeline and in the manner currently contemplated’.
Significant uncertainty exists as to the respective legal and regulatory arrangements under which the RBS Group and its subsidiaries will operate once the transition period has ended. The legal and political uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules, could have a significant impact on the RBS Group’s non-UK operations and/or legal entity structure, including attendant restructuring costs, level of impairments, capital requirements, regulatory environment and tax implications and as a result may adversely impact the RBS Group’s profitability, competitive position,, business model and product offering.
The RBS Group has obtained the requisite regulatory permissions (including third country licence branch approvals and access to TARGET2 clearing and settlement mechanisms) it currently considers are required for continuity of business as a result of the UK’s departure from the EU. These are required in order to maintain the ability to clear euro payments and to serve non-UK EEA customers if there is a loss of access to the European Single Market. These changes to the RBS Group’s operating model have been costly and may require further changes to its business operations, product offering and customer engagement. The regulatory permissions from the Dutch and German authorities are conditional in nature and will require on-going compliance with certain conditions, including maintaining minimum capital level and deposit balances as well as a defined local physical presence going forward; such conditions may be subject to change in the future. Maintaining these permissions and the RBS Group’s access to the euro payment infrastructure will be fundamental to its business going forward and further changes to the RBS Group’s business operations may be required.
The RBS Group faces additional political uncertainty as to how the Scottish parliamentary process (including, as a result of any further Scottish independence referendum or the next Scottish Parliament elections in May 2021) may adversely impact the RBS Group. RBSG plc and a number of other RBS Group entities (including NWM Plc) are headquartered and/or incorporated in Scotland. Any changes to Scotland’s relationship with the UK or the EU (as an indirect result of Brexit or other developments) would impact the environment in which the RBS Group and its subsidiaries operate, and may require further changes to the RBS Group’s structure, independently or in conjunction with other mandatory or strategic structural and organisational changes which could adversely impact the RBS Group.
Actual or perceived difficult global economic conditions can create challenging economic and market conditions and a difficult operating environment for the RBS Group’s businesses and its customers and counterparties, thereby affecting its financial performance.
The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: trade barriers and the increased possibility of trade wars, widespread political instability, an extended period of low inflation and low interest rates, and global regional variations in the impact and responses to these factors. Such conditions could be worsened by a number of factors including political uncertainty or macro-economic deterioration in the Eurozone, China or the US, the conflicts or tensions the Middle East or Asia, increased instability in the global financial system and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new or extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the ageing demographics of the populations in the markets that the RBS Group serves, or rapid change to the economic environment due to the adoption of technology and artificial intelligence. Any of the above developments could adversely impact the RBS Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and the RBS Group’s customers and their banking needs).
RBS – Annual Report and Accounts 2019 286 decline in the value of the RBS Group’s financial instruments, which may have an adverse effect on the RBS Group’s results of operations in future periods, or inaccurate carrying values for certain financial instruments.
Conversely, while increases in interest rates may support RBS Group income, sharp increases in interest rates could lead to generally weaker than expected growth, or even contracting GDP, reduced business confidence, higher levels of unemployment or underemployment, adverse changes to levels of inflation, and falling property prices in the markets in which the RBS Group operates.
Decisions of major central banks (including by the Bank of England, the European Central Bank and the US Federal Reserve) and political or market events (including Brexit and the general UK political climate), which are outside of the RBS Group’s control, may lead to sharp and sudden variations in foreign exchange rates.
Financial resilience risk The RBS Group may not meet targets and be in a position to continue to make discretionary capital distributions (including dividends to shareholders). As part of the RBS Group’s strategy, the RBS Group has become a principally UK and ROIfocussed banking group and as part of its Purpose-led Strategy has set a number of financial, capital and operational targets for the RBS Group including in respect of: CET1 ratio targets, return on tangible equity (‘ROTE’), leverage ratio targets, funding plans and requirements, reductions in RWAs and the timing thereof, employee engagement, diversity and inclusion as well as environmental, social and customer satisfaction targets and discretionary capital distributions (including dividends to shareholders). See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’.
The RBS Group’s ability to meet its targets and to successfully meet its strategy is subject to various internal and external factors and risks. These include, but are not limited to, market, regulatory, macroeconomic and political uncertainties, operational risks and risks relating to the RBS Group’s business model and strategy (including risks associated with ESG and climate issues) and litigation, governmental actions, investigations and regulatory matters.
