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. Refer to the Litigation, investigations and reviews section of Note 30 on the consolidated accounts on page
Reputational risk is of significant importance and is controlled by a governance framework, with Board-level oversight reinforced by a Reputational Risk Policy.
Emerging reputational issues are identified by business franchises and functions with the Sustainability Services and
Reputational risk is mitigated through governance frameworks and training of staff to ensure early identification, assessment and escalation of cases with potential reputational risk, if appropriate. This includes creating appropriate fora, for example reputational risk committees or individual reputational risk approvers.
and its staff towards customers, or in the markets in which it operates, leads to unfair or inappropriate customer outcomes and results in reputational damage, financial loss or both. The damage or loss may be the result of a failure to comply with (or adequately plan for changes to) relevant official sector policy, laws, regulations, or major industry standards, or of failing to meet customers’ or regulators’ expectations.
RBS and certain members of it are party to legal proceedings and are subject to investigation and other regulatory action in the UK, the US and other jurisdictions.
Our business model is consistent with our strategy and serves our customers well whilst balancing the commercial needs of the bank
Product profitability and pricing structures and fair are transparent Our products and services are designed to meet customer needs, the level of complexity is appropriate for the target market and they also work in the way they are expected to
Our people are trained, managed and rewarded to serve customers well and deliver good outcomes. Our people act with integrity and understand the impact of their decisions and behaviours on customer outcomes
Our governance, policies and procedures ensure that good customer and conduct outcomes are achieved. We abide by all relevant laws and regulations and conflicts of interest are managed
We have robust systems and controls in place to prevent financial crime pillars
Bank wide Conduct Risk Appetite supported by the 7 Risk Appetite Statements
The minimum standards which the business can augment with specific Conduct Risks inherent with their business model
The remediation of PPI continued and RBS increased its provisioning by £500 million, following the issuance of the consultation paper by the FCA in November 2015; this sets out proposed rules and guidance for how firms should handle PPI
complaints fairly. The Consultation Paper also contains proposals for the introduction of a deadline date for complaints in 2018.
During 2015 a new Conduct Risk Appetite Framework was established and is being embedded across RBS.
The Framework enables the implementation of a consistent approach to assessing conduct and regulatory risk; the removing of silos and duplicative testing in businesses; and the design of a simplified risk assessment process across conduct and operational risk.
Conduct & Regulatory Affairs (C&RA) is responsible for defining appropriate standards of conduct, and for driving adherence to them, for designing the framework for managing conduct and regulatory risk, and for overseeing remediation activity. It also provides appropriate controls, challenge and oversight to ensure good customer outcomes. In so doing, C&RA acts as a second line of defence control function.
Risk assessments are used to identify material conduct risks and key controls across all business areas. The risk assessment process is designed to confirm that risks are effectively managed and prioritised and that controls are tested.
Work to refine and embed the risk appetite framework and associated control processes continued in 2015. The risk appetite statements set the minimum standards which the RBS franchises augment with specific conduct risks inherent in their business model. The franchises undertake an annual self-assessment of the inherent and residual conduct risks against the risk appetite statements.
RBS’s senior boards and committees receive updates on conduct risk exposures and action plans through monthly C&RA-initiated reporting. The reporting is intended to be focused, forwardlooking and action-oriented.
Whistleblowing Update Report. It details cases by internal reporting categories based on the Public Interest Disclosure Act
(1998); identifies underlying causal and subject trends; and highlights the outcome of investigations and actions taken.
C&RA is working with each business to enhance the management information linked to their risk appetite statements.
C&RA communicates information on regulatory developments, and follow-ups with regulators, to customer-facing businesses and functions, helping them identify and execute any required mitigating changes to strategy or business models.
Early identification and effective management of changes in legislation and regulation, are critical to the successful mitigation of conduct and regulatory risk. All regulatory and compliance changes are managed to ensure timely compliance readiness.
Following the major IT incident that occurred in 2012, significant improvements have been delivered to the technology environment. These included major investments in upgrading core banking infrastructure and improving a broad range of processes and tools. Further improvement initiatives will continue as part of the Transformation Programme to simplify RBS’s technology environment.
The operational risk function, an independent second line of defence, plays a leadership role and seeks to achieve a robust operational risk management framework and culture across RBS.
The operational risk function is responsible for the design, development, delivery and continuous improvement of the
Policy Framework and provides direction for the consistent identification, assessment, management, monitoring and reporting of operational risk. Through a network of oversight teams, the function undertakes second line of defence oversight and challenge to ensure the integrity of the ORMF, and manages the overall operational risk profile against risk appetite.
The Operational Risk Executive Committee (OREC), which is a sub-committee of the Executive Risk Forum (ERF), acts on all operational risk matters. This includes reviewing the operational risk exposure against risk appetite; identifying and assessing material operational risks, encompassing both current and emerging material risks; reviewing and monitoring the operational risk profile; and reviewing and approving material policy changes.
The Control Environment Certification (CEC) process is a half yearly self-assessment of the adequacy and effectiveness of
These risks were identified due to their significance and they are regularly reported to the OREC, ERF and BRC. Work has commenced to cascade these statements to each business. The statements are monitored and reported at business risk committees.
Above these sits an RBS-level operational risk appetite statement which encompasses the full range of operational risks and drives the strategic risk measurement of stakeholder confidence. This is reviewed annually by the ERF. The statement is supported by three simple measures: (i) the relationship between operational risk losses and RBS’s gross income; (ii) metrics covering control environment performance; and (iii) the requirements for the material RBS wide operational risks to be managed within risk appetite.
RBS to support management decision-making in line with RBS’s financial and non-financial appetite statement.
The New Product Risk Assessment process aims to ensure that the risks represented by new products (and material variations to existing products) are identified and assessed before launch.
There is now a requirement to demonstrate that all products provide fair outcomes to customers. Ongoing enhancements to improve the risk rating of new and significant changes to products as well as increasing the focus on customers were introduced
Control owners are accountable for the design, execution, performance and maintenance of key controls.
Monitoring and reporting are part of RBS’s operational risk management processes, which aim to ensure that risks and issues are identified, considered by senior executives, and managed effectively.
The most material operational risks and their position relevant to risk appetite are regularly reviewed at the OREC, along with any emerging risks and the actions taken to mitigate them. These are also reported to the BRC and the ERF. Exposures specific to each business are communicated through monthly risk and control reports that are discussed at business risk committees.
RBS uses the standardised approach to calculate its operational risk capital requirement. This is based upon multiplying three years’ average historical gross income by co-efficients set by the regulator based on type of income.
Scenario analysis is used to assess the potential impact of extreme but plausible operational risks. It provides a forwardlooking basis for evaluating and managing operational risk exposures.
Using the standardised approach, RBS’s Pillar 1 capital requirement for 2015 was £2.5 billion (2014 - £2.9 billion).
The event and loss data management process ensures the capture and recording of operational risk loss events that meet defined criteria. The loss data is used for regulatory and industry reporting and is included in the capital modelling, for the calculation of the regulatory capital for operational risk.
of all operational risk events. These were: (i) clients, products and business practices; (ii) execution, delivery and process management; (iii) fraud; and (iv) employment practices and workplace safety. This was broadly unchanged from 2014. At 31
The losses in this category resulted from new conduct-related provisions, and further increased provisions relating to Payment
Pension risk* Definition Pension obligation risk is the risk to RBS caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also means the risk that the bank will make payments or other contributions to or with respect to a pension scheme because of a moral obligation or because the bank considers that it needs to do so for some other reason.
Sources of risk RBS has exposure to pension risk through its defined benefit schemes worldwide. Four of the largest schemes, which represent around 90% of RBS’s pension liabilities, are the Royal
Pension scheme liabilities vary with changes in long-term interest rates and inflation as well as with pensionable salaries, the longevity of scheme members and legislation. Meanwhile, pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates and equity and property prices. RBS is exposed to the risk that the schemes’
assets together with future returns and any additional future contributions are insufficient to meet liabilities as they fall due. In such circumstances, it could be obliged (or might choose) to make additional contributions to the schemes or be required to hold additional capital to mitigate this risk.
Key developments in 2015 A payment of £650 million was made to the Main scheme in 2015 in line with the current Schedule of Contributions, in addition to the regular annual contribution of around £270 million for ongoing accrual of benefits and the expenses of running the scheme.
Governance The Main scheme operates under a trust deed. The corporate trustee, RBS Pension Trustee Limited, is a wholly owned subsidiary of The Royal Bank of Scotland plc. The trustee board currently comprises six directors selected by RBS and four directors nominated by members. The trustee is supported by
Liability Committee (ALCo) and formulates RBS’s view of pension risk. The PRC considers mechanisms that could potentially be used for managing risk within the funds as well as financial strategy and employee welfare implications, and also reviews actuarial assumptions from a sponsor perspective as appropriate.
The PRC is a key component of RBS’s approach to pension risk where risk management, asset strategy and financing issues are reviewed and monitored on behalf of RBS. The PRC also serves as a formal link between RBS, RIEL and the trustee.
RBS’s pension plan assets at 31 December 2015, are invested in a diversified portfolio of quoted and private equity, government and corporate fixed interest and index-linked bonds, property and other alternative assets.
RBS Risk Monthly Management Report. The report includes a measurement of the overall deficit or surplus position based on the latest data, estimated capital requirements and an assessment of the associated assets and liabilities.
RBS’s balance sheet, income statement and capital position are incorporated into the overall bank-wide stress test results.
Benefits’) to changes in interest rates and equity values at the year end, taking account of the current asset allocation and hedging arrangements. Asset sensitivity to changes in nominal yields increased over the year as swap yields fell at longer durations and the Main scheme increased its interest rate hedging ratio.
Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 1,029 1,104 (75)
Fall in credit spreads of 0.25% at all durations with no change in nominal or real swap yields 70 1,526 (1,456)
The following disclosures in this section are audited: • Risk assessment and monitoring
° Risk mitigation; ° Problem debt management - Forbearance; ° Key credit portfolios - commercial real estate LTV
Derivatives and securities financing - RBS enters into derivatives contracts and securities financing transactions. These result in counterparty credit risk, which is the risk of financial loss arising from the failure of a counterparty to meet obligations that vary in value by reference to a market factor. To mitigate the risk of loss, collateral and netting are used along with the additional legal rights provided under the terms of over-the-counter contracts.
Off-balance sheet products - RBS provides trade finance and guarantees for customers, as well as committed but undrawn lending facilities, and is exposed to credit risk as a result.
Credit quality and impairment - The portfolio reduced due to the strategic disposal of Citizens and Capital Resolution assets.
Improvement in asset quality was evidenced by a reduction in the number of customers showing financial stress, the number of customers in default and a release of provisions. This was achieved against a backdrop of supportive economic conditions in RBS’s key markets.
Automotive - As a result of market events, heightened credit monitoring and an ongoing risk appetite review were introduced for this sector with proactive management of direct and indirect exposures. However, no deterioration of asset quality was observed. For further information, refer to the Key credit portfolios section on page 201.
Emerging markets - Exposure decreased as RBS continued to withdraw from non-strategic countries. The reduction in exposure to China during 2015 reflected corporate loan sales and reductions in bank cash collateral due to a decrease in volumes of foreign exchange trade. For further information, refer to the
Credit risk: management basis continued The key elements of the credit risk management function are set out below.
Authority over provisions adequacy and approval of recommendations from business provisions committees in accordance with approval thresholds.
Wholesale and Personal portfolios and are expressed as a set of mandatory controls.
Assurance activities, as defined by credit policy, are undertaken by an independent assurance function.
Personal customers are grouped into portfolios of similar risk and managed on a portfolio basis
Risk appetite across all risk types is set using specific quantitative targets under stress, including earnings volatility and capital adequacy. The credit risk appetite frameworks have been designed to reflect factors that influence the ability to meet those targets. Tools such as stress testing and economic capital are used to measure credit risk volatility and develop links between the credit risk appetite frameworks and risk appetite targets. The frameworks are supported by a suite of policies and transaction acceptance standards that set out the risk parameters within which franchises must operate. For further information of the specific frameworks for wholesale and personal refer to page 189 and 203 respectively.
RBS uses a range of measures for credit risk exposures. The internal measure used, unless otherwise stated, is credit risk assets (CRA) consisting of: • Lending exposure - measured using drawn balances (gross of impairments). Comprises cash balances at central banks as well as loans and advances to banks and customers.
Each customer account is scored and models are used to assign a PD rating. Inputs vary across portfolios and include both internal account and customer level data, as well as data from credit bureaus. This score is used to support automated credit decision-making through the use of a statistically-derived scorecard.
Loss given default (LGD) models estimate the amount that cannot be recovered in the event of a customer default. When estimating LGD, RBS’s models assess both borrower and facility characteristics, as well as any credit risk mitigants. The cost of collections and a time-discount factor for the delay in cash recovery are also incorporated.
Regulatory requirements stipulate that EAD must always be equal to, or higher, than current utilisation, though exposures can be reduced by a legally enforceable netting agreement.
Model changes affect year-on-year comparisons of risk measures in certain disclosures. Where meaningful, in commentary RBS
For more information on model governance and review refer to the Model section on page 138 and to the RBS Pillar 3 2015
Risk mitigation techniques are used in the management of credit portfolios across RBS, typically to mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations. Mitigation tools applied can include: structuring a security interest in a physical or financial asset; use of credit derivatives, including credit default swaps, credit-linked debt instruments and securitisation structures; and use of guarantees and similar instruments (for example, credit insurance) from related and third parties. When seeking to mitigate risk, at a minimum RBS considers the following: • The suitability of the proposed risk mitigation, particularly if restrictions apply; • The means by which legal certainty is to be established, including required documentation, supportive legal opinions and the steps needed to establish legal rights; • The acceptability of the methodologies to be used for initial and subsequent valuation of collateral, the frequency of valuations and the advance rates given; • The actions which can be taken if the value of collateral or other mitigants is less than needed; • The risk that the value of mitigants and counterparty credit quality may deteriorate simultaneously; • The need to manage concentration risks arising from collateral types; and
Industry standard documentation - such as master repurchase agreements and credit support annexes accompanied by legal opinion - is used for financial collateral taken as part of trading activities.
• For wholesale customers PD, LGD and EAD values are used.
• For personal, calculations are performed at portfolio level by product (e.g. mortgages, credit cards or unsecured loans).
The Restructuring credit team will ultimately recommend or approve any provision that may be required.
Impaired loans and receivables are written-off when there is no longer any realistic prospect of recovery of part, or the entire loan. For loans that are individually assessed for impairment, the timing of write-off is determined on a case-by-case basis. Such loans are reviewed regularly and write-offs may be prompted by bankruptcy, insolvency, forbearance and similar events. For details of the typical time frames, from initial impairment to write off, for collectively assessed portfolios refer to the accounting policies section on 281.
Notes: (1) RoI: Republic of Ireland. (2) Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank. (3) Completed during the period. (4) Forbearance stock: Wholesale forbearance stock represents loans that have been subject to a forbearance event in the two years up to the reported date. Personal forbearance stock is reflective of all forbearance granted up to the reporting date (refer to individual Personal section on page 203 for further details). Overall personal forbearance stock, based on EBA definition is £7.0 billion, the main contributor for the difference being exit criteria after a defined period of satisfactory performance).
(5) Personal provisions include £425 million of provisions against personal customers within Business Banking as well as £391 million of latent provisions, of which £283 million against residential mortgage lending.
• For Wholesale, the decreased flow into forbearance during 2015, in comparison to 2014, reflected improving market conditions and a reduction in exit portfolios through RCR’s disposal strategy. 41% of the total forbearance granted was related to non-performing loans with a provision coverage of
• Lower customer defaults within the business and commercial elements resulted in only modest new impairments in the Wholesale portfolio. The majority of provisions in the Wholesale portfolio relate to CRE. For further details on the CRE portfolio refer to page 195.
Credit grades are assigned at legal entity level for wholesale customers.
All credit grades map to both an RBS-level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures, used for internal management reporting across portfolios. Accordingly, measures of risk exposure may be aggregated and reported at differing levels of detail depending on stakeholder or business requirements. Performing loans are defined as AQ1-AQ9 (where the PD is less than 100%) and nonperforming loans as AQ10 (where the PD is 100%).
The AQ bands and corresponding probability of default ranges are set out below: AQ Band Probability of default Indicative S&P rating
A breakdown of RBS’s asset quality is set out in the chart below: AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Other(1)
Note: (1) Largely comprises assets covered by the standardised approach, for which a probability of default equivalent to those assigned to assets covered by the internal ratings based approach is not available. Standardised exposures sit predominantly within CPB.
Risk addressed Outsized loss due to concentration on a single borrower or borrower group.
