The unearned premium provision is included within Accruals, deferred income and other liabilities (see Note 24).
At 1 January 2009 4,498 5,326 Premiums received - continuing operations 250 349 - discontinued operations 278 — Fees and expenses (16) (13) Investment return 400 442 Actuarial adjustments (205) — Account balances paid on surrender and other terminations in the year (546) (712) Exchange and other adjustments (180) (263) At 1 January 2010 4,479 5,129 Premiums received 237 46 Fees and expenses (13) (16) Investment return 100 228 Actuarial adjustments (174) — Account balances paid on surrender and other terminations in the year (434) (159) Disposal of subsidiaries (4,032) (5,115) Exchange and other adjustments (95) (113)
The associated liabilities are: - linked contracts and participating bonds classified as insurance contracts — 4,175 4,189 - linked contracts classified as investment contracts — 5,053 5,208
Insurance risk Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations of the Group at the time of underwriting.
Insurance claims - net of reinsurance Accident year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total £m £m £m £m £m £m £m £m £m £m £m
Group 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
In May 2010, the Group redeemed certain subordinated debt securities and equity preference shares in exchange for cash or senior debt. The exchanges involving instruments classified as liabilities all met the criteria in IFRS for treatment as the extinguishment of the original liability and the recognition of a new financial liability. Gains on these exchanges and on the redemption of securities classified as liabilities for cash, totalling £553 million were credited to profit or loss. No amounts have been recognised in profit or loss in relation to the redemption of securities classified as equity in the Group financial statements. The difference between the consideration and the carrying value for these securities amounting to £651 million has been recorded in equity.
Group 2011 2012 2013-2015 2016-2020 Thereafter Perpetual Total 2010 - final redemption £m £m £m £m £m £m £m
Group Currently 2011 2012 2013-2015 2016-2020 Thereafter Perpetual Total 2010 - call date £m £m £m £m £m £m £m £m
Group 2010 2011 2012-2014 2015-2019 Thereafter Perpetual Total 2009 - final redemption £m £m £m £m £m £m £m
Group Currently 2010 2011 2012-2014 2015-2019 Thereafter Perpetual Total 2009 - call date £m £m £m £m £m £m £m £m
Company 2011 2012 2013-2015 2016-2020 Thereafter Perpetual Total 2010 - final redemption £m £m £m £m £m £m £m
Company Currently 2009 2010 2011-2013 2014-2018 Thereafter Perpetual Total 2008 - call date £m £m £m £m £m £m £m £m 351RBS Group 2010
US$1,250 million floating rate subordinated notes 2014 — — 862 AUD590 million 6% subordinated notes 2014 (callable January 2011) 391 330 281 AUD410 million floating rate subordinated notes 2014 (callable January 2011) 272 229 195
US$750 million floating rate subordinated notes 2015 (callable September 2011) 483 462 513 €750 million floating rate subordinated notes 2015 725 741 783
US$500 million floating rate subordinated notes 2016 (callable October 2011) 322 308 346 US$1,500 million floating rate subordinated notes 2016 (callable April 2011) 967 926 1,038 €500 million 4.5% subordinated notes 2016 (callable January 2011) 450 476 511 CHF200 million 2.75% subordinated notes 2017 (callable December 2012) 138 120 129 €100 million floating rate subordinated notes 2017 86 89 97 €500 million floating rate subordinated notes 2017 (callable June 2012) 432 445 482 €750 million 4.35% subordinated notes 2017 (callable January 2017) 721 728 770 AUD450 million 6.5% subordinated notes 2017 (callable February 2012) 302 255 217 AUD450 million floating rate subordinated notes 2017 (callable February 2012) 295 250 214 US$1,500 million floating rate subordinated callable step-up notes 2017 (callable August 2012) 966 925 1,029
US$125.6 million floating rate subordinated notes 2020 81 78 87 €1,000 million 4.625% subordinated notes 2021 (callable September 2016) 949 962 1,019 €300 million CMS linked floating rate subordinated notes 2022 280 292 303 €144.4 million floating rate subordinated notes 2022 153 143 152
Charter One Financial, Inc. US$400 million 6.375% subordinated notes 2012 265 255 287
RBS Holdings USA Inc. US$170 million subordinated loan capital floating rate notes 2009 — — 116 US$100 million 5.575% senior subordinated revolving credit 2009 — — 69 US$500 million subordinated loan capital floating rate notes 2010 (redeemed December 2010) — 311 342
US$1,500 million floating rate Bermudan callable subordinated notes 2015 (callable March 2011) 927 887 982 US$100 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) (6) — 62 68 US$36 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) (6) — 22 25 US$1,000 million floating rate Bermudan callable subordinated lower tier 2 notes 2017 (callable January 2012) (6) — 598 661 AUD575 million 6.50% Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 371 318 286 AUD175 million floating rate Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 111 93 79 £42 million amortising MTN subordinated lower tier 2 notes 2010 (redeemed December 2010) — 7 15 £25 million amortising MTN subordinated lower tier 2 notes 2011 (redeemed January 2011) 3 8 9 £750 million 5% fixed rate Bermudan callable subordinated upper tier 2 notes 2016 (6) — 727 728 US$250 million 7.75% fixed rate subordinated notes 2023 163 155 173 US$150 million 7.13% fixed rate subordinated notes 2093 98 93 104 PKR800 million floating rate subordinated notes 2012 — — 7 MYR200 million zero coupon subordinated notes 2017 42 36 40 TRY60 million floating rate callable subordinated notes 2012 — — 34
Non-controlling interests subordinated issues 20 12 16 *In addition, the company has in issue €166 million (2009 - €166 million; 2008 - €500 million) subordinated loan notes of €1,000 each, US$633 million (2009 - US$827 million; 2008 - US$1,950 million) subordinated loan notes of US$1,000 each and £93 million (2009 - £93 million; 2008 - £400 million) subordinated loan notes of £1,000 each. These loan notes are included in the company balance sheet as loan capital but are reclassified as non-controlling interest trust preferred securities on consolidation (see Note 28).
The Royal Bank of Scotland plc £31 million (2009 - £96 million; 2008 - £175 million) 7.375% undated subordinated notes (callable August 2011) (1,2) 31 101 190 £51 million (2009 - £117 million; 2008 - £350 million) 6.25% undated subordinated notes (callable December 2012) (1,2) 55 126 380 £56 million (2009 - £138 million; 2008 - £500 million) 6% undated subordinated notes (callable September 2014) (1,2) 61 143 565 €176 million (2009 - €197 million; 2008 - €500 million) 5.125% undated subordinated notes (callable July 2014) (1,2) 166 194 516 €170 million (2009 - €243 million; 2008 - €1,000 million) floating rate undated subordinated notes (callable July 2014) (1,2) 145 214 966 £54 million (2009 - £178 million; 2008 - £500 million) 5.125% undated subordinated notes (callable March 2016) (1,2) 58 189 556 £200 million 5.125% subordinated upper tier 2 notes (redeemed May 2010) — 210 210 £35 million (2009 - £260 million; 2008 - £600 million) 5.5% undated subordinated notes (callable December 2019) (1,2) 35 272 677 £21 million (2009 - £174 million; 2008 - £500 million) 6.2% undated subordinated notes (callable March 2022) (1,2) 43 206 614 £103 million (2009 - £145 million; 2008 - £200 million) 9.5% undated subordinated bonds (callable August 2018) (1,2,5) 130 176 253 £400 million 5.625% subordinated upper tier 2 notes — — 397 £22 million (2009 - £83 million; 2008 - £300 million) 5.625% undated subordinated notes callable September 2026) (1,2) 21 90 431 £19 million (2009 - £201 million; 2008 - £500 million) 5.625% undated subordinated notes (callable June 2032) (1,2) 20 199 508 £1 million (2009 - £190 million; 2008 - £400 million) 5% undated subordinated notes (callable March 2011) (1,2) 2 197 424 JPY25 billion 2.605% undated subordinated notes (redeemed May 2010) — 173 217 CAD474 million (2009 and 2008 - CAD700 million) 5.37% fixed rate undated subordinated notes (callable May 2016) (2) 340 452 464
National Westminster Bank Plc US$193 million (2009 - US$332 million; 2008 - US$500 million) primary capital floating rate notes, Series A (callable on any interest payment date) (1,2) 124 205 343 US$229 million (2009 - US$293 million; 2008 - US$500 million) primary capital floating rate notes, Series B (callable on any interest payment date) (1,2) 148 182 347 US$285 million (2009 - US$312 million; 2008 - US$500 million) primary capital floating rate notes, Series C (callable on any interest payment date) (1,2) 184 192 346 €178 million (2009 and 2008 - €400 million) 6.625% fixed/floating rate undated subordinated notes (callable on any interest payment date) (2) 154 358 388 €10 million (2009 and 2008 - €100 million) floating rate undated step-up notes (callable on any interest payment date) (2) 9 90 97 £87 million (2009 - £162 million; 2008 - £325 million) floating undated subordinated step-up notes (callable January 2015) (1,2) 89 174 363 £53 million (2009 - £127 million; 2008 - £200 million) 7.125% undated subordinated step-up notes (callable October 2022) (1,2) 54 127 201 £35 million (2009 - £55 million; 2008 - £200 million) 11.5% undated subordinated notes (callable December 2022) (1,2,6) 42 79 269
RBS NV and subsidiaries €1,000 million 4.310% perpetual Bermudan callable subordinated tier 1 notes (callable March 2016) (10) — 834 824 €800 million 10.00% fixed perpetual mandatory convertible tier 1 notes 2099 (10) — 716 — €967 million 10.00% fixed perpetual mandatory convertible tier 1 notes 2072 (10) — 866 — €833 million 10.00% fixed perpetual mandatory convertible tier 1 notes 2073 (10) — 746 —
Series F US$156 million (2009 and 2008 - US$200 million) 7.65% (redeemable at option of issuer) (2) 101 123 137 Series H US$242 million (2009 and 2008 - US$300 million) 7.25% (redeemable at option of issuer) (2) 156 185 205 Series L US$751 million (2009 and 2008 - US$850 million) 5.75% (redeemable at option of issuer) (2) 484 524 582
Series C US$246 million (2009 and 2008 - US$300 million) 7.7628% (2,4) 168 193 215
RBS NV and subsidiaries US$1,285 million 5.90% Trust Preferred V 633 696 760 US$200 million 6.25% Trust Preferred VI 100 107 121 US$1,800 million 6.08% Trust Preferred VII 889 950 1,064
Transfer to retained earnings — (629) (629) At 1 January 2010 14,668 2,227 16,895 Currency translation and other adjustments (529) 63 (466) (Loss)/profit attributable to non-controlling interests - continuing operations (121) 61 (60)
Included in non-controlling interests are the following trust preferred securities: US$357 million (2009 - US$357 million; 2008 - US$950 million) 5.512% (redeemable September 2014) (3) 198 198 529 US$276 million (2009 - US$470 million; 2008 - US$1,000 million) 3 month US$ LIBOR plus 0.80% (redeemable September 2014) (3,4) 153 261 555 €166 million (2009 - €166 million; 2008 - €500 million) 4.243% (redeemable January 2016) (3) 112 112 337 £93 million (2009 - £93 million; 2008 - £400 million) 5.6457% (redeemable June 2017) (3) 93 93 400 556 664 1,821
Ordinary shares of 25p 14,091 523 — 14,614 B shares of £0.01 510 — — 510 Dividend access share of £0.01 — — — — Non-voting deferred shares of £0.01 27 — (27) — Additional Value Shares of £0.01 — — — — Non-cumulative preference shares of US$0.01 2 — (1) 1 Non-cumulative convertible preference shares of US$0.01 — — — — Non-cumulative preference shares of €0.01 — — — — Non-cumulative convertible preference shares of €0.01 — — — — Non-cumulative convertible preference shares of £0.25 — — — — Non-cumulative convertible preference shares of £0.01 — — — — Non-cumulative preference shares of £1 1 — (1) — Cumulative preference shares of £1 1 — — 1
Ordinary shares of 25p 58,458,131 56,365,721 39,456,005 44,603,278 B shares of £0.01 51,000,000 51,000,000 — — Dividend access share of £0.01 (2) — — — — Non-voting deferred shares of £0.01 — 2,660,556 2,660,556 32,300,000 Additional Value Shares of £0.01 — — — 2,700,000 Non-cumulative preference shares of US$0.01 209,609 308,015 308,015 516,000 Non-cumulative convertible preference shares of US$0.01 65 1,000 1,000 3,900 Non-cumulative preference shares of €0.01 2,044 2,526 2,526 66,000 Non-cumulative convertible preference shares of €0.01 — — — 3,000 Non-cumulative convertible preference shares of £0.25 — — — 900,000 Non-cumulative convertible preference shares of £0.01 15 200 200 1,000 Non-cumulative preference shares of £1 54 750 5,750 300,000 Cumulative preference shares of £1 900 900 900 900
Employee share trusts purchased 1.6 billion ordinary shares at a cost of £672 million and awarded 17.9 million ordinary shares on receipt of £0.5 million on the exercise of awards under employee share plans.
In March 2010, the company converted 935,228 non-cumulative convertible preference shares of US$0.01 into ordinary shares resulting in approximately 1.6 billion ordinary shares being issued.
B shares and dividend access share In December 2009, the company entered into an acquisition and contingent capital agreement with HM Treasury. HM Treasury agreed to acquire at 50p per share 51 billion B shares with a nominal value of 1p each and a dividend access share with a nominal value of 1p; these shares were issued to HM Treasury on 22 December 2009. Net proceeds were £25.1 billion. HM Treasury also agreed to subscribe for up to 16 billion further B shares with a nominal value of 1p each at 50p per share subject to certain conditions including the Group's Core Tier 1 capital ratio falling below 5%. The fair value of the consideration payable by the company on entering into this agreement amounted to £1,458 million; of this £1,208 million was debited to the contingent capital reserve.
Non-voting deferred shares In November 2010, the company cancelled all of its outstanding Nonvoting deferred shares of £0.01 each, all of which were held by a nominee company wholly owned by the Group.
Preference shares Under IFRS certain of the Group's preference shares are classified as debt and are included in subordinated liabilities on the balance sheet.
In the event that the non-cumulative convertible preference shares are not redeemed on or before the redemption date, the holder may convert them into ordinary shares in the company at the prevailing market price.
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 non-cumulative 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 three most recent quarterly dividend payments due on the noncumulative dollar preference shares (other than Series U), the two most recent semi-annual dividend payments due on the non-cumulative convertible dollar preference shares and the most recent dividend payments due on the non-cumulative euro preference shares, the noncumulative sterling preference shares, the Series U non-cumulative dollar preference shares and the non-cumulative convertible sterling 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.
30 Reserves On 1 January 2008, the merger reserve comprised the premium on shares issued to acquire NatWest less goodwill amortisation charged under previous GAAP. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act 1985.
Paid-in equity represents notes issued under the company's euro medium term note programme with an initial par value of US$1,600 million and CAD600 million that are classified as equity under IFRS. The notes attract coupons of 6.99% and 6.666% respectively until October 2017 when they change to 2.67% above the London interbank offered rate for 3-month US dollar deposits and 2.76% above the Canadian dollar offered rate respectively. Paid-in equity of US$1,036 million was repurchased in April 2009 and CAD279 million was repurchased in May 2010 as part of the liability management exercises.
