ADR Depositary Bank BNY Mellon Shareowner Services PO Box 358516 Pittsburgh, PA 15252-8516 Telephone: +1 888 269 2377 (US callers) Telephone: +1 201 680 6825 (International) Email: shrrelations@bnymellon.com Website: www.bnymellon.com/shareowner
RBS provides a wide range of products and services to personal, commercial and large corporate and institutional customers through its two main subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Citizens, Charter One, Ulster Bank and Coutts.
Strategic Report 2013 Financial Results 02 Our purpose and values 06 Our business model and strategy 08 RBS at a glance 11
UK Retail 12 UK Corporate 13 Wealth 14 International Banking 15 Ulster Bank 16 US Retail & Commercial 17 Markets 18 Non-Core 19 Business Services 19
RBS reports a pre-tax loss for 2013 of £8,243 million, including regulatory and redress provisions of £3,844 million, and impairments and other losses of £4,823 million related to the establishment of RBS Capital Resolution (RCR).
• Non-Core losses down 27% to £2,107 million, with the cost base falling in line with run-off.
Notes: (1) Operating profit/(loss) before tax, own credit adjustments, Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, integration and restructuring costs, gain on redemption of own debt, write-down of goodwill, amortisation of purchased intangible assets, strategic disposals, bank levy, write-down of other intangible assets and RFS Holdings minority interest.
(4) Net of provisions, including disposal groups and excluding repurchase agreements.
(7) Based on indicative Core attributable profit taxed at standard rates and Core average tangible equity per the average balance sheet (89% of Group tangible equity based on risk-weighted assets at 31 December 2013).
(10) During the year the Group recognised £4,823 million of impairment and other losses related to the establishment of RCR. This comprises impairment losses of £4,490 million (of which £173 million relate to core Ulster Bank assets which were not transferred to RCR but are subject to the same strategy) and £333 million reduction in income reflecting asset valuation adjustments.
Third party assets were reduced by £130 billion over the course of 2013, with Markets down £72 billion and Non-Core down £29 billion. In the five years since the end of 2008, the funded balance sheet has been reduced by £487 billion and total assets by £1,191 billion.
RBS remains highly liquid, with short-term wholesale funding down £10 billion to £32 billion at the end of 2013, covered more than four times by a £146 billion liquidity portfolio.
Building a bank that is trusted by its customers RBS has announced a refreshed strategic direction with the ambition of building a bank that earns its customers’ trust by serving them better than any other bank.
To position RBS to deliver a sustainable overall return on tangible equity of 12% plus in the long term, we must achieve a significant reduction in costs and complexity.
Future performance will be reported against customer and financial measures. Further details are set out on page 10.
Group income, excluding the RCR impact, was down 10% to £19,775 million, principally reflecting a £1,161 million reduction in Markets income, with expenses down 4% to £13,313 million.
Non-Core losses, excluding £3,420 million of impairments and other losses related to the creation of RCR, were down 27% to £2,107 million, with the cost base falling in line with run-off.
Loss attributable to shareholders was £8,995 million, reflecting the charges relating to the creation of RCR and legacy conduct litigation and redress, the write-down of goodwill and other intangible assets and deferred tax assets.
RCR was set up from 1 January 2014 and will manage a pool of £29 billion of assets with particularly high capital intensity or potentially volatile outcomes in stressed environments, aiming to accelerate run-down of these exposures to free up capital for the bank. The revised strategy to run down high risk loans faster led to an increased impairment charge. When originally announced, RCR assets were projected to be £38 billion at the end of 2013, but accelerated disposals and increased impairments have reduced this total to £29 billion. Further details about RCR are set out on page 160.
During the course of 2013 RBS sold two tranches of its remaining shares in Direct Line Insurance Group, realising gross proceeds of £1,137 million. At 31 December 2013, RBS held 28.5% of Direct Line Insurance Group. On 26
February 2014, RBS announced that it had entered into a placing agreement to complete the sale of its residual interest (except for 4.2 million shares held to satisfy long term incentive plan awards granted by RBS to Direct Line Group management). Accordingly, on settlement of the placing, the Group will have completed the disposal as required by the European Commission.
On 1 November 2013, RBS announced plans to accelerate the divestment of Citizens, its US banking subsidiary. Preparations for a partial initial public offering (IPO) in 2014 remain on track, and the bank intends to fully divest the business by the end of 2016.
Discussions with the UK Government over the retirement of the Dividend Access Share (DAS) are well advanced. A successful restructuring of the DAS will represent a significant step towards the normalisation of RBS’s capital structure.
On 16 December 2013, RBS cancelled its £8 billion Contingent Capital Facility with HM Treasury.
2013. Out of a cumulative PPI provision of £3.1 billion, £2.2 billion had been utilised by 31 December 2013. The remaining £0.9 billion provision covers approximately 12 months at current levels of redress and administrative expenses.
Our future is not about us, its about our customers. We needed to ensure that this ran through the bank – from boardroom to branch.
We spent time with colleagues across the bank debating what should be at the core of our ambition to build a bank known for its consistent, high quality customer service. We agreed on a single, simple purpose – to serve customers well. We want to be trusted, respected and valued by our customers, shareholders and communities. To do this we have put a common set of values at the heart of how we do business. Our values are not new, but capture what we do when we are at our best.
Our vision: We want to be trusted, respected and valued by our customers, shareholders and communities.
We have a programme of change in place that embeds a working culture which celebrates challenge when business decisions or behaviours are not in line with our values. We have engaged our employees to stimulate ideas and change that ultimately results in material improvements to the customer experience.
Regional leadership workshops were designed to build understanding and engagement for more than 3,000 of our leaders. Those leaders then engaged locally to help their people understand how the purpose and values were relevant to their business area. By September, 66% of staff had been involved in a conversation with their leader, and 93% of those have a better understanding of the relevance to their part of the business.
We have made progress but we need to continue to have a rigorous focus on how to serve customers well, and work to fully embed our values in everything we do. Our employees believe in the goals of RBS and already 1 in 2 people have seen a change in how their team works.
Our Markets business earns income from client driven trading activities particularly Rates, Currencies, Asset-Backed Products and Credit.
Over the period 2009-2013, the RBS strategic approach has focused first and foremost on rebuilding financial resilience: • reducing total assets, principally through the run-off of Non-Core; • reducing risk concentrations; • reducing dependence on short-term wholesale funding while achieving a deposit-led funding model; and
This emphasis was necessary in order to correct historical weaknesses and to set RBS on a sound footing, but it left us falling short in our ability to build long-term shareholder value on the foundation of serving our customers and meeting more of their financial needs.
In 2013 we have refocused our Markets and International Banking businesses to deliver a targeted wholesale banking proposition to UK corporates and global financial institutions.
The RBS business model is that of a UK-focused retail and commercial bank. Our market leading customer franchises in the UK – serving personal, business and corporate customers – form the anchor of the RBS strategy. Our wholesale banking operations in the corporate and institutional business enhance and complement the proposition to our commercial customers.
Business structure RBS will be structured to deliver this ambition by organising itself around the needs of its customers, so as to combine customer groups with similar needs into business units able to deliver co-ordinated services. The seven existing operating divisions will be realigned into three businesses: • Personal & Business Banking will serve
UK personal and affluent customers together with small businesses (generally reporting up to £2 million turnover), with more business bankers moving back into branches.
• Commercial & Private Banking will serve commercial and mid-corporate customers and high net worth individuals, deepening relationships with commercial clients operating overseas through its market-leading trade and foreign exchange services while connecting our private banking brands more effectively to successful business owners and entrepreneurs.
The reorganised bank will be a UK-focused retail and corporate bank with an international footprint to drive its corporate business. It will be managed as one bank, with one strategy.
• Position RBS to deliver a sustainable overall return on tangible equity of 12% plus in the long term.
A more detailed review of component business lines continues within each business, and further updates will be provided over the course of the year.
Addressing costs and returns Key to achieving this is a significant reduction in RBS’s costs and complexity. Transforming the bank to deliver this involves rationalising and simplifying systems, based on a target architecture with improved resilience. Examples of these measures include: • The number of technology platforms we use will be reduced by over 50%.
• From 80 payment systems currently maintained we will move to approximately 10.
• We will maintain a similar level of investment spending but directed at customerfacing process improvements, instead of maintaining inefficient legacy infrastructure.
This simplification is intended to deliver significant improvements to services delivered to our customers but at the same time serves as the cornerstone of a programme designed to bring our cost base down from £13.3 billion in 2013 to £8 billion in the medium term, including the impact of business exits such as Citizens Financial Group and Williams & Glyn, the bank levy, restructuring costs and, from 2015, the EU resolution fund charge. This plan will take RBS towards a cost:income ratio of around 55%, moving towards 50% in the longer term. Bringing our cost base back into alignment with the reduced scale of our business underpins our potential to deliver improved returns in future years.
Personal & Commercial & Corporate & Business Banking Private Banking Institutional Banking
(1) All business targets refer to steady state performance 2018 – 2020.
Delivery of 2009-2013 Strategic Plan In 2009 RBS set out a five year strategic plan aimed at restoring RBS to standalone strength. The plan was built on four business objectives: • To base RBS on enduring customer franchises, with each business capable of generating a sustainable return in excess of its cost of capital; • To deliver the RBS strategy from a stable risk profile and balance sheet, with each banking business self-funding (100% loan:deposit ratio); • To deliver an attractive blend of profitability, stability and sustainable growth from the chosen business mix; and
We set out key measures and have consistently reported on our progress against these over the course of the five year plan. Progress against the risk measures has been strong, with all targets exceeded, in some cases by very large margins. Progress against value drivers, however, has not lived up to our expectations at the time the plan was established, with deterioration in both return on equity and cost:income ratio.
Measures Future performance will be reported against both customer and financial measures.
People Great place to work Engagement index ≥ Global Financial Services norm (2)
Mobile nation With over one billion logins since its launch, the RBS mobile banking app helps customers access their money while on the move.
In March 2013 UK Retail announced its strategy to become a simpler and more customerfocused business. Investment of £700 million over the next 3-5 years has been committed to build the best retail bank in the UK. Investment in digital channels continued, with half of all eligible customers now banking online or on mobile. Although branch counter transactions have fallen 30% since 2010 a programme to refurbish our branches has begun.
• Operating profit was down 41% at £1,060 million. Excluding £410 million impairments related to the creation of RCR, operating profit was down 18%.
• Impairments included an additional £410 million related to the creation of RCR. Excluding this, impairments were 7% lower than in 2012.
Stormy weather The UK suffered from terrible weather at the end of 2013, which caused serious damage and destruction. Adverse weather can have a dramatic effect on a business – loss of property and stock, failing systems, supply chain failures and halted trading – pushing them into financial difficulty, impacting employees and local communities. To help ease the pressure for businesses who have been directly or indirectly affected, we launched a £250 million UK Storm Business Fund. Interest-free loans can be provided for three months to viable and eligible businesses, whether or not they are existing customers (maximum of £250k per loan). Short-term, interest-free financing can be provided to cover, for example, cost of repairs and replacement stock while businesses wait for insurance claims to be paid.
• Assets under management rose 3%, but total client assets and liabilities managed by the division declined by 2% following the repricing initiative.
However, Coutts’ focus on adding value to every relationship can also help bring the right people together. When one client was looking to diversify into renewables and food security in the Middle East, Coutts were able to bring the right people to the table, providing a catalyst for the client’s growth opportunities and showing the value of our inter-connected world.
We offer a core banking proposition to multinational corporates and financial institutions by providing debt financing, risk management and transaction services. We work with clients to find the best product mix to execute their strategy.
• Customer deposits declined by 15% in line with a change in Group funding strategy.
They also wanted to use this as an opportunity to make payments more efficient and reduce risk. They worked closely with RBS to make a number of changes to their internal processes and thanks to meticulous planning and communication, the changes were successful. TomTom now has one, single payment process for suppliers across the world.
• Retail and SME deposit balances increased by 2%, offset by a reduction in wholesale customer balances, resulting in a 2% decline in total deposit balances.
Home run Demand for affordable housing is extremely high across the UK and Apex, one of Northern Ireland’s largest housing associations, is working hard to help meet this need. Apex employs 570 people and has over 4,000 units under management, including general needs housing, supported housing, sheltered housing and registered care.
Bruce Van Saun Chief Executive, RBS Citizens and Head of RBS Americas
• Operating profit of $1,012 million was down 15%, with low short-term interest rates continuing to limit net interest margin expansion while rising long-term rates slowed mortgage refinance volumes.
• Average loans and advances were flat, with commercial loan growth of 5% partly offset by run-off of long-term fixed rate consumer products.
We provide financing, risk management and advisory services to RBS corporate and institutional clients.
• Operating profit fell by £889 million, 59% to £620 million with income falling by 26%, partly offset by significant cost reductions. The de-risking of Markets resulted in a 36% reduction in risk-weighted assets.
• Currencies income increased but returns from the Rates business were subdued.
• Third party assets were reduced by £72 billion (down 25%) and risk-weighted assets by £37 billion (down 36%).
In 2013, Markets launched and executed a strategy aimed at reducing risk, tightening controls, consolidating the geographic footprint and reducing complexity by refocusing on the franchise’s core strengths. The division met or exceeded all internal targets for reducing controllable costs, risk-weighted assets and the balance sheet, while meeting revenue and income expectations. Lower income in 2013 compared with 2012 reflected both the strategic scaling back of the balance sheet and risk reduction in a difficult market environment with client activity limited by uncertainty over monetary policy in the US.
Weighing anchor Peel Ports Group, one of the UK’s biggest port operators, handles over 65 million tonnes of cargo a year. An RBS backed refinancing programme has enabled the development of Liverpool2, the new deep sea container terminal in the Port of Liverpool, costing in excess of £300 million.
Established in 2009 as the principal vehicle of risk reduction. At inception it had £258 billion of third party assets and £171 billion of riskweighted assets. Non-Core reduced these assets in a capital efficient manner and at a pace the bank could afford.
• Third party assets declined by £29 billion, or 51%, reflecting run-off, disposals and impairments.
Non-Core has successfully achieved and surpassed its five year strategic plan target set in 2009, reducing third party assets by 89% from an initial £258 billion. By the end of 2013 Non-Core represented c.4% of RBS’s funded balance sheet, compared with 21% when the division was created.
In Business Services we keep RBS running, supporting our customers 24 hours a day, 365 days a year. We put money in the ATMs, keep the bank’s technology systems operating, help to keep our customers safe from fraud, process billions of pounds worth of payments across the world, and provide call centre and online services to customers.
• Through our Simplifying Customer Life initiative 4,500 ideas have been submitted improving over four million customer interactions each year.
• We have delivered almost 50 Cyber Crime and Fraud Prevention seminars to more than 2,500 RBS customers, non-customers and RBS Relationship Managers worldwide.
• Our energy initiatives have resulted in an 18% reduction in energy consumption in our flagship buildings during 2013.
• IT incidents in recent years have caused inconvenience to our customers. To reduce the impact of any technology outages on our customers, we are investing over £750 million in a three-year period to improve the resilience of our systems, becoming safer and more secure.
Board and committee activity increased significantly in 2013, with a number of key strategic issues taking centre stage, and Board committees continued to play a crucial role in our governance framework, undertaking their complex work comprehensively and effectively supporting the work of the Board.
There were a number of changes to the Board’s composition during 2013, details of which can be found in the Chairman’s Statement on pages 22 and 23 and in the Corporate governance report on page 45.
The Board is the main decision making forum for the company. It is collectively responsible for the long-term success of the company and is accountable to shareholders for financial and operational performance.
The Board has overall responsibility for the following areas: • the establishment of strategy and consideration of strategic challenges; • the management of the business and affairs of the Group; • ensuring that risk is managed effectively through the approval and monitoring of risk appetite; • considering stress scenarios and agreed mitigants and identifying longer term strategic threats to the Group’s business operations; • the allocation and raising of capital; and • the preparation and approval of the RBS
We conducted an internal evaluation of the effectiveness of the Board and its committees in 2013, led by the Group Secretary. The evaluation has concluded that the Board is operating effectively but has identified some areas for improvement which we will focus on during 2014.
Assists the Board in discharging its responsibilities for monitoring the integrity of the financial statements of the Group. It reviews the accounting policies, financial reporting and regulatory compliance practices of the Group and the Group’s system and standards of internal controls, and monitors the Group’s processes for internal audit and external audit.
Provides oversight and advice to the Board on current and potential future risk exposures of the Group and risk strategy. It reviews the Group’s compliance with approved risk appetite and oversees the operation of the Group Policy Framework.
Responsible for overseeing performance and the Group’s policy on remuneration. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.
Simon McNamara Group Chief Administrative Officer * As at the date of signing of the Annual Report and Accounts.
For more detail of the operation of the committee please refer to the full committee report on pages 50 and 51.
Responsible for overseeing and challenging how management is addressing sustainability and reputation issues relating to all stakeholder groups, except where such issues have already been dealt with by other Board committees.
UK Corporate Governance Code This is the first year that we are reporting under the new narrative reporting requirements which include the new Strategic Report and changes in remuneration reporting. Throughout the year ended 31 December 2013, the company has complied with all of the provisions of the UK Corporate Governance Code except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. The company considers that this is a matter which should rightly be reserved for the Board. Our statement of compliance with the UK Corporate Governance Code (the “Code”) is set out on page 91.
“ We are confident that the actions announced will deliver a customer- focused bank.”
Five years ago RBS embarked on a strategic restructuring designed to correct the aspects of its business that made it particularly vulnerable to the financial crisis of 2008. The execution of that restructuring has transformed the financial position of the bank: we have reduced our balance sheet by more than £1 trillion, repaid hundreds of billions of Government funding support and removed the imminent threat that our size, risk and complexity posed to the UK economy. In 2013 we took further steps to resolve our remaining legacy balance sheet issues by announcing the creation of RCR, with the aim of accelerating the removal of these legacy assets and releasing the capital they are still tying up.
We have also taken very substantial charges for a variety of conduct-related issues, including LIBOR, PPI, interest rate swaps and RMBS litigation. Almost all of these costs for
As our 2013 results make clear, however, restoring the strength of the bank’s balance sheet was only one part of the job. In June the Board announced that Stephen Hester, who had led our financial restructuring since 2008 very effectively, would be stepping down as Group Chief Executive. We selected Ross McEwan to re-energise the task of building a bank that earns its customers’ trust, improves operating efficiency and can move down the path back to full private ownership. The Board and I want to thank Stephen Hester for his dedication to RBS and to congratulate him on his success in putting the bank on to a sound footing.