The RBS Group’s ability to meet its planned reductions in its annual underlying costs may vary considerably from year to year. Furthermore, the focus on meeting cost reduction targets may result in limited investment in other areas which could affect the RBS Group’s long-term product offering or competitive position and its ability to meet its other targets, including those related to customer satisfaction.
There is no certainty that the RBS Group’s Purpose-led Strategy will be successfully executed, that the RBS Group will meet its targets and expectations or be in a position to continue to distribute capital, or that the RBS Group will be a viable, competitive or profitable banking business.
The RBS Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption. The markets for UK financial services, and the other markets within which the RBS Group operates, are highly competitive. The RBS Group expects such competition to continue or intensify in response to evolving customer behaviour, technological changes (including the growth of digital banking, including from fintech entrants), competitor behaviour, new entrants to the market (including nontraditional financial services providers such as large retail or technology conglomerates, who may have competitive advantages in scale, technology and customer engagement), competitive foreign-exchange offerings, industry trends resulting in increased disaggregation or unbundling of financial services or conversely the re-intermediation of traditional banking services, and the impact of regulatory actions and other factors. In particular, developments in the financial sector resulting from new banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, notably with respect to payment services and products, and the introduction of disruptive technology may impede the RBS Group’s ability to grow or retain its market share and impact its revenues and profitability, particularly in its key UK retail banking segment. Moreover, innovations such as biometrics, artificial intelligence, the cloud, blockchain, and quantum computing may rapidly facilitate industry transformation. These trends may be catalysed by various regulatory and competition policy interventions, particularly as a result of the UK initiative on Open Banking and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking, as well as the competition-enhancing measures under the RBS Group’s Alternative Remedies Package see also, ‘The cost of implementing the Alternative Remedies Package could be more onerous than anticipated’.
Furthermore, the RBS Group’s competitors may be better able to attract and retain customers and key employees and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than the RBS Group. Although the RBS Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, such investments may be insufficient or ineffective, especially given the RBS Group’s focus on its cost savings targets. This may limit additional investment in areas such as financial innovation and therefore could affect the RBS Group’s offering of innovative products or technologies for delivering products or services to customers and its competitive position. Furthermore, the development of innovative products depends on the RBS Group’s ability to produce underlying high quality data, failing which its ability to offer innovative products may be compromised.
The RBS Group has significant exposure to counterparty and borrower risk. The RBS Group has exposure to many different industries, customers and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and other counterparties are inherent in a wide range of the RBS Group’s businesses. The RBS Group is exposed to credit risk if a customer, borrower or counterparty defaults, or under IFRS 9, suffers a sufficiently significant deterioration of credit quality such that, under SICR (‘significant increases in credit risk’) rules, it moves to Stage 2 for impairment calculation purposes. The RBS Group’s lending strategy and associated processes may fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower, or fail to adequately value physical or financial collateral. This may result in increased default rates or a higher loss given default for loans, which may, in turn, impact the RBS Group’s profitability. See also, ‘Capital and risk management — Credit Risk’.
The credit quality of the RBS Group’s borrowers and other counterparties is impacted by prevailing economic and market conditions and by the legal and regulatory landscape in the UK and any deterioration in such conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and consequently impact the RBS Group’s ability to enforce contractual security rights. See also, ‘The RBS Group faces increased political and economic risks and uncertainty in the UK and global markets’. In particular, developments relating to Brexit, or the consequences thereof, may adversely impact credit quality in the UK and the resulting negative economic outlook could drive an increased level of credit impairments reflecting the more forward-looking nature of IFRS 9. See also, ‘Prevailing uncertainty regarding the terms of the UK’s withdrawal from the European Union has adversely affected and will continue to affect the RBS Group’.
Within the UK, the level of household indebtedness remains high although the pace of consumer credit growth has slowed during 2019. The ability of such households to service their debts could be challenged by a period of high unemployment or increased interest rates. In particular, the RBS Group may be affected by volatility in property prices (including as a result of Brexit and the general UK political climate) given that the RBS Group’s mortgage loan and wholesale property portfolios as at 31 December 2019, amounted to £210.3 billion, representing 61.9% of the RBS Group’s total customer loan exposure. If property prices were to weaken this could lead to higher impairment charges, particularly if default rates also increase. In addition, the RBS Group’s credit risk may be exacerbated if the collateral that it holds cannot be realised as a result of market conditions or regulatory intervention or if it is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the RBS Group. This is most likely to occur during periods of illiquidity or depressed asset valuations.