Elevated approval requirements, monitoring and reporting, the requirement for regular reviews and for plans to address any exposures in excess of limit.
Risk appetite limits were reduced taking account of the revised risk appetite associated with the restructured CIB
These approvers act within a delegated approval authority under the wholesale Credit Authorities Framework (CAF) approved by the Executive Risk Forum.
In 2015, new Transaction Acceptance Standards (TAS) were introduced to provide more detailed transactional lending and risk acceptance guidelines which are one of the tools to control risk appetite at the customer/transaction level. TAS are supplementary to Credit Policy.
RBS or by another lender; • Consideration of other risks such as environmental, social and ethical, regulatory and reputational risks; and
Commercial real estate valuations - RBS has a panel of chartered surveying firms that cover the spectrum of geography and property sectors in which RBS takes collateral. RBS has a programme that identifies suitable valuers for particular assets.
Each segment has defined early warning indicators (EWIs) to identify customers experiencing financial difficulty, and to increase monitoring if needed. EWIs may be internal, such as a customer’s bank account activity, or external, such as a publiclylisted customer’s share price. If EWIs show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty they may decide to place the customer on the Watchlist.
RBS has reviewed the Watchlist process and will implement a new Risk of Credit Loss framework in early 2016. This will ensure the problem debt portfolio is managed consistently and efficiently, with added focus on customers whose credit profiles have deteriorated outside original risk appetite.
Watch Amber customers are performing customers who show early signs of potential financial difficulty, or have other characteristics that warrant closer monitoring.
When a customer is classified as Watch Red, the Restructuring team engaged to consider whether the relationship should be transferred to them. Watch Red customers who continue to be managed outside of restructuring tend to be those requiring specialist subject matter expertise that is only available outside of
Once on the Watchlist a number of mandatory actions are taken, including a review of the customer’s credit grade and facility and security documentation. Depending on the severity of the financial difficulty and the size of the exposure, the customer relationship strategy is reassessed by credit officers, by specialist credit risk or relationship management units in the relevant business or by Restructuring.
In more material cases, a forum of experienced credit, portfolio management and remedial management specialists in either the relevant business or Restructuring may reassess the customer relationship strategy.
RBS’s wholesale problem debt portfolio. The factor common to all customers with Restructuring involvement is that RBS’s exposure is outside risk appetite. The primary function of Restructuring is to restore customers to an acceptable credit profile, minimise losses to RBS and protect RBS’s capital.
Specialists in Restructuring work with customers experiencing financial difficulties, and showing signs of financial stress, with the aim of restoring their business to financial health whenever possible. The objective is to find a mutually acceptable solution, including restructuring of existing facilities, repayment or refinancing if that is the customer’s preferred option.
Forbearance takes place when a concession is made on the contractual terms of a loan in response to a customer’s financial difficulties. Concessions granted where there is no evidence of financial difficulty, or where any changes to terms and conditions are within usual risk appetite (for a new customer), or reflect improving credit market conditions for the customer, are not considered forbearance.
For example it may be structured as either increased margin on a cash or payment-in-kind basis, deferred-return instruments or both. While RBS considers these types of concessions qualitatively different from other forms of forbearance, they constitute a significant proportion of wholesale forborne loans and are therefore included in these disclosures.
Contractual margin may be amended to bolster the customer’s day-to-day liquidity to help sustain its business as a going concern. This would normally be a short-term solution. RBS would seek a return commensurate to the risk that it is required to take.
• Payment concessions and loan rescheduling (including extensions in contractual maturity)
May be granted to improve the customer’s liquidity or on the expectation that the customer’s liquidity will recover when market conditions improve. In addition, they may be granted if the customer will benefit from access to alternative sources of liquidity, such as an issue of equity capital. These options have been used in CRE transactions, particularly during periods where a shortage of market liquidity has ruled out immediate refinancing and made short-term collateral sales unattractive.
Where forbearance is no longer viable, RBS will consider other options such as the enforcement of security, insolvency proceedings or both. The following are generally considered to be options of last resort: • Enforcement of security or otherwise taking control of assets - Where RBS holds collateral or other security interest and is entitled to enforce its rights, it may enforce its security or otherwise take control of the assets. The preferred strategy is to consider other possible options prior to exercising these rights.
The table below shows the value of loans (excluding loans where RBS has initiated recovery procedures) where forbearance was completed during the year, by sector and types. This only includes the forborne facility exposure. No exit criteria are currently applied. 2015 2014
Natural resources of which: Note: (1) Provision coverage reflects impairment provision as a percentage of non-performing loans.
Forbearance arrangements The table below shows the incidence of the main types of Wholesale renegotiations.
Notes: (1) Forbearance arrangements in 2014 included £133 million of payment and £177 million of non-payment refinancing concessions respectively; refinancing forbearance arrangements in 2015 totalled nil. (2) Previously reported forbearance types are classified as non-payment (covenant concessions, release of security) and payment (payment concessions and loan rescheduling, forgiveness of all or part of the outstanding debt, variation in margin, standstill agreements).
• Forbearance in the Natural Resources sector cluster showed a material increase over 2015, given the sector’s challenges. (Refer to page 197 for further information).
• Non-RCR customers were granted forbearance on loan facilities totalling £3.0 billion, of which £1.3 billion was managed by Restructuring during 2015. This equated to 48% of loans managed by Restructuring (excluding loans to customers where recovery procedures have commenced).
• Provisions for the non-performing loans disclosed above are individually assessed and therefore not directly comparable across periods. Provision coverage decreased in 2015, which is reflective of the lower proportion of the forborne portfolio that RCR customers represent compared to the prior year. RCR customers have a higher provision coverage than the non-RCR portfolio given the nature of the
• The data presented in the tables above include loans forborne during 2015 and 2014. Until April 2014 a reporting threshold was in place which ranged from nil to £3 million after which no thresholds were in use. A number of immaterial portfolios have forbearance assessed under a portfolio approach.
In Commercial Banking, lending applications are reviewed by specialist CRE transactional credit teams, including a dedicated development team. Lending guidelines and policy are informed by lessons learned from the 2008 financial crisis.
• The LTVs in the table above continued to be affected by the legacy portfolio. Loans originated during 2015 are considered in line with current market terms in relation to
• The proportion of the book with LTV higher than 75%
• The exposure in Other relates predominantly to lending to large corporate entities. It is not asset-backed but secured against corporate balance sheets.
• Accelerated divestments in Capital Resolution have contributed significantly to the improvement in portfolio quality during the year.
Of which included in: Natural Resources 548 218 772 218 1,140 1,596
• Mining & Metals: the reduction in CRA and TCE during 2015 reflected proactive credit management of more vulnerable sub-sectors. The majority of the exposure is to large international customers and matures within five years.
UK RoI Europe US RoW (1) Total 2015 £m £m £m £m £m £m
Other wholesale and trading activities 326 77 516 68 377 1,364
Including committed undrawn exposures of which: exploration and production 145 — 3 3,118 302 3,568
Note: (1) Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa *unaudited
• The sub-sector in which a customer operates is a primary consideration for assessing credit risk. Customers involved in exploration and production (E&P) are most immediately exposed to the oil price decline. Companies involved in this area have already introduced capital spending reductions to conserve cash. In turn, this reduced spending is likely to have an adverse impact on oilfield service providers. This is due to the E&P companies buying fewer products and services from the oilfield service providers, and demanding lower prices for those they do purchase.
• Committed lending exposure included legal commitments to syndicated bank facilities with tenors up to five years. These committed facilities are for general corporate purposes including funding operating needs and capital expenditures and are available as long as counterparties comply with the terms of the credit agreement. Contingent obligations relate to guarantees, letters of credit and suretyships provided to customers. RBS had no high-yield bond or loan underwriting positions at 31 December 2015 (2014 - US$86 million highyield loan underwritings in the Americas).
Note: (1) Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa
• Mining & Metals has been reclassified as a high-oversight sector due to rising concerns over the economic slowdown in China.
• Mining & Metals represented 0.4% of the Wholesale portfolio, excluding Capital Resolution.
(2014 - 60%) of the portfolio was investment grade at 31
• The slight increase in AQ10 reflected challenging market conditions. AQ10 assets at 31 December 2015 totalled £48 million.
• The global automotive market has shown good levels of growth over the last few years. However, the underlying analysis is somewhat mixed with declines in Latin America and a slow growth trend in China offset by an increase in the
• Automotive represented 2.4% of the Wholesale portfolio excluding Capital Resolution.
• The portfolio showed robust credit quality with strong returns and below-average risk with no material changes in risk metrics during the year.
• The Automotive sector was reclassified as high-oversight to allow assessment of contagion risk following the United
carried out a detailed stress test and an extreme global downturn stress scenario. The results of these tests showed that the credit quality of the portfolio would not be materially affected.
• The decrease in AQ10 was predominantly driven by proactive credit management and the run-off of RCR. AQ10 assets at 31 December 2015 totalled £86 million.
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Other(1)
• Shipping exposure was £7.1 billion (2014 - £10.1 billion) at to asset-backed ocean-going vessels. As the majority of the Shipping exposure is within Capital Resolution, portfolio metrics quoted below are for Capital Resolution only. The
China. Tanker market conditions were favourable and container markets stabilised over the year but remained weak in comparison to historic averages. Most of the RBS
• The majority of ship-secured exposure was extended against modern vessels with a low average age of approximately seven years (2014 - 6.4 years). Less than 3% of the total Capital Resolution portfolio is secured by vessels that are more than 15 years old and around 85%
(2014 - 87%) was secured by vessels built in the last ten years. Due to strategic considerations, RBS is providing finance on a selective basis against delivered or secondhand vessels and generally at low leverage levels.
Personal lending entails making a large number of small-value loans. To ensure that these lending decisions are made consistently, RBS analyses credit information, including the historical debt servicing behaviour of customers with respect to both RBS and their other lenders. RBS then sets its lending rules accordingly, developing different rules for different products. The process is then largely automated, with customers receiving a credit score that reflects a comparison of their credit profile with the rule set. However, for relatively high-value, complex personal loans, including some residential mortgage lending, specialist credit managers make the final lending decisions.
RBS takes collateral in the form of residential property to mitigate the credit risk arising from mortgages and home equity lending.
“breathing space” suspends collections activity for a 30-day period to allow time for the repayment plan to be put in place.
Customers who contact RBS directly because of financial difficulties, or who are already in payment arrears, may be granted forbearance. In the course of assisting customers, more than one forbearance treatment may be granted.
UK Personal, interest only conversions have not been used to support customers in financial difficulty since 2009.
Monitoring of forbearance - The granting of forbearance will only change the delinquency status of the loan in exceptional circumstances, which can include capitalisation of principal and interest in arrears, where the loan may be returned to the performing book if it remains up to date for the duration of the probation period and is deemed likely to continue to do so.
• Forborne loans form a separate risk pool for 24 months.
Collective • No difference in treatment for non-forborne loans. LGD models unaffected by forbearance.
• The PD model used in latent provision calculations is calibrated separately for forborne loans, using information on the historic performance of loans subject to similar arrangements.
Where an acceptable repayment arrangement cannot be agreed with the customer litigation may be considered. In the UK and
Northern Ireland, no repossession procedures are initiated until at least six months following the emergence of arrears (in the
Republic of Ireland, regulations prohibit taking legal action for an extended period). Additionally, certain forbearance options are made available to customers managed by the recoveries function.
Of which: Mixed (capital and interest only)* 5,397 86 7 29 748 6,267
LTV ratio value <=50% <=70% <=90% <=100% <=110% <=130% <=150% >150% LTVs Other Total 2015 £m £m £m £m £m £m £m £m £m £m £m *unaudited
UK Ulster Private excluding PBB Bank RoI Banking RBSI W&G Citizens Citizens Total £m £m £m £m £m £m £m £m
Of which: Mixed (capital and interest only)* 6,163 120 — — 741 7,024 788 7,812
• Gross new mortgage lending amounted to £22.7 billion in 2015. Lending to owner-occupiers during this period was £18.9 billion (2014 - £15.5 billion) and had an average LTV
(2014 - 51%) and 56% by weighted value of debt outstanding (2014 - 58%). This excludes £2 billion of mortgages granted by Ulster Bank Northern Ireland which are indexed against the house price index published by the
Approximately 15% (£13 billion) of owner-occupied mortgages were on interest-only terms with a bullet repayment and 6% (£5 billion) were on a combination of interest-only and capital and interest. The remainder were capital and interest. 65% (£9 billion) of the buy-to-let mortgages were on interest-only terms and 3% (£0.4 billion)
• The impairment charge for mortgage loans remained low at £2.8 million in 2015 reflecting continuing house price increases and is stable when compared to the net release of impairment provision of £29.5 million in 2014.
Notes: (1) 2016 includes pre-2016 maturity exposure. (2) Includes £1.5 billion (2014 - £1.6 billion) of repayment mortgages that have been granted interest only concessions (forbearance). (3) 2015 includes pre-2015 maturity exposure.
• Ulster Bank RoI’s residential mortgage portfolio totalled £13.8 billion at 31 December 2015. Excluding the impact of exchange rate movements, the portfolio decreased by 4.4%
• The interest-rate product mix was approximately 87% (£12.0 billion) of the mortgage portfolio on variable-rate products and 13% (£1.7 billion) on fixed rate.
Excluding the impact of exchange rate movements, the value of mortgage assets subject to a forbearance arrangement has decreased by £131 million (3.3%).
Notes: (1) 2016 includes pre-2016 maturity exposure. (2) Includes £0.1 billion (2014 - £0.3 billion) of repayment mortgages that have been granted interest only concessions (forbearance). (3) Maturity date relates to the expiry of the interest only period. (4) 2015 includes pre-2015 maturity exposure.
• The majority of the Private Banking personal lending portfolio relates to mortgage lending. The portfolio increased
• A total of 85% (£54 million) of forbearance loans were subject to a long term arrangement (capitalisations, term extensions, economic concessions) at 31 December 2015
(2014 - 65% or £32.8 million). Short term forbearance comprises payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest only arrangements.
• Private Banking offers interest-only mortgages to high net worth customers, with over a third of the book typically being refinanced/replaced per annum. A summary of the maturity profile for bullet principal repayment interest only mortgages
2015 £m £m £m £m £m £m £m £m 2014 £m £m £m £m £m £m £m £m
summary of the maturity profile for bullet principal repayment interest only mortgages (excluding mixed repayment mortgages) is set out below:*
(2014 - £0.2 billion) with an average LTV by weighted value of
Fixed interest rate products of varying time durations accounted for approximately 55% (£5.7 billion) of the mortgage portfolio with 7% (£0.8 billion) a combination of fixed and variable rates and the remainder (£4 billion) variable rate.
2015* £m £m £m £m £m £m £m £m 2014* £m £m £m £m £m £m £m £m
Cash and balances at central banks 74.9 — (3.8) — — 0.6 — 71.7
Notes: (1) The exposures in regulatory trading book businesses are subject to market risk and are hence excluded from CRA. Refer to Market risk on page 231. (2) Includes cash in ATMs and branches, reverse repurchase agreements, securities and other assets (refer to note below). (3) Includes impairment loss provisions related to loans and advances and credit valuation adjustment on derivatives. (4) Comprises: - Loans and advances: cash collateral pledged with counterparties in relation to net derivative liability positions. - Derivatives: impact of master netting arrangements.
The tables in this section show RBS’s exposure at 31 December 2015 and 2014. Exposures are reported by country of operation of the obligor, except exposures to governments and individuals, which are shown by country of residence.
The country of operation is the counterparty’s country of main operations, taking account of branches and subsidiaries.
The comments below relate to changes in country exposures in 2015 unless indicated otherwise*.
• Net balance sheet and off-balance sheet exposure to most countries and products declined. RBS continued to maintain a cautious stance and implemented its strategy to become a more UK-centred bank with an international focus on
Western Europe. In addition, many clients continued to reduce debt levels. The euro depreciated against sterling by 5.7% while the US dollar appreciated by 5.3%.
• Total eurozone net balance sheet exposure decreased by £10.5 billion or 11%, to £87.1 billion. The depreciation of the euro played a significant role in the reduction.
• Eurozone periphery: Ireland is no longer considered part of this group because of its improved economic conditions.
(mostly to the commercial real estate, construction and land transport sectors).
• Portugal - exposure decreased by £0.1 billion to £0.6 billion, due largely to decreases in derivatives exposure to banks and corporate clients.
• Greece - net balance sheet exposure decreased to £0.1 billion (from £0.4 billion), mostly as a result of sales of derivatives positions. The remaining exposure was mostly lending and collateralised derivatives exposure to corporates, including subsidiaries of international clients.
