2016 compared with 2015 An operating loss of £1,865 million compared with an operating loss of £2,445 million in 2015. The adjusted operating loss was £1,231 million compared with a loss of £467 million in 2015, primarily driven by lower adjusted income and increased impairments partially offset by lower adjusted expenses.
Operating expenses decreased from £5,241 million to £2,824 million in 2016, driven by lower restructuring costs and lower adjusted expenses, primarily reflecting a 1,000 reduction in headcount in the Legacy business.
Funded assets decreased by £28.2 billion compared with 2015 to £128.5 billion, mainly reflecting disposal activity.
RWAs decreased by £12.4 billion compared with 2015 to £69.7 billion reflecting disposal activity partially offset by business movements and the impact of the weakening of sterling.
Note: (1) Shipping and other activities which were formerly in Capital Resolution, were transferred to Commercial Banking on 1 October 2017, including total funded assets of £3.3 billion, net loans and advances to customers of £2.6 billion, and RWAs of £2.1 billion. Whole business securitisations and relevant financial institutions (RFI) were transferred from Commercial Banking during December 2017, including net loans and advances to customers of £0.8 billion, and RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
2016 compared with 2015 Central items not allocated represented a charge of £5,006 million in 2016, compared with a £2,982 million charge in 2015, and included restructuring costs of £1,482 million and litigation and conduct costs of £4,088 million. Restructuring costs included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding the business previously described as Williams & Glyn. Treasury funding costs were a charge of £94 million, compared with a gain of £169 million in 2015, and included a £510 million charge for volatile items under IFRS, due to reductions in long term interest rates, and a £349 million foreign exchange gain, principally associated with the weakening of sterling against the US dollar. In addition, there was a £126 million loss on redemption of own debt in 2016. These were partially offset by a VAT recovery of £227 million and a £246 million gain on the sale of the stake in VISA Europe.
Note: (1) The total gain in relation to the sale of Euroclear was £161 million, of which £135 million central items and £26 million NatWest Markets.
Presentation of information Except as otherwise indicated, information in the Capital and risk management section (pages 149 to 228) is within the scope of the Independent auditor’s report.
Introduction RBS operates an integrated risk management framework, centred around the embedding of a strong risk culture, which is designed to achieve the correct balance between prudential and conduct obligations. Each element of the risk management framework functions both individually and as part of a larger continuum. The framework ensures the tools and capability are in place to facilitate risk management and decision-making across the organisation.
Risk appetite, which is supported by a robust set of principles, policies and practices, defines our levels of tolerance for a variety of risks.
It is a key element of RBS’s risk management framework and culture, providing a structured approach to risk-taking within agreed boundaries.
Effective governance, underpinned by our three lines of defence model is essential to ensure the right decisions are being made by the right people at the right time. Governance includes regular and transparent risk reporting as well as discussion and decisionmaking at senior management committees, which informs management strategies across the organisation.
RBS continually improves how risk is managed, by taking action where necessary
All RBS employees share ownership of the way risk is managed. The businesses, the control and support functions, and Internal Audit work together to make sure business activities and policies are consistent with risk appetite; following the three lines of defence model. RBS constantly monitors its risk profile against its defined risk appetite and limits, taking action when required to balance risk and return.
To achieve this, RBS is focusing on leaders as role models and taking action to build clarity, continuing to develop capability and motivate employees to reach the required standards of risk culture behaviour, including:  Taking personal accountability and proactively managing risk.  Respecting risk management and the part it plays in daily work.  Understanding clearly the risks associated with individual roles.  Aligning decision-making to RBS’s risk appetite.  Considering risk in all actions and decisions.  Escalating risks and issues early.  Taking action to mitigate risks.  Learning from mistakes and near-misses.  Challenging others’ attitudes, ideas and actions.  Reporting and communicating risks transparently.
To embed and strengthen the required risk culture, a number of RBS-wide activities were undertaken in 2017. These included ethical scenario training, mandatory Group Policy Learning, and Managing Our Performance meetings designed to enhance risk culture at a team and individual employee level.
RBS’s target risk culture behaviours have now been embedded into Our Standards. These are clearly aligned to the core values of “serving customers”, “working together”, “doing the right thing” and “thinking long term”. They act as a clear starting point for a strong and effective risk culture because Our Standards are used for performance management, recruitment and selection and development.
Risk culture behaviour assessment is incorporated into performance assessment and compensation processes for enhanced governance staff. In Q1 2017, an objective aligned to RBS’s risk culture target was set for the Executive Committee. Activity against that objective over the year was integral to performance reviews.
Training Enabling employees to have the capabilities and confidence to manage risk is core to RBS’s learning strategy.
 In five years’ time would others see this as a good way to work?
Each of the five questions is a prompt to think about how the situation fits with RBS Group’s values. It ensures that employees can think through decisions that do not have a clear answer, and guides their judgements.
If conduct falls short of RBS’s required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned. RBS’s approach to remuneration and related policies promotes effective risk management through a clear distinction between fixed remuneration – which reflects the role undertaken by an individual – and variable remuneration, which is directly linked to, and reflects performance and can be risk-adjusted. The Group Performance & Remuneration Committee considers risk performance and conduct when determining overall bonus pools. Such pay decisions aim to reinforce the need for all employees to demonstrate acceptable risk management practice.
Note: (1) The IFRS 9 Metrics Oversight Committee has delegated authority from the RBS Provisions Committee to approve the Significant Deterioration framework, the data rules for missing variables, materiality decisions relating to the expected credit loss calculation, adjustments relating to the expected credit loss calculation if necessary, and changes in expected credit loss provision calculation methodology.
Reviews and approves the risk appetite framework and risk appetite targets for
Responsibilities include technical updates and escalations from other Executive Risk Forum sub‐committees, and annual deep‐
Risk committees review and monitor all risks, providing guidance, recommendations and decisions on risks affecting the businesses. Business provisions committees approve
Responsible for approval – or recommendation to the Board for approval – of certain risk appetite
Committee, Operational Risk Executive Committee, Market and Treasury Risk Committee, Financial Crime Executive Steering Group, and Reputational
Oversees the effective management of the current and future balance sheet in line with Board‐approved
Responsible for setting the limits, policies and controls relating to financial balance sheet risks, including funding and liquidity, intra‐group
Risk management framework (unaudited) continued Risk management structure The diagram illustrates RBS’s risk management structure in 2017 and key risk management responsibilities.
(2) Regulatory Affairs In 2017, Regulatory Affairs was responsible for providing leadership of RBS’s relationships with its regulators. Regulatory Affairs is part of Corporate Governance & Regulatory Affairs. Remediation & Complaints reports to the Services Chief Operating Officer.
Capital, liquidity and funding risk as well as recovery and resolution planning. Treasury also participates in the Capital Management & Stress Testing
Manages legal risk and provides legal advice on customer transactions and products, acquisitions, disposals, joint ventures and intellectual property as well as managing major litigation
 Ensuring that the culture of the business supports balanced risk decisions and compliance with policy, laws and regulations.
 Ensuring the business has effective mechanisms for identifying, reporting and managing risk and controls.
 Leading the articulation, design and development of risk culture and appetite.
Third line of defence – Internal Audit Responsibilities include:  Providing assurance to the Group Audit Committee that the main business risks have been identified and effective controls are in place to manage these risks.
Risk appetite Risk capacity defines the maximum level of risk RBS can assume before breaching constraints determined by regulatory capital and liquidity needs, the operational environment, and from a conduct perspective. Articulating risk capacity helps determine where risk appetite should be set, ensuring there is a buffer between internal risk appetite and RBS’s ultimate capacity to absorb losses.
Risk appetite defines the level and types of risk RBS is willing to accept, within risk capacity, in order to achieve strategic objectives and business plans. It links the goals and priorities to risk management in a way that guides and empowers staff to serve customers well and achieve financial targets.
RBS’s risk profile is frequently reviewed and monitored to ensure it remains within appetite and that management focus is concentrated on all strategic risks, material risks and emerging risk issues. Effective processes are in place for reporting risk profile relative to risk appetite to the Board and senior management.
The RBS policy framework directly supports the qualitative aspects of risk appetite, helping to rebuild and maintain stakeholder confidence in RBS’s risk control and governance. Its integrated approach is designed to ensure that appropriate controls, aligned to risk appetite, are set for each of the strategic and material risks it faces, with an effective assurance process put in place to monitor and report on performance.
RBS has developed a risk directory which contains details of the financial and non-financial risks that it faces each day. It provides a common risk language to ensure consistent terminology is used across RBS. The risk directory is subject to annual review. This ensures that the directory continues to provide a comprehensive and meaningful list of the inherent risks within the businesses.
Risk treatment and mitigation Risk treatment and mitigation is an important aspect of ensuring that risk profile remains within risk appetite. Risk mitigation strategies are discussed and agreed with the businesses.
Early identification and effective management of changes in legislation and regulation are critical to the successful mitigation of conduct and regulatory risk. The effects of all changes are managed to ensure timely compliance readiness. Changes assessed as having a high or medium-high impact are managed closely.
Risk management framework (unaudited) continued Top and emerging risks that may affect future results and performance are reviewed and monitored. Action is taken to mitigate potential risks as and when required. In depth analysis is carried out, including the stress testing of exposures relative to the risk.
The Board Risk Committee, Asset & Liability Management Committee and Executive Risk Forum provide governance and oversight.
The function has three main elements – assurance, model risk and risk culture. Risk & Conduct Assurance teams perform quality assurance on targeted credit, market, financial crime and conduct risk activities. They also review selected key controls and manage model risk governance and validation activities. In addition, the Head of Risk & Conduct Assurance oversees the delivery of work to embed and strengthen RBS’s desired risk culture.
The Head of Risk & Conduct Assurance also oversees the three lines of defence model, including relevant principles. For further information refer to page 154.
Assurance Qualitative reviews are carried out to assess various risk aspects as appropriate, including: the quality of risk portfolios, the accuracy of the Basel Model Inputs and related probability of default/loss given default classifications, the quality of risk management practices, policy compliance and adherence to risk appetite. This can include testing the bank’s credit portfolios and market risk exposures to assist in early identification of emerging risks, as well as undertaking targeted reviews to examine specific concerns raised either by these teams or by their stakeholders.
The adequacy and effectiveness of selected key controls owned and operated by the Risk function are also tested (with a particular focus on credit risk and market risk controls). The team’s remit includes selected controls within the scope of Section 404 of the US Sarbanes-Oxley Act 2002 as well as selected controls supporting risk data aggregation and reporting.
The Risk & Conduct Assurance Committee ensures a consistent and fair approach to all aspects of the team’s assurance review activities. The committee also monitors and validates the ongoing programme of reviews and tracks the remediation of the more material review actions.
RBS uses a variety of models as part of its risk management process and activities. Key examples include the use of model outputs to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of risk-weighted assets. Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stresstesting purposes also play a key role in ensuring RBS holds sufficient capital, even in stressed market scenarios.
Model Risk Management Model Risk Management performs independent model validation for material models. It works with individual businesses and functions to monitor adherence to model risk standards, ensuring that models are developed and implemented appropriately and that their operational environment is fit for purpose.
Risk management framework (unaudited) continued Model Risk Management reassesses the appropriateness of approved risk models on a periodic basis. Each periodic review begins with an initial assessment. Based on the initial assessment, an internal model governance committee will decide to re-ratify a model or to carry out additional work. In the initial assessment, Model Risk Management assesses factors such as a change in the size or composition of the portfolio, market changes, the performance of – or any amendments to – the model and the status of any outstanding issues or scheduled activities carried over from previous reviews.
Model Risk Management also monitors the performance of RBS’s portfolio of models to ensure that they appropriately capture underlying business rationale.
For more specific information relating to market risk models and pricing models, refer to page 218.
The process for stress testing consists of four broad stages: Define scenarios 
 Scenario results are used to inform RBS’s business and capital plans.
3) Risk identification: through a better understanding of the risks that could potentially impact RBS’s financial strength and capital position.
Risk management framework (unaudited) continued Capital sufficiency: going concern forward-looking view Going concern capital requirements are examined on a forwardlooking basis – including as part of the annual budgeting process – by assessing the resilience of capital adequacy and leverage ratios under hypothetical future states. A range of future states are examined. In particular, capital requirements are assessed:  Based on a forecast of future business performance given expectations of economic and market conditions over the forecast period.
The examination of capital requirements under normal economic and market conditions enables RBS to demonstrate how its projected business performance allows it to meet all internal and regulatory capital requirements as they arise over the plan horizon. For example, RBS will assess its ability to issue lossabsorbing debt instruments in sufficient quantity to meet regulatory timelines. The cost of issuance will be factored into business performance metrics.