Bruce Van Saun took up his new role as Chairman and Chief Executive of RBS Citizens Financial Group, Inc. on 1 October 2013 and has stepped down from the Board having done an excellent job as our Group Finance Director. He was succeeded by Nathan Bostock, who has since confirmed his resignation; his leaving date has not yet been agreed and the search for his replacement is under way.
Ross McEwan is bringing a fresh perspective to RBS’s challenges, and that perspective is now bearing fruit in the results of the strategic review that we are setting out. The Board believes that this was the right time for this review, so as to ensure that we target our future efforts firmly towards serving our customers, shareholders and wider stakeholders in the best possible way.
We also faced accusations that our Global Restructuring Group had been culpable of “systematic and institutional” behaviour in artificially distressing otherwise viable businesses. No evidence has been provided for that allegation but it has, nevertheless, done serious damage to RBS’s reputation. That is why we instructed the law firm Clifford Chance to conduct an independent review. This is an area where all banks routinely make difficult judgments, and indeed the banking sector has been criticised for excessive forbearance in recent years, charged with supporting unviable “zombie” companies for too long.
On many of these issues we have engaged closely with HM Treasury (HMT) through UK Financial Investments, which manages HMT’s shareholding, and with our two main regulators, the Prudential Regulation Authority and the Financial Conduct Authority. Over the course of the year they have all proposed actions for consideration by the Board.
Ross McEwan has spoken of the need to reset our relationship with HMT and our main regulators. I hope and believe that we have made good progress in this direction. There is a desire on all sides that our relationship with the Government in its role as controlling shareholder should be primarily managed by UKFI on a commercial, arm’s length basis. I want to make it clear, however, that the path we have set and decisions we have taken reflect the Board’s view of what is in the interests of all RBS’s shareholders and other stakeholders.
We are monitoring the debate on Scottish independence but, as I and my colleagues have said many times, we are politically neutral. We don’t support political parties or political movements. We will respond to whatever voters decide and governments agree.
Since 2009 RBS has cleaned up the world’s largest bank balance sheet by removing more than £1 trillion in assets. This was a remarkable achievement, born of absolute necessity, but delivered with exceptional skill.
Since taking up post in October, I have listened extensively to our customers and our staff. It is clear to me that people have not given up on us. Our customers tell me we have good people with good intentions. But they also tell me they are frustrated by the way we work.
We are clear on our purpose as a bank: to serve customers well, but we are yet to operate in a way that means we can really deliver on this. Delivering on our purpose will mean running the bank differently.
To meet more of our customers’ needs we must earn more of their trust. This starts with improving the things that matter most to customers, and then rewarding their loyalty. There are too few rewards for customer loyalty in banking and we need to change this. Loyal and rewarded customers are the basis for the higher quality earnings we intend to deliver.
Change won’t happen overnight, but we are clear where we can improve and our progress will be evident quarter-by-quarter. We have already started calling out the barriers to our ambition.
2013 Financial performance This bank has had an extraordinary five years. Cleaning up a £2.2 trillion balance sheet whilst addressing the many failings of the past has carried a very heavy cost, which shows in our results.
Why we must change Capital: The capital plan we announced in November outlined a number of concrete actions to place the bank on a sure footing. Among them, the creation of RCR and the flotation of Citizens Financial Group will allow us to target a Common Equity Tier 1 capital position of 12% or greater by the end of 2016.
Cost and Complexity: There was a necessary complexity to running an organisation with a £2.2 trillion balance sheet, as ours was five years ago, but this need has reduced as we have scaled the bank dramatically down over recent years. We now need to simplify our structure and cost base to match.
RBS remains a complex bank. We can be hard to do business with, costly to operate, and complicated to work in. We have seven customer-facing divisions as well as RCR and central functions, many of which are duplicated across divisions. Across this we have hundreds of internal committees. These are costly barriers to interaction between our people and with our customers, meaning we lose out too many times on the opportunity to serve them with more products and services.
Trust and Reputation: Behaviour and performance influence the perception of worth. RBS carries huge reputational discount due to the extent of bad headlines the bank attracts. This carries through into our customer and investor interaction and can only be solved by a sustained improvement in the quality of our earnings and meaningful change in the way we deal with customers.
Our customers like and trust the people they deal with, but not the bank itself. We can change this by moving more of the appropriate decision making and process management closer to the people who deal with customers.
Performance: Great companies know that quality service goes hand-in-hand with disciplined management; they chase down costs intelligently so they can invest more for their customers. They prioritise and invest with relentless focus on the areas that deliver the strongest, most sustainable returns.
Our support functions will be smaller, more expert and dedicated to helping the businesses succeed for customers. We will run highly disciplined and well managed conduct and risk functions to maintain safety and soundness.
Our focus will be determined by where our customers need us, and where we can serve their needs better than anyone else.
The UK is our home market and our strongest market. It is also our biggest advantage. Our corporate customer trade flows mean we need a strong European and US presence, so this is where we will be. Our UK clients rely on inward investment, so we’ll retain a presence in Asia.
The businesses will be built on franchises that can be number one for customers. We have a family of brands across the bank and will use these to deliver on our ambition.
Not every business in our current structure will be best placed to deliver on our strategy. Technology investment will enable some to improve service at a rate that outpaces the market, but others will not.
For those activities where we can’t see a clear path to being number one, we will review on the basis of ‘fix, close or dispose’. These will become clear as each of our three businesses defines its new customer franchises over the coming months.
Ahead of results, we announced that we would take an additional £2.9 billion of charges for litigation and conduct related matters. While these charges were in our future capital plan, provisions were recognised in 2013 and reduced our fully loaded Basel III Common Equity Tier 1 ratio to 8.6% at the end of 2013.
Mainly as a result of the increased impairments we have taken and significantly higher levels of disposals in Non-Core than had been forecast, the opening balance is £29 billion of third party assets and £65 billion of risk-weighted asset equivalents (RWAe). This reduction in assets has also resulted in a corresponding decrease in the bank’s funding requirements.
Ulster Bank: The thinking behind every aspect of our new strategy applies to our business in the island of Ireland.
Measure 1: Customer We will target the best Net Promoter Score in the market in the long term in each of our chosen business areas. The most trusted bank in the UK in the long term.
Measure 3: Returns Our overall targeted return on tangible equity (RoTE) will be approximately 9-11% in the medium term. Our long-term RoTE target is 12% plus.
These simple measures mean we will strike a permanent balance between the needs of our stakeholders.
Although we remain in the shadow of our past conduct failings, we have a clear and universal set of values that bind the bank together.
Conclusion RBS isn’t just any bank. Few, if any, comparisons do justice to the scale of the turnaround that RBS required.
Over time, with steady focus and disciplined delivery, the new RBS will emerge. The businesses we operate will be highly effective and relentless in their pursuit of delivering service that makes us number one for customers.
The outcome will be a bank that is truly trusted by customers.
In the UK, performance improved. Total economic activity, as measured by gross domestic product (GDP), grew by 1.9% compared with growth of 0.3% in 2012. At the start of the year, expectations had been for an increase of only 1.0%. Consumption led the way, despite falling real wages. There were more people in work and households drew down savings to fund spending.
Housing market activity accelerated sharply, prompted in part by measures to encourage house purchases such as Help to Buy. According to the Halifax house price index, the average price of a house in the UK increased by 5.8% during the year. Other indices reported stronger price growth. Prices look to have risen in all parts of the UK but inflation was strongest in London, where prices rose by more than 10%.
In the face of considerable fiscal austerity and continuing disputes about the public finances, which led to a government shutdown in the autumn, GDP growth in the United States was 1.9% compared with 2.8% in 2012. There was encouraging news on the job market, where unemployment had fallen to 6.7% in December 2013, although part of the fall was accounted for by people leaving the job market rather than finding work. The housing market again performed strongly, with prices up 14% in the year to November.
Unemployment averaged 13.2% and finished the year at 12.4%. House prices rose by 6.4%, the first year-on-year increase since 2007. However, rises were confined to Dublin, where prices increased by 16%. Outside the capital, prices fell slightly. Nationally, prices ended the year 45% below their 2007 level.
Entering 2013, the greatest economic concern was how problems related to sovereign debt in the euro zone would be managed. With the exception of Cyprus, there were none of the episodes of concern that had marked previous years. Markets were generally convinced that the European Central Bank would indeed ‘do what it takes’ to sustain the single currency. Further steps were taken towards a banking union. Nevertheless, the region’s economy remained weak. Unemployment averaged 12.1%, a record, and inflation fell to 0.8% at the end of the year.
Key themes of 2013 Safety and soundness The Group continued to pursue its safety and soundness agenda during 2013, with NonCore ’s assets falling to £28 billion and Markets repositioning its business, both resulting in risk reduction and lower RWAs.
Whilst the continued deleveraging led to a significant reduction in RWAs, this was more than offset by the impact of the regulatory and redress provisions and increased impairment losses reflecting the establishment of RCR. Our Core Tier 1 capital ratio improved over the year, increasing from 10.3% to 10.9%. The fully loaded Basel III Common Equity Tier 1 ratio also improved in the year to 8.6%.
Strategic review The Group launched a strategic review in the fourth quarter of 2013 to reshape the business to deliver superior customer service. This involved a wide-ranging review of core activities, resulting in the formulation of a plan to address the business challenges of the next five years. While the Group believes the resulting strategy is appropriate, risks remain; the strategy may prove inadequate or the Group may be unable to execute it successfully. Its successful execution, despite increasing regulatory demands and scrutiny as well as a challenging economic environment, is key to the future success of the Group.
To deliver its capital plan, RBS has formed Capital Resolution Group (CRG), which comprises four pillars: exiting the assets in RCR, delivering the IPOs of both Citizens Financial Group and Williams & Glyn, and optimising the bank’s group-wide shipping business. RCR was set up from 1 January 2014 and will manage a pool of funded assets (£29 billion) with particularly high capital intensity or potentially volatile outcomes in stressed environments, aiming to accelerate the run-down of these exposures to free up capital for the Group.
Macroeconomic risks • Increased impairments arising from defaults in sectors to which RBS has concentrated exposures, particularly commercial real estate and shipping. Optimisation of the Group’s shipping and a significant proportion of commercial real estate portfolios is part of CRG strategy.
• An increase in RBS obligations to support pension schemes. The trustee is responsible for the investment of the main scheme’s assets, which are held separately from the assets of RBS.
Conduct, regulatory and legal risks • Increased conduct costs and reputational damage arising from a failure to achieve fair customer outcomes. In order to address this risk, during the year RBS continued to embed good conduct at the heart of the business to ensure fair outcomes for customers.
Risks related to the Group’s operations • Increased losses arising from cyber attacks. The Group has participated in an industry-wide cyber attack simulation. It has also initiated a program to improve controls over user access, taken steps to rationalise its websites, put anti-virus protection in place and educated staff on information protection.
• Increased costs arising from a failure to execute successfully major projects. RBS is working to implement change in line with its plans while assessing the risks to implementation and taking steps to mitigate those risks where possible.
• Increased costs due to an inability to recruit or retain suitable staff. RBS has communicated expected changes in its organisational structure to members of staff, implementing plans aimed at minimising unexpected staff losses.
Political risks • RBSG and the Royal Bank, its principal operating subsidiary, are both headquartered and incorporated in Scotland. The Scottish Government is holding a referendum in September 2014 on the question of Scottish independence from the UK. Although the outcome of such referendum is uncertain, subject to any mitigating factors, the uncertainties resulting from an affirmative vote in favour of independence would be likely to significantly impact the Group’s credit ratings and could also impact the fiscal, monetary, legal and regulatory landscape to which the Group is subject.
• The occurrence of any of the impacts above could significantly impact the Group’s costs and would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
A more detailed discussion of developments in 2013 can be found in the ‘Risk and balance sheet management’ section on pages 187 to 191.
For information on how we manage Environmental, Social and Ethical (ESE) risks, please see our Sustainability report, available at rbs.com/sustainable.
“ The success of a bank depends on two things. A strong financial position; and a reputation for great customer service based on a deep connectivity with the society the bank supports, and is in turn supported by.”
The Committee has overseen a number of important developments within the company since it was established in 2009. For more information on the work of the Committee in 2013, see the report of the Chair of the Committee on page 64.
Stakeholder engagement Operating in a sustainable manner is about managing our business in a way that takes account of the impact of our activities on our stakeholders. As such, we work with a number of stakeholder groups to understand their views of our organisation, to help shape the way we do business. As a large company we have many stakeholders and we engage with them in a variety of ways, from focus groups to meetings to online forums. These interactions inform decision making and ultimately improve our company. More detail about our stakeholder engagement is available at rbs.com/sustainable.
We will continue to host these sessions to ensure that we understand our stakeholders’ priorities. For more detailed information on these sessions see our sustainability pages on rbs.com.
We have been members of the United Nations Global Compact (UNGC) since 2003, the leading platform for the development, implementation and disclosure of responsible policies and practices in the areas of: human rights, labour, environment and anti-corruption.
Each year RBS receives ratings for its environmental and social performance by external indices. RBS has been included in the Dow Jones Sustainability World Index (DJSI) every year since its launch in 1999, achieving our best ever score in 2013. The Index ranks companies’ corporate sustainability performance, based on analysis of economic, environmental and social issues like corporate governance, risk management, branding and climate change.
The CDP is an independent, investor-driven organisation which facilitates the measurement and disclosure of Green House Gas (GHG) Emissions for 2,500 organisations in over 60 countries. In 2013 RBS received a disclosure score of 88% and a performance score B.
The FTSE4Good Index Series measures the performance of companies that meet globally recognised corporate responsibility standards. RBS has been included in the FTSE4Good since it was launched 10 years ago.
The activities of RBS and those of our clients can present a number of Environmental, Social and Ethical (ESE) risks and it is our responsibility to manage these risks. We have a robust ESE policy framework, with sector specific policies relating to high risk sectors including oil and gas, mining and metals and forestry.
Total Scope 1 & Scope 2 CO2e emissions (tonnes) 632,506 548,752 514,671 -18.6% -6.2%
Our approach to Human Rights We recognise our corporate responsibility to respect and uphold human rights, regularly review our policies and procedures to ensure that we avoid infringing on the human rights of others, both in our own operations and throughout our sphere of influence. In 2013, we contributed to the Thun discussion paper on the implications of UN Guiding Principles 16-21 for banks and are committed to the implementation of the Guiding Principles within our operations.
We have adopted and contributed to a number of internationally accepted codes, notably the Equator Principles and the UN Global Compact, which specifically address the management of human rights issues. The RBS Group Code of Conduct sets out the standards we expect our people to work to, including a clear commitment to respecting human rights. We listen to our people in a variety of ways, including through an annual employee survey, enabling our people to raise issues regarding their working environment. We also have in place an independent whistleblowing facility for employees to raise concerns, without fear of adverse consequence.
Board committees Board committees continued to play a crucial role in our governance framework during 2013, undertaking their complex work comprehensively and effectively supporting the work of the Board.
The Group Audit Committee has monitored progress on various regulatory investigations and has overseen the remediation of culture and control issues in the Markets division. The Group Audit Committee has also supported the Board in making its assessment that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, in accordance with new provisions in the UK Corporate Governance Code.
The Board Risk Committee has continued to oversee the remediation activity following the major IT incident in 2012 and is also providing oversight of the investigations underway in response to various allegations made by Mr Tomlinson, customer and adviser to the Department of Business, Innovation and Skills.
The Group Sustainability Committee has provided oversight of the introduction and embedding of our new values, including the launch of a new code of conduct for our people, and continued its innovative programme aimed at understanding and engaging more effectively with key stakeholders.
Two of our non-executive directors also retired from the Board in 2013. Joe MacHale stood down in May, having served on the Board for nearly nine years. Joe made a substantial contribution to the Board and the committees he served on, providing valuable continuity throughout a challenging period, and on behalf of the Board I would like to express our sincere thanks for his hard work and commitment. Art Ryan also retired in September after more than five years on the Board. The knowledge, wisdom and experience Art brought to the Board and the Group Performance and Remuneration Committee in particular, were greatly appreciated. Art remains on the board of RBS Citizens Financial Group, Inc.
In December 2013 we welcomed Robert Gillespie as a new nonexecutive director and I am delighted to say that the Board is already benefitting from Robert’s skills and experience. We are also announcing alongside our 2013 results some further Board and committee changes to ensure that we will continue to have an appropriate balance of skills, experience, independence and knowledge. Philip Scott will step down from the Board by 31 October 2014 and I would like to thank Philip for the significant contribution he has made to the Board and the committees he has served on and especially for his strong leadership of the Board Risk Committee during a particularly challenging period for RBS. Baroness Noakes will succeed Philip Scott as Chairman of the Board Risk Committee with effect from 1 April 2014. Following the 2014 Annual General Meeting, Penny Hughes will become Chair of the Group Sustainability Committee replacing Sandy Crombie and Sandy will become Chairman of the Group Performance and Remuneration Committee. I would like to thank both Penny and Sandy for their outstanding commitment and dedication whilst chairing the Group Performance and Remuneration Committee and Group Sustainability Committee respectively
Board effectiveness This year, we conducted an internal evaluation of the effectiveness of the Board and its committees, led by the Group Secretary. The evaluation has concluded that the Board is operating effectively but has identified some areas for improvement which we will focus on during 2014.
The Board also received support from the Group Secretary in a number of other areas related to board effectiveness such as Board process and information flows, continuing professional development and induction for new directors.
Corporate governance This is the first year that we are required to report under the new narrative reporting requirements, which include the new Strategic report and changes in remuneration reporting. Our statement of compliance with the UK Corporate Governance Code (the “Code”) is set out on page 91.
Finally, as we reflect on another challenging year, I would like to conclude this letter by recording my sincere thanks towards my fellow Board members. Being a director of RBS requires extensive time and commitment, and the readiness to deal with the unusual challenges of a government controlled listed company. I remain extremely grateful for their continued support and dedication in working towards the recovery of RBS.
Board Risk Committee Provides oversight and advice to the Board on current and potential future risk exposures of the Group and future risk strategy. It reviews the Group’s compliance with approved risk appetite and oversees the operation of the Group Policy Framework.
Group Performance and Remuneration Committee Responsible for overseeing performance and the Group’s policy on remuneration. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.
Group Nominations Committee Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and membership and chairmanship of Board committees.
