Governance at a glance 29 Risk overview 30 Viability statement 32 Sustainable banking 33
Governance 36 Business review 93 Capital and risk management 133 Financial statements 252 Additional information 374 Risk factors 390 Shareholder information 415 Abbreviations and acronyms 419 Glossary of terms 420 Index 427 Important addresses 430
The Strategic Report for the year ended 31 December 2015 set out on pages 1 to 35 was approved by the Board of directors on 25 February 2016.
(3) Return on equity for Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and CIB combined.
CIB made an adjusted operating loss of £55 million, compared with an adjusted operating profit of £233 million in 2014, driven by lower income in line with the business’s reduced scale and risk appetite. Adjusted expenses were down 15% as CIB continues to move towards a more sustainable cost base.
Tangible net asset value was 352p per ordinary share at 31 December 2015, down from 374p at 31 December 2014 post restatement for the accounting policy change. This was largely driven by the attributable loss for the year less the impact of reclassified reserves on the deconsolidation of Citizens and cash flow hedging reclassifications from equity arising as the hedged transactions occurred.
Notes: (1) Excluding own credit adjustments, loss on redemption of own debt and strategic disposals and excluding litigation and conduct costs, restructuring costs and write down of goodwill.
Reduce risk-weighted assets (RWAs) to <£300 billion £243 billion, a reduction of £113 billion.
£2 billion AT1 issuance Successfully issued US$3.15 billion AT1 capital notes (£2 billion equivalent).
Simplifying the bank Reduce costs by £800 million, target exceeded and increased to >£900 million
Supporting growth Lending growth in strategic segments ≥ nominal UK GDP growth 4.8% growth achieved in UK PBB and Commercial Banking in 2015, exceeding nominal UK GDP growth (2).
Delivery against our 2015 targets In 2015, RBS set out targets across its five strategic priorities, and continued its track record of delivery.
Notes: (1) Excluding litigation and conduct costs, restructuring costs, write down of goodwill and other intangible assets and the operating costs of Williams & Glyn.
(2) Preliminary estimate for nominal UK GDP growth in 2015 is 2.6% year-on-year.
The leverage ratio rose to 5.6% at 31 December 2015, an improvement of 140 basis points from 4.2% at 31 December 2014 and 220 basis points from 3.4% at 31 December 2013, assisted by the successful issuance of Additional Tier 1 (AT1) capital notes in August 2015 and a substantial reduction in leverage exposure to £702 billion, down £237 billion from 31 December 2014 and £380 billion from 31 December 2013. Planned 2016 issuance of £2 billion AT1 capital notes, subject to market conditions, will provide further balance sheet resilience. In addition, issuance of £3-5 billion of senior debt, eligible to meet RBS’s Minimum Requirement for Own Funds and Eligible Liabilities (MREL), is targeted from the RBS Group plc holding company, again subject to market conditions.
In 2015 RBS: • Completed the exit from Citizens a year ahead of schedule, reducing RWAs by £63 billion in the process and underlining our commitment to a UK market focus.
• Delivered strong progress in the first year of CIB Capital Resolution, reducing RWAs by £32.6 billion to
• Achieved the run-down target of RCR a year ahead of schedule, reducing funded assets by 88% since the original pool of assets was identified, exceeding the targeted 85%, to £4.6 billion at 31 December 2015.
• Improved the quality of its core loan books, primarily through the sale of commercial real estate and infrastructure portfolios in Commercial
• Committed to fair banking through making overdrafts more accessible to one million customers who are now eligible for overdrafts of £100 and £250.
• One of the first UK banks to offer the Government-led Help to Buy: ISA as we continue to help first time buyers.
• One of the first UK banks to launch Apple Pay and subsequently created an Apple Watch app.
• Employed a new automated accountopening system to improve our onboarding process, accelerating endto -end account opening times by 50% for business customers and 30% for commercial customers.
• Launched a new customer relationship management tool, enabling a single view of the customer.
• Launched an ‘online diary’ where customers can book an appointment with an advisor from the comfort of their own home.
Investing in our people: • Delivered leadership training to over 13,000 leaders through a comprehensive ‘Determined to Lead’ training programme.
• Around 5,500 front line staff completed certified banking skills programmes, with a further c.11,000 enrolled.
Government shareholding On 4 August 2015, HM Treasury (HMT) sold 630 million RBS ordinary shares, its first sale since its initial investment in 2008.
On 8 October 2015, HMT converted the 51 billion B shares it held into 5.1 billion ordinary shares, further normalising the ownership structure of RBS. These new ordinary shares were admitted to the London Stock Exchange on 14 October 2015. HMT’s economic interest was 72.6% at 31 December 2015.
Current trading PBB and CPB franchises have traded in line with expectations in the first six weeks of 2016. CIB has had a difficult start to the year, given overall market conditions.
The net impact of lower long term yields and year to date sterling weakness have contributed to earnings volatility, reflected in certain line items such as IFRS volatility, own credit adjustments and foreign exchange gains/losses.
Customer experience narrow the gap to No.1 for NPS in every primary UK brand.
Supporting growth net 4% growth in PBB and CPB customer loans.
Employee engagement raise employee engagement to within two points of GFS norm.
In our core PBB and CPB franchises we expect income to stabilise in 2016 as headwinds from low interest rates and the uncertain macroeconomic environment are balanced by strong planned volume growth, particularly in mortgages but also in core commercial lending. CIB may see some modest further income erosion. Cost savings of £800 million are planned in 2016 (in addition to the £2 billion achieved in 2014 and 2015). Our expectation is for cost reduction to exceed any income erosion across our combined core businesses.
Legacy credit portfolios have now been substantially disposed of, so we do not expect the considerable recoveries seen in 2014 and 2015 to be repeated and some portfolios may see net impairment charges. However, impairments on core portfolios are expected to remain low in 2016, with a modest overall net impairment charge for the year, though we recognise that the risk of larger single name events has increased, given the uncertain macroeconomic environment.
Based upon the currently expected timing of payments, the combined impact of the accelerated pension payment as announced on 27 January 2016, and the final DAS dividend would be to reduce TNAV per share by 13p during Q1 2016.
We continue to deal with a range of uncertainties in the external environment, including those caused by the referendum on the UK’s continuing membership of the European Union. We will also have to manage conduct-related investigations and litigation, including US RMBS, throughout 2016, and substantial incremental provisions may be recognised during the year.
Work continues on the separation of Williams & Glyn, but this will now not be achieved until after Q1 2017. The Group remains committed to full divestment by the end of 2017, although it continues to face significant challenges and risks in separating the Williams & Glyn business, some of which may only emerge as various separation process phases are progressed. The Williams & Glyn separation process is a high priority for the Group and involves the diversion of Group resources away from other key areas. The associated risks are discussed in more detail in the Risk Factors on pages 390 to 414.
Innovation First UK bank to enable customers to login to their mobile banking app using only their fingerprint.
Real time registration This enables customers to have access to mobile banking as they open their current account. Active mobile users have increased 27% to 3.7 million.
Online diary Launched an ‘online diary’ where customers can book an appointment with an advisor from the comfort of their own home.
Branches refurbished Branch Transformation programme – 322 branches refurbished, 922 ATMs replaced.
Supporting employment Increased the number of apprentices from 50 to over 300.
Simple IT Core technology platforms continued to be simplified with 370 applications and over 6,000 servers decommissioned.
Determined to make a difference Comprehensive campaign started in October 2015 placing emphasis on personal determination and accountability. 13,000 leaders went through our Determined to Lead training programme to ensure a consistent approach to decision making.
Philip would be the first to acknowledge that the period was not an easy one for the bank or its shareholders. The recovery from the financial crisis has taken longer than foreseen and there is still much work to be done. However, Philip led the Board with calm authority through many challenging episodes and earned the respect and gratitude of his colleagues and successive teams of executives. We all wish him well in his new role as chair of the GSK Board.
Strategy The Board’s strategy for this bank is straightforward: a simpler bank focused on doing fewer things, and doing them well, built around a low risk UK and Irish retail and commercial bank; a stronger bank with a long term target of at least 13% CET1 ratio; and a fair bank that meets customers’ needs, with a target to be seen as the best UK bank for customer service, trust and advocacy by 2020.
I am therefore pleased to note the progress that management have made in delivering that strategy across all our businesses including the accelerated downsizing of the investment bank announced in February 2015. This reshaping exercise remains one of the foremost priorities for the Board, and while the disposal process is ahead of plan we continue to pay close attention to it. There are as many risks involved in exiting businesses as there are in entering them.
Any company must have mixed feelings about a reduction of its activities on this scale but I note that a number of other banking groups, especially in Europe, have now reached similar conclusions about the need to cut back their investment banking activities faced with ever-increasing capital and leverage requirements and a challenging competitive environment.
I am pleased to report that one exit was successfully achieved during the year. The Board decided in 2013 that Citizens Financial Group (CFG) was not an integral part of the bank in the longer term and resolved to float it through an IPO, and eventually to sell all the equity. The sale was achieved in stages, with the final tranche sold at the end of October 2015. The outcome was a good one for the bank’s shareholders and we wish the Board of CFG success as they embark on life as a wholly independent entity.
I would observe, however, that a period of stability and reflection on the new rules, alongside some assessment of their overall impact, will be welcome. That would also allow banks more opportunity to look at how we finance the rest of the economy and hence support growth.
As is the case for other major banks domiciled in the UK, our future operations will be materially affected by the requirement to ring-fence the retail and commercial banking activities, following the legislation to implement the recommendations of the Independent Commission on Banking. The restructuring will have an important impact on the way we serve our customers, so the Board has devoted considerable time to the oversight of the plans being developed to erect the ring fence, which must be in place by the end of 2018.
The Future Shareholders, including of course the UK government through UK Financial Investments, are well aware that it is now seven years since RBS posted a profit or paid a dividend. It would be good to be able to promise both in the near future, but while potentially large US settlements remain outstanding it would be imprudent to do so.
The bank’s ambition to be number one in our chosen markets for customer service, trust and advocacy is stretching, but it focuses the attention of all our staff on the right things, and there are promising signs that staff morale is responding positively to the challenge. Our brand franchises are strong and distinctive and there is much to build on as we refocus RBS on its core markets in the British Isles. At the same time, we need to reduce our cost base, and embed a new risk culture which will guard against a recurrence of the failings and bad behaviour which have held us back in the past.
The Board is firmly behind the strategy, and believes that we have the right management in place to deliver it. There are of course varying risks and uncertainties, which we set out in the accompanying company risk disclosures, so our role is to be supportive, while also exercising strong oversight of the risk appetite and control frameworks, to protect the long-term interests of shareholders.
Looking forward into 2016 and beyond RBS, there are a number of macroeconomic and political risks and uncertainties which are set out in the accompanying risk disclosures. One key question for the UK electorate this year will be whether the UK should remain in the EU. We are a UK-focused bank, but we have good businesses operating in other EU countries such as Ulster Bank in Ireland and many of our business customers heavily depend on unfettered access to the European Single Market. Most economic forecasts therefore point to a slowdown in UK growth, at least in the short to medium term, which would be unwelcome. Therefore, like any prudent business we are preparing for various potential scenarios. However, our primary responsibility is to serve and support our customers, and we will continue to do this, whichever way the UK electorate ultimately decide to vote.
Conclusion Apart from the departure of Philip Hampton, the composition of the Board has remained unchanged through the year, though we welcomed a new member early in 2016: Mike Rogers, the CEO of Liverpool Victoria, who brings valuable retail financial services experience to the Board.
RBS made progress again in 2015. We ended the year a simpler, stronger bank with a business anchored squarely in the UK and Ireland, focused on retail and commercial markets.
Simpler and stronger Over the last few years, RBS has built a good track record in restructuring and we reinforced that record in 2015. The sale of Citizens was completed early following the largest US bank IPO ever. We are well through the sale of our international private banking business, and are winding down our non-UK transaction services business. Major loan portfolios have been divested, and the progress continues on the complex process to exit 25 of the 38 countries in our international network. We also marked the end of RBS Capital Resolution (RCR), having substantially completed its run down one year ahead of schedule.
Our progress on exits and disposals has supported a substantial uplift in capital strength, with our CET1 ratio up by 430 basis points over the year to 15.5%.
An improving core bank As well as exiting businesses that don’t fit our strategy, we have made strong progress in improving our core retail and commercial franchises. Mortgage and commercial lending showed healthy growth over the year as we played a key role in supporting the UK economy.
Focus continues around simplifying processes as the scale and footprint of the bank is reshaped. At an operational level,
we have reduced our London property footprint, further rationalised and simplified our systems, and increased stability across our core platforms. Simplification across the bank has helped reduce our cost base by £983 million this year.
Our underlying performance over the year shows the strength – and further potential – of our core businesses, but the conduct and restructuring issues mentioned have taken their toll on our bottom line. While adjusted operating profit for the year totalled £4,405 million, we recorded a full year attributable loss of £1,979 million.
We went further, faster against our targets in 2015 We have consistently referred to five priorities, which have become a familiar framework for tracking performance. This management team is committed to a simple approach: we set out our priorities, we commit to targets against each of them, and then we deliver, as we have set out on page 4.
Our long-term financial and customer targets remain unchanged, but we have stretched our employee engagement target further. The logic we are following is simple: more engaged employees have better customer conversations, which will drive better service and, as a result, higher returns.
Focus for 2016 We are looking to take another £800 million from our cost base. This is an area where we must continue to be disciplined given the uncertain macroeconomic and low interest rate environment our core businesses face. In two years, we have taken out £2 billion in costs and next year will see us move closer to a sustainable cost base that reflects the size and scale of this bank.
Corporate & Institutional Banking (CIB) has plans through to 2020 to deliver acceptable returns and will now be focused on serving our largest and most valuable corporate clients.
We have repositioned Ulster Bank with Ulster Bank customers in Northern Ireland included in Personal & Business Banking and the Republic of Ireland (RoI) business separated into Ulster Bank RoI. The franchise is focused on improving returns by reducing its costs, given it is now a smaller but safer business.
Business model and strategy Our major source of income in our retail and commercial banking businesses is net interest income. This is the difference between the income we earn from the loans and advances we have made to our personal, corporate and institutional customers and on our surplus funds and the interest we pay on deposits placed with us by our customers and on debt securities we have issued. We also earn fees from financial services and other products we provide to our customers as well as rental income from assets we lease to our customers.
Services Services, led by the Chief Administrative Officer, provides business-aligned technology, operations and property services across the bank. It is also accountable for technology risk, payments, data, change and the bank’s fraud and security functions.
Functions These teams define functional strategy and the financial plan to support the Customer Businesses and other functions.
Most functions are a mix of control, expertise, advisory and transaction services. All common activities across the organisation are included.
Our Plan Our overarching ambition is to become the number one bank for customer service, trust and advocacy. We have set out how we track our progress towards this goal on page 19. We also track a number of other performance measures and have set long-term targets for these to keep us on track.
Simplifying the bank Cost:income ratio <50% Reduce operating expenses by £800 million (2)
Our plan to build the best bank in the UK & RoI has three phases.
Note: (1) Earliest possible timing is likely to be later than Q1 2017, subject to Board and PRA approval. Key milestones before seeking PRA approval for capital distributions would include, among other considerations, maintaining the 13% CET1 ratio target, passing regulatory capital requirements, pass 2016 Bank of England stress test (including Individual Capital Guidance hurdle) and operating within capital risk appetite, peak of litigation and conduct costs passed including US RMBS, confidence in sustainable profitability, and Williams & Glyn exit assured.
We care for each other and work best as one team.
�We prize fairness and diversity and exercise judgement with thought and integrity.
Disciplined and rigorous The organisation will manage activities endto -end in one best way.
Personal Banking NatWest (England & Wales) (1) 6 8 9 9
Business Banking NatWest (England & Wales) (3) -11 6 9 -7
Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating ‘extremely likely’ and 0 indicating ‘not at all likely’. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. NPS is established by subtracting the proportion of detractors from the proportion of promoters.
Notes: (1) Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3509) Royal Bank of Scotland (Scotland) (623). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“
(3) Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with an annual turnover up to £2 million. Quarterly rolling data. Latest base sizes: NatWest England & Wales (1352), RBS Scotland (432). Weighted by region and turnover to be representative of businesses in England & Wales/Scotland.
(4) Source: PWC Northern Ireland Business Banking Tracker and PWC Republic of Ireland Business Banking Tracker. Data collected annually. Latest base sizes: Ulster Bank NI (377), Ulster Bank RoI (222). Weighted by turnover to be representative of businesses in Northern Ireland and Republic of Ireland.
(5) Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with annual turnover between £2 million and £1 billion. Latest base size: RBSG Great Britain (872). Weighted by region and turnover to be representative of businesses in Great Britain.
(6) Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (974), RBS Scotland (187).
Despite this generally positive environment, inflation hovered around 0% throughout the year. Most of the weakness in inflation was a consequence of falling commodity prices and the effects of the depreciation in sterling since 2013. However, some of it reflected spare capacity in firms and in the labour market that contained domestic cost growth. Low inflation was one important reason why Bank Rate remained unchanged throughout the year at 0.5%, where it has been since March 2009. During early 2016, the date at which markets expected Bank Rate to rise ranged from 2017 to 2020, materially later than expectations in mid-2015.
Growth in the wider euro area accelerated modestly to more than 1.0%. However, with inflation close to zero and unemployment averaging more than 11%, the European Central Bank launched a programme of quantitative easing. That programme will continue until September 2016 at the earliest. In the US, growth was 2.4%, the same as in 2014, and unemployment fell to 5%. Inflation was close to zero throughout the year. In December, the Federal Open Market Committee voted to raise the Federal Funds Target Rate by 0.25% to a range of 0.25%-0.5%.
In emerging markets, notably China, growth slowed sharply during the year, although this was not always reflected in official data. During 2015 and again in early 2016, market volatility rose because of concerns about prospects in China and other emerging markets and the possible consequences of slower growth there for advanced economies. Weaker emerging market growth contributed to slow trade growth.
Commercial & Private Banking (CPB) comprises three reportable segments: Commercial Banking, Private Banking and RBS International (RBSI).
Corporate & Institutional Banking (CIB) serving our largest corporate and institutional clients.
Performance overview • PBB recorded an operating profit of £1,292 million in 2015, down 20% from 2014, with good asset growth offset by pressure on new business margins and higher costs for restructuring the business and remedying past conduct issues.