Future minimum lease rentals £m 2010 Within 1 year 3,559 (309) (20) 3,230 997 After 1 year but within 5 years 7,833 (795) (245) 6,793 2,388 After 5 years 7,843 (2,763) (263) 4,817 998 Total 19,235 (3,867) (528) 14,840 4,383 2009 Within 1 year 3,617 (534) (30) 3,053 781 After 1 year but within 5 years 8,582 (1,890) (212) 6,480 2,514 After 5 years 11,251 (2,461) (334) 8,456 1,018 Total 23,450 (4,885) (576) 17,989 4,313 2008 Within 1 year 3,783 (784) (24) 2,975 918 After 1 year but within 5 years 9,843 (2,288) (162) 7,393 2,479 After 5 years 12,962 (3,124) (385) 9,453 1,141 Total 26,588 (6,196) (571) 19,821 4,538 £m £m £m Nature of operating lease assets on the balance sheet Transportation 6,162 6,039 5,883 Cars and light commercial vehicles 1,016 1,352 1,199 Other 208 403 617 7,386 7,794 7,699
Finance lease contracts and hire purchase agreements Accumulated allowance for uncollectable minimum receivables 401 313 213
After 2 years but within 5 years After 5 years Total - cars and light commercial vehicles 503 109 100 9 721 - other 30 20 39 13 102 Finance lease contracts 20 41 131 263 455 Hire purchase agreements — 3 70 — 73 910 630 2,174 2,382 6,096 2009 Operating leases - transportation 164 327 1,607 2,255 4,353 - cars and light commercial vehicles 624 134 113 7 878 - other 31 32 40 7 110 Finance lease contracts 23 35 96 313 467 Hire purchase agreements 7 20 61 21 109 849 548 1,917 2,603 5,917 2008 Operating leases - transportation 794 130 1,701 2,103 4,728 - cars and light commercial vehicles 577 195 182 8 962 - other 112 35 48 8 203 Finance lease contracts 24 29 99 341 493 Hire purchase agreements — 9 25 44 78 1,507 398 2,055 2,504 6,464
32 Collateral and securitisations Securities repurchase agreements and lending transactions The Group enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level.
The fair value (and carrying value) of securities transferred under repurchase transactions included within debt securities on the balance sheet were £80.1 billion (2009 - £66.9 billion; 2008 - £80.6 billion). All of these securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £94.3 billion (2009 - £74.0 billion; 2008 - £89.3 billion), of which £93.5 billion (2009 - £73.0 billion; 2008 - £49.0 billion) had been resold or repledged as collateral for the Group's own transactions.
Asset type Assets £m Liabilities £m Assets £m Liabilities £m Assets £m Liabilities £m
Refer to page 218 for additional analysis on commercial paper conduits.
Continuing involvement At 31 December 2010, securitised assets were £2.3 billion (2009 - £3.1 billion; 2008 - £1.1 billion); retained interest £286.1 million (2009 - £101.9 million; 2008 - £50.6 million); subordinated assets £4.2 million (2009 - £90.7 million; 2008 - £9.0 million); and related liabilities £4.2 million (2009 - £32.7 million; 2008 - £9.0 million).
33 Capital resources The Group's regulatory capital resources in accordance with Financial Services Authority (FSA) definitions were as follows: Composition of regulatory capital 2010 £m Tier 1 Ordinary and B shareholders' equity 70,388 69,890 45,525 Non-controlling interests 1,719 16,895 21,619 Adjustments for: - goodwill and other intangible assets - continuing businesses (14,448) (17,847) (20,049) - goodwill and other intangible assets - discontinued businesses — (238) — - unrealised losses on available-for-sale (AFS) debt securities 2,061 1,888 3,687 - reserves arising on revaluation of property and unrealised gains on AFS equities (25) (207) (984) - reallocation of preference shares and innovative securities (548) (656) (1,813)
*Includes reduction for own liabilities carried at fair value (1,182) (1,057) (1,159)
Contingent liabilities Guarantees and assets pledged as collateral security 20,044 5,220 2,178 3,659 31,101 40,008 49,262
Other contingent liabilities - these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities.
- after 1 year but within 5 years 1,515 1,691 1,727
Property, plant and equipment Contracts to buy, enhance or maintain investment properties 2 — 7 Contracts to buy assets to be leased under operating leases (2) 2,585 2,724 6,063 Other capital expenditure 150 89 128
Trustee and other fiduciary activities In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of £629 million (2009 - £1,355 million; 2008 - £1,442 million) from these activities.
The Financial Services Compensation Scheme The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Financial Services Authority (FSA). In addition, the FSCS has the power to raise levies (‘exit levies’) on firms who have ceased to participate in the scheme and are in the process of ceasing to be authorised for the amount that the firm would otherwise have been asked to pay during the relevant levy year. The FSCS also has the power to raise exit levies on such firms which look at their potential liability to pay levies in future years.
34 Memorandum items continued Bank levy In his 22 June 2010 budget statement, the Chancellor announced that the UK Government will introduce an annual bank levy. The Finance Bill 2011 contains details of how the levy will be calculated and collected. The levy will be collected through the existing quarterly Corporation Tax collection mechanism starting with payment dates on or after the date the Finance Bill 2011 receives Royal Assent.
The levy will be set at a rate of 0.075 per cent from 2011. Three different rates apply during 2011, these average to 0.075 per cent. Certain liabilities will be subject to only a half rate, namely: any deposits not otherwise excluded (except for those from financial institutions and financial traders); and liabilities with a maturity greater than one year at the balance sheet date. The levy will not be charged on the first £20 billion of chargeable liabilities.
If the levy had been applied to the balance sheet at 31 December 2010, the cost of the levy to RBS Group would be in the region of £350 million to £400 million in 2011.
Other than as set out in this section “Litigation”, so far as RBS Group is aware, no member of RBS Group is or has been engaged in or has pending or threatened any governmental, legal or arbitration proceedings which may have or have had in the recent past (covering the 12 months immediately preceding the date of this document) a significant effect on RBS Group’s financial position or profitability.
The putative class is composed of (1) all persons who purchased or otherwise acquired RBS Group ordinary securities and US American depositary receipts (ADRs) between 1 March 2007 and 19 January 2009; and/or (2) all persons who purchased or otherwise acquired RBS Group Series Q, R, S, T and/or U non-cumulative dollar preference shares issued pursuant or traceable to the 8 April 2005 US Securities and Exchange Commission (SEC) registration statement and were damaged thereby. Plaintiffs seek unquantified damages on behalf of the putative class.
RBS Group considers that it has substantial and credible legal and factual defences to the remaining and prospective claims and will defend them vigorously. RBS Group is unable to reliably estimate the liability, if any, that might arise or its effect on RBS Group’s consolidated net assets, operating results or cash flows in any particular period.
Other securitisation and securities related litigation in the United States RBS Group companies have been named as defendants in a number of purported class actions and other lawsuits in the United States that relate to the securitisation and securities underwriting businesses. In general, the cases involve the issuance of mortgage backed securities, collateralised debt obligations, or public debt or equity where the plaintiffs have brought actions against the issuers and underwriters of such securities (including RBS Group companies) claiming that certain disclosures made in connection with the relevant offerings of such securities were false or misleading with respect to alleged “sub-prime” mortgage exposure. RBS Group considers that it has substantial and credible legal and factual defences to these claims and will continue to defend them vigorously. RBS Group cannot at this stage reliably estimate the liability, if any, that may arise as a result of or in connection with these lawsuits, individually or in the aggregate, or their effect on RBS Group’s consolidated net assets, operating results or cash flows in any particular period.
Investigations RBS Group’s businesses and financial condition can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. RBS Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis regarding operational, systems and control evaluations and issues, including those related to compliance with applicable anti-bribery, antimoney laundering and applicable sanctions regimes. It is possible that any matters discussed or identified may result in investigatory or other action being taken by the regulators, increased costs being incurred by RBS Group, remediation of systems and controls, public or private censure, restriction of RBS Group’s business activities or fines. Any of these events or circumstances could have a significant effect on RBS Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
Retail banking In the European Union, regulatory actions included an inquiry into retail banking initiated on 13 June 2005 in all of the then 25 member states by the European Commission’s Directorate General for Competition. The inquiry examined retail banking in Europe generally. On 31 January 2007, the European Commission (EC) announced that barriers to competition in certain areas of retail banking, payment cards and payment systems in the European Union had been identified. The EC indicated that it will consider using its powers to address these barriers and will encourage national competition authorities to enforce European and national competition laws where appropriate. In addition, in late 2010, the EC launched an initiative pressing for increased transparency of bank fees.
Multilateral interchange fees In 2007, the EC issued a decision that while interchange is not illegal per se, MasterCard’s current multilateral interchange fee (MIF) arrangement for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIF (i.e. set these fees to zero) by 21 June 2008.
In the UK, the OFT has carried out investigations into Visa and MasterCard domestic credit card interchange rates. The decision by the OFT in the MasterCard interchange case was set aside by the Competition Appeal Tribunal (the CAT) in June 2006. The OFT’s investigations in the Visa interchange case and a second MasterCard interchange case are ongoing. On 9 February 2007, the OFT announced that it was expanding its investigation into domestic interchange rates to include debit cards. In January 2010 the OFT advised that it did not anticipate issuing a Statement of Objections prior to the European General Court’s judgment, although it has reserved the right to do so if it considers it appropriate.
Following unsuccessful negotiations with the industry, the FSA issued consultation papers on PPI complaint handling and redress in September 2009 and again in March 2010. The FSA published its final policy statement on 10 August 2010 and instructed firms to implement the measures contained in it by 1 December 2010. The new rules impose significant changes with respect to the handling of mis-selling PPI complaints. On 8 October 2010, the British Bankers’ Association filed an application for judicial review of the FSA’s policy statement and of related guidance issued by the FOS. The court hearing took place from 25 to 28 January 2011 and judgment is awaited. RBS Group is unable to reliably estimate the liability, if any, that might arise from this litigation or its effect on RBS Group’s consolidated net assets, operating results or cash flows in any particular period. Separately, discussions continue between the FSA and RBS Group in respect of concerns expressed by the FSA over certain categories of historical PPI sales.
Gender equality in insurance contracts A ruling is expected in March 2011 from the European Court of Justice (ECJ) in a case relating to gender equality in the pricing of and the provision of benefits under insurance contracts and whether a person’s gender can be used as one of the factors in calculating insurance premiums. At this stage, it is not possible to estimate the effect, if any, which the ECJ’s ruling may have on the Group.
On 7 October 2009, the OFT published a follow-up report summarising the initiatives agreed between the OFT and personal current account providers to address the OFT’s concerns about transparency and switching, following its market study. Personal current account providers will take a number of steps to improve transparency, including providing customers with an annual summary of the cost of their account and making charges prominent on monthly statements. To improve the switching process, a number of steps are being introduced following work with BACS, the payment processor, including measures to reduce the impact on consumers of any problems with transferring direct debits.
On 26 May 2010, the OFT announced its review of barriers to entry. The review concerns retail banking for individuals and small and medium size enterprises (up to £25 million turnover) and will look at products which require a banking licence to sell mortgages, loan products and, where appropriate, other products such as insurance or credit cards where cross-selling may facilitate entry or expansion. The OFT published its report in November 2010. It advised that it expected its review to be relevant to the Independent Commission on Banking, the FSA, HM Treasury and the Department for Business, Innovation and Skills and to the devolved governments in the United Kingdom. The OFT has not indicated whether it will undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch networks and brands. At this stage, it is not possible to estimate the effect of the OFT’s report and recommendations regarding barriers to entry upon RBS Group.
Equity underwriting On 10 June 2010, the OFT announced its intention to conduct a market study into equity underwriting and related services and sought views on scope by 9 July 2010. The OFT study was formally launched on 6 August 2010. The OFT undertook to examine the underwriting services for the different types of share issue used by FTSE 350 firms to raise capital in the UK including rights issues, placings and follow-on offers but excluding initial public offerings. The OFT has been looking at the way that the market works and the following three key issues: (i) how underwriting services are purchased; (ii) how underwriting services are provided; and (iii) how the regulatory environment affects the provision of underwriting services. The OFT published its report on 27 January 2011 identifying certain concerns around the level of equity underwriting fees. The OFT has identified a number of options which would enable companies and institutional shareholders to address these concerns and allow them to drive greater competition in the market. It is currently consulting on its provisional decision not to refer the market to the CC. RBS Group is engaged in the OFT market study and it is not possible to estimate with any certainty what effect this study and any related developments may have on RBS Group, its business or results of operations.
US dollar clearing activities In May 2010, following a criminal investigation by the United States Department of Justice (DoJ) into its dollar clearing activities, Office of Foreign Assets Control compliance procedures and other Bank Secrecy Act compliance matters, RBS NV formally entered into a Deferred Prosecution Agreement (DPA) with the DoJ resolving the investigation. The investigation was in relation to activities before the Consortium Members acquired ABN AMRO Holding N.V. (now known as RBS Holdings N.V.). The agreement was signed by RBS NV and is binding on that entity and its subsidiaries. Pursuant to the DPA, RBS NV paid a penalty of US$500 million and agreed that it will comply with the terms of the DPA and continue to co-operate fully with any further investigations. Payment of the penalty was made from a provision established in April 2007 when an agreement in principle to settle was first announced. Upon satisfaction of the conditions of the DPA for the period of 12 months from May 2010, the matter will be fully resolved. Failure to comply with the terms of the DPA during the 12 month period could result in the DoJ recommencing its investigations, the outcome of which would be uncertain and could result in public censure and fines or have an adverse effect on RBS Holdings N.V.’s operations, any of which could have a material adverse effect on its business, reputation, results of operation and financial condition.
In June 2009, in connection with an investigation into the role of investment banks in the origination and securitisation of sub prime loans in Massachusetts, the Massachusetts Attorney General issued subpoenas to various banks, including an RBS Group subsidiary, seeking information related to residential mortgage lending practices and sales and securitisation of residential mortgage loans. This investigation is ongoing and RBS Group is co-operating.
Previously, in 2008, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained as part of the due diligence process from the independent due diligence firms. RBS Group completed its production of documents requested by the New York State Attorney General in 2009, principally producing documents related to loans that were pooled into one securitisation transaction. More recently, in September 2010, RBS Group subsidiaries received a request from the Nevada State Attorney General requesting information related to securitisations of mortgages issued by three specific originators. The investigation by the Nevada Attorney General is in the early stages and therefore it is difficult to predict the potential exposure from any such investigation. RBS Group and its subsidiaries are co-operating with these various investigations and requests.
Although there has been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner (or at all) over the last year (including as a result of interventions by certain states and local governments), to date, CFG has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.
The Group cannot estimate what the future level of repurchase demands or ultimate exposure of GBM N.A. or CFG may be, and cannot give any assurance that the historical experience will continue in the future. Furthermore, the Group is unable estimate the extent to which the matters described above will impact it and future developments may have an adverse impact on the Group’s business, financial condition, results of operations, cash flow and the value of its securities.
Other investigations In April 2009, the FSA notified RBS Group that it was commencing a supervisory review of the acquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of RBS Group. RBS Group and its subsidiaries co-operated fully with this review and investigation. On 2 December 2010, the FSA confirmed that it had completed its investigation and had concluded that no enforcement action, either against RBS Group or against individuals, was warranted. RBS Group is engaging constructively with the FSA with regard to the publication of a report by the FSA relating to the supervisory review, subject to any necessary commercial constraints.