Philip Hampton (age 60) Date of appointment: 19 January 2009 (Board) 3 February 2009 (Chairman)
Committee membership(s) • Group Nominations Committee (Chair) • RCR Board Oversight Committee
Experience: Has more than 25 years experience in the finance, insurance and investment industries. He joined RBS in August 2012 as Chief Executive Officer for UK Retail, having previously been Group Executive for Retail Banking Services and Executive General Manager responsible for the branch network, contact centres and third party mortgage brokers at Commonwealth Bank of Australia, Managing Director of stockbroking business First NZ Capital Securities, and Chief Executive of National Mutual Life Association of Australasia Ltd/AXA New Zealand Ltd.
Nathan Bostock (age 53) Date of appointment: 1 October 2013. Nathan Bostock has since confirmed his resignation although his leaving date is still to be agreed.
Experience: Joined RBS in 2009 as Head of Restructuring and Risk and Group Chief Risk Officer. Prior to this, he spent eight years with Abbey National plc (now Santander UK), latterly as Chief Financial Officer, ten years with RBS in a number of roles, including Chief Operating Officer of Treasury and Capital Markets and Group Risk Director and seven years with Chase Manhattan Bank in a variety of areas and functions. He is a chartered accountant and holds a BSc (Hons) in Mathematics.
Committee membership(s): • Group Sustainability Committee (Chair) • Board Risk Committee • Group Nominations Committee • Group Performance and Remuneration
Experience: Managing partner of Fifth Era, an investment firm focussed on early stage technology investments. Previously, she served as a director of City National Bank and First Data Corporation and as chair of the board of LECG Corporation. She has also worked at McKinsey & Company, AT Kearney, as Chief Financial Officer at Barclays Global Investors (now BlackRock) and managing partner of Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.
• Non-executive director, chair of the compensation committee and member of the audit committee of Diamond Foods Inc.
• Director of the Governing Board of Women’s Initiative for Self Employment
Tony Di Iorio (age 70) Date of appointment: 1 September 2011
Penny Hughes, CBE (age 54) Date of appointment: 1 January 2010
External appointment(s): • Non-executive director, chair of the corporate compliance and responsibility committee and member of the audit, nomination and remuneration committees of Wm Morrison Supermarkets plc
Experience: Former global chairman, financial services for KPMG. Previously held senior leadership roles within KPMG including as a member of the KPMG UK board from 1999 to 2006 and as vice-chairman from 2006. Chairman of the Audit Committee of the Institute of Chartered Accountants of Scotland from 2005 to 2008.
Committee membership(s): • Board Risk Committee • Group Audit Committee • Group Nominations Committee
External appointment(s): • Non-executive director and chairman of the audit committee of Diageo plc
Rory Cullinan (age 54) Chief Executive, RBS Capital Resolution Group Rory Cullinan became CEO of the RBS Capital Resolution Group (CRG) on 1 January 2014. CRG was set up to deliver, transform, optimise or exit the businesses and assets which will be the primary driver of the RBS capital build. CRG includes RBS Capital Resolution (RCR) and the divestments of both RBS Citizens Financial Group, Inc and Williams & Glyn. He previously served as CEO of the Group’s Non-Core Division and also led the negotiation and establishment of RBS’s entry into the UK Government’s Asset Protection Scheme. Rory previously worked at RBS as Head of Equity Finance (2002-2005). Before rejoining RBS he was Co-Managing Partner and Group Board Member at Renaissance Group. Prior to 2002, he worked for a variety of banks and active financial investment companies in the Americas, Africa and Europe including Permira Advisors, Verdoso Investments (a company he co-founded), Pembridge Investments and Citibank.
Les Matheson (age 54) Chief Executive, UK Retail Les Matheson was appointed Chief Executive of UK Retail on 11 February 2014. He joined RBS in January 2010 as Managing Director of Products, assumed additional responsibility for Marketing in October 2011 and then served as interim Chief Executive for UK Retail before assuming the role on a permanent basis. Prior to joining RBS, Les was Group Executive Retail for St George Bank (part of the Westpac Group of companies) and before that was with Citigroup for eleven years, where he was CEO Citibank Australia, Citigroup Country Officer for Australia and a member of the Citigroup Global Management Committee. Prior to Citigroup Les worked for a number of consumer marketing companies. He began his career with Procter & Gamble in Brand Management in the UK. Les is a member of the Board of Visa Europe and is a member of the Edinburgh University Court.
David Stephen (age 49) Group Chief Risk Officer David Stephen joined RBS in July 2010 as Deputy Group Chief Risk Officer, and became Group Chief Risk Officer on 1 October 2013. He is responsible for risk globally across all divisions including credit risk, market risk and operational risk functions and enterprise risk management. Spanning a 28 year career in the finance industry across London, New York, Hong Kong and Melbourne, he has worked for both full service and investment banks. These included Credit Suisse Financial Products where he was Chief Credit Officer and ANZ Bank where he was Group Chief Risk Officer and was a member of ANZ Bank's Management Board. David is a graduate of Melbourne's Monash University.
Chris Sullivan (age 56) Chief Executive, Corporate Banking Chris Sullivan was appointed Chief Executive of the Corporate Banking Division in August 2009 and also has responsibility for Ulster Bank Group. Chris’ previous role was as Chief Executive of RBS Insurance. Prior to this, Chris was Chief Executive of Retail and Deputy Chief Executive of Retail Markets. Chris is the Group sponsor for Gender Diversity and the Group’s internal Women’s Networks and was recognised as the European Diversity Champion of the Year in 2011. He is an active sponsor of professional and leadership development and is a member of the Chartered Banker Professional Standards Board and Governor of Ashridge College. Chris holds a number of positions outside the Group including Chairman of the Global Banking Alliance for women and is a member of the Westminster Abbey Investment Committee. Chris earned his Fellowship of the Chartered Institute of Bankers in Scotland for his services to Scottish Banking.
The Board The Board has eleven directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director.
Board Changes Joe MacHale retired from the Board on 14 May 2013 and Stephen Hester, Art Ryan and Bruce Van Saun all retired from the Board on 30 September 2013. Ross McEwan and Nathan Bostock were appointed to the Board on 1 October 2013 and Robert Gillespie was appointed to the Board on 2 December 2013. Mr Bostock has since confirmed his resignation although his leaving date is still to be agreed.
The Board has overall responsibility for: • the establishment of Group strategy and consideration of strategic challenges; • the management of the business and affairs of the Group; • ensuring the Group manages risk effectively through the approval and monitoring of the Group’s risk appetite; • considering stress scenarios and agreed mitigants and identifying longer term strategic threats to the Group’s business operations; • the allocation and raising of capital; and
Chairman The role of Chairman is distinct and separate from that of the Group Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Group Chief Executive managing the Group’s businesses on a day to day basis.
The Group Chief Executive’s key responsibilities are to: • exercise executive responsibility for the Group’s businesses; • develop and implement strategy approved by the Board; • act in accordance with authority delegated by the Board; • consult regularly with the Chairman and Board on matters which may have a material impact on the Group; • lead the senior executive team and ensure there are clear accountabilities for managing the Group’s business and managing risk; and
Board Committees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Please see the corporate governance framework on page 38 for more details. The work of the Board committees are also discussed in their individual reports as follows
Nominations Committee - pages 50 and 51. Group Audit Committee - pages 52 to 57. Board Risk Committee - pages 58 to 63. Group Sustainability Committee - pages 64 and 65. Group Performance and Remuneration Committee - pages 66 to 90.
Conflicts of interests The company has procedures in place to ensure that the Board’s powers for authorising actual or potential conflicts of interest are operating effectively. On appointment, each director is provided with the Group’s guidelines for referring conflicts of interest to the Board. Each director is required to notify any actual or potential conflicts of interest to the Board for consideration and to update the Board on an ongoing basis when he or she becomes aware of any changes.
Notes: (1) Appointed to the Board on 1 October 2013. Nathan Bostock has since confirmed his resignation although his leaving date is still to be agreed. (2) Appointed to the Board on 2 December 2013 (3) Retired from the Board on 30 September 2013. (4) Retired from the Board on 14 May 2013.
Principal activities of the Board during 2013 In advance of each Board meeting, the directors are supplied with comprehensive papers in hard copy and/or electronic form. During 2013 there has been an enhanced focus on culture and values, conduct and customers. These have been recurring themes underpinning Board discussions during the year and the Board received regular updates on the cultural change programme. An overview of the principal activities of the Board during 2013 is shown below.
• Reports from committee Chairs • Secretary’s Report (routine matters for approval / noting) 1st Quarter 2nd Quarter • UK Retail Deep Dive • Budget Update • Markets Strategy Updates • Remuneration Proposals • Lending Updates • Risk Appetite Framework • Annual Results & AGM Notice • Board and committee
• Non-Core Deep Dive • AGM Preparations • Q1 Results • Markets Strategy Updates • Lending Updates • Recovery and Resolution
Other senior executives, such as the Group Chief Risk Officer and the Head of Conduct and Regulatory Affairs, also attend Board meetings as required to present reports. Divisional Chief Executives, accompanied where appropriate by other senior executives from the division, attend Board meetings to present the divisional deep dives. This provides the Board with an opportunity to engage directly with divisional management on key issues and supports the Board’s succession planning activity.
• Retail Banking • Risk • Finance & Accountancy • Private Equity • Investment Banking • Insurance & Actuarial • Manufacturing
Group Chairman Group Chief Executive Group Finance Director Senior Independent Director Board committee Chairs Group Secretary Group Chief Risk Officer Head of Conduct and Regulatory Affairs Group Treasurer General Counsel External Auditor External Counsel
Divisional Chief Executives Divisional visits (UK and overseas) Group Finance Group Risk Group Internal Audit Group Tax Investor Relations Group Strategy Group Communications Institutional Investors
Ross McEwan and Nathan Bostock joined the Board on 1 October 2013. Mr Bostock has since confirmed his resignation, although his leaving date is still to be agreed. Robert Gillespie joined the Board on 2 December 2013. Both Mr McEwan and Mr Bostock were serving executives in the Group prior to their appointment to the Board and as such their induction has been focussed on enhancing their knowledge of Board matters and continuing to build relationships with Board members. A comprehensive induction programme was prepared for Mr Gillespie and is underway.
Recommendations; • Banking Reform Bill; • Department for Business, Innovation and Skills (BIS) Proposals on
Firms; • Fourth Capital Requirements Directive (CRD IV); • Competition Commission’s investigation into statutory audit services; • Government reforms on executive remuneration and reporting; and
Performance evaluation process The Group Secretary undertook a formal and rigorous evaluation by: • preparing a detailed framework of key themes for discussion and questions which was used to structure individual meetings held with each director; • discussing the outcomes and recommendations with the Chairman; and
Strategic oversight Ensure that Board agendas for 2014 allocate sufficient time for Board oversight of key areas of strategic focus.
External relationships Ensure regular contact with key external stakeholders in order to maintain effective working relationships at Board level.
Individual director and Chairman effectiveness reviews The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback that had been provided as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance and canvassed views on the Chairman’s performance from the non-executive directors collectively. The results of the Chairman’s effectiveness review were then discussed by the Chairman and the Senior Independent Director.
Communication with the company's largest institutional shareholders is undertaken as part of the Investor Relations programme: • the Group Chief Executive and Group Finance Director meet regularly with UKFI, the organisation set up to manage the Government’s investments in financial institutions, to discuss the strategy and financial performance of the business. The Group Chief Executive and Group Finance Director also undertake an extensive annual programme of meetings with the company’s largest institutional shareholders.
• the Senior Independent Director is available if any shareholder has concerns that they feel are not being addressed through the normal channels.
• the Chair of the Group Performance and Remuneration Committee consults extensively with major shareholders in respect of the Group’s remuneration policy.
In 2013, the Group introduced a programme of UK based events aimed at individual shareholders. These events provided an opportunity for shareholders to meet with directors and senior management to learn more about the business.
Throughout the year, the Chairman, Group Chief Executive, Group Finance Director and Chair of the Group Performance and Remuneration Committee communicate shareholder feedback to the Board. The directors also receive independent analyst notes and reports reviewing share price movements and performance against the sector. Detailed market and shareholder feedback is provided to the Board after major public announcements such as a results release. The arrangements in place are to ensure that directors develop an understanding of the views of major shareholders and that these are considered as part of the annual Board evaluation.
The Group’s Investor Relations programme also includes communications aimed specifically at its fixed income (debt) investors. The Group Finance Director and/or Group Treasurer give regular presentations to fixed income investors to discuss strategy and financial performance. There is also a separate section on the Group’s website for fixed income investors which includes information on credit ratings, securitisation programmes and securities documentation. Further information is available at rbs.com/ir.
As Chairman of the Board, I also chair the Group Nominations Committee and I am pleased to present our report on the committee’s activity during 2013.
The Group Nominations Committee engages with external consultants, considers potential candidates and recommends appointments of new directors to the Board. The terms of reference of the Group Nominations Committee are reviewed annually and approved by the Board and are available at rbs.com
Membership and meetings All non-executive directors are members of the Group Nominations Committee which is chaired by the Chairman of the Board. The Group Chief Executive is invited to attend meetings.
The Group Nominations Committee holds at least two scheduled meetings per year, and also meets on an ad hoc basis as required. In 2013, five meetings of the Group Nominations Committee were held and the following table illustrates members’ attendance at these meetings.
Philip Hampton (Chairman) 5/5 Sandy Crombie 5/5 Alison Davis 5/5 Tony Di lorio 5/5 Robert Gillespie (1) 1/1 Penny Hughes 5/5 Brendan Nelson 5/5 Baroness Noakes 5/5 Philip Scott 5/5
Notes: (1) Appointed to the Board on 2 December 2013. (2) Retired from the Board on 14 May 2013. (3) Retired from the Board on 30 September 2013.
Group Chief Executive succession On 12 June 2013, it was announced that Stephen Hester would step down as Group Chief Executive and the search for his successor commenced immediately, led by the Chairman on behalf of the Board. MWM Consulting was engaged to support the recruitment process for the new Group Chief Executive and conducted a global search for potential external candidates as well as engaging fully with internal candidates. This enabled the internal candidates to be benchmarked against the very best in the market. The Committee held a number of discussions on potential candidates (internal and external) and agreed that Ross McEwan was the strongest candidate on the basis of his extensive experience in banking, the leadership he had already demonstrated during his time as CEO Retail at RBS and his strong focus on serving our customers. Ross McEwan was announced as the new Group Chief Executive on 2 August 2013 and took over from Stephen Hester on 1 October 2013. MWM Consulting does not provide services to any other part of the Group.
Consideration of new non-executive directors Egon Zehnder International continued to support the search for new nonexecutive directors during 2013. Egon Zehnder International were tasked with identifying suitable candidates both to fill existing vacancies (e.g. replacements for Joe McHale and Art Ryan who both retired from the Board during 2013) and to support future Board succession planning. The Committee considered a number of potential candidates during 2013 and Robert Gillespie was appointed to the Board on 2 December 2013. Robert was appointed on the basis of his strong background in finance and banking and his experience of business and regulatory environments in the UK, US and Europe. The search for future potential candidates is continuing. Egon Zehnder International does not provide services to any other part of the Group.
Tenure of non-executive directors The chart below sets out the tenure of non-executive directors.
In accordance with the recommendations contained within Lord Davies’ report, the Board operates a boardroom diversity policy and a copy of the Board’s diversity statement is available on rbs.com>about us.
The Group understands the importance of diversity and, with regard to gender diversity, recognises the importance of women having greater representation at key decision making points in organisations. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board, however, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board.
The balance of skills, experience, independence, knowledge and diversity (including gender diversity) on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. If appropriate, additional targets on diversity will be developed in due course.
Philip Hampton Chairman of the Group Nominations Committee 26 February 2014
Dear Shareholder, 2013 has been a year of significant change for the Group, presenting a number of challenges to the Group Audit Committee. The priority of the Committee has been to ensure the quality and transparency of disclosure and the integrity of the Group’s financial statements. Most notably the Committee supported the Board in its decision to release a trading statement in advance of announcing the Group’s full year results prompted by the recognition of further provisions relating to conduct and litigation, primarily relating to mortgage-backed securities litigation and past conduct issues. These provisions are substantial and have had a significant impact on the Group’s performance for the year.
Progress on remediating known control issues has remained a focus of the Committee during 2013. On behalf of the Board, the Committee has overseen the Controls and Culture Remediation Programmes within the Markets division and has questioned management in relation to the prioritisation of issues, delivery of remediation, quality assurance and contingency plans. The Committee received reports from Risk Management and Internal Audit and commissioned independent assurance that the programmes were progressing according to plan; that issues were being remediated to industry standard; and that internal reporting accurately reflected progress. On behalf of the Committee I discussed progress and prioritisation with the Prudential Regulatory Authority (PRA). The progress made by management during the course of 2013 was encouraging. However, we will continue to exercise oversight of the areas remediated to ensure improvements are sustained and that further progress is made during 2014.
The annual programme of joint visits by the Group Audit and Board Risk Committees to the Group's business divisions and control functions continued in 2013. The programme allows members of the Committees to spend additional time with areas of the business which the Committees judge would benefit from a more detailed review. Invitations to attend are extended to all non-executive directors. During 2013, the Committees undertook a total of eight visits, including a week long visit to the Group’s operations in Asia and a two-day visit to Ulster Bank. During these visits I took the opportunity to meet with local regulators to gain a better understanding of their perspectives and concerns on our business and key control issues.
In all our work we seek to strike the right balance between on the one hand providing independent oversight and on the other encouragement and support to management. It has been another demanding year for the Group Audit Committee and I would like to extend my thanks to my fellow Committee members for their continued dedication and support throughout 2013.
Brendan Nelson Chairman of the Group Audit Committee 26 February 2014
All members of the Group Audit Committee are also members of the Board Risk Committee facilitating effective governance of finance and risk issues. The Group Audit and Board Risk Committees have strong links with the Group Performance and Remuneration Committee ensuring that compensation decisions reflect relevant finance and risk considerations.
Performance evaluation An external evaluation of the effectiveness of the Group Audit Committee takes place every three to five years with internal reviews by the Board in the intervening years. An internal review of the Board and its senior committees took place during 2013 following an external review in 2012. Overall, the review concluded that the Group Audit Committee continued to operate effectively.