Concerns about, or a default by, a financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and interdependent as a result of credit, trading, clearing and other relationships. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for the RBS Group. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the RBS Group interacts on a daily basis. See also, ‘The RBS Group may not be able to adequately access sources of liquidity and funding’.
As a result, borrower and counterparty credit quality may cause accelerated impairment charges under IFRS 9, increased repurchase demands, higher costs, additional write-downs and losses for the RBS Group and an inability to engage in routine funding transactions.
RBS – Annual Report and Accounts 2019 289 exposure, this may adversely affect the financial condition and prospects of the RBS Group.
The RBS Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger the execution of certain management actions or recovery options. The RBS Group is required by regulators in the UK, the EU and other jurisdictions in which it undertakes regulated activities to maintain adequate financial resources. Adequate capital also gives the RBS Group financial flexibility in the face of turbulence and uncertainty in the global economy and specifically in its core UK and European markets, as well as permitting the RBS Group to make discretionary capital distributions (including dividends to shareholders).
The RBS Group’s current capital strategy is based on the expected accumulation of additional capital through the accrual of profits over time, planned capital actions (including issuances, redemptions, and discretionary capital distributions), RWA growth in the form of regulatory uplifts and lending growth and other capital management initiatives which focus on improving capital efficiency.
 limitations on the use of double leverage, i.e. RBSG plc’s use of borrowed money to invest in the equity of its subsidiaries, as a result of the Bank of England’s and/or the RBS Group’s evolving views on distribution of capital within groups.
A shortage of capital could in turn affect the RBS Group’s capital ratio, and/or ability to make capital distributions.
In addition to regulatory capital, RBSG plc is required to maintain a set quantum of MREL set as a percentage of its RWAs. MREL comprises loss-absorbing senior funding and regulatory capital instruments. The Bank of England has identified single point-of-entry as the preferred resolution strategy for the RBS Group. As a result, RBSG plc is the only RBS Group entity that can externally issue securities that count towards the RBS Group’s MREL requirements, the proceeds of which can then be downstreamed to meet the internal MREL issuance requirements of its operating entities and intermediate holding companies as required.
The RBS Group is subject to Bank of England oversight in respect of resolution, and the RBS Group could be adversely affected should the Bank of England deem the RBS Group’s preparations to be inadequate. The RBS Group is subject to regulatory oversight by the Bank of England, and is required (under the PRA rulebook) to carry out an assessment of its preparations for resolution, submit a report of the assessment to the PRA, and disclose a summary of this report. The initial report is due to be submitted to the PRA on 2 October 2020 and the Bank of England’s assessment of RBS Group’s preparations is scheduled to be released on 11 June 2021.
As at 31 December 2019, the RBS Group’s liquidity coverage ratio was 152%. If its liquidity position were to come under stress, and if the RBS Group were unable to raise funds through deposits or in the debt capital markets on acceptable terms or at all, its liquidity position could be adversely affected and it might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet its obligations under committed financing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. The RBS Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitments. In a time of reduced liquidity, the RBS Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could negatively affect the RBS Group’s results.
In addition, credit ratings agencies are increasingly taking into account environmental, social and governance (“ESG”) factors, including climate risk, as part of the credit ratings analysis, as are investors in their investment decisions.
Any reductions in the credit ratings of RBSG plc or of certain other RBS Group entities, including, in particular, downgrades below investment grade, or a deterioration in the capital markets’ perception of the RBS Group’s financial resilience could significantly affect the RBS Group’s access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivatives contracts and other secured funding arrangements or the need to amend such arrangements, which could adversely affect the RBS Group’s (and, in particular, RBSG plc’s) cost of funding and its access to capital markets and could limit the range of counterparties willing to enter into transactions with the RBS Group (and, in particular, RBSG plc). This could in turn adversely impact its competitive position and threaten the prospects of the RBS Group in the short to medium-term.