• Netherlands - net balance sheet exposure decreased by £4.4 billion, the result of reductions in lending, derivatives,
• India - net balance sheet exposure fell by £0.4 billion to £1.6 billion, with reductions mainly in corporate lending, reflecting
• Russia - net balance sheet exposure decreased by £1.4 billion to £0.4 billion, partly through loan sales in the second half of 2015. The remaining exposure was below the £1 billion threshold for inclusion in the table. It was on run-off, and consisted mainly of lending to banks and with risks largely mitigated.
2015 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
China 459 1,374 1,674 41 3,548 2,886 243 62 243 114 531 4,079 (4) 244 4,770 Notes: (1) Net balance sheet exposure - Comprises net lending, debt securities, derivatives (net) and SFT (net) exposures, as defined below. (2) Net lending-Comprises loans and advances net of provisions and includes cash balances. (3) Debt securities-includes held-for-trading (HFT), designated as fair value through profit or loss (DFV), available for-for-sale (AFS) and loans and receivables (LAR). HFT debt securities, aggregated with DFV securities, are presented as long positions net of short positions. (4) Derivatives (net)-Comprise the mark-to-market (mtm) value of such contracts after the effect of legally enforceable netting agreements in line with regulatory capital models, but before the effect of collateral. (5) Securities financing transactions (SFT) (net) - Comprise the mtm value of the cash and securities that are due to RBS at a future date after the effect of collateral intrinsic to the transaction and legally enforceable netting agreements. Counterparty netting is applied in line with regulatory capital approach. Additional collateral called to offset mtm positions (variation margin) is not included.
(6) Off-balance sheet-Comprises letters of credit, guarantees, other contingent obligations and legally committed undrawn facilities. (7) Total exposure-Comprises net balance sheet exposure and off-balance sheet exposure, as defined above. (8) Credit default swaps (CDSs)-Under a CDS contract, the credit risk on the reference entity is transferred from the buyer to the seller. ‘Fair value’ (or ‘mtm value’) represents the balance sheet carrying value of the resulting exposure. The mtm value of CDSs is included in derivatives against the counterparty of the trade, as opposed to the reference entity. The notional is the par value of the credit protection bought or sold and is included against the reference entity of the CDS contract. The column ‘CDS notional less fair value’ represents the net effect on exposure should the CDS contracts be triggered by a credit event, assuming a zero recovery rate on the reference exposure. This net effect would be the increase in exposure arising from sold positions netted against the decrease arising from bought positions. For a sold position, the change in exposure equals the notional less the fair value amount; this represents the amount RBS would owe to its CDS counterparties if the reference entity defaulted. Positive recovery rates would tend to reduce the gross components (increases and decreases) of those numbers.
(9) NL - Netherlands; Lux - Luxemburg. (10) Other eurozone - Austria, Estonia, Finland, Latvia, Malta, Slovakia and Slovenia.
Credit risk assets analysed on pages 188 to 211 are reported internally to senior risk management. However, they exclude certain exposures, primarily securities and reverse repurchase agreements and take account of legal netting agreements, that provide a right of legal set-off but do not meet the offset criteria in IFRS. The tables that follow are therefore provided to supplement disclosures of credit risk assets and related information to reconcile to the balance sheet. All the disclosures in this section are audited. Whilst totals in tables within this section include balances relating to Citizens, detailed analysis and commentary exclude Citizens to facilitate like-for-like comparison with 2015.
Notes: (1) Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House and US
• The £238 billion net exposure comprises approximately one third each of cash and balances at central banks, unsecured commercial and personal bank lending, and debt securities.
Finance leases and instalment credit — 11,290 21 — 26 — 11,337 (1) 11,336
For geographic concentrations refer to: ° Lending: Loans and related credit metrics; ° Debt securities: Issuer and IFRS measurement and Credit risk - Country risk; ° Equity shares; and
The asset quality analysis presented below is based on internal asset quality ratings which have ranges for the probability of default. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across RBS map to both an asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Debt securities are analysed by external ratings and are therefore excluded from the following table and are set out on pages 224 to 226.
The mapping to the S&P ratings is used by RBS as one of several benchmarks for its wholesale portfolios, depending on customer type and the purpose of the benchmark. The mapping is based on all issuer types rated by S&P. It should therefore be considered illustrative and does not, for instance, indicate that exposures reported against S&P ratings either have been or would be assigned those ratings if assessed by S&P. In addition, the relationship is not relevant for retail portfolios, smaller corporate exposures or specialist corporate segments given that
Impairment AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Past due Impaired provision Total 2015 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
AQ1 AQ2 AQ3 AQ4 AQ5 AQ6 AQ7 AQ8 AQ9 AQ10 Past due Impaired provision Total 2014 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
• Capital Resolution’s disposal strategy and other portfolio reduction strategies resulted in the non-investment grade
being investment grade or higher, supported by benign economic and credit conditions.
EMEA Rates, the wind down of US ABP business and a decrease in APAC due to the exit of trading activities in
The tables below analyse gross loans and advances (excluding reverse repos) and related credit metrics by reportable segment.
REIL as a % Provisions Provisions as a % Impairment of gross loans as a % of gross loans losses/ Amounts
• Ulster Bank RoI: Lending decreased by £1.9 billion. Strong new lending volumes were offset by high levels of customer repayments, the sale of a £0.3 billion buy-to-let mortgage portfolio and exchange rate movements. Tracker mortgages portfolio reduced by £1.4 billion to £9.2 billion, making up two thirds of the mortgage book, and commercial real estate lending fell by £0.4 billion.
• CIB: lending fell by £10.4 billion, £5.0 billion reflecting the transfers to Commercial Banking and the rest primarily derivative collateral reduction.
• Capital Resolution lending fell by £38.1 billion and included loan sales in US £3.1 billion, APAC £2.2 billion and EMEA
• Risk elements in lending (REIL) declined by £14.7 billion to £12.2 billion, with REIL as a percentage of gross loans falling from 7.6% to 3.9%. The reduction was primarily driven by the disposals in RCR within Capital Resolution.
Impairment charge and provision The tables below analyse the categories, loan impairment losses/(releases) and provisions by reportable segment.
Impairment losses/(releases) Impairment provision 2015 Individual Collective Latent Total Individual Collective Latent Total £m £m £m £m £m £m £m £m
• Capital Resolution recorded net releases of £794 million, compared with £1,321 million, with disposal activity continuing. Ulster Bank RoI recorded net impairment releases of £142 million, a reduction from £306 million, as economic conditions in Ireland continue to improve whilst
• Amounts written-off increased by £4.0 billion of which £6.2 billion related to commercial real estate.
• Loan impairment provisions were about 41% of the level at 2014 year end at £7.1 billion and covered REIL by 59%
• Provisions were 2.3% of gross loans, significantly lower than 5.0% last year.
Citizens (1) REIL (1) REIL (1) Citizens provisions provisions 2015 £m £m £m £m £m £m
Currency translation and other adjustments (889) 29 (860) (579) 17 (562)
Transfers between REIL and potential problem loans (222) — (222) — — —
Release to the income statement from continuing operations — — — (853) — (853)
Currency translation and other adjustments (1,125) 75 (1,050) (710) 21 (689)
Release to the income statement from continuing operations — — — (1,364) — (1,364)
Impaired Accruing excluding Citizens Total excluding Citizens Total loans past due Citizens (1) REIL (1) REIL (1) Citizens (1) REIL (1) REIL (1) £m £m £m £m £m £m £m £m
Designated as at fair value (DFV) — — 111 — — — 111 —
Available-for-sale AFS reserves (gross of tax) 54 (52) (9) 12 257 5 267 117
Gross unrealised losses - excluding Citizens (1) (5) (3) (1) (133) (2) (145) (120)
• HFT: Decreases were due to exit of trading businesses, novation of equities portfolio, balance sheet reduction and risks.
RBS's ABS portfolio were more than 80% of European origin compared with 65% a year ago on a like for like basis reflecting the exit from the US asset-backed product business as well as other reductions in Capital Resolution.
Credit risk: balance sheet analysis continued Asset-backed securities The table below summarises the ratings of asset-backed securities on the balance sheet.
Total sponsored Non- CDOs & Other or similar (2) conforming CLOs ABS £m £m £m £m £m £m £m £m
The table below analyses holdings of equity shares for eurozone countries and other countries with balances of more than £50 million by country, issuer and measurement classification. The HFT positions are used mainly for economic hedging of debt issuances and equity derivatives. The AFS balances are individually small holdings in unlisted companies, mainly acquired through debt for equity transactions in Restructuring.
(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating. (3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting. Transactions include foreign exchange hedges and interest rate swaps. (4) Sovereigns and supranational entities with one way collateral agreements in their favour.
yields, partially offset by foreign exchange re-translation and the downward shift in US yields.
dollar against the euro and Japanese yen as the portfolio was materially positioned to receive US dollar and pay euro and Japanese yen at year end 2015.
• Credit derivatives. Credit compression cycles and the reduction of trading in the US asset-backed products business were the main drivers for the decrease in the notional and fair values.
• Net exposure at 31 December 2015 was two thirds of that a year ago decreasing by £5.4 billion to £12.6 billion reflecting bank strategy to reduce the scale of the investment bank.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The following table shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures. For discussion of CVA methodology, refer to Financial instruments - valuation on page 297.
Other valuation reserves - funding valuation adjustment (FVA) 752 718 - product and deal specific 660 657
Credit risk: balance sheet analysis continued Derivatives: settlement basis and central counterparties
Traded on Not settled Traded on Traded Traded on Traded recognised Settled by central by central recognised over the recognised over the exchanges counterparties counterparties Total exchanges counter exchanges counter £bn £bn £bn £bn £m £m £m £m
RBS is exposed to traded market risk through its trading activities and to non-traded market risk as a result of its banking activities.
During 2015, RBS continued to align its business with bank strategy, with an impact on both traded and non-traded market risk. Overall, this resulted in a further reduction of risk, a notable driver of which was the exit from a significant part of US assetbacked product (ABP) trading in the first half of the year.
Market Risk function adjusted to the new structure and recalibrated its market risk limits.
The increased market volatility and reduced liquidity were also the key drivers of the back-testing exceptions recorded by the
Non-traded interest rate risk (NTIRR) arises from the provision to customers of a range of banking products that have differing interest rate characteristics. When aggregated, these products form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market interest rates. Mismatches in these characteristics can give rise to volatility in net interest income as interest rates vary.
For general information on risk governance, refer to the Risk governance section on page 135.
The limit framework at RBS level comprises VaR, stressed valueat -risk (SVaR) and sensitivity and stress limits (for more details on VaR and SVaR, refer to pages 232 to 237). The limit framework at trading unit level also comprises additional metrics that are specific to the market risk exposures within its scope.
For information on risk controls and assurance, refer to page 138.
Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks.
daily report that summarises market risk exposures against the limits set by the Executive Risk Forum is sent to the Chief Risk
Committee, the Board Risk Committee and the Board. The update focuses on risk profiles relative to risk appetite; it also covers the key risks and trends, together with a discussion of relevant issues and market topics.
The reporting and updates facilitate frequent reviews and discussions of traded market risk exposures and related issues between the market risk functions, senior management and the front office.
RBS uses a comprehensive set of methodologies and techniques to measure traded market risk.
The key inputs into these measurement methods are market data and sensitivities. Sensitivities refer to the changes in deal or portfolio value that result from small changes in market parameters that are subject to the market risk limit framework.
VaR model is based on a historical simulation, utilising market data from the previous 500 days on an equally weighted basis.
The internal VaR model captures the potential impact on the income statement of the following risk factors: • Interest rate risk - which arises from the impact of changes in interest rates and volatilities on cash instruments and derivatives. This includes interest rate tenor basis risk and cross-currency basis risk.
• Credit spread risk - which arises from the impact of changes in the credit spreads of sovereign bonds, corporate bonds, securitised products and credit derivatives.
• Currency risk - which arises from the impact of changes in currency rates and volatilities.
• Commodity risk - which arises from the impact of changes in commodity prices and volatilities.
The following types of risk - which are components of the abovementioned factors - are also considered: • Basis risk - which is the risk that imperfect correlation between two instruments in a hedging strategy creates the potential for excess gains or losses, thus adding risk to the position; • Prepayment risk - which is the risk associated with early unscheduled return of principal on a fixed rate security; and
• Inflation risk - which is the risk of a decrease in the value of instruments as a result of changes in inflation rates and associated volatilities.
‘tail’ risks. These risks are more appropriately assessed using measures such as SVaR and stress testing.
The use of a one-day time horizon does not fully capture the profit and loss implications of positions that cannot be liquidated or hedged within one day. This may not fully reflect market risk at times of severe illiquidity in the market when a one-day period may be insufficient to liquidate or hedge positions fully. Thus, the regulatory VaR that is used for modelled market risk capital uses a ten-day time horizon.
Finally, volatile market conditions, such as those experienced in 2015, can lead to new risk factors emerging. RBS addresses this issue by using a combination of proxy risk factors and the RNIV
• Total traded VaR decreased in 2015, falling by 24% on a period end basis and by 32% on an average basis. This reflected the continued alignment of the trading business with the bank’s strategic ambitions. A notable driver was the decrease in credit spread VaR reflecting the exit from a significant part of US asset-backed product (ABP) trading in the first half of 2015.
• VaR remained volatile, reflecting developments in the eurozone periphery, evolving geopolitical risks - notably, developing tensions in the Middle East and in Russia and
Quantitative analysis is used to: • Perform internal back-testing to complement the regulatory back-testing; and
In addition, as part of ongoing risk management, any market or portfolio weaknesses that could become significant are identified.
The VaR model is also subject to independent reviews carried out by Model Risk Management (refer to page 138).
Therefore, it is subject to not only ongoing internal review and validation but also regulator-prescribed back-testing.
The main approach employed to assess the ongoing performance of the VaR model is back-testing, which counts the number of days when a loss exceeds the corresponding daily
Actual or Hypo P&L exceeds the VaR level on a given day. Such an event may be caused by a large market movement or may highlight issues such as missing risk factors or inappropriate time series. Any such issues identified are analysed and addressed through taking appropriate remediation or development action.
Back-testing at the legal entity level is performed and reported on 1-day 99% regulatory VaR. Back-testing at the franchise level and lower-level portfolios is performed on 1-day 99% internal
The graph below presents 1-day 99% regulatory VaR vs. Actual and Hypo P&L for RBS plc, RBS's largest legal entity by market risk
• Statistically RBS would expect to see back-testing exceptions 1% of the time over a period of 250 business days. From a capital requirement perspective, the PRA
categorises a firm’s VaR model as green, amber or red. A
model and is achieved for models that have four or fewer exceptions in a continuous 250-day period. An amber model status suggests potential issues regarding the quality or accuracy of the model in question but no definitive conclusions.
• Most of the back-testing exceptions experienced in the period were driven by the higher market volatility and reduced liquidity.
However, on the dates when the exceptions occurred, the residual risk at end of the day resulted in the exceptions due to the business being adversely positioned to market moves.
The table below shows internal back-testing exceptions for a period of 250 days for 1-day 99% traded internal VaR vs. Actual and Hypo
• The exception in the Securitised Products business was due to a loan re-mark.
VaR-based measure using historical data from a one-year period of stressed market conditions.
The RNIV approach is used for market risks that are insufficiently captured by the VaR and SVaR model methodologies, for example due to a lack of suitable historical data. The RNIV
framework has been developed to quantify these market risks and to ensure that RBS holds adequate capital.
The RNIV calculations provide a capital estimate of risks not captured in the VaR model and are regularly reported and discussed with senior management and the regulator. The methodology used in the material RNIV calculations is internally reviewed by Model Risk. Where appropriate, risk managers set sensitivity limits to control specific risk factors giving rise to the
RNIV. RNIV calculations form an integral part of RBS’s ongoing model and data improvement efforts to capture all market risks in scope for model approval in VaR and SVaR.
Regulatory VaR), RNIV amounts are aggregated to obtain the following three measures: (i) Total VaR RNIV; (ii) Total SVaR
RNIV; and (iii) Total stress-based RNIV. In each of these categories, potential diversification benefits between RNIVs are ignored.
The most material categories of RNIV are proxied sensitivities or risk factors, missing basis risks and static pricing parameters.
These risk factor movements and the resulting valuation changes are typically smaller than those considered in other stress tests.
VaR, the current portfolio is stressed using historical data since 1
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses the key vulnerabilities of the portfolio in terms of plausible, so-called vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical.
VaR and SVaR capture general and specific risks but not risks arising from the impact of defaults and rating changes associated with traded credit products and their derivatives. For these risks, two product-dependent approaches are used: • The incremental risk charge (IRC) model captures risks arising from rating migration and default events for the more liquid traded credit instruments and their derivatives.