Committee considered the assumptions that had been set in valuing the fund and the sensitivities of those assumptions; • the accounting treatment of businesses that the Group has committed to sell, in particular the classification of Direct Line Insurance Group plc in light of the sale of tranches of shares in 2013 and the loss of control by the Group; • the assessment by management of the adequacy and effectiveness of internal controls over financial reporting which had identified weaknesses in the Group’s privileged access and user entitlement controls within Technology Services. The Committee considered the potential impact of those issues upon financial reporting systems and requested assurance directly from management regarding prioritisation of remediation and compensating controls. The Committee will continue to monitor delivery of the required remediation programme in 2014; • the form and content of the newly introduced Strategic Report contained within the Annual Report and Accounts. As part of its overall assessment of the Annual Report and Accounts, the Committee assisted the Board in determining that the Annual Report and Accounts taken as a whole was fair, balanced and understandable, providing the information necessary for shareholders to assess the company’s performance, business model and strategy. A comprehensive review process supports both the Group Audit Committee and ultimately the Board in reaching their conclusion:-
° the production of the Annual Report and Accounts is coordinated centrally by the Group Chief Accountant with guidance on requirements being provided to individual contributors; ° The Annual Report and Accounts are reviewed by the Group
Disclosure Committee prior to consideration by the Group Audit Committee; ° A management certification process requires members of the
This process is also undertaken in respect of quarterly results announcements. In addition, the External Auditor considers the Board’s statement as part of its audit requirements.
Systems of internal control In addition to the Markets Control and Culture Remediation Programmes, oversight of the three lines of defence model and consideration of accountability in relation to inappropriate rate setting activity (all as more fully described in the letter from the Committee Chairman), the Committee reviewed the progress of the Finance and Risk Transformation Programme. The Committee challenged management on the pace of delivery, cost, prioritisation and benefits. Management is considering the delivery and direction of the programme in light of the organisational changes announced following the strategic review and the Committee will exercise close oversight of the revised programme in 2014.
The Committee also reviewed the effectiveness of the internal Notifiable Event Process during the year; alerts on each event are received by the Chairman of the Committee, and the Chairman of the Board Risk Committee.
Regular reports were received by the Committee on wholesale credit quality assurance testing and consumer credit quality assurance testing. The Committee reviewed the Group’s various pension obligations and discussed the status of funding and triennial valuation discussions underway with the RBS Group Pension Fund. The Committee will monitor the investment strategy, capital impact and funding of the scheme during 2014, as negotiations progress.
During bi-annual visits with Internal Audit, the Committee considered the bench-strength and capability of the function and areas where enhancement was required, including Technology and Markets. Plans in place to make improvements, including strategies to externally co-source certain activities and to accelerate recruitment were discussed to ensure that risks were appropriately covered. The Committee also reviewed Internal Audit’s budget and succession-planning.
The Committee considered and approved enhancements to the reporting methodology in Internal Audit reports and agreed that the changes to the criteria underlying ratings would improve transparency and provide additional evidence about culture and attitude. These improvements to reporting will be introduced in 2014. Proposed improvements to the evaluation of risk and enhancement to the audit universe, that will enable scoping and prioritisation of the work of Internal Audit that better reflects the scale and complexity of the business, were also considered by the Committee. The impact of assurance work initiated by the Group’s regulators on risk coverage was discussed and the annual plan of audit activity was approved.
An external review of the effectiveness of Internal Audit takes place every three to five years, with internal reviews continuing in intervening years. In December 2013, the Group Audit Committee undertook an internal evaluation of Group Internal Audit. The evaluation concluded that Group Internal Audit had operated effectively throughout 2013. Minor observations and recommendations will be progressed. Benchmarking of Internal Audit against the Chartered Institute of Internal Auditors “Effective Internal Audit in the Financial Services Sector” guidance recommendations was explicitly included in the evaluation of effectiveness. Internal Audit currently meets these recommendations in the majority of areas and has incorporated actions within its strategic plan to address identified shortcomings.
The Committee closely monitored the Group’s relationship with its international regulators and significant time was dedicated in particular to understanding the regulatory requirements in the US and their implications for the Group’s US operations and structure. The Committee Chairman also met with the Japanese Financial Services Authority, the Central Bank of Ireland and the Federal Reserve Bank of Boston during local visits.
The second phase of the review will be conducted following completion of the 2013 audit and will involve targeted interviews with individuals based on outputs from the initial phase and their level of interaction with the External Auditor.
In addition to the annual evaluation performed by the Group Audit Committee, the External Auditor will also conduct their own annual review of audit quality. Twelve service criteria for the audit have been defined by them to measure their performance against the quality commitments set out in their annual audit plan. Feedback will be obtained and discussed with relevant internal stakeholders. The results of this exercise will be presented to the Group Audit Committee, with actions defined and agreed to address any areas where performance has fallen below expected standards.
Deloitte LLP has been the company’s auditor since March 2000. There are no contractual obligations restricting the company's choice of External Auditor. The revised UK Corporate Governance Code, issued by the Financial Reporting Council in September 2012 provides that companies should put the external audit contract out to tender at least every ten years. The Competition Commission following their investigation into the supply of statutory audit services also concluded that FTSE 350 companies should tender the audit engagement every ten years. The Group Audit Committee has considered the requirements and emerging developments in the EU and currently intends to put the contract for the 2016 (and future periods) audit of the Group out to tender later this year. In the interim, the Board has endorsed the Group Audit Committee's recommendation that shareholders be requested to approve the reappointment of Deloitte LLP as External Auditor at the Annual General Meeting in 2014.
Audit and non-audit services The Group Audit Committee has adopted a policy on the engagement of the External Auditor to supply audit and non-audit services, which takes into account relevant legislation regarding the provision of such services by an external audit firm.
In particular, the Group does not engage the External Auditor to provide any of the following non-audit services: • bookkeeping or other services related to the accounting records or financial statements; • financial information systems design and implementation; • appraisal or valuation services, fairness opinions or contribution-inkind reports;
• actuarial services; • internal audit outsourcing services; • management functions or human resources; • broker or dealer, investment adviser, or investment banking services; • legal services and expert services unrelated to the audit; and
• other services determined to be impermissible by the US Public Company Accounting Oversight Board.
Annual audit services also include statutory or non-statutory audits required by Group companies that are not incorporated in the UK. Terms of engagement for these audits are agreed separately with management, and are consistent with those set out in the audit engagement letter to the extent permitted by local regulations. During 2013, prospectively approved non-audit services included the following classes of service: • capital raising, including consents, comfort letters, reviews of registration statements and similar services in respect of documents that incorporate or include the audited financial statements of the Group; • accounting opinions, including accounting consultations and support related to generally accepted accounting principles and financial reporting matters relating to the financial statements of the Group and its subsidiaries; • any reports that, according to law or regulation in the relevant jurisdiction, must be (and may only be) rendered by the External Auditor; • reports providing assurance to third parties over certain of the Group’s internal controls prepared under US Statement of Auditing Standards 70 “Service Organisations” or similar auditing standards in other jurisdictions; and
Tax advisory and compliance services (one engagement) Tax advisory services were provided to a subsidiary established by RBS and Blackstone. The External Auditor had been involved in establishing the subsidiary company and so had an in-depth understanding of its structure and tax liabilities.
Non-statutory audit of full year accounts (one engagement) As part of the disposal of certain UK branches, it has been necessary to prepare audited accounts for the business for 2012 and 2013. The External Auditor was selected to provide audit services based on its extensive experience of the Group’s systems and process, as well as its specific knowledge of the project. In addition, following the completion of the banking licence application for the business, the new legal entity would be a wholly-owned subsidiary of the Group; it is the Group’s policy to use the Group’s External Auditor to audit the accounts of all subsidiaries except in exceptional circumstances.
Throughout 2013, the Board Risk Committee has sought to continue to provide assurance that the Group is operating in a safe and controlled manner and within the agreed risk appetite framework approved by the Board. This has been done against a backdrop of difficult external market conditions and increased regulatory scrutiny by the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) and the Group’s overseas regulators.
Oversight of risk has been enhanced in the period, through the separation of the Risk Management and Conduct and Regulatory Affairs functions. The restructure of the Risk function has enabled the Committee to achieve clearer and more effective oversight of conduct and regulatory issues, which will have long-lasting benefits. The Committee dedicates substantial time each year to the oversight of the risk operating model and succession planning and will continue to monitor these changes during 2014 as the respective functions continue to strengthen and embed.
• an economic capital framework was presented and the Committee considered how this would be transitioned into business as usual.
2013 was a challenging year for the Board Risk Committee and I would like to extend my gratitude to my fellow members and to the Group’s senior leadership team for the additional time that they have dedicated to the business of the Committee.
Report of the Board Risk Committee Meetings and visits The Board Risk Committee held seven scheduled meetings in 2013. Meetings are held alongside Group Audit Committee meetings to ensure that the work of the two Committees is coordinated and consistent. Board Risk Committee meetings are attended by relevant executive directors, risk management, finance and internal audit executives. External advice may be sought by the Board Risk Committee where considered appropriate. During 2013, the members of Board Risk Committee, in conjunction with the members of the Group Audit Committee, took part in an annual programme of visits to the Group’s business divisions and control functions. This programme included two in depth sessions with the Risk Management function to consider key risk areas and the risk strategy and operating model. Full details about the programme of visits is set out in the Report of the Group Audit Committee on page 53.
Notes: (1) Missed one meeting due to travel disruption. (2) Retired from the Board on 14 May 2013.
Performance evaluation A review of the effectiveness of the Board and senior committees, including the Board Risk Committee, during 2013 was conducted internally. The Committee has considered and discussed the report on the outcomes of the evaluation and is satisfied with the way in which the evaluation has been conducted, the conclusions and the recommendations for action. Overall, the review concluded that the Board Risk Committee continued to operate effectively but some areas where further enhancements could be made, were identified. The outcomes of the evaluation have been reported to the Board, and during 2014, the Committee will place focus on driving further improvements to risk reporting and prioritisation of Committee time.
The role and responsibilities of the Board Risk Committee The Board Risk Committee’s primary responsibilities are shown below and are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on rbs.com.
RBS has a clear risk strategy supported by well defined strategic risk objectives. The members of the Board Risk Committee provide input to the overarching strategy for the business on an ongoing basis.
During 2013, the Board Risk Committee reviewed the implementation of the Group Policy Framework across the organisation. It also reviewed the output of control environment certifications which provided the Committee with an assessment of the effectiveness of the Group’s internal control environment. Particular focus was placed on how the operational risk framework was structured to identify single points of failure and “black swan” events, being those events that were difficult to predict but would have a high impact. The Committee agreed that Risk Management should reinforce with divisions that risk assessments and scenario analysis should extend to these events and that consideration should also be given to resilience.
The Committee has received reports on plans underway to enhance data quality across the organisation. It has also considered information security, corporate security and cyber risk.
During 2013, the Committee has continued to focus on enhancing risk reporting and some improvements have been made, including the creation of a risk report at entity level of National Westminster Bank Plc. However, the annual Committee performance evaluation has highlighted that more work is required to rationalise the reports that are received by the Committee; to ensure that key risks are conveyed succinctly and prominently; and to standardise and simplify presentations. This will be taken forward in 2014.
The Committee was dismayed to learn of the most recent system outage in late 2013 and will ensure that this matter and any correlation with the earlier IT incident is fully understood.
In 2013, the Balcony Oversight Committee was established in acknowledgment of the volume of ongoing conduct issues, particularly in the Markets division. The aim of the Balcony Oversight Committee chaired by the Head of Conduct and Regulatory Affairs, is to provide independent oversight, identify common themes and to share lessons learned. The Balcony Oversight Committee reports to the Board Risk Committee and regular updates were provided on the status of ongoing investigations and emerging themes.
Capital and liquidity The Committee reviewed the capital and liquidity position of the business regularly in light of external conditions.
The Committee continued to review the output of stress testing and discussed the stress scenarios and underlying assumptions. In the second half of 2013, the Committee noted the output of a reverse stress testing exercise and recommended it for approval to the Board.
The strengthening of the Conduct and Regulatory Affairs function during the second half of the year resulted in various changes to the risk management operating model which were discussed in detail with the Committee. Further developments to Risk Management, Conduct and Regulatory Affairs and the risk committee framework that underpins the Board Risk Committee will continue to be progressed in 2014 and the Committee will remain involved in the discussions and changes as appropriate.
The Committee has reviewed specific accountability cases as required and made recommendations accordingly.
Early in 2013 the remit of the Group Sustainability Committee was increased to include broader sustainability issues including conduct, culture, reputation and most importantly, how the Group serves its customers.
Membership was strengthened with an additional non-executive director and meeting frequency was also increased, all underlining our commitment to the sustainability agenda.
(ESE) policies to ensure increased transparency and disclosure and more responsible management of risks in sensitive and high risk sectors. ESE policies reviewed in 2013 included Mining and Metals, Oil and Gas and Gambling; • receiving reports on the sustainability activities across the company including supporting enterprise, employee engagement, citizenship, environment, safety and security; • improved reporting through the annual Sustainability Report which provides a review of our activities and details future commitments, goals and priorities. We adhere to best practice standards for our reporting, following a principles framework of inclusivity, materiality and responsiveness. Deloitte LLP undertake independent assurance of our reporting and were able to provide an unqualified assurance statement in respect of the 2012 Sustainability Report which was published in May 2013; • receiving reports on people issues including health and safety, diversity and inclusion, employee wellbeing and employee opinion; and
• receiving reports on legal issues and legislative changes that impact the sustainability agenda.
To continue the progress made in 2013, a priority for the Committee will be to ensure that its strategic direction is aligned with business priorities and that sustainability is embedded in everything that we do.
Finally I would like to thank my fellow Committee members for their expertise and guidance and all those who have supported us, whether inside or outside RBS, for their contribution to our work.
Report of the Group Sustainability Committee Meetings The Group Sustainability Committee held six Committee meetings in 2013 in addition to seven stakeholder engagements sessions. Both were attended by senior representatives from the customer facing divisions as well as Human Resources, Sustainability, Risk Management, Communications, Legal, Strategy and Corporate Services. The Chairman of the Board regularly attends the meeting as well as internal and external specialists who may be requested to attend for specific items.
Stakeholder Engagement Sessions Balancing the needs of stakeholders means understanding the views of all those who have an interest in our business. In addition to ongoing engagement throughout RBS with internal and external stakeholders, during the year, the Group Sustainability Committee participated in seven stakeholder engagement sessions covering the following topics: • Fair Banking; • Safety and Security; • Citizenship; • Supporting Enterprise; • Sustainability priorities in the USA; • Investor Perspective; and • Employee Engagement.
In 2013, a programme of UK based events aimed at individual shareholders was introduced. These events provided an opportunity for shareholders to meet directors and senior management to learn more about the business.
Notes: (1) One meeting missed due to time zone differences. (2) Appointed to the Committee with effect from 30 July 2013.
Performance evaluation An internal review of the effectiveness of the Group Sustainability Committee took place in 2013. Overall the review concluded that the Group Sustainability Committee continued to operate effectively. An ongoing challenge will be to ensure that the Group’s strategy covers the long term needs of all stakeholders and that the work of the Group Sustainability Committee is fully aligned with that strategy.
2013 performance – a challenging year Although now safer and more secure than it was five years ago, RBS is still beset by issues that have their roots in the past. Our substantial loss for 2013 arises primarily from the decision to remove more of the bad assets from our balance sheet and make additional provisions for conduct and litigation issues. It is a matter of great regret that it is against this background that I have to make this report. I know shareholders had hoped that losses like this would have been well behind RBS by now. Those who served on the Executive Committee during the year did not receive any bonus for 2013. Most of this team is relatively new, but this was an important leadership issue.
• The Group bonus pool has fallen between 2012 and 2013 in line with the fall in pre-RCR operating profit.
• The underlying reduction is significantly greater when taking account of the deduction made last year for LIBOR.
• In our UK retail business, incentive schemes for customer facing staff have minimum standards relating to customer and risk measures which must be met before any payments can be considered.
It is worth noting that bonuses and other variable pay arrangements are standard practice for FTSE100 companies, not just banks. Research indicates that 99% of executives in the FTSE100 at Executive Committee level or above have a variable to fixed pay ratio that exceeds 1:1.
I know it is not always easy to accept, but if RBS is to thrive we must do what it takes to attract and keep the people who will help us achieve our goals. We think that the right positioning of the business is to be commercial. While we are sensitive to public opinion, particularly given our ownership structure, the ability to pay competitively is fundamental to getting RBS to where we need it to be.
New Share Plan At the 2014 AGM we will seek approval for the RBS 2014 Employee Share Plan. This will replace the Deferral Plan which expires in December 2014 and the Long Term Incentive Plan. Further details will be set out in the Letter to Shareholders.
The regulatory landscape and increasing capital requirements have an impact on our returns to shareholders and, in turn, this must be reflected in our returns to employees. The Committee considers all these factors when determining appropriate reward levels.
Performance considerations for 2013 • Group Operating Profit, excluding the impact of RBS Capital
• Loss before tax of £8,243 million, due in part to the impact of RCR
• Markets division making strategic progress, staff costs are down 19% and RWAs are down 36%.
• Core Tier 1 capital ratio improved to 10.9% from 10.3% at the end of
Decisions made on pay • Full details of decisions for both current and former directors are set out in this report.
• Ross McEwan’s salary on appointment as Group Chief Executive represented a 17% reduction to his predecessor.
• In line with existing policy, Ross McEwan will receive a long-term incentive award in March 2014.
Group level and 17% for Markets compared to 2012. This includes a £25 million reduction as part of the committed LIBOR related actions.
• Total Group variable compensation as a percentage of operating profit (pre-RCR and before variable compensation), a key ratio, has remained at 19%.
43% of employees who are eligible will not receive a bonus.
• Of those employees who do receive an award, 47% will receive £2,000 or less and 70% will receive less than £5,000.
• Any awards above £25,000 will be delivered 100% in shares and deferred over a three year period.
• Average salary increases made across the business in 2014 will be less than 2%.
My closing message is simple. Pay must align with the long-term strategy and be cut when performance disappoints. This is what RBS is doing. I hope shareholders find this year’s report helpful and feel able to support the proposals at the AGM.
Penny Hughes Chair of the Group Performance and Remuneration Committee 26 February 2014
The rates for 2014 are as follows: Group Chief Executive - £1,000,000 Group Finance Director - £765,000
Further details on remuneration arrangements for the year ahead are set out on pages 82 to 84 of the annual report on remuneration.
No performance conditions are directly applicable although any future salary increases will take into account performance rating during the year.
A set level of funding is provided and EDs can select from a range of benefits including: • Company car • Private medical insurance • Life assurance • Ill health income protection
Set level of funding for benefits (currently £26,250) which is subject to review.
Provision of a monthly cash pension allowance based on a multiple of salary.
IV. If regulatory requirements emerge that prohibit any such allowances being delivered in shares, then the company reserves the right to provide the value of the allowance in cash instead in order to comply.
Performance is assessed against a range of financial and nonfinancial measures to encourage superior longterm value creation for shareholders.