• Customer lending grew by 5% to £136.5 billion, with good growth also recorded in customer deposits, up 2% to £150.9 billion. While deposit margins widened, overall net interest margin was lower as competitive conditions and the increased proportion of lower margin mortgage lending reduced asset margins.
Building a better bank that serves customers well • In 2015 PBB moved to build deeper customer engagement through the launch of a new current account, ‘Reward’, which enables customers to receive 3% cashback on their household bills for a monthly account fee of £3.
NatWest was one of the first banks to make the service available to UK customers, and thanks to this partnership between the bank and Apple, customers can now use their Apple devices to pay for goods in shops, make payments in apps and pay fares on the London transport system while travelling around the city.
Customers want banking to be simple and straightforward – and to be rewarded for their loyalty. It’s never fair when new customers get all the best deals. Our new Reward account is benefiting customers old and new, who choose to do their everyday banking with us.
• Total income declined by 3% to £4,265 million, driven by a loss of £34 million from the sale of non-strategic asset portfolios, the transfer of the commercial cards business to UK PBB in 2014 and reduced fee income in Private Banking.
• Good growth was achieved in lending to UK businesses. Adjusting for internal transfers, Commercial Banking achieved net new lending of £3.6 billion, while continuing to run down some nonstrategic portfolios. Pressure on new business lending margins was partially offset by deposit repricing.
• Impairment losses were £82 million, in line with the modest impairments experienced in 2014.
Building a better bank that serves customers well • Commercial Banking made progress towards improving customer experience by becoming easier and simpler to do business with through operational investment and process simplifications
• Continued enhancements within the business contributed to commercial lending growth in 2015.
• Private Banking is being refocused on its UK connected customers, with a simpler operating model and new customer propositions for wealthy individuals and families. Closer links with Commercial have driven an increase in client referrals.
The University wanted to raise £135 million to invest in its Strand campus, and returned to the private placement market to deliver.
Acquiring price comparison website uSwitch in June 2015 allowed ZPG to develop its combined services and become the consumer champion at the heart of the home.
RBS supported the acquisition by acting as Mandated Lead Arranger in a £150 million four-bank arrangement.
Thanks to the successful deal, ZPG can now help its consumers make smarter decisions when finding, moving or managing their home.
• Total income declined by £404 million, or 21%, to £1,527 million in 2015. This includes £120 million relating to own credit adjustments and £98 million relating to the transfer of portfolio businesses to Commercial Banking. Excluding this, CIB income was £1,309 million, in line with previous guidance.
• Adjusted operating expenses were £249 million lower totalling £1,467 million, principally due to considerable reduction in headcount as the business moves towards a more sustainable cost base. Operating expenses of £2,369 million included litigation and conduct costs of £378 million and restructuring costs of £524 million.
Rotterdam-based AVR handles public and commercial waste from across the Netherlands and surrounding countries, including the UK and Ireland. The waste is transformed into green energy for the Dutch power grid and district heating.
RBS has a long-standing relationship with Whitbread, the UK’s largest hospitality company, which owns a number of well known brands including Premier Inn, Costa Coffee, Beefeater and Brewers Fayre.
Performance overview • Capital Resolution funded assets fell by £62.2 billion to £53.4 billion, primarily due to run off of the repo financing book and loan portfolio disposals.
• Within this RCR reduced funded assets by 88% since its formation to £4.6 billion, exceeding the targeted reduction of 85% a year ahead of schedule.
• CIB Capital Resolution delivered on its commitment to reduce RWAs by £25 billion in 2015, with a reduction of £32.6 billion.
Executive Committee The Board is supported by the Executive Committee comprising the executive directors and other senior executives. It supports the Chief Executive in managing RBS’s businesses. It reviews and debates relevant items before consideration by the Board. It is responsible for developing and delivering RBS’s strategy and it monitors and manages financial performance, capital allocation, risk strategy and policy, risk management, operational issues and customer issues.
An external evaluation of the effectiveness of the Board and its committees was conducted in 2015, led by Condign Board Consulting Limited.
Progress in 2015 RBS made continued progress in 2015 on delivering its strategy to reduce risk and strengthen its balance sheet and capital position.
• The first tranche of the international private banking business sale was completed with the second tranche due to be completed in the first half of 2016.
Top and emerging risks RBS employs a robust process for identifying and managing its top and emerging risks. Top risks are defined as scenarios that, while unlikely, may materialise, and which, if they did, would have a significant negative impact, such that RBS as a whole, or a particular business, could potentially fail to meet one or more of its strategic objectives. A number of scenarios attracted particular attention in 2015: Macro-economic and other external risks • Risks related to the wider economy: Like most other businesses, RBS remains vulnerable to changes in the external economic environment. Among potential scenarios considered, the following could
An increase in obligations to support pension schemes: If economic growth stagnates, and interest rates remain low, the value of pension scheme assets may not be adequate to fund pension scheme liabilities. The deficit in RBS pension schemes as determined by the most recent triennial valuations has increased, requiring RBS to increase its current and future cash contributions to the schemes. An acceleration of certain previously committed pension contributions in Q1 2016 will reduce this risk. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the deficit may increase at subsequent valuations.
Regulatory and legal risks • The impacts of past business conduct: Future conduct and litigation charges could be substantial. RBS is involved in ongoing class action litigation, securitisation and mortgage-backed securities related litigation, investigations into foreign exchange trading and ratesetting activities, continuing LIBOR-related litigation and investigations, investigations into the treatment of small and mediumsized business customers in financial difficulty, anti-money laundering, sanctions, mis-selling (including mis-selling of payment protection insurance products), and other investigations. Settlements may result in additional financial penalties, non-monetary penalties or other consequences, which may be material. More detail on these issues can be found in the Litigation, Investigations and Reviews and Risk Factors sections. To prevent future conduct from resulting in similar impacts, RBS has embarked on a programme to embed a strong and comprehensive risk and compliance culture.
• Risks to income, costs and business models arising from regulatory requirements: RBS is exposed to the risk of further increases in regulatory capital requirements as well as risks related to new regulations that could affect its business models. RBS considers the implications of proposed or potential regulatory activities in its strategic and financial plans.
Operational and execution risks • Increased losses arising from a failure to execute major projects successfully: The successful execution of major projects, including the transformation plan, the restructuring of CIB, the divestment of Williams & Glyn and the embedding of a strong and pervasive organisational and risk culture, are essential to meet RBS’s strategic objectives. The separation and eventual divestment of Williams & Glyn is a complex process and as such entails significant operational and execution risk. The Group remains committed to full divestment of Williams & Glyn by the end of 2017. These projects cover organisational structure, business strategy, information technology systems, operational processes and product offerings. RBS is working to implement change in line with its project plans while assessing the risks to implementation and taking steps to mitigate those risks where possible.
• Impact of cyber attacks: Cyber attacks are increasing in frequency and severity across the industry. RBS has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a large-scale programme to improve user access controls is in progress, along with a number of other actions, including a reduction in the number of external websites, enhancement of anti-virus protections, and the implementation of a staff education programme on information protection.
• Inability to recruit or retain suitable staff: RBS is undergoing significant organisational change, the result of a need to implement new business strategies and respond to a changing external environment. The pace of change, coupled with the associated uncertainty, may cause experienced staff to leave and prospective staff not to join. Although these risks concern all customer businesses, they particularly affect CIB. RBS has communicated expected changes in its organisational structure to members of staff, implementing plans aimed at minimising unexpected staff losses. It is also working to implement an enhanced recruitment strategy.
The assessment has been made over a period of three years. The time period has been selected taking into account that the level of uncertainty relating to the assessment increases the longer the period chosen, particularly in the markets and regulatory environment in which the bank operates; the directors consider a period of three years to be an appropriate period.
The bank’s base plans are also tested in a series of robust downside financial scenarios as part of internal and external stress testing, including the Internal Capital Adequacy Assessment Process (ICAAP) and the Individual Liquidity Adequacy Assessment (ILAA). These are summarised in the Capital and Risk Management section on page 150 and 160.
Assessments of the risks of the greatest concern are captured through the bank’s processes for continuously identifying and effectively managing the principal top and emerging risks, as detailed on pages 30 and 31. These assessments provide a view on the impact of the top risks crystallising, individually and in combination. These are outlined in the Risk Overview and further discussed in the Risk Factors; contained on pages 134 and 390 to 414, respectively, and include political, legal, macroeconomic, regulatory, operational and execution risks.
Sustainable banking means serving today’s customers in a way that also helps future generations. It requires us to put customers first, make RBS a great place to work, support our communities and be mindful of environmental impacts.
This section gives a short overview of our two main areas of focus: supporting enterprise and financial capability. It also provides details of our key disclosures on carbon emissions, inclusion and human rights. Our forthcoming Sustainable Banking Report, independently assured to AA1000 standards, provides a much more comprehensive overview of our approach to these areas and other material issues affecting the bank. Further information is available at rbs.com/sustainable.
We continue to strive to reduce the energy and associated emissions of our data centres, whilst also ensuring the delivery of reliable and innovative services to our customers remains a key priority. We’ve made changes in our waste reporting, by expanding our data collection streams and working closely with suppliers to find innovative ways to meet targets.
Our ambitious ‘Zero Waste to Landfill’ target remains challenging and if we are to meet it, will require us to find new approaches to collaboration. The 2015 reporting year has seen the removal of Citizens from our environmental footprint, and so to remain in line with best practice, we’ve applied our re-baselining strategy to remove CFG emissions and normalise our environmental footprint. In 2014,
During 2015 we continued our roll out of unconscious bias learning for all employees. We have introduced a gender goal to have at least 30% of women in the bank’s top three leadership levels by 2020. Further, we aim to have 50/50 balance at all levels by 2030. This is supported by the launch of a female development proposition. An increased
35For full information about how we manage sustainability at RBS visit rbs.com/sustainable.
RBS has been recognised for its work on Equality, Diversity and Inclusion by our Platinum ranking from Opportunity Now (gender); our Gold ranking for Race for Opportunity (race); retaining a position in the Times Top 50 Employers for Women; and improving upon our ranking in the Stonewall Workplace Equality Index (LGBT). As at 31 December 2015, of our global population of 90,158 employees (actual headcount excluding temporary workers), 42,892 (48%) were male and 47,266 (52%) female.
Our Sustainable Procurement Code sets out our expectations of the companies that we work with. It states that our suppliers should not engage in breaches of human rights or labour rights, or in discrimination. We are also committed to equal opportunities for suppliers, and we recognise that diversity strengthens our supply chain. During 2015 we conducted introductory training on sustainability to members of our procurement team.
RBS welcomes new legislation – the Modern Slavery Act 2015 – to combat slavery and human trafficking. We are obliged to produce a public statement under this Act for the reporting year 2016, and we are identifying the steps necessary to ensure there is no modern slavery within our organisation and supply chain.
Independent assurance Limited assurance provided by Ernst & Young LLP over total reported 2015 Scope 1*, 2** and 3*** GHG emissions.
Total Scope 1 CO2e emissions (tonnes) 42,665 46,087 43,598 34,844 34,736 -19% -0.3%
Total Scope 1 & Scope 2 CO2e emissions per FTE (tonnes) 4.9 4.7 4.2 4.1 3.9 -19% -5%
Scope 3 CO2e emissions from business travel (tonnes) 122,391 84,718 116,515 84,808 74,110 -39% -13%
Report of the RBS Capital Resolution (RCR) Board Oversight Committee 61
General Manager with responsibility for the branch network, contact centres and third party mortgage brokers.
Sandy has had a variety of cultural and community roles, and was previously Chairman of Creative
Experience: Previously, Alison served as a director of City National Bank, First Data
• Member of the Board of Directors of the Harvard Business School Club of
where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989.
Experience: Brendan was global chairman, financial services for KPMG. He previously held senior leadership roles within KPMG including as a member of the KPMG UK board from 1999 to 2006 and as vice-chairman from 2006. Chairman of the
Experience: An experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s
Experience: Has extensive experience in retail banking and financial services. Mike joined
I am pleased to introduce the Corporate Governance report, my first since being appointed Chairman of the Board. A brief review of the principal issues addressed by the Board during the year is included in my Chairman’s Statement on page 10. The following report provides an overview of key roles and responsibilities of the Board, and sets out in greater detail how the Board spent its time in 2015. Board effectiveness and performance evaluation are also covered, as well as an overview of how we communicate with shareholders.
Biographies for each director and details of which Board committees they are members of can be found on pages 37 to 40. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.
In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Please see page 29 of the Strategic Report for more details. The terms of reference are available on rbs.com.
During 2015, two additional temporary committees were established to support the Board’s oversight of Global
The Chief Governance Officer and Board Counsel’s key responsibilities include: • advising on Board skills and composition including induction, ongoing training and professional development; • executive responsibility for Chairman/non-executive director search and appointment process; • delivery of a global corporate governance strategy across
RBS; • the provision of professional secretariat support to the Board and its committees; and
Articles of Association. The Board considers each request for authorisation on a case by case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process.
In 2015, nine Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below.
Chairman and the non-executive directors meet at least once per year without executive directors present.
Notes: (1) Appointed to the Board on 14 July 2015. (2) Appointed to the Board on 26 January 2016. (3) Stepped down from the Board on 31 August 2015.
In advance of each Board meeting, the directors are provided with comprehensive papers. During 2015 there has been an enhanced focus on organisational culture, including risk culture, and on continued enhancement of the risk appetite framework.
These have been recurring themes underpinning Board discussions during the year. A revised approach to Board papers was adopted in 2015 in order to improve and enhance the quality, content and consistency of information presented to the Board which has been well received. An overview of the principal activities of the Board during 2015 is shown below.
• Chief Financial Officer’s report including monthly results and update on capital, funding and liquidity
Executive Committee members attend part of each Board meeting to provide an update on the performance of each of the franchises and risk and conduct issues. Other relevant senior executives attend Board meetings to present reports to the Board as appropriate. This provides the Board with an opportunity to engage directly with management on key issues and supports the
The table below illustrates the breadth of skills and experience on the Board.
The Chairman continues to progress his tailored and comprehensive induction programme, which includes all of the above, together with additional customer, employee, shareholder and governmental engagement sessions, to support the nature and scope of the Chairman’s role.
The directors have access to a wide range of briefing and training sessions and other professional development opportunities.
During 2015, the directors received updates on a range of subjects to enhance their knowledge, including: • ICB/ring-fencing.
• European Commission consultation on the impact of the bonus cap, October 2015.
• PRA/FCA Report into the failure of HBOS plc and report by
Andrew Green QC assessing the FSA’s enforcement actions in relation to the failure of HBOS plc.
The Chief Governance Officer and Board Counsel maintains continuing professional development logs. These are reviewed regularly between the Chairman and each director individually, to assist in identifying future training and development opportunities that are specific to the individual director’s requirements.
Chief Governance Officer and Board Counsel. In 2014, an evaluation of the Board’s effectiveness was also carried out by the PRA. Following the 2014 evaluations, a number of initiatives were implemented, aimed at improving the overall performance and effectiveness of the Board. These included improving the quality and volume of information provided to the Board, ensuring sufficient time on Board agendas for customer matters and RBS’s priorities, enhancing the professional development provided to directors and a focus on succession planning. Work continues to address these topics and will be kept under regular review as a matter of good practice.
Officer and the Chief Conduct & Regulatory Affairs Officer; • discussing outcomes and recommendations with the
Board and committee agendas); Board and committee composition and structuring, external relationships with regulators, shareholders and stakeholders; and overall Board effectiveness.
Key strengths identified included the following: • the Board was exceptionally hard-working, engaged, and appropriately composed throughout the year; • the group dynamic between Board members was good and on the whole members continued to work well together, creating effective challenge, considerable debate and detailed oversight; and
• the Board’s committees also operated effectively within their terms of reference throughout the year providing a great deal of support to the Board.
A summary of the key themes arising from the 2015 performance evaluation is set out below, together with an overview of the key actions proposed: Key themes Board resourcing and succession planning
The need to plan for rotation in the Board’s membership was highlighted, as a number of directors reach or exceed the six year point in their tenure. The review highlighted the importance of regularly reviewing Board and Board Committee composition, according to business and staffing needs, with scope also identified to streamline Nominations Committee processes.
The evaluation also acknowledged the continuing importance of the Board’s role in developing the appropriate performance and behavioural culture which is shared with the organisation, and ensuring appropriate alignment between the Board and the executive as remediation issues reduce and the forward agenda develops.
The full performance evaluation report set out a series of recommendations which have been carefully considered by the
Nominations and Governance Committee. The committee report on page 47 contains more detail on the remit of the new
The priorities for this exercise are to minimise duplication, optimise the use of directors’ time, and to engage directors’
These actions include undertaking post-decision reviews to pinpoint learnings for future Board development and continuing to ensure appropriate Board involvement in executive succession planning. The forward agenda planner will also be discussed biannually to ensure that business needs, the Board’s expectations and executive support are aligned.
The Chairman is responsible for ensuring effective communication with shareholders. The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General
Annual General Meeting and any General Meetings held or can submit written questions in advance. The Senior Independent
Communication with the company's largest institutional shareholders is undertaken as part of the Investor Relations programme: • the Chief Executive and Chief Financial Officer meet regularly with UKFI, the organisation set up to manage the
Financial Officer and/or the RBS Treasurer give regular presentations to fixed income investors to discuss strategy and financial performance. There is also a separate section on the
In 2015, discussions principally focused on the Chairman search and the search for new non-executive directors. The Committee also continued to monitor succession planning taking into account business requirements and industry developments.
In September 2014, it was announced that Philip Hampton would step down as Chairman in 2015 and Egon Zehnder International
(EZ) was engaged to support the search process for his successor. EZ does not provide services to any other part of
RBS. On 26 February 2015, it was announced that I would be appointed as Chairman with effect from 1 September 2015, and I
joined the Board as a non-executive director on 14 July 2015.
EZ has continued to support the search for new non-executive directors during 2015 and to support the future Board succession planning. The Committee has considered the skills and experience required to complement the Board and these have been incorporated into the search process.
During 2015, the Committee considered a number of potential candidates and in December it was announced that Mike Rogers would join the Board as a non-executive director with effect from 26 January 2016. Mike’s extensive experience of retail banking and financial services will strengthen the Board.