• Securitisation and re-securitisation risks in the trading book are treated with the non-trading book non-modelled capitalisation approach.
The calculation of regulatory VaR differs from that of the internal
• RBS’s total market risk minimum capital requirement fell in 2015, driven by decreases in both the non-modelled component and the overall Pillar 1 model-based component.
• The decrease in the non-modelled PRR was largely driven by a decline in trading book securitisations as a result of asset disposals, in line with the wind-down of the US ABP
business. This was partially offset by an increase in the foreign currency PRR, reflecting the sale of Citizens, which led to an increase in the US dollar capital position.
• The SVaR charge fell by 7%, reflecting risk reduction in RBS
AAA AA A BBB BB B CCC Total £m £m £m £m £m £m £m £m
Cash - asset-backed securities — — — — 0.2 — — 0.2
Ratings (1) Non Noninvestment modelled AAA AA A BBB grade Unrated Total (1,2) PRR (3)
Notes: (1) Based on S&P ratings. (2) Includes both long and short positions. (3) Percentage of total non-modelled position risk requirement. (4) There were no capital deductions in 2014 or 2015.
Additional details relating to pricing and market risk models are presented below.
RBS holds appropriate capital for the market risk to which it is exposed.
In addition to MRM’s independent oversight, the model testing team monitors the model performance for market risk through back-testing, which is discussed in more detail on page 235, and other processes.
RBS manages the three key categories of non-traded market risk separately. The categories are: non-traded interest rate risk; nontraded foreign exchange risk; and non-traded equity risk.
The Chief Risk Officer delegates responsibility for day-to-day control of non-traded market risk to the Director of Market Risk.
or their interest rates reset (in the case of floating-rate positions) at different dates. These mismatches may give rise to net interest income and economic value volatility as interest rates vary.
• Optionality risk - which arises when customers have the right to terminate, prepay or otherwise alter a transaction without penalty, resulting in a change in the timing or magnitude of the cash flows of an asset, liability or offbalance sheet instrument.
This task is primarily carried out by Treasury, to which all businesses except CIB transfer most of their NTIRR. The main exposures and limit utilisations are reported to the ALCo and the
The only material non-traded open currency positions are the structural foreign exchange exposures arising from investments in foreign subsidiaries, branches and associates and their related currency funding. These exposures are assessed and managed by Treasury to predefined risk appetite levels under delegated authority from the ALCo. Treasury seeks to limit the potential volatility impact on RBS’s Common Equity Tier 1 (CET1) ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity reserves and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals RBS’s CET1 ratio. The sensitivity of the CET1 capital ratio to exchange rates is monitored monthly and reported to the ALCo at least quarterly.
(generally one year) impact on the income statement of charges in interest rates.
These two approaches provide different yet complementary views of the impact of interest rate risk on the balance sheet at a point in time. The scenarios employed in the NII sensitivity approach incorporate business assumptions and simulated modifications in customer behaviour as interest rates change. In contrast, the VaR approach assumes static underlying positions and therefore does not provide a dynamic measurement of interest rate risk. In addition, while the NII sensitivity calculations are measured to a 12 month horizon and thus provide a shorter-term view of the risks on the balance sheet, the
• The main movements by currency in 2015 related to US
Earnings sensitivity to rate movements is derived from a central forecast over a 12 month period. A simplified scenario is shown based on the period-end balance sheet assuming that noninterest rate variables remain constant. Market implied forward rates are used to generate a base case earnings forecast, which is then subjected to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
The following table shows the sensitivity of net interest income, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base case earnings sensitivity and mismatches in the re-pricing dates of loans and deposits.
Euro Sterling US dollar Other Total 2015 £m £m £m £m £m
+ 100 basis point shift in yield curves (17) 385 94 7 469
− 100 basis point shift in yield curves (7) (345) (79) 2 (429)
+ 100 basis point shift in yield curves — — 154 — 154
− 100 basis point shift in yield curves (34) (298) (87) (12) (431)
• Changes in pricing strategies and increased hedging of customer deposits are the key actions in retail and commercial banking that may reduce the interest rate sensitivity.
• The incremental impact of product hedges on net interest income above 3 month LIBOR remained positive in 2015.
The notional size of the hedge increased from £64 billion in 2014 to £72 billion, split by business broadly in line with the proportion of income as shown above. During the year, interest rates remained at or close to historical low levels, as a result of which the average book yield (including 3 month
• At 31 December 2015, the equivalent yield available in the market was 1.45% compared with 1.34% one year previously.
(2014 - £0.8 billion), which is an incremental benefit relative to short-term wholesale cash rates. The year-on-year fall in yield mainly results from reinvestment of maturing hedges at lower rates. The size of the hedge was unchanged from 2014 at £41 billion in 2015.
Sensitivity of available-for-sale and cashflow hedging reserves to interest rate movements*
+25 basis points -25 basis points +100 basis points -100 basis points 2015 £m £m £m £m
US dollar - total including Citizens 11,402 (2,321) 9,081 (3,683) 5,398 (4,034) 1,364
• Structural foreign currency exposure at 31 December 2015 was £7.6 billion and £4.6 billion before and after economic hedges respectively, £4.0 billion and £0.9 billion lower than
• The disposal of Citizens contributed significantly to: ° The £9.9 billion decline in net assets of overseas operations; ° The £2.2 billion decline in non-controlling interests; and
Equity positions are carried at fair value on the balance sheet based on available market prices where possible. In the event that market prices are not available, fair value is based on appropriate valuation techniques or management estimates.
The table below shows the balance sheet carrying value of non-traded book equity positions.
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity shares with no observable market parameters or (iii) other unlisted equity shares. Excluding Citizens Citizens
Unrealised gains included in Tier 1 or Tier 2 capital 301 197 2 199
Gains on equity securities designated at fair value through profit or loss but not held for trading purposes were £367 million for 2015
The interest rate risk and credit spread risk in Treasury arise primarily from portfolios held for liquidity and collateral management purposes. Credit spread risk is the risk arising from the volatility in the spread between bond and swap rates and arises mainly from those non-trading book debt securities that are accounted at fair value. This risk is reflected through changes in the portfolio valuation and is recognised in capital through available-for-sale (AFS) reserves.
The table below shows the interest rate and credit spread VaR relating to these exposures.
Note: (1) Interest rate exposure managed outside the structural interest rate exposure process.
Capital for NTIRR is captured under the Pillar 2A process. This is calculated by considering the potential impact on RBS’s economic value over a one year horizon. The four main sources of NTIRR - repricing, yield curve, basis and optionality risks - are captured in the calculation.
Pillar 1 capital must be held for non-trading book foreign exchange exposures, as outlined under CRR Articles 455 and 92(3)c. Structural foreign exchange exposures are excluded from the calculations as outlined under CRR Article 352(2); such exposures are considered under Pillar 2A.
The table below analyses RBS’s balance sheet by trading and non-trading business. 2015 2014 Trading Non-trading Trading Non-trading Total business (1) business (2) Total business (1) business (2)
Cash and balances at central banks 79.9 — 79.9 75.5 — 75.5 Interest rate
Debt securities 82.5 35.9 46.6 101.9 49.3 52.6 Interest rate, credit spreads
Derivatives 262.5 260.0 2.5 354.0 350.1 3.9 Interest rate, credit spreads
Short positions 20.8 20.8 — 23.0 23.0 — Interest rate, credit spreads
Notes on the consolidated accounts 1 Net interest income 281 2 Non-interest income 281 7 Earnings per ordinary share 293 10 Financial instruments - maturity analysis 307 16 Property, plant and equipment 315 17 Prepayments, accrued income and other assets 316 18 Discontinued operations and assets and liabilities of disposal groups 317 20 Provisions, accruals and other liabilities 319 23 Non-controlling interests 325 31 Net cash flow from operating activities 347 32 Analysis of the net investment in business interests and intangible assets 347 33 Interest received and paid 348 34 Analysis of changes in financing during the year 348 35 Analysis of cash and cash equivalents 348 37 Directors’ and key management remuneration 354 38 Transactions with directors and key management 354 40 Post balance sheet events 355
In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s loss for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European
The financial statements comprise the consolidated income statement, the consolidated and parent company balance sheets as at 31
We have nothing material to add or draw attention to in relation to: • the directors’ confirmation on page 32 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; • the disclosures on pages 30 to 31 that describe those risks and explain how they are being managed or mitigated; • the directors’ statement on page 89 about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • the directors’ explanation on page 32 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and we confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk How the scope of our audit responded to the risk
• The recognition, measurement and disclosure of litigation and regulatory exposures in respect of mortgage-backed securities in the US.
We tested the design and operating effectiveness of the Group’s key controls over the identification, recording and disclosure of exposures. The controls tested included those over the timely identification of exposures; the completeness and accuracy of data used in any models; and the assessment of the provision and disclosure of exposures in accordance with the relevant accounting standards.
We challenged the adequacy of provisions recognised by critically assessing the key assumptions used in the provision models and comparing the assumptions to available peer and historical data.
We also assessed the disclosures provided on conduct and litigation exposures in order to determine whether the disclosures were sufficiently clear regarding the uncertainties that existed in relation to the contingent liabilities and provisions recognised, including testing the disclosures on the sensitivity of the provisions to changes in the underlying assumptions.
As set out in the Accounting policies, the Group uses one of three methods to assess the amount of impairment provisions required: • For larger, individually significant loans and advances, impairments are assessed on an individual basis. These are largely in the Corporate & Institutional Banking,
• Latent loss provisions are held against losses that have been incurred but have not been identified at the year end. Latent provisions are held against loans and advances across all segments and calculated using models based on probabilities of default and loss given default as well as emergence periods between the impairment event occurring and an individual or collective impairment being recognised.
The most significant judgements arise on impairments recorded against loans and advances in Capital Resolution (£2 billion at 31 December 2015). As a result of the strategy to exit these assets, loan impairments in Capital Resolution remain particularly sensitive to changes in market conditions.
We tested a sample of loans and advances (including loans that had not been identified by management as potentially impaired) to form our own assessment as to whether impairment events had occurred and to assess whether impairments had been identified in a timely manner. We challenged the completeness of assets considered to be in forbearance and we increased the focus on loans that were not reported as being impaired in sectors that are currently experiencing difficult economic and market conditions including the oil and gas and shipping sectors.
For individually assessed loans we selected a sample of loans and, where we deemed them to be impaired, tested the estimation of the future expected cash flows from customers including from realisation of collateral held. This work involved assessing the work performed by external experts used by the Group to value the collateral or to assess the estimates of future cash flows. In some cases we used our own industry experts, particularly in respect of commercial real estate and shipping loans, to assess the appropriateness of valuations and estimates used by the Group. Where we determined that a more appropriate assumption or input in provision measurement could be made, we recalculated the provision on that basis and compared the results in order to assess whether there was any indication of error or management bias.
For instruments with significant, unobservable valuation inputs, and in respect of valuation adjustments relating to credit and funding, we used our own internal valuation experts to assess and challenge the valuation assumptions used, including considering alternative valuation methodologies used by other market participants.
Included on the Group’s balance sheet at 31 December 2015 are deferred tax assets of £2,631 million, goodwill of £5,558 million and other intangible assets of £979 million that are supported by the Group’s forecasts of future profitability. During the year a goodwill impairment of £498 million was recorded as a result of a reduction in future expected profits from the Private Banking segment, and an impairment of £834 million on other intangible assets was recorded as a result of the decision taken to restructure the Corporate & Institutional Banking franchise with a resulting impact on future profit forecasts.
Bill and the anticipated impact of ring-fencing on the Group’s future taxable profits.
We compared the directors’ assumptions on growth rates and discount rates to industry averages, those used by peer organisations and other economic metrics, considering reasonable alternative assumptions. We tested the Group’s forecasts of profits, comparing the forecasts to historical experience and assessing whether the forecast is reflective of the Group’s committed plans.
As described in Note 1 on page 267, in 2015 the Group revised its accounting policy for determining whether or not it has an unconditional right to a refund of any surplus in its defined pension schemes. This change of policy had the effect of reducing retained earnings by £1,483 million at 1 January 2015.
We used our pensions accounting specialists and our own actuaries to understand, challenge, assess and review pertinent evidence and calculations made in determining the pension assets and liabilities.
• the asset ceiling, which is the amount of any surplus eligible to continue to be recognised as an asset representing the benefits available from reductions in future service contributions for current employees.
Where these deficiencies affected applications and databases within the scope of our audit we performed a combination of controls testing and substantive testing in order to determine whether we could place reliance on the completeness and accuracy of system generated information, including: • Determined whether unauthorised or inappropriate changes had been made to the affected databases and IT application systems; and
We determined materiality for the Group to be £300 million (2014 - £300 million), which was calculated as 0.6% (2014 - 0.5%) of the total equity of the Group. This represented 25% of the Group’s loss for the year (2014 - 11% of the Group’s loss). Our materiality in both 2015 and 2014 was based on the equity of the Group given the significant volatility of the Group’s profits and losses in recent years.
We agreed with the Group Audit Committee that we would report all audit differences in excess of £15 million, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Group Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
The scope of our Group audit was determined by obtaining an understanding of the Group and its environment, including group-wide controls and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope on the components of the audit that have most significance to the financial statements. The significant components of our audit are consistent with the operating segments identified in the financial statements together with the central functions of the Group including Finance (both in the UK and overseas), Treasury and Services. A number of these components consist of a number of different operations with audit work performed in different countries. Full scope audits were performed of the Group’s operations in 6 countries, and a further 15 countries were subject to an audit of specified account balances or specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations at those locations. The audit work performed across the 21 countries accounted for 98% (2014 - 99%) of the Group’s total assets and
The Group audit team sent component auditors detailed instructions on audit procedures to be undertaken and the information to be reported back to the Group audit team. Regular contact was maintained throughout the course of the audit with key component auditors which included holding Group planning meetings, maintaining regular communications on the status of the audits and continuing with a programme of planned visits designed so that the Senior Statutory Auditor or another senior member of the Group audit team visited each significant component audit team a number of times during the year.
• the parent company financial statements are not in agreement with the accounting records and returns.
Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Write down of goodwill and other intangible assets (1,332) (523) (1,403)
Profit/(loss) from discontinued operations, net of tax 18 1,541 (3,445) 558
Basic and diluted loss from continuing and discontinued operations 7 (17.2p) (30.6p) (80.3p)
Recycled to profit or loss on ceding control of Citizens (4) 9 — —
Shares issued under employee share schemes — 23 1 *Restated - refer to page 267 for further details. For notes to these tables refer to page 265.
The accompanying notes on pages 281 to 355, the accounting policies on pages 267 to 280 and the audited sections of the Business review: Capital and risk management on pages 133 to 251 form an integral part of these financial statements.
Movements in cash flow hedging reserve - amount recognised in equity 32 18 —
Notes: (1) In October 2015, all B shares were converted into ordinary shares of £1 each.
The accounts are prepared on a going concern basis (see the
On 31 December 2014, Citizens Financial Group Inc. was classified as a discontinued operation and a disposal group: its aggregate assets were presented in Assets of disposal groups and its aggregate liabilities in Liabilities of disposal groups. Prior period results were re-presented.
From 3 August 2015, when RBS’s interest in Citizens fell to 20.9%, Citizens was accounted for as an associate classified as held for sale. RBS subsequently completed its divestment of
In the fourth quarter of 2015, the Group changed its accounting policy for the recognition of surpluses in its defined benefit pension schemes: in particular, the policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. Where the Group has a right to a refund, this is not deemed unconditional if pension fund trustees are able unilaterally to enhance benefits for plan members. As a result of this change, a minimum funding requirement to cover an existing shortfall in a scheme may give rise to an additional liability and surpluses may not be recognised in full. The revised accounting policy, by taking account of the powers of pension trustees in assessing the economic benefit available as a refund, provides more relevant information about the effect on the Group’s financial position of its defined benefit pension schemes.
In accordance with IFRS, the amended policy has been applied retrospectively and prior periods restated. The impact of the change in policy is set out below.
There are no adjustments to the income statement in 2014 and 2013. The adjustment in 2015 reduced basic and diluted earnings per ordinary share by 0.5p.
Total comprehensive loss after tax (1,869) (812) (2,681) (783) (1,399) (2,182) (10,189) (45) (10,234)
Under As previously As previously previous policy Adjustment As published reported Adjustment Restated reported Adjustment Restated £m £m £m £m £m £m £m £m £m
Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those measured at fair value are determined using the effective interest method.
Income is accrued at period end for services provided but not yet charged.
non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. If the asset (or disposal group) is acquired as part of a business combination it is initially measured at fair value less costs to sell.