Any variable pay award made will be delivered in the form of a longterm incentive, paid in shares (or in other instruments if required by regulators) and subject to a combination of time deferral and performance-based requirements. A minimum three year performance period will apply.
Our intention is that awards for executive directors will be maintained at a maximum of 300% of base salary in line with past practice(1).
Any award made will be subject to future performance conditions over a minimum three year period.
Details of the award and performance measures for each year will be set out in the annual report on remuneration.
Note: (1) In the event that shareholder approval is not sought or obtained for the 2:1 cap, corresponding adjustments will be made to ensure that executive directors remain within the variable to fixed limit.
Opportunity to contribute from salary to the RBS Sharesave and Buy As You Earn Plan.
Notes to policy table • The Committee sets performance targets taking into account the
Group’s Strategic Plan, financial forecasts and wider non-financial metrics. The performance conditions for variable pay awards made to EDs have been chosen to promote the building of a safer, stronger and more sustainable business. The Committee selects the measures each year after consultation with major shareholders.
• Remuneration for EDs broadly follows the policy for all employees but with greater emphasis on delivery in shares and a significant element of variable performance-related pay. This is to ensure that total remuneration to EDs is more aligned with the long-term interests of shareholders and dependent on specific performance measures being met. Further details on the remuneration policy for all employees can be found on page 88 and 89.
Changes for Executive Directors • EDs will no longer be eligible to receive annual bonuses.
• Future long-term incentive awards will be subject to an overall five year vest period, with a three year performance period and vesting in equal tranches in years four and five.
• The policy reflects our objective of moderating total remuneration while providing strong alignment with shareholders over the longerterm.
The level of remuneration for non-executive directors reflects their responsibility and time commitment and the level of fees paid to directors of comparable major UK companies. Non-executive directors do not participate in any incentive or performance plan. Non-executive directors’ fees are reviewed regularly.
Any future increases to fees will be considered against non-executive directors at comparable companies and will not normally be greater than the average inflation rate over the period under review, taking into account that any change in responsibilities, role or time commitment may merit a larger increase.
Fees have not yet been set for the recently established RCR Board Oversight Committee. Our policy is that additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board Committees as detailed in the annual report on remuneration.
Policy start date The remuneration policy will be effective from the date of the 2014 AGM, subject to shareholder approval. It is intended that the policy will apply for three years unless changes are required in which case a revised policy will be submitted to shareholders for approval.
Further discretions include the ability to: treat awards in a range of ways in the event of a change of control; change measures, targets, and adjust awards if major events occur (for example transaction and capital raisings); and make administrative changes to the plan rules.
Consideration of employment conditions elsewhere in the company The Committee retains oversight of remuneration policy for all employees to ensure there is a fair and consistent approach throughout the organisation. This includes the use of deferral and clawback to promote effective risk management and alignment with shareholders. Further details on our remuneration policy for all employees are set out on pages 88 and 89.
If either party wishes to terminate an executive director’s service contract they are required to give 12 months’ notice to the other party.
Any shares already received under fixed share allowances will not be forfeited on termination but must continue to be held for the original retention periods. In leaver circumstances executive directors will also be eligible to receive a pro-rated fixed share allowance.
Contracts include standard clauses covering remuneration arrangements and discretionary incentive plans (as set out in the main policy table above), reimbursement of reasonable out-of-pocket expenses incurred in performance of duties, redundancy terms and sickness absence, the performance review process, the disciplinary procedure and terms for dismissal in the event of personal underperformance or breaches of RBS policies.
Arrangements for the Chairman Philip Hampton is entitled to receive a cash payment in lieu of notice of 12 months’ fees in the event that his appointment is terminated as a result of the majority shareholder seeking to effect the termination of his appointment, or if RBS terminates his appointment without good reason, or if his re-election is not approved by shareholders in General Meeting resulting in the termination of his appointment.
• Salary + Benefits + Pensions delivered in cash . The benefits include standard benefit funding as outlined in the policy but exclude exceptional items such as relocation allowances, the value of which will be disclosed in the total remuneration table each year.
• Target = Fixed remuneration and assuming payout of long-term incentive vesting at 45% of maximum (135% of salary).
The charts shown above are for illustration only and do not take into account any share price movement. Any value receivable in respect of long-term incentive awards will depend on performance over the period and the share price when the holding period comes to an end.
A number of shareholders cautioned that legal advice should be obtained to confirm that the proposed pay arrangements complied with the requirements of CRD IV. The Committee responded to these concerns by obtaining independent legal advice. Another theme from shareholders was that there should be a demonstrable reduction in remuneration to reflect the benefits of pay certainty for the participants.
Some shareholders asked for the level of reduction in total compensation opportunity and rationale to be clearly explained. As set out in this report, annual bonus awards have been discontinued for executive directors. A fixed share allowance will be introduced that will deliver up to 100% of salary in shares to be released in equal tranches over a five year period. The new structure results in a reduction of 16% of maximum remuneration opportunity and still maintains alignment in shares and with longer holding periods.
Total remuneration paid to directors The sections as indicated on pages 76 to 81 have been audited by the company's auditor, Deloitte LLP.
Former directors Current directors Stephen Hester (1) Bruce Van Saun (2) Ross McEwan (3) Nathan Bostock (3)
Salary 900 1,200 570 750 250 — 191 — Benefits (4) 20 26 74 134 40 — 7 — Pension 315 420 348 436 88 — 67 — Annual bonus — — — 980 — — — — LTIP (5) — — — — — — — — Total remuneration 1,235 1,646 992 2,300 378 — 265 —
Notes: (1) Stephen Hester stepped down from the Board on 30 September 2013 and did not receive any annual bonus entitlement for the 2013 performance year. See page 79 for details of termination arrangements and payment in lieu of notice. (2) Bruce Van Saun stepped down from the Board on 30 September 2013 to become CEO and Chairman of RBS Citizens Financial Group and Head of RBS Americas. Mr Van Saun also stepped down as a non-executive director of Direct Line Insurance Group plc and Worldpay (Ship Midco Limited), for which he did not receive any fees. He is a non-executive director of Lloyd’s of London Franchise Board for which he received fees of £51,750 for the period to 30 September 2013. The amounts included in the table in respect of Mr Van Saun's pension relates to contributions that would have been made to his Unfunded Unapproved Retirement Benefit Scheme ("UURBS") (if it had been funded) comprising a pension allowance of 35% of salary, together with additional amounts through a salary sacrifice arrangement plus an investment return at a rate of 4.7% for 2013 (6.2% for 2012).
(5) The zero value reflects awards granted to executive directors under the Long-term Incentive Plan in 2010 that did not vest in May 2013. See page 78 for details of subsequent LTIP assessments.
Chairman and non-executive directors’ remuneration (£000s) (audited) Remuneration of non-executive directors, excluding the Chairman, was reviewed in 2013. Basic board fees were last increased in 2008 and Committee fees were last increased in 2010. It was recognised that time commitment at RBS had increased significantly over the period. This increased time commitment was due to a number of factors including an intense regulatory agenda, the extended remit of Board Committees, wider engagement with the business and the executive team and efforts to drive cultural change. Consideration was also given to evidence of market increases in Board fees over the period. For the current non-executive directors, the Board, excluding non-executive directors, approved a revised fee structure applicable from 1 April 2013 as set out on page 82.
Stephen Hester As part of the exit arrangements detailed on page 79, no annual bonus award is payable to Stephen Hester for 2013.
Maximum vesting triggered by early delivery of Core business profitability, well ahead of the range implied by the published Strategic Plan targets and also in excess of the cost of capital.
20% vesting if TSR is at the median rising to 100% vesting if TSR is at the upper quartile of the companies in the comparator group.
20% vesting if RBS share price reaches £5.75. 100% vesting if RBS share price reaches £7.75.
The LTIP awarded in 2010 was due to vest in May 2013. The number of shares under award is set out in the table on page 80.
Awards did not vest in May 2013 as a result of the threshold performance requirements not being met and the awards lapsed.
Conditional share awards subject to stretching performance conditions over a three year period ending on the third anniversary of the grant date, as detailed below.
The LTIP award granted to Ross McEwan will be assessed based on 12 months against the targets applicable as CEO UK Retail and 24 months against the targets applicable as Group Chief Executive.
Continued difficult conditions mean that the economic profit target has not been met.
Based on share price performance up to 31 December 2013, the threshold target is unlikely to be met by the vesting date.
Based on share price performance up to 31 December 2013, the threshold targets have not yet been met.
All targets – including NonCore run down, Core Tier 1 capital, wholesale funding, liquidity, leverage ratio, loan to deposit ratio and funded assets - have been met or exceeded. Credit rating condition was not met, but given over-achievement on other measures, the Committee determined that the Balance Sheet and Risk element would vest in full.
For the Strategic Scorecard, the cost:income ratio target has been missed driven by income shortfall. Overall the Committee determined that fewer than half of the objectives have been met and also took into account the extent of the shortfall on cost:income ratio and determined that this element should not vest.
Cost:income ratio remains challenging to achieve largely due to market-driven income pressures. Positive performance to date on some of the other Strategic Scorecard measures would result in some level of vesting for this element if continued over the performance period.
In respect of the 2011 LTIP award which is due to vest on 7 March 2014, the latest performance assessment by the Committee indicates a vesting level for executive directors of 27% of the original number of shares under award. The Committee also received advice that BRC and the Group’s risk management function is satisfied that risk performance of the Group has adversely impacted the Economic Profit and TSR outcomes and consequently no further adjustment is required to the proposed vesting level.
Payments to past directors (audited) No payments were made to former directors during the year ended 31 December 2013.
Payments for loss of office (audited) Stephen Hester Stephen Hester stepped down from the Board on 30 September 2013 and, in line with his contractual arrangements, he received the following payments in lieu of 12 months’ notice.
The Committee exercised discretion under the LTIP rules to allow unvested awards to continue subject to time pro-rating and performance assessment. The Committee believed this was an appropriate use of discretion in the circumstances recognising the significant contribution made by Stephen Hester over the period and his willingness to assist in an orderly handover period. The performance conditions will be assessed by the Committee at the end of the relevant performance periods in line with the LTIP rules. Stephen Hester and the Committee agreed that the maximum number of shares available for vesting under outstanding LTIP awards would be capped at 65% after the application of time pro-rating. The maximum number of shares available for vesting is therefore as follows: Unvested LTIP shares at departure Shares remaining after time pro-rating
Max number of time pro-rated shares capped at 65% (1) 1,342,014
Note: (1) The actual number of shares will depend on performance assessment and may be less.
Notes: (1) Value is based on the share price at 31 December 2013, which was £3.38 other than for Stephen Hester where the value is based on the share price of £3.60 at 30 September 2013, the date he stepped down from the Board. During the year ended 31 December 2013, the share price ranged from £2.66 to £3.85. (2) Tony Di Iorio’s interests in the company’s shares are held in the form of American Depository Receipts (ADRs). Each ADR represents 2 ordinary shares of £1.00 each in the company. Tony Di Iorio has interests in 15,000 ADRs representing 30,000 ordinary shares
Deferred awards Awards are structured as conditional rights to receive shares under the RBS 2010 Deferral Plan and are subject to clawback prior to vesting.
Awards held at 1 January 2013 (or date of appointment if later)
Notes: (1) Stephen Hester and the Committee agreed that the maximum number of shares available for vesting would be capped at 65% (a total of 1,342,014 shares). The actual number of shares will depend on the performance assessment and may be less. (2) Stephen Hester and Bruce Van Saun stepped down from the Board on 30 September 2013. (3) Ross McEwan and Nathan Bostock were appointed to the Board on 1 October 2013. (4) This relates to an award made to Ross McEwan on joining RBS as CEO UK Retail in September 2012, in recognition of awards forfeited on leaving Commonwealth Bank of Australia. (5) In accordance with the plan rules, Nathan Bostock’s outstanding LTIP, Deferred awards and MPP award have subsequently been lapsed and the Executive Share Option will lapse on his final date of employment. (6) This relates to a bonus award in respect of the 2012 performance year, awarded in March 2013.
Total Shareholder Return (TSR) performance The graph below shows the performance of RBS over the past five years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added for comparison. The TSR for the company and the indices have been rebased to 100 at 1 January 2009. Source: Datastream
Salary Benefits Annual Bonus 2013 to 2012 change 2013 to 2012 change 2013 to 2012 change
Group Chief Executive (16.7%) — — All employees 2.1% 2.1% (16.6%)
Relative importance of spend on pay The table below shows a comparison of remuneration expenditure against other disbursements.
These measures have been included as they reflect the key stakeholders for the Group and the major categories of disbursements made by the Group to its key stakeholders, including its ordinary and preference shareholders and Governments in the Group’s operational territories.
Group Chief Executive £1,000,000 £26,250 + relocation benefits (3) 35% of salary No award in 2014 300% of salary Group Finance Director (2) £765,000 £26,250 35% of salary 100% of salary 300% of salary
Notes: (1) Fixed Share Allowance will be payable in arrears and the shares will be released in equal tranches over a five year period. (2) The search for a new Group Finance Director is underway and the remuneration package will be consistent with the recruitment policy as set out on page 73. (3) Relocation benefits include housing and flight allowances, the value of which will be disclosed each year in the total remuneration table.
People & Culture (25%) • Operating Model - deliver first phase of efficient and effective bank-wide operating model.
Risk & Control (25%) • Risk Appetite - further progress on embedding enhanced risk appetite and risk frameworks.
• Conduct - embed the agreed conduct risk framework across the business.
• End to End Risk Management Framework - maintain an effective risk management framework across the business.
Economic profit (25%) The Economic Profit measure will be based on the ‘go-forward’ RBS business to align with the long-term future and earnings for the business. Economic Profit, being a risk-adjusted financial measure, is consistent with the PRA Code and also provides a balance between measuring growth and the cost of capital employed in delivering that growth. Economic Profit is defined as Operating Profit after Tax and preference share charges less attributed equity multiplied by the cost of equity, where • Operating Profit after Tax is Operating Profit taxed at a standard tax rate. • Attributed Equity is defined as equity allocated to the businesses, calculated as a function of the businesses risk-weighted asset base. • Current Cost of Equity is 11.0%, which is subject to review at least annually.
Relative Total Shareholder Return (25%) The relative TSR measure provides a direct connection between executive directors’ awards and relative performance delivered to shareholders. The measure compares performance against a group of comparator banks. The comparator group has been changed for the 2014 awards to be more in line with the new strategic direction of RBS. This has involved removing from the comparator group non-European firms, which in particular reduces the exposure of the peer group to US and Markets activity.
• 20% of the award will vest if TSR is at the median of the companies in the comparator group
Target ranges will be set for each measure, and will determine vesting, although the overall vesting under the Safe & Secure Bank and Customers & People categories will be qualified by Group Performance and Remuneration Committee discretion taking into account changes in circumstances over the performance period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
Summary of the principal activity of the Committee during 2013 The Committee considered issues under the accountability review process at every meeting held in 2013 and CRD IV implementation at the majority of meetings held in 2013. Set out below is a summary of other key activities considered by the Committee.
First quarter • 2012 performance reviews and arrangements for members of the
Group’s Executive and Management Committees, APS in scope employees, Code Staff and high earners. 2013 objectives for the Group’s Executive and Management Committee members.
• Assessment of the performance to date of unvested LTIP awards and performance targets for 2013 awards.
Second quarter • Group Chief Executive departure terms and consideration of appointment and remuneration terms for various senior positions.
• Presentation from Retail on business and strategic priorities and people plans.
Fourth quarter • 2013 preliminary variable pay pool discussions for Group and
The review concluded that the Committee continued to operate effectively. Themes that emerged from the evaluation included recognition of the Committee workload and time spent outside of meetings, the ongoing importance of independence, management support and interaction with other Board Committees. Priorities that were identified for 2014 included recruiting an additional member of the Committee and considering how to streamline the agenda to maintain rigorous scrutiny and challenge on key issues. The outcomes of the evaluation have been reported to the Board.
Membership of the Group Performance and Remuneration Committee All members of the Committee are independent non-executive directors. The Committee held nine scheduled meetings in 2013 and a further seven unscheduled meetings.
Penny Hughes (Chair) 9/9 Sandy Crombie 9/9 Alison Davis 9/9 Art Ryan (1) 7/7
PwC also provide professional services in the ordinary course of business including assurance, advisory, tax and legal advice to RBS subsidiaries. The Committee Chair is notified of other work that is being undertaken by PwC and is satisfied that there are processes in place to ensure that the advice the Committee receives is independent. As well as receiving advice from PwC in 2013, the Committee took account at meetings of the views of the Chairman, Group Chief Executive, Group Finance Director, Human Resources Director, Head of Reward, the Group Secretary and the Chief Risk Officer. The fees paid to PwC for advising the Committee in relation to directors’ remuneration are charged on a time/cost basis and in 2013 amounted to £190,465.
Shareholder dilution During the ten year period to 31 December 2013, awards made that could require new issue shares under the company's share plans represented 4.2% of the company's issued ordinary share capital (including the B share capital), leaving an available dilution headroom of 5.8%. The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares.
Notes (1) Remuneration earned for period worked in 2013 at RBS for members of Group Executive Committee plus Group HR Director. (2) Disclosure includes prior year long-term incentive awards which vested during 2013. The amounts shown reflect the value of vested awards using the share price on the day the awards vested.
Our Group-wide Remuneration Policy The remuneration policy supports the business strategy and is designed to: • Attract, retain, motivate and reward high-calibre employees to deliver long-term business performance within acceptable risk parameters; and • Provide clear alignment between annual and long-term targets for individuals and strategic plans
The remuneration policy applies the same principles to all employees including Code Staff (1). The current key principles underpinning the remuneration policy for all employees are set out below.
Role-based allowance To provide fixed pay that reflects the skills and experience required for, and the responsibilities of, the role.
Annual incentives To support a culture where employees recognise the importance of serving customers well and are rewarded for superior performance.
RBS provides certain employees in senior roles with long-term incentive awards. Awards are structured as performance-vesting shares. Vesting may occur after a three year period and will typically be based partly on divisional or functional performance and partly on performance across the business.
Other share plans To offer employees in certain jurisdictions the opportunity to acquire RBS shares.
How risk is reflected in our remuneration process The RBS remuneration policy explicitly aligns remuneration with effective risk management. Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pools and incentive plan design as well as the application of clawback. The Committee is supported in this by the Group Audit Committee, the Board Risk Committee and the Group’s risk management function.
Variable pay proposals are reviewed in the context of key compensation framework ratios including total compensation to revenue, total compensation to pre-compensation profit, variable pay to pre-variable pay profit and variable pool to pre-variable pool economic profit. These ratios help to ensure appropriate sharing of value between employees and shareholders and aim to provide transparency.