Internal assessment of capital adequacy An internal assessment of material risks is carried out annually to enable an evaluation of the amount, type and distribution of capital required to cover these risks. This is referred to as the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP consists of a point-in-time assessment of RBS’s exposures and risks at the end of the financial year together with a forward-looking stress capital assessment. The ICAAP is approved by the Board and submitted to the PRA.
Capital allocation RBS has mechanisms to allocate capital across its legal entities and businesses which aim to optimise the utilisation of capital resources taking into account applicable regulatory requirements, strategic and business objectives and risk appetite.
The framework for allocating capital is approved by the Asset & Liability Management Committee.
Stress testing: liquidity Liquidity risk monitoring and contingency planning In implementing the liquidity risk management framework, a suite of tools is used to monitor, limit and stress test the risks on the balance sheet. Limit frameworks are in place to control the level of liquidity risk, asset and liability mismatches and funding concentrations.
Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the Asset & Liability Management Committee at least monthly. Liquidity Condition Indicators are monitored daily which ensures any buildup of stress is detected early and the response escalated appropriately through recovery planning.
The market perceives RBS to be suffering from a severe stress event, which results in an immediate assumption of increased credit risk or concerns over solvency.
Risk management framework (unaudited) continued Stress testing: recovery and resolution planning The RBS Group maintains a recovery plan that sets out credible recovery options that could be implemented in the event of a severe stress to restore its business to a stable and sustainable condition, focusing on addressing the capital and liquidity position of the RBS Group and its constituent legal entities.
The recovery plan is a key component of risk management including the framework for managing capital.
Two significant legal entities, RBS Securities Inc. and The Royal Bank of Scotland International Limited, maintained separate recovery plans to address specific risks. These plans were aligned to the 2017 RBS recovery plan to ensure they operated consistently in the event of a stress scenario.
Resolution would be implemented if the RBS Group was assessed by the UK authorities to have failed and the appropriate regulator placed the RBS Group into resolution. The process of resolution is owned and implemented by the Bank of England (as UK Resolution Authority).
Traded market risk RBS undertakes daily market risk stress testing to identify vulnerabilities and potential losses in excess of, or not captured in, value-at-risk. The calculated stresses measure the impact of changes in risk factors on the fair values of the trading and available-for-sale portfolios.
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management. Macroeconomic stress tests are carried out periodically as part of the bank-wide, cross-risk capital planning process. The scenario narratives are translated into risk factor shocks using historical events and insights by economists, risk managers and the first line.
Market risk stress results are combined with those for other risks into the capital plan presented to the Board. The cross-risk capital planning process is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by RBS.
 The 2017 Bank of England stress test results demonstrate that good progress has been made in transforming the balance sheet to being safe and sustainable.
Funding consists of on-balance sheet liabilities that are used to provide cash to finance assets. Funding risk is the risk of not maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including through the maturity transformation role that banks perform. The risks are dependent on factors such as:  Maturity profile;  Composition of sources and uses of funding;  The quality and size of the liquidity portfolio;  Wholesale market conditions; and  Depositor and investor behaviour.
Sources (unaudited) Capital The determination of what instruments and financial resources are eligible to be counted as capital is laid down by applicable regulation. Capital is categorised under two tiers (Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency and the ranking of absorbing losses on either a going or gone concern basis. There are three broad categories of capital across these two tiers:  CET1 capital. CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary shares issued and retained earnings.
 AT1 capital. This is the second type of loss absorbing capital and must be capable of absorbing losses on a going concern basis. These instruments are either written down or converted into CET1 capital when a pre-specified CET1 ratio is reached.
 Tier 2 capital. Tier 2 capital is the Group’s supplementary capital and provides loss absorption on a gone concern basis. Tier 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt securities with a minimum maturity of five years.
Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other specific loss absorbing instruments – including senior notes issued by the Group – may be used to cover certain gone concern capital requirements which, in the EU, is referred to as MREL. Gone concern refers to the situation in which resources must be available to enable an orderly resolution, in the event that the Bank of England (BoE) deems that the Group has failed.
Liquidity RBS maintains a prudent approach to the definition of liquidity resources. Liquidity resources are divided into primary and secondary liquidity as follows:  Primary liquid assets include cash and balances at central banks, treasury bills and other high quality government and US agency bonds.
Customer deposits Licensed deposit-taking entities operating as PBB, CPB and RBSI franchises.
Term debt Issuance of long-term (more than 1 year) unsecured and secured debt securities.
The use of such facilities can be both part of a wider strategic objective to support initiatives to help stimulate economic growth or as part of the broader liquidity management and funding strategy.
For further details on capital constituents and the regulatory framework covering capital, liquidity and funding requirements, please refer to the RBS Pillar 3 Report 2017 on pages 4 and 8. For MREL refer to page 161.
Capital, liquidity and funding risk continued  CRR leverage ratio increased to 5.3% (2016 – 5.1%). UK
 During the year the BOE published indicative data on the minimum amount of loss-absorbing resources for the larger UK banks comprising MREL plus buffers. RBS is expected to require loss-absorbing resources of 24.0% of RWAs by 1 January 2020, rising to 27.8% by 1 January 2022. Total loss absorbing capital, based on RBS’s interpretation of the rules and including the benefit of legacy securities, was 27.1% of RWAs at 31 December 2017.
 The liquidity portfolio increased by £22 billion in 2017 to £186 billion, mainly within primary liquidity which is now £124 billion (2016 – £95 billion). This build up in liquidity is driven by TFS participation, increased deposits in the franchises and Treasury issuance, offset by funding maturities and calls of securities.
 Shorter term forecasts are developed frequently in response to actual performance, changes in internal and external business environment and to manage risks and opportunities.
 Impact assessment captures input from across the Group including from businesses.
 Capital planning informs potential capital actions including managing capital through buy backs, redemptions or through new issuance to external investors or via internal transactions.
 As part of capital planning, the Group will monitor its portfolio of external capital securities and assess the optimal blend and most cost effective means of financing.
Liquidity portfolio management (unaudited) The size of the portfolio is determined by referencing RBS’s liquidity risk appetite. RBS retains a prudent approach to setting the composition of the liquidity portfolio, which is subject to internal policies and limits over quality of counterparty, maturity mix and currency mix.
Separate from the liquidity portfolio, RBS holds high quality assets to meet payment systems collateral requirements; these are managed by RBS Treasury.
Ring-fencing implications As a result of the legal entity restructuring in response to the UK government’s ring-fencing legislation, the current Royal Bank of Scotland plc (expected to be renamed NatWest Markets plc at the time of the RFTS during the first half of 2018) will separately hold and manage its own liquidity portfolio outside of the ringfenced group. It will cease to form part of the UK DoLSub at a point in time in the second half of 2018 (subject to regulatory agreement). RBS International will begin to hold its own liquidity portfolio and RBS N.V. and UBI DAC will continue to hold separate liquidity to meet local regulatory requirements.
Treasury has commenced the transfer of the existing liquidity portfolio from RBS plc into National Westminster Bank Plc (where the majority of the UK DoLSub liquidity portfolio will be held post ring-fencing) to ensure appropriate levels of liquidity are held in both RBS plc and the UK DoLSub.
(5) The Group may be subject to a PRA buffer requirement as set by the PRA. The PRA buffer consists of two components: - A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could range between 10% and 40%. - A buffer relating to the results of the BoE concurrent stress testing results. The PRA requires that the level of this buffer is not publicly disclosed.
Leverage ratios The table below summarises the minimum ratios of capital to leverage exposure under the PRA UK leverage framework that the Group must meet. In November 2016, the European Commission published a package of legislative proposals (CRR 2) for the adoption of a legally binding 3% of Tier 1 capital minimum leverage ratio with consideration of a leverage buffer ratio for G-SIBs once a final international agreement had been reached. Different minimum requirements may apply to individual legal entities or sub-groups.
(FPC) increased the rate from 0.0% to 0.5% effective June 2018; subsequently in November 2017 the FPC announced a further increase to 1% effective November 2018. The applicable ratio for foreign exposures may be different. On 3 October 2017 the PRA, via revised policy statement (PS21/17), increased the Tier 1 leverage ratio requirement for UK banks by 25 basis points to 3.25% (CET1 requirement of 2.4375%). The PRA minimum leverage ratio requirement is supplemented with a G-SIB additional leverage ratio buffer, currently 0.175% under transitional arrangements (31 December 2016 – 0.13125%) increasing to 0.35% at the end point, and countercyclical capital buffer of 0.0%.
Notes: (1) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. The minimum ratio above excludes Pillar 2 add-ons. (2) BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018 by which time banks are expected to meet and maintain a ratio of 100%. In November 2016, the European Commission (EC) included a net stable funding ratio of 100% as part of the CRR 2 package of legislative proposals. The timing of a binding NSFR coming into force in the European Union and United Kingdom remains subject to uncertainty. In the meantime, RBS uses the definitions from the BCBS guidelines, and its own interpretations, to calculate the NSFR. RBS’s ratio may not be comparable with those of other financial institutions.
Notes: (1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases with the exception of unrealised gains on available-for-sale securities which has been included from 2015 under the PRA transitional basis. (2) Based on 3 month average of month end leverage exposure and Tier 1 Capital.
Measures in relation to end-point CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities (end-point CRR basis).
RWAs: Current securitisation positions are shown as risk-weighted at 1,250%. RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on large financial sector entities. RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation. Counterparties which meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges
The table below sets out the key liquidity and related metrics monitored by RBS.
Notes: (1) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. The published LCR excludes
(2) RBS's stressed outflow coverage (SOC) is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS’s ILAAP. This assessment is performed in accordance with PRA guidance.
(3) BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018 by which time banks are expected to meet and maintain a ratio of 100%. In November 2016, the European Commission (EC) included a net stable funding ratio of 100% as part of the CRR 2 package of legislative proposals. The timing of a binding NSFR coming into force in the European Union and United Kingdom remains subject to uncertainty. In the meantime, RBS uses the definitions from the BCBS guidelines, and its own interpretations, to calculate the NSFR. RBS’s ratio may not be comparable with those of other financial institutions.
End-point transitional End-point transitional CRR basis (1) basis (1) CRR basis (1) basis (1) £m £m £m £m
Qualifying instruments issued by subsidiaries and held by third parties 369 1,876 2,268 4,818
Share capital and reserve movements in respect of employee share schemes 139 139
Undrawn commitments <1 year which may not be cancelled 1.8 1.8
Other undrawn commitments >1 year which may not be cancelled & off-balance sheet 2.1 3.3
Senior unsecured debt securities issued by: LAC as a ratio of RWAs 27.1% 24.9%
The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
As at and for year ended Senior debt roll-off profile (1) 31 December Roll-off profile RBSG 2017 H1 2018 H2 2018 2019 2020 2021 & 2022 2023 & later - weighted average rate spread (bps) 202 172 171 205 162 224 201
RBS plc - weighted average rate spread (bps) 116 188 244 84 24 202 201
- weighted average rate spread (bps) 114 125 — — 5 — —
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers.
Capital, liquidity and funding risk continued RWAs by segment (unaudited) The chart below illustrates the concentration of risk-weighted assets by segment.
Banking as a result of growth in targeted segments being more than offset by active management of the lending book.
 During the year RBSI received regulatory approval to adopt the advanced internal ratings based approach on the wholesale corporate book, which led to an RWA reduction of £4.4 billion.
Capital, liquidity and funding risk continued Liquidity portfolio The table below shows the liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as it is stated after discounts (or haircuts) applied to instruments by the Bank of England and other central banks.
DoLSub (1) Other Total DoLSub (1) Total DoLSub (1) Other Total DoLSub (1) Total £m £m £m £m £m £m £m £m £m £m
Cash and balances at central banks 91,377 2,280 93,657 76,386 79,425 66,598 2,542 69,140 56,772 59,489
Below AA rated governments — — — — — — 237 237 — —
Local government — — — — — — — — — —
Total liquidity portfolio GBP USD EUR Other Total £m £m £m £m £m
Capital, liquidity and funding risk continued Funding sources The table below shows the carrying values of the principal funding sources based on contractual maturity.
Notes: (1) Includes £19.0 billion (2016 - £5.0 billion) relating to TFS participation and £1.8 billion (2016 - £1.3 billion) relating to RBS’s participation in central bank financing operations under the European Central Bank’s Targeted Long Term Refinancing Operations. (2) Cash collateral includes £9,113 million (2016 - £10,002 million) from financial institutions.
Key points  During 2017, RBS issued new debt securities of £12.2 billion including: o £3.6 billion of MREL-eligible senior debt by RBSG
o Other issuance of £5.1 billion, including MTNs, commercial paper and CDs, and securitisations.