Morten Friis, Brendan Nelson and Baroness Noakes are members. It is anticipated that the Committee will be stood down in the first half of 2016.
The GRG Board Oversight Committee first met in May 2015 to provide oversight in relation to matters related to GRG including the Group’s response to the FCA’s Section 166 Review.
Board Evaluation, I intend to lead a review of the Board
• consideration should be given to expanding the Committee’s remit to include a governance oversight function; • the search and nomination process for new non-executive directors should be reviewed and further streamlined as appropriate; • non-executive director recruitment remains challenging for a number of reasons, including the significant time commitment expected of RBS non-executive directors; • Group Nominations Committee membership should be reviewed, as part of a wider review of Board Committee composition; and
Committee’s remit, adding a governance oversight function and changing its name to the Nominations and Governance
Key themes and actions arising from these general recommendations are set out in the Board report on pages 45 and 46 and will be considered, and addressed as appropriate, at
The review also recommended that all Committee chairmen should ensure continued focus on agenda planning and streamlined reporting to the Board, which will also be a priority for the Group Nominations and Governance Committee during 2016.
On 26 January 2016, the Board approved changes to the remit of the Group Nominations Committee which now includes responsibility for monitoring the Group’s governance arrangements, in order to ensure best corporate governance standards and practices are upheld.
As part of this extended remit, the Committee will consider developments relating to banking reform and analogous issues affecting the Group in the markets where it operates, and will make recommendations to the Group Board on any consequential changes to the Group’s governance model. In order to reflect the revised remit, the Group Nominations
The Board currently exceeds the target of 25 per cent female board representation as set out in Lord Davies’ 2011 report on women on Boards. We also acknowledge the additional recommendations that have recently been published and await with interest the next steps to be taken in this regard.
Further details on RBS’s approach to diversity can be found on
Group Audit Committee has supported the bank in its ambitions and has carried out its responsibilities effectively in the period, as confirmed by the annual effectiveness review. A fuller summary of the outcomes of that review, and a description of the activity of the Committee during the year, is set out in the report that follows.
A key role of the Group Audit Committee is to satisfy itself that the accounting policies, risks and significant management judgements which underpin the bank’s financial disclosures are reasonable and transparent. During 2015, the Committee reviewed and challenged management on material judgements, in particular those relating to accounting for provision for litigation and regulatory investigations and the treatment of committed pension obligations in light of accounting developments during 2015. Other key matters debated included: loan impairments; valuation of financial instruments; conduct provisions, including
Accounts, we assisted the Board in determining that the disclosures taken as a whole were fair, balanced and understandable, and provided the information necessary for shareholders to assess RBS’s position and performance, business model and strategy.
UK Corporate Governance Code, which requires directors to make a longer-term viability statement. This statement is set out on page 32. The Group Audit Committee reviewed the processes in place to allow the Board to make a robust assessment of the bank’s principal risks, in order to support this statement.
While Deloitte continued as RBS’s external auditor throughout 2015, we supervised the transition period of the new auditors,
Ernst & Young LLP (EY), who were selected in 2014 following a competitive tender process. The Committee reviewed the processes followed to ensure EY’s independence and extended our policy on non-audit services to the firm to ensure that there was no impact on the audit service or EY’s independence. EY
shadowed the audit process in 2015 and I am confident that they will be well-positioned and appropriately informed to commence as the external auditor in 2016.
Key priorities for 2016 2016 is set to be no less challenging for the bank and the
IFRS 9, monitoring systems of control and ongoing remediation programmes through a period of continued change and embedding the correct culture and behaviours across the bank.
More detailed information on the topics considered are set out in the report that follows. This demonstrates the breadth and scale of the matters considered and I would like to thank my fellow members for their continued support and focus during 2015.
Brendan Nelson, Morten Friis and Baroness Noakes are also members of the Board Risk Committee. Sandy Crombie is
Committee. This common membership helps facilitate effective governance across all finance and risk issues, including compensation decisions, and that agendas are aligned and overlap of responsibilities is avoided where possible.
Exchange. Full biographical details of GAC members are set out on pages 37 to 40.
The Committee’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the
Committee and approved by the Board. These are available on the Bank’s website: rbs.com.
The Committee held seven scheduled meetings during 2015, four of which were held immediately prior to the submission of the quarterly financial statements to the Board. The Committee also convened three ad hoc meetings to consider the outputs and required affirmations relating to the annual external audit of benchmark interest rate submissions, to finalise the H1 company announcement prior to publication and the selection and approval of the external auditor for Williams & Glyn.
Committee, members of the Committee took part in an annual programme of visits to businesses and control functions in order to gain a deeper understanding of the risks and issues they face.
The annual review of the effectiveness of the Board and its senior
Committees, including the Group Audit Committee, was conducted by Condign Board Consulting Limited, an external consultant, in 2015. The Committee has considered and discussed the outcomes of this evaluation. Overall the review concluded that the Group Audit Committee continued to operate effectively.
Accounting judgments and reporting issues considered in the preparation of financial reports
applications within the bank; the Committee monitored remediation plans to address the issue; and
The Committee recommended the quarterly and interim results announcements and the Annual Report and
Committee prior to consideration by the Audit Committee; and a management certification process which required members of the Executive Committee and other senior executives to provide confirmation following their review of the Annual Report and Accounts that they considered them to be fair, balanced and understandable. This process was also undertaken in respect of the half year and quarterly results announcements. In addition, the External
Detailed consideration was also given to disclosure contained within the Annual Report and Accounts concerning relevant internal control matters.
The Committee received updates on whistleblowing activity including reports on incidents reported and investigated. It monitored the development by C&RA of an enhanced whistleblowing regime for employees, including the outputs of a benchmarking exercise.
The Committee considered the plan and approach to align data for Risk, Finance, and Treasury, under the Ledger
Transformation Programme. Key dependencies and risks to delivery were debated and oversight of the programme will remain a key focus of the Committee in 2016.
Taxation The Committee reviewed the bank’s tax position and the tax audits being conducted across various jurisdictions including an in-depth session on tax compliance in October 2015.
The Committee received bi-annual reports on the bank’s notifiable event process. Each Board member was alerted to each major event.
A refreshed audit plan for 2015 was approved in H2 following the bank’s extensive strategic changes to ensure appropriate focus on the highest risks and change initiatives. The Committee considered and approved Internal
Audit’s plan for 2016. The Committee also challenged resourcing levels for the revised plan and approved budget and resource for 2016.
During two visits to Internal Audit in 2015, the Committee reviewed resourcing and recruitment, strategy and internal quality assurance.
Evaluation The Committee received regular updates on the actions taken by Internal Audit following the external review by
EY the previous year. The annual review of effectiveness of Internal Audit was undertaken internally in 2015. The evaluation concluded that Internal Audit had operated effectively during the year. Certain recommendations were made to enhance particular practices within the function. These will be implemented during 2016, with progress tracked by the Committee.
The Committee received regular reports on the status of ongoing regulatory investigations and the progress of mandatory and remediation projects. It challenged the management of individual business areas and functions on their ability to meet regulatory expectations and the level of resource required to do so.
Considered reports from the External Auditor on its observations and conclusions from the year-end audit and half-year review of RBSG plc, RBS plc and NatWest Plc, work in connection with the first and third quarter financial results and any recommendations for enhancements to RBS’s reporting and controls.
The Committee conducted an internal evaluation to assess the independence and objectivity of the External
Auditor during 2015 and the effectiveness of the audit process including seeking the views of Committee members and attendees and other key members of management. Regard was had to: experience of the audit engagement team; scope of audit work planned and executed; standards of communication and reporting; quality of insights on the internal control environment; and independence.
with effect for the financial year ending 31 December 2016. The Committee supervised the transition of the external auditor from Deloitte to EY during 2015 and reviewed EY’s initial Audit engagement plan for 2016. EY
To help safeguard the objectivity and independence of the external auditor, the Committee maintains a policy that sets out the circumstances in which the external auditor is permitted to supply audit and non-audit services. The policy is reviewed annually and audit services and permitted non-audit services are approved in advance. As mentioned above, since the start of EY’s transition towards becoming the external auditor the firm has been subject to the policy in full.
A competitive tender process is required for all proposed non-audit services engagements where the fees are expected to exceed £100,000 and approval of the full Committee is required. As an additional governance control all engagements have to be approved by the Director of Finance and Supply Chain Services. Where the engagement is tax related, approval must also be obtained from the Director of RBS Tax. Ad hoc approvals of non-audit services are ratified by the Group Audit Committee each quarter.
issue in June resulting in a delay in transactions being posted to customer accounts. We oversaw the exchange of correspondence with the regulator explaining how the matter had been resolved, considered the outputs of the post implementation review exercise and examined the residual risks following the incident. IT resilience and the stability of the bank’s payments infrastructure will remain a priority of the Board and the
We will continue to monitor discussions with regulators in other jurisdictions over the coming months and make recommendations to the Group Performance and Remuneration
We will keep this under close review and plan to examine the next steps to achieving our target risk culture state in the first quarter of 2016.
Risk Data Aggregation and Reporting (RDAR) Standards; • the capital and liquidity position of RBS and related regulatory submissions; • improvements to risk reporting; and
• oversight of the bank’s risk profile through monitoring the risks inherent in the bank’s operations and portfolios.
Key priorities for 2016 Management remains committed to the reduction of risk within the organisation and demonstrated real progress in many areas during 2015. The Committee will continue to oversee the work being undertaken to ensure that the bank progresses towards operating within risk appetite and that historic issues are fully and sustainably remediated. Oversight of the Williams & Glyn separation and disposal process will be a key focus for the
The Board Risk Committee assumes responsibility on behalf of the Board to provide oversight of current and potential risk exposures and future risk strategy, including the determination of risk appetite and tolerance, and to promote a culture of risk awareness within RBS.
Committee and approved by the Board. These are available on the bank’s website: rbs.com.
Note: (1) The BRC meeting in March 2015 had to be rescheduled at short notice, meaning
Baroness Noakes, Morten Friis and Brendan Nelson are also members of the Group Audit Committee. Robert Gillespie is also a member of the Group Performance and Remuneration
Committee meetings are also attended by relevant executive directors, including the Chief Executive, Chief Financial Officer,
Meetings and visits Five scheduled meetings and four ad hoc meetings were held in 2015. The ad hoc meetings were required to consider: the preliminary 2015 Bank of England regulatory stress test results; the final 2015 Bank of England regulatory stress test results; and the key elements of the Williams & Glyn Banking Licence
In 2015, members of the Committee undertook a programme of visits to various businesses and control functions in conjunction with members of the Group Audit Committee. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit Committee above.
However, it was recognised that the agenda of the Committee was substantial and complex, and that meetings were lengthy as a result. It was acknowledged that the situation would also be expected to improve as the bank’s simplification programme progressed.
The outcomes of the evaluation have been reported to the Board and the Committee will track progress on its 2016 priorities during the year.
Detailed examination of the risks and challenges to the timely separation of physical assets in advance of the planned divestment, confirming appropriate governance was in place to support the programme. The
Committee will oversee delivery closely during 2016 and that appropriate contingency arrangements are in place. The Committee reviewed and approved the key documents for the Banking Licence and Consumer
Consideration of the change risk profile of the bank’s transformation programme and recommendations from
PRA in June 2015. The Committee considered feedback from the regulator in Q4 2015 and will oversee enhancement plans throughout 2016. The Committee also reviewed the major milestones and responsibilities aimed at improving the bank’s resolvability. The Committee considered the work already underway and further steps that may be required as regulatory expectations evolve over the coming years. The Committee also considered proposed enhancements to the management, governance and alignment of recovery and resolution planning. Regular updates on progress against plan will be provided to the Committee.
Consideration of the operation of the RBS Policy Framework, including plans to simplify the structure in line with the bank’s strategic aims. The Committee requested that management continue to improve the process for exceptions to policy.
Reporting The Committee dedicated considerable meeting time to providing oversight of the bank’s risk profile through the review of emerging risks and changes in the bank’s most significant portfolios and operations, presented within the monthly risk report. This was supplemented by oral updates, provided by the Chief Risk Officer and
During 2015, the General Counsel was also invited to provide a report at each meeting on current and emerging legal and litigation risks facing the bank.
Considerable time was spent reviewing the bank’s risk appetite framework. The Committee recommended the proposed risk appetite for the bank’s strategic objectives (earnings volatility, capital adequacy, stakeholder confidence and liquidity) to the Board for approval. The Committee held two deep dive meetings to consider the risk appetite statements for material risks and for each of the franchises and Services, placing a particular focus on: how the statements aligned with business plans and how deeply risk appetite was embedded within each area. In 2016, the Committee will look at all of these areas in greater depth including in particular the coherence of top down strategic risk appetite statements with the lower level business and risk level statements.
The Committee discussed and agreed the dimensions of the bank’s target risk culture before this was considered further by the full Board. A further report covering franchise and functional action plans will be presented to the Committee in Q1 2016.
Considerable time was dedicated to stress testing throughout 2015. In Q1, the Committee considered the outputs of the 2014 reverse stress testing exercise and made recommendations to the Board. It has since recommended the reverse stress test thresholds that will underpin the 2015 exercise and will review outputs in the first quarter of 2016. The Committee discussed and agreed the underlying assumptions and scenario selection for both internal and external (Bank of England) stress tests (including Internal Audit’s opinion) and monitored the results. Recommendations were made to the Board where formal Board approvals were required for regulatory purposes. A key focus of the Committee has been overseeing enhancements to the bank’s stress testing capability as well as meeting internal and external regulatory milestones and requirements. Capability enhancement will remain a priority during 2016.
RDAR Monitored ongoing preparations for the new Basel Principles on Effective Risk Data Aggregation and Reporting
The Committee requested the articulation of a model risk appetite statement and risk rating methodology and for a full inventory of models to be prepared. Progress will be reviewed by the Committee in Q1 2016.
Risk assurance The Committee received its first quarterly report on risk assurance which highlighted the emerging issues and any deteriorating trends in the control framework for Credit and Market Risk.
Regulatory reviews Oversaw ongoing investigations into foreign exchange manipulation. The Committee was kept appraised of the negotiations of settlements with the United States Department of Justice and US Federal Reserve System that were announced in May 2015.
Portfolio Programme, which draws together a number of work streams to remediate broader risk and control issues, including regulatory and conduct risk, to strengthen the control environment.
An FCA Presentation in June 2015 on its strategic approach to regulation, the evolving risk landscape for banking groups and the areas of focus for the next 12 months. The FCA also presented the outcome of its firm evaluation, covering cultural change at the bank, root cause analysis, the scale and complexity of the bank’s transformation programme and the challenges of simplification.
The Committee requested a full inventory of key representations to regulators and sought assurances on the processes and governance in place to support submissions. This work is ongoing and will be kept under regular review.
Monitored progress of plans to improve the bank’s Operational Risk Management Framework (ORMF)
including the work underway to complete risk and control assessments across the businesses. The Committee noted that significant progress had been made and agreed that the programme could move to reporting only by exception if any major issues arise.
Received a bi-annual report on Security & Resilience risks and internal controls in place across the bank. The
Payments Examined the stability and operational risks inherent within the bank’s payments environment and considered resilience, the adequacy of resource and controls. The Committee received reports on the changing regulatory environment.
Internal Capital Adequacy Assessment Process (ICAAP) and Individual Liquidity Adequacy Assessment (ILAA)
• consideration of the performance conditions for the bank’s Long Term Incentive Plans and assessment of proposed vesting levels to ensure risk management/conduct performance is fairly reflected in vesting outcomes.
RCR was established to separate and wind down RBS’s high capital intensive assets. Targets were set to remove 55-75%
I was appointed Chairman of the Committee on 1 April 2014 and am pleased to present the report on the Committee’s activity
The Committee’s responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on rbs.com.
management, aligned to the objectives of RCR; • consider financial disclosures in respect of RCR; and
Notes: (1) Howard Davies joined the Committee on 1 September 2015 when he succeeded
Philip Hampton as Group Chairman. He did not attend the meeting in October 2015 as he was on business in the US.
Committee meetings are attended by senior RCR managers and also representatives from the control functions, in particular from the Risk function.
“efforts to rebuild a responsible and sustainable business are being recognised through independent and external measures”
Sustainable Banking Committee, I am pleased with the progress made under the Committee’s refocused strategic direction.
We will rebuild our reputation and earn our customers’ trust by putting customers first, making RBS a great place to work, supporting our communities, and being mindful of environmental impacts.
Some good progress was made in 2015 under our core themes: • considering what is being done to foster a sustainable business for customers and understanding the needs of particular customer groups; • oversight of how management is embedding culture and standards including engagement, motivation, living the values and leadership; • oversight of the brand strategy and building on our legacy as a bank of brands, developing our brands to build on the connection with our customers; • development of the Sustainability agenda, meeting the needs of all our stakeholders whilst aligning with the Bank’s overall strategy; • ongoing commitment to stakeholder engagement through face to face sessions with advocacy groups on key topics; • considering sustainability positioning on environmental targets, climate change, sustainable energy and the social economy; and
Report which describes our performance and approach to making RBS a more sustainable business.
Jones World Sustainability Index with a score of 80 and have also been included in the Carbon Disclosure Project’s FTSE 350
Climate Disclosure Leadership Index with a score of 99/100 for disclosure and ‘B’ for performance. RBS has also been reselected for inclusion in the FTSE4Good index which measures the performance of companies against globally recognised responsibility criteria.
In addition, the programme of UK-based events aimed at individual shareholders continued in the first half of 2015 and provided an opportunity for shareholders to meet directors and senior management to learn more about the business.
Committee has considered the findings of the review. Overall the review concluded that the Sustainable Banking Committee continued to operate effectively. Whilst no specific recommendations were made in relation to the Committee, the review highlighted the importance of maintaining focus around the remit of the committee.