Accountability review process Our Accountability Review process is an important tool in how we manage remuneration and manage adjustments to remuneration.
Remuneration Code As part of the annual remuneration governance process we provide details of our approach to pay and how we comply with the Remuneration Code to the PRA and FCA. As in previous years we have received the required regulatory confirmation in order to conclude our year end remuneration process.
Code Staff Remuneration Disclosure These disclosures are in accordance with the Prudential sourcebook for banks, building societies and investment firms (BIPRU) 11.5.18 (6) and (7).
1. Aggregate remuneration expenditure During the year, there were 342 Code Staff. Aggregate remuneration expenditure was as follows: Markets £m
Long-term incentives Long-term incentive awards made each year are paid three years after the date of award based on the extent to which performance conditions are met and can result in zero payment.
Notes on the presentation of remuneration In the relevant tables above, assumptions have been made for the notional value of LTIP (verified by external advisors), forfeitures through resignation for deferred awards and the share price relevant to the date of the event or valuation point has been used.
All staff total remuneration Total remuneration comprises; fixed pay, pension and benefit funding, variable remuneration and long-term incentives.
• The average salary for all employees is £34,000. • 21,609 employees earn total remuneration between £50,000 and £100,000. • 9,151 employees earn total remuneration between £100,000 and £250,000. • 1,730 employees earn total remuneration over £250,000.
(including actual value of LTIP vesting in respect of the performance period ending 2013) after the application of clawback.
75 employees earn total remuneration of over £1 million which represent just 0.06% of our employees. This number reduces to 68 employees if we exclude pension and benefit funding.
• Income generators responsible for high levels of income including those involved in managing trading activity and supporting clients with more complex financial transactions, including financial restructuring.
Statement of compliance The company is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
Throughout the year ended 31 December 2013, the company has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated September 2012 (the “Code”) except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. The company considers that this is a matter which should rightly be reserved for the Board and this is an approach the company has adopted for a number of years. Remuneration for the Chairman and executive directors is first considered by the Group Performance and Remuneration Committee which then makes recommendations to the Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group Performance and Remuneration Committee, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how the company has applied the main principles of the Code can be found in the Corporate governance report on pages 35 to 90. A copy of the Code can be found at www.frc.org.uk
The Board has established a process for the identification, evaluation and management of the significant risks faced by the Group, which operated throughout the year ended 31 December 2013 and to 26 February 2014, the date the directors approved the Report and Accounts. This is confirmed by a semi-annual Control Environment Certification process which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control framework and the compliance of their business with Group policies and associated standards (in accordance with the Group Policy Framework), and they meet the requirements of Sarbanes-Oxley Section 404 and the Code Section C2. The policies that govern these processes, and reports on internal controls arising from them, are regularly reviewed by the Board and meet the requirements of the guidance ‘Internal Control: Revised Guidance for Directors on the Combined Code’ issued by the Financial Reporting Council in October 2005. Enhancements have been made to the Risk Management framework throughout 2013 and further improvements will be made in 2014.
The company has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, with the exception that the Chairman of the Board is also the Chairman of the Group Nominations Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). In addition, although the members of the Group Performance and Remuneration Committee are deemed independent in compliance with the provisions of the Code, the Group Board has not assessed the independence of the members of the Group Performance and Remuneration Committee and of its compensation committee advisers in accordance with the independence tests prescribed by the NYSE standards. The company’s Group Audit, Board Risk, Group Sustainability and Group Nominations Committees are otherwise composed solely of non-executive directors deemed by the Group Board to be independent. In addition, the NYSE Standards require that a compensation committee has direct responsibility to review and approve the Group Chief Executive’s remuneration. As stated at the start of this Compliance report, in the case of the company, the Group Board, rather than the Group Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Group Chief Executive.
The Group Audit Committee complies with the provisions of the NYSE Standards that relate to the composition, responsibilities and operation of audit committees. In April 2013, the company submitted its required annual written affirmation to the NYSE confirming its full compliance with those and other applicable provisions. More detailed information about the Group Audit Committee and its work during 2013 is set out in the Group Audit Committee report on pages 52 to 57.
The directors present their report together with the audited accounts for the year ended 31 December 2013.
Group structure The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland plc, the principal direct operating subsidiary undertaking of the company. The Group comprises the company and all its subsidiary and associates, including the Royal Bank and NatWest. Details of the principal subsidiary undertakings of the company are shown in Note 8 on page 505.
Following placing and open offers in December 2008 and in April 2009, HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT. This new capital took the form of B shares, which do not generally carry voting rights at general meetings of ordinary shareholders but are convertible into ordinary shares and qualify as Core Tier 1 capital. Following the issuance of the B shares, HMT’s holding of ordinary shares of the company remained at 70.3%, although its economic interest rose to 84.4%.
Results and dividends The loss attributable to the ordinary and B shareholders of the company for the year ended 31 December 2013 amounted to £8,995 million compared with a loss of £6,055 million for the year ended 31 December 2012, as set out in the consolidated income statement on page 370.
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HMT containing commitments and undertakings that were designed to ensure that HMT was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011 and ended on 1 April 2013.
In the context of prior macro-prudential policy discussions, the Board decided to partially neutralise any impact on Core Tier 1 capital of coupon and dividend payments in respect of 2013 Group hybrid capital instruments through equity issuances of c.£300 million. Consequently during the year, approximately £255 million was raised through the issue of new ordinary shares and a further £44 million was raised in connection with equity funding of employee incentive awards through the sale of surplus shares held by the Group’s Employee Benefit Trust.
Business review Activities The Group is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of the Group, including the products and services provided by each of its divisions and the competitive markets in which they operate, are contained in the Business review on pages 104 to 106. Details of the strategy for delivering the company’s objectives can be found in the Strategic report.
RBS Holdings N.V. (formerly ABN AMRO Holding N.V.) In 2007, RFS Holdings B.V., which was jointly owned by the Group, the Dutch State (successor to Fortis) and Santander (together, the “Consortium Members”) completed the acquisition of ABN AMRO Holding N.V.
On 1 April 2010, the businesses acquired by the Dutch State were transferred to ABN AMRO Group N.V., itself owned by the Dutch State. In connection with the transfer ABN AMRO Holding N.V. was renamed RBS Holdings N.V. and its banking subsidiary was renamed The Royal Bank of Scotland N.V. (“RBS N.V.”).
Business divestments To comply with the European Commission State Aid requirements the Group agreed a series of restructuring measures to be implemented over a four year period from December 2009. These include the divestment of Direct Line Insurance Group plc (DLG), the sale of 80.01% of the Group’s Global Merchant Services business (completed in 2010) and the sale of substantially all of the RBS Sempra Commodities joint venture business (largely completed in 2010), as well as the divestment of the RBS branchbased business in England and Wales and the NatWest branches in Scotland, along with the direct SME customers across the UK (“UK branch-based businesses”).
In October 2012, Santander UK plc withdrew from its agreed purchase of the UK branch-based businesses. In September 2013, the Group reached an agreement with an investor consortium led by Corsair Capital and Centerbridge Partners for an investment in these businesses ahead of a stock market flotation. This includes 308 RBS branches in England and Wales and 6 NatWest branches in Scotland. The new bank will be called Williams & Glyn, the brand RBS used for its branches in England and Wales before 1985.
The Group sold a first tranche of ordinary shares representing 34.7% of the ordinary issued share capital of Direct Line Group (DLG) in October 2012 through an initial public offering. On 13 March 2013, the Group sold a further 16.8% of the ordinary issued share capital in DLG and ceded control. This fulfilled the Group’s plan to cede control of DLG by the end of 2013. On 20 September 2013, the Group sold a further 20% of the ordinary issued share capital in DLG.
Employee feedback Every year since 1999, through the Your Feedback survey, employees in all our businesses have shared their thoughts about what it’s like working for RBS. In 2013, we renamed the survey Our View, reflecting the emphasis we place on a shared responsibility to build a better bank. The survey enables the business to monitor levels of employee satisfaction and engagement and how these compare with other companies. It also provides a further mechanism for RBS to track employee perception of the progress we are making in strengthening our culture. Insights from Our View inform what the business needs to do to improve the way it works, whether it’s a local issue or something that affects everyone.
Inclusion is built into various policy areas and people management processes. For example: the business continues to support disabled persons, ensuring there are equal opportunities in recruitment, employment, promotion and training.
The business also supports employee-led networks, with three being introduced this year relating to the areas of disability, multi-culturalism and carers. These new networks run alongside existing ones, such as Focused Women and Rainbow, who provide personal and career development opportunities through networking and training events.
This approach to inclusion also extends to the marketplace with the RBS Women in Business specialists supporting and guiding more and more women to take the step of starting their own business.
The code of conduct is available at rbs.com>sustainability>governance> reporting and engagement. It will also be provided to any person without charge, upon request, by contacting RBS Secretariat at the telephone number listed on page 561.
Sustainability Sustainability at RBS means building our future on long term thinking that focuses on our customers and supporting the communities in which they live. Our core duty is to be safe and strong. This underpins everything that RBS does and enables people to run their daily lives and businesses. This, in turn, supports economic growth and brings wider benefits to society. The final strand to building a sustainable business centres on how we choose to operate and how we can go further to shape the world in a positive way.
For more information on our approach and progress read the RBS Sustainability Report, available on rbs.com/sustainable.
Greenhouse gas emissions Disclosures relating to greenhouse gas emissions are included in the Strategic report on page 32.
Corporate governance The company is committed to high standards of corporate governance. Details are given in the Corporate governance report on pages 35 to 90. The Corporate governance report and compliance report (pages 91 and 92) form part of this Report of the directors.
Share capital Details of the ordinary and preference share capital at 31 December 2013 and movements during the year are shown in Note 26 on the consolidated accounts.
In addition, the company issued 53.7 million ordinary shares of £1 each in connection with employee share schemes.
The cumulative preference shares represent less than 0.015% of the total voting rights of the company, the remainder being represented by the ordinary shares.
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). Pursuant to the Listing Rules of the FCA, certain employees of the company require the approval of the company to deal in the company’s shares.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment are set out in the company’s Articles of Association. It will be proposed at the 2014 Annual General Meeting that the directors be granted authorities to allot shares under the Companies Act 2006. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
Directors The names and brief biographical details of the current directors are shown on pages 39 to 42.
Sandy Crombie, Alison Davis, Tony Di Iorio, Philip Hampton, Penny Hughes, Brendan Nelson, Baroness Noakes and Philip Scott all served throughout the year and to the date of signing of the financial statements.
Robert Gillespie was appointed to the Board on 2 December 2013.
Directors’ interests The interests of the directors in the shares of the company at 31 December 2013 are shown on page 79. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2013 to 26 February 2014.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and
Revised allocation of Business Services costs In 2013, the Group reclassified certain costs between direct and indirect expenses for all divisions. Comparatives have been restated accordingly; the revision did not affect total expenses or operating profit.
Reconciliations between managed and statutory results are detailed on pages 169 to 171.
Glossary A glossary of terms is provided on pages 549 to 556.
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believe’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions.
In particular, this document includes forward-looking statements relating, but not limited to: the Group’s restructuring and new strategic plans, divestments, capitalisation, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), return on equity (ROE), profitability, cost:income ratios, leverage and loan:deposit ratios, funding and risk profile; discretionary coupon and dividend payments; implementation of legislation of ring-fencing and bail-in measures; sustainability targets; litigation, regulatory and governmental investigations; the Group’s future financial performance; the level and extent of future impairments and write-downs; and the Group’s exposure to political risks, including the referendum on Scottish independence, credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: global economic and financial market conditions and other geopolitical risks, and their impact on the financial industry in general and on the Group in particular; the ability to implement strategic plans on a timely basis, or at all, including the simplification of the Group’s structure, the divestment of Citizens Financial Group and the exiting of assets in RBS Capital Resolution as well as the disposal of certain other assets and businesses as announced or required as part of the State Aid restructuring plan; the achievement of capital and costs reduction targets; ineffective management of capital or changes to capital adequacy or liquidity requirements; organisational restructuring in response to legislation and regulation in the
Description of business Introduction The Royal Bank of Scotland Group plc is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, the Group operates in the United Kingdom, the United States and internationally through its principal subsidiaries, the Royal Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing banks. In the United States, the Group's subsidiary RBS Citizens is a large commercial banking organisation. Globally, the Group has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers.
At 31 December 2013, HM Treasury’s holding in the company’s ordinary shares was 63.9% and its economic interest was 80.2%.
The Group had total assets of £1,028 billion and owners' equity of £59 billion at 31 December 2013. The Group's risk asset ratios at 31 December 2013 were a Total capital ratio of 16.5%, a Core Tier 1 capital ratio of 10.9% and a Tier 1 capital ratio of 13.1%.
UK Corporate is a leading provider of banking, finance and risk management services to the corporate and SME sector in the United Kingdom. It offers a full range of banking products and related financial services through a nationwide network of relationship managers, and also through telephone and internet channels. The product range includes invoice finance through the RBSIF brand and asset finance through the Lombard brand.
Wealth provides private banking and investment services in the UK through Coutts & Co and Adam & Company, offshore banking through RBS International, NatWest Offshore and Isle of Man Bank, and international private banking through Coutts & Co Ltd.
International Banking serves the world’s largest companies with a leading client proposition focused on financing, risk management and transaction services. It serves as the delivery channel for Markets products to international corporate clients. The division also serves international subsidiaries of clients from other RBS Group divisions (e.g. UK Corporate, Ulster Bank and US Retail & Commercial) through its international network.
On 26 February 2014 RBS announced that it had entered into a placing agreement to complete the sale of its residual interest in DLG (except for 4.2 million shares held to satisfy long term incentive plan awards granted by RBS to DLG management). Accordingly, on settlement of the placing, the Group will have completed the disposal as required by the European Commission.
RBS Capital Resolution (RCR) In response to a recommendation by the Parliamentary Commission on Banking Standards, RBS worked closely with HM Treasury (HMT) and its advisers on a ‘good bank/bad bank’ review and identified a pool of c.£38 billion of assets with particularly high long-term capital intensity, credit risk and/or potentially volatile outcomes in stressed environments.
The aim of the review is to improve the bank’s performance and effectiveness in serving its customers, shareholders and wider stakeholders.
Competition The Group faces strong competition in all the markets it serves. Banks’ balance sheets have strengthened whilst loan demand remains subdued as many customers continue to deleverage even as the UK economy begins to show signs of recovery. Competition for retail deposits has eased somewhat as institutions have made progress towards building strong and diverse funding platforms for their balance sheets.
In the personal banking segment, the Group competes with UK clearing banks and building societies, major retailers and life assurance companies. In the mortgage market, the Group competes with UK clearing banks and building societies. Increasingly, the ambitions of nontraditional players in the UK market are gaining credibility, with new entrants active and seeking to build their platforms by acquiring businesses made available through restructuring of incumbents. The Group distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.
Risk factors Summary of our Principal Risks and Uncertainties Set out below is a summary of certain risks which could adversely affect the Group; it should be read in conjunction with the Risk and Balance Sheet management section on pages 174 to 364. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included on pages 523 to 536.
• The Group’s ability to implement its new strategic plan and achieve its capital goals depends on the success of its efforts to refocus on its core strengths and the timely divestment of RBS Citizens. The Group has undertaken since 2009 an extensive restructuring, including the disposal of non-core assets as well as businesses as part of the State Aid restructuring plan approved by the EC. The Group recently created RBS CRG to manage the run down of problem assets with the goal of removing such assets from the balance sheet over the next three years. The Group has also taken steps to strengthen its capital position and established medium term targets which will require the timely divestment of RBS Citizens to achieve. The Group is also undertaking a new strategic direction which will result in a significant downsizing of the Group, including simplifying the Group by replacing the current divisional structure with three customer segments. The level of structural change required to implement the Group’s strategic and capital goals together with other regulatory requirements such as ring fencing are likely to be disruptive and increase operational risks for the Group. There is no assurance that the Group will be able to successfully implement its new strategy on which its capital plan depends or achieve its goals within the time frames contemplated or at all.
• Despite the improved outlook for the global economy over the near to medium-term, actual or perceived difficult global economic conditions and increased competition, particularly in the UK, create challenging economic and market conditions and a difficult operating environment for the Group’s businesses. Uncertainties surrounding the referendum on Scottish independence and the implications of an affirmative outcome for independence are also likely to affect the Group. These factors, together with additional uncertainty relating to the recovery of the Eurozone economy where the Group has significant exposure and the risk of a return of volatile financial markets, in part due to the monetary policies and measures carried out by central banks, have been and will continue to adversely affect the Group’s businesses, earnings, financial condition and prospects.
• The Group is subject to substantial regulation and oversight, and any significant regulatory or legal developments such as that which has occurred over the past several years could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition. Certain regulatory measures introduced in the UK and in Europe relating to ring-fencing of bank activities may affect the Group’s borrowing costs, may impact product offerings and the viability of certain business models and require significant restructuring with the possible transfer of a large number of customers between legal entities.
• The Group is subject to a number of regulatory initiatives which may adversely affect its business, including the UK Government’s adoption of the Financial Services (Banking Reform) Act 2013, the US Federal Reserve’s new rules for applying US capital, liquidity and enhanced prudential standards to certain of the Group’s US operations and ongoing reforms in the European Union with respect to capital requirements, stability and resolution of financial institutions, including CRD IV and other currently debated proposals such as the Resolution and Recovery Directive.
• The Group is, and may be, subject to litigation and regulatory and governmental investigations that may impact its business, reputation, results of operations and financial condition. Although the Group settled a number of legal proceedings and regulatory investigations during 2013, the Group is expected to continue to have a material exposure to legacy litigation and regulatory matter proceedings in the medium term. The Group also expects greater regulatory and governmental scrutiny for the foreseeable future particularly as it relates to compliance with new and existing laws and regulations such as anti-money laundering and anti-terrorism laws.
• The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures, including recapitalisation of the Group or any of its UK bank subsidiaries, through bail-in which has been introduced by the Financial Services (Banking Reform) Act 2013 and will come into force on a date stipulated by HM Treasury. These various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group’s businesses.
• The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.
• The Group is required to make planned contributions to its pension schemes and to compensation schemes in respect of certain financial institutions, either of which, independently or in conjunction with additional or increased contribution requirements may have an adverse impact on the Group’s results of operations, cash flow and financial condition.