The RBS Group may be adversely affected if it fails to meet the requirements of regulatory stress tests. The RBS Group is subject to annual stress tests by its regulator in the UK and is also subject to stress tests by European regulators with respect to RBSG plc, NWM N.V. and Ulster Bank Ireland DAC. Stress tests are designed to assess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. If the stress tests reveal that a bank’s existing regulatory capital buffers are not sufficient to absorb the impact of the stress, then it is possible that the bank will need to take action to strengthen its capital position.
Failure by the RBS Group to meet the quantitative and qualitative requirements of the stress tests as set forth by its UK regulator or those elsewhere may result in: the RBS Group’s regulators requiring the RBS Group to generate additional capital, reputational damage, increased supervision and/or regulatory sanctions, restrictions on capital distributions and loss of investor confidence.
The RBS Group could incur losses or be required to maintain higher levels of capital as a result of limitations or failure of various models. Given the complexity of the RBS Group’s business, strategy and capital requirements, the RBS Group relies on analytical models for a wide range of purposes, including to manage its business, assess the value of its assets and its risk exposure, as well as to anticipate capital and funding requirements (including to facilitate the RBS Group’s mandated stress testing). In addition, the RBS Group utilises models for valuations, credit approvals, calculation of loan impairment charges on an IFRS 9 basis, financial reporting and for financial crime and fraud risk management. The RBS Group’s models, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy.
Such models are inherently designed to be predictive in nature. Failure of these models, including due to errors in model design or inputs, to accurately reflect changes in the micro and macroeconomic environment in which the RBS Group operates, to capture risks and exposures at the subsidiary level, to be updated in line with the RBS Group’s current business model or operations, or findings of deficiencies by the RBS Group’s regulators (including as part of the RBS Group’s mandated stress testing) may result in increased capital requirements or require management action. The RBS Group may also face adverse consequences as a result of actions based on models that are poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misunderstood, or by such information being used for purposes for which it was not designed.
The accounting policies deemed critical to the RBS Group’s results and financial position, based upon materiality and significant judgments and estimates, which include loan impairment provisions, are set out in ‘Critical accounting policies and key sources of estimation uncertainty’ on page 212. New accounting standards and interpretations that have been issued by the International Accounting Standards Board but which have not yet been adopted by the RBS Group are discussed in ‘Accounting developments’ on page 212.
The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Generally, to establish the fair value of these instruments, the RBS Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently credible, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In such circumstances, the RBS Group’s internal valuation models require the RBS Group to make assumptions, judgments and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain.
With effect form 1 January 2019, the RBS Group adopted IFRS 16 Leases, as disclosed in the Accounting Policies. This increased Other assets by £1.3 billion and Other liabilities by £1.7 billion. While adoption of this standard has had no effect on the RBS Group’s cash flows, it has impacted financial ratios, which may influence investors’ perception of the financial condition of the RBS Group.
The value or effectiveness of any credit protection that the RBS Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties. The RBS Group has some remaining credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as the RBS Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage-linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, the RBS Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. The RBS Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a negative impact on the RBS Group’s results.
The RBS Group’s results could be adversely affected if an event triggers the recognition of a goodwill impairment. The RBS Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised at cost less any accumulated impairment losses. As required by IFRS, the RBS Group tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate that it might be impaired.
An impairment test compares the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31 December 2019, the RBS Group carried goodwill of £5.6 billion on its balance sheet. The value in use and fair value of the RBS Group’s cash-generating units are affected by market conditions and the economies in which the RBS Group operates.
Uncertainty exists as to how the Authorities may exercise the powers granted to them under the Banking Act including the determination of actions undertaken in relation to the ordinary shares and other securities of the RBS Group and may depend on factors outside of the RBS Group’s control. Moreover, the relevant provisions of the Banking Act remain untested in practice.
If the RBS Group is at or is approaching the point of non-viability such that regulatory intervention is required, any exercise of the resolution regime powers by the Authorities may adversely affect holders of RBSG plc’s ordinary shares or other RBS Group securities that fall within the scope of the resolution regime powers. This may result in various actions being undertaken in relation to the RBS Group and any securities of the RBS Group, including cancellation, transfer, dilution, write-down or conversion (as applicable). There may also be a corresponding adverse effect on the market price of such securities.
Legal, regulatory and conduct risk The RBS Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect the RBS Group. The RBS Group is subject to extensive laws, regulations, corporate governance practice and disclosure requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes, which may increase compliance and conduct risks. The RBS Group expects government and regulatory intervention in the financial services industry to remain high for the foreseeable future.