Operating loss before tax - continuing operations (399) (2,647) (25,691) (4,471) (1,286) (10,017) Operating loss before tax - discontinued operations (541) (49) (10,937) — — — (Increase)/decrease in prepayments and accrued income (67) 433 (921) — — — Interest on subordinated liabilities 500 1,490 2,144 462 537 499 (Decrease)/increase in accruals and deferred income (1,915) (1,538) 3,961 (1) (1) 7 Provisions for impairment losses 9,298 14,950 8,072 — — — Loans and advances written-off net of recoveries (5,631) (6,540) (2,829) — — — Unwind of discount on impairment losses (455) (408) (194) — — — Profit on sale of property, plant and equipment (50) (43) (167) — — — Loss/(profit) on sale of subsidiaries and associates 107 135 (943) — — (487) Profit on sale of securities (496) (294) (342) — — — Charge for defined benefit pension schemes 540 659 490 — — — Pension scheme curtailment gains (78) (2,148) — — — — Cash contribution to defined benefit pension schemes (832) (1,153) (810) — — — Other provisions utilised (211) (159) (32) — — — Depreciation and amortisation 2,220 2,809 3,154 — — — Gain on redemption of own debt (553) (3,790) — (53) (238) — Write-down of goodwill and other intangible assets 10 363 32,581 — — — Write-down of investment in subsidiaries — — — 5,124 5,139 14,321 Elimination of foreign exchange differences (691) 12,217 (41,874) 272 (753) 1,778 Elimination of non-cash items on discontinued activities — — 592 — — — Other non-cash items 875 1,404 2,167 — 21 2 Net cash inflow/(outflow) from trading activities 1,631 15,691 (31,579) 1,333 3,419 6,103 Decrease/(increase) in loans and advances to banks and customers 42,766 151,568 (5,469) (6,300) 4,121 (15,542) Decrease/(increase) in securities 8,723 (5,902) 75,964 (168) (1,286) — Decrease/(increase) in other assets 445 (1,839) (5,845) 105 (10) (73) Decrease/(increase) in derivative assets 10,741 544,744 (708,607) (306) (1) (995)
(Decrease)/increase in deposits by banks and customers (24,794) (131,685) (78,166) (78) 11,533 (4,064) Increase/(decrease) in insurance liabilities 494 429 (186) — — — (Decrease)/increase in debt securities in issue (28,493) (34,528) 27,222 (3,020) (1,828) (1,794) Increase/(decrease) in other liabilities 1,108 20 (8,869) (267) (66) 32 Increase/(decrease) in derivative liabilities 2,454 (540,540) 699,601 (215) 85 182 Increase/(decrease) in settlement balances and short positions 3,651 1,769 (37,864) 11 (11) — Changes in operating liabilities (45,580) (704,535) 601,738 (3,569) 9,713 (5,644) Total income taxes received/(paid) 565 (719) (1,540) (133) 409 119 Net cash inflow/(outflow) from operating activities 19,291 (992) (75,338) (9,038) 16,365 (16,032)
37 Interest received and paid Group Company £m £m £m £m £m £m 375RBS Group 2010
Other adjustments including foreign exchange (1) 803 — — (9,011) (8,666) 10,425 803 — — (616) (1,094) 2,571 At 31 December 52,750 64,240 49,323 27,053 37,652 49,154 41,869 53,359 38,442 8,048 8,762 10,314
Note: (1) The Group subordinated liabilities amount for 2010 includes £6.1 billion relating to the disposal of RFS Holdings minority interest.
Net cash inflow/(outflow) 12,456 9,261 (10,859) (14,091) 11,379 3,496 At 31 December 152,530 144,186 134,925 2,357 16,448 5,069
The Group's reportable segments are on a divisional basis as follows: UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through the RBS and NatWest networks of branches and ATMs in the United Kingdom, and also through telephone and internet channels.
Global Transaction Services (GTS) ranks among the top five global transaction services providers, offering global payments, cash and liquidity management, and trade finance and commercial card products and services. It includes the Group's corporate money transmission activities in the United Kingdom and the United States.
Global Banking & Markets (GBM) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit and mortgage markets and portfolio management and origination.
UK Retail 4,078 1,412 5,490 (2,957) (1) (1,160) 1,372 UK Corporate 2,572 1,323 3,895 (1,498) (173) (761) 1,463 Wealth 609 447 1,056 (723) (11) (18) 304 Global Transaction Services 974 1,587 2,561 (1,459) (5) (9) 1,088 Ulster Bank 761 214 975 (573) (2) (1,161) (761) US Retail & Commercial 1,917 1,029 2,946 (2,024) (99) (517) 306 Global Banking & Markets 1,215 6,697 7,912 (4,281) (116) (151) 3,364 RBS Insurance 366 4,003 4,369 (4,641) (23) — (295) Central items 25 400 425 1,007 (852) (3) 577 Core 12,517 17,112 29,629 (17,149) (1,282) (3,780) 7,418 Non-Core 1,683 1,350 3,033 (2,582) (480) (5,476) (5,505) 14,200 18,462 32,662 (19,731) (1,762) (9,256) 1,913 Reconciling items RFS Holdings minority interest 9 (151) (142) (9) 1 — (150) Fair value of own debt — 174 174 — — — 174 Amortisation of purchased intangible assets — — — — (369) — (369) Integration and restructuring costs — — — (1,012) (20) — (1,032) Gain on redemption of own debt — 553 553 — — — 553 Strategic disposals — 171 171 — — — 171 Bonus tax — — — (99) — — (99) Asset Protection Scheme credit default swap - fair value changes — (1,550) (1,550) — — — (1,550) Write-down of goodwill and other intangible assets — — — (10) — — (10)
Reconciling items RFS Holdings minority interest (282) (29) (311) (100) (66) (7) (484) Fair value of own debt — 1,232 1,232 — — — 1,232 Amortisation of purchased intangible assets — — — — (443) — (443) Integration and restructuring costs — — — (1,321) (36) — (1,357) Strategic disposals — 442 442 — — — 442 Write-down of goodwill and other intangible assets — — — (16,911) — — (16,911)
UK Retail 5,513 (23) 5,490 5,157 (76) 5,081 5,499 (377) 5,122 UK Corporate 4,345 (450) 3,895 4,422 (840) 3,582 6,372 (2,635) 3,737 Wealth 562 494 1,056 409 700 1,109 (761) 1,820 1,059 Global Transaction Services 2,428 133 2,561 2,438 49 2,487 1,967 464 2,431 Ulster Bank 865 110 975 1,003 31 1,034 1,315 (276) 1,039 US Retail & Commercial 2,672 274 2,946 2,380 344 2,724 2,141 446 2,587 Global Banking & Markets 7,817 95 7,912 10,174 884 11,058 979 1,378 2,357 RBS Insurance 4,417 (48) 4,369 4,475 (15) 4,460 4,413 17 4,430 Central items (400) 825 425 (1,577) 1,910 333 (4,042) 3,679 (363)
32,670 (8) 32,662 29,497 70 29,567 19,503 (136) 19,367 Reconciling items RFS Holdings minority interest (150) 8 (142) (251) (70) (321) (447) 136 (311) Fair value of own debt 174 — 174 (142) — (142) 1,232 — 1,232 Gain on redemption of own debt 553 — 553 3,790 — 3,790 — — — Strategic disposals 171 — 171 132 — 132 442 — 442 Asset Protection Scheme credit default swap - fair value changes (1,550) — (1,550) — — — — — — 31,868 — 31,868 33,026 — 33,026 20,730 — 20,730 379RBS Group 2010
UK Retail 111,793 97,148 — 110,987 91,755 — 102,429 82,721 4 UK Corporate 114,550 101,738 381 114,854 89,306 598 120,990 84,076 1,418 Wealth 21,073 37,054 63 17,952 36,273 11 16,130 35,079 41 Global Transaction Services 25,221 78,032 22 18,380 64,684 17 22,162 54,259 7 Ulster Bank 40,081 34,481 101 44,021 40,597 — 49,107 47,672 1 US Retail & Commercial 71,173 66,088 197 75,369 72,407 179 88,673 89,254 204 Global Banking & Markets 802,578 774,753 852 826,054 822,830 513 1,395,032 1,456,138 880 RBS Insurance 12,555 8,195 50 11,973 7,775 33 11,018 7,510 61 Central items 99,728 140,086 632 82,041 150,739 804 70,217 157,331 1,235 Core 1,298,752 1,337,575 2,298 1,301,631 1,376,366 2,155 1,875,758 2,014,040 3,851 Non-Core 153,882 38,503 761 220,850 66,152 3,259 342,935 140,338 2,225 1,452,634 1,376,078 3,059 1,522,481 1,442,518 5,414 2,218,693 2,154,378 6,076 Reconciling item RFS Holdings minority interest 942 647 76 174,005 159,337 296 182,959 166,776 174 1,453,576 1,376,725 3,135 1,696,486 1,601,855 5,710 2,401,652 2,321,154 6,250
At 1 January 2009 2,803 2,695 800 3,067 — 3,023 38 1,029 597 1,510 15,562 Transfers to disposal groups — — — — — — — — (238) — (238) Currency translation and other adjustments — — (12) (233) — (302) (1) (8) (34) (107) (697) Write-down of goodwill — — — — — — — (66) (297) — (363) At 1 January 2010 2,803 2,695 788 2,834 — 2,721 37 955 28 1,403 14,264 Currency translation and other adjustments — — 25 24 — 122 4 — 1 (40) 136 Disposals (4) — — (481) — — — — (14) (1,363) (1,862) Write-down of goodwill — — (1) — — — — (9) — — (10)
Operating profit/(loss) before tax 862 2,091 (2,450) (902) (399) Total assets 932,917 341,770 102,756 76,133 1,453,576 Total liabilities 860,932 323,529 119,946 72,318 1,376,725 Net assets attributable to equity owners and non-controlling interests 71,985 18,241 (17,190) 3,815 76,851 Contingent liabilities and commitments 134,983 98,429 71,025 9,894 314,331 Cost to acquire property, plant and equipment and intangible assets 1,283 355 1,388 109 3,135
Operating profit/(loss) before tax 1,776 (457) (2,877) (1,089) (2,647) Total assets 949,765 338,649 320,008 88,064 1,696,486 Total liabilities 873,716 322,698 321,133 84,308 1,601,855 Net assets attributable to equity owners and non-controlling interests 76,049 15,951 (1,125) 3,756 94,631 Contingent liabilities and commitments 175,392 93,694 65,026 17,549 351,661 Cost to acquire property, plant and equipment and intangible assets 1,974 390 3,252 94 5,710
Net interest income 9,923 2,783 1,791 985 15,482 Net fees and commissions 3,687 1,494 735 495 6,411 (Loss)/income from trading activities (7,415) (1,604) (773) 767 (9,025) Other operating income/(loss) 2,589 45 (464) (17) 2,153 Insurance premium income (net of reinsurers' share) 5,195 — 514 — 5,709 Total income 13,979 2,718 1,803 2,230 20,730
Non-executive directors - emoluments 1,093 823 Chairmen and executive directors - emoluments 5,243 4,971 - contributions and allowances in respect of defined contribution pension schemes 321 —
6,657 5,794 - amounts receivable under long-term incentive plans 1,097 1,103
No directors are accruing benefits under defined benefit schemes (2009 - one), one director is accruing benefits under defined contribution schemes (2009 - nil).
Short-term benefits 35,654 29,292 Post-employment benefits (503) 9,781 Share-based payments 21,551 8,953 56,702 48,026 42 Transactions with directors and key management (a) At 31 December 2010, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £3,603,075 in respect of loans to seven persons who were directors of the company at any time during the financial period.
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the Group Management Committee. The captions in the Group's primary financial statements include the following amounts attributable, in aggregate, to key management: Loans and advances to customers 10,970 11,196 Customer accounts 10,641 11,713
43 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government's shareholding is managed by UK Financial Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and UK Government controlled bodies became related parties of the Group.
43 Related parties continued As at 31 December balances with the UK Government and UK Government controlled bodies were: Central government
Assets Balances at central banks 18,862 — — 18,862 16,617 — — 16,617 393 — — 393 Loans and advances to banks — — 674 674 — — 664 664 — — 1,081 1,081 Loans and advances to customers 46 1,427 1,170 2,643 53 1,231 340 1,624 5 721 468 1,194
There were no balances between the company and the UK Government and UK Government controlled bodies at 31 December 2010, 2009 and 2008. Notes: (1) In addition to UK Government's shareholding in the Group, the UK Government and UK Government controlled bodies may hold debt securities, subordinated liabilities and other liabilities or shares issued by the Group in the normal course of their business. It is not practicable to ascertain and disclose these amounts. (2) Certain of the liability balances are secured.
Asset Protection Scheme On 22 December 2009, the Group entered into an agreement (the Asset Protection Scheme (APS), with HM Treasury (HMT), acting on behalf of the UK Government, under which the Group purchased credit protection over a portfolio of specified assets and exposures (covered assets) from HMT. The portfolio of covered assets has a par value of £282 billion. The protection is subject to a first loss of £60 billion and covers 90% of subsequent losses. Once the first loss has been exhausted, losses and recoveries in respect of assets for which a trigger event - failure to pay, bankruptcy or restructuring - has occurred are included in the balance receivable under the APS. Receipts from HMT will, over time, amount to 90% of cumulative losses (net of 90% of cumulative recoveries) on the portfolio of covered assets less the first loss amount.
The Group has a right to terminate the APS at any time provided that the Financial Services Authority has confirmed in writing to HMT that it has no objection to the proposed termination. On termination the Group must pay HMT the higher of the regulatory capital relief received and £2.5 billion less premiums paid plus the aggregate of amounts received from the UK Government under the APS.
HMT has the right to appoint step-in managers to carry out any oversight, management or additional functions on behalf of HMT to ensure that the covered assets are managed and administered in compliance with the agreed terms and conditions.
In consideration for the protection provided by the APS, the Group paid a premium of £700 million during 2010 (2009 - £1,400 million). Quarterly premiums of £125 million are payable from 31 December 2011 and subsequently until the earlier of 2099 and the termination of the agreement.
There is no change in the recognition and measurement of the covered assets as a result of the APS. Impairment provisions on covered assets measured at amortised cost are assessed and charged in accordance with the Group’s accounting policy; held-for-trading assets, assets designated at fair value and available-for-sale assets within the APS portfolio continue to be measured at fair value with no adjustments to reflect the protection provided by the APS. There is no change in how gains and losses on the covered assets are recognised in the income statement or in other comprehensive income.
The special liquidity scheme - this was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills, with fees charged based on the spread between 3month LIBOR and the 3-month gilt repo rate. The scheme will operate for up to three years after the end of the drawdown period (30 January 2009) at the Bank of England's discretion.
Government credit guarantee scheme Announced in October 2008, the scheme provides a guarantee on eligible new debt issued by qualifying institutions for a fee. The fee, payable to HM Treasury on guaranteed issues is based on a per annum rate of 50 basis points plus 100% of the institution's median five-year credit default swap (CDS) spread during the twelve months to 7 July 2008.
Other related parties a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. 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.
b) The Group recharges The Royal Bank of Scotland Group Pension
d) The captions in the primary financial statements of the parent company include amounts attributable to subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial statements.
44 Post balance sheet events There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
Financial summary The Group's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the five years ended 31 December 2010 are presented below. The dollar financial information included below has been converted from sterling at a rate of £1.00 to US$1.5392, being the Noon Buying Rate on 30 December 2010 (the last US business day in 2010).