The results of discontinued operations - comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised either on measurement to fair value less costs to sell or on disposal of the discontinued operation - are shown as a single amount on the face of the income statement; an analysis of this amount is presented in Note 18 on the accounts. A
Accounting policy 25. Variable compensation that is settled in cash or debt instruments is charged to profit or loss over the period from the start of the year to which the variable compensation relates to the expected settlement date taking account of forfeiture and clawback criteria.
For defined benefit schemes, the defined benefit obligation is measured on an actuarial basis using the projected unit credit method and discounted at a rate determined by reference to market yields at the end of the reporting period on high quality corporate bonds of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. The difference between scheme assets and scheme liabilities - the net defined benefit asset or liability - is recognised in the balance sheet. A defined benefit asset is limited to the present value of any economic benefits available to the Group in the form of refunds from the plan or reduced contributions to it.
Group's interest in the net fair value of the subsidiary’s identifiable assets, liabilities and contingent liabilities. Goodwill arises on the acquisition of a joint venture when the cost of investment exceeds the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities. Goodwill is measured at initial cost less any subsequent impairment losses.
over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Freehold land is not depreciated.
At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value is not greater than it would have been had no impairment loss been recognised.
Investment property is not depreciated but is stated at fair value.
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences arising on nonmonetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale nonmonetary financial assets, for example equity shares, which are recognised in other comprehensive income unless the asset is the hedged item in a fair value hedge.
Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. Income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to profit or loss on disposal of a foreign operation.
Finance lease receivables are included in the balance sheet, within Loans and advances to customers, at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment and included in Interest receivable. Unguaranteed residual values are subject to regular review; if there is a reduction in their value, income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
The Group’s contracts to lease assets are principally operating leases. Operating lease rental expense is included in Premises and equipment costs and recognised as an expense on a straight-line basis over the lease term unless another systematic basis better represents the benefit to the Group.
Current tax is income tax payable or recoverable in respect of the taxable profit or loss for the year arising in profit or loss, other comprehensive income or equity. Provision is made for current tax at rates enacted or substantively enacted at the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered. Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is calculated using tax rates expected to apply in the periods when the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract. Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Available-for-sale financial assets - financial assets that are not classified as held-to-maturity; held-for-trading; designated as at fair value through profit or loss; or loans and receivables are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Availablefor -sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as available-for-sale financial assets. Impairment losses and exchange differences resulting from retranslating the amortised cost of foreign currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest method (see
Additionally, held-for-trading financial assets that do not meet the definition of loans and receivables may, in rare circumstances, be transferred to available-for-sale financial assets or to held-tomaturity investments. Reclassifications are made at fair value.
Impaired loans and receivables are written off, i.e. the impairment provision is applied in writing down the loan's carrying value partially or in full, when the Group concludes that there is no longer any realistic prospect of recovery of part or all of the loan.
Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 12. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
Borrowed securities are not recognised on the balance sheet or lent securities derecognised.
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the
Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The
Derivative financial instruments are initially recognised, and subsequently measured, at fair value. The Group’s approach to determining the fair value of financial instruments is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Note 9.
Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial Reporting’. The judgements and assumptions involved in the Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the
In determining the value of scheme liabilities, financial and demographic assumptions are made including price inflation, pension increases, earnings growth and the longevity of scheme members. A range of assumptions could be adopted in valuing the schemes' liabilities. Different assumptions could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group's pension schemes are set out in Note 4 on the accounts, together with sensitivities of the balance sheet and income statement to changes in those assumptions.
The Group capitalises goodwill arising on the acquisition of businesses, as discussed in Accounting policy 6. The carrying value of goodwill as at 31 December 2015 was £5,558 million
States and other jurisdictions, arising out of their normal business operations. The measurement and recognition of liabilities in respect of litigation involves a high degree of management judgement. Before the existence of a present obligation as the result of a past event can be confirmed, numerous facts may need to be established, involving extensive and time-consuming discovery, and novel or unsettled legal questions addressed.
Once it is determined there is an obligation, assessing the probability of economic outflows and estimating the amount of any liability can be very difficult. In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. Furthermore, for an individual matter, there can be a wide range of possible outcomes and often it is not practicable to quantify a range of such outcomes. The
Group’s outstanding litigation is periodically assessed in consultation with external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability. A detailed description of the Group’s material legal proceedings and a discussion of the nature of the associated uncertainties are given in Note 30.
The Group makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £2,631 million were recognised as at 31 December 2015 (2014 - £1,911 million).
Deferred tax assets of £6,349 million (2014 - £5,738 million) have not been recognised in respect of tax losses and other temporary differences where the availability of future taxable profits is uncertain. Further details about the Group’s deferred tax assets are given in Note 21.
Where the Group manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, it measures the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction at the measurement date under current market conditions.
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Further details about the Group’s valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given in Note 9.
issued in May 2014 amends IFRS 11 ‘Joint Arrangements. An acquirer of an interest in a joint operation that is a business applies the relevant principles for business combinations in IFRS
IFRS 12 ‘Disclosure of Interests in Other Entities’ and IAS 28
September 2014 to clarify the accounting for sales between an investor, its associate or joint ventures, and in December 2014 to clarify the application of the investment entity consolidation exception. The September 2014 amendments will be effective from a date to be determined by the IASB and the December
was issued in December 2014 to clarify the application of materiality to financial statements. Its effective date is 1 January
The material in IAS 39 setting out the criteria for the recognition and derecognition of financial instruments has been included unamended in IFRS 9.
Financial assets - There are three classifications for financial assets in IFRS 9: fair value through profit or loss; fair value through other comprehensive income; and amortised cost.
• Other financial assets are measured at fair value through profit and loss.
Hedge accounting requirements are designed to align accounting more closely to the risk management framework; permit a greater variety of hedging instruments; and remove or simplify some of the rule-based requirements in IAS 39. The basic mechanics of hedge accounting: fair value, cash flow and net investment hedges are retained. There is an option in IFRS 9 for an accounting policy choice to continue with the IAS 39 hedge accounting framework. The Group is actively considering its implementation approach.
IFRS 9’s credit impairment requirements apply to financial assets measured at amortised cost, to those measured at fair value through other comprehensive income, to lease receivables and to certain loan commitments and financial guarantee contracts. On initial recognition a loss allowance is established at an amount equal to 12-month expected credit losses (‘ECL’) that is the portion of life-time expected losses resulting from default events that are possible within the next 12 months. Where a significant increase in credit risk since initial recognition is identified, the loss allowance increases so as to recognise all expected default events over the expected life of the asset. The Group expects that financial assets where there is objective evidence of impairment under IAS39 will be credit impaired under IFRS 9, and carry loss allowances based on all expected default events.
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted: determined by evaluating at the reporting date for each customer or loan portfolio a range of possible outcomes using reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions. The estimation of ECL also takes into account the time value of money. Recognition and measurement of credit impairments under IFRS 9 are more forward-looking than under IAS 39.
A single bank-wide programme has been established to implement the necessary changes in the modelling of credit loss parameters, and the underlying credit management and financial processes; this programme is led jointly by Risk and Finance.
The inclusion of loss allowances on all financial assets will tend to result in an increase in overall impairment balances when compared with the existing basis of measurement under IAS 39.
Statements’ to require disclosure of the movements in financing liabilities. The amendment is effective from1 January 2017.
‘Revenue’ and several Interpretations. Contracts are bundled or unbundled into distinct performance obligations with revenue recognised as the obligations are met. It is effective from 1
Internal funding of trading businesses 105 91 329 £m £m £m
Other changes in the fair value of financial assets and liabilities designated as at fair value through profit or loss and related derivatives 375 83 (26)
Changes in the fair value of investment properties 2 (25) (281)
Write down of goodwill and other intangible assets (see Note 15) 1,332 523 1,403
Notes: (1) Includes Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, and other litigation and conduct costs. Further details are provided in
Note 20. (2) Includes other administrative expenses, write down of goodwill and other intangible assets.
As described in the Remuneration report on page 82, the Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award (1) Vesting conditions (2) Settlement
Notes: (1) Awards are equity-settled unless international comparability is better served by cash-settled awards. (2) All awards have vesting conditions and therefore some may not vest. (3) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan, the Medium-Term Performance Plan and the Employee Share Plan.
The fair value of options granted in 2015 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to seven years; expected option lives that equal the vesting period; no dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
Options are exercisable within six months of vesting; 1.0 million options were exercisable at 31 December 2015 (2014 - 1.9 million; 2013 - 1.3 million). The weighted average share price at the date of exercise of options was £3.54 (2014 - £3.65; 2013 - £3.36). At 31
December 2015, exercise prices ranged from £2.33 to £18.93 (2014 and 2013 - £2.33 to £39.27) and the remaining average contractual life was 2.9 years (2014 - 3.7 years; 2013 - 3.5 years). The fair value of options granted in 2015 was £12 million (2014 - £18 million; Value at Shares Value at Shares Value at Shares grant awarded grant awarded grant awarded £m (million) £m (million) £m (million)
The awards granted in 2015 vest evenly over the following three anniversaries.
The market value of awards vested/exercised in 2015 was £55 million (2014 - £44 million; 2013 - £37 million). There are vested options over 5 million shares exercisable up to 2019 (2014 - 7 million; 2013 - 13 million).
Variable compensation awards The following tables analyse the Group and CIB variable compensation awards for 2015.
Proportion of variable compensation that is deferred 84% 84% 97% 96%
Income statement charge for amounts awarded in current year 276 271 306
Add: current year charge for amounts deferred from prior years 140 201 279
Less: forfeiture of amounts deferred from prior years (102) (64) (37)
Less: clawback of variable compensation deferred from prior years (10) (3) — — —
Notes: (1) The tables above relate to continuing businesses only. (2) Cash awards are limited to £2,000 for all employees. (3) Excludes other performance related compensation. (4) Reported operating profit excluding Citizens Financial Group before variable compensation expense and one-off and other items. CIB 2014 data excluding the impact of the creation of Capital Resolution. (5) CIB variable compensation as a percentage of operating profit/(loss) for 2015 is impacted by the reduced scale and resources in CIB as the segment is reshaped and income decreases faster than costs.
Group’s retirement benefit obligations, was closed to new entrants in 2006. Since 2009, pensionable salary increases in the
The sterling yield curve (applied to 93% of the Group’s defined benefit obligations) is constructed by reference to yields on ‘AA’
corporate bonds from which a single discount rate is derived based on a cash flow profile similar in structure and duration to the pension obligations. Significant judgement is required when setting the criteria for bonds to be included in the population from which the yield curve is derived.
Equity and bond call options 6,277 744 1 7,382 846 48
Swaps are part of the management of the inflation and interest rate sensitivity of the Main scheme liabilities. They have been executed at prevailing market rates and within standard market bid/offer spreads with a number of banks, including The Royal
Collateral is required on all swap transactions. The banks had delivered £1,267 million of collateral at 31 December 2015 (2014
Ordinary shares of the company with a fair value of £2 million
Effect of changes in actuarial financial assumptions — (1,124) (1,124) — (1,387) (1,387)
Effect of changes in actuarial demographic assumptions — 112 112 — 48 48
Note: (1) In recognising the net surplus or deficit of a pension scheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement imposed on the sponsor and any ceiling on the amount that the sponsor has a right to recover from a scheme.
Net assets of schemes in surplus (included in Prepayments, accrued income and other (215) (180)
The income statement charge comprises: £m £m £m *Restated - refer to page 267 for further details
Main scheme (decrease)/increase in obligation at 31 December 0.25% increase in the discount rate (1,392) (1,466)
Fair value of plan assets 30,703 30,077 24,272 22,441 21,111 34,708 34,359 28,488 26,370 25,086
The trustee of the Main scheme is responsible for setting the actuarial assumptions used in the triennial funding valuation having taken advice from the Scheme Actuary. These represent the trustee’s prudent estimate of the future experience of the Main scheme taking into account the covenant provided by RBS and investment strategy of the scheme. They are agreed with RBS and documented in the
The key assumption methodology used at the 31 March 2013 valuation is set out below: Principal actuarial assumptions
Discount rate Fixed interest swap yield curve plus 1.5% per annum at all durations
Fees payable to the auditor and its associates for other services to the Group - the audit of the company’s subsidiaries 19.3 24.2
Notes: (1) Comprises fees of £0.8 million (2014 - £0.9 million) in relation to reviews of interim financial information, £2.5 million (2014 - £2.5 million) in respect of reports to the Group’s regulators in the UK and overseas, £0.4 million (2014 - £0.3 million) in respect of internal controls assurance and £1.1 million (2014 - £1.1 million) in relation to non-statutory audit opinions.
(2) Comprises fees of £1.1 million (2014 - £0.9 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the Group, including securitisations, £0.6 million (2014 - £0.8 million), and a working capital report in connection with a circular to shareholders, £0.4 million. Fees in 2014 included £0.8 million in respect of reporting accountant services in connection with disposals by the Group.
Losses and temporary differences in year where no deferred tax asset recognised (1,086) (89) (887)
(2) Prior year tax adjustments for 2015 include releases of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations in line with the strategy to become a smaller, simpler UK focused bank. The prior year tax adjustment also reflects adjustments to reflect submitted tax computations in the UK and overseas and a further prior year tax credit in respect of tax losses arising in the Belfast Branch of Ulster Bank Ireland Limited reflecting UK tax law changes and European Court of Justice decisions on the surrender of tax losses.
(Profit)/loss from discontinued operations attributable to ordinary shareholders (1,207) 3,527 (521)
Weighted average number of ordinary shares outstanding during the year 11,516 11,356 11,196
Effect of dilutive share options and convertible securities 60 91 115
Note: (1) All periods include the effect of 51 billion B shares that were converted to 5.1 billion ordinary shares in October 2015 (see Note 24).
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within other assets and other liabilities.
Held-for- through profit Hedging Available- Loans and Held-to- Finance Other trading or loss derivatives for-sale receivables maturity leases assets £m £m £m £m £m £m £m £m £m
Liabilities trading or loss derivatives Amortised cost liabilities £m £m £m £m £m £m
Liabilities of disposal groups 71,320 71,320 *Restated - refer to page 267 for further details.
The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or subject to enforceable master netting agreement together with financial collateral received or given.
Amount that Reduction/ Amount recognised in would have been (increase) in the income statement recognised had profit or loss
Note: (1) A loss of £3 million (2014 - gain of £12 million) was taken to AFS reserves.
RBS's control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent of the businesses entering into the transactions. There are specific controls to ensure consistent pricing policies and procedures, incorporating disciplined price verification. RBS ensures that appropriate attention is given to bespoke transactions, structured products, illiquid products and other instruments which are difficult to price.
IPV takes place at least each month end date, for exposures in the regulatory trading book and at least quarterly for exposures in the regulatory banking book. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Pricing Unit determines IPV policy, monitors adherence to that policy and performs additional independent reviews of highly subjective valuation issues.
Product Control team following the principles in IFRS 13. They base their judgment on information gathered during the IPV
Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g. interest rate caps and floors)
• Interest rates - these are principally benchmark interest rates such as the London Interbank Offered Rate (LIBOR),
RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products. CIB and RCR contribute to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. A breakdown of valuation adjustments is provided in Capital and risk management: Credit derivatives on page 230.
Bid-offer spreads vary by maturity and risk type to reflect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are widened in comparison to proxies to reflect reduced liquidity or observability. Bid-offer methodologies may also incorporate liquidity triggers whereby wider spreads are applied to risks above pre-defined thresholds.
OIS rates at an individual trade level. Uncollateralised derivatives are discounted with reference to funding levels by applying a funding spread over benchmark interest rates on a portfolio basis
FVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate funding costs and benefits that arise in relation to uncollateralised derivative exposures.
On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred.
were carried forward. During the year, net gains of £16 million
Expected gains are determined from market implied probabilities of default and recovery levels. FVA is considered the primary adjustment applied to derivative liabilities. The extent to which
(DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below.
Cumulative own credit adjustment (1) HFT DFV Total liabilities DFV Total Derivatives Total £m £m £m £m £m £m £m
Financial instruments carried at fair value - valuation hierarchy The following tables show financial instruments carried at fair value on the Group’s balance sheet by valuation hierarchy – level 1, level 2 and level 3 and related level 3 sensitivities.
Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(2) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between level 1 and level 2.
Notes: (1) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(2) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected pay-outs. Similarly to price, an instrument’s yield may be compared with other instruments’ yields either directly or indirectly.
(4) Valuation: for private equity investments, risk may be measured by beta, estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA.
(5) Correlation: measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made.