The Committee recently conducted a review of its terms of reference to reflect the Committee’s strategic role of overseeing, supporting and challenging actions being taken by management to run the bank as a sustainable business. During 2016, the
Authority is delegated to the Sustainable Banking Committee by the Board and the Committee reports and makes recommendations to the Board as required. The terms of reference of the Committee are available on rbs.com and these are reviewed annually and approved by the Board. A report on the activities of the Committee in fulfilling its responsibilities is provided to the Board following each meeting. The principal responsibilities of the Committee are shown below and during 2015 were grouped under three core themes of work: Bank-wide
Oversight of: • management of reputation and delivery of commitments on trust, advocacy and customer service; • reputational challenges relating to people agenda including embedding values and cultural change activity; • development of brand strategy in line with RBS’s purpose, vision and values; • sustainable growth of business and measures taken to support economic development and how banks can better serve society; • community programmes and employee engagement in charitable partnerships; Serving customers
I am pleased to set out the Directors’ Remuneration Report for 2015. This report details the remuneration policy for the year ahead as well as our pay decisions for 2015 and the reasons behind them. The Committee’s aim is to make sure the remuneration policy supports RBS’ strategy, a key element of which is to deliver our ambition of becoming the number one bank in the UK for customer service, trust and advocacy.
It has been a year of continuing progress. On the one hand, good progress has been made against our strategic targets. We believe the focus on culture and encouraging good behaviours will, in time, make a significant contribution to driving sustainable returns for shareholders. On the other hand, while we continue to make progress in addressing and resolving legacy and conduct issues, these continue to drag on financial results and the
Variable pay at RBS remains restrained in a market context, reflecting both our ownership structure and the transition to a smaller bank, centred in the UK and Ireland. Decisions by the
I know that it is in the public interest to show restraint on remuneration while at the same time there is a need to deliver fair and reasonable pay outcomes for employees. Average annual salary increases are in line with the financial services market.
There is a focus on paying the right wage to employees and our rates of pay exceed the Living Wage Foundation Benchmarks.
The bonus pool has fallen from £421 million in 2014 to £373 million in 2015, a reduction of 11%. In order to ensure there is a balanced distribution, over 90% of this pool will be directed to those below the most senior RBS employees. Where employees do receive a bonus, the average bonus amounts remain relatively modest with 52% of employees receiving £2,000 or less and a further 21% receiving less than £5,000.
One change to the performance measures for long-term incentive awards is a slight amendment to the comparator group for Total
In accordance with UK regulatory requirements, further amendments will be made to the variable pay awarded to individuals identified as Senior Managers under the PRA regime.
Variable pay to Senior Managers for performance years starting on or after 1 January 2016 will be subject to deferral over seven years and the potential clawback period will be extended to ten years.
• Senior leaders have collective performance objectives that target financial strength as well as customer experience improvements through net promoter and trust scores.
This programme is aimed at ensuring stronger and more consistent leadership.
• Building on established processes and ways of working, new professional Standards Frameworks set out the relevant knowledge, skills, attitudes and behaviours expected of RBS employees in their role, to embed good conduct and an appropriate culture.
• RBS is simplifying how employees get paid. In PBB, pay is linked to supporting customers, rather than short-term incentive schemes.
LTI award not bonus, with future looking performance measures linked to the strategic plan.
Remuneration Report with over 99% voting in favour. No changes are being made to the remuneration policy, approved at the 2014 AGM, at this time.
• Being fair is grounded in paying people appropriately for their work and commitment to serve customers well.
• In 2015, malus has been applied to remuneration outcomes as part of the accountability review process.
Notes: (1) Amount for Ross McEwan includes standard benefit funding and relocation benefits. (2) Estimated value of the LTI award due to vest in March 2016. A summary of the performance assessment is set out below and full details can be found on page 73.
The LTI shown above is the award to be granted in March 2016. The notional value at 48% of the grant reflects an estimate of the potential value in light of the stretching performance conditions and risk of forfeiture over the five year vesting period.
Number of shares to vest in March 2016 Estimated value before tax
An extract of the policy, updated to ensure it is relevant for the current year, is set out below. In the event of any conflict, the approved policy (available on rbs.com) takes precedence over the information set out in this section.
To provide fixed pay that reflects the skills and experience required for the role. This will be delivered in shares which must be retained for the long term.
A set level of funding is provided and executive directors can select from a range of benefits including: company car private medical insurance life assurance ill health income protection
The value of benefits paid is disclosed each year in the annual report on remuneration.
Provision of a monthly cash pension allowance based on a percentage of salary. Opportunity to participate in a defined contribution pension scheme.
To support a culture where good performance against a full range of measures will be rewarded. To incentivise the delivery of stretching targets in line with the Strategic
Plan. The selection of performance metrics will be closely aligned with key performance indicators.
The long-term incentive award will be delivered under the RBS 2014 Employee
The maximum level of award is subject to any limit on the ratio of variable to fixed pay as required by regulators. This currently limits variable pay to the level of fixed pay (i.e. base salary, fixed share allowance, benefits and pension). A higher ratio, up to 200% of fixed pay, is possible with shareholder approval. RBS is not intending to seek any such approval at the 2016 AGM.
To ensure executive directors build and continue to hold a significant shareholding to align interests with shareholders.
A period of five years is allowed in which to build up shareholdings to meet the required levels.
• RBS considers both internal and external candidates and assesses the skills and experience required for each role.
Pay is generally set at no more than is required to attract the most suitable candidate for the role.
• A buy-out policy exists to replace awards forfeited or payments foregone. The Committee will seek to minimise buy-outs wherever possible and will seek to ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing. No sign-on awards or other payments will be offered.
• The maximum level of variable pay which may be granted to new executive directors is the same as that applicable to existing executive directors, excluding any buy-out arrangements.
• The Chairman and non-executive directors do not receive variable pay.
• RBS or the executive director is required to give 12 months’
notice to the other party to terminate the executive director’s employment.
• There is discretion for RBS to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.
Governance Code, all directors of the company stand for election or re-election annually by shareholders at the company’s AGM.
Neither of the current executive directors hold a non-executive director role at any other company.
remuneration policy, around 28,000 of our employees are shareholders through our incentive and all-employee share plans and have the ability to express their views through voting on the
The Chairman and nonexecutive directors do not participate in any incentive or performance plan.
Benefits Any benefits offered would be in line with market practice.
The value of the private medical cover provided to the Chairman will be in line with market rates and disclosed in the annual report on remuneration.
Notes: (1) Fixed share allowance will be payable broadly in arrears, currently in two instalments per year, and the shares will be released in equal tranches over a five year period. (2) The LTI that can be awarded in 2016 is limited to the level of fixed remuneration. Before applying the discount factor for long-term deferral, calculated in line with EBA rules, the face value for the LTI is approximately 113% of fixed remuneration. The performance measures and targets are set out on page 75. (3) Also entitled to a flight allowance as part of his relocation arrangements, the value of which will be disclosed in the total remuneration table.
Total remuneration paid to executive directors for 2015 (audited) Ross McEwan Ewen Stevenson £000s £000s
Ross McEwan was granted an LTI award in March 2013 while CEO of UK Retail, prior to becoming Chief Executive in October 2013.
based on RBS-wide measures. The performance conditions ended on 31 December 2015 and the award is due to vest in March 2016.
Notes: (1) The performance measures applicable for UK Retail were based on: Financial targets (weighted 50%) covering risk weighted assets, RWAe, nominal assets, loan:deposit ratio, return on equity, operating profit, cost:income ratio; Customer measures (weighted 10%); People measures (weighted 10%); and Risk measures (weighted 30%). All financial targets were deemed to have been met in full other than the cost:income ratio which was considered partially met at 54% versus a 51% target. The customer, people and risk measures were also ranked as partially met. The Committee also considered recommendations from the BRC in determining the final outcome.
(2) This element follows the performance conditions applicable to the overall RBS-wide measures for the 2013 LTI awards and the assessment is detailed below.
Economic Profit 25% (£3.5 billion) 25% £1 billion (£1.2 billion) 62% 16%
(2) The following six targets were met or exceeded: lending growth to be in line with market share and, for 2015, lending growth >= nominal UK GDP growth; retaining place in the Dow Jones Sustainability Index; leadership index to be within 5% of Global Financial Services (GFS) norm; engagement index to be within 5% of GFS norm; embedding the Group’s values; succession planning in place across the franchises and functions. The two targets that were not met were the cost:income ratio of 55% and customer targets where performance has improved but over the three year period the performance was not considered sufficient.
2014 and 2015 LTI awards to executive directors – current assessment (audited)
Note: (1) The number of shares awarded is based on a multiple of salary, 156% for Ross McEwan and 270% for Ewen Stevenson, in line with the regulatory cap that limits variable pay to the level of fixed pay. The award price of £3.7362 was calculated based on the average share price over five business days prior to the grant date.
Awards granted to executive directors in March 2016 will be subject to four equally weighted performance categories, each able to vest up to 100% of base salary, subject to the maximum award that is possible under the approved policy and the regulatory cap. Details of the performance measures and the
Measure: Economic Profit for the Group defined as profit after tax less preference share charges less tangible net asset value multiplied by the cost of equity.
Weighting Performance target Vesting range 25% TSR between median and upper
Reason: The Safe & Secure Bank measures have a particular focus on risk reduction and the building of a safer, sustainable business.
Target consistent with RBS’ strategic long term CET1 ratio target of 13%
Target consistent with RBS’ strategic long term C:I ratio target of <50%
RBS plans to close to zero by 2020. It is calculated using the gap to #1 leading competitor in each customer segment, weighted by the revenue contribution of each segment.
Philip Hampton stood down from the Board on 31 August 2015. No remuneration payment or payment for loss of office was made in connection with his departure.
Stephen Hester and Bruce Van Saun received shares on 9 March 2015 on the vesting of the LTI award granted in 2012 as set out below. The assessment of RBS-wide performance measures is detailed on page 85 of the 2014 Annual Report and Accounts.
Notes: (1) The Committee also considered recommendations from the BRC and concluded it would be appropriate to apply the risk and financial performance underpin in respect of the above awards. This resulted in downward discretion being applied to reduce the final vesting outcome from 61.5% to 55.25%. (2) The maximum number of shares is calculated in line with the underlying award structure where each of the four performance categories could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 300% of salary. The number has been reduced on a pro rata basis to reflect time served by Stephen Hester. The interests for Bruce Van Saun’s award were converted to shares in Citizens Financial Group, Inc. as part of the IPO of that business.
(3) Based on a RBS share price of £3.68 and Citizens Financial Group, Inc. share price of $25.50 on the date of vesting.
UURBS, the benefit paid out on 1 April 2015 and there is no further entitlement to benefits from the scheme. The current executive directors do not participate in RBS defined benefit pension arrangements but receive a cash allowance instead. 2015 £000s £000s
While no changes were made to the fee structure during 2015, two additional Board Oversight Committees (BOCs) were established and fees are payable in line with those for the RCR BOC. The CIB BOC was established in March 2015 with a mandate to oversee the implementation of the CIB strategy without placing additional burdens on the existing Committee framework. The GRG BOC was established in May 2015 in order to provide oversight of the work and findings of the expert panel engaged to conduct an independent review of customer files and to provide advice in relation to matters generally related to GRG. The total fees paid are set out below.
Notes: (1) Howard Davies joined the Board on 14 July 2015 and became Chairman with effect from 1 September 2015. The Benefits column includes private medical cover. (2) Philip Hampton stepped down from the Board on 31 August 2015. The Benefits column includes private medical cover. (3) In line with market practice, non-executive directors are reimbursed expenses incurred in connection with their attendance at Board meetings. To the extent that HMRC
Gillespie was the RBS nominated director of Citizens Financial Group, Inc. (CFG) until 3 November 2015 for which he received fees, delivered in cash and in restricted stock units in CFG. The value shown has been converted using an average exchange rate during 2015 of $1.528:£1.
The target shareholding requirement is to hold shares to the value of 250% of salary for the Chief Executive and 125% of salary for the
Chief Financial Officer and members of the Executive Committee, excluding any unvested share awards in the calculation. A period of five years is allowed in which to build up shareholdings to meet the required levels. Shareholding requirements will be considered when relevant individuals request permission to sell shares and the Committee receives annual updates on progress towards meeting these requirements.
Share interests held by executive directors Shareholding requirements for executive directors
Notes: (1) Ross McEwan holds 159,393 shares from his 2015 fixed share allowance that are included in the total shares beneficially owned but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period. (2) Value of shares held is based on the share price on 31 December 2015, which was £3.02. During the year ended 31 December 2015, the share price ranged from £2.83 to
No other director had an interest in the company's ordinary shares during the year or held a non-beneficial interest in the shares of the company at 31 December 2015, at 1 January 2015 or date of appointment if later. The interests shown above include connected persons of the directors. As at 25 February 2016, there were no changes to the directors' interests in shares shown in the table above.
Notes: (1) Relates to an award made to Ross McEwan on joining RBS as CEO UK Retail in September 2012 to replace awards forfeited on leaving Commonwealth Bank of Australia. (2) Award granted to Ewen Stevenson on appointment in May 2014 to replace awards forfeited on leaving Credit Suisse.
The graph below shows the performance of RBS over the past seven years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The
Chief Executive pay over same period 2009 2010 2011 2012 2013 (1) 2014 2015
Annual bonus against maximum opportunity 0% 85% 0% 0% 0% n/a n/a
Note: (1) 2013 remuneration includes Stephen Hester (SH) as CEO for the period to 30 September and Ross McEwan (RM) for the period from 1 October to 31 December 2013.
The table below shows the percentage change in remuneration for the Chief Executive between 2014 and 2015 compared with the percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary, benefits and annual bonus. Salary Benefits Annual Bonus 2014 to 2015 change 2014 to 2015 change 2014 to 2015 change
Distributions to holders of preference shares and paid-in equity (3) 385 699 (45%)
- Irrecoverable VAT and other indirect taxes incurred by RBS (4) 691 665 3.9%
Notes: (1) Numbers exclude discontinued operations, principally CFG. (2) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. (3) Includes initial payment relating to the initial dividend on the Dividend Access Share in 2014. (4) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE
All members of the Committee are independent non-executive directors. The Committee held nine scheduled meetings in 2015 and a further two ad hoc meetings.
Board in respect of the remuneration arrangements of the executive directors; • approving remuneration arrangements for members and formal attendees of the Executive Committee and employees with total annual compensation which exceeds £1 million; and
Set out below is a summary of other key activities considered by the Committee.
• 2015 preliminary pay elements including bonus pool, deferral and LTI awards.
Committee’s remuneration advisers on 14 September 2010 following a review of potential advisers, and the appointment was reconfirmed by the Committee in July 2015 after an annual review of the quality of the advice received and fees charged.
PwC also provide professional services in the ordinary course of business including assurance, advisory, tax and legal advice to
in 2015, the Committee took account at meetings of the views of the Chairman; Chief Executive; Chief Financial Officer; Chief HR
The tables below set out the voting by shareholders on the resolution to approve the Annual Report on Remuneration at the
Annual Report on Remuneration – 2015 AGM For Against Total votes cast Withheld
An extensive consultation is undertaken every year with major shareholders including UKFI and other stakeholders on our remuneration approach. The process takes place in sufficient time for shareholders’ views to be considered prior to the
Discussions during the latest consultation covered a range of topics including strategic direction, employee engagement, IT
RBS did not become too disconnected from industry norms and that a commercial approach was required.
Committee noted that, while RBS operates under a slightly different pay construct to some competitors, this may help to ensure employees that do join want to be part of RBS in the longer term.
In addition to the annual consultation process, two shareholder events took place in 2015 outside of the AGM to allow directors to engage with private shareholders, regardless of the size of their shareholding.
Notes: (1) Remuneration earned in 2015 for eight members of the Executive Committee. Full year earnings have been reported including those individuals promoted to the Executive
Committee part way through 2015. (2) Disclosure includes prior year long-term incentive awards which vested during 2015. The amounts shown reflect the value of vested awards using the share price on the day the awards vested.
For the 2015 performance year, RBS has operated a multi-step process which is a control function led assessment to determine performance and therefore the appropriate bonus pool by franchise and function.
The process considers a balanced scorecard of performance assessments at the level of each franchise or support function.
BRC will then review any material risk and conduct events and if appropriate an underpin may be applied to the individual business and function bonus pools and where appropriate to the overall RBS bonus pool. BRC may recommend reduction of a bonus pool if it considers that risk and conduct performance is unacceptable or that the impact of poor risk management has yet to be fully reflected in the respective inputs.
Malus can be applied to reduce (if appropriate to zero) the amount of any variable pay awards prior to payment taking place.
Clawback provisions can also be applied to recover awards that have vested. Any variable pay awarded to Material Risk Takers from 1 January 2015 onwards is subject to clawback for seven years from the date of grant. For the 2016 performance year this period can be extended to ten years for executive directors and other Senior Managers under the PRA Senior Manager regime.
Malus and clawback can be applied to current and former employees.
• in the case of malus only, circumstances where there has been a material downturn in financial performance.
During 2015 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including: reduction and forfeiture of unvested awards through malus; reduction of current year variable pay awards; dismissal with forfeiture of unvested awards; and suspension of awards pending further investigation.
As in previous years, we have received the required regulatory confirmation in order to conclude our year end remuneration process.
The remuneration policy supports the business strategy and is designed to promote the long-term success of RBS. It aims to reward employees for delivering good performance against targets provided this is achieved in a manner consistent with our values and within acceptable risk parameters. The remuneration policy applies the same principles to all employees including Material Risk Takers
(MRTs) subject to UK regulatory requirements (1). The current key elements underpinning the remuneration policy are set out below.
The Qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; staff, individually or as part of a Committee, with authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The Quantitative criteria are: individuals earning €500,000 or more in the previous year; individuals in the top 0.3% of earners in the previous year; individuals who earned more than the lowest paid identified staff per the Qualitative criteria, subject to specific exceptions in the criteria.
Article 450 of the EU Capital Requirements Regulation in relation to 707 employees who have been identified as MRTs.
No severance payments were made outside of contractual payments or standard policy entitlements related to termination of employment such as pay in lieu of notice and benefits.
In the relevant tables above, assumptions have been made for the notional value of LTI (verified by external advisors) and forfeitures through resignation for deferred awards. In addition, the share price relevant to the date of the event or valuation point has been used.