Net interest income 21,870 14,209 13,388 15,482 11,550 10,596 Non-interest income (1,2,3) 27,181 17,659 19,638 5,248 17,922 17,406 Total income 49,051 31,868 33,026 20,730 29,472 28,002 Operating expenses (4,5,6,7) (28,056) (18,228) (17,417) (35,065) (13,383) (12,480) Profit/(loss) before other operating charges and impairment losses 20,995 13,640 15,609 (14,335) 16,089 15,522 Insurance net claims (7,362) (4,783) (4,357) (3,917) (4,528) (4,458)
(Loss)/profit attributable to: Non-controlling interests (1,023) (665) 349 (10,832) 163 104 Preference shareholders 162 105 878 536 246 191 Paid-in equity holders 29 19 57 60 — — Ordinary and B shareholders (1,732) (1,125) (3,607) (24,306) 7,303 6,202
Owners' equity 115,643 75,132 77,736 58,879 53,038 40,227 Non-controlling interests 2,646 1,719 16,895 21,619 38,388 5,263 Subordinated liabilities 41,640 27,053 37,652 49,154 38,043 27,654 Deposits 938,116 609,483 756,346 897,556 994,657 516,365 Derivatives, settlement balances and short positions 735,855 478,076 475,017 1,025,641 363,073 152,988 Other liabilities 403,444 262,113 332,840 348,803 353,630 114,335 Total liabilities and equity 2,237,344 1,453,576 1,696,486 2,401,652 1,840,829 856,832 387RBS Group 2010
(Loss)/earnings per ordinary and B share from continuing operations - pence (1) (0.5p) (6.3) (146.2) 64.0 54.4 Diluted (loss)/earnings per ordinary and B share from continuing operations - pence (1,2) (0.5p) (6.3) (146.2) 63.4 53.9 Adjusted (loss)/earnings per ordinary and B share - pence 0.6p (13.2) (43.1) 65.5 55.8 Dividends per ordinary share - pence — — 19.3 27.0 21.6 Dividend payout ratio (3) — — — 43% 45% Share price per ordinary share at year end - £ 0.39 0.29 0.49 3.72 5.56 Market capitalisation at year end - £bn 42.8 31.4 19.5 44.4 62.8 Net asset value per ordinary and B share - £ 0.64 0.65 1.15 3.74 3.24 Return on average total assets (4) (0.07%) (0.18%) (1.19%) 0.65% 0.74% Return on average ordinary and B shareholders' equity (5) (0.7%) (7.2%) (50.1%) 18.7% 18.5% Adjusted return on average ordinary and B shareholders' equity (6) 0.9% (15.0%) (14.8%) 19.8% 18.8% Average owners' equity as a percentage of average total assets 4.6% 2.8% 2.9% 3.9% 4.4% Risk asset ratio - Tier 1 12.9% 14.1% 10.0% 7.3% 7.5% Risk asset ratio - Total 14.0% 16.1% 14.1% 11.2% 11.7% Ratio of earnings to combined fixed charges and preference share dividends (7)
- including interest on deposits 0.94 0.75 0.05 1.45 1.62 - excluding interest on deposits 0.38 (0.30) (7.80) 5.73 6.12 Ratio of earnings to fixed charges only (7)
- including interest on deposits 0.95 0.80 0.05 1.47 1.64 - excluding interest on deposits 0.44 (0.46) (9.74) 6.53 6.87
September 2008. (2) None of the convertible securities had a dilutive effect in 2010, 2009 or 2008. All of the convertible preference shares had a dilutive effect in 2007 and 2006 and as such were included in the computation of diluted earnings per share. (3) Dividend payout ratio represents the interim dividend paid and final dividend proposed as a percentage of profit attributable to ordinary and B shareholders before discontinued operations, integration and restructuring costs, amortisation of purchased intangible assets and net gain on sale of strategic investments and subsidiaries (net of tax). (4) Return on average total assets represents profit attributable to ordinary and B shareholders as a percentage of average total assets. (5) Return on average ordinary and B shareholders' equity represents profit attributable to ordinary and B shareholders expressed as a percentage of average ordinary and B shareholders' equity. (6) Adjusted return on average ordinary and B shareholders' equity represents profit attributable to ordinary and B shareholders before discontinued operations, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, gain on redemption of paid-in equity and preference shares, strategic disposals, gains on pensions curtailment, bonus tax, Asset Protection Scheme credit default swap - fair value changes and write-down of goodwill and other intangible assets expressed as a percentage of average ordinary and B shareholders' equity.
Overseas US 34,754 28,778 27,221 90,753 93,569 126,277 135,059 92,166 Rest of the World 42,837 31,362 33,543 107,742 264,712 327,391 277,721 57,896 Total Overseas offices 77,591 60,140 60,764 198,495 358,281 453,668 412,780 150,062 Loans and advances to customers - gross 217,681 139,593 216,041 573,315 745,519 885,611 834,987 470,826 Loan impairment provisions (18,055) (17,126) (10,889) (6,449) (3,933) Loans and advances to customers - net 555,260 728,393 874,722 828,538 466,893
Fixed rate 37,074 25,756 47,534 110,364 238,756 183,693 351,336 115,240 Variable rate 180,607 113,837 168,507 462,951 506,763 701,918 483,651 355,586 Loans and advances to customers - gross 217,681 139,593 216,041 573,315 745,519 885,611 834,987 470,826 389RBS Group 2010
Financial summary continued Loan impairment provisions For a discussion of the factors considered in determining the amount of provisions, see ‘Risk elements in lending, provisions and reserves’ on page 181 and ‘Critical accounting policies’ on page 283. The following table shows the movements in loan impairment provisions.
Provisions at the beginning of the year Domestic 6,670 4,474 3,258 3,037 2,759 Foreign 10,613 6,542 3,194 898 1,128 17,283 11,016 6,452 3,935 3,887 Transfer to disposal groups Domestic (25) — — — — Foreign (47) (324) (767) — — (72) (324) (767) — — Currency translation and other adjustments Domestic (79) (228) 107 5 (17)
Recoveries of amounts written-off in previous years Domestic 151 175 116 158 119 Foreign 260 224 203 184 96 411 399 319 342 215 Charged to income statement - continuing operations (1) Domestic 3,948 5,370 2,701 1,395 1,663 Foreign 5,196 7,720 3,777 508 214 9,144 13,090 6,478 1,903 1,877 Charged to income statement - discontinued operations Domestic — — (3) 25 — Foreign 42 1,044 616 18 — 42 1,044 613 43 — Unwind of discount Domestic (214) (226) (151) (150) (127)
Provisions at the end of the year (2) Domestic 8,199 6,670 4,474 3,258 3,037 Foreign 9,983 10,613 6,542 3,194 898 18,182 17,283 11,016 6,452 3,935 Gross loans and advances to customers Domestic 287,070 297,347 312,287 323,362 251,522 Foreign 286,245 448,172 573,324 511,625 219,304 573,315 745,519 885,611 834,987 470,826 Closing customer provisions as a % of gross loans and advances to customers (3) Domestic 2.86% 2.24% 1.43% 1.01% 1.21%
The following table shows additional information in respect of loan impairment provisions. 2010 £m £m £m £m £m
Average loans and advances to customers (gross) 610,131 821,155 858,333 567,900 445,766
As a % of average loans and advances to customers during the year Total customer provisions charged to income statement 1.5% 1.6% 0.7% 0.4% 0.4% Amounts written-off (net of recoveries) - customers 0.9% 0.8% 0.3% 0.3% 0.4%
Risk elements in lending and potential problem loans The Group's loan control and review procedures do not include the classification of loans as impaired, accruing past due, restructured and potential problem loans, as defined by the SEC in the US.
Loans accounted for on an impaired basis (2) Domestic 15,471 13,572 8,588 5,599 5,420 Foreign 20,230 21,453 10,891 4,763 812 Total 35,701 35,025 19,479 10,362 6,232 Accruing loans which are contractually overdue 90 days or more as to principal or interest (3) Domestic 2,363 2,224 1,201 217 81 Foreign 534 1,000 581 152 24 Total 2,897 3,224 1,782 369 105 Total risk elements in lending 38,598 38,249 21,261 10,731 6,337
Notes: (1) For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions. (2) All loans against which an impairment provision is held are reported in the impaired category. (3) Loans where an impairment event has taken place but no impairment recognised. This category is used for fully collateralised non-revolving credit facilities. (4) Loans for which an impairment event has occurred but no impairment provision is necessary. This category is used for fully collateralised advances and revolving credit facilities where identification as 90 days overdue is not feasible. (5) Gross of provisions and excluding reverse repurchase agreements. Includes gross lending relating to disposal groups in 2010 and 2009.
Gross income not recognised but which would have been recognised under the original terms of impaired loans Domestic 579 625 393 390 370 Foreign 830 1,032 338 64 77 1,409 1,657 731 454 447
Interest on impaired and restructured loans included in net interest income Domestic 214 226 150 165 142 Foreign 241 182 42 15 15 455 408 192 180 157 393RBS Group 2010
Financial summary continued Analysis of deposits - product analysis The following analyses the Group's deposits by type and geographical area. 2010 £m 2009 £m £m UK Domestic Demand deposits - interest-free 66,608 45,855 43,376
Held-for-trading 116,189 106,477 137,080 Designated as at fair value through profit or loss 4,824 8,580 8,054
Overseas based companies and branches Certificates of deposit 14,120 7,423 4,192 377 26,112 Other time deposits 20,251 4,082 4,184 6,294 34,811 60,876 17,571 13,142 18,380 109,969
Other contractual cash obligations The table below summarises the Group's other contractual cash obligations by payment date.
Operating leases 132 365 837 678 1,178 1,714 Contractual obligations to purchase goods or services 71 212 111 3 — — 203 577 948 681 1,178 1,714 2009 Operating leases 140 339 965 726 1,219 1,836 Contractual obligations to purchase goods or services 180 300 168 16 — 1 320 639 1,133 742 1,219 1,837
The Group's undrawn formal facilities, credit lines and other commitments to lend were £266,822 million (2009 - £291,634 million). While the Group has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown.
Noon Buying Rate High 1.6042 1.5882 1.6291 1.6027 1.5851 1.5979 Low 1.5490 1.5361 1.5557 1.5681 1.5315 1.5358 2010 2009 2008 2007 2006 Noon Buying Rate Period end rate 1.5392 1.6167 1.4619 1.9843 1.9586 Average rate for the year (1) 1.5415 1.5707 1.8424 2.0073 1.8582
Notes: (1) The average of the Noon Buying Rates on the last US business day of each month during the year. (2) The rates used by the Group for translating US dollars into sterling in the preparation of its financial statements. (3) On 22 February 2011, the Noon Buying Rate was £1.00 = US$1.6129.
In the UK, the Group’s largest market, economic conditions improved in 2010. Total economic activity, as measured by gross domestic product (GDP), grew by 1.3 per cent in 2010. This followed a contraction of 4.9 per cent in 2009. However, a fall in activity in the final quarter of 2010 served as a timely reminder that, while conditions are generally improving, the recovery is fragile. The UK’s inflation rate increased sharply, reaching 3.7 per cent by the end of the year. Yet policy makers kept the main policy rate unchanged at 0.5 per cent throughout 2010, attributing the pick up in inflation to temporary factors such as rising commodity prices and an increase in VAT.
The recovery has helped many of our customers. Company trading profits grew for the first time since 2008. The unemployment rate levelled off at around 8 per cent, which is much higher than at the start of the recession, but still relatively low compared to the peak in other recessions. These factors supported commercial property prices, which were 6 per cent higher in December 2010 than they were a year earlier, according to the International Property Databank. Most of those gains came in the first half of the year. The residential market was less robust; house prices fell in the second half of the year, dragging the year-on-year growth rate to -1 per cent in December 2010, according to the Nationwide index.
The US economy registered the fastest growth amongst our principal markets. GDP grew by 2.8 per cent, following a contraction of 2.6 per cent in 2009. Despite this, the unemployment rate remained stubbornly high, which prompted a further loosening of monetary and fiscal policy. Inflationary pressures were generally subdued, but picked up somewhat towards the end of the year. Policy makers pledged to keep Fed funds rate exceptionally low for an extended period of time to provide a necessary support to the economic recovery.
In Ireland, hopes of a recovery in 2010 were dashed, as GDP contracted by an estimated 0.6 per cent. This followed a 7.6 per cent reduction in 2009. The Irish government requested a financial rescue package of €85 billion in November, equivalent to about half of Ireland’s GDP.
The UK authorised banks in the Group include the Royal Bank, NatWest, Coutts & Co and Ulster Bank Limited. Wholesale activities, other than Group Treasury activities, are concentrated in the Group's Global Banking & Markets and UK Corporate divisions, and are undertaken under the names of the Royal Bank and NatWest. UK retail banking activities are managed by the UK Retail division. The exception is Ulster Bank Limited, which is run as a separate division within the Group. Ulster Bank Group moved to a single brand in the Republic of Ireland during 2010, with First Active merging with Ulster Bank. Ulster Bank Limited provides banking services in Northern Ireland while the banking service in the Republic of Ireland is provided by Ulster Bank Ireland Limited, which is primarily supervised by the Central Bank of Ireland.
United States The Group is both a bank holding company and a financial holding company within the meaning of the US Bank Holding Company Act of 1956. As such, it is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (“the Federal Reserve”). Among other things, the Group's direct and indirect activities and investments in the United States are limited to those that are 'financial in nature' or 'incidental' or 'complementary' to a financial activity, as determined by the Federal Reserve. The Group is also required to obtain the prior approval of the Federal Reserve before acquiring directly or indirectly, the ownership or control of more than 5% of any class of the voting shares of any US bank or holding company. Under current Federal Reserve policy, the Group is required to act as a source of financial strength for its US bank subsidiaries. Among other things, this source of strength obligation could require the Group to inject capital into any of its US bank subsidiaries if any of them became undercapitalised.
The Group's US bank and non-bank subsidiaries and the Royal Bank's US branches are also subject to supervision and regulation by a variety of other US regulatory agencies. RBS Citizens NA is supervised by the Office of the Comptroller of the Currency, which is charged with the regulation and supervision of nationally chartered banks. Citizens Bank of Pennsylvania is subject to the regulation and supervision of the US Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Insurance. Citizens Financial Group is under the supervision of the Federal Reserve as a bank holding company. The Royal Bank's New York branch is supervised by the New York State Banking Department, and its Connecticut branch is supervised by the Connecticut Department of Banking. Both branches are also subject to supervisory oversight by the Federal Reserve, through the Federal Reserve Bank of Boston.
Regulatory developments and reviews The Group works with domestic and international trade associations and proactively engages with regulators and other authorities such as the Basel Committee, the EU Commission, Governments and regulators, in order to understand the implications of proposed regulatory change and to contribute to the development of regulatory policy.
The Group has continued to participate fully in the analysis of the cause of the financial crisis and the development of potential policy and reform. A wide range of ideas and proposals, aimed at strengthening the resilience of the banking system and addressing perceived shortcomings in existing regulation, have been advanced and continue to be developed. With respect to prudential requirements, the Group provided detailed feedback on the FSA's consultations on Strengthening Capital Standards and its Discussion Paper on reviewing trading activities, to name but two. Other consultations included HM Treasury’s consultations on the structure of financial regulation and on the new bank levies.