 In 2017, subordinated debt securities of £5.7 billion and senior unsecured debt securities of £9.0 billion were redeemed or matured through the year.
 Repos at 31 December 2017 increased by £6.1 billion to £38.4 billion driven largely by strong demand in the market for high quality securities.
2017 2016* Loans and Loans and advances to Customer Funding advances to Customer Funding customers (1) deposits (2) LDR surplus/(gap) (3) customers (1) deposits (2) LDR surplus/(gap) (3)
Notes: (1) Excludes reverse repo agreements and net of impairment provisions. (2) Excludes repo agreements. (3) Calculated as customer deposits less loans and advances to customers. (4) nm = not meaningful.
The table below shows RBS's principal funding sources. 2017 2016 GBP USD EUR Other Total GBP USD EUR Other Total By currency £m £m £m £m £m £m £m £m £m £m
Commercial Covered Subordinated Total notes Total notes paper and CDs MTNs bonds Securitisations Total liabilities in issue in issue £m £m £m £m £m £m £m %
In its analysis to assess and manage asset and liability maturity gaps, RBS determines the expected customer behaviour through qualitative and quantitative techniques. These incorporate observed customer behaviours over long periods of time. This analysis is subject to governance through RBS ALCo Technical committee down to a segment level.
 The net funding surplus in 2017 is concentrated in the longer-dated buckets, reflecting the stable characteristics of customer deposits and lending that is behaviourally shorter dated.
Capital, liquidity and funding risk continued Contractual maturity This table shows the residual maturity of financial instruments, based on contractual date of maturity. Held-for-trading (HFT) assets and liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below. Hedging derivatives are included in the relevant maturity bands.
Less than 6 months More than excluding 1 month 1-3 months 3-6 months - 1 year Subtotal 1-3 years 3-5 years 5 years HFT HFT Total 2017 £m £m £m £m £m £m £m £m £m £m £m
 Pre-positioned with central banks as part of funding schemes and those encumbered under such schemes.
Covered assets held bonds & Repos & at central Readily Other Cannot securitisations Derivatives similar (2) Total (3) banks (4) available available be used Total Total 2017 (1) £bn £bn £bn £bn £bn (5) £bn (6) £bn (7) £bn £bn £bn
(8) In accordance with market practice, RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
The principal sources of credit risk for RBS are lending, offbalance sheet products, derivatives and securities financing, and debt securities. RBS is also exposed to settlement risk through foreign exchange, trade finance and payments activities.
Controls Credit policy standards are in place for both the Wholesale and Personal portfolios. They are expressed as a set of mandatory controls.
Credit stewardship Risks are identified through relationship management and credit stewardship of portfolios or customers. Credit risk stewardship takes place throughout the customer relationship, beginning with the initial approval. It includes the application of credit assessment standards, credit risk mitigation and collateral, ensuring that credit documentation is complete and appropriate, carrying out regular portfolio or customer reviews and problem debt identification and management.
Risk measurement RBS uses current exposure and potential exposure as its measures of credit risk exposure. Unless otherwise stated, current exposure and potential exposure are reported:  Net of collateral – cash and gold collateral for all product types as well as financial collateral for derivative and securities financing products.
Measured using the mark-to-market value after the effect of enforceable netting agreements and net of legally enforceable financial collateral.(3)
Asset quality Credit grades are assigned at legal entity level for Wholesale customers.
Risk mitigation techniques, as set out in the appropriate credit policies, are used in the management of credit portfolios across RBS. These techniques mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations. Mitigation tools can include structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default swaps, credit-linked debt instruments and securitisation structures, and the use of guarantees and similar instruments (for example, credit insurance) from related and third parties. To mitigate credit risk arising from Personal mortgage lending, collateral is taken in the form of residential property.
Amounts owed by RBS to a counterparty are netted against amounts the counterparty owes RBS, in accordance with relevant regulatory and internal policies. This is only done if a netting agreement is in place.
Risk assessment and monitoring (unaudited) Practices for credit stewardship – including credit assessment, approval and monitoring as well as the identification and management of problem debts – differ between the Wholesale and Personal portfolios.
Wholesale customers – including corporates, banks and other financial institutions – are grouped by industry sectors and geography as well as by product/asset class and are managed on an individual basis.
For all other transactions credit is only granted to customers following joint approval by an approver from the business and the credit risk function. Credit risk management is organised in terms of the complexity of the assessment rather than aligned to franchises. The joint business and credit approvers act within a delegated approval authority under the Wholesale Credit Authorities Framework approved by the Executive Risk Forum. The level of delegated authority held by approvers is dependent on their experience and expertise. Only a small number of senior executives hold the highest authority provided under the Wholesale Credit Authorities Framework. Both business and credit approvers are accountable for the quality of each decision taken but the credit risk approver holds ultimate sanctioning authority.
Where the customer is part of a group, the credit assessment considers aggregated credit risk limits for the customer group as well as the nature of the relationship with the broader group (for example parental support) and its impact on credit risk.
Problem debt management Wholesale (unaudited) Early problem identification Each segment has defined early warning indicators to identify customers experiencing financial difficulty, and to increase monitoring if needed. Early warning indicators may be internal, such as a customer’s bank account activity, or external, such as a publicly-listed customer’s share price. If early warning indicators show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty they may decide to classify the customer within the Risk of Credit Loss framework.
Heightened Monitoring customers are performing customers who have met certain characteristics, which have led to material credit deterioration. Collectively, characteristics reflect circumstances that may affect the customer’s ability to meet repayment obligations. Characteristics include trading issues, covenant breaches, material PD downgrades and past due facilities.
The purpose of Restructuring is to protect the bank’s capital. Where practicable, Restructuring does this by working with corporate and commercial customers to support their turnaround and recovery strategies and enable them to return to mainstream banking. Restructuring will always aim to recover capital in a fair and efficient manner.
Specialists in Restructuring work with customers experiencing financial difficulties and showing signs of financial stress. Throughout Restructuring’s involvement the mainstream relationship manager will remain an integral part of the customer relationship, unless an exit strategy is deemed appropriate. The objective is to find a mutually acceptable solution, including restructuring of existing facilities, repayment or refinancing.
Where a solvent outcome is not possible, insolvency may be considered as a last resort. However, helping the customer return to financial health and restoring a normal banking relationship is always the preferred outcome.
Personal customers experiencing financial difficulty are managed by the Collections function. If the Collections function is unable to provide appropriate support after discussing suitable options with the customer, management of that customer moves into Recoveries. If at any point in the Collections and Recoveries process, the customer is identified as being potentially vulnerable, the customer will be separated from the regular strategy and supported by a specialist team to ensure the customer receives appropriate support for their circumstances.
Recoveries The Recoveries function will issue a notice of intention to default to the customer and, subsequently, a formal demand, while also registering the account with the credit reference agencies where appropriate. Following this, the customer’s debt may then be placed with a third-party debt collection agency, or alternatively a solicitor, in order to agree an affordable repayment plan with the customer.
Credit risk: management basis continued Forbearance Forbearance across RBS takes place when a concession is made on the contractual terms of a loan/debt in response to a customer’s financial difficulties. Concessions granted where there is no evidence of financial difficulty, or where any changes to terms and conditions are within current risk appetite, or reflect improving credit market conditions for the customer, are not considered forbearance.
In the Personal portfolio, loans are considered forborne until they meet the exit criteria set out by the European Banking Authority. These include being classified as performing for two years since the last forbearance event, making regular repayments and the debtor being less than 30 days past due. Exit criteria are not currently applied for Wholesale portfolios.
Monitoring of forbearance In the Wholesale portfolio, all customers are assigned a PD and related facilities an LGD. These are re-assessed prior to finalising any forbearance arrangement in light of the loan’s amended terms. The ultimate outcome of a forbearance strategy is unknown at the time of execution. It is highly dependent on the cooperation of the borrower and the continued existence of a viable business or repayment outcome. Where forbearance is no longer viable, RBS will consider other options such as the enforcement of security, insolvency proceedings or both, albeit these are options of last resort.
For performing loans, credit metrics are an integral part of the latent provision methodology, and an extended emergence period for forborne loans is applied.
The transfer of wholesale loans from impaired to performing status follows assessment by relationship managers and credit. When no further losses are anticipated and the customer is expected to meet the loan’s revised terms, any provision is written off or released and the balance of the loan returned to performing status. This course of action is not dependent on a specified time period and follows the credit risk manager’s assessment.
The loan would remain in forbearance for the defined probation period and be subject to performance criteria including making regular repayments and be less than 30 days past due.
Additionally for some forbearance types a loan may be transferred to the performing book if a customer makes payments that reduce loan arrears below 90 days (Ulster Bank RoI and UK PBB collections function).
 Ulster Bank RoI: forborne and previously forborne mortgages form separate risk pools. The PD model used is calibrated separately for forborne loans, using information on the historic performance of loans subject to similar arrangements.
Impairment A financial asset is impaired if there is objective evidence that the amount, or timing, of future cash flows has been adversely affected. Refer to accounting policies on pages 255 and 256 for details of the quantification of impairment losses.
Determining whether evidence of impairment exists requires the exercise of management judgement. It should be noted that the following factors are not, of themselves, evidence of impairment, but may be evidence of impairment when considered with other factors:  Disappearance of an active market because an entity’s financial instruments are no longer publicly traded.  A downgrade of an entity’s credit rating.  A decline in the fair value of a financial asset below its cost or amortised cost.
Write-offs Impaired loans and receivables are written-off when there is no longer any realistic prospect of recovery of part, or the entire loan. For loans that are individually assessed for impairment, the timing of write-off is determined on a case-by-case basis. Such loans are reviewed regularly and write-offs may be prompted by bankruptcy, insolvency, forbearance and similar events. For details of the typical time frames, from initial impairment to write off, for collectively assessed portfolios refer to the accounting policies section on pages 255 and 256.
Notes: (1) Includes SME customers managed in the Business Banking segment of UK PBB who are assigned a sector under RBS’s sector concentration framework. (2) Includes exposure to central governments, central banks and sub-sovereigns such as local authorities. (3) Excludes Private Banking, Lombard and Invoice Finance exposures which are not material in context of the Risk of Credit Loss portfolio. (4) Audited. (5) Wholesale forbearance stock represents loans that have been subject to a forbearance event in the two years up to the reporting date. Personal forbearance is aligned to
Credit risk: management basis continued Key points (unaudited)  Measured against RBS’s asset quality scale, as at 31
December 2017, 72% of total current exposure was rated in the AQ1-AQ4 bands, equating to an indicative investment grade rating of BBB- or above (2016 – 70%). Across the Personal lending exposure, 67% was in the AQ1-AQ4 category (67% as at 31 December 2016). The loan-to-value (LTV) ratio of the mortgage portfolio was 57% (2016 – 58%).
 The increase in current exposure across the Wholesale portfolio reflected increases in the Sovereign sector resulting from liquidity management activities. This was offset by decreases in the Banks and other FIs portfolio, which reflected receipt of higher collateral against traded products and by decreases in Transport – particularly Shipping – in line with the exit strategy for this sector.
 Credit quality, measured against RBS’s asset quality scales marginally improved across the Wholesale and Personal portfolios, reflecting resilient market conditions during the period.
 Loans totalling £1.4 billion were granted approval for forbearance in 2017 but had not yet reached legal completion at 31 December 2017 (2016 – £1.4 billion). These exposures are referred to as “in process” and are not included in the tables on the previous page. 71% (£1.0 billion) of these “in process” exposures related to non-performing customers and 29% (£0.4 billion) related to performing loans. The principal types of arrangements offered were payment concessions and loan rescheduling.
Personal Banks and Other Current Banks and Other Potential other FIs Sovereigns (2) wholesale exposure Personal other FIs Sovereigns (2) wholesale Total exposure
Notes: (1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS’s sector concentration framework. (2) Includes exposures to central governments, central banks and sub-sovereigns such as local authorities. (3) RoW: Rest of world, which also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned to specific countries from a country risk perspective.
Overview of the Personal portfolio split by product type and segment on a current exposure basis (unaudited)
 The increase in Personal portfolio lending was primarily driven by growth in mortgages; mainly in UK PBB.
 The mortgage portfolio loan-to-value ratio remained largely stable. The improvement in Ulster Bank RoI reflected house price recovery.
 Overall the proportion of mortgages by value on interestonly and mixed terms (capital and interest only) reduced, reflecting a move to repayment mortgages and repayment of legacy mortgages. There was a marginal increase in interest only mortgages in Private Banking which reflected increased lending to high net worth individuals.
 43% of mortgage lending was in London and the South East
(2016 – 44%). New business in this region reduced as a result of lower demand for both buy-to-let and owneroccupied properties. Average weighted loan-to-value for this region was 51% (2016 – 55%).