RBS has also implemented the recommendations arising from the Walker Review and complied in all material respects with the
Certification process which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control frameworks and certify that their business or function is compliant with the requirements of
and reports on internal controls arising from them – are reviewed by the Board and meet the requirements of the Financial
Committee. Internal Audit undertakes independent assurance activities and provides reports to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving the bank’s objectives. In addition, the
Over recent years, RBS has made progress strengthening the control environment. However, more needs to be done. The bank is continuing on its journey of improvement, building on the established control environment, strengthening and remediating where appropriate. Areas of particular focus during 2015 included the work carried out to continue embedding the three lines of defence model (see page 136 for further details). In addition, preexisting risk appetite has been strengthened with enhanced statements introduced across risk types and business disciplines to support a robust and holistic control approach. In parallel with this, progress has been made in establishing a consistent end-toend risk and control assessment process across RBS. Allied with continuing efforts aimed at developing, enhancing and embedding a strong and dynamic risk culture across each of the franchises and functions, these programmes and other initiatives will continue in 2016.
The remediation of known control issues remained an important focus of the Group Audit Committee and the Board Risk
Board Risk Committee. The Group Audit Committee has received confirmation that management has taken, or is taking, action to remedy significant failings or weaknesses identified through
Board Risk Committee will continue to focus on such remediation activity, particularly in view of the transformation agenda.
Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK
concluded that RBS’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
As a foreign issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the “NYSE”),
RBS is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the applicable NYSE Standards.
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) the Chairman of the Board is also the Chairman of the Group Nominations Committee, which is permitted under the Code (since the Chairman was considered independent on appointment); (ii) although the members of the
Group Performance and Remuneration Committee and of its compensation committee advisers in accordance with the independence tests prescribed by the NYSE Standards; and (iii)
Group Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Chief Executive. RBS’s Group Audit, Board Risk, Sustainable
Details of the principal subsidiary undertakings of the company are shown in Note 7 on page 361 and 362. A full list of subsidiary undertakings of the company is shown in Note 15 on pages 365
At 31 December 2015, HMT’s holding in the company’s ordinary shares was 72.6%.
Commercial & Private Banking (CPB). To support this, a number of initiatives have been announced which include but are not limited to: • the restructuring of Corporate & Institutional Banking (CIB)
• the run down of RBS Capital Resolution (RCR), one year ahead of schedule.
Business structure RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To support this and reflect the progress made on the initiatives above the previously reported operating segments will now realign as follows: Personal & Business Banking (PBB) comprises two reportable segments: • UK PBB serves individuals and mass affluent customers in the UK together with small businesses (generally up to £2 million turnover). UK PBB includes Ulster Bank customers in Northern Ireland.
Commercial & Private Banking (CPB) comprises three reportable segments: • Commercial Banking serves commercial and corporate customers in the UK and Western Europe.
• RBS International (RBSI) serves retail, commercial, corporate and financial institution customers in Jersey,
CIB serves UK and Western European corporate customers, and global financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.
The loss attributable to the ordinary shareholders of the company for the year ended 31 December 2015 amounted to £1,979 million compared with a loss of £3,470 million for the year ended 31 December 2014, as set out in the consolidated income statement on page 260.
The company did not pay a dividend on ordinary shares in 2014
January 2016 until 1 January 2021. The uplift rate on any unpaid balance is 10% per annum thereafter. RBS intends to pay a final dividend on the Dividend Access Share (DAS) during the first half of 2016 subject to final Board and PRA approval, further normalising the capital structure of the bank and removing an obstacle toward the resumption of capital distributions.
December 2015, including details of each segment, and RBS's financial position as at that date is contained in the Business review on pages 101 to 127.
In 2007, RFS Holdings B.V., which was jointly owned by RBS, the Dutch State (successor to Fortis) and Santander completed the acquisition of ABN AMRO Holding N.V.
The new bank will be called Williams & Glyn, the brand RBS
We recognise that building an engaged, healthy and inclusive workforce is crucial if we are to achieve our ambition. We continue to ask people across the Bank to share their thoughts on what it’s like to work at RBS via our annual employee survey
In the UK we are a living wage employer meaning that we adhere to Living Wage Benchmarks (both national and London)
for all employees. All third party contractors who regularly work in our buildings will also be in scope by 2017 at the latest.
In 2015, we announced the removal of incentive schemes for our customer facing employees in Personal & Business Banking.
We are committed to professionalising all our people. We offer a wide range of learning which can be mandatory, role specific or related to personal development.
Williams & Glyn and Ulster Bank) would complete this learning in
In 2015, our wellbeing programme focused on three main areas; Mental Health, Physical Health and Resilience. Activities include the continued promotion of Lifematters (RBS’s Employee
We recognise employee representatives such as trade unions and work councils in a number of businesses and countries.
During 2015 we continued our roll out of unconscious bias learning for all employees. We’ve introduced a gender goal to have at least 30% of women in the bank’s top three leadership levels by 2020. Further, we aim to have 50/50 balance at all levels by 2030. This is supported by the launch of a female development proposition. An increased focus on disability has led to the development of a comprehensive plan to support our colleagues and customers with additional needs and will help
RBS has been recognised for its work on Equality, Diversity and
Sustainable Banking Committee’s role is to support the Board in overseeing, supporting and challenging actions being taken by management to run the bank as a sustainable business.
For more information on our approach and progress please read the RBS Sustainability Report, available on rbs.com/sustainable.
Disclosures relating to greenhouse gas emissions are included in the Strategic report on page 35.
RBS’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review.
The risk factors which could materially affect RBS’s future results are set out on pages 390 to 414. RBS’s regulatory capital resources and significant developments in 2015 and anticipated future developments are detailed on pages 145 to 160. The liquidity and funding section on pages 159 to 170 describes
RBS’s funding and liquidity profile, including changes in key metrics, the build up of liquidity reserves and the outlook for
Under the revised UK Corporate Governance Code the directors are required to confirm that they have carried out a robust assessment of the Bank’s principal risks and make a longer term viability statement. This is set out in the Strategic report on page
and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
The EDTF established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012. All EDTF recommendations are reflected in the 2015
In addition, the company issued 69 million shares in connection with employee share schemes during 2015.
At the Annual General Meeting in 2015, shareholders authorised the company to make market purchases of up to 643,628,671 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authority at the
The rights and obligations attached to the company’s ordinary shares and preference shares are set out in the company’s
Share Trust hold shares on behalf of RBS’s employee share plans. The voting rights are exercisable by the Trustees, however, in accordance with investor protection guidelines, the
The names and brief biographical details of the current directors are shown on pages 37 to 40.
Howard Davies was appointed to the Board on 14 July 2015 and assumed the role of Chairman on 1 September 2015. Mike
December 2015 are shown on page 77. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2015 to 25 February
“Companies Act”), Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Executive Committee, PRA/FCA Approved Persons and certain directors and/or officers of RBS subsidiaries.
Other than the matter disclosed on page 355, 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.
At the Annual General Meeting in 2015, shareholders gave authority under Part 14 of the Companies Act, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2015, RBS made no political donations, nor incurred any political expenditure in the
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 253 to 259.
Ulster Bank RoI. UK PBB serves individuals and mass affluent customers in the UK together with small businesses (generally up to £2 million turnover). UK PBB includes Ulster Bank customers in Northern Ireland. Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
RBSI serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar.
The following items were previously reported separately after operating profit, they are now being reported within operating profit.
• Own credit adjustments; • Gain/(loss) on redemption of own debt; • Write-down of goodwill; • Strategic disposals; and • RFS Holdings minority interest (RFS MI).
Allocation of central balance sheet items RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. However, previously central balance sheet items have not been allocated.
The assets (and risk-weighted assets) held centrally, mainly relating to Treasury, are now allocated to the business using appropriate drivers.
• In preparation for the separation of Williams & Glyn, that element of treasury allocations previously charged to UK
• The impact of changes to the notional equity allocation is detailed on following page.
(Ulster Bank RoI - 15%; RBSI - 10%). RBS’s forward planning tax rate is 26%.
August 2015, RBS’s interest in Citizens fell to 20.9% and consequently it is treated as an associate held for sale thereafter.
On 30 October 2015, RBS sold all of its remaining shareholding in Citizens. Citizens is no longer treated as a reportable segment.
Notes: (1) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals. Tax on these items was a £15 million charge in 2015 (2014 - £29 million credit; 2013 - £28 million credit) (2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill. Tax on these items was £563 million in 2015 (2014 - £551 million; 2013 - £1,174 million) (3) 2013 adjusted earnings per share excludes the participation rights of the dividend access share (DAS). (4) Tangible equity is equity attributable to ordinary shareholders less intangible assets.
Analysis of results Net interest income 2015 2014 2013 £m £m £m
Cost of interest-bearing liabilities of the banking business (1.11) (1.24) (1.47)
2015 compared with 2014 Net interest income declined by £491 million, or 5% to £8,767 million compared with £9,258 million, driven principally by a 46%
Net interest margin (NIM) declined by 1 basis point to 2.12%
UK PBB net interest income fell by £69 million, 2% to £4,152 million, as competitive front book margin pressures impacted. In addition, customers continued to roll off standard variable rate products (17% of overall mortgage book in 2015) and onto lower margin fixed rate products. As a result NIM fell by 14 basis points to 3.18% compared with 3.32% in 2014.
Ulster Bank RoI net interest income fell by £102 million, 22% to £365 million compared with £467 million primarily due to the weakening of the euro relative to sterling and reduced income on free funds. Ulster Bank RoI NIM continues to be impacted by the low yielding tracker mortgage book.
Non-interest income totalled £4,156 million, a decline of £1,736 million, or 29%, compared with £5,892 million in 2014, primarily driven by a reduction of £945 million in Capital Resolution as the business accelerated the planned shrinkage of the balance sheet, including disposal losses from the sale of several portfolios in the year. A movement of £530 million from volatile items under
IFRS was recorded, which represented a gain of £29 million in 2015 compared with a charge of £501 million in 2014.
Net fees and commissions fell by £606 million, or 17%, to £2,933 million, compared with £3,539 million, principally from the reduced scale of activity in CIB, run down of Capital Resolution and lower card interchange fees in UK PBB, down £59 million.
Total disposal losses in Capital Resolution were £367 million, including £38 million of strategic disposal losses. Total strategic disposal losses were £157 million, compared with a gain of £191 million in 2014, principally relating to the international private banking business.
Other operating income reduced by £435 million, or 45%, to £528 million compared with £963 million, principally due to the reduced scale of CIB together with the run down of Capital Resolution and the impact of disposal losses. A loss of £67 million on the disposal of available-for-sale securities in Treasury was recorded compared with a gain of £149 million in 2014.
Non-interest income declined by £1,828 million or 24% to £5,892 million including lower gains from the redemption of own debt of £20 million compared with £175 million in 2013.
The decrease in other operating income reflected a fall of £510 million in gains from the sale of securities and a loss from RFS MI
Total operating expenses of £16,353 million included significantly higher litigation and conduct costs of £3,568 million (2014 - £2,194 million), restructuring costs of £2,931 million (2014 - £1,154 million) and a goodwill impairment of £498 million attributed to Private Banking (2014 - £130 million in Capital
Adjusted operating expenses fell by £1,025 million, 10% to £9,356 million compared with £10,381 million. Excluding expenses associated with Williams & Glyn and the benefit of lower intangible asset write offs, adjusted operating expenses reduced by £983 million, exceeding the revised 2015 cost saving target of over £900 million.
Restructuring costs totalled £2,931 million compared with £1,154 million in 2014, as the transformation of the bank accelerated, particularly re-engineering the CIB business. This is in line with prior guidance for total restructuring costs of c.£5 billion from 2015 to 2019. CIB restructuring costs totalled £524 million, including software and property write downs. Capital Resolution restructuring costs were much higher totalling £1,307 million as the business continues its planned rundown. Williams & Glyn separation costs totalled £630 million. Private Banking also recorded a £91 million asset write down related to software.
to £3,568 million, compared with £2,194 million in 2014. This includes: additional provisions for mortgage backed securities litigation in the US of £2,100 million; provisions for foreign exchange investigations in the US of £334 million; customer redress provisions primarily relating to PPI of £600 million; packaged accounts provisions of £157 million; and other conduct provisions of £377 million.
Operating expenses decreased by £3,607 million or 21% to £13,859 million, including a write down of goodwill of £130 million in 2014 compared with £1,059 million in 2013.
Payment Protection Insurance redress (£650 million) in PBB, potential costs following investigations into the foreign exchange market (£720 million) in CIB, Interest Rate Hedging Product redress (£185 million) in Commercial Banking and CIB, the IT
Although releases were at lower levels than in 2014, credit quality remained stable, reflecting supportive economic conditions in UK
Capital Resolution recorded net releases of £725 million, compared with £1,307 million in 2014, with disposal activity continuing. Ulster Bank RoI recorded net impairment releases of £141 million, down from £306 million in 2014, as economic conditions in Ireland continue to improve. UK PBB recorded a release of £7 million compared with a loss of £154 million, due to lower debt flows and increased releases and recoveries. Net impairment releases were also reported in CIB, although at more modest levels.
Securities losses rose to £126 million from £12 million in 2014, principally related to a small number of single name exposures, mainly an exposure in the RBS N.V. liquidity portfolio.
Net loan impairment releases of £1,352 million were recorded in 2014 compared with a net impairment loss of £8,120 million in 2013 which included £4,490 million provisions related to the creation of RCR.
Releases were recorded principally in Capital Resolution (£1,307 million), which benefited from favourable economic and market conditions, and in Ulster Bank RoI (£306 million) supported by rising Irish property values and proactive debt management.
Excluding these releases, the underlying charge was low at just over £261 million, primarily in UK PBB (£154 million).
CIB, partially offset by an increase in the carrying value of the deferred tax asset in respect of Irish tax losses, the benefit of previously unrecognised Irish tax losses being offset against profits arising in Ireland during the year and the impact of certain conduct charges that do not qualify for tax relief.
UK Personal & Business Banking (UK PBB) made signficant positive changes to the customer proposition in 2015, whilst becoming simpler and fair. We have seen a number of key customer metrics improve. Results now include Ulster Bank
Northern Ireland and exclude Williams & Glyn, which is reported as a separate segment.
• Launched online diary where customers can book an appointment with an advisor from the comfort of their own home.
• We launched testing of small value overdrafts to c.1 million customers, specifically to help customers avoid unexpected fees.
approved cards, becoming the first UK bank product to achieve RNIB accreditation.
Helping UK homebuyers: • In 2015 the business made a concerted investment in its mortgage business, increasing mortgage advisors by 21%
from 803 to 974 (excluding Ulster Bank NI). This contributed to a strong year for mortgage lending with net balances increasing by £9.3 billion to £104.8 billion.
• Time to open a new current account reduced by 50%, allowing frontline staff more time to have great customer conversations.
Investing in our people: • We continue on our journey to enhance the capability of our people. During the year, we have made significant further investment in training our leaders, in rolling out skills-based pay in our telephony centres and in introducing the new
compared with the prior year as interchange fees on credit and debit cards declined £59 million, combined with reduced advice income.
2015 was a strong year for the mortgage business with applications increasing 48% from £21.7 billion to £32.0 billion as gross new lending rose 29% to £23 billion. Market share of new mortgages was 10.5% versus a stock share of 8.2%. This led to net mortgage balances growing by £9.3 billion or 10% to £104.8 billion.
Operating expenses decreased by £239 million or 5%, reflecting a reduction in other costs supported by a 7% reduction in headcount and lower Financial Services Compensation Scheme
(FSCS) accruals. Litigation and conduct costs included additional provisions for Payment Protection Insurance redress (£650 million) and other conduct provisions in respect of legacy investment products and packaged account sales.
The net impairment charge was down by 77% to £154 million driven by a further decrease in new default charges together with releases of provisions and recoveries on previously written off debt. Mortgage balances increased by £3.8 billion or 4%, to £96 billion driven by strong performance supported by increased advisor capacity. RWAs declined 18% to £36.6 billion with improved credit quality and lower unsecured balances.
Loan impairment (release)/charge as a % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Performance ratios Return on equity (4) 10.6% 18.6% (24.5%) 10.6% 18.6% (24.5%)
Total loans and advances to customers (gross) 25.3 26.4 32.1 18.6 20.5 26.7
Total risk elements in lending 4.7 5.6 9.2 3.5 4.4 7.6
Ulster Bank RoI has continued to strengthen its customer offering and service capability in 2015 as it made it simpler for customers to do business. The year has also seen stronger new lending volumes, buoyed by the improving economic conditions: • Further investment in the mortgage business through the launch of the "mortgage you can live with" campaign which offers a range of new product options to both new and existing customers combined with a re-entry to the mortgage broker market and the introduction of a team of mobile mortgage managers. Gross new mortgage lending increased 53% to £0.5 billion in 2015.
• Delivered new propositions for commercial customer lending across several sectors, including food and drink, agriculture, asset finance and international business. Gross new lending to commercial customers increased by 65% to £1.1 billion from 2014.
A significant weakening of the euro relative to sterling during 2015 had a material impact on Ulster Bank RoI’s financial comparison with 2014 and the income trend in particular.
Ulster Bank RoI recorded an operating profit of £262 million compared with an operating profit of £489 million in 2014, the decline was primarily due to considerably lower net impairment releases in 2015. Adjusted operating profit was £264 million, a decrease of £219 million from 2014. Return on equity was 10.6%, down from 18.6% in 2014.
Operating expenses increased by 2% from £421 million to £429 million, reflecting an increase in pension servicing costs, totalling £22 million, largely offset by the benefit of a weakening euro.
Net impairment releases reduced by £165 million to £141 million, and although at lower levels, continued to reflect the improving economic conditions and the benefits of proactive debt management.
Gross new mortgage lending increased 53% to £0.5 billion whilst gross new lending to commercial customers increased 65% to £1.1 billion. Strong new lending volumes across the business in 2015 were offset by high levels of customer repayments and the sale of a £0.3 billion buy-to-let mortgage portfolio. Net loans and advances to customers decreased £1.4 billion to £16.7 billion, £1 billion of which related to exchange rate movements. The low yielding tracker mortgage portfolio balances reduced from £10.6 billion in 2014 to £9.2 billion, but continues to make up a significant part of the overall mortgage book.
RWAs reduced 11% from £21.8 billion to £19.4 billion due to improved credit metrics and the impact of a weakening euro while
Ulster Bank RoI recorded an operating profit of £489 million in 2014 compared with a loss of £1,103 million in 2013. The turnaround was driven by £306 million net impairment releases compared with impairment losses of £1,525 million in 2013.