In 2010, the Consumer Credit Directive was transposed into national law and introduced standardised disclosure requirements for all lenders of unsecured consumer credit. It is aimed at improving cross border lending and promoting responsible lending and borrowing.
The FSA, in their 2010/11 Business Plan, emphasised that they would be implementing a new intensive supervision strategy in relation to 'Treating Customers Fairly' (TCF). The Group has implemented TCF governance arrangements for all relevant businesses, and continues to undertake a process of continuous improvement of management information to demonstrate its continued commitment to treating customers fairly throughout the product lifecycle.
European Union/global developments The Group follows closely the work (and recommendations) of the G20, as well as international standard setters such as the Basel Committee on Banking Supervision. Of particular note were the discussions that took place throughout 2010 regarding proposals from the Basel Committee on Banking Supervision for an enhanced capital and liquidity framework. The Group was closely involved in all aspects of the proposals on capital and liquidity, as well as on other related policy areas, such as countercyclical capital buffers and contingent capital, being developed separately.
Lastly, the EU has also overhauled its supervisory framework, creating a system of EU Supervisory Authorities and the European Systemic Risk Board. Powers of the authorities will include the supervision of national regulators, but also potentially direct supervision of selected financial institutions should it be required in specific circumstances.
Description of property and equipment The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2010, the Royal Bank and NatWest had 647 and 1,549 retail branches, respectively, in the UK. Ulster Bank has a foot print of 236 branches and an extensive network of business banking offices across Northern Ireland and the Republic of Ireland. US Retail & Commercial had 1,525 retail banking offices (including in-store branches) covering Connecticut, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. The Group's principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
Total capital expenditure on premises (excluding investment properties), computers and other equipment in the year ended 31 December 2010 was £656 million (2009 - £1,215 million; 2008 - £1,406 million).
Major shareholders Details of major shareholders of the company’s ordinary and B shares are given on page 233.
Other than detailed above, there have been no significant changes in the percentage ownership of major shareholders of the company's ordinary, B and preference shares during the three years ended 23 February 2011. All shareholders within a class of the company's shares have the same voting rights.
Material contracts The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: Consortium and Shareholders Agreement (CSA) On 28 May 2007, Fortis Bank Nederland, the company, Santander and RFS Holdings entered into the CSA. Fortis Bank Nederland acceded to the CSA on 26 July 2007. On 3 October 2008, the Dutch State acquired Fortis Bank Nederland. On 24 December 2008 the Dutch State acceded to the CSA following its acquisition of the shares held by Fortis Bank Nederland in RFS Holdings pursuant to a Deed of Accession entered into between RFS Holdings, the company, Fortis Bank Nederland, Santander and the Dutch State. On 1 April 2010 the CSA was restated. The CSA governs the relationships amongst the parties thereto in relation to the acquisition by RFS Holdings of ABN AMRO (now RBS Holdings N.V.). The CSA as restated details, inter alia, the equity interests in RFS Holdings, the governance of RFS Holdings, the arrangements for the transfer of certain ABN AMRO businesses, assets and liabilities to the Dutch State (previously Fortis Bank Nederland), the company and Santander, further funding obligations of the Dutch State, the company and Santander where funding is required by regulatory authorities in connection with the ABN AMRO businesses, the allocation of Core Tier 1 capital, the allocation of taxes and conduct of tax affairs and the steps that the Dutch State, the company and Santander expect to take to enable the company to become the sole shareholder of RFS Holdings.
Pursuant to the terms of the Second Placing and Open Offer Agreement, the aggregate proceeds of the Second Placing and Open Offer (net of expenses) were used in full to fund the redemption on Admission (as defined in the Second Placing and Open Offer Agreement) of the preference shares held by HM Treasury at 101 per cent of their issue price (£5.05 billion) together with the accrued dividend on the preference shares (from and including 1 December 2008 to but excluding the Date of Admission (as defined in the Second Placing and Open Offer Agreement)) and the commissions payable to HM Treasury under the Second Placing and Open Offer Agreement.
The company's commitments, described in this section have been superseded by the Scheme Rules and the Accession Agreement, (for details of the Accession Agreement, see below), with the exception of a commitment to inform the Department for Business, Innovation and Skills prior to making significant reductions in the level of lending being made available to certain borrowers or counterparties, which will apply until 28 February 2011, in line with the duration of the commitments under the Lending Commitments Letter described below.
The company gave certain representations and warranties to HM Treasury on the date of the Acquisition and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company has agreed to give such representations and warranties again on each date (if any) a Contingent Subscription is triggered and on each date (if any) on which B shares are issued pursuant to a Contingent Subscription.
Material contracts continued HM Treasury has agreed to waive its statutory pre-emption rights arising out of the B shares and the Dividend Access Share in respect of any future issue of equity securities by the company other than B shares and has agreed to vote its B shares and the Dividend Access Share, as applicable, in favour of each special resolution to disapply its pre- emption rights under the B shares and/or the Dividend Access Share then held by HM Treasury every time they arise. The pre-emption rights arising out of the B shares and the Dividend Access Share have also been disapplied in the Articles of Association.
Under the APS, HM Treasury is liable to make payments to the company in respect of a pre-defined pool of assets and exposures (the "Covered Assets") in respect of which a specified failure to pay, bankruptcy or restructuring trigger occurs or is deemed to occur. Payments under the APS are intended to protect the company, over time, for 90% of the amount by which cumulative losses on the whole portfolio of Covered Assets (as reduced by cumulative recoveries on the portfolio) exceed a fixed first loss threshold of £60 billion. Cumulative losses (as reduced by cumulative recoveries) below the first loss threshold, and a 10% vertical slice of any cumulative losses (as reduced by cumulative recoveries) exceeding the first loss threshold, are for the account of the company.
Protection under the APS is, subject to various requirements under the Scheme Conditions, provided in respect of the Covered Assets on the company's consolidated balance sheet as at 31 December 2008 with an aggregate covered amount of £282 billion. Protection under the APS may be lost or limited in certain specified circumstances, including the failure of a Covered Asset to satisfy certain asset eligibility criteria set out in the Scheme Conditions.
The company has the right, in certain circumstances, to withdraw from the APS permanently all or part of a Covered Asset. In addition, the company contractually has the right to terminate the APS exercisable at any time provided that the FSA has confirmed in writing to HM Treasury that it has no objection to the proposed termination. An exit fee and, potentially, a refund of HM Treasury's net payments under the APS are payable by the company upon such termination. The Scheme Conditions also contain various provisions and restrictions on the management and administration of the Covered Assets and certain related assets. The company is obliged to manage such assets in accordance with the asset management objective, which is to maximise the expected net present value of such assets (discounted at an HM Treasury rate), including by minimising losses and potential losses and maximising recoveries and potential recoveries. The company also has monitoring and reporting obligations under the Scheme Conditions which are aimed at transparency in respect of the Covered Assets to enable HM Treasury to manage and assess its exposure under the APS. In addition, the company has to establish a separate governance structure for the purposes of the APS. Further, the Scheme Conditions and the Accession Agreement also contain requirements for the development of a remuneration policy for the Group and specific remuneration requirements for certain officers and employees of the company.
Certain Scheme Conditions are subject to modification at any time with retrospective effect at the discretion of HM Treasury without the company's consent. The modification rights arise broadly and subject to certain conditions where the operation, interpretation or application of such Scheme Conditions conflicts with any of the overriding general principles set out in the Scheme Conditions.
State Aid Commitment Deed As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the European Commission, which has now been approved under the State Aid rules. The company has agreed a series of measures to be implemented over a four year period, which supplement the measures in the company's strategic plan.
The Group entered into a State Aid Commitment Deed with HM Treasury which provides that the Group will comply or procure compliance with these measures and behavioural commitments. The Group agreed to do all acts and things necessary to ensure HM Treasury's compliance with its obligations under any European Commission decision approving State Aid to the Group.
Sale of RBS England and Wales and NatWest Scotland branch based business to Santander UK plc On 4 August 2010, the Royal Bank, NatWest Plc and National Westminster Home Loans Limited entered into a Sale and Purchase Agreement with Santander UK plc pursuant to which the Royal Bank, NatWest Plc and National Westminster Home Loans Limited agreed to sell 311 Royal Bank of Scotland branded branches in England and Wales, seven NatWest branded branches in Scotland, the retail and SME customer accounts attached to these branches, the Direct SME business, and certain mid-corporate businesses and associated assets and liabilities to Santander UK plc for a premium of £350 million to net assets at closing. The consideration will be paid in cash and is subject to certain closing adjustments, including those relating to the performance of the business. The transaction is subject to regulatory, anti-trust and other conditions.
RBS Sempra Commodities JV sales On 16 February 2010, the Group announced that RBS Sempra Commodities JV, a joint venture owned by the Royal Bank and Sempra Energy, had agreed to sell to J.P. Morgan Ventures Energy Corporation (JPMorgan) its metals, oils and European energy business lines. The Group announced completion of the transaction on 2 July 2010, for a total cash consideration of US$1.6 billion, post interim distributions of which the company's share is approximately 47 per cent.
Material contracts continued Sale of Global Merchant Services business On 6 August 2010, the Royal Bank, Citizens Financial Group, Inc., RBS Netherlands Holdings B.V., Ulster Bank Limited, Ulster Bank Ireland Limited, NatWest Plc and Ship Bidco Limited (a company representing Advent International (‘Advent’) and Bain Capital (‘Bain’) which has now changed its name to WorldPay (UK) Limited) entered into a Transfer Agreement pursuant to which the Royal Bank (either directly or through its group companies) sold 80.01 per cent of its Global Merchant Services business for an enterprise value of up to £2.025 billion. Approximately £1.45 billion (subject to customary post-closing adjustments) was received in cash on closing of the sale of the 80.01 per cent interest. Up to £200 million is receivable in the future if the returns realised by Advent and Bain exceed certain thresholds. The sale completed on 30 November 2010.
The Royal Bank, in its capacity as holder of a retained interest in the Global Merchant Services business, also entered into an Investment Agreement on 6 August 2010 (subsequently amended and restated on 29 November 2010) with Ship Bidco Limited (now WorldPay (UK) Limited), certain other acquisition vehicles, specified management and funds operated by Advent International and Bain Capital relating to the operations of the joint venture company which is the uppermost of the intermediate acquisition vehicles and the ultimate parent company of WorldPay (UK) Limited. The interests of the Royal Bank are insufficient to block major decisions of this joint venture company at the shareholder or board level.
The SRR may be triggered prior to the insolvency of the company or its UK bank subsidiaries. The purpose of the stabilisation options is to address the situation where all or part of the business of a relevant entity has encountered, or is likely to encounter, financial difficulties. Accordingly, the stabilisation options may only be exercised if (a) the FSA is satisfied that a relevant entity such as the company’s UK banking subsidiaries, including the Royal Bank and NatWest, is failing, or is likely to fail, to satisfy the threshold conditions within the meaning of section 41(1) of the FSMA (which are the conditions that a relevant entity must satisfy in order to retain its authorisation to perform regulated activities), (b) following consultation with the other Authorities, the FSA determines that it is not reasonably likely that (ignoring the stabilisation options) action will be taken that will enable the relevant entity to satisfy those threshold conditions, and (c) the Authorities consider the exercise of the stabilisation options to be necessary, having regard to certain public interest considerations (such as the stability of the UK financial systems, public confidence in the UK banking systems and the protection of depositors). It is therefore possible that one of the stabilisation options could be exercised prior to the point at which any insolvency proceedings with respect to the relevant entity (such as the Royal Bank or NatWest) or the company could be initiated.
The stabilisation options may be exercised by means of powers to transfer property, rights or liabilities of a relevant entity and shares and other securities issued by a relevant entity. HM Treasury may also take the parent company of a relevant entity (such as the company) into temporary public ownership provided that certain conditions are met. Temporary public ownership is effected by way of a share transfer order and can be actioned irrespective of the financial condition of the parent company.
Various actions may be taken in relation to any securities issued by the company without the consent of the holders thereof. If HM Treasury decides to take the company into temporary public ownership, it may take various actions in relation to any securities issued by the company (the “Securities”) without the consent of holders of the Securities, including (among other things): (i) transferring the Securities free from any contractual, legislative or other restrictions on transfer; (ii) transferring the Securities free from any trust, liability or other encumbrance; (iii) extinguishing any rights to acquire Securities; (iv) delisting the Securities; (v) converting the Securities into another form or class (the scope of which power is unclear, although may include, for example, conversion of the Securities into equity securities); (vi) disapplying any termination or acceleration rights or events of default under the terms of the Securities which would be triggered by the transfer or certain related events; or
(vii) where property is held on trust, removing or altering the terms of such trust.
Where HM Treasury has made a share transfer order in respect of securities issued by the holding company of a relevant entity, HM Treasury may make an order providing for the property, rights or liabilities of the holding company or of any relevant entity in the holding company group to be transferred and where such property is held on trust, removing or altering the terms of such trust.
A partial transfer of the company’s business may result in a deterioration of its creditworthiness. If the company were taken into temporary public ownership and a partial transfer of its or any relevant entity’s business were effected, or if a relevant entity were made subject to the SRR and a partial transfer of its business to another entity was effected, the nature and mix of the assets and liabilities not transferred may adversely affect the company’s financial condition and increase the risk that the company may eventually become subject to administration or insolvency proceedings pursuant to the Banking Act. In such circumstances, holders of Securities may have a claim for compensation under one of the compensation schemes contemplated by the Banking Act, but there can be no assurance that compensation would be assessed to be payable or that such holders would recover any compensation promptly and/or equal to any loss actually incurred.
The Group’s businesses, earnings and financial condition have been and will continue to be affected by the global economy and instability in the global financial markets. The performance of the Group has been and will continue to be influenced by the economic conditions of the countries in which it operates, particularly the UK, the US and other countries throughout Europe and Asia. The outlook for the global economy over the near to medium term remains challenging, particularly in the UK, the US and other European economies. In addition, the global financial system has yet to fully overcome the difficulties which first manifested themselves in August 2007 and financial markets conditions have not yet fully normalised. These conditions led to severe dislocation of financial markets around the world and unprecedented levels of illiquidity in 2008 and 2009, resulting in the development of significant problems at a number of the world’s largest corporate institutions operating across a wide range of industry sectors, many of which are the Group’s customers and counterparties in the ordinary course of its business. In response to this economic instability and market illiquidity, a number of governments, including the UK Government, the governments of the other EU member states and the US Government intervened in order to inject liquidity and capital into the financial system, and in some cases, to prevent the failure of these institutions.
The Group is subject to a variety of risks as a result of implementing the State Aid restructuring plan and is prohibited from making discretionary dividend or coupon payments on existing hybrid capital instruments (including preference shares and B shares) which may impair the Group’s ability to raise new Tier 1 capital. The Group was required to obtain State Aid approval for the aid given to the Group by HM Treasury as part of the placing and open offer undertaken by the company in December 2008 (the “First Placing and Open Offer”), the issuance of £25.5 billion of B shares in the capital of the company (the “B shares”) which are, subject to certain terms and conditions, convertible into ordinary shares of the company to HM Treasury, a contingent commitment by HM Treasury to subscribe (the “Contingent Subscription”) for up to an additional £8 billion of B shares (the “Contingent B shares”) if certain conditions are met and the Group’s participation in the Asset Protection Scheme (the “APS”) (the “State Aid”). In that context, as part of the terms of the State Aid approval, the Group, together with HM Treasury, agreed the terms of a restructuring plan (the “State Aid restructuring plan”).