Of which: Mixed (capital and interest only) 893 — — — 893
Personal portfolio – forbearance on a current exposure basis Ulster Private RBS UK PBB Bank RoI Banking International Total 2017 £m £m £m £m £m
Forbearance stock 1,332 3,101 7 21 4,461 Forbearance stock: arrears Current 822 1,536 6 12 2,376 1-3 months in arrears 293 387 — 2 682 > 3 months in arrears 217 1,178 1 7 1,403 Provisions against forbearance stock 51 792 — 4 847
Forbearance type: (1) Long-term arrangement (2) 746 1,048 6 18 1,818 Short-term arrangement (3) 875 2,053 1 3 2,932 2016*
LTV ratio value (1) <=50% <=80% <=100% <=150% >150% Total average LTV Other Total £m £m £m £m £m £m % £m £m
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and building materials).
Note: (1) Geography splits are based on country of collateral risk.
Credit risk: management basis continued Key points (unaudited)  The majority of the CRE exposure is managed by
 The commercial real estate market performed far better in 2017 than had been expected by most at the start of the year. Investment activity was 20% up on 2016 and just 10% short of the record level reached in 2015. A notable factor was the influx of capital from China, estimated at over £10 billion, equating for approximately 15% of the total market.
 Much of this capital was targeted at the London office market, helping to support values despite the ongoing risks associated with exiting the European Union. The industrial market was the standout performer, supported by growing demand for logistics capacity. At the other end of the scale, the retail sector continued to feel the effect of online sales growth, with secondary shopping centres particularly at risk from falling tenant demand.
 The core strategy for CRE in the Republic of Ireland is in line with the wider Ulster Bank RoI strategy to support the Irish economy with some controlled growth of the balance sheet over the upcoming years, within risk appetite.
Loan-to-value AQ1-AQ9 AQ10 Total AQ1-AQ9 AQ10 Total £m £m £m £m £m £m
(3) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Shipping on a current exposure basis (unaudited) Exposure to the shipping sector is summarised below.
Key points (unaudited)  The majority of the Shipping portfolio relates to loans or finance leases secured by ocean-going vessels. The remaining exposure relates principally to Ports, Shipbuilding and Inland Water Transport sub sectors. In line with RBS’s exit strategy for this portfolio the reduction in exposure during 2017 was largely driven by asset sales and debt repayment on the ship finance product; with other exposure remaining largely stable.
 The key component of the AQ1-AQ4 exposure banding is a portfolio of long-dated finance leases, financing ships to investment-grade oil majors and shipping companies.
 Continued progress in managing down the defaulted portfolio resulted in lower AQ10 exposure, with very few new transfers into the category during 2017.
 The weakness in the dry bulk and container shipping markets generated a high level of forbearance activity in 2016. However, a recovery in those markets – particularly in dry bulk – during 2017 limited the flow into forbearance. Fewer forbearance concessions were granted and these related to smaller exposures. The market recovery – as well as clients, in general, continuing to support their shipping investments in terms of maintaining debt service and security cover covenants – allowed RBS to remove a number of transactions from risk of loss status during the year.
Balance sheet to current exposure bridge (unaudited) The table below provides a bridge between the balance sheet and the related components of current exposure (CE).
Within Netting Methodology Not within the Balance the scope of Disposal and differences and scope of sheet market risk (1) groups (2) collateral (3) reclassifications (4) CE (5) CE 2017 £bn £bn £bn £bn £bn £bn £bn
Cash and balances at central banks 74.3 — — — (0.6) (4.2) 69.5
(4) Primarily includes cash management pooling arrangements not allowed under IFRS for loans and advances. - Settlement balances: exposure not included in current exposure measure
(5) Primarily includes cash in ATMs and branches; Other assets (see note below); and Settlement balances (not within the scope of current exposure). (6) Balance sheet position shows reverse repurchase and stock borrowing position; current exposure position shows net reverse repurchase/stock borrowing and repurchase/stock lending position. (7) Balance sheet position includes intangible assets, property, plant and equipment, deferred tax, prepayments and accrued income and assets of disposal groups.
Credit risk: balance sheet analysis Current and Potential Exposures presented in Credit risk: management basis are used by Group Credit Risk Management for risk management and monitoring. However, they exclude certain exposures, primarily trading securities and take account of legal netting agreements that provide a right of legal set-off but do not meet the offset criteria in IFRS. The tables that follow are therefore provided to supplement the disclosures in the Credit risk: management basis section, to reconcile to the balance sheet. The tables in this section include balances relating to disposal groups, reflecting the total credit risk and losses faced by RBS. All the disclosures in this section are audited.
Cash and balances at central banks 98.4 — 98.4 — — — — — — 98.4 2016 Cash and balances at central banks 74.3 — 74.3 — — — — — — 74.3
(2) The carrying value on the balance sheet represents the exposure to credit risk by class of financial instrument. (3) The amount by which credit risk exposure is reduced through arrangements, such as master netting agreements and cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty. (4) RBS holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
(5) Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty. (6) Represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements. (7) Property valuations are capped at the loan value and reflect the application of haircuts in line with regulatory rules to indexed valuations. Commercial collateral includes ships and plant and equipment collateral. (8) Comprises credit derivatives (bought protection) and guarantees against exposures.
 The majority of the £237.8 billion net exposure comprises cash and balances at central banks, unsecured commercial and personal bank lending and sovereign debt securities.
 Net exposure increased by £9.9 billion reflecting higher cash placements with UK and Eurozone central banks and higher debt securities
Credit risk: balance sheet analysis continued Sector concentration The following table analyses financial assets by industry sector.
Reverse Securities Derivatives financial Balance Exposure repos Lending Debt Equity assets sheet value Offset post offset £m £m £m £m £m £m £m £m £m
Finance leases and instalment credit — 12,019 2 — — — 12,021 — 12,021
The table that follows details the relationship between internal asset quality (AQ) bands and external ratings published by Standard & Poor’s (S&P), for illustrative purposes only. This relationship is established by observing S&P’s default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the probability of default ranges associated with the master grading scale to these default rates given that, for example, the S&P published default rates do not increase uniformly by grade and the historical default rate is nil for the highest rating categories.
Cash and balances at central banks 98.3 — — — — — — 98.3
Cash and balances at central banks 74.3 — — — — — — 74.3
Credit risk: balance sheet analysis continued Loans, REIL and impairment provisions Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.
 Central items & other: Short term bank placings declined £0.8 billion.
 REIL were 2.7% of gross lending, down from 3.1% in 2016.This reflected the relatively low-interest-rate environment in the UK and house price growth for personal lending, along with disposal activity of legacy assets within NatWest Markets.
 Provisions coverage of REIL was stable at 43%, but within that write offs, repayments and disposals in REIL were £1.2 billion and £2.7 billion compared with £3.7 billion and £3.3 billion a year ago.
 Amounts written off were significantly lower at £1.2 billion compared to £3.7 billion in 2016, primarily in commercial real estate which had £1.3 billion lower write offs in 2017, principally in Ulster Bank RoI.
Credit risk: balance sheet analysis continued Impairment charge and provisions The tables below analyse the categories of loan impairment losses/(releases) and provisions by reportable segment.
Central items & other 1 — — 1 — — — —
Central items & other — — — — 1 — — 1 * Re-presented to reflect segmental reorganisation.
Credit risk: balance sheet analysis continued Sector and geographical concentration The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office. Ulster Bank RoI contributes a significant proportion of the European loan exposure. Refer to Business review on page 134.
Central and local government 4,684 — — — — — — —
Finance leases and instalment credit 12,019 170 88 1.4 52 0.7 23 14
of which: commercial real estate 23,754 1,139 247 4.8 22 1.0 (71) 116
Europe of which: commercial real estate 1,030 50 46 4.9 92 4.5 (5) 23
Credit metrics REIL Provisions Provisions Impairment Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (release) written-off of which: commercial real estate 26,265 1,407 511 5.4 36 1.9 (184) 1,483
Inter segment transfers — — 1,384 — — (1,384) — — —
Currency translation and other adjustments — 123 — — 5 (86) 1 43 1,013
UK Bank Commercial Private RBS NatWest items PBB RoI Banking Banking International Markets & other Total Total £m £m £m £m £m £m £m £m £m
Currency translation and other adjustments — 8 (7) — — (27) — (26) 480
Recoveries of amounts previously written-off 117 12 16 — 1 10 — 156 109
Charges/(releases) to income statement 235 60 362 6 3 (137) 1 530 537 * Re-presented to reflect segmental reorganisation
Securities and available-for-sale reserves Debt securities The table below analyses debt securities by issuer and IAS 39 classifications. The other financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor’s, Moody’s and Fitch.
Of which UK US Other institutions ABS £m £m £m £m £m £m £m £m
Of which US agencies — — — — 333 — 333 —
Of which US agencies — — — — 386 — 386 —
Available-for-sale AFS reserves (gross of tax) 79 (66) 190 5 144 (6) 346 46
Of which: Key points  HFT assets and short positions: UK government securities, as well as European and Japanese government bonds, increased in 2017 driven by client flow trading and market making activity in NatWest Markets. US government securities were down, both assets and short positions, compared with 2016 due to lower client demand towards the end of 2017.
government securities, was due to the liquidity portfolio management, as gilts offered higher capital adjustment returns relative to central bank cash balances.
Total Non- CDOs & Other conforming CLOs ABS £m £m £m £m £m £m £m
Notes: (1) Residential mortgage-backed securities (RMBS) and commercial mortgaged-backed securities (CMBS) are securities that represent an interest in a portfolio of residential and commercial mortgages respectively. Repayments made on the underlying mortgages are used to make payments to holders of the mortgage-backed securities (MBS). The risk of the MBS will vary primarily depending on the quality and geographic region in which the underlying mortgage assets are located and the credit enhancement of the securitisation structure. Several tranches of notes are issued, each secured against the same portfolio of mortgages, but providing differing levels of seniority to match the risk appetite of investors. The most junior (or equity) notes will suffer early capital and interest losses experienced by the referenced mortgage collateral, with each more senior note benefiting from the protection provided by the subordinated notes below. Additional credit enhancements may be provided to the holder of senior MBS notes. The main categories of mortgages that serve as collateral to RMBS held by RBS are set out below and described in the Glossary on page 414. The US market has more established definitions of differing underlying mortgage quality and these are used as the basis for RBS's RMBS categorisation.
Equity shares The table below analyses holdings of equity shares for eurozone countries and other countries with balances of more than £50 million by country, issuer and IAS 39 classification. The HFT positions are used mainly for economic hedging of debt issuances and equity derivatives. The AFS balances are individually small holdings in unlisted companies, mainly acquired through debt for equity transactions in Restructuring.
Interest rate 2,512 4,311 4,317 876 12,016 120,945 112,160 16,625 170,524 158,485 Exchange rate 352 1,598 579 896 3,425 39,211 41,681 4,445 75,442 77,148 Credit — 9 29 — 38 531 558 42 682 557 Equity and commodity — 2 1 — 3 156 107 21 333 285
Balance sheet 2,864 5,920 4,926 1,772 15,482 160,843 154,506 21,133 246,981 236,475 Counterparty mark-to-market netting (128,287) (128,287) (197,288) (197,288)
Banks (1) 461 466 1,260 1,339 Other financial institutions (2) 1,608 1,625 3,090 2,897 Corporate (3) 3,843 2,065 7,348 3,393 Government (4) 483 76 818 93
AQ1 - AQ4 5,173 9,775 AQ5 - AQ8 1,216 2,724 AQ9 3 4 AQ10 3 13
(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating. (3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting. (4) Sovereigns and supranational entities with one way collateral agreements in their favour. (5) The notional amount of interest rate derivatives include £7,400 billion (2016 - £9,724 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflect IFRS offset of £17 billion (2016 - £51 billion) and £17 billion (2016 - £51 billion) respectively.
 The decrease in foreign exchange derivative fair values reflected US dollar depreciation against major currencies in 2017.
Credit risk: balance sheet analysis continued Valuation reserves When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The following table shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures. For details of CVA methodology, refer to Note 9 on the consolidated accounts: Financial instruments - valuation.
Traded on Not settled Traded on Traded Traded on Traded recognised Settled by central by central recognised over the recognised over the 2017 exchanges counterparties counterparties Total exchanges counter exchanges counter £bn £bn £bn £bn £m £m £m £m
Non-traded market risk The following disclosures in this section are audited:  Internal banking book VaR.  Foreign exchange risk.  Equity risk.
Definition Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.
 During 2017, revised non-traded market risk appetite metrics were approved by the Board and cascaded to the franchises.
 Political events during the year, notably elections in the UK, France and the Netherlands, resulted in periods of market volatility. UK and European interest rates remained at low levels, although the Bank of England and the US Federal Reserve began raising interest rates. These events did not affect non-traded market risk management strategy during the year.