Recent regulatory changes, proposed or future developments and heightened levels of public and regulatory scrutiny in the UK, the
Any of these developments (including any failure to comply with new rules and regulations) could have a significant impact on the RBS Group’s authorisations and licences, the products and services that the RBS Group may offer, its reputation and the value of its assets, the RBS Group’s operations or legal entity structure, and the manner in which the RBS Group conducts its business. Areas in which, and examples of where, governmental policies, regulatory and accounting changes and increased public and regulatory scrutiny could have an adverse impact (some of which could be material) on the RBS Group include, but are not limited to, those set out above as well as the following:  general changes in government, central bank, regulatory or competition policy, or changes in regulatory regimes that may influence investor decisions in the markets in which the RBS Group operates;  amendments to the framework or requirements relating to the quality and quantity of regulatory capital to be held by the RBS Group as well as liquidity and leverage requirements, either on a solo, consolidated or subgroup level;  changes to the design and implementation of national or supranational mandated recovery, resolution or insolvency regimes or the implementation of additional or conflicting loss-absorption requirements, including those mandated under UK rules, the BRRD or MREL;  additional rules and regulatory initiatives and review relating to customer protection and resolution of disputes and complaints, including increased focus by regulators (including the Financial Ombudsman Service) on how institutions conduct business, particularly with regard to the delivery of fair outcomes for customers and orderly/transparent markets;  rules and regulations relating to, and enforcement of, anti-corruption, antibribery, anti-money laundering, antiterrorism, sanctions, anti-tax evasion or other similar regimes;  the imposition of additional restrictions on the RBS Group’s ability to compensate its senior management and other employees and increased responsibility and liability rules applicable to senior and key employees;  rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;  changes to corporate governance practice and disclosure requirements, senior manager responsibility, corporate structures and conduct of business rules;  financial market infrastructure reforms establishing new rules applying to investment services, short selling, market abuse, derivatives markets and investment funds;  increased attention to the protection and resilience of, and competition and innovation in, UK payment systems and retail banking developments relating to the UK initiative on Open Banking, Open Finance and the European directive on payment services;  new or increased regulations relating to customer data and privacy protection as well as IT controls and resilience, including the GDPR;  the introduction of, and changes to, taxes, levies or fees applicable to the RBS Group’s operations, such as the imposition of a financial transaction tax, changes in tax rates, changes in the scope and administration of the Bank Levy, increases in the bank corporation tax surcharge in the UK, restrictions on the tax deductibility of interest payments or further restrictions imposed on the treatment of carry-forward tax losses that reduce the value of deferred tax assets and require increased payments of tax;  laws and regulations in respect of climate change and sustainable finance (including ESG) considerations; and
To support the UK’s goal of Net Zero by 2050, the UK and Scottish governments and UK and international regulators, such as the PRA and European Commission, are actively seeking to develop new and existing regulations directly and indirectly focussed on climate change and the associated financial risks. Regulatory and policy developments, such as the minimum energy efficient requirements for residential and commercial real estate, may
In a Joint Declaration on Climate Change published in July 2019, the PRA, FCA, Financial Reporting Council and The Pensions Regulator set out their commitment to working collaboratively to address the risks of climate change. In October 2019, the RBS Group submitted its initial plan to meet the PRA’s supervisory expectations in its supervisory statement (SS 3/19) which sets forth an expectation that regulated entities adopt a Board-level strategic approach to managing and mitigating the financial risks of climate change and embed the management of them into their governance frameworks, subject to existing prudential regulatory supervisory tools (including stress testing and individual and systemic capital requirements). In addition, The Bank of England announced in December 2019 that it will use the 2021 biennial exploratory scenario (BES) to stress banks on certain climate scenarios to test the resilience of the current business models of the largest banks, insurers and the financial system to the physical and transition risks from climate change. The prudential regulation of climate risk will be an important driver in how the RBS Group otherwise decides how it allocates capital and further develop its risk appetite for financing certain types of activity or engaging with counterparties that do not align to a transition to a net zero economy.
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory or conflicting laws, rules or regulations by key regulators or policymakers in different jurisdictions, or failure by the RBS Group to comply with such laws, rules and regulations, may adversely affect the RBS Group’s business, financial condition and results. In addition, uncertainty and insufficient international regulatory coordination as enhanced supervisory standards are developed and implemented may adversely affect the RBS Group’s ability to engage in effective business, capital and risk management planning.