Adjusted operating profit was £483 million compared with a loss of £1,254 million in 2013.
Net interest income decreased by £11 million to £467 million, driven by a weakening of the euro against sterling. Excluding the impact of the euro exchange rate movement, net interest income increased by £13 million due to a significant reduction in the cost of deposits and a benefit from the recognition of income on certain previously nonperforming assets, partly offset by the adverse impact on the tracker mortgage book of lower European
Central Bank refinancing interest rates. Net interest margin increased 42 basis points to 1.92%. Other non-interest income reduced by £54 million primarily due to the non recurrence of significant hedging gains on the mortgage portfolio in 2013.
These benefits were partly offset by higher regulatory charges and levies including a new bank levy introduced in the Republic of Ireland, of £14 million, and the impact of a realignment of costs following the creation of RCR, £35 million.
The loan:deposit ratio decreased from 144% to 124% during 2014 mainly due to a 17% reduction in net loan balances to £18.1 billion reflecting the transfer of assets to RCR and continued customer repayments partly offset by growth in new lending.
- Private sector services (education, health, etc) 6.7 6.8 8.4 - Wholesale and retail trade repairs 7.5 6.8 6.8
Notes: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11% (previously 13%) of the monthly average of segmental RWAes, assuming 28% tax rate; previously 25%. (2) Excluding restructuring costs and litigation and conduct costs. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (4) RWAs in 2013 are on a Basel 2.5 basis.
Continued enhancements within the business contributed to commercial lending growth in 2015.
• Supported AB Inbev's acquisition of SABMiller, the fifth largest corporate takeover ever and largest in the UK.
• Our Commercial Relationship Bankers are undertaking intensive training and development, accredited by the
• Proactive capital management with £2.2 billion of lower performing assets run-off in 2015.
Commercial Banking recorded volume growth across segments, resulting in net loans and advances to customers increasing by £6.4 billion to £91.3 billion. This included £5.0 billion from the transferred businesses, offset by strategic run-off and sale of selected assets totalling £2.2 billion. Excluding the transferred businesses and strategic run-off and disposals, net new lending was £3.6 billion.
Customer deposits totalled £88.9 billion, an increase of £4.0 billion reflecting high levels of liquidity in the market.
Net interest income increased by £67 million or 4%, largely reflecting re-pricing activity on deposits partly offset by the impact of reduced asset margins, a result of the net transfer in of lower margin legacy loans (after the cessation of Non-Core). Noninterest income was down £42 million or 3% as lower CIB
revenue share income, restructuring fees and the transfer out of commercial cards income to UK PBB in August 2014 were only partially offset by higher fair value gains and operating lease income, along with lower close out costs of interest rate products associated with impaired loans.
Net impairment losses declined £516 million to £85 million, with fewer individual cases across the portfolio, reduced collectively assessed provisions and higher latent provision releases, reflecting improved credit conditions.
increase in net loans and advances to customers, as reductions in the commercial real estate and restructuring portfolio were offset by growth across other businesses and reduced customer deposits, down 5%, reflecting the rebalancing of the bank’s liquidity position.
RWAs were £4.5 billion lower at £63.2 billion, primarily reflecting net transfers to RCR, effective 1 January 2014, and improving credit quality on the back of UK economic recovery, offset by loan growth.
• A series of customer initiatives to ensure client connectivity has resulted in a 29% increased use of digital channels, increased volumes of payments and transfers with a rise in the client satisfaction score.
Banking and Commercial Banking has driven increased client introductions and on-boarding.
• Operational enhancements delivered in the credit application process combined with improved customer experience through improved fraud detection functionality.
Adjusted operating expenses were £518 million, up 3%, with reductions in the direct cost base offset by a higher UK bank levy charge. Operating expenses totalled £1,101 million, an increase of £506 million, driven by a goodwill impairment charge of £498 million, and considerably higher restructuring costs of £73 million which included a share of an asset write down related to software of £91 million, and lower litigation and conduct costs of £12 million.
Net interest income growth of £40 million or 10% was driven by increased deposit margins with non-interest income down £5 million resulting in an annual increase in total income of £35 million or 5%.
Operating expenses declined by £78 million or 12% with restructuring and litigation and conduct costs driving the reduction. Adjusted operating expenses declined £45 million or 8% reflecting lower technology costs and one-off benefits from the exit of a number of London properties.
Net impairment releases of £5 million, compared with a net impairment loss of £7 million in the prior year reflected improved credit conditions and higher UK property prices.
The loan:deposit ratio was stable with assets, customer deposits and assets under management all flat.
is reported as a separate segment for the first time. RBSI
During 2015 RBSI has enhanced its customer offering: • Invested in the multi-currency online banking platform, a unique system to RBSI, to ensure a transformative service to further simplify customer experience.
• Continued its support for Gibraltar's largest private sector turnover company through a syndicated working capital facility.
There were no impairments in 2015 compared with modest impairment releases of £7 million in the prior year.
Net loans and advances to customers increased by £0.1 billion to £7.3 billion. Customer deposit balances grew £0.5 billion to £21.3 billion. The business is a liability heavy business with a loan:deposit ratio of 35%.
Non-interest income was up £2 million as higher lending and guarantee fees were offset by lower CIB revenue share income, impacted by reducing foreign exchange margins.
Operating expenses rose £7 million or 5%, primarily as a result of
UK bank levy charges. Litigation and conduct costs were down £9 million, primarily relating to interest rate swap redress, but partially offset by £2 million higher restructuring costs.
Net impairment losses reduced £54 million with net impairment releases of £7 million in 2014. 2013 included a charge for one large individual case.
The current CIB business is undergoing a multi-year transformation implementing a simpler and sustainable operating model as the business re-shapes and downsizes. The business has been shaped around three product lines: Rates, Currencies and Financing with core focus on UK and Western European corporates and global financial institutions.
CIB reported an operating loss of £837 million in 2015, compared with an operating loss of £710 million in 2014. This included restructuring costs of £524 million and litigation and conduct costs of £378 million. The adjusted operating loss was £55 million, compared with a profit of £233 million in 2014. The reduction was driven by lower income partially offset by the continued reduction in adjusted expenses, down £249 million, or 15%, to £1,467 million as the business continues to take costs out and move towards a more sustainable cost base.
Total income declined by £404 million, or 21%, to £1,527 million in 2015. This includes £120 million relating to own credit adjustments and £98 million relating to the transfer of portfolio businesses to Commercial Banking. Excluding this, CIB income was £1,309 million, in line with previous guidance.
• Rates income declined, reflecting the reduced scale and risk appetite of the business.
• Currencies incurred losses when the Swiss Central Bank unexpectedly removed the Swiss Franc's peg to the Euro.
CIB recorded an operating loss of £710 million compared with an operating loss of £368 million in 2013. This included litigation and conduct costs of £832 million compared with £613 million a year before. Adjusted operating profit was £233 million compared with £300 million in 2013. This movement was primarily driven by lower income, partially offset by a reduction in expenses.
• Currencies income declined in a highly competitive market as both market volatility and customer activity remained subdued for much of the year. Some volatility returned in the fourth quarter of 2014, boosting income in the Options business in particular.
Net impairment releases totalled £9 million compared with £37 million in 2013.
Risk-weighted assets were £41.9 billion as at 31 December 2014, flat compared with 31 December 2013 despite the introduction of
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) RWAs in 2013 are on a Basel 2.5 basis. (3) Asia-Pacific portfolio. (4) European, the Middle East and Africa portfolio.
Capital Resolution, and RBS Capital Resolution (RCR), with total funded assets of £116 billion and RWAs of £95 billion at the start
business. Funded assets on 1 January 2015 were £101 billion, consisting of three regional portfolios (Americas, EMEA and
2015 was a year of strong progress across Capital Resolution: CIB Capital Resolution accelerated the execution of its strategy: • Reduced RWAs by £32.6 billion to £40.5 billion, achieving the £25 billion target; • North American loan portfolios sales drove £6.8 billion of
American exit portfolio; • APAC loan portfolio reduction of £3.5 billion RWA to £0.5bn
• A partnership was formed with BNP Paribas to offer existing international customers an alternative to Global Transaction
Services (GTS). Uncommitted GTS trade lending and new business has been terminated.
• The net effect of the operating profit of £465 million and
RWA equivalent reduction of £17.8 billion was CET1 accretion of £2.2 billion in 2015 and £8.3 billion since the perimeter was agreed.
Following the businesses reorganisation in Q4 2015, RCR is included in the Capital Resolution reportable segment, and the balances below are included in the Capital Resolution disclosures on pages 117 to 119.
The following disclosures illustrate the progress made since the creation of RCR in relation to the targeted 85% run down of funded assets, achieving a reduction of 88% to £4.6 billion. As RCR has now achieved its targeted rundown and has been closed these are the final standalone RCR disclosures.
Notes: (1) Asset disposals contributed £757 million (2014 - £904 million) to RCR’s operating profit: impairment provision releases of £770 million (2014 - £874 million); £63 million loss
Notes: (1) Includes disposal groups. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (3) RWA equivalent (RWAe) is an internal metric that measures the equity capital employed in segments. RWAe converts both performing and non-performing exposures into a consistent capital measure, being the sum of the regulatory RWAs and the regulatory capital deductions, the latter converted to RWAe by applying a multiplier. RBS applies a CET1 ratio of 10% for RCR; this results in an end point CRR RWAe conversion multiplier of 10.
Funded assets 1 January 31 December 2014 Repayments Disposals (1) Impairments Other 2015 £bn £bn £bn £bn £bn £bn
RWA equivalent (4) 1 January Risk 31 December 2014 Repayment Disposals (1) parameters (2) Impairments Other (3) 2015 £bn £bn £bn £bn £bn £bn £bn
Notes: (1) Does not reflect the cost base, funding, liquidity and capital profile of a standalone bank. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (3) RWAs in 2013 are on a Basel 2.5 basis.
Key points As part of its commitments to the European Commission (EC),
UK. The bank has c.240,000 commercial customers served, through either the retail bank or a national network of relationship managers.
W&G is in the process of being established as a fully licensed, independent, full-service retail and commercial bank, with its own operating infrastructure and platform. RBS continues to work towards the separation of W&G and to meeting its EC
This view of W&G, as it stands as a reportable segment within the RBS Group, reflects the contribution made by W&G’s ongoing business to RBS, as distinct to the financial effects of any disposal transaction itself. These figures do not reflect the cost base, funding, liquidity and capital profile of W&G as a standalone bank and does not include certain customer portfolios which are currently reported through other reportable segments within RBS.
Operating expenses totalled £387 million, an increase of £57 million, including a restructuring charge of £28 million in
Commercial Banking. Adjusted expenses increased 9% to £359 million as the business continued to stand up the central functions and operations areas resulting in an increase in staff costs of 7% or £13 million.
Operating profit was £467 million, compared with a profit of £469 million in 2013. The reduction is primarily attributable to an increase in staff costs and lower non-interest income partially offset by an increase in net interest income and a reduction in net impairment charges.
Total income was £852 million, compared with £856 million in 2013. Net interest income increased £7 million to £664 million primarily due to improved margins on new lending volumes and product mix within Commercial Banking. Net interest margin was 2.93%, 7 basis points higher than 2013. Non-interest income fell by 6% due to lower credit card and interchange fees within the
Operating expenses totalled £330 million, an increase of £23 million, or 7% primarily due to a 12%, or £21 million, increase in staff costs as a result of headcount growth as the business stands up functions and operations ahead of divestment.
RWAs fell £1.6 billion to £10.1 billion due to a regulatory change in the calculation of RWAs related to Commercial lending and a reduction in Retail mortgages RWAs linked to improved loss given default rates.
Central items not allocated represented a charge of £903 million compared with a charge of £931 million in 2014. This includes restructuring costs relating to Williams & Glyn of £630 million, a write-off of intangible assets of £59 million, a loss of £263 million on the repurchase of certain US dollar, Sterling and Euro senior debt securities and a loss of £67 million on the disposal of available-for-sale securities. These were partially offset by
Treasury funding costs, including volatile items under IFRS, a gain of £169 million. Also included are £56 million of income, £109 million of direct operating expenses and £122 million of indirect operating expenses in relation to the international private banking business. Adjusted operating expenses totalled £231 million, 6% lower than 2014.
Non-Core 2013 was the final reporting period for the Non-Core division. Approximately £12 billion of assets which were managed by Non-Core were returned to the relevant originating segments, with the remaining assets transferring to RCR within Capital Resolution from 1 January 2014.
Loans and advances to banks decreased by £13.1 billion, 30%, to £30.6 billion. Excluding reverse repurchase agreements and stock borrowing (‘reverse repos’), down £8.4 billion, 41%, to £12.3 billion, bank placings declined £4.7 billion, 20%, to £18.3 billion, mainly reflecting Capital Resolution run-down.
The decrease in assets and liabilities of disposal groups, down £78.5 billion to £3.5 billion, and £68.3 billion to £3.0 billion respectively, primarily reflects the disposal of Citizens partially offset by the transfer of the international private banking business to disposal groups.
Excluding repos, customer deposits were down £11.1 billion, 3%, to £343.2 billion, primarily reflecting the reduction of corporate deposits in CIB and run-down in Capital Resolution offset by growth in UK PBB and in Commercial Banking.
Non-controlling interests decreased by £2.2 billion to £0.7 billion reflecting the disposal of Citizens.
Net cash outflows from investing activities of £4,866 million related to the net outflows from purchase of securities of £5,906 million and the purchase of property, plant and equipment of £783 million, offset by inflows of £391 million from disposals, primarily Citizens and net cash inflows from the sale of property, plant and equipment of £1,432 million.
Net cash outflows from financing activities of £940 million relate primarily to the repayment of subordinated liabilities of £3,047 million, redemption of preference shares of £1,214 million and interest paid on subordinated liabilities of £975 million partly offset by the proceeds of non-controlling interests issued of £2,537 million and the issue of Additional Tier 1 capital notes of
The major factors contributing to the net cash outflow from operating activities of £30,631 million were the decrease of £28,745 million in operating assets and liabilities, the net loss before tax of £8,066 million from continuing and discontinued operations, loans and advances written-off net of recoveries of £4,090 million and other provisions utilised of £2,066 million.
These were partially offset by provisions for impairment losses of £8,432 million and other provisions charged net of releases of
Balance Disposal disposal Balance Disposal disposal sheet groups (1) groups sheet groups (2) groups £m £m £m £m £m £m
Net loans and advances to banks 18,361 642 19,003 23,027 1,745 24,772
Loans and advances to banks 30,646 709 31,355 43,735 1,745 45,480
Net loans and advances to customers 306,334 1,639 307,973 334,251 60,550 394,801
Loans and advances to customers 333,892 1,639 335,531 378,238 60,550 438,788
Prepayments, accrued income and other assets 4,242 111 4,353 5,763 1,695 7,458
Repurchase agreements and stock lending 10,266 — 10,266 24,859 1,666 26,525
Repurchase agreements and stock lending 27,112 — 27,112 37,351 706 38,057
For the notes to this table refer to the following page.
Gross loans and advances to customers 313,452 1,659 315,111 351,711 61,090 412,801
Net loans and advances to customers (3) 306,334 1,639 307,973 334,251 60,550 394,801
Gross loans and advances to banks 18,362 642 19,004 23,067 1,745 24,812
Net loans and advances to banks (3) 18,361 642 19,003 23,027 1,745 24,772
Gross unrealised gains on debt securities 876 4 880 1,316 261 1,577
Regulatory developments and RBS’s current and future capital position 151 Measurement 154 � Capital and leverage 154 � Loss absorbing capital and senior debt roll off profile 157 � RWAs 158
Liquidity and funding risk Definition 160 Overview and key developments 160 Policy, framework and governance 160
Business risk 171 Reputational risk 172 Conduct and regulatory risk 173 Operational risk 175 Pension risk 179 Credit risk: management basis Definition and sources 181 Overview and key developments 181 Governance 181 Risk appetite, risk measurement and models, and risk mitigation 183
Wholesale credit risk 189 � Problem debt management and forbearance 191 � Key credit portfolios 195 Personal credit risk 203 � Problem debt management and forbearance 203 � Personal portfolio overviews 205 � Key credit portfolios 207
Definition and sources 231 Overview and key developments 231 Governance 232 Traded market risk 232 Non-traded market risk 242
Except as otherwise indicated by an asterisk (*), information in the Capital and risk management section (pages 133 to 251) is within the scope of the Independent auditor’s report. Unless otherwise indicated, disclosures in this section include disposal groups businesses in relevant exposures. Refer to pages 131 and 132 for the Analyses of the balance sheet pre and postdisposal groups.
RBS aims to become a bank that its customers and all other stakeholders can trust. It is doing so by focusing on Personal &
and Corporate & Institutional Banking (CIB) customers in its main markets of the UK and the Republic of Ireland. By delivering only services that meet their needs, it aims to achieve an appropriate return. Accordingly, RBS is simplifying its services as well as the processes it uses to deliver them, providing customers with better value services. It aims to become the number one bank in the UK
RBS predominantly serves UK and Republic of Ireland customers through retail and commercial banking activities. PBB serves individual and mass affluent customers together with small businesses, providing a variety of traditional retail banking products, including current and savings accounts, residential mortgages and credit cards in the UK through UK PBB and in the
Western European corporates and global financial institutions through three core business lines: Rates, Currencies and
Financing. CIB is moving towards a simpler business model and is re-shaping and downsizing.
RBS is also committed to full divestment of Williams & Glyn, which provides retail and commercial banking services in the UK, by the end of 2017.
RBS's business model faces regulatory risk and is responding to new and impending regulation. In particular, RBS’s business model is adapting to UK Financial Services (Banking Reform) Act requirements that retail banking operations be ‘ring fenced’ separate and protected from more volatile undertakings - by
These divestment, rationalisation and transformation projects expose RBS to a high degree of execution risk over the next few years as it transitions to its target business model. If not effectively managed, this represents a potential management burden and distraction, and associated business upheaval may affect RBS’s ability to attract the talent and skills required.
RBS continues to resolve issues related to historical misconduct and unsustainable strategic decision-making. To prevent recurrence of similar issues in the future, RBS aims to underpin its business model with a strong risk culture across its businesses, one that promotes appropriate risk awareness and judgements about risk-taking.