As part of the State Aid restructuring plan, there is a prohibition on the making of discretionary dividend (including preference shares and B shares) or coupon payments on existing hybrid capital instruments for a two-year period which commenced on 30 April 2010. These restrictions will prevent the company, the Royal Bank and other Group companies (other than companies in the RBS Holdings N.V. group, (which was renamed from ABN AMRO Holding N.V. on 1 April 2010) which are subject to different restrictions) from paying dividends on their preference shares and coupons on other Tier 1 securities, and the company from paying dividends on its ordinary shares, for the same duration, and it may impair the Group’s ability to raise new capital through the issuance of ordinary shares and other securities issued by the company.
The Group is subject to a variety of risks as a result of implementing the State Aid restructuring plan, including required asset disposals. In particular, the Group agreed to undertake a series of measures to be implemented over a four-year period from December 2009, which include disposing of RBS Insurance, the Group’s insurance division (subject to potentially maintaining a minority interest until the end of 2014). The company also agreed to divest its global card payment services business, Global Merchant Services (“GMS”), by the end of 2013, subject to the company retaining up to 20 per cent. of GMS if required by the purchaser, its interest in RBS Sempra Commodities LLP (“RBS Sempra Commodities”), the Group’s joint venture with Sempra Energy and a leading global commodities trader and the Royal Bank branch-based business in England and Wales and the NatWest branches in Scotland, along with the Direct small and medium-size enterprise (SME) customers and certain mid-corporate customers across the UK. The Group has progressed with certain of these disposals over the course of 2010. For further information, see “Material Contracts”. There is no assurance that the price that the Group receives or has received for any assets sold pursuant to the State Aid restructuring plan will be at a level the Group considers adequate or which it could obtain in circumstances in which the Group was not required to sell such assets in order to implement the State Aid restructuring plan or if such sale were not subject to the restrictions contained in the terms thereof. Further, if the Group fails to complete any of the required disposals within the agreed timeframes for such disposals, under the terms of the State Aid approval, a divestiture trustee may be empowered to conduct the disposals, with the mandate to complete the disposal at no minimum price.
Furthermore, if the Group is unable to comply with the terms of the State Aid approval, it could constitute a misuse of aid. In circumstances where the European Commission doubts that the Group is complying with the terms of the State Aid approval, it may open a formal investigation. At the conclusion of any such investigation, if the European Commission decided that there had been misuse of aid, it could issue a decision requiring HM Treasury to recover the misused aid which could have a material adverse impact on the Group.
Because the ability to dispose of assets and the price achieved for such disposals will be dependent on prevailing economic and market conditions, which may remain challenging, there is no assurance that the Group will be able to sell or run-down (as applicable) those remaining businesses it is seeking to exit either on favourable economic terms to the Group or at all. Tax liabilities could arise on the disposal of assets. Furthermore, where transactions are entered into for the purpose of selling non-core assets and businesses, they may be subject to conditions precedent, including government and regulatory approvals and completion mechanics that in certain cases may entail consent from customers. There is no assurance that such conditions precedent will be satisfied, or consents and approvals obtained, in a timely manner or at all. There is consequently a risk that the Group may fail to complete such disposals by any agreed longstop date.
Lack of liquidity is a risk to the Group’s business and its ability to access sources of liquidity has been, and will continue to be, constrained. Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of enterprise specific factors, including an over-reliance on a particular source of wholesale funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. During recent years, credit markets worldwide have experienced a severe reduction in liquidity and term-funding. During this time, the market perception of bank credit risk has changed significantly and banks that are deemed by the market to be riskier have issued debt at a premium to the cost of debt for banks that are perceived by the market as being safer. The uncertainty regarding the perception of credit risk across different banking groups also led to reductions in inter-bank lending, and hence, in common with many other banking groups, the Group’s access to traditional sources of liquidity has been, and may again be, restricted. In addition, in common with other banking groups, the Group has experienced pressures to increase the average maturity of its wholesale funding. An increase in the maturity of wholesale funding has the effect of increasing the Group’s overall cost of funding.
Like many banking groups, the Group relies on customer deposits to meet a considerable portion of its funding. Furthermore, as part of its ongoing strategy to improve its liquidity position, the Group is actively seeking to increase the proportion of its funding represented by customer deposits. However, such deposits are subject to fluctuation due to certain factors outside the Group’s control, such as a loss of confidence, increasing competitive pressures for retail customer deposits or the encouraged or mandated repatriation of deposits by foreign wholesale or central bank depositors, which could result in a significant outflow of deposits within a short period of time. There is currently heavy competition among UK banks for retail customer deposits, which has increased the cost of procuring new deposits and impacted the Group’s ability to grow its deposit base. An inability to grow, or any material decrease in, the Group’s deposits could, particularly if accompanied by one of the other factors described above, have a materially adverse impact on the Group’s ability to satisfy its liquidity needs unless corresponding actions were taken to improve the liquidity profile of other deposits or to reduce assets. Significant progress was made during the course of 2010 in reducing non-core asset levels. While the liquidity position of the Group may be materially adversely impacted if it is unable to achieve the run-off and sale of non-core and other assets and businesses as expected, the magnitude of this risk reduced during the course of 2010. Any significant delay in those plans may nevertheless require the Group to consider disposals of other assets not previously identified for disposal to achieve its funded balance sheet target level.
There can be no assurance that the measures described above, alongside other available measures, will succeed in improving the funding and liquidity in the markets in which the Group operates, or that these measures, combined with any increased cost of any funding currently available in the market, will not lead to a further increase in the Group’s overall cost of funding or require the Group to consider disposals of other assets not previously identified for disposal to reduce its funding requirements, each of which could have a material adverse impact on the Group’s financial condition and results of operations or result in a loss of value in the Securities.
In the United States during the last year there has been disruption in the ability of certain financial institutions to complete foreclosure proceedings in a timely manner (or at all), including as a result of interventions by certain states and local governments. This disruption has lengthened the time to complete foreclosures, increased the backlog of repossessed properties and, in certain cases, has resulted in the invalidation of purported foreclosures. In addition, a number of other financial institutions have experienced increased repurchase demands in respect of US mortgage loans or other related securities originated and sold. However, the Group has not experienced a significant volume of repurchase demands in respect of similar loans or related securities it originated or sold and has not ceased any of its US foreclosure activities.
The trends and risks affecting borrower credit quality have caused, and in the future may cause, the Group to experience further and accelerated impairment charges, increased repurchase demands, higher costs, additional write-downs and losses for the Group, and may result in a loss of value in the Securities.
The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions. Financial markets continue to be subject to significant stress conditions, where steep falls in perceived or actual asset values have been accompanied by a severe reduction in market liquidity, as exemplified by recent events affecting asset-backed collateralised debt obligations, residential mortgage-backed securities and the leveraged loan market. In dislocated markets, hedging and other risk management strategies have proven not to be as effective as they are in normal market conditions due in part to the decreasing credit quality of hedge counterparties, including monoline and other insurance companies and credit derivative product companies. Severe market events have resulted in the Group recording large write-downs on its credit market exposures in recent years. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs. Moreover, market volatility and illiquidity (and the assumptions, judgements and estimates in relation to such matters that may change over time and may ultimately not turn out to be accurate) make it difficult to value certain of the Group’s exposures. Valuations in future periods, reflecting, among other things, then-prevailing market conditions and changes in the credit ratings of certain of the Group’s assets, may result in significant changes in the fair values of the Group’s exposures, even in respect of exposures, such as credit market exposures, for which the Group has previously recorded write-downs. In addition, the value ultimately realised by the Group may be materially different from the current or estimated fair value. Any of these factors could require the Group to recognise further significant write-downs in addition to those already recorded or realised or realise increased impairment charges, which may have a material adverse effect on its financial condition and its results of operations or result in a loss of value in the Securities.
Further information about the write-downs which the Group has incurred and the assets it has reclassified can be found in the Risk and balance sheet management section of the Business review.
The value or effectiveness of any credit protection that the Group has purchased from monoline and other insurers and other market counterparties (including credit derivative product companies) depends on the value of the underlying assets and the financial condition of the insurers and such counterparties. The Group has credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (“CDSs”), which are carried at fair value. The fair value of these CDSs, as well as the 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. Since 2007, monoline and other insurers and other market counterparties (including credit derivative product companies) 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 has deteriorated rapidly, which may continue. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates further, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs in addition to those already recorded and such adjustments may have a material adverse impact on the Group’s financial condition and results of operations.
The Group’s borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its and the UK Government’s credit ratings. The company, the Royal Bank and other Group members have been subject to a number of credit rating downgrades in the recent past. Any future reductions in the long-term or short-term credit ratings of the company or one of its principal subsidiaries (particularly the Royal Bank) would further increase its borrowing costs, require the Group to replace funding lost due to the downgrade, which may include the loss of customer deposits, and may also limit the Group’s access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. Furthermore, given the extent of the UK Government ownership and support provided to the Group through HM Treasury’s guarantee scheme
(announced by the UK Government on 8 October 2008) (the “Credit Guarantee Scheme”), any downgrade in the UK Government’s credit ratings could materially adversely affect the credit ratings of Group companies and may have the effects noted above. Standard & Poor’s Credit Market Services Europe Limited reaffirmed the UK Government’s “AAA” rating with stable outlook on 26 October 2010 and Moody’s Investors Service Limited reaffirmed the UK Government’s “Aaa” rating on 7 May 2010. Fitch Ratings Limited reaffirmed the UK Government’s “AAA” rating with stable outlook on 31 July 2009 and Moody’s Investors Service Limited reiterated the UK Government’s stable outlook on 23 June 2010. Credit ratings of RBS N.V., Ulster Bank and Citizens are also important to the Group when competing in certain markets, such as overthe -counter derivatives. As a result, any further reductions in the company’s long-term or short-term credit ratings or those of its principal subsidiaries could adversely affect the Group’s access to liquidity and competitive position, increase its funding costs and have a material adverse impact on the Group’s earnings, cash flow and financial condition or result in a loss of value in the Securities.
The Group’s business performance could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements. Effective management of the Group’s capital is critical to its ability to operate its businesses, to grow organically and to pursue its strategy of returning to standalone strength. The Group is required by regulators in the UK, the US and other jurisdictions in which it undertakes regulated activities, to maintain adequate capital resources. The maintenance of adequate capital is also necessary for the Group’s financial flexibility in the face of continuing turbulence and uncertainty in the global economy. Accordingly, the purpose of the issuance of the £25.5 billion of B shares, the grant of the Contingent Subscription and the previous placing and open offers was to allow the Group to strengthen its capital position. The FSA’s liquidity policy statement issued in October 2009 states that UK regulated firms must hold sufficient eligible securities to survive a liquidity stress and that liquidity policy statement, together with the developments described below, has resulted in the Group holding a greater amount of government securities to ensure that it has adequate liquidity in times of financial stress.
To the extent the Group has estimated the indicative impact that Basel III reforms may have on its RWAs and capital ratios, such estimates are preliminary and subject to uncertainties and may change. In particular, the estimates assume mitigating actions will be taken by the Group (such as deleveraging of legacy positions and securitisations, including NonCore, as well as other actions being taken to derisk market and counterparty exposures), which may not occur as anticipated, in a timely manner, or at all.
The Basel Committee changes and other future changes to capital adequacy and liquidity requirements in the UK and in other jurisdictions in which it operates, including the European Commission’s public consultation on further possible changes to the Capital Requirements Directive launched in February 2010, may require the Group to raise additional Tier 1 (including Core Tier 1) and Tier 2 capital by way of further issuances of securities, including in the form of ordinary shares or B shares and will result in existing Tier 1 and Tier 2 securities issued by the Group ceasing to count towards the Group’s regulatory capital, either at the same level as present or at all. The requirement to raise additional Core Tier 1 capital could have a number of negative consequences for the company and its shareholders, including impairing the company’s ability to pay dividends on or make other distributions in respect of ordinary shares and diluting the ownership of existing shareholders of the company. If the Group is unable to raise the requisite Tier 1 and Tier 2 capital, it may be required to further reduce the amount of its riskweighted assets and engage in the disposal of core and other Non-Core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group. In addition, pursuant to the State Aid approval, should the Group’s Core Tier 1 capital ratio decline to below 5 per cent. at any time before 31 December 2014, or should the Group fall short of its funded balance sheet target level (after adjustments) for 31 December 2013 by £30 billion or more, the Group will be required to reduce its risk-weighted assets by a further £60 billion in excess of its plan through further disposals of identifiable businesses and their associated assets. As provided in the Acquisition and Contingent Capital Agreement (as defined below), the Group will also be subject to restrictions on payments on its hybrid capital instruments should its Core Tier 1 ratio fall below 6 per cent. or if it would fall below 6 per cent. as a result of such payment.
Also, recent market volatility and illiquidity have challenged the factual bases of certain underlying assumptions and have made it difficult to value certain of the Group’s financial instruments. Valuations in future periods, reflecting prevailing market conditions, may result in further significant changes in the fair values of these instruments, which could have a material adverse effect on the Group’s results of operations and financial condition or result in a loss of value in the Securities.
The Group operates in markets that are highly competitive and consolidating. If the Group is unable to perform effectively, its business and results of operations will be adversely affected. The consolidation that has taken place in recent years among banking institutions in the UK, the US and throughout Europe continues to change the competitive landscape for banks and other financial institutions. If financial markets continue to be volatile, more banks may be forced to consolidate. This consolidation, in combination with the introduction of new entrants into the US and UK markets from other European and Asian countries, could increase competitive pressures on the Group.
Furthermore, increased government ownership of, and involvement in, banks generally may have an impact on the competitive landscape in the major markets in which the Group operates. The effects of the substantial government shareholding and involvement in the banks may differ from jurisdiction to jurisdiction, and such involvement may cause the Group to experience stronger competition for corporate, institutional and retail clients and greater pressure on profit margins. Future disposals and restructurings by the Group and the compensation structure and restrictions imposed on the Group may also have an impact on its ability to compete effectively. Since the markets in which the Group operates are expected to remain highly competitive in all areas, these and other changes to the competitive landscape could adversely affect the Group’s business, margins, profitability, financial condition and prospects or result in a loss of value in the Securities.
As a condition to HM Treasury support, the company has agreed to certain undertakings which may serve to limit the Group’s operations. Under the terms of the First Placing and Open Offer, the company provided certain undertakings aimed at ensuring that the subscription by HM Treasury of the relevant ordinary shares and preference shares and the Group’s participation in the Credit Guarantee Scheme offered by HM Treasury as part of its support for the UK banking industry are compatible with the common market under EU law. These undertakings included (i) certain lending commitments in relation to UK residential mortgage lending and lending to SMEs in the UK until 28 February 2011, (ii) regulating management remuneration and (iii) regulating the rate of growth of the Group’s balance sheet. Under the terms of the placing and open offer undertaken by the company in April 2009 (the “Second Placing and Open Offer”), the Group’s undertakings in relation to mortgage lending and lending to SMEs were extended to larger commercial and industrial companies in the UK. Pursuant to these arrangements, the Group agreed to make available to creditworthy borrowers on commercial terms, £16 billion above the amount the company had budgeted to lend to UK businesses and £9 billion above the amount the company had budgeted to lend to UK homeowners in the year commencing 1 March 2009.