In the ROI, Ulster Bank Ireland DAC remains engaged in a review of the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. A redress and compensation exercise has now concluded although an appeals process is currently anticipated to run until at least the end of 2020. See also, ‘Litigation, investigations and reviews’ of Note 26 on the consolidated accounts for details of these matters. The RBS Group has dedicated resources in place to manage claims and complaints relating to the above and other conduct-related matters. Provisions taken in respect of such matters include the costs involved in administering the various complaints processes. Any failure to administer such processes adequately, or to handle individual complaints fairly or appropriately, could result in further claims as well as the imposition of additional measures or limitations on the RBS Group’s operations, additional supervision by the RBS Group’s regulators, and loss of investor confidence.
The RBS Group may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk free rates. UK and international regulators are driving a transition from the use of interbank offer rates (IBORs), including LIBOR, to alternative risk free rates (RFRs). In the UK, the FCA has asserted that they will not compel LIBOR submissions beyond 2021, thereby jeopardising its continued availability, and have strongly urged market participants to transition to RFRs, as has the CFTC and other regulators in the US. The RBS Group has a significant exposure to IBORs, and continues to reference it in certain products, primarily its derivatives, commercial lending and legacy securities. Although the RBS Group is actively engaged with customers and industry working groups to manage the risks relating to such exposure, and is exploring ways to utilise RFRs to the extent possible, the legal mechanisms to effect transition cannot be confirmed, and the impact cannot be determined nor any associated costs accounted for, until such time that RFRs are utilised exclusively, and there is market acceptance on the form of alternative RFRs for different products, and certain IBOR obligations may not be able to be changed. The transition and uncertainties around the timing and manner of transition to RFRs represent a number of risks for the RBS Group, its customers and the financial services industry more widely. Following an analysis of the RBS Group’s IBOR-linked financial products and instruments, the RBS Group has identified the following risks: legal risks (as changes will be required to documentation for new and the majority of existing transactions); financial risks (which may arise from any changes in valuation of financial instruments linked to benchmarks rates and may impact the RBS Group’s cost of funds and its risk management related financial models); pricing risks (such as changes to benchmark rates could impact pricing mechanisms on certain instruments); operational risks (due to the requirement to adapt IT systems, trade reporting infrastructure and operational processes); and conduct risks (which include communication regarding the potential impact on customers, and engagement with customers during the transition period).
Adverse findings resulting from current or future competition investigations may result in the imposition of reforms or remedies which may impact the competitive landscape in which the RBS Group operates or result in restrictions on mergers and consolidations within the financial sector.
The cost of implementing the Alternative Remedies Package could be more onerous than anticipated. In connection with the implementation of the Alternative Remedies Package (regarding the business previously described as Williams & Glyn), an independent body (‘Independent Body’) has been established to administer the Alternative Remedies Package. The implementation of the Alternative Remedies Package has involved costs for the RBS Group, including but not limited to the funding commitments of £425 million for the Capability and Innovation Fund and £350 million for the incentivised switching scheme, both being administered by the Independent Body. Implementation of the Alternative Remedies Package may involve additional costs for the RBS Group and may also divert resources from the RBS Group’s operations and jeopardise the delivery and implementation of other significant plans and initiatives. In addition, under the terms of the Alternative Remedies Package, the Independent Body may require the RBS Group to modify certain aspects of the RBS Group’s execution of the incentivised switching scheme, which could increase the cost of implementation. Furthermore, should the uptake within the incentivised switching scheme not be sufficient, the Independent Body has the ability to extend the duration of the scheme by up to twelve months, impose penalties of up to £50 million, and can compel the RBS Group to extend the customer base to which the scheme applies which may result in prolonged periods of disruption to a wider portion of the RBS Group’s business.
Failure to generate sufficient future taxable profits or further changes in tax legislation (including with respect to rates of tax) or accounting standards may reduce the recoverable amount of the recognised tax loss deferred tax assets, amounting to £1 billion as at 31 December 2019. Changes to the treatment of certain deferred tax assets may impact the RBS Group’s capital position. In addition, the RBS Group’s interpretation or application of relevant tax laws may differ from those of the relevant tax authorities and provisions are made for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.