 Positive sensitivity to higher interest rates increased by £275 million year on year in a 100-basis-point upward rate shift, partly due to higher deposit volumes and changes in assumptions relating to deposit margin retention in a higher rate environment. Adverse sensitivity to lower rates also increased, by £193 million in a 100-basis-point downward shift, affected by the higher level of interest rates in the central forecast.
Non-traded market risk is largely managed in line with the following key categories: interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
NTIRR comprises three primary risk factors: gap risk, basis risk and option risk. For more information, refer to page 207.
 Non-trading book foreign exchange risk – arising from customer transactions and profits and losses that are in a currency other than the functional currency of the transacting operation.
Responsibility for identifying, measuring, monitoring and controlling the market risk arising from non-trading activities lies with the relevant business, with second-line-of-defence oversight provided by the Non-Traded Market Risk function, which reports into the Director of Enterprise Wide Risk.
Risk positions are reported monthly to the Executive Risk Forum (ERF) and quarterly to the Board Risk Committee, as well as to the Asset and Liability Committee (ALCo) (monthly in the case of interest rate, credit spread and accounting volatility risks and quarterly in the case of foreign exchange and equity risks).
RBS’s qualitative appetite is set out in the non-traded market risk appetite statement.
To ensure approved limits are not breached and that RBS remains within its risk appetite, triggers at RBS and lower levels have been set such that if exposures exceed a specified level, action plans are developed by the front office, Market Risk and Finance.
Risk controls and assurance (unaudited) For information on risk controls and assurance, refer to page 156.
Non-traded interest rate risk (NTIRR) factors are grouped into the following categories:  Gap risk – which arises from the timing of rate changes in non-trading book instruments. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk).
 Basis risk – which captures the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices, or on the same interest rate indices but with different tenors.
Due to the long-term nature of many retail and commercial portfolios and their varied interest rate repricing characteristics and maturities, it is likely that net interest income will vary from period to period, even if interest rates remain the same. New business originated in any period will alter RBS’s interest rate sensitivity if the resulting portfolio differs from portfolios originated in prior periods, depending on the extent to which exposure has been hedged.
This task is primarily carried out by RBS Treasury, to which all businesses except NatWest Markets transfer most of their NTIRR. The main exposures and limit utilisations are reported to the ALCo and the ERF monthly and to the Board Risk Committee quarterly.
Investments, acquisitions or disposals of a strategic nature are referred to RBS’s Acquisitions and Disposals Committee (ADCo). Once approved by ADCo for execution, such transactions are referred for approval to the Board, the Executive Committee, the Chief Executive, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the nontrading book that are not of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority under the credit approval framework.
Note: (1) RBS benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
towards the end of the year reflected higher eurodenominated investments in subsidiaries, which are expected to decline following a dividend paid by UBI DAC in January 2018.
 The year-on-year decline in sterling interest rate VaR, on both a period-end and average basis, partly reflects the impact of charges to equity recognised at year-end 2016 on RBS’s structural hedge benchmark. The charges to equity related mainly to increased provisions against prospective RMBS fines. The equity structural hedge was reduced in 2016 and 2017. For more information on structural hedging, refer to the following page.
The table below presents the incremental income allocation (above 3-month LIBOR), the average notional and the overall yield (including 3-month LIBOR) associated with the product and equity hedges managed by Treasury.
2017 2016 Incremental Average Overall Incremental Average Overall income notional yield income notional yield £m £bn % £m £bn %
 The fall in the average notional of the equity hedge reflects the reduction in RBS’s equity base.
 As at 31 December 2017, the 10-year and 5-year swap rates were 1.21% and 0.98%, respectively. The market rate matching the amortising structure of the total structural hedge was 0.92%.
In addition to the hedges presented in the table above, other parts of the Group also maintain structural hedges. Hedges are transacted with Treasury and generally have an amortised five-year profile. In aggregate, Private Banking, RBS International, UBI DAC and Ulster Bank Limited maintained structural hedges against Treasury relating to equity and products, with an average notional of £20 billion for 2017. This resulted in £147 million incremental income allocation (above 3-month LIBOR) to the businesses in 2017, with an overall yield of 0.83%. A significant proportion of the hedge is euro-denominated.
Earnings sensitivity to rate movements is derived from a central forecast over a 12-month period. A simplified scenario is shown based on the period-end balance sheet assuming that noninterest rate variables remain constant. Market-implied forward rates are used to generate a base-case earnings forecast, which is then subjected to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
+ 25 basis point shift in yield curves 13 151 14 — 178
+ 100 basis point shift in yield curves 53 664 58 — 775
+ 25 basis point shift in yield curves 4 79 11 2 96
+ 100 basis point shift in yield curves 9 436 42 13 500
− 100 basis point shift in yield curves (2) (337) (30) (9) (378)
Change in net interest earnings − 25 basis point upward shift in yield curves Year 1 Year 2 (2) Year 3 (2)
While the projected sensitivity of net interest income is favourable to an upward shift in the yield curve and adversely sensitive to a downward shift in the yield curve, the market valuation sensitivity of derivatives hedging retail and commercial structural interest rate exposures is adversely sensitive to an upward shift in the yield curve and favourable to a downward shift in the yield curve. Many of the derivatives are documented in cash flow hedge accounting relationships because they reduce the sensitivity of expected future cash flows to unexpected changes in interest rates. If the derivative hedges are maintained to maturity, the immediate impact on the portfolio value would lessen over time as derivative cash flows are settled (amongst other potential factors).
The information shown below comprises simplified scenarios in which all rates across the yield curve have instantaneously shifted upwards or downwards by 25 basis points and 100 basis points and taxation effects have not been estimated. In this analysis, interest rates have not been floored at zero. Note that a movement in the AFS reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
Non-traded market risk continued Key points (unaudited)  The increase in net investments in foreign operations mainly reflected investment taken to support RBS’s business in the US. Net investments in euro-denominated operations also increased in 2017. However, a dividend paid by UBI DAC in January 2018 has reduced net investments in euro operations by approximately £1.3 billion.
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity shares with no observable market parameters or (iii) other unlisted equity shares. 2017 2016 £m £m
Non-traded market risk exposures are capitalised through the Internal Capital Adequacy Assessment Process (ICAAP). This process covers the following risk types: gap risk, basis risk, credit spread risk, pipeline risk, structural foreign exchange risk, prepayment risk and accounting volatility risk. ICAAP is performed using a combination of value-based and earningsbased measures.
Traded market risk The following disclosures in this section are audited:  Internal VaR
Definition Within trading books, traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments as a result of fluctuations in market prices.
 Political events during the year, including elections in the UK, France and the Netherlands, resulted in periods of market volatility. European interest rates remained at historically low levels, although the Bank of England and US Federal Reserve began raising interest rates.
 Traded VaR increased on an average basis compared to 2016, but remained within risk appetite. This was partly because the level of risk was reduced in H1 2016 as a result of concerns over the stability of the financial sector, leading to a lower average risk profile for that year. The risk profile subsequently returned to a more normalised level. Refinements to the VaR methodology used for certain credit products also contributed to the increase.
Sources of risk (unaudited) The primary objective of RBS’s trading activities is to provide a range of financing, risk management and investment services to its customers − including major corporations and financial institutions around the world. From a market risk perspective, the trading activities are focused on the following markets: rates; currencies; securitised products; and traded credit.
 Credit spread risk – which is the risk that the value of a position will change due to changes in the real or marketperceived ability of a borrower to pay related cash flows or obligations.
 Commodity price risk – which is the risk that the fair value of a position will change due to the change in commodity prices.
Risk governance (unaudited) Responsibility for identifying, measuring, monitoring and controlling the market risk arising from trading activities lies with the relevant trading business, with second-line-of-defence oversight provided by the Traded Market Risk function.
RBS’s qualitative appetite for traded market risk is set out in the traded market risk appetite statement.
Its quantitative appetite is expressed in terms of exposure limits in the form of Board risk measures (approved by the RBS Board on the recommendation of the Board Risk Committee) and key risk measures (approved by the Technical Executive Risk Forum).
The limit framework at trading unit level also comprises additional metrics that are specific to the market risk exposures within its scope. These additional metrics aim to control various risk dimensions such as product type, exposure size, aged inventory, currency and tenor.
For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions.
Traded market risk continued Risk controls and assurance (unaudited) For information on risk controls and assurance, refer to page 156.
Risk identification and assessment (unaudited) Identification and assessment of traded market risk is achieved through gathering, analysing, monitoring and reporting market risk information at desk, business, franchise and RBS-wide levels. Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks.
This is complemented by the New Product Approval process, in which the market risk team participates to assess and quantify the market risk associated with all proposed new products.
Risk monitoring (unaudited) Traded market risk exposures are monitored against limits and analysed daily by market risk reporting and control functions. A daily report that summarises market risk exposures against the limits at RBS, franchise, business and desk levels is sent to senior management and market risk managers across the function.
In addition, as noted under Risk governance above, regular updates on traded market risk positions are provided to the ERF and Board Risk Committee.
The internal VaR model – which captures all trading book positions including those products approved by the regulator – is based on a historical simulation, utilising market data from the previous 500 days on an equally weighted basis.
The model also captures the potential impact of the following key risk factors: interest rate risk; credit spread risk; foreign currency price risk; equity price risk; and commodity price risk. These are defined under Sources of risk.
The performance and adequacy of the VaR model are tested on a regular basis through the following processes:  Back-testing – Internal and regulatory back-testing is conducted on a daily basis. (For information on internal back-testing, refer to page 217.)
 Ongoing model validation – VaR model performance is assessed both regularly and on an ad-hoc basis if market conditions or book constitution change significantly.
 Model Risk Management review – As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure that the model is still fit for purpose given current market conditions and book constitution (refer to page 156).
Total Trading VaR Interest Rate VaR Credit Spread VaR FX VaR Equity VaR Commodity VaR
Average Maximum Minimum Period end Average Maximum Minimum Period end £m £m £m £m £m £m £m £m
 On an average basis, total traded VaR increased in 2017 compared to 2016, but remained within risk appetite. This was partly because the level of risk was reduced in H1 2016 as a result of concerns over the stability of the financial sector, leading to a lower average risk profile for that year. The risk profile subsequently returned to a more normalised level. Refinements applied to the VaR methodology used for certain credit products during 2017 also contributed to the increase.
 On a period-end basis, total traded VaR was in the middle of the range for the year.
The main approach employed to assess the ongoing performance of the VaR model is back-testing, which counts the number of days when a loss exceeds the corresponding daily VaR estimate, measured at a 99% confidence level.
Two types of profit and loss (P&L) are used in back-testing comparisons: Actual P&L and Hypothetical (Hypo) P&L.
The Actual P&L for a particular business day is the firm’s actual P&L for that day in respect of the trading activities, including any intraday activities, adjusted by stripping out fees and commissions, brokerage, and additions to and releases from reserves that are not directly related to market risk.
A portfolio is said to produce a back-testing exception when the Actual or Hypo P&L exceeds the VaR level on a given day. Such an event may be caused by a large market movement or may highlight issues such as missing risk factors or inappropriate time series. Any such issues identified are analysed and addressed through taking appropriate remediation or development action. Both Actual and Hypo back-testing exceptions are monitored.
Key points (unaudited)  Statistically RBS would expect to see back-testing exceptions 1% of the time over the 250-day period.
 The number of exceptions observed in 2017 for major businesses in NatWest Markets was broadly in line with this expectation.
The risk system simulates 99% VaR on the current portfolio for each 250-day period from 2005 to the current VaR date, moving forward one day at a time. The SVaR is the worst VaR outcome of the simulated results.
Key point (unaudited)  Traded SVaR fluctuated throughout 2017, reflecting political developments, market events, customer flows and other macroeconomic factors. On a period-end basis, traded SVaR in 2017 remained at a similar level to 2016.
RNIV calculations form an integral part of ongoing model and data improvement efforts to capture all market risks in scope for model approval in VaR and SVaR.
The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) that are held in the trading book. It further captures basis risk between different instruments, maturities and reference entities.
Pricing models Pricing models are developed by a dedicated front office quantitative team, in conjunction with the trading desk. They are used for the valuation of positions for which prices are not directly observable and for the risk management of the portfolio.
These committees comprise representatives of the major stakeholders in the valuation process - trading, finance, market risk, model development and model review functions. Model approval by such a committee requires review and approval by these stakeholders, including independent model review by Model Risk Management.
The review process includes the following steps:  The committees prioritise models for review by Model Risk
Management, considering the materiality of the risk booked against the model and an assessment of the degree of model risk, that is the valuation uncertainty arising from the choice of modelling assumptions.