As discussed above, the Group has also agreed to certain other material commitments under the State Aid restructuring plan approved by the European Commission in relation to State Aid, including an agreement to refrain from making discretionary dividends (including on preference shares and B shares) or coupon payments on existing hybrid capital instruments for a two-year period which commenced on 30 April 2010. It is possible that the Group may, in future, be subject to further restrictions on payments on such hybrid capital instruments, whether as a result of undertakings given to regulatory bodies or otherwise. The Group has also agreed to certain other undertakings in the Acquisition and Contingent Capital Agreement (the “Acquisition and Contingent Capital Agreement”).
Areas in which, and examples of where, governmental policies, regulatory changes and increased public and regulatory scrutiny could have an adverse impact on the Group include, but are not limited to: the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies; requirements to separate retail banking from investment banking, and restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank; government-imposed requirements with respect to lending to the UK SME market and larger commercial and corporate markets and residential mortgage lending; requirements to operate in a way that prioritises objectives other than shareholder value creation; changes to financial reporting standards (including accounting standards), corporate governance requirements, corporate structures and conduct of business rules; the imposition of restrictions on the Group’s ability to compensate its senior management and other employees; regulations relating to, and enforcement of, anti-bribery, anti-money laundering, anti-terrorism or other similar sanctions regimes; rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets; other requirements or policies affecting the Group’s profitability, such as the imposition of onerous compliance obligations, further restrictions on business growth or pricing, and the introduction of, and changes to, levies, fees or taxes applicable to the Group’s operations (such as the imposition of financial activities taxes and changes in tax rates that reduce the value of deferred tax assets); and other unfavourable political, military or diplomatic developments producing social instability or legal uncertainty which, in turn, may affect demand for the Group’s products and services.
The Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations. The Group maintains a number of defined benefit pension schemes for past and a number of current employees. Pensions risk is the risk that the assets of the Group’s various defined benefit pension schemes which are long term in nature do not fully match the timing and amount of the schemes’ liabilities as a result of which the Group is required or chooses to make additional contributions to the schemes. Pension scheme liabilities vary with changes to long-term interest rates, inflation, pensionable salaries and the longevity of scheme members as well as changes in applicable legislation. The scheme’s assets comprise investment portfolios that are held to meet projected liabilities to the scheme members. Risk arises from the schemes because the value of these asset portfolios’ returns from them and any additional future contributions to the schemes may be less than expected and because there may be greater than expected increases in the estimated value of the schemes’ liabilities. In these circumstances, the Group could be obliged, or may choose, to make additional contributions to the schemes, and during recent periods, the Group has voluntarily made such contributions to the schemes. Given the recent economic and financial market difficulties and the prospect that they may continue over the near and medium term, the Group may experience increasing pension deficits or be required or elect to make further contributions to its pension schemes and such deficits and contributions could be significant and have an adverse impact on the Group’s results of operations or financial condition or result in a loss of value in the Securities. A funding valuation of the Group’s major defined benefit pension plan, The Royal Bank of Scotland Group Pension Fund is currently being carried out with an effective date of 31 March 2010.
Operational risks are inherent in the Group’s operations. The Group’s operations are dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations where it does business. The Group has complex and geographically diverse operations and operational risk and losses can result from internal and external fraud, errors by employees or third parties, failure to document transactions properly or to obtain proper authorisation, failure to comply with applicable regulatory requirements and conduct of business rules (including those arising out of anti-bribery, anti-money laundering and anti-terrorism legislation, as well as the provisions of applicable sanctions programmes), equipment failures, business continuity and data security system failures, natural disasters or the inadequacy or failure of systems and controls, including those of the Group’s suppliers or counterparties. Although the Group has implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, to identify and rectify weaknesses in existing procedures and to train staff, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by the Group. Any weakness in these systems or controls, or any breaches or alleged breaches of such laws or regulations, could result in increased regulatory supervision, enforcement actions and other disciplinary action, and have an adverse impact on the Group’s business, applicable authorisations and licences, reputation, results of operations and the price of its securities. Notwithstanding anything contained in this risk factor, it should not be taken as implying that the company will be unable to comply with its obligations as a company with securities admitted to the Official List of the UK Listing Authority (the “Official List”) nor that it, or its relevant subsidiaries, will be unable to comply with its or their obligations as supervised firms regulated by the FSA.
The recoverability and regulatory capital treatment of certain deferred tax assets recognised by the Group depends on the Group's ability to generate sufficient future taxable profits and there being no adverse changes to tax legislation, regulatory requirements or accounting standards. In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent that it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and allowable losses. Failure to generate sufficient future taxable profits or changes in tax legislation or accounting standards may reduce the recoverable amount of the recognised deferred tax assets. In April 2011, the UK Government will commence a staged reduction in the rate of UK corporation tax from 28 per cent. to 24 per cent. over a four-year period. Such a change in the applicable tax rate would reduce the recoverable amount of the recognised deferred tax assets.
The APS is a unique form of credit protection over a complex range of diversified assets and exposures (the “Covered Assets”) in a number of jurisdictions. Owing to the complexity, scale and unique nature of the APS and the uncertainty resulting from the recent economic recession, there may be unforeseen issues and risks that are relevant in the context of the Group’s participation in the APS and in the impact of the APS on the Group’s business, operations and financial condition. Such issues or risks may have a material adverse effect on the Group.
Moreover, the Group’s choice of assets or exposures to be covered by the APS was based on certain predictions and assumptions at the time of its accession to the APS. There is therefore a risk that the Covered Assets will not be those with the greatest future losses or with the greatest need for protection and the Group’s financial condition, income from operations and the value of any Securities may still suffer due to further impairments and credit write-downs.
If the Group is unable to issue the Contingent B Shares to HM Treasury, it may have a material adverse impact on the Group’s capital position, liquidity, operating results and future prospects. In the event that the Group’s Core Tier 1 capital ratio declines to below 5 per cent., HM Treasury is committed to subscribe for up to an additional £8 billion of Contingent B Shares if certain conditions are met. If such conditions are not met and are not waived by HM Treasury, and RBSG is unable to issue the Contingent B Shares, the Group will be required to find alternative methods for achieving the requisite capital ratios. Such methods could include an accelerated reduction in risk-weighted assets, disposals of certain businesses, increased issuance of Tier 1 capital securities, increased reliance on alternative government-supported liquidity schemes and other forms of government assistance. There can be no assurance that any of these alternative methods will be available or would be successful in increasing the Group’s capital ratios to the desired or requisite levels. If RBSG is unable to issue the Contingent B Shares, the Group’s business, results of operations, financial condition and capital position and ratios will suffer, its credit ratings may drop, its ability to lend and access funding will be further limited and its cost of funding may increase. The occurrence of any or all of such events may cause the price of the Securities to decline substantially and may result in intervention by the Authorities or other regulatory bodies in the other jurisdictions in which the Group operates, which could include full nationalisation, other resolution procedures under the Banking Act or revocation of permits and licences necessary to conduct the Group’s businesses. Any compensation payable to holders of Securities would be subject to the provisions of the Banking Act, and investors may receive no value for their Securities.
The extensive governance, asset management and information requirements under the Scheme Conditions and any changes or modifications to the Scheme Conditions may have a negative impact on the expected benefits of the Scheme and may have an adverse impact on the Group. There are extensive governance, asset management and information requirements under the Scheme Conditions in relation to the Covered Assets, other assets and the operations of the Group and HM Treasury also has the right to require the appointment of one or more step-in managers to exercise certain step-in rights in certain circumstances. The step-in rights are extensive and include certain oversight, investigation, approval and other rights, the right to require the modification or replacement of any of the systems, controls, processes and practices of the Group and extensive rights in relation to the direct management and administration of the Covered Assets. Additionally pursuant to the Accession Agreement, HM Treasury has the right to require RBS to appoint one or more Special Advisers (“SOC Special Advisers”) to exercise oversight functions over certain assets in the APS. On 18 June 2010, the Asset Protection Agency required that RBS appoint SOC Special Advisers in relation to certain assets and business areas in order to provide additional support to the Senior Oversight Committee of RBS and there have been four such appointments to date granting certain oversight rights in relation to certain specified assets. The obligations of the Group and the rights of HM Treasury may, individually or in the aggregate, impact the way the Group runs its business and may serve to limit the Group’s operations with the result that the Group’s business, results of operations and financial condition will suffer. In addition, the market’s reaction to such controls and limitations may have an adverse impact on the price of the Securities.
Any changes to the expected regulatory capital treatment of the APS, the B Shares and the Contingent B Shares may negatively impact the Group’s capital position. One of the key objectives of the APS and the issuance of £25.5 billion of B Shares and, if required, the £8 billion Contingent B Shares was to improve capital ratios at a consolidated level for the Group and at an individual level for certain relevant Group members. The Group has entered and may in the future enter into further back-to-back arrangements with Group members holding assets or exposures to be covered by the APS in order to ensure the capital ratios of these entities are also improved by virtue of the APS. There is a risk that the interpretation of the relevant regulatory capital requirements by one or more of the relevant regulatory authorities may differ from that assumed by the Group, with the result that the anticipated improvement to the Group’s capital ratios will not be fully achieved.
The costs of the APS may be greater than the benefits received. The costs of participating in the APS incurred by the Group to HM Treasury include, among others, a fee of £700 million per annum, payable in advance for each of the first three years of the APS and £500 million per annum thereafter until the earlier of (i) the date of termination of the APS and (ii) 31 December 2099.
Participation in the APS may result in greater tax liabilities for the Group and the loss of potential tax benefits. The Group can opt (with the consent of HM Treasury) to satisfy the annual fee in respect of both the APS and the Contingent Subscription and any APS exit fee by waiving certain United Kingdom tax reliefs that are treated as deferred tax assets. The Group has not opted to do so to date, but if the Group so opts in the future, it is difficult to value accurately the cost to the Group, which depends on unascertainable factors including the extent of future losses, the extent to which the Group regains profitability and any changes in tax law.
In addition to suffering greater tax liabilities in future years as a result of the waiver of the right to certain United Kingdom tax reliefs that are treated as deferred tax assets (the “Tax Loss Waiver”), the Group may also be subject to further tax liabilities in the United Kingdom and overseas in connection with the APS and the associated intra-group arrangements which would not otherwise have arisen. The Tax Loss Waiver provides that the Group will not be permitted to enter into arrangements which have a main purpose of reducing the net cost of the Tax Loss Waiver. It is unclear precisely how these restrictions will apply, but it is possible that they may limit the operations and future post-tax profitability of the Group.
Under certain circumstances, the Group cannot be assured that assets of RBS Holdings N.V. (and certain other entities) will continue to be covered under the APS, either as a result of a withdrawal of such assets or as a result of a breach of the relevant obligations. If HM Treasury seeks to exercise its right to appoint one or more step-in managers in relation to the management and administration of Covered Assets held by RBS Holdings N.V. or its wholly-owned subsidiaries, RBS Holdings N.V. will, in certain circumstances, need to seek consent from the Dutch Central Bank to allow it to comply with such step-in. If this consent is not obtained by the date (which will be no less than 10 business days after the notice from HM Treasury) on which the step-in rights must be effective, and other options to effect compliance are not possible (at all or because the costs involved prove prohibitive), those assets would need to be withdrawn by the Group from the APS where permissible under the Scheme Conditions or, otherwise, with HM Treasury consent. If the Group cannot withdraw such Covered Assets from the APS, it would be likely to lose protection in respect of these assets under the APS and/or may be liable under its indemnity to HM Treasury. If the Group loses cover under the APS in respect of any Covered Asset held by RBS Holdings N.V. or its wholly-owned subsidiaries, any losses incurred on such asset will continue to be borne fully by the Group and may have a material adverse impact on its financial condition, profitability and capital ratios. Similar issues apply in certain other jurisdictions but the relevant Covered Assets are of a lower quantum.
Risk factors continued Any conversion of the B Shares, in combination with any future purchase by HM Treasury of ordinary shares, would increase HM Treasury’s ownership interest in the company, and could result in the delisting of the company from the Official List. On 22 December 2009, RBSG issued £25.5 billion of B Shares to HM Treasury. The B Shares are convertible, at the option of the holder at any time, into ordinary shares at an initial conversion price of £0.50 per ordinary share.
Dividends Payment dates Cumulative preference shares 31 May and 30 December 2011 31 March, 30 June, 30 September and
Shareholders may also download forms from the 'Shareholder Services' section of our website (www.rbs.com/shareholder)
Should you wish to donate your shares to charity in this way you should contact ShareGift for further information: ShareGift, The Orr Mackintosh Foundation 17 Carlton House Terrace, London SW1Y 5AH Tel: +44 (0)20 7930 3737 www.sharegift.org
At 31 December 2010, there were 74 registered shareholders of Series F ADSs, 42 registered shareholders of Series H ADSs, 27 registered shareholders of Series L ADSs, 7 registered shareholders of Series M ADSs, 22 registered shareholders of Series N ADSs, 28 registered shareholders of Series P ADSs, 14 registered shareholders of Series Q ADSs, 2 registered shareholders of Series R ADSs, 1 registered shareholder of Series S ADSs, 17 registered shareholders of Series T ADSs and 1 registered shareholder of Series U ADSs.
ADSs representing ordinary shares In October 2007, the company listed ADSs, each representing one ordinary share nominal value 25p each (or a right to receive one ordinary share), and evidenced by an ADR or uncertificated securities, on the NYSE. With effect from 7 November 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares. As of 31 December 2010, 14.5 million ADSs were outstanding. The ADSs were issued in connection with the company's bid for the outstanding share capital of ABN AMRO Holding N.V..
The following table shows, for the periods indicated, the high and low sales prices for each of the outstanding ADSs representing non-cumulative dollar preference shares and PROs, as reported on the NYSE or NASDAQ.
January 2011 High 14.31 2010: Q4 High 15.67 2010 High 17.30 Low 12.40 Low 11.76 Low 9.89
December 2010 High 13.39 2010: Q3 High 16.68 2009 High 18.95 Low 11.91 Low 12.14 Low 3.33 November 2010 High 15.42 2010: Q2 High 17.30 2008 High 149.05 Low 11.76 Low 11.91 Low 12.20 October 2010 High 15.67 2010: Q1 High 13.61
Low 14.18 Low 9.89 September 2010 High 15.61 2009: Q4 High 16.00
Low 14.03 Low 9.17 August 2010 High 16.68 2009: Q3 High 18.95
Non-cumulative preference shares of US$0.01 - Series D (redeemed March 2006) (1) — — — — — 0.21 - Series E (redeemed January 2007) (1) — — — — 0.04 1.10 - Series F (1) 1.91 1.06 1.22 1.04 0.96 1.03 - Series G (redeemed January 2007) (1) — — — — 0.04 1.00 - Series H (1) 1.81 1.03 1.15 0.99 0.91 0.98 - Series I (redeemed March 2006) (1) — — — — — 0.20 - Series K (redeemed January 2007) (1) — — — — 0.04 1.06 - Series L (1) 1.44 0.86 0.92 0.78 0.72 0.78 - Series M (2) 0.40 0.26 1.02 0.89 0.80 0.87 - Series N (2) 0.40 0.26 1.01 0.88 0.79 0.86 - Series P (2) 0.39 0.25 0.99 0.87 0.78 0.85 - Series Q (2) 0.42 0.27 1.07 0.94 0.84 0.53 - Series R (2) 0.38 0.25 0.97 0.85 0.77 — - Series S (2) 0.41 0.27 1.05 0.92 0.41 — - Series T (2) 0.45 0.29 1.15 1.01 0.23 — - Series U (2) 3,820 2,474 5,019 3,935 — — Non-cumulative convertible preference shares of US$0.01 - Series 1 (1) 91.18 34.93 60.33 49.66 45.58 50.26 Non-cumulative preference shares of €0.01 - Series 1 (2) — — 49.46 46.53 39.63 37.18 - Series 2 (2) — — 46.00 41.79 35.52 36.22 - Series 3 (2) — — 3,125 2,782 — — Non-cumulative convertible preference shares of £0.01 - Series 1 (1) 114.68 73.87 73.87 73.87 73.87 73.87 Non-cumulative preference shares of £1
The Group has undertaken that, unless otherwise agreed with the European Commission, neither the company nor any of its direct or indirect subsidiaries (other than companies in the RBS Holdings N.V. group, which are subject to different restrictions) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from 30 April 2010 for a period of two years thereafter ("the
Ordinary dividends Ordinary dividends per share in the table below were restated for the effect of the rights issue in June 2008 and the capitalisation issue in September 2008.