On 9 October 2015, the company announced that on 8 October 2015, it had received a valid conversion notice from HM Treasury in respect of all outstanding B shares held by HM Treasury. The new ordinary shares issued on conversion of the B shares were admitted to the official list of the UK Listing Authority (UKLA), and to trading on the London Stock Exchange plc, on 14 October 2015. Following such conversion, HM Treasury no longer holds any B shares.
The aggregate number of ordinary shares which the company may purchase from HM Treasury under the Directed Buyback Contract will not exceed 4.99 per cent. of the company’s issued share capital and the aggregate consideration to be paid will not exceed 4.99 per cent. of the company’s market capitalisation. The price to be paid for each ordinary share will be the market price at the time of purchase or, if the directed buyback is in conjunction with an institutional placing, the placing price.
Pursuant to the Framework and State Aid Deed, the company has committed: (i) £425 million into a fund for eligible bodies in the UK banking and financial technology sectors to develop and improve their capability to compete with the company in the provision of banking services to small and medium-sized enterprises (“SMEs”) and develop and improve the financial products and services available to SMEs (the “Capability and Innovation Fund”); and (ii) £275 million to eligible bodies to help them incentivise SME banking customers within the division of the company previously known as Williams & Glyn to switch their business current accounts and loans to the eligible bodies (the “Incentivised Switching Scheme”). The company has also agreed to set aside up to a further £75 million in funding to cover certain costs customers may incur as a result of switching under the Incentivised Switching Scheme. In addition, under the terms of the Alternative Remedies Package, should the uptake within the Incentivised Switching Scheme not be sufficient, the company may be required to make a further contribution, capped at £50 million. The Independent Body will distribute funds from the Capability and Innovation Fund and implement the Incentivised Switching Scheme.
State Aid Costs Reimbursement Deed Under the 2009 State Aid Costs Reimbursement Deed, the company has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State Aid and State Aid approval.
Financial calendar Dividends Payment dates Cumulative preference shares 31 May and 31 December 2020
Ex-dividend date Cumulative preference shares 30 April and 3 December 2020
Shareholder enquiries You can check your shareholdings in the company by visiting the Shareholder centre section of our website, www.rbs.com and clicking the Managing your shareholding tab. You will need the shareholder reference number printed on your share certificate or tax voucher to access this information.
Share and bond scams Share and bond scams are often run from ‘boiler rooms’ where fraudsters cold-call investors, after obtaining their phone number from publicly available shareholder lists, offering them worthless, overpriced or even non-existent shares or bonds.
They use increasingly sophisticated tactics to approach investors, offering to buy or sell shares, often pressuring investors to make a quick decision or miss out on the deal. Contact can also be in the form of email, post or word of mouth. Scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities and may offer free gifts or discounts on dealing charges.
It is strongly advised that you seek independent professional advice before making any investment.
If you have already invested in a scam, fraudsters are likely to target you again or sell your details to other criminals. The follow-up scam may be completely separate, or may be related to the previous scam in the form of an offer to get your money back or buy back the investment on payment of a fee.
Individuals 176,739 98.7 0.8 Banks and nominee companies 4,821 11,883.7 98.3 Investment trusts 43 0.1 — Insurance companies 2 0.3 — Other companies 458 58.9 0.5 Pension trusts 20 — — Other corporate bodies 71 52.2 0.4
Range of shareholdings: 1 - 1,000 157,364 38.2 0.3 1,001 - 10,000 23,055 52.6 0.4 10,001 - 100,000 969 28.5 0.2 100,001 - 1,000,000 464 163.1 1.4 1,000,001 - 10,000,000 230 772.2 6.4 10,000,001 and over 72 11,039.3 91.3
Direct Mailing for overnight packages: BNY Mellon Shareowner Services 462 South 4th Street Suite 1600 Louisville KY 40202
Corporate, Governance and Regulatory Affairs The Royal Bank of Scotland Group plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ Telephone: +44 (0)131 556 8555
Registered office 36 St Andrew Square Edinburgh, EH2 2YB Telephone: +44 (0)131 556 8555 Registered in Scotland No. SC45551
The Royal Bank of Scotland plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ
Limitations inherent to forward-looking statements These statements are based on current plans, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to the RBS Group’s strategy or operations, which may result in the RBS Group being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by such forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. Forward-looking statements speak only as of the date we make them and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the RBS Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.