This can be more difficult as assessing the liquidity of a market is not always straightforward. For an equity traded on an exchange, daily volumes of trading can be seen, but for an over-the-counter
For modelled products the market convention is to quote these trades through the model inputs or parameters as opposed to a cash price equivalent. A mark-to-market is derived from the use of the independent market inputs calculated using RBS’s model.
The decision to classify a modelled instrument as Level 2 or 3 will be dependent upon the product/model combination, the currency, the maturity, the observability and quality of input parameters and other factors. All these must be assessed to classify the asset.
For issued debt the own credit adjustment is based on debt issuance spreads above average inter-bank rates at the reporting date (at a range of tenors). Whilst certain debt issuance spreads are not based on observable market data, the uncertainty of the inputs is not considered to have a significant effect on the valuation of individual trades. Neither the classification of issued debt nor any related valuation sensitivities are determined by the observability of the debt issuance spreads.
Amount recorded in the statement of comprehensive income — 198 198 — — (45) (45) —
Notes: (1) There were no net losses on HFT instruments (2014 - £100 million) recorded in income from trading activities in continuing operations. Net gains on other instruments of £193 million (2014 - £205 million) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued operations.
and Private Banking in order to reflect the homogeneous nature of these portfolios.
For certain portfolios where there are very few or no recent transactions, such as Ulster Bank RoI’s portfolio of lifetime tracker mortgages, a bespoke approach is used based on available market data.
The majority of debt securities are valued using quoted prices in active markets, or using quoted prices for similar assets in active markets. Fair values of the rest are determined using discounted cash flow valuation techniques.
Total12 months 12 months 12 months 12 months £m £m £m £m £m £m
Loans and advances to banks 30,536 110 30,646 43,175 560 43,735
Loans and advances to customers 111,455 222,437 333,892 149,118 229,120 378,238
and liabilities of £344.4 billion (2014 - £477.1 billion) have been excluded from the following tables.
Guarantees and commitments notional amount 141,234 — — — — —
Unwind of discount (recognised in interest income) (51) (93) — (144) (247)
Impairment (releases)/losses charged to the income statement (continuing operations) 2015 2014 2013 £m £m £m
Loans and advances to customers (2) 10,849 6,534 4,315 25,201 16,444 8,757
Financial and non-financial assets recognised on the balance sheet, obtained during the year by taking possession of collateral or calling on other credit enhancements, were £34 million (2014 - £43 million).
Bank Rate. The financial assets are customer loans and the financial liabilities are customer deposits and LIBOR linked medium-term notes and other issued securities. At 31 December 2015, variable rate financial assets of £77 billion (2014 - £80 billion) and variable rate financial liabilities of £29 billion (2014 - £14 billion) were hedged in such cash flow hedge relationships.
and fixed rate financial liabilities of £21 billion (2014 - £32 billion)
Notional Notional amount Assets Liabilities amount Assets Liabilities £bn £m £m £bn £m £m
Included in the table above are derivatives held for hedging purposes as follows: Assets Liabilities Assets Liabilities £m £m £m £m
Gains/(losses) on the hedged items attributable to the hedged risk 110 809 (165)
Over 0-1 years 1-5 years 5-10 years 10-20 years 20 years Total
Gross gains of £61 million (2014 - £175 million) and gross losses of £1 million (2014 - £64 million) were realised on the sale of availablefor -sale equity shares in continuing operations. There were no gains or losses in discontinued operations.
Currency translation and other adjustments (418) (6) (424) (86) 20 (66)
Disposals and write-off of fully amortised assets — (1,222) (1,222) (20) (2,058) (2,078)
Impairment testing involves the comparison of the carrying value of a CGU or group of CGUs with its recoverable amount.
Value in use is the present value of expected future cash flows from the CGU or group of CGUs. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
The recoverable amounts for all CGUs at 30 September 2015 and 31 December 2015 were based on value in use, using management's latest five-year forecasts. The long-term growth rates have been based on nominal UK GDP growth rates. The risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGU’s.
Following the changes to the reportable segments, the Group’s goodwill was subject to a further full review at 31 December 2015 using revised business forecasts. This resulted in full impairment of the £498 million goodwill relating to Private Banking.
Banking to International Private Banking which had been included within disposal groups since 31 March 2015, see Note 18. In addition, goodwill of £0.1 billion that was written off in 2014 was allocated to Capital Resolution from Corporate &
In 2014, the change in reportable segments resulted in the £2.8 billion goodwill attributed to UK Corporate being allocated to
Goodwill growth rate discount rate carrying value rate growth rate pre-tax earnings 31 December 2015 £bn % % £bn £bn £bn £bn
Disposals and write-off of fully depreciated assets (951) (446) (69) (155) (1,003) (212) (2,836)
Write down of property, plant and equipment — 279 — — 93 — 372
Net book value at 31 December 915 1,469 90 500 628 880 4,482
Currency translation and other adjustments (175) 17 (2) 11 59 23 (67)
Write down of property, plant and equipment — 4 — 2 4 — 10
Charge for the year - continuing operations — 95 9 97 305 165 671
Valuations were carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body; property with a fair value of £700 million (2014 - £932 million) was valued by independent valuers.
Interests in associates 1,212 1,054 *Restated - refer to page 267 for further details.
On reclassification to disposal groups at 31 December 2014, the carrying value of Citizens exceeded its fair value less costs to sell
(a) Profit/(loss) from discontinued operations, net of tax 2015 2014 2013 £m £m £m
Profit/(loss) from Citizens discontinued operation, net of tax 1,525 (3,486) 410
Profit from other discontinued operations, net of tax 16 41 148
Included within RBS’s cash flows are the following amounts attributable to discontinued operations: Net cash flows from operating activities (57) 3,997 359
(c) Assets and liabilities of disposal groups 2015 2014 £m £m
Disposal groups at 31 December 2015 is primarily International Private Banking (fair value less costs to sell reflects the agreed sale to
Union Bancaire Privée: fair value hierarchy 3) (£3,344 million assets; £2,724 million liabilities).
Total protection hedging customer FX regulatory Property insurance (1) products (2) redress (3) investigations (4) provisions (4) and other (6) £m £m £m £m £m £m £m £m
Currency translation and other movements — — — 16 1 105 106 228
Single premium book past business review take up rate 55% 56% +/-5 +/-55
Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to RBS of administering the redress process. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs. Assumptions related to these are inherently uncertain and the ultimate financial impact may be different from the amount provided. We continue to monitor the position closely and refresh the underlying assumptions.
Background information in relation to PPI claims is given in Note 30.
(2) RBS has a provision of £149 million for its liability in respect of the sale of Interest Rate Hedging Products (IRHP), having an incurred cost of £1.5 billion. The provision includes redress that will be paid to customers, consequential loss (including interest) on customer redress, the cost to RBS of exiting the hedging positions and the cost of undertaking the review.
The cumulative charge for IRHP is £1.5 billion, of which £1.1 billion relates to redress and £0.4 billion to administrative expenses.
The principal assumptions underlying RBS’s provision are: • the proportion of relevant customers with interest rate caps that will ask to be included in the review; • the type of consequential loss claims that will be received; • movements in market rates that will impact the cost of closing out legacy hedging positions; and
(3) RBS has provided for other customer redress, primarily in relation to investment advice in retail and private banking, £100 million
(2014 - £190 million) and packaged accounts, £157 million (2014 - £150 million).
(4) RBS is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of RBS incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. An additional charge of £361 million was booked in 2015 (2014 - £820 million; 2013 - £124 million), primarily relating to investigations into the foreign exchange market, regulatory fines in connection with the June 2012 technology incident and other conduct and regulatory matters. Details of these investigations and a discussion of the nature of the associated uncertainties are given in Note
(6) The majority of property provisions relate to vacant leasehold property and comprise the present value of the shortfall between rentals payable and rentals receivable from sub-letting. Other provisions include restructuring provisions of £483 million principally termination benefits.
UK tax losses carried forward - The Royal Bank of Scotland plc 462 489 - UK branch of RBS N.V. 1 —
Overseas tax losses carried forward - Ulster Bank Ireland Limited 210 222 *Restated - refer to page 267 for further details.
In periods from April 2015, the Finance Act 2015 limits the offset of losses carried forward by UK banks to 50% of profits. The main rate of UK Corporation Tax will reduce from 20% to 19%
December 2015 are given credit in future periods at the main rate of UK corporation tax rate, excluding the Banking Surcharge rate
The Royal Bank of Scotland plc – The Royal Bank of Scotland plc reported a taxable profit in 2011 and tax losses in 2012 and 2013. The tax loss for 2012 reflected the reversal of previous own credit gains offset by core banking profitability. In 2013 UK
National Westminster Bank Plc – the deferred tax asset in respect of tax losses at 31 December 2015 relates to residual unrelieved trading losses that arose between 2009 and 2014.
Based on RBS’s strategic plan, the losses on which a deferred tax asset has been recognised will be utilised against future taxable profits by the end of 2022.
Deferred tax liabilities of £256 million (2014 - £186 million; 2013 - £186 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK
2015 - final redemption £m £m £m £m £m £m £m
Currently 2016 2017 2018-2020 2021-2025 Thereafter Perpetual Total 2015 - call date £m £m £m £m £m £m £m £m 2014 - final redemption £m £m £m £m £m £m £m
Currently 2015 2016 2017-2019 2020-2024 Thereafter Perpetual Total 2014 - call date £m £m £m £m £m £m £m £m
The Royal Bank of Scotland plc €23 million floating rate dated notes Ineligible 17 —
CHF34 million floating rate subordinated notes Tier 2 — 23 €176 million floating rate undated notes Tier 2 — 138 €170 million floating rate undated notes Tier 2 — 133 £1 million floating rate undated notes Tier 2 — 1
AUD32 million floating rate subordinated notes (partial redemption) Tier 2 — 17
NatWest plc £87 million 5.95% undated notes Tier 2 87 —
Ulster Bank Ireland Ltd £60 million floating rate subordinated notes Tier 2 — 60
US$72.8 million 6.14% subordinated notes (partial redemption) Tier 2 — 45
Gains on available-for-sale financial assets, net of tax 24 76 — 100
During 2015, the company allotted and issued the following new ordinary shares of £1 each: Month Number of shares
In addition, the company issued 69 million ordinary shares of £1 each in connection with employee share plans. In October 2015, the company allotted and issued 5.1 billion new ordinary shares of £1 each to HM Treasury on conversion of 51 billion B shares.
Access Share (‘DAS’). The DAS Retirement Agreement sets out terms for the removal of the DAS. Under the DAS Retirement
Under IFRS certain of RBS's preference shares are classified as debt and are included in subordinated liabilities on the balance sheet.
Between 1 January 2016 and the date of approval of these accounts, dividends amounting to US$77 million and £0.4 million have been declared in respect of equity preference shares for payment on 31 March 2016.
On a winding-up or liquidation of the company, the holders of the non-cumulative preference shares are entitled to receive, out of any surplus assets available for distribution to the company's shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the three most recent quarterly dividend payments due on the non-cumulative dollar preference shares (other than Series U), the two most recent semi-annual dividend payments due on the non-cumulative convertible dollar preference shares and the most recent dividend payments due on the non-cumulative euro preference shares, the noncumulative sterling preference shares, the Series U noncumulative dollar preference shares and the non-cumulative convertible sterling preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
(3) Preferred securities in issue - €166 million RBS Capital Trust C, fixed/floating rate non-cumulative trust preferred securities.
Own shares held - at 31 December 2015, 26 million ordinary shares of £1 each of the company (2014 - 28 million; 2013 - 34 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts awarded 2 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans.
RBS optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the company or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables (refer to pages 294 to 295) and operating lease assets (refer to pages 315 and 316).
RBS’s interests in unconsolidated structured entities are analysed below. 2015 2014
Notes: (1) Income from interests in unconsolidated structured entities includes interest receivable, changes in fair value and other income less impairments. (2) A sponsored entity is a structured entity established by RBS where RBS provides liquidity and/or credit enhancements or provides ongoing services to the entity. RBS can act as sponsor for its own or for customers’ transactions. (3) In 2015, no assets were transferred into sponsored structured entities (2014 - £1,756 million) which are not consolidated by RBS and for which RBS held no interest at 31
December 2015. Income arising from sponsored entities where we hold net interest at year end was £39 million (2014 - £172 million).
UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
Assets subject to securities repurchase agreements or security lending transactions 2015 2014 £m £m
Loans and Loans and advances advances Deposits Customer to banks to customers Securities Total by banks accounts Derivatives Total £m £m £m £m £m £m £m £m
Qualifying instruments issued by subsidiaries and held by third parties 1,627 1,648
Note: (1) Regulatory capital for 2014 has not been impacted by the change in accounting policy for pensions.
Less than less than less than Over 1 year 3 years 5 years 5 years £m £m £m £m £m £m
Guarantees and assets pledged as collateral security 2,725 1,081 1,739 3,491 9,036 16,721
Standby facilities and credit line lend - under a loan commitment,
Notes: (1) Predominantly property leases. (2) Of which due within 1 year: £302 million (2014 - £389 million).
The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposittaking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31
& Bingley. In addition, the FSCS levied an interim payment relating to resolution costs for Dunfermline Building Society of £325 million. The total capital element levied on the industry in the 2015/16 scheme year was £353 million (£399 million in the 2014/15 scheme year).
The Royal Bank of Scotland Group plc (the company or RBSG
plc) and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action (“Matters”) in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions.
The aggregate provisions for regulatory and legal actions of £2.9 billion recognised during 2015 included provisions in respect of mortgage backed securities litigation (£2.1 billion) and payment protection insurance (£0.6 billion).
alleging that untrue and misleading statements and/or improper omissions, in breach of the Financial Services and Markets Act 2000, were made in connection with the rights issue announced by RBS on 22 April 2008. In July 2013 these and other similar threatened claims were consolidated by the Court via a Group
RBS companies remain as defendants in more than 20 lawsuits brought by or on behalf of purchasers of MBS, including the purported class action identified below.
RBS and a number of other financial institutions, all of which, except for the two cases described below, have since settled for amounts that were publicly disclosed.
United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of MBS for which RBS
entities acted as sponsor/depositor and/or lead underwriter or colead underwriter. Of these US$32 billion, approximately US$8.6 billion were outstanding at 31 December 2015 with cumulative write downs to date on the securities of approximately US$1.1 billion (being the recognised loss of principal value suffered by security holders). In September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended complaint in this case. This matter continues in the discovery phase.
Southern District of New York issued a written decision in favour of FHFA on its claims against Nomura and RBS Securities Inc., finding, as relevant to RBS, that the offering documents for four
Nomura-issued MBS for which RBS Securities Inc. served as an underwriter, relating to US$1.4 billion in original principal balance, contained materially misleading statements about the mortgage loans that backed the securitisations, in violation of the Securities
The Court has stayed the judgment pending the result of the appeal that the defendants are taking to the United States Court of Appeals for the Second Circuit, though post-judgment interest on the judgment amount will accrue while the appeal is pending.
The National Credit Union Administration Board (NCUA) is litigating two MBS cases against RBS companies (on behalf of
Credit Union). The original principal balance of the MBS at issue in these two NCUA cases is US$3.25 billion. In September 2015, in a third case brought by NCUA (on behalf of Southwest
Federal Credit Union), the NCUA accepted RBS’s offer of judgment for US$129.6 million, plus attorney’s fees, to resolve the matter, which concerned US$312 million in MBS. RBS has paid to the plaintiff the agreed US$129.6 million plus attorney’s fees.
Other remaining MBS lawsuits against RBS companies include, among others, cases filed by the Federal Home Loan Banks of
Boston and Seattle. RBS has settled the MBS lawsuits filed by the Federal Home Loan Bank of San Francisco and the
RBS companies are also defendants in a purported MBS class action entitled New Jersey Carpenters Health Fund v. Novastar
District Court for the Southern District of New York. Another MBS
RBS has £3.8 billion in cumulative provisions relating to the MBS
MBS litigation, as well as the investigations into MBS-related conduct involving RBS set out under ‘Investigations and reviews’
with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating
USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser plaintiffs who transacted directly with a defendant.
Pound sterling LIBOR, all of which are pending before other judges in the United States District Court for the Southern District of New York. On 28 March 2014, the Court in the action relating to Euroyen TIBOR futures contracts dismissed the plaintiffs’
Beginning in September 2014, RBS plc and a number of other financial institutions were named as defendants in several purported class action complaints (now consolidated into one complaint) pending in the United States District Court for the
Southern District of New York alleging an unlawful restraint of trade in the market for credit default swaps. The RBS defendants have reached an agreement to settle this matter for US$33 million, and that settlement received preliminary approval from the Court on 29 October 2015. The settlement amount has been paid into escrow pending final court approval of the settlement.