Notes: (1) Total income on a managed basis excludes own credit adjustments, gain on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS MI. In the statutory consolidated income statement, these items are included in total income. (2) Operating (loss)/profit on a managed basis excludes own credit adjustments, PPI costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, sovereign debt impairment and related interest rate hedge adjustments, integration and restructuring costs, gain on redemption of own debt, write-down of goodwill and other intangible assets, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals, bank levy, bonus tax and RFS MI.
(6) Funded balance sheet represents total assets less derivatives. (7) Comprises deposits by banks and customer accounts.
Overview of results The financial information on a managed basis, prepared using the Group’s accounting policies, shows the underlying performance of the Group which excludes certain one-off and other items. This information is provided to give a better understanding of the results of the Group’s operations.
Summary consolidated income statement for the year ended 31 December 2013 In the income statement set out below, own credit adjustments, PPI costs, Interest Rate Hedging Products redress and related costs, regulatory and legal actions, sovereign debt impairment and related interest rate hedge adjustments, integration and restructuring costs, gain on redemption of own debt, write-down of goodwill and other intangible assets, Asset Protection Scheme, amortisation of purchased intangible assets, strategic disposals, bank levy, bonus tax and RFS Holdings minority interest (“one-off and other items”) are shown separately. In the statutory consolidated income statement on page 370, these items are included in the appropriate captions.
The Group does not allocate one-off and other items to individual divisions. However, of the one-off and other items of significance, regulatory and legal actions of £2,394 million in 2013 relate predominantly to Markets while Payment Protection Insurance (PPI) costs of £900 million relate mainly to UK Retail and Interest Rate Hedging Products redress and related costs of £550 million is mainly attributable to UK Corporate and Markets. Goodwill writedown of £1,059 million relates to International Banking and the write-down of other intangible assets relates to Markets. Of the integration and restructuring costs of £656 million, UK Retail accounts for approximately 30%, International Banking approximately 15%, Markets approximately 10%, Centre approximately 23% and other divisions less than 10% each.
Own credit adjustments (120) (4,649) 1,914 — — — Payment Protection Insurance costs (900) (1,110) (850) — — — Interest Rate Hedging Products redress and related costs (550) (700) — — — — Regulatory and legal actions (2,394) (381) — — — — Sovereign debt impairment and related interest rate hedge adjustments — — (1,268) — — — Integration and restructuring costs (656) (1,415) (1,021) — — — Gain on redemption of own debt 175 454 255 — — — Write-down of goodwill (1,059) (18) — — — — Asset Protection Scheme — (44) (906) — — — Amortisation of purchased intangible assets (153) (178) (222) — — —
Bonus tax — — (27) — — — Write-down of other intangible assets (344) (106) — — — — RFS Holdings minority interest 100 (20) (7) — — —
Own credit adjustments 1.0p 32.5p (13.9p) Payment Protection Insurance costs 6.2p 7.8p 5.8p Interest Rate Hedging Products redress and related costs 3.8p 4.9p — Regulatory and legal actions 15.1p 3.5p — Sovereign debt impairment and related interest hedge adjustments — — 10.2p Integration and restructuring costs 4.6p 10.1p 7.2p Gain on redemption of own debt (1.7p) (3.2p) (2.3p) Write-down of goodwill 9.4p 0.1p — Asset Protection Scheme — 0.3p 6.2p Interest rate hedge adjustments — — 1.6p Amortisation of purchased intangible assets 1.1p 1.2p 1.4p
Write-down of other intangible assets 3.1p 1.0p — Bonus tax — — 0.2p Adjusted (loss)/earnings per ordinary and equivalent B share from continuing operations (1) (38.3p) 4.3p (2.7p) *Restated - see page 102.
Results summary 2013 compared with 2012 - managed Operating loss Group operating loss was £2,303 million compared with an operating profit of £2,952 million in 2012. The decline in performance primarily related to increased impairment losses resulting from the establishment of RBS Capital Resolution (RCR) and lower income in Markets.
Net interest income Group net interest income declined by 4% to £10,992 million largely reflecting lower interest-earning asset balances partially offset by repricing initiatives. Group net interest margin improved by 9 basis points driven by moves to reprice deposits in a number of divisions, partially offset by a roll-off in higher yielding securities.
Risk elements in lending at 31 December 2013 represented 9.5% of loans and advances excluding reverse repos, compared with 9.1% a year earlier. Provision coverage was 64% compared with 52% at 31 December 2012.
To reflect current experience of Payment Protection Insurance complaints received, the Group increased its PPI provision by £900 million in 2013 compared with £1,110 million in 2012, bringing the cumulative charge taken to £3.1 billion, of which £2.2 billion had been utilised at 31 December 2013.
Integration and restructuring costs were £656 million compared with £1,415 million in 2012 with most of the costs relating to the Retail transformation, a reduction in the size of Markets and programme costs for the EC mandated disposal of certain UK branch-based businesses.
Write-down of goodwill was £1,059 million compared with £18 million in 2012 as the International Banking division was written off in 2013. Writedown of other intangible assets, including software, of £344 million related to Markets.
Liability management exercises undertaken by the Group during 2013 resulted in a net gain of £175 million (2012 - £454 million).
The Asset Protection Scheme, which the Group exited from in 2012, was accounted for as a credit derivative and movements in the fair value of the contract were taken as non-operating items. The APS fair value charge was £44 million in 2012.
The UK bank levy is based on the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period. The cost of the levy to the Group for 2013 was £200 million compared with £175 million in 2012.
Loss per share Basic loss from continuing operations was 81.3p per ordinary and equivalent B share compared with 54.5p in 2012. Adjusted loss from continuing operations was 38.3p compared with earnings of 4.3p in 2012.
2013 compared with 2012 - statutory Operating loss Operating loss before tax for the year was £8,243 million compared with £5,277 million in 2012.
Operating expenses Operating expenses increased to £19,568 million from £17,939 million in 2012. This included PPI costs of £900 million (2012 - £1,110 million), IRHP redress and related costs of £550 million (2012 - £700 million), regulatory and legal actions of £2,394 million (2012 - £381 million), integration and restructuring costs of £656 million (2012 - £1,415 million), write-down of goodwill of £1,059 million (2012 - £18 million) and writedown of other intangible assets of £344 million (2012 - £106 million). Excluding these items, operating expenses were down 4% driven by exiting staff and lower central support requirements on downsizing in Markets and Non-Core.
Impairment losses Impairment losses were £8,432 million, including £4,490 million relating to RCR, compared with £5,279 million in 2012.
Total income Total income declined by 6% to £22,085 million, primarily reflecting lower net interest income.
Non-interest income Non-interest income decreased by £443 million in 2012 principally driven by lower net fees and commissions and a fall in insurance net premium income. Net fees and commissions fell largely due to weaker consumer spending volumes in the UK together with legislation changes in the US.
Operating expenses Total operating expenses fell by 7% to £13,854 million, with staff costs down 6% as headcount fell by 8,300 to 119,200. The decline in expenses was largely driven by Non-Core run-down and lower variable compensation (particularly in Markets), including variable compensation award reductions and clawbacks following the settlements reached with UK and US authorities in relation to attempts to manipulate LIBOR. The run-off of discontinued businesses in Markets and International Banking, following the restructuring announced in January 2012, and simplification of processes and headcount reduction in UK Retail also yielded cost benefits. Group cost: income ratio was flat at 63%.
Impairment losses Impairment losses fell to £5,279 million from £7,437 million in 2011, with Core impairments falling by £464 million and Non-Core by £1,694 million, mostly in the Ulster Bank and commercial real estate portfolios.
Risk elements in lending at 31 December 2012 represented 9.1% of loans and advances excluding reverse repos, compared with 8.6% a year earlier. Provision coverage was 52%, compared with 49% at 31 December 2011.
To reflect current experience of Payment Protection Insurance complaints received, the Group increased its PPI provision by £1,110 million in 2012 compared with £850 million in 2011, bringing the cumulative charge taken to £2.2 billion, of which £1.3 billion (59%) in redress had been paid by 31 December 2012.
Interest Rate Hedging Products redress and related costs Following an industry-wide review conducted in conjunction with the Financial Services Authority, a charge of £700 million has been booked for redress in relation to certain interest-rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules.
Earnings per share Basic loss from continuing operations was 54.5p per ordinary and equivalent B share compared with a loss of 22.7p in 2011. Adjusted earnings from continuing operations was 4.3p per ordinary and equivalent B share compared with a loss of 2.7p in 2011.
2012 compared with 2011 - statutory Operating loss Operating loss before tax for the year was £5,277 million compared with £1,396 million in 2011.
Operating expenses Operating expenses increased to £17,939 million from £17,340 million in 2011. This included PPI costs of £1,110 million (2011 - £850 million), IRHP redress and related costs of £700 million, regulatory fines of £381 million, integration and restructuring costs of £1,415 million compared with £1,016 million in 2011, and write-down of goodwill and other intangible assets of £124 million, principally as a result of exits from selective countries and lower revenue projections by Markets. Excluding these items, operating expenses were down 8% driven by cost savings achieved as a result of the cost reduction programme.
Tax The tax charge for 2012 was £441 million (2011 - £1,075 million).
The Royal Bank of Scotland plc base rate (average) 0.50 0.50 0.50 0.50 0.50 0.50 London inter-bank three month offered rates (average) - Sterling 0.52 0.82 0.87 0.52 0.82 0.87 *Restated - see page 102.
Notes: (1) Interest receivable has been increased by £4 million (2012 and 2011 - £8 million) and interest payable has been increased by £83 million (2012 - £152 million; 2011 - £150 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 was increased by £2 million in 2011 in respect of exceptional interest receivable. (3) Interest receivable has been decreased by £38 million (2012 and 2011 - nil) and interest payable has been decreased by £31 million (2012 - £138 million; 2011 - £143 million) in respect of nonrecurring adjustments. (4) Interest receivable has been increased by nil (2012 - nil; 2011 - £5 million) and interest payable has been decreased by £11 million (2012 - £15 million; 2011 - £3 million) to exclude RFS Holdings minority interest. (5) Interest receivable includes £798 million (2012 - £565 million; 2011 - £627 million) in respect of loan fees forming part of the effective interest rate of loans and receivables. (6) Gross yield is the interest earned on average interest-earning assets of the banking book. (7) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (8) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. (9) The analysis into UK and overseas has been compiled on the basis of location of office. (10) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (11) 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.
Loans and advances to customers - UK 256,728 11,022 4.29 277,646 11,326 4.08
Total interest-earning assets - banking business (1,3,4,5) 543,881 16,706 3.07 594,062 18,538 3.12 - trading business (10) 216,211 240,131 Interest-earning assets 760,092 834,193 Non-interest-earning assets 467,274 596,179 Total assets 1,227,366 1,430,372
Customer accounts: other time deposits - UK 31,714 433 1.37 39,813 522 1.31
Internal funding of trading business - UK (24,041) 348 (1.45) (21,140) 264 (1.25)
Total interest-bearing liabilities - banking business (1,3,4) 420,090 5,800 1.38 477,355 7,127 1.49 - trading business (10) 223,264 248,647 Interest-bearing liabilities 643,354 726,002 Non-interest-bearing liabilities: Demand deposits - UK 55,303 46,420 - Overseas 21,304 27,900 Other liabilities 438,856 556,242 Owners' equity 68,549 73,808 Total liabilities and owners' equity 1,227,366 1,430,372
Total interest-bearing liabilities - banking business (1,3) 537,488 8,737 1.63 - trading business (10) 307,564 Interest-bearing liabilities 845,052 Non-interest-bearing liabilities: Demand deposits - UK 46,495 - Overseas 19,909 Other liabilities 548,074 Owners' equity 75,625 Total liabilities and owners' equity 1,535,155
Average balance sheet and related interest continued Statutory 2013 Statutory 2012 Average Average balance Interest Rate balance Interest Rate
Assets Loans and advances to banks - UK 42,466 261 0.61 33,656 248 0.74
Debt securities in issue - UK 50,684 1,244 2.45 69,272 1,831 2.64
Total interest-bearing liabilities - banking business (1,3) 420,267 5,811 1.38 476,946 7,142 1.50 - trading business (10) 223,264 248,647 Interest-bearing liabilities 643,531 725,593 Non-interest-bearing liabilities: Demand deposits - UK 55,303 46,420 - Overseas 21,304 27,900 Other liabilities 438,679 556,651 Owners' equity 68,549 73,808 Total liabilities and owners' equity 1,227,366 1,430,372
Assets Loans and advances to banks - UK 29,843 277 0.93
Total interest-bearing liabilities - banking business (1,3) 537,893 8,740 1.62 - trading business (10) 307,564 Interest-bearing liabilities 845,457 Non-interest-bearing liabilities: Demand deposits - UK 46,495 - Overseas 19,909 Other liabilities 547,669 Owners' equity 75,625 Total liabilities and owners' equity 1,535,155
Interest-earning assets Loans and advances to banks UK 60 (47) 13 60 (47) 13
Interest-bearing liabilities Deposits by banks UK 144 (92) 52 144 (92) 52
Customer accounts: savings deposits UK (133) 346 213 (133) 346 213
Debt securities in issue UK 463 124 587 463 124 587
Total interest payable of the banking business UK 478 361 839 478 361 839
Total interest receivable of the banking business UK (705) (211) (916) (705) (211) (916)
Interest-bearing liabilities Deposits by banks UK (14) 60 46 (14) 60 46
Customer accounts: other time deposits UK 51 (92) (41) 51 (92) (41)
Debt securities in issue UK 1,286 (362) 924 1,286 (362) 924
Internal funding of trading business UK 99 (214) (115) 99 (214) (115)
Total interest payable of the banking business UK 1,271 (817) 454 1,271 (817) 454
Income from trading activities - excluding Asset Protection Scheme 2,651 3,533 3,313 2,685 1,719 3,607 - Asset Protection Scheme — — — — (44) (906) Gain on redemption of own debt — — — 175 454 255 *Restated - see page 102.
2013 compared with 2012 - managed Non-interest income decreased by £2,218 million to £8,450 million.
The majority of the decline in income was in Markets, where income from trading activities was £1,001 million lower as the division managed down the scale of the balance sheet and reduced risk. This was partially offset by a £506 million improvement in Non-Core trading losses.
The continuing strengthening of RBS’s credit profile, albeit modest, resulted in a £120 million accounting charge in relation to own credit adjustment compared with £4,649 million in 2012.
The decrease in other operating income predominantly reflected the disposal of RBS Aviation Capital in June 2012, which resulted in lower rental income in Non-Core.
The decrease in other operating income predominantly reflected own credit adjustments and the disposal of RBS Aviation Capital in June 2012, which resulted in lower rental income in Non-Core, partially offset by a lower fair value charge on the Asset Protection Scheme.
Other administrative expenses - Payment Protection Insurance costs — — — 900 1,110 850 - Interest Rate Hedging Products redress and related costs — — — 550 700 — - regulatory and legal actions — — — 2,394 381 —
The Group cost:income ratio increased from 63% to 68%, with the Core cost:income ratio increasing from 59% to 64%, driven by weaker income.
2013 compared with 2012 - statutory Operating expenses increased by £1,629 million, or 9% primarily due to higher charges resulting from regulatory and legal actions, and writedown of goodwill and other intangible assets, primarily in International Banking. These were partially offset by lower charges on Payment Protection Insurance claims, Interest Rate Hedging Products redress and integration and restructuring costs.
Staff expenses were down by 13%. Excluding integration and restructuring costs of £280 million (2012 - £812 million), staff costs were down 7%, as staff numbers (FTEs) fell by 4,100 to 118,400, principally in UK Retail, Markets and Non-Core.
Charges for PPI redress and related costs totalled £900 million, down £210 million from 2012. Of the cumulative provision of £3.1 billion, £2.2 billion had been utilised at 31 December 2013. The remaining provision of £900 million covers approximately twelve months of redress and administrative expenses.
The Core cost:income ratio was broadly flat at 59%, reflecting the ongoing focus on cost control in an environment where income growth remained challenging.
Staff expenses were cut by 4%. Excluding integration and restructuring costs of £811 million (2011 - £464 million), staff costs were down 9%, as headcount fell by 10,200 to 118,700.
On 31 January 2013, the Financial Services Authority announced the findings of its industry-wide review of the sale of Interest Rate Hedging Products to some small and medium-sized businesses that were classified as retail clients under FSA rules. As a result, RBS provided £700 million in 2012 to meet the costs of redress.
Accruals in relation to integration costs are set out below. Charge Utilised At At 1 January to income during 31 December 2013 statement the year 2013 £m £m £m £m
Divestment costs of £165 million in 2013 (2012 - £171 million; 2011 - £145 million) relate to preparation for the European Commission mandated divestments.
Comprising: Loan impairment losses 8,412 5,315 7,241 8,412 5,315 7,241 Securities - sovereign debt impairment and related interest rate hedge adjustments — — — — — 1,268 - other 20 (36) 196 20 (36) 198 Charge to income statement 8,432 5,279 7,437 8,432 5,279 8,707
Of which RCR related (2) 4,490 — — 4,490 — —
RBS Capital Resolution ('RCR') was set up from 1 January 2014 and will manage a pool of £29 billion of assets with particularly high capital intensity or potentially volatile outcomes in stressed environments, aiming to accelerate the run-down of these exposures over a three year period to free up capital for the bank. This revised strategy to run down high risk loans faster resulted in an increased impairment charge relating to impaired or non-performing assets transferred to RCR, reflecting adverse changes in our estimates of future cash flows. Further details about RCR are set out on pages 160 to 163.
2013 compared with 2012 - managed and statutory Group loan impairment losses rose by 58% to £8,412 million reflecting the increased provisions recognised in connection with the creation of RCR. Adjusting for this, impairment losses fell by £1,393 million (26%) to £3,922 million, driven by significant improvements in Non-Core, Ulster Bank and UK Retail, partially offset by increases in International Banking, US Retail & Commercial and Markets.
Core loan impairments were down £408 million, or 12%, largely due to lower default rates in UK Retail and an improved credit environment for US Retail & Commercial, which helped drive impairment reductions of £259 million and £165 million respectively. Core Ulster Bank impairments stabilised, though still at a very high level (£1,364 million in 2012 versus £1,384 million in 2011).
Loan impairments as a percentage of gross loans and advances improved by 30 basis points, principally reflecting the improved credit profile in Non-Core and the better US credit environment.
UK corporation tax rate 23.25 24.50 26.50 *Restated – see page 102.
Treasury costs are allocated to operating divisions as follows: term funding costs are allocated or rewarded based on long term funding gap or surplus; liquidity buffer funding costs are allocated based on share of overall liquidity buffer derived from divisional stresses; and capital cost or benefit is allocated based on share of divisional risk-adjusted riskweighted assets (RWAs).