 Model Risk Management quantifies the model risk, which may include comparing front office model outputs with those of alternative models independently developed by Model Risk Management.
 The conclusions of the review are used to inform risk limits and by Finance to inform model reserves.
Risk models All model changes are approved through model governance committees at franchise level. Changes to existing models are subject to Model Risk Management review and RBS follows regulatory guidance for assessing the materiality of extensions and changes to the internal model approach for market risk.
In addition to Model Risk Management’s independent oversight, the model testing team monitors the model performance for market risk through back-testing, which is discussed in more detail on page 217, and other processes.
Cash and balances at central banks 98.3 98.3 — 74.3 74.2 0.1 Interest rate
Net loans and advances to banks 16.3 9.3 7.0 17.3 10.4 6.9 Interest rate
Debt securities 78.9 51.4 27.5 72.5 48.0 24.5 Interest rate, credit spreads
Debt securities in issue 30.6 28.0 2.6 27.3 22.9 4.4 Interest rate
Derivatives 154.5 1.5 153.0 236.5 1.9 234.6 Interest rate, credit spreads
Prior to 6 April 1997, individuals who contracted out of the UK State Second Pension were entitled to a Guaranteed Minimum Pension (GMP). Men accrued GMP at different rates to women. The Government intends that GMP should be equalised but until the mechanism is defined, pension funds are uncertain of their obligations. In the meantime, no allowance is made for GMP equalisation in the IAS 19 defined benefit obligations and risk disclosures.
Key developments in 2017 A memorandum of understanding between Ulster Bank Ireland DAC and Ulster Bank Pension Trustees Limited was agreed. A contribution of €200 million was paid to the pension scheme and the investment strategy amended to include more hedging assets.
The Main scheme operates under a trust deed. The corporate trustee, RBS Pension Trustee Limited, is a wholly owned subsidiary of National Westminster Bank Plc. The trustee board comprises six directors selected by RBS and four directors representing members. The trustee is supported by RBS Investment Executive Ltd (RIEL), which specialises in pension investment strategy.
Risk appetite Investment policy for the schemes is defined by the trustee with input from RIEL where appropriate and other specialist advisers employed by the trustee. While the trustee is responsible for the management of the scheme assets, it consults with RBS on material changes to the Main scheme’s risk appetite and investment policy.
RBS Group plc is the parent of several entities that participate in the Main scheme, and which could be required to fund any deficit that arises. The table below shows the sensitivity of the Main scheme’s assets and liabilities (measured according to IAS 19 ‘Employee Benefits’). It includes changes in interest rates and equity values at the year-end, taking account of the current asset allocation and hedging arrangements. Increase in Increase in Increase in net pension value of value of assets/ assets liabilities (obligations) 2017 £m £m £m
Fall in AA credit spreads of 0.25% at all durations with no change in nominal or real swap yields or other credit spreads 7 2,055 (2,048) Fall in equity values of 10% (1) (909) — (909)
2016 Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields 1,048 502 546 Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields 1,485 1,552 (67)
RBS is developing a strategy to meet these requirements. This will require the agreement of the pension scheme trustee. RBS’s intention is for the Main scheme to be supported by entities within the ring-fence. This could result in the pension scheme trustee concluding that the employer covenant (the ability of participating employers to support the scheme) has been weakened as a result of the entities outside the ring-fence no longer participating in the pension scheme, and as a result requesting additional contributions. Discussions with respect to the above issues are ongoing with the trustee.
The aggregate contributions RBS commits to will therefore depend not only on the size of any deficit arising from the triennial valuation (on assumptions that must be agreed with the trustee), but also on the extent to which RBS needs to provide additional mitigation for any perceived weakening in the covenant as a result of ring-fence restructuring. The assumptions to be agreed with the trustee will include the discount rate (the rate at which future cash flows are discounted to arrive at a present value of the total pension scheme liabilities) as well as a range of other assumptions such as recent changes to life expectancy projections.
 Different assumptions are used for technical provisions (for example longevity).
Conduct risk (unaudited) Definition Conduct risk is the risk that the behaviour of RBS and its staff towards customers, or in the markets in which it operates, leads to unfair or inappropriate customer outcomes resulting in reputational damage, financial loss or both. The damage or loss may be the result of a failure to comply with (or adequately plan for changes to) relevant official sector policy, laws, regulations, or major industry standards, or of failing to meet the expectations of customers or regulators.
Sources of conduct risk Conduct risk exists across all stages of RBS’s relationships with its customers – from the development of its business strategies, to post-sales processes – and arises from a variety of activities. These include product design, marketing and sales, complaint handling, staff training, and handling of confidential insider information. Conduct risk also arises if RBS does not take effective action to prevent fraud, bribery and money laundering. As set out in Note 31 on the consolidated accounts, RBS and certain members of staff are party to legal proceedings and are subject to investigation and other regulatory action in the UK, the US and other jurisdictions.
August 2019 as the deadline for PPI mis-selling claims.  The FCA is reviewing the business models of UK retail banks, building societies and credit unions, to understand how recent changes are affecting competition and conduct in the sector.
 Work also progressed on the conduct-related aspects of the UK’s ring-fencing requirements.
 Changes were implemented to support compliance with the second Payment Services Directive in advance of its introduction in early 2018.
Conduct risk management function The management of conduct risk is based on seven key elements, ensuring that conduct risk exposures are understood and managed in accordance with agreed risk appetite.
Risk governance RBS defines appropriate standards of conduct and drives adherence to those standards through its framework for managing conduct risk. The Board and its senior committees receive updates on conduct risk exposures and action plans through regular reporting.
Key elements of the governance structure are set out below:  The Risk, Conduct & Restructuring Executive Committee considers emerging material risks and issues, and implements Board and Executive Committee risk management policy decisions.
RBS can clearly demonstrate that its business model is consistent with its strategy and serves its customers well while balancing the commercial needs
RBS colleagues are trained, managed and rewarded to serve customers well and deliver good outcomes. RBS’s people act with integrity and understand the impact of their decisions and behaviors on customer outcomes
RBS’s governance, policies and Procedures Ensure that good customer and conduct outcomes are achieved. RBS abides by all relevant laws and regulations and conflicts of interest are managed
Qualitative and quantitative management information linked to the risk appetite pillars
Conduct risk (unaudited) continued Risk assessments are used to identify material conduct risks and inform key controls across all business areas. The risk assessment process is designed to confirm risks are effectively managed and prioritised. The process also ensures controls are tested.
The conduct risk appetite statements, in line with RBS-wide risk appetite, articulate the levels of risk which franchises and functions must not exceed. Where businesses are operating outside conduct appetite, the problems are addressed through agreed risk mitigation plans.
Risk monitoring and measurement The Board and senior RBS committees receive updates on conduct risk exposures and action plans through regular reporting. The reporting is intended to be focused, forwardlooking and action-oriented.
The most material conduct matters are reported to the appropriate committees, including the Board, the Group Audit Committee and Board Risk Committee.
An annual Money Laundering Reporting Officer’s Report is submitted to the Board and shared with the FCA. This covers RBS’s Anti-Money Laundering (AML) framework and the operation and effectiveness of the systems and controls in place to comply with AML laws and regulations. In addition, it covers the systems and controls in place to prevent the financing of terrorism and to ensure compliance with sanctions.
The Speak Up policy encompasses both the legislative definition contained within the Public Interest Disclosure Act 1998 and the regulatory definition within FCA and PRA regulations and guidance. It extends these to include conduct or behaviour which does not meet the expected standards documented in Our Code.
Definition Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events. It arises from day-to-day operations and is relevant to every aspect of the business.
Operational risk may directly affect customers, lead to financial loss or damage RBS’s reputation (for example, cyber attacks, a major IT systems failure or fraudulent activity). There can also be a link between operational risk failures and conduct risk issues.
There was also a strong focus on RBS’s risk and control assessment methodology. Following on from work carried out in 2016, the aim of this consistent, bank-wide methodology was to enhance understanding of the risk profile for the most critical products and services. In 2017, coverage was significantly extended across RBS, with outputs used to inform Group-wide reporting.
RBS continued to support an industry-led education initiative – Take Five to Stop Fraud – which offers advice to help the public protect themselves from preventable financial fraud. The initiative is led by Financial Fraud Action UK Ltd and is being delivered in conjunction with the Home Office, law enforcement and other banks.
The information and cyber security risk facing RBS continued to change in line with the constantly evolving threats. Internal security improvement programmes progressed across RBS, developing new and strengthening existing controls in order to protect the Group and its customers. RBS continuously developed and used proactive threat management and intelligence processes to understand, manage and mitigate credible threats.
RBS decommissioned a number of internet-facing websites to reduce the attack surface visible to hackers and fraudsters. Improvements were also made to prevent data leakage, secure externally bound email, as well as enhance malware defences and management of user access to key systems. Internal training programmes continued to ensure all employees are fully aware of the threats facing RBS and remain vigilant to unauthorised attempts by internal or external parties to access systems and data.
Operational risk management function Risk governance A strong operational risk management function is vital to support RBS’s ambitions to serve its customers better. Improved management of operational risk against a defined appetite directly supports the strategic risk objective of improving stakeholder confidence and is vital for stability and reputational integrity.
The operational risk function, which is the second line of defence, is tasked with delivering a robust operational risk management framework and culture across RBS. The Director of Operational Risk reports to the Chief Risk Officer.
The CEC outcomes, including forward-looking assessments for the next two half-yearly cycles and the progress made to improve the control environment, are reported to the Board, the Group Audit Committee and the Board Risk Committee. They are also shared with external auditors.
Monitoring and reporting are part of RBS’s operational risk management processes, which aim to ensure that risks are identified, considered by senior executives, and managed effectively. The most material operational risks and their position relevant to risk appetite are regularly reviewed at the OREC, along with any emerging risks and the actions taken to mitigate them. These are also reported to the Board Risk Committee and the ERF. Exposures specific to each business are communicated through regular risk and control reports discussed at business risk committees.
Operational risk (unaudited) continued RBS uses the standardised approach to calculate its operational risk capital requirement. This is based on multiplying three years’ average historical gross income by coefficients set by the regulator based on type of income.
As part of the wider Internal Capital Adequacy Assessment Process an operational risk economic capital model is used as a key capital benchmark. The model uses loss data and scenario analysis inputs from the operational risk framework, plus external loss data and certain other factors to provide a risk-sensitive view of RBS’s operational risk capital requirement.
Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk.
The most serious events are escalated in a simple, standardised process to all senior management, by way of a ‘Group Notifiable Event Process’.
All losses and recoveries associated with an operational risk event are reported against their financial accounting date. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2017 may relate to events that occurred, or were identified in, prior years.
Clients, products and business practices (2) 614 5,411 84% 98% 7% 11% Execution, delivery and process management 65 40 9% 1% 7% 8% Employment practices and workplace safety 4 5 1% — 3% 3%
Key developments in 2017 RBS continued to reduce its business risk profile by implementing its strategic plan to shift the business mix towards the UK and retail and commercial banking segments, with higher risk activities in NatWest Markets curtailed.
RBS also continued with its simplification and cost reduction programmes during 2017.
As negotiations on the prospective withdrawal of the UK from the European Union have progressed, RBS has been closely monitoring and assessing the operating environment and its effect on business risk.
In July 2017, RBS reached a settlement with the Federal Housing Finance Agency, paying US$5.5 billion to resolve claims in relation to the issuance and underwriting of residential mortgagebacked securities in the US. This was an important step forward in resolving one of the most significant legacy matters facing RBS.
Governance The Board has ultimate responsibility for business risk and for approving strategic plans, initiatives and changes to strategic direction.
RBS’s strategic planning process is managed by Strategy and Corporate Development. The Risk and Finance functions are key contributors to strategic planning.
Risk mitigation RBS operates a monthly rolling forecasting process to identify projected changes in, or risks to, key financial metrics, and ensures appropriate actions are taken.
Reputational risk (unaudited) Definition Reputational risk is the risk to RBS’s public image from a failure to meet stakeholders’ expectations in relation to performance, conduct or business profile. Stakeholders include customers, investors, employees, suppliers, government, regulators, special interest and consumer groups, media and the general public.
Sources of risk Reputational risk can arise from the conduct of employees; activities of customers and the sectors and countries in which they operate; provision of products and transactions; as well as operations and infrastructure.
Risk appetite RBS manages and articulates its appetite for reputational risk through the implementation of a qualitative reputational risk appetite statement and a committee-based governance framework. This has improved the identification, assessment and management of customers, transactions, products and issues that present a material reputational risk, resulting in a greater awareness and focus on the importance of this risk. Moreover, RBS has seen a rise in the number of cases being referred to franchise and group-wide reputational risk fora as a result of increased awareness of the framework as well as training on reputational risk.