Retirement Income Security Act claims on behalf of employee benefit plans that engaged in FX transactions, are pending in the same court and name certain members of the Group as defendants.
In September 2015, certain members of the Group, as well as a number of other financial institutions, were named as defendants in two purported class actions filed in Ontario and Quebec on behalf of persons in Canada who entered into foreign exchange transactions or who invested in funds that entered into foreign exchange transactions. The plaintiffs allege that the defendants violated the Canadian Competition Act by conspiring to manipulate the prices of currency trades.
US Treasury securities or derivatives based on such instruments, including futures and options. On 8 December 2015, all pending matters were transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings.
District Court for the Northern District of Illinois on 18 February 2016. The complaints allege that the defendants violated the US
antitrust laws by restraining competition in the market for interest rate swaps through various means and thereby caused inflated bid-ask spreads for interest rate swaps, to the alleged detriment of the plaintiff class. RBS anticipates moving to dismiss the claims asserted in these matters.
bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff’s estate. A
further claim, for US$21.8 million, was filed in October 2011. This matter is subject to pre-discovery motions to dismiss the claims against RBS N.V..
In March 2013, RBS N.V. was ordered to pay A$19.7 million.
Following an unsuccessful appeal, RBS N.V. made the required payments totalling A$19.7 million in March and April 2013. The judgment may potentially have significance to the other claims served and to any future similar claims.
FCA review. The customer has sought permission to appeal and this is being considered by the Mercantile Court. If the Mercantile
(or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest is liable for damages arising from those attacks pursuant to the US Antiterrorism Act because NatWest previously maintained bank accounts and transferred funds for the Palestine Relief &
On 10 November 2014, RBS N.V. and certain other financial institutions (HSBC, Barclays, Standard Chartered, Credit Suisse, and Bank Saderat) were named as defendants in a complaint filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in more than 70 attacks in Iraq between 2004 and 2011. The attacks were allegedly perpetrated by
RBS’s businesses and financial condition can be affected by the actions of various governmental and regulatory authorities in the
segment in particular has been providing information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities. Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBS’s business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
In the US, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and selfregulatory organisations, including the DOJ and various other members of the RMBS Working Group of the Financial Fraud
Enforcement Task Force (including several state attorneys general), relating to, among other things, issuance, underwriting and trading in mortgage-backed securities, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and synthetic products.
These ongoing matters include, among others, active investigations by the civil and criminal divisions of the DOJ and the office of the attorney general of Connecticut, on behalf of the
Connecticut Uniform Securities Act when underwriting MBS, noting RBS plc’s May 2015 FX-related guilty plea, and offering an opportunity for RBS Securities Inc. to demonstrate its compliance with the law and why administrative proceedings seeking fines and other remedies should not be commenced. RBS Securities
The investigations also include civil and criminal investigations relating to alleged misrepresentations in the trading of various forms of asset-backed securities, including residential mortgagebacked securities, commercial mortgage-backed securities,
Group, has focused on the same or similar issues as the other state and federal MBS Working Group investigations described above. The investigation is ongoing and RBS continues to respond to requests for information.
RBS’s CIB business in North America has been a purchaser of non-agency US residential mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-backed securities (MBS). CIB did not originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government sponsored enterprises
CIB. However, repurchase demands presented to CIB are subject to challenge and rebuttal by CIB.
Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of LIBOR. RBS agreed to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the investigations and also agreed to certain undertakings in its settlement with the CFTC. As part of the agreement with the DOJ, RBS plc entered into a Deferred
Prosecution Agreement (DPA) in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. The DPA expired in April 2015 and is of no further effect.
In July 2014, RBS entered into an Enforceable Undertaking with the Australian Securities and Investments Commission (ASIC) in relation to potential misconduct involving the Australian Bank Bill
In October 2014, the EC announced its findings that (1) RBS and one other financial institution had participated in a bilateral cartel aimed at influencing the Swiss Franc LIBOR benchmark interest rate between March 2008 and July 2009; and (2) RBS and three other financial institutions had participated in a related cartel on bid-ask spreads of Swiss Franc interest rate derivatives in the
RBS is providing information and documents to the CFTC as part of its investigation into the setting of USD, EUR and GBP
CFTC investigation is at an advanced stage. RBS is also under investigation by competition authorities in a number of jurisdictions stemming from the actions of certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading. At this stage, as there remains considerable uncertainty around the outcome of these investigations, it is not practicable to estimate the aggregate impact reliably, if any, on
and the CFTC in relation to investigations into failings in RBSG
Federal Reserve System (Federal Reserve) in relation to investigations into its FX business within its CIB segment. RBS
plc paid a penalty of US$274 million to the Federal Reserve and has agreed to pay a penalty of US$395 million to the DOJ to resolve the investigations. The DOJ fine is fully covered by existing provisions.
As part of its plea agreement with the DOJ, RBS plc pled guilty in the United States District Court for the District of Connecticut to a one-count information charging an antitrust conspiracy. RBS plc admitted that it knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the euro/US
(which is publicly available), the DOJ and RBS plc have agreed jointly to recommend to the Court that it impose a sentence consisting of a US$395 million criminal fine and a term of probation, which among other things, would prohibit RBS plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and require RBS plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). If RBS plc is sentenced to a term of probation, a violation of the terms of probation could lead to the imposition of additional penalties.
RBS plc and RBS Securities Inc. have also entered into a cease and desist order with the Federal Reserve relating to FX and other designated market activities (the FX Order). In the FX
RBS Securities Inc. are obligated to implement and comply with these programs after they are approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a riskfocused sampling of key controls.
CIB segment, including with respect to potential collateral consequences of the RBS plc guilty plea described above. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and could be material.
RBS provisions in relation to the above redress exercises total £1.5 billion to date for these matters, of which £1.4 billion had been utilised at 31 December 2015.
All of these claims have been stayed pending the outcome of the other bank’s case, in which the customer has already received permission to proceed. That case, which went to trial on 25
as Skilled Person on RBS's IRHP redress programme may then proceed to full hearing to assess the fairness of KPMG’s role in the redress programme in those particular cases. If deemed unfair, this could have a consequential impact on the reasonableness of the methodology applied to reviewed and settled IRHP files generally.
As there remains considerable uncertainty and the judicial review is at an early stage, it is not practicable reliably to estimate the impact of such matters, if any, on RBS which may be material.
Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required RBS to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the UK Financial Planning channel of the Personal & Business Banking (PBB) segment of RBS, which includes RBS plc and NatWest, during the period from March
Limited and 13 banks and credit card issuers, including RBS, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers.
The closing date before which any claims under the compensation scheme must have been submitted has now passed. All compensation payments have now been made and all claims, whether through the courts or the Financial
has made provisions totalling £307 million to date for this matter.
Tomlinson Report. On 17 January 2014, a Skilled Person was appointed. The Skilled Person’s review is focused on RBS’s UK
small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS’s Global Restructuring Group or within similar units within RBS’s Corporate Banking Division that were focused on customers in financial difficulties. In the period 2008 to 2013 RBS
was one of the leading providers of credit to the UK SME sector.
Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: RBS was alleged to be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses and through that putting businesses into insolvency. Clifford Chance published its report on 17 April 2014 and, while they made certain recommendations to enhance customer experience and transparency of pricing, they concluded that there was no evidence to support the principal allegation.
RBS and the FCA during the first half of 2016 but no final timescale has been determined. RBS will have an opportunity to respond to any such review findings before the Skilled Person delivers its final report. In the event that the Skilled Person’s review concludes that there were material failings in RBS’s treatment of SME customers those conclusions could, depending on their nature, scale and type, result in the commencement of regulatory enforcement action by the FCA, the imposition of redress requirements and the commencement of litigation claims against RBS, as well as potentially wider investigations and litigation related to RBS’s treatment of customers in financial difficulty. At this stage, as there remains considerable uncertainty around the final conclusions of the Skilled Person’s review and any collateral consequences thereof, it is not practicable reliably to estimate the potential impact on RBS.
In April 2013, the EC announced it was opening a new investigation into interchange fees payable in respect of payments made in the EEA by MasterCard cardholders from non-
This agreement has now been market tested and was made legally binding on 26 February 2014. The agreement is to last for four years.
In addition, on 8 June 2015, a regulation on interchange fees for card payments entered into force. The regulation requires the capping of both cross-border and domestic MIF rates for debit and credit consumer cards. The regulation also sets out other reforms including to the Honour All Cards Rule which require merchants to accept all cards with the same level of MIF but not cards with different MIF levels.
In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange fees applicable in respect of Visa and MasterCard consumer and commercial credit and debit card transactions. On 6 May 2015, the successor body to the OFT, the Competition & Markets Authority (CMA), announced that it had closed these investigations on the grounds of administrative priorities.
EC investigation, and regulation, but they may have a material adverse effect on the structure and operation of four party card payment schemes in general and, therefore, on RBS’s business in this sector.
On 27 May 2015, the FCA announced that it was considering whether additional rules and/or guidance are required to deal with the impact of the Plevin decision on complaints about PPI
On 26 November 2015, the FCA issued Consultation Paper 15/39, in which it sets out proposed rules and guidance for how firms should handle PPI complaints fairly in light of the Plevin decision and how the FOS should consider relevant PPI
The proposals in the Consultation Paper include an FCA-led communications campaign to raise awareness of the deadline and to prompt those who intend to complain to act ahead of the deadline. If the proposals are agreed and implemented, RBS
expects higher claims volumes, persisting longer than previously modelled, and additional compensation payments in relation to
Complaints made after the proposed 2018 deadline would lose the right to be assessed by firms or by the Financial Ombudsman
PPI complaint volumes during Q4 2015 were in line with previous trends. Actual payments made to settle PPI claims during Q4 covered the four month period from 1 September until 31
RBS has made provisions totalling £4.3 billion to date for PPI
claims, including £0.6 billion for 2015, of which £3.3 billion had been utilised by 31 December.
CMA provisionally decided to make a market investigation reference (MIR) into retail banking which would cover PCA and
The notice of possible remedies sets out measures to address these concerns, including measures to make it easier for customers to compare products, and requiring banks to help raise public awareness of, and confidence in, switching bank accounts. On 29 January 2016, the CMA announced that it expects to extend the timetable for the MIR (by up to 6 months)
intends to publish an interim report in Summer 2016 with the final report expected in early 2017.
At this stage, as there remains considerable uncertainty around the outcome of these reviews it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.
In April 2011 the EC opened an antitrust investigation into the
CDS information market to which RBS was a party. In general terms, the EC raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges from entering the CDS market. On 4 December 2015 the EC decided to close the case against RBS and the other bank parties to the investigation. Markit and ISDA remain party to the investigation.
In the Governance Order, RBS agreed to create the following written plans or programmes: • a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of RBS’s US operations on an enterprise-wide and business line basis,
• a plan to oversee compliance by RBS’s US operations with all applicable US laws, rules, regulations, and supervisory guidance
• a plan to improve the US Branches’ compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of
• a customer due diligence programme designed to ensure reasonably the identification and timely, accurate, and complete reporting by the US Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations, and
RBS has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with RBS’s efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for RBS’s US operations. RBS continues to test the effectiveness of the remediation efforts it has undertaken to ensure they are sustainable and meet regulators' expectations. Furthermore, RBS
compliance programme) RBS was required to appoint an independent consultant to conduct an annual OFAC compliance review of compliance policies and their implementation and an appropriate risk-focused sampling of US dollar payments. RBS
In August 2013, the DOJ announced a programme for Swiss banks (the Programme) which provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, of the DOJ’s investigations of the role that Swiss banks played in concealing the assets of US
has identified a number of instances where it has not properly explained to customers how borrower and guarantor liabilities work under the EFG scheme. There are also concerns around the eligibility of some customers to participate in the EFG
Profit on sale of property, plant and equipment (91) (137) (44)
Write down of goodwill and other intangible assets 1,332 533 1,403
32 Analysis of the net investment in business interests and intangible assets 2015 2014 2013
Net inflow/(outflow) of cash in respect of disposals 1,053 (806) 1,888
Other adjustments including foreign exchange — — — (11) 214 (1,057)
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 have been realigned as follows: Personal & Business Banking (PBB) comprises two reportable segments. UK Personal & Business Banking (UK PBB) and
International (RBSI). Commercial Banking serves commercial and mid-corporate customers in the UK. Private Banking serves high net worth individuals in the UK and RBSI serves retail, commercial, corporate and financial institution customers in
EMEA and APAC), Shipping, Markets assets, Other legacy assets including Saudi Hollandi Bank (SHB) and Global
RCR was created on 1 January 2014 to de-risk the balance sheet. The original perimeter was £47 billion of funded assets consisting of four asset groups: Ulster Bank (Ulster RCR), Real
Williams & Glyn comprises the RBS England and Wales branchbased businesses, along with certain SME and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not include certain portfolios that are ultimately intended to be divested as part of W&G, for example, certain NatWest branches in Scotland.
Non-Core Division, established in 2009 as a principal vehicle for risk reduction, was dissolved on 31 December 2013.
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 using appropriate drivers.
Treasury allocations which are included within the segmental net interest income balances have been revised to reflect the following: • In preparation for the separation of Williams & Glyn, that element of Treasury allocations previously charged to
• To reflect the impact of changes to the notional equity allocation for the purposes of calculating segmental return on equity.
Citizens was classified as a discontinued operation and as a disposal group on 31 December 2014 and its assets and liabilities from that date to 3 August 2015 have been aggregated and presented as separate lines in accordance with IFRS 5. On 3
August 2015, RBS’s interest in Citizens fell to 20.9% and it was treated as an associate held for sale thereafter. On 30 October 2015, RBS sold its remaining shareholding in Citizens. Citizens is no longer treated as a reportable segment.
Comparatives have been restated for the organisational and reporting changes outlined above.
Segmental analysis of goodwill is as follows: UK Personal & Business Commercial Private RBS Capital Central items
Banking Banking Banking International Resolution and other (1) Total £m £m £m £m £m £m £m
Transfer to disposal groups — — — — — (3,957) (3,957)
*Restated - refer to pages 267 and 349 for further details. Re-presented to reflect the segmental reorganisation.
Of which total assets held for sale 915 750 198 1,154 3,017
Net assets attributable to equity owners and non-controlling interests 54,402 14,240 (9,994) 483 59,131
The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 19,395 20,917
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the
Government and UK Government controlled bodies became related parties of the Group. During 2015, all of the B shares held by the UK Government were converted into ordinary shares of £1 each and the Dividend Access Share Retirement Agreement was agreed between RBS and HM Treasury (see Note 24 on page
and FSCS levies (page 334) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
December 2015 and the date of approval of these accounts which would require a change to or additional disclosure in the accounts.
The accompanying notes on pages 359 to 373 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 25 February 2016 and signed on its behalf by: Howard Davies
Transfer on impairment of investment in RBS plc 2,341 — —
Notes: (1) In October 2015, all B shares were converted into ordinary shares of £1 each. (2) Non-cumulative dollar preference shares totalling $1.9 billion were redeemed in September 2015.
Cash and cash equivalents at 31 December 13 3,006 1,105 1,345
Board to be the most important to the portrayal of its financial condition are those involved in assessing the impairment if any in its investments in subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a subsidiary is impaired. If any such indication exists, the company undertakes an impairment test by comparing the carrying value of the investment in the subsidiary with its estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the higher of its fair value less cost to sell and its value in use. Impairment testing inherently involves a number of judgments: the choice of appropriate discount and growth rates; and the estimation of fair value.
Other net interest income, non-interest income and operating expenses 14 (94) (572)
Write-down of investments in subsidiaries (see Note 7) (2,827) (16) —
Loans and advances to banks (1) - loans and receivables 22,148 24,490
Accruals, deferred income and other liabilities - non-financial liabilities 183 165
Less than More than Total 12 months 12 months 12 months 12 months £m £m £m £m £m £m
2015 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
7 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: 2015 2014 £m £m
The majority of the impairment charge for 2015 relates to the company’s investment in RBS plc. At 31 December 2015 its carrying value exceeded its recoverable amount (based on its value in use) and an impairment of £2,782 million was recognised. The effect of the impairment on the company’s retained earnings was partially offset by the release of the balance on the merger reserve (£2,341 million)
which became a realised profit on writing down the company’s investment in RBS plc.
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which are unlisted with the exception of certain preference shares issued by NatWest and RBS Holdings N.V..
Full information on all related undertakings is shown on page 365.