UK Retail 43.9 45.7 48.4 UK Corporate 86.1 86.3 79.3 Wealth 12.0 12.3 12.9 International Banking 49.0 51.9 43.2 Ulster Bank 30.7 36.1 36.3 US Retail & Commercial 56.1 56.5 59.3 Retail & Commercial 277.8 288.8 279.4 Markets 64.5 101.3 120.3 Other 10.1 5.8 12.0 Core 352.4 395.9 411.7 Non-Core 29.2 60.4 93.3 Group before benefit of Asset Protection Scheme 381.6 456.3 505.0 Benefit of Asset Protection Scheme — — (69.1) Group before RFS Holdings minority interest 381.6 456.3 435.9 RFS Holdings minority interest 3.9 3.3 3.1 Group 385.5 459.6 439.0
Performance ratios Return on equity (1) 26.3% 24.4% 24.5% Net interest margin 3.57% 3.58% 3.95% Cost:income ratio 54% 51% 49%
Capital and balance sheet Loans and advances to customers (gross) - mortgages 99.3 99.1 95.0 - personal 8.1 8.8 10.1 - cards 5.8 5.7 5.7 113.2 113.6 110.8 Loan impairment provisions (2.1) (2.6) (2.7) Net loans and advances to customers 111.1 111.0 108.1
Assets under management (excluding deposits) 5.8 6.0 5.5 Loan:deposit ratio (excluding repos) 97% 103% 106%
Risk-weighted assets (3) - credit risk (non-counterparty) 36.1 37.9 41.1 - operational risk 7.8 7.8 7.3 Total risk-weighted assets 43.9 45.7 48.4
Notes: (1) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions). (2) Provision coverage percentage represents loan impairment provisions as a percentage of risk elements in lending. (3) Divisional RWAs are based on a long-term conservative average secured mortgage probability of default methodology rather than the current lower point in time basis required for regulatory reporting.
UK Retail continued • Significant focus on streamlining processes has benefited all distribution channels, with the capacity created allowing more time for staff coaching and resulting in advisors spending more time and having better conversations with customers.
• In addition, our product range has been simplified down from 56 to 46 with several products winning awards. A highlight of this UK Retail strategy is the success of the new instant saver product launched in Q4 2012, which at the end of 2013 had more than £10 billion in balances. Furthermore, nearly 800,000 customers have registered for Cashback Plus online since launch in Q3 2013 and are being rewarded for using their debit cards with selected retailers.
During 2013 good progress has been made with FCA (Financial Conduct Authority) reportable complaints, which declined 22%. In addition, the provision relating to historic Payment Protection Insurance (PPI) misselling was increased by £860 million, bringing the total to £3.0 billion. The PPI expense is not included in the operating profit of UK Retail.
Mortgage balance growth was affected in H1 2013 by mortgage advisor training; however, balances recovered during H2 2013 assisted by early adoption of the second phase of the UK Government’s Help To Buy scheme. Gross lending increased to £8.9 billion in H2 2013. Customer deposits increased by 7%, above the UK market average of 4% due to strong growth in both current accounts (13%) and instant access savings accounts (15%).
Net interest income was broadly flat. • Mortgage new business margins reduced in line with market conditions; however, overall book margins improved.
Non-interest income fell by 2% to £958 million due to subdued advice income post RDR.
Non-interest income was 19% lower mainly due to: • lower unauthorised overdraft fees as we continue to help customers manage their finances by providing mobile text alerts and further improving mobile banking functionality; • weak consumer confidence lowering spending and associated fees on cards; and
Analysis of income by business Corporate and commercial lending 2,557 2,636 2,643 Asset and invoice finance 671 685 660
Analysis of impairments by sector Financial institutions 10 15 20 Hotels and restaurants 53 52 59 Housebuilding and construction 39 143 103
Private sector education, health, social work, recreational and community services 138 37 113
Wholesale and retail trade, repairs 0.9% 1.3% 1.0% Asset and invoice finance 0.3% 0.4% 0.4%
Net interest margin 3.07% 3.06% 3.06% Cost:income ratio 50% 44% 44%
Loan impairment provisions (2.8) (2.4) (2.1) Net loans and advances to customers 99.7 104.6 108.6
Total third party assets 105.0 110.2 114.2 Risk elements in lending 6.2 5.5 5.0
2013 was a year in which UK Corporate underlined its commitment to support the UK economy and played an active role in the communities it operates in.
The division has continued to support the government-backed Funding for Lending Scheme (FLS) and as at 31 December 2013 had allocated in excess of £4.7 billion of new FLS-related lending to almost 25,000 customers, £3.1 billion of which has been drawn since the scheme was launched. Mid-sized manufacturers are being offered targeted support, with interest rates reduced by more than 1% in some cases. SME customers benefited from both lower interest rates and the removal of arrangement fees.
As well as delivering a range of lending initiatives, UK Corporate continued to develop new propositions for its customers. Following a successful pilot UK Corporate launched a leading business-to-business online community platform, Bizcrowd, to support independent needs matching. By the end of 2013 Bizcrowd had over 27,000 users and is now helping to bring businesses together across the UK.
During the course of 2013 UK Corporate’s Business Banking Enterprise Programme helped over 40,000 entrepreneurs through over 1,000 events. Through its combination of nationwide start-up surgeries, mobile business schools and business academies, the programme offers support and advice to aspiring entrepreneurs, new start-up businesses and established SMEs looking to grow. Combined with UK Corporate’s skills-based volunteering scheme, a programme offering all employees five days to volunteer with a charitable organisation, UK Corporate continued to deliver on its on-going commitment to communities.
2013 compared with 2012 The business delivered a return on equity of 11.0% excluding the impact of increased impairment losses related to the creation of RCR, primarily property and shipping exposures, which reduced return on equity by 3.1%.
Net interest income was 3% lower at £2,874 million, as increased income from re-pricing initiatives was offset by the lower rate environment impacting deposit returns, the non-repeat of 2012 deferred income recognition revisions (£58 million) and reduced lending volumes, as loan repayments coupled with run-off in property and shipping sectors outpaced new lending.
Non-interest income reduced 9% to £1,593 million, primarily from lower Markets revenue share income, a decline in operating lease income (offset by an associated reduction of operating lease depreciation in expenses), lower lending fees and higher derivative close-out costs associated with impaired assets.
Risk-weighted assets were broadly in line with 2012 at £86.1 billion as reduced asset volumes and movements into default offset increases resulting from the implementation of risk model changes.
Net interest income was 4% lower, reflecting a 3% fall in lending volumes as loan repayments outstripped new lending, deposit margin compression due to strong competition and the continuation of low yields on current accounts. This was partially offset by improved asset margins and a 1% increase in deposit volumes.
Impairments increased by 6% with lower specific provisions, mainly in the SME business, more than offset by reduced levels of latent provision releases across the division (£44 million in 2012 versus £226 million in 2011). Impairments as a percentage of loans and advances edged up modestly to 80 basis points.
Capital and balance sheet Loans and advances to customers (gross) - mortgages 8.7 8.8 8.3
Loan impairment provisions (0.1) (0.1) (0.1) Net loans and advances to customers 16.7 17.0 16.8
2013 saw a major shake-up of the UK financial advice landscape with the implementation of the Retail Distribution Review (RDR). Clients welcomed Coutts’ new fully compliant advice-led model where Coutts requires its advisers to achieve the more stringent Level 6 rating, in excess of the FCA’s minimum Level 4 requirement. Coutts has received a number of industry accolades for its levels of service, such as ‘UK Private Bank of the Year’ (The Banker Global Private Banking Awards). Total assets under advice grew to approximately £3 billion over the year.
Work continued on streamlining client-facing processes and driving increased benefits from the division’s global technology platform, including significant enhancements to Coutts’ online and digital client channels. A streamlining of the London property footprint from 11 buildings to 2 was also concluded, alongside further office rationalisation in the International business.
Income declined by 7% to £1,093 million, with the reduction in net interest income reflecting the lower spread earned on deposits as a result of lower Group funding requirements.
Client assets and liabilities managed by the division declined by 2%, with a £1.7 billion reduction in deposits following re-pricing initiatives in the UK in line with the wider Group funding strategy. Assets under management increased by 3% due to positive market movements. Lending was 2% lower, reflecting increased levels of repayments in the UK.
Impairments were £17 million lower at £29 million, largely reflecting a small number of specific impairments.
2012 compared with 2011 Operating profit increased by £1 million to £243 million driven by higher income partially offset by increased expenses and impairment losses.
Impairment losses were £46 million, up £21 million, largely reflecting a small number of large specific impairments.
Performance ratios (ongoing businesses) Return on equity (2) 3.9% 9.1% 11.5% Net interest margin 1.59% 1.64% 1.73% Cost:income ratio 73% 66% 62%
Notes: (1) Pertaining to the creation of RCR and related strategy. (2) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 10% of the monthly average of divisional RWAs, adjusted for capital deductions), for the ongoing businesses.
Total third party assets (excluding derivatives mark-to-market) 48.5 53.0 69.9 Risk elements in lending 0.5 0.4 1.6
The strength of the division’s efforts in serving its customers’ needs is reflected in recent external industry awards and recognition, including: • Best Trade Finance Bank, UK, and Best Supply Chain Finance
Provider, Western Europe - Global Finance. Global Trade Review magazine’s 'Leaders in Trade' award for Best Bank for Documentary Processing 2013, making this the 4th consecutive win for the bank.
• Received the ‘Most Innovative Investment Bank for Loans’ award at
International Banking continued 2013 compared with 2012 Operating profit, decreased by £315 million as lower income and higher impairments, including £52 million in relation to the accelerated asset recovery strategy associated with RCR, were only partially offset by lower costs.
Income was 13% lower: • Cash management was 22% lower reflecting a decline in threemonth LIBOR rates as well as increased funding costs of liquidity buffer requirements.
Expenses were down £77 million, or 5%, reflecting continued emphasis on cost control and timely run-off of discontinued business.
Impairment losses were £118 million higher than in 2012, including two large single-name provisions and £52 million in relation to the impact of the accelerated RCR asset recovery strategy.
Third party assets were down 8% due to reductions in the loan portfolio following increased levels of customer repayments partially offset by an increase in Asia trade volume.
Risk-weighted assets decreased by 6% primarily as a result of management action to mitigate credit model increases and a smaller balance sheet.
Income was 17% lower: • Loan portfolio decreased by 32%, mainly due to a strategic reduction in assets, in order to allocate capital more efficiently, and the effect of portfolio credit hedging and lower corporate appetite for risk management activities.
• Trade finance increased by 6% as a result of increased activity, particularly in Asia.
Customer deposits increased by 2%. Successful efforts to rebuild customer confidence following the Moody’s credit rating downgrade and the Group technology incident in June 2012 outweighed economic pressures. This, coupled with the managed reduction in loans and advances to customers, improved the loan:deposit ratio to 91%.
Performance ratios Return on equity (2) (32.4%) (21.8%) (22.8%) Net interest margin 1.91% 1.88% 1.87% Cost:income ratio 64% 62% 58%
Capital and balance sheet Loans and advances to customers (gross) - mortgages 19.0 19.2 20.0 - commercial real estate - investment 3.4 3.6 3.9 - development 0.7 0.7 0.9 - other corporate 7.1 7.8 7.7 - other lending 1.2 1.3 1.6 31.4 32.6 34.1 Loan impairment provisions (5.4) (3.9) (2.7) Net loans and advances to customers 26.0 28.7 31.4
Risk elements in lending - mortgages 3.2 3.1 2.2 - commercial real estate - investment 2.3 1.6 1.0 - development 0.5 0.4 0.3 - other corporate 2.3 2.2 1.8 - other lending 0.2 0.2 0.2 Total risk elements in lending 8.5 7.5 5.5 Provision coverage (1) 64% 52% 50%
Customer deposits 21.7 22.1 21.8 Loan:deposit ratio (excluding repos) 120% 130% 143%
Risk-weighted assets - credit risk - non-counterparty 28.2 33.6 33.6 - counterparty 0.3 0.6 0.6 - market risk 0.5 0.2 0.3 - operational risk 1.7 1.7 1.8 Total risk-weighted assets 30.7 36.1 36.3
Operating performance for 2013, excluding the impact of the creation of RCR, improved by £494 million or 48% versus prior year primarily reflecting higher income and a 64% reduction in mortgage impairment losses driven by enhanced collections effectiveness, the development of programmes to assist customers in financial difficulty and a modest improvement in economic conditions.
Ulster Bank is committed to supporting the Irish economic recovery and £1.7 billion of funding has been made available to support new lending in 2014, £1 billion for business customers and £700 million for personal customers. The bank made considerable progress during 2013 in its commitment to building a really good bank that serves customers well.
Supporting Enterprise and the Community: • Supporting entrepreneurship and the growth of small businesses in the local community is a long term commitment of Ulster Bank. Highlights in 2013 included: • The Community Impact Fund and Business Woman Can initiative which facilitated women in local communities to set up their own business. The bank also supported a number of projects in schools across the island of Ireland through its MoneySense programme.
• Ulster Bank’s dedicated SME teams offer professional support and a range of products to help customers meet their banking challenges and grow their business. The agri–specialist team has introduced a number of initiatives during 2013 to support the farming sector.
Irish charities through a series of fundraising events involving both customers and staff.
Total income increased by £26 million or 3% to £871 million primarily reflecting hedging gains on the mortgage portfolio. Net interest margin for 2013 increased by 3 basis points to 1.91% although net interest income was £18 million lower at £631 million, largely driven by lower interestearning assets and a higher cost of funding.
Total expenses increased by £33 million or 6% to £554 million driven by the costs of mandatory change programmes such as the Single Euro Payment Area, £18 million, an investment of £10 million in programmes to support customers in financial difficulty and an accelerated depreciation charge of £12 million.
Impairment losses, excluding the impact of RCR, were £482 million, 35% lower. This was predominantly due to a sharp reduction in losses on the mortgage portfolio which reduced by £411 million or 64% due to a decline in arrears levels driven by an improved collections performance and the development of programmes to assist customers in financial difficulty, coupled with stabilising residential property prices.
2012 compared with 2011 Operating loss increased by £56 million primarily reflecting a reduction in income driven by lower interest earning asset volumes.
Performance ratios Return on equity (1) 7.2% 8.3% 6.3% 7.2% 8.3% 6.3%
Capital and balance sheet Loans and advances to customers (gross) - residential mortgages 9.6 9.4 9.4 5.8 5.8 6.1
Net loans and advances to customers 83.2 82.4 79.1 50.3 51.0 51.1
Total risk elements in lending 1.7 1.9 1.6 1.0 1.1 1.0
US Retail & Commercial continued On 1 November 2013, RBS announced plans to accelerate its previously announced partial initial public offering of RBS Citizens Financial Group (RBSCFG) into the second half of 2014. RBS intends to fully divest its position in RBSCFG by the end of 2016, leaving it as a standalone regional bank, owned by public shareholders.
RBSCFG has commenced a number of actions in 2013 aimed at improving financial performance. RBSCFG continued to drive profitable growth in its core business by focusing on the customer and delivering a differentiated experience. In addition, RBSCFG has launched a series of initiatives aimed at narrowing the performance gap with competitors, including selectively expanding lending areas where RBSCFG has proven capabilities (such as Mid-Corporate, Specialty Verticals) and selective expansion of risk appetite (moving from super-prime to prime in certain products).
RBSCFG has also launched transformational initiatives in 2013 including: • A special initiative called Project ‘TOP’, ‘Tapping Our Potential’. The project intends to improve the overall effectiveness and efficiency of the franchise by utilising ideas generated by our colleagues.
In 2013, Consumer Banking continued to improve customer convenience, address the shift in customer preference, and expand its distribution presence. Consumer Banking installed more than 900 intelligent deposit machines (enhanced ATMs), improved the web account opening process, simplified online banking log-in, and released a new mobile application optimised for the iPad. Consumer Banking also implemented a new branch image capture system throughout the network that automates teller processing and offers secure paperless transactions, debit card identification and clear receipts that provide on-the-spot balance availability.
In recognition of the customer experience it offers, Money magazine named Citizens Bank one of the “Best Banks in America” in 2013. In addition to a “robust presence” defined by its many branches and ATMs, Money recognised RBSCFG’s extended branch hours that include sevenday -a-week supermarket branches. Money also noted that RBSCFG’s convenience options also extend to its mobile banking apps for Android and iPhone, which are generating positive customer feedback in the industry. An August report issued by Xtreme Labs noted that “Citizens Bank is the only bank with the highest rated apps on both Android (4.5 stars) and iOS (4.5 stars) platforms”.
The Small Business Banking and Commercial Enterprise Banking divisions were integrated into one consolidated Business Banking division within Consumer Banking, targeting companies with up to $25 million in annual sales. The consolidation will enhance the customer experience, transform sales and service, and align products and processes.
Commercial Banking remained focused on growing and deepening relationships by providing thought leadership and improved product capabilities to clients. Commercial and Industry loan growth was 8.5% compared with the same time period a year ago, which was 1.3% higher than the market(2). The strong results are partially due to the launch of several growth initiatives, which includes expanding our MidCorporate business nationally, as well as growing our Franchise Finance, Lender Finance and other key industry verticals.
Corporate Finance & Capital Markets continued to take market share from both regional competitors and large money centre banks. Commercial Banking moved up in the Overall Middle Market Bookrunner league table from an unranked position in 2009 to #6 by origination volume and #8 by number of transactions in Q4 2013.
As a result of our ongoing focus on providing thought leadership to our clients, our most recent client survey (Q3 2013) showed significant improvement in Middle Market customer satisfaction metrics over the same period a year ago. Net Promoter score increased from 36 to 50, which is well above the peer average of 42. “Proactively Provides Advice and Solutions” score was up from 62% to 85% and lead relationships as a percent of total relationships improved from 51% to 58%. Both metrics are strong indicators of our Commercial bankers’ thought leadership capabilities.
Notes: (1) RBSCFG will continue to operate several businesses in the Chicago market, including the consumer businesses lines of mortgage lending, Education Finance and Auto Finance. RBS Citizens, the bank’s commercial banking division, will continue a diverse range of commercial banking operations in Chicago including Asset-Based Lending, Asset Finance, Equipment Leasing, Commercial Real Estate, Treasury Solutions, Capital Markets, Sponsor Finance, Franchise Finance and the majority of its corporate banking business.
Net interest income was down 1% at £1,916 million ($2,998 million) due to a smaller investment portfolio, consumer loan run-off and the effect of prevailing economic conditions on asset yields partially offset by the benefit of interest rate swaps, commercial loan growth and favourable funding costs.