The most material threats to RBS’s reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of its regulators, some of which have resulted in fines and public censure. Refer to the Litigation, investigations and reviews section of Note 31 on the consolidated accounts on page 313.
• Consolidated balance sheet as at 31 December 2017; • Consolidated income statement for the year then ended; • Consolidated statement of comprehensive income for the year then ended; • Consolidated statement of changes in equity for the year then ended; • Consolidated cash flow statement for the year then ended; • Accounting Policies on pages 251 to 263; • Related notes 1 to 41 to the financial statements; • Information identified as ‘audited’ in the Annual report on remuneration on pages 83 to 105; and • Capital and risk management section of the Business review except information identified as ‘unaudited’ on pages 149 to 228.
 Balance sheet as at 31 December 2017;  Statement of changes in equity for the year then ended;  Cash flow statement for the year then ended; and  Related notes 1 to 15 to the financial statements.
Conclusions relating to principal risks, going concern and viability statement In relation to the ISAs(UK) which require us to report to you whether we have anything material to add or draw attention to, we have nothing to report in respect of the following information in the annual report: • the disclosures in the Annual Report and Accounts (set out on pages 372 to 402) that describe the principal risks and explain how they are being managed or mitigated; • the directors’ confirmation (set out on page 49) in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the directors’ statement (set out on page 112) in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
Separate opinion in relation to IFRSs as issued by the IASB As explained in the accounting policies, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, the Group has applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Group financial statements comply with IFRSs as issued by the IASB.
Key Audit Matters  Provisions for conduct, litigation and regulatory matters, customer remediation and claims.  Future profitability estimates impacting the recognition of deferred tax, impairment in goodwill and, in the parent company accounts, investments in subsidiaries.  Impairment of loans and advances.  Valuation of financial instruments with higher risk characteristics including related income from trading activities.
 Hedge effectiveness testing including the impact on non-interest income.  Provision for restructuring costs.
 The components where we performed full or specific audit procedures accounted for 93% or more of Group total income, equity and total assets.
Materiality  Overall Group materiality has been set at £300 million which represents 0.6% of total equity.
The continued litigious environment and the heightened regulatory scrutiny gives rise to a high level of judgement in determining appropriate provisions and disclosures. At the year end, the Group has reported £7.8 billion (2016: £12.8 billion) of provisions for liabilities and charges, including £5.8 billion (2016: £11.0 billion) for conduct and litigation claims, including RMBS, PPI and the FCA review of RBS’s treatment of SMEs as detailed in Note 20 of the financial statements on page 299.
We tested the design and operating effectiveness of the Group’s key controls over the identification, estimation, monitoring and disclosure of provisions considering the potential for management override of controls. The controls tested included those designed and operated by management to identify and monitor claims, assess the completeness and accuracy of data used to estimate provisions.
We sent external confirmations to the Group’s external counsel for significant matters and corroborated management’s conclusion by independently obtaining the underlying information used in estimating the provisions.
In addition, we attended key management meetings and reviewed the minutes of legal and conduct provision committee meetings to conclude on the effectiveness of management’s review controls and the appropriateness of the conclusions reached
We are satisfied that the Group’s provisions for conduct, litigation and regulatory matters, customer remediation and claims are within a reasonable range and recognised in accordance with IFRS. We did not identify any material unrecorded provisions. We highlighted the following matters:  In assessing and evaluating the total US RMBS provision of £3.2 billion, management and the Board considered other industry settlements and claims. It is a reasonable reflection of the Group’s current position given the prevailing uncertainty as to the outcome of the remaining discussions with the US Department of Justice and other parties. The risk of future material additional charges is appropriately disclosed in the financial statements.
 The PPI provision remains sensitive to key assumptions, the most significant of which is future complaint volumes. Management’s estimate was within our range of outcomes based on reasonable alternative assumptions.
 Assumptions regarding the economic consequences of Brexit and other political developments over an extended period.
The recognition of deferred tax assets considers the future profit forecasts of the legal entities as well as interpretation of recent changes to tax rates and laws.
Key observations communicated to the Group Audit Committee We are satisfied that the carrying values of deferred tax assets, goodwill and, in the parent company accounts, investments in subsidiaries are reasonable and the related disclosures are in compliance with IFRS. We highlighted the following:  Results of our sensitivity analysis of the value in use and headroom to changes in the key assumptions in the forecasts including the long term growth rate, discount rate and factors impacting the underlying level of profitability both at a Group level and for individual segments;  Sensitivity of the goodwill and the investment in subsidiaries to the Group’s forecast cost reduction and the impact of the amount and timing of actual cost reductions achieved; and
Report of the Group Audit Committee (page 65) Accounting policies (page 251) Note 15 (page 295) and Note 22 (page 301) of the financial statements, and Note 7 (page 340) of the Parent company financial statements.
 Completeness and accuracy of data input into models and provision calculators.
Where post model adjustments were made as a result of limitations in existing models, we confirmed the extent of the model shortcoming, recalculated and assessed the appropriateness of the adjustment. Based on current economic and market circumstances, we considered the need for sector or systemic overlay adjustments.
In Ulster Bank RoI we specifically focused on key data inputs and model parameters, including probabilities of modelled outcome and collateral haircuts, and reviewed management’s back testing of key assumptions.
For loans individually assessed for impairment we based our sample on factors including high risk sectors such as shipping, construction, oil and gas and commercial real estate. With input from our valuation specialists we formed an independent view of collateral or exit values, cash flow assumptions and exit strategies. We re-performed the discounted cash flow calculations and compared our measurement outcome to that prepared by management and investigated any differences arising. We assessed the appropriateness and presentation of disclosures against relevant accounting standards.
Report of the Group Audit Committee (page 65) Accounting policies (page 251) Note 11 of the financial statements (page 291)
Our testing on complex model-dependent valuations involved the specialist review of detailed model documentation and use of internally developed EY challenger models to analyse and challenge judgements and assumptions applied within each relevant model.
 The manipulation of revenue recognition is most likely to arise through the inappropriate valuation of these instruments given the level of management judgement involved.
Our testing of fair value adjustments for counterparty credit, funding risk and other product and deal specific considerations on uncollateralised derivatives involved: (i) comparing valuation judgements applied by management to our knowledge of current industry practice through benchmarking exercises (ii) re-valuing a sample of counterparty level FVA and CVA calculations using independent models, (iii) testing funding spreads to third party data and analysis of recent trade activity to verify the drivers of differences between book value and trade value, (iv) independent challenge of illiquid CVA inputs and (v) testing assumptions of material product and deal specific adjustments, including analysis of recent trade activity.
Report of the Group Audit Committee (page 65) Accounting policies (page 251) Note 9 of the financial statements (page 279)
Hedge effectiveness testing for both of these programs is identified as a risk area because the application of accounting rules and execution of hedge effectiveness testing lead to significant adjustments to the balance sheet and income statement which are inherently complex and involve some management judgement. These adjustments impact non-interest income and there is an incentive to manipulate the hedge effectiveness results, to avoid undesirable income statement volatility. Any hedge ineffectiveness remains in the income statement.
While the majority of the Group process for hedge accounting is automated a risk arises that management design an effectiveness testing methodology that does not comply with IAS 39 requirements or manually override otherwise automated results to influence the income statement impact.
With the support of our hedge accounting specialists we independently re-performed a sample of hedge effectiveness tests. This included testing hedge relationships and manual adjustments made to the effectiveness assessment.
Report of the Group Audit Committee (page 65) Accounting policies (page 251) Note 12 of the financial statements (page 292)
Transformation programmes as well as organisational changes lead to impairment, restructuring provisions and other severance payments. The timing and amount of restructuring costs recognised depend on management judgement to determine when the accounting criteria have been met to support recognition in the current period. At year end, the Group recorded total restructuring provisions of £482 million (2016: £450 million). Management judgement is needed to determine whether an obligation exists and a provision should be recorded at 31 December 2017 in accordance with the accounting criteria set under IAS 37. This includes determining if:  There is a legal or constructive obligation as a result of a past event;  It is probable that an economic outflow such as a payment will occur; and  The amount of the payment (or other economic outflow) can be estimated reliably.
The most significant areas of judgement when recognising these costs are:  Determining whether a constructive obligation has been met. For example, has the Group indicated to other parties that it will accept certain responsibilities; and
 Judgement involved in the measurement of the provision based on estimated costs.
 Our assessment of IAS 37 criteria that resulted in differences that were not material being recorded by management.
Report of the Group Audit Committee (page 65) Accounting policies (page 251) Note 20 (page 299) of the financial statements.
The Group operates a number of defined benefit schemes which in total are significant in the context of the overall balance sheet. At year end the Group reported a net pension asset of £263 million (2016: £87 million net pension liability).
The valuations of the retirement benefit liabilities are calculated with reference to a number of actuarial assumptions and inputs including discount rate, rate of inflation and mortality rates. The net pension asset is sensitive to changes in the assumptions.
We also tested the controls associated with the actuarial assumptions setting process and the measurement of the fair value of the schemes’ assets. We concluded that the key controls were designed, implemented and operated effectively.
With the support of our actuarial specialists, we understood the judgements made in determining the assumptions used by management to value the retirement benefit liabilities and we challenged and verified whether these assumptions met the requirements of the applicable accounting standards, the specific circumstances of the schemes and their participants, and were in line with market practice.. Our audit procedures included an assessment of the methodology adopted by the actuaries in determining the assumptions, a comparison of life expectancy assumptions with relevant mortality tables, benchmarking inflation and discount rates against external market data, considering changes in historical assumptions and evaluating the independence, qualifications and results of work performed by management’s actuaries involved in the valuation process.
We tested the fair value measurement of scheme assets by independently calculating a fair value for a sample of the assets held. Our sample included cash, equity instruments, derivative financial instruments and other assets. We also tested the existence of the sampled pension assets by obtaining written confirmation from the relevant pension asset custodian and by examining the relevant legal documentation.
We also tested the actuaries’ calculation of the pension liabilities by independently rolling forward the prior year figures allowing for the ageing of members, accrual of benefits over the year and changes in financial and demographic assumptions over the period.
We read and tested the disclosures made in the financial statements, including the sensitivities to the key assumptions.
We described and discussed results of our internal benchmarking of key actuarial assumptions including the discount rate, inflation, mortality and pension payments. We concluded that assumptions tested are within a reasonable range. We also presented the results of our independent valuation of a sample of pension assets.
We are satisfied that IT controls relevant to financial reporting operated effectively at year-end. We noticed that a number of user access related deficiencies were identified. Compensating controls were tested or alternate procedures were performed.
Report of the Group Audit Committee (page 65) Accounting policies (page 251)
Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each component of the Group. Taken together, this enables us to form an opinion on the financial statements. We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each component.
Our audit of the significant components covers the reportable segments identified in the financial statements, together with the central functions of the Group based in the UK and overseas, and includes Finance, the Services function and Treasury. In assessing the risk of material misstatement to the Group financial statements, and to ensure that we had adequate quantitative coverage of significant accounts in the financial statements, we selected seven components covering entities within the UK and 10 other countries, which represent the principal business units within the Group.
Of the seven components selected, we performed an audit of the complete financial information of four components (‘full scope components’) which were selected based on their size or risk characteristics. For the remaining three components (‘specific scope components’), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the accounts and disclosures in the financial statements either because of the size of these accounts or their risk profile.
The table below illustrates the coverage obtained from the work performed by our audit teams. As the Group has historically made losses, we considered total assets, total equity and the absolute value of the amounts in the income statement (meaning the magnitude of the amounts without regard to their positive or negative value) to verify we had appropriate overall coverage on the income statement.
Changes from the prior year In Q4 2017, RBS completed a segmental reorganisation, which included:  Williams & Glyn, previously a specific scope component, was integrated into UK Personal and Business Banking (UK PBB).  Capital Resolution, previously a full scope component, with the exception of the Retail Mortgaged Backed Securities (RMBS)
Audit work of component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component team is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated by the primary audit engagement team to components was between £60 million and £115 million.