Taxation for US Holders The following discussion summarises certain US federal and UK tax consequences of the acquisition, ownership and disposition of ordinary shares, non-cumulative dollar preference shares, ADSs representing ordinary shares (ordinary ADSs), ADSs representing non-cumulative dollar preference shares (preference ADSs) or PROs by a beneficial owner that is a citizen or resident of the United States or that otherwise will be subject to US federal income tax on a net income basis in respect of the ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs (a US Holder). This summary assumes that a US Holder is holding ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs, as applicable, as capital assets. This summary does not address the tax consequences to a US Holder (i) that is resident (or, in the case of an individual, ordinarily resident) in the UK for UK tax purposes, (ii) that carries on a trade, profession or vocation through a branch, agency or permanent establishment in the UK in connection with which their ordinary shares, non-cumulative preference shares, ordinary ADSs, preference ADSs or PROs, are held, used or acquired, or (iii) generally, that is a corporation which alone or together with one or more associated companies, controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address the tax consequences to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-tomarket method of tax accounting, persons holding ordinary shares, noncumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to such securities, persons whose functional currency for US federal income tax purposes is not the US dollar, entities classified as partnerships for US federal income tax purposes, tax-exempt entities or persons that own or are deemed to own 10% or more of the voting stock of the company.
The following discussion assumes that the company is not, and will not become, a passive foreign investment company - see ‘Passive Foreign Investment Company (PFIC) considerations’ on page 433.
Ordinary shares, preference shares, ordinary ADSs and preference ADSs Taxation of dividends For the purposes of the Treaty, the Estate Taxation Treaty and the US Internal Revenue Code of 1986 as amended (the Code), US Holders of ordinary ADSs and preference ADSs should be treated as owners of the ordinary shares and the non-cumulative dollar preference shares underlying such ADSs.
Dividends will be included in a US Holder's income on the date of the US Holder's (or in the case of ADSs, the depositary's) receipt of the dividend. The amount of any dividend paid in pounds sterling or euros to be taken into income by a US Holder will be the US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is not converted into US dollars on the date of receipt, the US Holder may have foreign currency gain or loss.
An ordinary share, a non-cumulative dollar preference share, an ordinary ADS or a preference ADS beneficially owned by an individual, whose domicile is determined to be the United States for purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual's death or on a lifetime transfer of such share or ADS, except in certain cases where the share or ADS (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the ordinary share, non-cumulative dollar preference share, ordinary ADS or preference ADS is subject to both UK inheritance tax and US federal estate or gift tax.
Taxation for US Holders continued PROs United States Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders. A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to such tax.
United Kingdom Taxation of payments on the PROs Payments on the PROs will constitute interest rather than dividends for UK withholding tax purposes. However, the PROs will constitute 'quoted eurobonds' within the meaning of section 987 of the Income Tax Act 2007 and therefore payments of interest will not be subject to withholding or deduction for or on account of UK tax as long as the PROs remain at all times listed on a 'recognised stock exchange' within the meaning of section 1005 of the Income Tax Act 2007, such as the main market of the New York Stock Exchange. In all other cases, an amount must be withheld on account of UK income tax at the basic rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation does not apply to payments to persons who the company reasonably believes are within the charge to corporation tax or fall within various categories enjoying a special tax status (including charities and pension funds), or are partnerships consisting of such persons (unless HM Revenue & Customs directs otherwise). Where interest has been paid under deduction of UK withholding tax, US Holders may be able to recover the tax deducted under the Treaty.
Annual tax charges Corporate US Holders of PROs may be subject to annual UK tax charges (or relief) by reference to fluctuations in exchange rates and in respect of profits, gains and losses arising from the PROs, but only if such corporate US Holders carry on a trade in the UK through a UK permanent establishment to which the PROs are attributable.
Inheritance tax In relation to PROs held through DTC (or any other clearing system), the UK inheritance tax position is not free from doubt in respect of a lifetime transfer, or death of, a US Holder who is not domiciled nor deemed to be domiciled in the UK for inheritance tax purposes; HM Revenue & Customs is known to consider that the situs of securities held in this manner is not necessarily determined by the place where the securities are registered. In appropriate circumstances, there may be a charge to UK inheritance tax as a result of a lifetime transfer at less than market value by, or on the death of, such US Holder. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. However, exemption from, or a reduction of, any such UK tax liability may be available under the Estate Tax Treaty (see below). US Holders should consult their professional advisers in relation to such potential liability. PROs beneficially owned by an individual, whose domicile is determined to be the United States for the purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual's death or on a lifetime transfer of the PRO, except in certain cases where the PRO (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the PRO is subject to both UK inheritance tax and US federal estate or gift tax.
Passive Foreign Investment Company (PFIC) considerations A foreign corporation will be a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable 'look-through rules', either (i) at least 75% of its gross income is 'passive income' or (ii) at least 50% of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income. The company does not believe that it was a PFIC for its 2010 taxable year. Although interest income is generally passive income, a special rule allows banks to treat their banking business income as non-passive. To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The company believes that it currently meets these requirements. The company's possible status as a PFIC must be determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US Holder holds ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs. If the company were to be treated as a PFIC in any year during which a US Holder holds ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs, US Holders would generally be subject to adverse US federal income tax consequences. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company's ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs.
Memorandum and Articles of Association The company's Memorandum and Articles of Association as in effect at the date of this annual report are registered with the Registrar of Companies of Scotland. The Articles of Association were last amended on 28 April 2010.
Code of conduct As discussed on page 231, the Group has adopted a code of conduct applicable to all Group employees, which will be provided to any person without charge, upon request, by contacting Group Secretariat at the telephone number listed on page 443.
Alt-A (Alternative A-paper) are mortgage loans with a higher credit quality than sub-prime loans but with features that disqualify the borrower from a traditional prime loan. Alt-A lending characteristics include limited documentation; high loan-to-value ratio; secured on non-owner occupied properties; and debt-to-income ratio above normal limits.
Collateralised loan obligations (CLOs) are asset-backed securities for which the underlying asset portfolios are loans, often leveraged loans.
Commercial paper (CP) comprises unsecured obligations issued by a corporate or a bank directly or secured obligations (asset-backed CP), often issued through a commercial paper conduit, to fund working capital. Maturities typically range from 2 to 270 days. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. Commercial paper is issued in a wide range of denominations and can be either discounted or interest-bearing.
Cost:income ratio - operating expenses as a percentage of total income.
Credit enhancements - are techniques that improve the credit standing of financial obligations; generally those issued by an SPE in a securitisation. External credit enhancements include financial guarantees and letters of credit from third-party providers. Internal enhancements include excess spread - the difference between the interest rate received on the underlying portfolio and the coupon on the issued securities; and overcollateralisation - on securitisation, the value of the underlying portfolio is greater than the securities issued.
Credit risk spread - is the difference between the coupon on a debt instrument and the benchmark or the risk-free interest rate for the instrument's maturity structure. It is the premium over the risk-free rate required by the market for the credit quality of an individual debt instrument.
Credit valuation adjustments - are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty.
Deferred tax asset - income taxes recoverable in future periods as a result of deductible temporary differences - temporary differences between the accounting and tax base of an asset or liability that will result in tax deductible amounts in future periods - and the carry-forward of tax losses and unused tax credits.
Deposits by banks - comprise money deposited with the Group by banks and recorded as liabilities. They include money-market deposits, securities sold under repurchase agreements, federal funds purchased and other short term deposits. Deposits received from customers are recorded as customer accounts.
Exposure at default (EAD) - an estimate of the expected level of utilisation of a credit facility at the time of a borrower's default. The EAD may be higher than the current utilisation (e.g. in the case where further drawings may be made under a revolving credit facility prior to default) but will not typically exceed the total facility limit.
Fannie Mae (Federal National Mortgage Association) - is a US Government Sponsored Enterprise. It buys mortgages, principally issued by banks, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government.
FICO score - a FICO score is calculated using proprietary software developed by the Fair Isaac Corporation in the US from a consumer's credit profile. The scores range between 300 and 850 and are used in credit decisions made by banks and other providers of credit.
Freddie Mac (Federal Home Loan Mortgage Corporation) - is a US Government Sponsored Enterprise. It buys mortgages, principally issued by thrifts, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government.
Futures contract - is a contract which provides for the future delivery (or acceptance of delivery) of some type of financial instrument or commodity under terms established at the outset. Futures differ from forward contracts in that they are traded on recognised exchanges and rarely result in actual delivery; most contracts are closed out prior to maturity by acquisition of an offsetting position.
G10 - the Group of Ten comprises the eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) that have agreed to participate in the IMF's General Arrangements to Borrow.
Ginnie Mae (Government National Mortgage Association) - is a US Government Agency that guarantees investors the timely payment of principal and interest on mortgage-backed securities for which the underlying asset portfolios comprise federally insured or guaranteed loans - mainly loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Ginnie Mae obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the US Government.
Government Sponsored Enterprises (GSEs) - are a group of financial services corporations created by the US Congress. Their function is to improve the efficiency of capital markets and to overcome statutory and other market imperfections which otherwise prevent funds from moving easily from suppliers of funds to areas of high loan demand. They include Fannie Mae and Freddie Mac.
Impaired loans - comprise all loans for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans.
Latent loss provisions - loan impairment provisions held against impairments in the performing loan portfolio that have been incurred as a result of events occurring before the balance sheet date but which have not been identified as impaired at the balance sheet date. The Group has developed methodologies to estimate latent loss provisions that reflect historical loss experience (adjusted for current economic and credit conditions) and the period between an impairment occurring and a loan being identified and reported as impaired.
Loss given default (LGD) - the economic loss that may occur in the event of default i.e. the actual loss - that part of the exposure that is not expected to be recovered - plus any costs of recovery.
Master netting agreement - is an agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any one contract.
Medium term notes (MTNs) - are debt securities usually with a maturity of five to ten years, but the term may be less than one year or as long as 50 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed maturity date (non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior, unsecured debt.
Glossary of terms continued Non-conforming mortgages - mortgage loans that do not meet the requirements for sale to US Government agencies or US Government sponsored enterprises. These requirements include limits on loan-tovalue ratios, loan terms, loan amounts, borrower creditworthiness and other requirements.
Potential problem loans - are loans other than impaired loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings where known information about possible credit problems of the borrower causes management to have serious doubts about the borrower's ability to meet the loan's repayment terms.
Pro forma cost:income ratio - operating expenses excluding purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration and restructuring costs and share of shared assets expressed as a percentage of total income excluding credit market writedowns and one-off items.
Retail loans - are loans made to individuals rather than institutions. The loans may be for car purchases, home purchases, medical care, home repair, holidays and other consumer uses.
Risk asset ratio (RAR) - total regulatory capital as a percentage of riskweighted assets.
Risk elements in lending (REIL) - comprise impaired loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings.
Special purpose entity (SPE) - is an entity created by a sponsor, typically a major bank, finance company, investment bank or insurance company. An SPE can take the form of a corporation, trust, partnership, corporation or a limited liability company. Its operations are typically limited for example in a securitisation to the acquisition and financing of specific assets or liabilities.
Structured notes - are securities that pay a return linked to the value or level of a specified asset or index. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency.
Sub-prime - sub-prime mortgage loans are designed for customers with one or more high risk characteristics, such as: unreliable or poor payment histories; loan-to-value ratio of greater than 80%; high debt-to-income ratio; the loan is not secured on the borrower's primary residence; or a history of delinquencies or late payments on the loan.
Super senior CDO - is the most senior class of instrument issued by a CDO vehicle. They benefit from the subordination of all other instruments, including AAA rated securities, issued by the CDO vehicle.
Tier 1 capital - core Tier 1 capital plus other Tier 1 securities in issue, less material holdings in financial companies.
Unaudited - unaudited financial information is information that has not been subjected to the audit procedures undertaken by the Group's auditors to enable them to express an opinion on the Group's financial statements.
VaR - is a technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels.
Write down - a reduction in the carrying value of an asset to record a decline in its fair value or value in use.
Accounting Corporate governance Accounting developments 286 Compliance with the Combined Code 235 Accounting policies 275 Risk management 17 Critical accounting policies 283 The Board and its committees 235
Asset-backed securities 204 Debt securities in issue Business review 191 Asset Protection Scheme 221 Consolidated 300 Parent company 304 Audit Committee report 240
Deposits Auditors Customer accounts 300 Auditor’s remuneration 296 Deposits from banks 300 Independent auditor’s report 267
Directors Average balance sheet 63 Attendance at Board and committee meetings 238
Biographies 226 Balance sheet Interests in shares 264 Business review 106 Remuneration 258 Consolidated 270 Remuneration policy 250 Parent company 270 Report of the directors 230 Service contracts 256 Bank levy 368
Employees Capital adequacy Business review 79 Capital ratios 112, 126 Costs 289 Capital resources 112, 127 Headcount 290 Notes on the accounts 365 Report of the directors 231
Non-interest income Global Transaction Services 28, 53, 87, 377 Business review 69
Directors’ pension arrangements 262 Group Chief Executive’s review 4 Notes on the accounts 292 Pension risk 203 Impairment Accounting policy 280 Post balance sheet events 233, 385 Business review 74 Critical accounting policies 283 Presentation of information 50 Notes on the accounts 328
Remuneration Committee Intangible assets Directors’ remuneration report 248 Accounting policy 277 Letter from the Chair of the Remuneration Committee 246 Goodwill 381 Notes on the accounts 335 Risk and balance sheet management
Index continued Risk factors 55, 405 Subordinated liabilities Consolidated 349 Risk-weighted assets 78, 112, 126, 129 Parent company 349
Business review 76 Share-based payments Critical accounting policies 285 Accounting policy 283 Notes on the accounts 297 Notes on the accounts 290 Notes on the accounts - deferred tax 342
Share capital UK Corporate 24, 53, 83, 377 Additional information 426 Notes on the accounts 358 UK Retail 20, 53, 80, 377
Shareholder information Ulster Bank 30, 53, 89, 377 Analysis of shareholders 425 Annual General Meeting 424 US Retail & Commercial 32, 53, 92, 377 Shareholder enquiries 424
Value-at-risk (VaR) 193 Statement of changes in equity Consolidated 271 Parent company 271
Registered office 36 St Andrew Square Edinburgh EH2 2YB Telephone: +44 (0)131 556 8555 Registered in Scotland No. 45551
RBS Holdings N.V. Gustav Mahlerlaan 10 Amsterdam 1082 PP Netherlands 443RBS Group 2010