RBS is also exposed to a range of other risks including pension, business, conduct, reputational and strategic risks. These, and the business model related risks outlined above, are considered in the relevant sections below, and illustrated by the concentration of riskweighted assets by segment below.
The three lines of defence model is used industry-wide for the management of risk. It provides a clear set of principles by which to implement a cohesive operating model, one that provides a framework for the articulation of accountabilities and responsibilities for managing risk across the organisation.
• Ensuring appropriate controls are in place to mitigate risk: balancing control, customer service and competitive advantage.
Responsibilities include: • Working with the businesses and functions to develop the risk and control policies, limits and tools for the business to use to discharge its responsibilities.
• Monitoring, evaluating and reporting on the remediation of material risks across RBS.
• Providing independent assurance to the FCA, PRA, CBI and other key jurisdictional regulators on both specific risks and control themes.
Operational risk and risk oversight of support functions, Capital Resolution and W&G
The RBS Chief Risk Officer (CRO) leads RBS Risk Management. The CRO reports directly to the Chief Executive and has an indirect reporting line to the Chairman of the Board Risk Committee and a right of access to the committee’s chairman.
RBS Risk Management is a function independent of the franchises, structured by risk discipline to facilitate the effective management of risk.
In 2015, Risk Management, which had previously been spread across the different business segments, re-organised itself into six functional areas: Credit Risk; Enterprise-Wide Risk; Risk Infrastructure; Operational Risk, Support Functions and Divested Businesses; Risk Assurance; and Market Risk. Directors of Risk were also appointed for each of the franchises and for Services. The streamlined structure consolidates risk information, allowing for more efficient decision-making.
The directors of risk functions are responsible for RBS-wide risk appetite and standards within their respective disciplines and report to the CRO.
The functional heads (the Directors of Financial Crime, Advisory, Remediation, Compliance Services and Regulatory Affairs), report to the Chief Conduct & Regulatory Affairs Officer. Each is responsible, where appropriate, for the RBS-wide risk appetite and standards of their respective areas.
Risk assurance is a second line of defence function in which most of RBS’s risk assurance activities are centralised. These primarily comprise credit risk and market risk quality assurance, controls assurance and Model Risk Management, each of which is described below.
Credit risk and market risk quality assurance: These teams provide assurance to both internal and external stakeholders including the Board, senior management, risk functions, franchises, Internal Audit and the regulators.
monitors and validates the ongoing programme of reviews and tracks the remediation of review actions. The credit and market risk assurance teams also attend relevant committees run by the customer franchises and other risk functions to ensure strong communication channels are maintained.
Sarbanes-Oxley Act of 2002. Since the team’s creation in late 2014, testing has primarily covered key controls within CIB and
Model governance follows a three lines of defence approach, with model developers having primary accountability and Model Risk
RBS uses a variety of models as part of its risk management process and activities. Key examples include the use of model outputs to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of risk-weighted assets.
For more information on the use of models in the management of particular types of risk, notably credit and market risk, refer to the relevant section.
MRM reassesses the appropriateness of approved risk models on a periodic basis according to the approved Periodic Review
decision is then made by an internal model governance committee with appropriate delegated authority. Based on the initial assessment, the committee will decide to re-ratify a model based on the initial assessment or to carry out additional work prior to making a decision. In the initial assessment, MRM
assesses changes since the last approval along the following dimensions, as appropriate: change in size/composition of the portfolio, market changes, model performance, model changes, status of any outstanding issues, scheduled activities including work carried over from previous reviews.
MRM also monitors the performance of RBS’s portfolio of models. By engaging with the business and model users, MRM
In 2015 RBS made significant steps in measuring and benchmarking its risk culture across all areas of the bank. This has resulted in agreement on its target risk culture and initiatives needed to achieve it. While changing organisational culture will take time, RBS’s risk culture objectives form a key part of individual performance objectives at all levels of the bank.
and “thinking long term”. They act as a clear starting point for a strong and effective risk culture.
These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of these principles facilitates sound decision making and a clear focus on good customer outcomes.
• Would customers and colleagues say I am acting with integrity?
Each question is a prompt to think about the situation and how it fits with RBS’s values. It ensures that employees can think through decisions that do not have a clear answer, guiding the judgements behind their decisions and actions.
It is key to ensuring overall safety and soundness and in embedding a strong risk culture throughout RBS.
The Board reviews and approves the risk appetite framework annually, establishing the level and types of risks RBS is able and willing to take in order to meet its: • Strategic objectives - The strategic plan is built on the core foundations of serving customers well, building a sustainable risk profile and creating long-term value for its shareholders; and
• Deliver stable earnings growth. To ensure that strategic growth is based around a longer-term risk-versus reward consideration, RBS sets risk appetite to remain profitable under severe stress.
• Maintain stakeholder confidence. To ensure that RBS is respected, valued and trusted by stakeholders (customers, employees, debt and equity investors, regulators and the wider community) to attain its strategic objectives, and establish and maintain an appropriate business culture and operational controls.
The strategic risk objectives are the bridge between the RBSwide business strategy and the frameworks, limits and tolerances that are used to set risk appetite and manage risk in the business franchises on a day-to-day basis.
Risk appetite starts with the strategic goals set by the Board and is cascaded through key limits and risk tolerances that influence decision-making at all levels.
Risk appetite is set in a manner that: • Is aligned to business and financial goals. The risk appetite framework ensures that risk is managed in a manner that aligns to and supports the attainment of business and financial objectives.
• Is meaningful to the business. Where possible risk appetite is expressed quantitatively and in a manner that can be cascaded meaningfully and unambiguously to the business.
Each franchise, RBS-wide material risk owner, function and material legal entity is required to develop, own and manage a risk appetite statement that: • Evidences alignment with strategic objectives and financial plans.
• Capital strength continued to improve throughout 2015, driven by the successful execution of exit strategy including the disposal of Citizens and continued de-risking of the balance sheet, primarily in Capital Resolution.
• RWAs have reduced by £113 billion from £356 billion to £243 billion, ahead of our year-end target of £300 billion, driven by the disposal of
Citizens (£63 billion) and the continued progress of Capital Resolution down £46 billion. There were further small reductions across most core business.
Resolution assets at a faster rate than their associated liabilities. The ratio was strengthened by the placing of surplus Capital Resolution liabilities in short-term liquid assets.
• NSFR, based on RBS’s interpretation of the Basel framework, had increased to 121% at 31 December 2015 from 112% at 31 December 2014. The increase in the metric is also partly due to the reduced need for stable funding as a result of Capital Resolution rundown.
• The customer loan:deposit ratio reduced to 89% compared with 95% at the end of 2014. This reflects the strategic run down of Capital Resolution loans and higher retail and commercial deposits, this was partly offset by loan growth within UK PBB and Commercial Banking.
• RBS reduced its business risk profile by implementing its strategic plan to shift the business mix towards the UK and the retail and commercial banking segments, with riskier activities in CIB and Capital Resolution curtailed via disposals and run-down.
• RBS continued with its simplification agenda and cost reduction programme.
• The most material threats to RBS’s reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of its regulators, some of which have resulted in fines and public censure.
Conduct risk arises if customers are not treated in line with their and other stakeholders’ expectations.
RBS does not take effective action to prevent fraud, bribery and money laundering.
continued to remediate historical conduct issues, while also focusing its customer-facing businesses and support functions around the needs of its customers.
Operational risk Operational risk arises from a failure to manage operations, transactions and assets appropriately. It may arise from human error, an inability to deliver change on time or adequately, or the unavailability of technology services or the loss of customer data. Fraud and theft are sources of operational risk, as is the impact of natural and manmade disasters. It may also arise from a failure to take appropriate measures to protect assets or take account of changes in law.
• The functional operating model for operational risk was embedded, with the aim of ensuring this is managed consistently across RBS. This supplemented work by the customer businesses to improve understanding of the operational risk profile and the actions required to mitigate risks outside of appetite.
• The threat to the security of RBS’s information from cyber attacks continued to be closely monitored. During 2015 RBS participated in industry-wide cyber attack simulations in order to help test and develop defence planning. Actions taken to mitigate the risk included a large-scale programme to improve user access controls, a reduction in the number of external websites, and enhanced protection against malware.
Credit risk Credit risk arises from lending and AFS debt securities.
• Overall credit risk exposure decreased in 2015 in line with RBS’s strategy to decrease exposure in non-strategic regions. The growth in UK PBB
gross mortgage lending reflected our strategy to refocus the business on the UK market, as well as improving economic conditions and increasing house prices in a continuing low interest environment.
• Risk appetite limits for the sector and product and asset class frameworks were reduced taking account of the revised risk appetite associated with the restructured CIB business.
° CRE lending fell to £27.6 billion from £43.3 billion at the end of 2014, of which £3.6 billion (2014 - £13.3 billion) was REIL with provision
• Average trading internal VaR decreased to £18.9 million (2014 - £27.8 million), reflecting strategic exits including from US asset-backed products trading in the first half of 2015.
Capital management lies at the core of RBS’s strength and sustainability goals. RBS defines capital as that part of the liability side of its balance sheet that has the capacity to absorb losses.
• Capital strength continued to improve during 2015, driven by the successful execution of exit strategy including the disposal of Citizens and continued de-risking of the balance sheet, primarily in Capital Resolution. CET1 ratio improved from 11.2% to 15.5% at end 2015 despite absorbing the 0.7% impact of the pension accounting policy change (0.4%
• Capital structure extended and improved leverage ratio through the over-subscribed issuance of US$3.15 billion (£2 billion) AT1 capital notes in August 2015.
• The de-risking throughout 2015 has allowed RBS to free up capital into the core franchises, helping to align to our strategy of becoming a more focused bank better able to serve our customers in our key markets.
• Leverage ratio improved from 4.2% to 5.6% reflecting the improvements in capital strength, including AT 1 issuance as well as reduction in leverage exposure, as funded assets fell by £145 billion to £553 billion. The pension accounting policy change lowered the leverage ratio by approximately 0.2% at 31 December 2015 and on a pro forma basis at end
• RBS’s current Pillar 2A requirement was 5.0% of RWAs at 31 December 2015, with 56% met by CET1 capital (2.8%).
• Based on CRR requirements being phased in by 2019, RBS
Risk appetite The RBS risk appetite framework establishes appetite targets on quantitative and qualitative measures which are set by the Board, aligned with its key strategic risk objectives.
RBS has a capital management framework including policies and procedures that are designed to measure actual and projected capital performance against risk appetite, ensures that it continues to comply with regulatory requirements and is positioned to meet anticipated future changes to its capital requirements.
Strategy RBS maintains a sufficient level of capital that allows it to operate over its strategic horizon with an agreed risk appetite in pursuit of its business strategy, taking into account regulatory requirements, support for customers and to provide confidence to stakeholders.
Tier 2 capital by issuing subordinated liabilities. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. RBS is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals.
instruments in accordance with internal needs, regulatory requirements and strategic plans. The amount of additional capital is determined as part of the annual budgeting cycle, by market conditions and through ongoing dialogue with regulators.
The framework for capital management within RBS first looks at the sources and drivers of risk based capital requirements. Through the internal budget and planning cycle, and increasingly through stress testing, each franchise balances the blend of products that is offered to customers, having regard to the impact of each on capital and leverage against the backdrop of the overall business strategy
A number of tools and processes taken together contribute to an integrated view of capital management. The diagram below is used to present this view: Governance
The Board sets the strategic direction and ensures RBS manages risk effectively by approving and monitoring RBS’s strategic risk appetite, considering RBS-wide stress scenarios and agreed mitigants, as well as identifying longer-term strategic threats to the business operations. The Board also approves the ICAAP.
MREL at both RBS level and major operating entity level. Forecasts are measured against minimum regulatory requirements and specific regulatory guidance such as the Individual Capital
RBS prepares an annual recovery plan, which include a framework of indicators identifying the points at which appropriate actions may be taken in the event of unexpected weaknesses in its capital or liquidity resulting from either idiosyncratic or systemic stress, as well as a menu of options for addressing such weaknesses.
RBS’s 2015 Recovery Plan was prepared in line with the PRA’s requirement that banks prepare, maintain and review recovery plans.
The final ICAAP is approved by the Board prior to submission to the PRA.
Assessing, monitoring and maintaining adequate capital. It is RBS’s policy to build and sustain a strong capital base and to use it efficiently throughout its activities to support strategic objectives and optimise shareholder returns while maintaining a prudent relationship between its capital base and the underlying risks of the business, including the risk of excessive leverage.
Treasury to determine the appropriate amount of capital needed over the budget horizon under both base and stress projections using both risk and leverage based assessment tools and given a specific risk appetite.
Capital plans are derived for RBS overall and its major operating, regulated entities. Capital plans are prepared in compliance with specific regulatory rules (for example CRD IV) and in accordance with system wide and local, specific regulatory guidance. Capital plans for UK regulated entities are drawn up centrally whereas capital plans for non-UK regulated entities are drawn up locally and subject to central review and challenge to ensure consistency of approach and adherence to capital management policies.
Furthermore specific idiosyncratic risks such as conduct risk are factored into capital plans.
Once the capital plan is approved it is then subject to ongoing review and assessment to reflect changes to the underlying components such as forecasts or new regulatory guidance or assumptions. Shorter term forecasts are more frequently undertaken to understand and respond to variations of actual performance against the plan.
Capital policies and procedures are subject to independent oversight. Regular reporting of actual and projected capital and leverage ratios, including those in stressed scenarios, is undertaken, including submissions to the ALCo, ERF, EXCo,
CRD IV technical standards and guidelines and within the UK by the PRA and through directions from the FPC.
RBS continues to monitor regulatory developments very closely, analysing the potential capital impacts to ensure RBS continues to maintain a strong capital position that exceeds the minimum regulatory requirements and risk appetite and is consistent with market expectations.
Capital demand is normally the aggregation of Pillar 1, Pillar 2A, the greater of the CRD IV or Pillar 2B buffers, and any management buffer (for example over and above MDA). Pillar 2 is becoming an increasingly important component of our capital requirements.
Pillar 2A is determined through the ICAAP process mentioned herein and reflects RBS specific risks. Factors driving Pillar 2 requirements include operational risk, interest rate risk in the banking book, credit concentration risk and pension risk amongst others.
The Pillar 2B requirement and recently introduced PRA buffer reflects the impact of stress through the analysis undertaken in annual ICAAP. The amount of stress capital may well also be informed by performance under the new regulatory stress testing process. The amount of stress based capital requirement is the higher of Pillar 2B or the CRD IV risk buffers plus any management buffer.
Capital supply consists of the amount of CET1, AT1, Tier 2 and, going forward, non-capital MREL securities in existence at any one time.
The capital planning process determines the most efficient mix between these different types of security in keeping with the bank’s strategic plans and risk appetite. Considerations include: • Internal risk appetite (including stress testing); • Regulatory policies and guidance; and
The bank will issue capital securities from time to time and may engage in selective buy backs, liability management exercises and other market actions in line with its stated risk appetite and other metrics. RBS’s policy is to manage its externally issued portfolio of debt securities for value.
• Assess the impact of current business strategies on risk appetite.
• Manage business through improved understanding of the underlying risk. Examples: ° Tail risk assessment: identification of risky portfolios that breach a series of pre-determined triggers.
• Determine a schedule of potential management actions to be executed in the event of stress.
• Stress test execution and governance: ° Impact of stress scenario is translated via relevant risk drivers such as RWAs, impairments; ° Profit and loss impacts of stress scenario are also assessed; and
° Review of stress output by the business as well as risk, treasury and finance teams.
• Consolidation and capital planning: ° Segmental results are consolidated to provide a combined view of stress impact; ° Stressed profit and loss and RWA assessment contribute towards arriving at a stressed capital plan; ° Additional capital impacts under stress are considered such as pension deficit, foreign exchange reserves; and
Risk-type specific stress testing is also conducted. For example, within the market risk management framework, a comprehensive programme of stress tests covers a variety of historical and hypothetical scenarios.
Portfolio-specific stress tests assess the reaction of key portfolios to systemic shocks and identify potential vulnerabilities, including risks that have not yet matured or are not yet visible. They assess the potential for outsized losses and the impact of rebalancing portfolios.
UK banks to corporate vulnerabilities such as deep recession in trading partners’ economies. Under the scenario, the UK suffers a severe recession with economic uncertainty damaging confidence and causing business investment contraction, a housing market shock and a significant rise in unemployment accompanied by a period of deflation.
RBS did not meet its individual capital guidance after management actions in this scenario. Since December 2014,
RBS has taken actions to improve its capital position. During the course of 2015, RBS issued £2 billion of AT1. In light of the steps that RBS has already taken to strengthen its capital position, coupled with its plans for future AT1 issuance, the PRA Board did not require RBS to submit a revised capital plan.
Key input of ICAAP Internal processes Governance and approvals Regulatory review
The ICAAP consists of two types of internal capital assessment: • Point-in-time capital assessment as at the financial year end: ° Pillar 1 - CET1 4.5% of credit, market and operational
Capital Risk Assessment is performed to ensure that all material risks are identified, appropriately managed and adequately capitalised where appropriate.
maintains adequate capital resources in stress to allow it to continue to meet the minimum capital requirements. The current capital planning buffer will be replaced by the PRA buffer from 1 January 2016.
In line with regulatory requirements, RBS regularly updates its recovery plans, which include a framework of indicators identifying the points at which appropriate actions may be taken in the event of unexpected weaknesses in its capital or liquidity resulting from either idiosyncratic or systemic stress, as well as a menu of options for addressing such weaknesses. Recovery plans are subject to an ongoing improvement assessment in line with regulatory feedback and internal standards and expectations.
RBS continues to develop its resolution capability and planning in line with best practice and regulatory guidance.
Recovery Plans are required to be updated annually; it is anticipated that RBS’s 2016 Recovery Plan will be prepared in line with revised rules taking into account the European Union
European Banking Authority’s regulatory technical standards on recovery planning. These rules would require a bank to notify the
PRA, without delay, if it decides to take action under the recovery plan or refrains from taking action.