US$750 million 6.80% notes 2042 (callable quarterly) (1,2) Ineligible 506 480
US$675 million 5.05% notes (redeemed January 2015) (1) Ineligible — 443
US$950 million 5.51% notes (redeemed January 2015) (1,2) Ineligible — 608
US$762 million 7.65% notes (callable September 2031) (1) Ineligible 519 493
Decrease/(increase) in loans and advances to banks and customers 4,274 (302) (225)
Net cash inflow/(outflow) from financing 2,314 314 264 (1,745) (2,180) 1,366
Ordinary shares issued in respect of employee share schemes 225 234 174
Net cash inflow/(outflow) 1,901 (240) 348 *Comprises loans and advances to banks 14 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 37 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
15 Related undertakings RBS legal entities and activities at 31 December 2015 In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. Group interest refers to ordinary shares of equal values and voting rights unless further analysis is provided in the footnotes. Activities are classified in accordance with Annex I to the Capital Requirements
Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital
Requirements (country-by-country) Reporting Regulations 2013 will be published on the Group’s website.
Australia RBS Nominees (Australia) Pty Ltd BF Australia RBS Rail Holdings (Australia) Pty Ltd BF Australia RBS Rail Investment (Australia) Trust BF Australia RBS Securities (Australia) Pty Ltd BF Australia RBS Services (Australia) Pty Ltd BF
Jersey C.J. Fiduciaries Ltd BF Jersey Citron 2004 Ltd BF Jersey Coutts & Co Trustees (Jersey) Ltd BF Jersey Fidelis Nominees Ltd BF Jersey Keep SPV Ltd BF (3) Jersey Lombard Finance (CI) Ltd BF Jersey Magnus Nominees Ltd BF Jersey Mulcaster Street Nominees Ltd OTH Jersey Pitstop Ltd OTH Jersey RBS International Employees' Pension
Norway Ringdalveien 20 AS BF Panama Growth Advisors S.A. BF Panama Steering Group SA BF Poland RBS Bank (Polska) S.A. CI Poland RBS Polish Financial Advisory Services sp.
Singapore The Royal Bank of Scotland Asia Securities (Singapore) Private Ltd
Sweden Arkivborgen KB BF Sweden Backsmedjan KB BF Sweden Bil Fastigheter i Sverige AB BF Sweden Bilfastighet i Täby AB BF Sweden Braheberget KB BF Sweden Brödmagasinet KB BF Sweden Dalklockan 6 KB BF Sweden Eurohill 4 KB BF Sweden Fastighet Kallebäck 2:4 i Göteborg AB BF Sweden Fastighets AB Flöjten i Norrköping BF Sweden Fastighets AB Hammarbyvagnen BF Sweden Fastighets AB Kabisten 1 BF Sweden Fastighets AB Stockmakaren BF Sweden Fastighets AB Xalam BF Sweden Fastighets AB Sambiblioteket BF Sweden Fastighetsbolaget Holma i Höör AB BF Sweden Forskningshöjden KB BF Sweden Förvaltningsbolaget Dalkyrkan KB BF Sweden Förvaltningsbolaget Predio 3 KB BF Sweden Gredelinen KB BF Sweden Grinnhagen KB BF Sweden Horrsta 4:38 KB BF Sweden IR Fastighets AB BF Sweden IR IndustriRenting AB BF Sweden Kallebäck Institutfastigheter AB BF Sweden KB Eurohill BF Sweden KB IR Gamlestaden BF Sweden KB Lagermannen BF Sweden KB Likriktaren BF Sweden Läkten 1 KB BF Sweden LerumsKrysset KB BF Sweden Limstagården KB OTH Sweden Mjälgen KB BF Sweden Mons Investment AB BF
GWNW City Developments Ltd OTH EAJV 50 Higher Broughton (GP) Ltd BF EAA 41 Isobel AssetCo Ltd SC FC 75 Isobel EquityCo Ltd BF FC 75 Isobel HoldCo Ltd BF FC 75 Isobel Intermediate HoldCo Ltd BF FC 75 Isobel Loan Capital Ltd BF FC 75 Isobel Mezzanine Borrower Ltd BF FC 75 Jaguar Cars Finance Ltd BF FC 50 JCB Finance (Leasing) Ltd BF FC 75 JCB Finance Ltd BF FC 75 Kangaroo Holdings Ltd BF IA 42 (5) Land Options (East) Ltd BF EAJV 50 Lombard GATX Holdings Ltd BF EAJV 50 MSW Ltd OTH IA 20 Omega Warrington Ltd OTH EAJV 50
Malaysia Gale Force Sdn Bhd BF EAA 25 Malaysia RBS Nominees
(3) Wholly-owned subsidiary of RFS Holdings B.V. which is 98% owned by the Group. (4) The Group is interested in 5% of the voting rights and 10% of the economic rights. (5) The Group is interested in 45% of the voting rights and 42% of the economic rights. (6) Related undertaking consolidated because RBS controls the company by virtue of contractual agreements. (7) By contractual agreement the Group holds 50% of the voting rights. (8) Related undertaking not consolidated as it is not controlled by the Group. (9) Related undertaking owned for the benefit of Group pension schemes. (10) Related undertaking for the benefit of trust preferred security holders.
The Royal Bank of Scotland International Ltd Gibraltar, Guernsey, Isle of Man
Derivatives, settlement balances and short positions 278,904 377,337 318,861 467,802 572,499 *Restated - refer to page 267 for further details.
Share price per ordinary share at year end - £ 3.02 3.94 3.38 3.25 2.02
Return on average total equity (5) (2.9%) (4.6%) (12.8%) (7.8%) (2.8%)
Average total equity as a percentage of average total assets 6.0% 5.8% 5.5% 5.2% 4.9%
Notes: (1) None of the convertible securities had a dilutive effect in the years 2011 to 2015. (2) Return on average total assets represents loss attributable to ordinary shareholders as a percentage of average total assets. (3) Return on average total equity represents loss attributable to equity owners expressed as a percentage of average shareholder funds. (4) Return on average ordinary shareholders' equity represents loss attributable to ordinary shareholders expressed as a percentage of average ordinary shareholders' equity. (5) 2015 and 2014 are calculated on a PRA transitional basis; 2011 to 2013 are calculated on a Basel 2.5 basis. (6) For this purpose, earnings consist of income before tax and non-controlling interests, plus fixed charges less the unremitted income of associated undertakings (share of profits less dividends received). Fixed charges consist of total interest expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the proportion of rental expense deemed representative of the interest factor (one third of total rental expenses).
unless indicated otherwise. ‘UK’ in this context includes transactions conducted through the offices in the UK which service international banking transactions.
Service industries and business activities 19,650 21,970 9,637 51,257 50,621 52,253 56,435 59,190
Finance leases and instalment credit 4,421 4,561 2,152 11,134 10,933 10,524 10,532 11,216
Loans and advances to customers - net 333,892 378,238 440,722 500,135 515,606
RBS provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to RBS’s corporate and commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a margin over a benchmark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base rate; other variable rate retail lending is charged at variable interest rates set by RBS such as its mortgage standard variable rate in the
Loans and advances to banks - UK 38,626 253 0.65 34,592 216 0.62
Internal funding of trading business - UK (13,909) 104 (0.75) (15,426) 89 (0.58)
Notes: (1) Interest receivable has been increased by nil (2014 - £11 million; 2013 - £4 million) and interest payable has been increased by £15 million (2014 - £58 million; 2013 - £83 million) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
(2) Interest receivable has been decreased by £38 million and interest payable has been decreased by £31 million in 2013 in respect of non-recurring adjustments. (3) Interest receivable includes £400 million (2014 - £453 million; 2013 - £538 million) in respect of loan fees forming part of the effective interest rate of loans and receivables. (4) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (5) Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers. (6) The analysis into UK and overseas has been compiled on the basis of location of office.
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 273 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 278. The following table shows the movements in loan impairment provisions.
As a % of average loans and advances to customers during the year
Total customer provisions (released)/charged to income statement (0.2%) (0.3%) 1.6% 0.9% 1.2%
Amounts written-off (net of recoveries) - customers 2.3% 1.1% 0.8% 0.7% 0.7%
Notes: (1) Includes £4 million release relating to loans and advances to banks (2014 - £10 million release; 2013 - £15 million release; 2012 - £23 million loss; 2011 - nil). (2) Excludes reverse repos.
Analysis of closing customer loan impairment provisions The following table analyses customer loan impairment provisions by geographical area and type of UK customer.
Risk elements in lending (REIL) comprises of impaired loans and accruing loans past due 90 days or more as to principal or interest.
Notes: (1) The write-off of impaired loans affects closing provisions for impairment as a % of total REIL (the coverage ratio). The coverage ratio reduces if the loan written-off carries a higher than average provision and increases if the loan written-off carries a lower than average provision. (2) Impaired loans at 31 December 2015 include £2,300 million (2014 - £7,052 million; 2013 - £7,687 million) of loans subject to forbearance granted during the year.
Notes: (1) Wholesale loans subject to forbearance include only those arrangements above thresholds set individually by the segments, ranging from nil to £3 million. (2) For 2015, wholesale loans subject to forbearance were £2,258 million (2014 - £3,040 million; 2013 - £4,305 million) and secured retail loans subject to forbearance were £1,502 million (2014 - £3,051 million; 2013 - £3,596 million). Unsecured retail loans subject to forbearance amounting to £96 million (2014 - £244 million; 2013 - £272 million) are not included.
Cross border exposures are loans and advances including finance leases and instalment credit receivables and other monetary assets, such as debt securities, including non-local currency claims of overseas offices on local residents. RBS monitors the geographical breakdown of these exposures based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures exclude exposures to local residents in local currencies.
Over 2015 0-3 months 3-6 months 6-12 months 12 months Total £m £m £m £m £m
Balance interest rate balance balance interest rate 2015 £bn % £bn £bn %
Other contractual cash obligations The table below summarises other contractual cash obligations by payment date.
Undrawn formal facilities, credit lines and other commitments to lend were £132,198 million (2014 - £212,777 million; 2013 - £213,046 million). While RBS has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
Agreement (“DRA”) with HMT which was approved by the company’s shareholders on 25 June 2014. Pursuant to the terms of the DRA the company has paid HMT an initial DAS dividend of £320 million. A further £1.18 billion is payable to HMT (together with the initial dividend, the “DAS Retirement Dividend Amount”), in the form of one or more further DAS dividends, at the discretion of the directors of the company. The unpaid portion of the DAS Retirement Dividend Amount is subject to an increase of 5 percent. per annum, calculated on a daily accruals basis from 1
January 2016, and an increase of 10 per cent. per annum, calculated on a daily accruals basis from 1 January 2021, on any part of the balance that has not been paid before 1 January 2021.
As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the European Commission (EC), which was then approved under the State Aid rules. The company agreed a series of measures which supplemented the measures in the company's strategic plan.
European Commission’s approval of amendments to the restructuring plan in April 2014 entered into a Revised State Aid
These provide that RBS will comply or procure compliance with certain measures and behavioural commitments. RBS agreed to do all acts and take all measures to ensure HM Treasury's compliance with its obligations under any EC decision approving
Scotland branch based business by the end of 2017. Subject to the completion of the operational and legal separation of the business into a standalone bank to be branded Williams & Glyn, which will now not be achieved until after Q1 2017, RBS is considering divestment options including an Initial Public Offer
(IPO). On 27 September 2013, RBS agreed a £600 million pre-
October 2013, which will be exchangeable in the event of an IPO
The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group’s operations, operating results, reputation, financial position and future prospects.
The Group continues to cooperate with governmental and regulatory authorities in these and other investigations and reviews. For more detail on certain of the Group’s ongoing legal, governmental and regulatory proceedings, see pages 334 to 346.
Settlements, resolutions and outcomes in relation to ongoing investigations may result in material financial fines or penalties, non-monetary penalties, ongoing commitments, restrictions upon or revocation of regulatory permissions and licences and other collateral consequences and may prejudice both contractual and legal rights otherwise available to the Group and the outcome of on-going claims against the Group may give rise to additional legal claims being asserted against the Group, any of which outcomes could materially adversely impact the Group’s capital position and prospects. Monetary penalties and other outcomes could be materially in excess of provisions, if any, made by the
Group. It is expected that the Group will continue to have a material exposure to litigation and governmental and regulatory proceedings and investigations relating to legacy issues in the medium term. Adverse outcomes or resolution of current or future regulatory, governmental or law enforcement proceedings or adverse judgements in litigation could result in restrictions or limitations on the Group’s operations, adversely impact the
Group’s strategic programme or have a material adverse effect on the Group’s reputation, results of operations, capital position and prospects.
The Group may be required to make new or increase existing provisions in relation to existing or future legal proceedings, investigations and governmental and regulatory matters which may be substantial, including with respect to current matters in relation to which the Group has not yet recognised legal provisions. In 2015, the Group booked a provision of £334 million in respect of foreign exchange trading-related investigations. In 2015 the Group booked an additional £2.1 billion related principally to mortgage-backed securities (“MBS”) litigation in the
Attorneys General investigations into MBS-related conduct matters. The costs of resolving these investigations and the costs
government to hold a referendum on the UK’s membership of the
vote supporting the UK’s exit from the European Union may also give rise to further political uncertainty regarding Scottish independence.
Pursuant to the State Aid Commitment Deed and its strategic programme, the Group is in the process of separating Williams &
Glyn or the ability of the Group to divest the business on commercially attractive terms is not certain. In particular, Williams
& Glyn is a complex business and unforeseen difficulties in integrating the business with that of any buyer could deter potential buyers from bidding for the business or completing the sale. In addition, the number of potential bidders with synergy potential or strategic interests may be limited and such investors may value the business below what the Group considers to be the fair value of the Williams & Glyn business.
Williams & Glyn business and other parts of the Group and in order to seek to meet the deadlines for divestment, this process will necessarily divert management and personnel resources from the effective conduct of the Group’s operations and jeopardise the delivery and implementation of a number of other significant change projects resulting from mandatory regulatory developments or as part of its strategic programme. In addition, the execution of the separation and divestment, and in particular the transition of the Williams & Glyn business to a stand-alone IT
Although the Group is committed to achieving the separation and divestment in the most cost-efficient manner, due to unforeseen complexities and factors outside of the Group’s control, costs could be materially higher than currently contemplated.
Williams & Glyn will be the granting of a banking licence by the
PRA, an application for which was submitted in September 2015, which in turn will depend, among other things, on demonstrating progress on the separation. Delays in obtaining the licence may impact the sale process and buyer confidence or the Group’s ability to meet the prescribed deadlines for divestment.
It may also lose the potential for realising additional associated revenues and margins, or cost savings that it otherwise might have achieved. The Group will also be unable to fully reduce its shared central costs in proportion to the scale of reduction in income resulting from the divestment of Williams & Glyn. The
In the first quarter of 2015, the Group articulated a new strategy focussed on the growth of its strategic operations in UK Personal
(“CIB”) business to focus mainly on UK and Western European corporate and financial institutions. It also announced the acceleration of the run-down of certain of its operations, businesses and portfolios in order to reduce risk-weighted assets as well as the scope and complexity of its activities.
Finally, the Group remains focussed on meeting its returns and efficiency targets (including cost reductions) as well as improving customer experience and employee engagement.
This strategy is intended to leave the Group better positioned for the implementation of the UK ring-fencing regime. The Group’s strategy is also focussed on strengthening its overall capital position. During the restructuring period and until the implementation of the UK ring-fencing regime in 2019, the Group has lifted its capital targets and currently aims for a CET1 ratio at or over 13%.
Implementing the Group’s current strategic programme, including the restructuring of its CIB business, will require further material changes to be implemented within the Group over the medium term at the same time that it will also be implementing structural changes to comply with the UK ring-fencing regime and divesting
The Group may not be able to successfully implement any part of its strategic programme in the time frames contemplated or at all, and, as a result, the Group may not be able to achieve its stated capital targets or its strategic objectives. The Group’s strategic programme comprises a number of different actions and initiatives, any of which could fail to be implemented due to operational or execution issues. Implementation of the Group’s strategic programme is expected to result in significant costs, which could be materially higher than currently contemplated, including due to material uncertainties and factors outside of the
ring-fencing regime and the divestment of Williams & Glyn, and will be increased by issues or delays in their implementation, in particular delays in the separation and divestment of Williams &
The UK Government’s White Paper on Banking Reform published in September 2012 outlined material structural reforms for the UK banking industry. The implementation of the “ringfencing ” of retail banking operations was introduced under the UK
These risks may be exacerbated by the Group’s other ongoing restructuring efforts, including, in particular, the separation of the
(“RFB”) organised under an intermediate holding company for its UK-focussed banking services while the non-ringfenced group entities (“NRFBs”) will hold the Group’s remaining trading activities, the operations of RBS