IV, which came into effect on 1 January 2014, the regulatory drive towards improved capital standards for banks continues and is centred on three broad themes: • Robust definitions of capital for CET1 and leverage purposes that are not dependent on one or more economic cycles; • Improved strength of banks, with strategic plans and business models capable of undergoing one or more significant stress events; and
The PRA issued Policy Statement 17/15 in July 2015 setting out the Pillar 2 capital requirements for UK banks. The changes are intended to support a more risk sensitive and consistent approach to setting Pillar 2A (P2A) capital and to provide greater transparency of the PRA capital setting process by allowing firms to manage present and future regulatory capital demands.
Banking Authority’s Supervisory Review and Evaluation Process guidelines. The changes are as follows: • The variable element of P2A is now expressed as a percentage of RWAs plus fixed add-ons instead of the current method where P2A is a formula comprising both a variable and a fixed element; • The PRA buffer replaces the current Capital Planning Buffer
(CPB). Use of the buffer will not be a breach in capital requirements and will not result in capital distribution restrictions however, failure to meet Pillar 2B (P2B) buffer may result in enhanced supervisory action; • The P2B buffer is now calculated as a percentage of RWAs rather than absolute terms and is to be met with CET1; • Firms already subject to a CPB are required to meet P2B
with CET1 in full immediately; • Where the PRA considers that firms have weak risk management or governance, PRA may require firms to hold additional PRA buffer on a scalar ranging from 10-40% of a firm’s CET1 Pillar 1 plus P2A capital requirements; and
Leverage ratio requirements are also subject to the following key aspects (consistent with proposals outlined in PS27/15 -
• The severity of the scenario to be counter-cyclical in nature.
The banking resolution and recovery directive introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and eligible liabilities (that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities (MREL). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding.
which will be the way in which the UK implements the TLAC
standard. MREL will apply to GSIBs from 2019 and to other relevant UK firms from 2020. The purpose of MREL is to ensure that, in the event of failure, a bank has sufficient loss-absorbing and recapitalisation capacity to allow for an orderly resolution that minimises any adverse impact on financial stability whilst preventing public funds being exposed to loss. The requirements will be firm-specific but the PRA’s consultation paper proposes that MREL will be required: • At a consolidated and individual bank level, including for the holding entity of a banking group.
Institutions (OSII) continue to be progressed and could impact the level of CET1 that is required to be held by RBS and specific legal entities including NatWest and the Royal Bank. The EBA
published in December 2014 a quantitative methodology as to how European regulators could quantify which firms would qualify as DSIBs. The PRA published CP39/15 on this in October 2015, and published its list of the sixteen firms designated as OSII; RBS is included within this list.
In January 2015, HM Treasury issued an explanatory memorandum on the SRB for banks, building societies and investment firms. The regulation implements Articles 133 and 134 of Directive 2013/36/EU and addresses the outstanding capital buffer element of the ring-fencing policy recommended by the
The SRB will apply to large banks with core (ring fenced entity)
deposits of more than £25 billion and large building societies with deposits of more than £25 billion. Implementation will occur from 1 January 2019 and capital buffers will range from 0-3% of a firm’s RWAs.
• The PRA is consulting on the need for firms to hold capital resources equivalent to at least 25% of annual fixed overheads in respect of critical services to facilitate operational continuity in resolution.
Capital and leverage: key ratios Capital, RWAs and risk asset ratios, on the basis of end-point CRR and transitional rules, calculated in accordance with PRA definitions, are set out below. 2015 2014 (1)
Notes: (1) Capital and leverage ratios have not been restated following the pension accounting policy change. Components within CET1 capital have however been represented to reflect revisions to accounting tangible equity, with corresponding adjustments to other deductions above. (2) Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for with the exception of unrealised gains on available-for-sale (AFS) securities which has been included from 2015 under the PRA transitional basis.
Refer to Pillar 3 report Appendix 1 and 2 for CRR Own funds and leverage disclosure.
Capital base: (1) Own funds are based on shareholders’ equity. (2) 2014 includes the nominal value of B shares (£0.5 billion) on the assumption that RBS will be privatised in the future and that they will count as permanent equity in some form by the end of 2017. (3) The adjustment arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full. The prudential valuation adjustment relating to assets under advanced internal ratings approach has been included in impairment provisions in the determination of the deduction from expected losses. (4) Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts. (5) Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business. (6) Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, RBS’s standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the year.
Share capital and reserve movements in respect of employee share schemes 206 — — 206
and have reference securities issued by public sector entities, multilateral development banks or other investment grade issuers. Non-qualifying credit derivatives attract a PFE add-on of 10%.
Undrawn commitments <1 year which may not be cancelled 0.6 2.3
Other undrawn commitments > 1 year which may not be cancelled & off-balance sheet items with 50% CCF 5.3 10.1
Loss absorbing capital RBS’s capital components and estimated loss absorbing capital (LAC) at 31 December 2015 based on current regulatory interpretations are set out below. Under current TLAC guidance, RBS will be required to hold a minimum LAC of 16% of RWAs by the beginning of 2019 and 18% of RWAs by the beginning of 2020. For additional details regarding regulatory developments in relation to MREL/TLAC
requirements, refer to Capital management on page 152. The roll-off profile and average spread relating to senior debt is set out on
Par Balance Regulatory LAC value (1) sheet value value (2) value (3)
(4) Corresponding shareholders’ equity was £53.4 billion. Refer to capital resources table on page 155 for further details. (5) Regulatory amounts reported for Additional Tier 1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
Based on current guidance, RBS anticipates issuing senior bonds from its holding company to ensure LAC classification under
RBSG plc As at and for year ended Roll-off profile - weighted average rate spread (bps) 162 77 110 139 172 211 266
Securitisation - weighted average rate spread (bps) 83 83 — — — — 83
Notes: (1) The weighted average spread reflects the average net funding cost to RBS. This is calculated as the difference between the issuing coupon and the equivalent hedging rate. (2) The balance sheet value relates to debt securities in issue of £31.2 billion excluding £0.6 billion exchangeable bond relating to Williams & Glyn.
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers. Credit risk
Market risk CIB Other Total Operational risk Total £bn £bn £bn £bn £bn
• RWAs have decreased by £113 billion in the year to £243 billion principally due to the disposal of Citizens and balance sheet and risk reduction strategy in Capital Resolution.
Total RWAs UK PBB RoI Banking Banking RBSI CIB Resolution W&G & other Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
(2) Methodology changes included: - Commercial Banking: revisions to CCF applied to uncommitted credit card limits and change in methodology for applying SME discount. (3) Credit risk models were updated during the year including: - UK PBB: non standard LGD model for mortgages and business banking EAD model. - CIB: large corporate PD model. Refer to RBS’s Pillar 3 2015 Report Table CR 1 for RWA density by sector cluster and regulatory approach.
US £6.8 billion, including £4.2 billion relating to the sale of North American loan portfolios; EMEA £4.7 billion; and APAC £3.5 billion. Significant progress was also seen in the Markets portfolios through sales, novations, risk transfers, unwinds and close outs, leading to a £11.4 billion reduction. The GTS business RWAs also fell by £6.2 billion following strategic reductions in trade finance lending across all regions. *unaudited
Citizens at 1 January 2015. Operational risk RWAs primarily relates to Citizens: exclusion is pending PRA approval.
Refer to RBS’s Pillar 3 2015 Report Table CR 1 for RWA density by sector cluster and regulatory approach.
Liquidity risk is the risk that RBS is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due.
Sources of funding and liquidity The risk arises through the maturity transformation role that banks perform. It is dependent on RBS specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour.
UK and Ireland. These deposits form a stable base which fully funds RBS’s customer lending activities.
• The liquidity position strengthened with the liquidity portfolio of £156 billion at 31 December 2015 covering short-term wholesale funding (STWF), excluding derivative collateral, by more than nine times. STWF, including derivative collateral, decreased by £16 billion to £38 billion mainly due to the maturity of term debt issued during the financial crisis.
Resolution loans faster than the associated liabilities and proceeds from the Citizens share sales; this was offset to some extent by UK PBB loan growth. The portfolio includes £61 billion of secondary liquidity consisting of assets eligible for discounting at central banks. The costs associated with maintaining the secondary liquidity portfolio are minimal being largely administrative and operational costs.
December 2015, with the improvement from 112% at year end 2014 primarily reflecting the strategic run-down of
December 2014) under the worst case stress scenario. The improvement in 2015 was primarily due to a reduction in net stressed outflows from the disposal of Citizens, and the increase in liquidity portfolio.
Individual Liquidity Adequacy Assessment (ILAA) stressed outflows, and RBS monitors its liquidity position against this risk tolerance on a daily basis. In setting risk limits the Board considers the nature of RBS’s activities, overall risk appetite, market best practice and regulatory compliance.
RBS maintains sufficient liquidity: the risk management framework determines the sources of liquidity risk and the steps that can be taken when these risks exceed certain actively monitored limits. These actions include when and how to use the liquid asset portfolio, and what other adjustments to the balance sheet should be undertaken to manage these risks within the bank’s risk appetite.
ALCo Technical Committee, oversees the implementation of liquidity management across RBS.
Regulatory oversight and liquidity framework* RBS operates across multiple jurisdictions and is subject to a number of regulatory regimes.
PRA regulatory framework, RBS undertakes the following: • An annual exercise to complete the Individual Liquidity
On 1 October 2015 the LCR became the PRA’s primary regulatory standard for liquidity, replacing the previous BIPRU 12 regime. LCR is being introduced on a phased basis and UK
EU. In the meantime, RBS uses the definitions from the BCBS
ALCos at least monthly. Any breach of internal metric limits will set in motion a series of actions and escalations that could lead to activation of the Contingency Funding Plan (CFP).
RBS maintains a CFP, which forms the basis of analysis and management actions to be undertaken in a liquidity stress. The
CFP is linked to stress test results and forms the foundation for liquidity risk limits. The CFP sets out the circumstances under which the plan would be invoked; this includes material worsening of liquidity condition indicators which are reported to senior management daily. It also prescribes a communications plan, roles and responsibilities, as well as potential management actions to take in response to various levels of liquidity stress. On invocation of the CFP, the Contingency Liquidity Team would be convened to identify the likely impact of the stress event and determine the appropriate management response.
Simulated liquidity stress testing is performed at least monthly for each business as well as the major operating subsidiaries in order to evaluate the strength of RBS’s liquidity position. The stressed outflows are measured over certain time periods which extend from two weeks to three months. RBS is expected to be able to withstand stressed outflows through its own resources
(primarily through the use of the liquidity portfolio) without having to resort to extraordinary central bank or governmental support.
and Ulster Bank Ireland Limited - hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
These portfolios are the responsibility of the local Treasurer who reports to the RBS Treasurer.
The UK DoLSub liquidity portfolio accounted for 95% of the total liquidity portfolio, this portion is available to meet liquidity needs as they arise across RBS. The remaining liquidity reserves are held within non-UK bank subsidiaries, the majority of this portion
• Secondary liquid assets that are eligible as collateral for local central bank liquidity facilities, but do not meet the core local regulatory definition. These assets include own-issued securitisations or whole loans that are retained on balance sheet and pre-positioned with a central bank so that they may be converted into additional sources of liquidity at very short notice.
DoLSub (1) Other Total DoLSub Total excl Citizens Total Citizens Total Citizens £m £m £m £m £m £m £m £m £m £m
AA- to AA+ rated governments and US agencies 18,238 3,216 21,454 11,462 22,546 14,484 17,631 8,350 12,792 5,539 *unaudited
Notes: (1) The PRA regulated UK Domestic Liquidity Subgroup (UK DoLSub) comprising RBS’s five licensed deposit taking UK banks: The Royal Bank of Scotland plc, National
RBS’s asset and liability types broadly match. Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; interbank lending and funding largely nets off and this gap has narrowed over the past 5 years; and derivative assets are largely netted against derivative liabilities.
Total funding excluding repos and Citizens 293,550 43,837 75,882 11,781 425,050 292,095 59,775 92,453 18,989 463,312
Subordinated Total notes Total notes and CDs bonds liabilities in issue in issue
Less than Greater than Less than Greater than Less than Greater than Less than Greater than 1 year 1-5 years 5 years Total 1 year1-5 years 5 years Total 1 year 1-5 years 5 years Total 1 year 1-5 years 5 years Total 2015 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
• The net funding surplus has increased by £18 billion during 2015, largely reflecting Capital Resolution (£18 billion) and
Capital Resolution and CIB, offset slightly by an increased funding gap within CB in the longest dated bucket.
The following table shows the residual maturity of financial instruments, based on contractual date of maturity. Held-for-trading (HFT)
Total Less than 6 months More than excluding 1 month -1 year Subtotal 5 years HFT £m £m £m £m £m £m £m £m £m £m £m
Cash and balances at central banks 79,939 — — — 79,939 — — — 79,939 — 79,939
£m £m £m £m £m £m £m £m £m £m £m
Total financial assets excluding Citizens 126,324 18,293 16,387 29,047 190,051 62,106 53,002 145,034 450,193 498,154 948,347
RBS evaluates the extent to which assets can be financed in a secured form (encumbrance), but certain asset types lend themselves more readily to encumbrance. The typical characteristics that support encumbrance are an ability to pledge those assets to another counterparty or entity through operation of law without necessarily requiring prior notification, homogeneity, predictable and measurable cash flows, and a consistent and uniform underwriting and collection process.
RBS categorises its assets into three broad groups; assets that are: • already encumbered and used to support funding currently in place via own asset securitisations, covered bonds and securities repurchase agreements.
• positioned with the central bank as part of RBS’s contingency funding.
Excluding balances relating to derivative and securities financing transactions 8% 11% 10%
with counter parties other than central banks central bank and unencumbered assets
Notes: (1) Covered bonds and securitisations include securitisations, conduits and covered bonds. (2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than within those positioned at the central bank as they are part of normal banking operations. (3) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security for the liability shown above and are therefore not available to secure funding or to meet other collateral needs. (4) Assets positioned at the central bank relates to RBS’s liquidity portfolio and comprises cash balances at central banks, high quality debt securities and loans that have been prepositioned with central banks. In addition, the liquidity portfolio includes securitisations of own assets which has reduced over the years and has been replaced by loans. (5) Readily available for encumbrance: including assets that have been enabled for use with central banks but not positioned; and unencumbered debt securities. (6) Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
Business risk is the risk that RBS makes inappropriate business or strategic choices or that RBS is not able to execute its chosen strategy in line with its budget. The risk is that RBS does not deliver its budgeted performance which could lead to a deterioration in stakeholder trust and confidence or to a breach of regulatory thresholds.
RBS could make inappropriate business or strategic choices if it fails to adequately assess the current and prospective operating environment. RBS may not be able to execute its chosen strategy in line with its budget if there are material changes to its internal or external operating environment.
Business risk arises as a result of the bank’s exposure to the macro-environment, to the competitive environment, and to technological changes. In addition, internal factors such as volatility in sales volumes, and input costs, and other operational risks such as RBS’s ability to assess the business operating environment, or to execute its chosen strategy, contribute to business risk.
RBS reduced its business risk profile by implementing its strategic plan to shift the business mix towards the UK and the retail and commercial banking segments, with riskier activities in
In addition, RBS continued with its simplification agenda and cost reduction programme.
The Board has ultimate responsibility for business risk and for approving strategic plans, initiatives and changes to strategic direction. Refer to the Risk governance section on page 135.
Corporate Development. The Risk and Finance functions are key contributors to strategic planning. As part of the process, each customer business develops a strategic plan within a framework set by RBS’s senior management. The strategic plans are consolidated at RBS-wide level, and reviewed and assessed against risk appetite by the Chief Executive, the Chief Financial
Officer and the Director of Strategy and Corporate Finance before presentation to, and approval by, the Board.
Business risk is also controlled via the monthly performance review processes which include financial reviews carried out by the Finance Function via the franchise Finance Directors and
Financial Planning & Analysis. These reviews are carried out to understand emerging trends, issues and, where there are adverse variations from plans, enable management to take appropriate actions. A wide variety of financial, risk, customer and market metrics are monitored to assess business performance and hence the effectiveness of chosen strategies.
In addition, business performance reviews are carried out on a quarterly basis to discuss detailed business issues and agree action plans. These are led by franchise Chief Executive Officers and Finance Directors, with RBS’s Chief Executive, Chief
Business risk is identified and managed at the product and transaction level. Estimated revenue, costs and capital, including the potential range of outcomes, are key considerations in the design of any new product or investment decision. All policies that ultimately seek to manage and control financial impact at the product and transaction level are therefore relevant to business risk management, including policies on conduct, funding and investment spending.
Business risk is reported, assessed and challenged at every governance level within the organisation. Each franchise monitors its financial performance relative to plans and reports this on a regular basis to the Finance Directors of each franchise.
These scenarios are tested against a range of sensitivities and stresses to identify the key risk drivers behind any potential volatility, together with management actions to address and manage them.
Key strategies are reviewed and approved by the Board. These reviews are intended to maximise the capture of market and customer insight while providing independent scrutiny and challenge. Strategic plans contain analysis of current and expected operating conditions, current and targeted competitive and market positioning, key strategic initiatives, financial and customer targets and milestones, and upside and downside risks.
A wide variety of financial, risk, customer and market metrics are used to monitor business performance and thus, inter alia, the effectiveness of chosen strategies. Any deviations from the expected values are analysed to determine drivers which could be strategic, environmental or management. Example metrics include: customer attrition, deposit balances, revenues, impairments or loan losses, profitability and risk-weighted returns.
RRFs was strengthened, including the review of selected cases and issues by senior business committees and the Board Risk
Committee. This ensures lessons are learned on reputational risk management both within businesses and across franchises.
Management information has also been improved, with a central register of cases and issues under development.
Executive Risk Forum (ERF) and cascaded to business franchises and functions.
The Board’s oversight of reputational issues is supported by the senior RBS-wide RRF which opines on cases that represent a material reputational risk to the whole organisation. The RRF, which has delegated authority from the ERF, also acts as a central forum to approve sector or theme-specific reputational risk appetite positions (including Environmental, Social & Ethical risk positions) following review at business franchise risk committees.
Enterprise Wide Risk teams focusing on new and emerging sustainability and strategic risks respectively. The Risk
Forum and the Board Risk Committee (BRC), may also discuss reputational risks facing RBS, and the annual Sustainability
Management information on customers, transactions, products or issues that have been escalated to relevant reputational risk approving authorities and forums is captured by each business franchise with select cases being reviewed by senior risk committees within the businesses. A summary of material reputational risk issues discussed at the senior RBS-wide