Accounting developments effective 1 January 2018 – IFRS 9 Financial Instruments IFRS 9 replaces the current financial instruments standard IAS 39 effective 1 January 2018. It represents a fundamental change to the way financial instruments are classified, measured and assessed for credit impairment. The Group has established a Group-wide programme to implement the necessary changes as a result of this standard and disclosed the impact of transition on equity. Our audit work on this accounting change has been performed throughout 2017, for the purpose of the transition disclosure included in the 2017 financial statements, and continues through 2018. Our procedures on the impact disclosed included:  Assessing the key interpretations made by management for compliance with IFRS 9  Classification and measurement: o Testing the intent of holding the instruments and their contractual characteristics in order to assess their classification
 Credit impairment: o Testing the assumptions and judgements used in the impairment models to calculate expected credit losses, including the incorporation of economic forecasts o Testing the data used to run the models o Testing the IT applications used in the credit impairment process
Other information The other information comprises the information included in the Annual Report and Accounts, including the Strategic Report (set out on pages 1 to 49, Governance (set out on pages 50 to 116), Business review (set out on pages 117 to 148), Capital and risk management (set out on pages 149 to 228), Additional information (set out on pages 357 to 371, Risk Factors (set out on pages 372 to 403, Shareholder information (set out on pages 404 to 407), Abbreviations and acronyms (set out on page 408), Glossary of terms (set out on pages 409 to 415), Index (set out on pages 416 to 418), and Important addresses (set out on page 419) other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.
 Group Audit Committee reporting (set out on page 65) – the section describing the work of the Group Audit Committee does not appropriately address matters communicated by us to the audit; or
 Directors’ statement of compliance with the UK Corporate Governance Code (set out on page 106) – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.
May 2016 to audit the financial statements of the Group for the period ending 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 2 years, covering periods from our appointment through 31 December 2017.
Jonathan Bourne (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 22 February 2018
Note: (1) The maintenance and integrity of the RBS web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions
Write down of goodwill and other intangible assets (29) (159) (1,332)
Profit/(loss) on remeasurement of retirement benefit schemes 4 90 (1,049) (73)
Recycled to profit or loss on ceding control of Citizens (6) — — 9
Foreign currency losses on hedges of net assets (6) (278) (176)
Changes in fair value of credit in financial liabilities designated at fair value through profit or loss - gross (126) — —
Movements in cash flow hedging reserve - amount recognised in equity — — 32
Notes: (1) In October 2015, all B shares were converted into ordinary shares of £1 each. (2) During 2017, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million has been credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion). The nominal value of £0.3 million (2015 – £1.0 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion (2015 - £0.2 billion) in respect of the movement in exchange rates since issue.
Net divestment of/(investment in) business interests and intangible assets 33 (199) (886) 391
Cash and cash equivalents at 31 December 36 122,605 98,570 103,592
The company is incorporated in the UK and registered in Scotland. Its accounts are presented in accordance with the Companies Act 2006. With the exception of investment property and certain financial instruments as described in Accounting policies 9, 14, 16 and 23, the accounts are presented on an historical cost basis.
In January 2016, the IASB amended IAS 12 ‘Income taxes’ to clarify the recognition of deferred tax assets in respect of unrealised losses.
All intergroup balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared under uniform accounting policies.
3. Revenue recognition Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those measured at fair value are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Negative effective interest accruing to financial assets is presented in interest payable.
Financial assets and financial liabilities held-for-trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss.
A curtailment occurs when the Group significantly reduces the number of employees covered by a plan. A plan amendment occurs when the Group introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when benefits are withdrawn or changed so that the present value of the defined benefit obligation decreases). A settlement is a transaction that eliminates all further obligation for part or all of the benefits.
Actuarial gains and losses (i.e. gains or and losses on remeasuring the net defined benefit asset or liability) are recognised in other comprehensive income in full in the period in which they arise.
6. Intangible assets and goodwill Intangible assets acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets' estimated economic lives using methods that best reflect the pattern of economic benefits and is included in Depreciation and amortisation. These estimated useful economic lives are: Computer software 3 to 12 years Other acquired intangibles 5 to 10 years
During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and economic viability are expensed as incurred as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised.
8. Impairment of intangible assets and property, plant and equipment At each balance sheet date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 23). Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences arising on nonmonetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale nonmonetary financial assets, for example equity shares, which are recognised in other comprehensive income unless the asset is the hedged item in a fair value hedge.
13. Tax Income tax expense or income, comprising current tax and deferred tax, is recorded in the income statement except income tax on items recognised outside profit or loss which is credited or charged to other comprehensive income or to equity as appropriate.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised.
14. Financial assets On initial recognition, financial assets are classified into held-tomaturity investments; held-for-trading; designated as at fair value through profit or loss; loans and receivables; or available-for-sale financial assets. Normal purchases of financial assets classified as loans and receivables are recognised on the settlement date; all other normal transactions in financial assets are recognised on the trade date.
Reclassifications - held-for-trading and available-for-sale financial assets that meet the definition of loans and receivables (nonderivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The Group typically regards the foreseeable future for this purpose as twelve months from the date of reclassification. Additionally, held-for-trading financial assets that do not meet the definition of loans and receivables may, in rare circumstances, be transferred to available-for-sale financial assets or to held-tomaturity investments. Reclassifications are made at fair value. This fair value becomes the asset's new cost or amortised cost as appropriate. Gains and losses recognised up to the date of reclassification are not reversed.
Fair value - the Group’s approach to determining the fair value of financial instruments measured at fair value is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments. Further details are given in Note 9 on the accounts.
A financial asset or group of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
The typical time frames from initial impairment to write off for the Group’s collectively-assessed portfolios are:  Retail mortgages: write off usually occurs within five years, or when an account is closed if earlier.  Credit cards: the irrecoverable amount is written off after 12 months; three years later any remaining amounts outstanding are written off.
 Overdrafts and other unsecured loans: write off occurs within six years.
Financial assets carried at fair value - when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in other comprehensive income and there is objective evidence that it is impaired, the cumulative loss is reclassified from equity to profit or loss. The loss is measured as the difference between the amortised cost (including any hedge accounting adjustments) of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-forsale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.
Held-for-trading - a financial liability is classified as held-fortrading if it is incurred principally for repurchase in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise.
19. Derecognition A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. The asset remains on the balance sheet if substantially all the risks and rewards have been retained. It is derecognised if substantially all the risks and rewards have been transferred.
20. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
21. Netting Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented gross.
The consideration for any ordinary shares of the company purchased by the Group (treasury shares) is deducted from equity. On the cancellation of treasury shares their nominal value is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance provisions of the Companies Act. On the sale or reissue of treasury shares the consideration received and related tax are credited to equity, net of any directly attributable incremental costs.
Hedge relationships are formally designated and documented at inception. The documentation identifies the hedged item and the hedging instrument and details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued.
25. Share-based compensation The Group operates a number of share-based compensation schemes under which it awards RBSG shares and share options to its employees. Such awards are generally subject to vesting conditions: conditions that vary the amount of cash or shares to which an employee is entitled. Vesting conditions include service conditions (requiring the employee to complete a specified period of service) and performance conditions (requiring the employee to complete a specified period of service and specified performance targets to be met). Other conditions to which an award is subject are non-vesting conditions (such as a requirement to save throughout the vesting period). The cost of employee services received in exchange for an award of shares or share options granted is measured by reference to the fair value of the shares or share options on the date the award is granted and takes into account non-vesting conditions and market performance conditions (conditions related to the market price of RBSG shares): an award is treated as vesting irrespective of whether any market performance condition or nonvesting condition is met. The fair value of options granted is estimated using valuation techniques which incorporate exercise price, term, risk-free interest rates, the current share price and its expected volatility. The cost is expensed on a straight-line basis over the vesting period (the period during which all the specified vesting conditions must be satisfied) with a corresponding increase in equity in an equity-settled award, or a corresponding liability in a cash-settled award. The cost is adjusted for vesting conditions (other than market performance conditions) so as to reflect the number of shares or share options that actually vest.
Provisions for litigation - the Group and members of the Group are party to legal proceedings in the United Kingdom, the United States and other jurisdictions, arising out of their normal business operations. The measurement and recognition of liabilities in respect of litigation involves a high degree of management judgement. Before the existence of a present obligation as the result of a past event can be confirmed, numerous facts may need to be established, involving extensive and time-consuming discovery, and novel or unsettled legal questions addressed. Once it is determined there is an obligation, assessing the probability of economic outflows and estimating the amount of any liability can be very difficult. In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. Furthermore, for an individual matter, there can be a wide range of possible outcomes and often it is not practicable to quantify a range of such outcomes. The Group’s outstanding litigation is periodically assessed in consultation with external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability. A detailed description of the Group’s material legal proceedings and a discussion of the nature of the associated uncertainties are given in Note 31 on the accounts.
(iii) Deferred tax The Group makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £1,740 million were recognised as at 31 December 2017 (2016 - £1,803 million).
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and temporary differences. Deferred tax assets are recognised in respect of unused tax losses and other temporary differences to the extent that it is probable that there will be future taxable profits against which the losses and other temporary differences can be utilised. The Group has considered their carrying value as at 31 December 2017 and concluded that, based on management’s estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets. These estimates are based on forecast performance and take into account Brexit, the Group’s plans to implement the UK ring-fencing regime and the resultant transfers between members of the Group.
It also uses the assumptions that market participants would use when pricing the asset or liability. In determining fair value the Group maximises the use of relevant observable inputs and minimises the use of unobservable inputs.
Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the Group’s own credit standing.
Accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2017 that would affect the Group from 1 January 2018 or later.
The measurement basis of the majority of the Group’s financial assets is unchanged on application of IFRS 9.
Hedge accounting IFRS 9’s hedge accounting requirements are designed to align the accounting more closely to the risk management framework; permit a greater variety of hedging instruments; and remove or simplify some of the rule-based requirements in IAS 39. The elements of hedge accounting: fair value, cash flow and net investment hedges are retained. The Group accounting policy choice is continue with the IAS 39 hedge accounting framework.
Credit impairment IFRS 9’s credit impairment requirements apply to financial assets measured at amortised cost, to those measured at fair value through other comprehensive income, to lease receivables and to certain loan commitments and financial guarantee contracts. On initial recognition a loss allowance is established at an amount equal to 12-month expected credit losses (ECL) that is the portion of life-time expected losses resulting from default events that are possible within the next 12 months. Where a significant increase in credit risk since initial recognition is identified, the loss allowance increases so as to recognise all expected default events over the expected life of the asset. The Group expects that financial assets where there is objective evidence of impairment under IAS 39 will be credit impaired under IFRS 9, and carry loss allowances based on all expected default events.
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted: determined by evaluating at the balance sheet date for each customer or loan portfolio a range of possible outcomes using reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions. The estimation of ECL also takes into account the time value of money. Recognition and measurement of credit impairments under IFRS 9 are more forward-looking than under IAS 39.
The result is an increase in overall credit impairment provisions when compared with the current basis of measurement under IAS 39.
Transition The classification and measurement and impairment requirements will be applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge accounting will be applied prospectively from that date.
IFRS 2 ‘Share-based payment’ was amended in June 2016 to clarify the accounting for net settlement of tax in respect of sharebased payments and the calculation of the cost of modified awards and those with vesting conditions that are not market conditions. IFRIC Interpretation 22 ‘Foreign Currency Transaction and Advance Consideration’ was issued in December 2016 clarifying the date of a foreign exchange transaction to be used on initial recognition of a related asset or other item.
Effective after 2018 IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17 ‘Leases’. There are no substantial changes to the accounting for leases by lessors nor for finance leases; operating leases will be brought on balance sheet through the recognition of assets representing the contractual rights of use, and liabilities will be recognised for the contractual payments that exist. The effective date is 1 January 2019.
In February 2018 the IASB amended IAS ‘Employee Benefits’ to clarify the need to update assumptions whenever there is a plan amendment, curtailment or settlement during the reporting period. The effective date is 1 January 2019.
Loans and advances to customers 10,409 10,706 11,268 Loans and advances to banks 277 246 340 Debt securities 348 306 317
Customer accounts: demand deposits 99 433 619 Customer accounts: savings deposits 445 432 446 Customer accounts: other time deposits 179 190 315 Balances with banks 175 97 45 Debt securities in issue 554 557 759 Subordinated liabilities 572 845 869 Internal funding of trading businesses 23 (4) 105
Other changes in the fair value of financial assets and liabilities designated as at fair value through profit or loss and related derivatives 99 (13) 375 Changes in the fair value of investment properties (14) (11) 2 Profit/(loss) on sale of securities 226 71 (4) Profit on sale of property, plant and equipment 75 18 91 Profit/(loss) on sale of subsidiaries and associates 245 273 (102) Loss on disposal or settlement of loans and receivables (35) (277) (558) Share of profits of associated entities 104 59 140 Other income (3) 88 66 151
Notes: (1) Negative interest on loans and advances is classed as interest payable and on customer deposits is classed as interest receivable. (2) Measured as the change in fair value from movements in the year in the credit risk premium payable by RBS. Ahead of adopting IFRS9 Financial Instruments from 1 January 2018, RBS has adopted the provisions in respect of the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss from 1 January 2017.
Property, plant and equipment depreciation and write down (see Note 16) 586 574 950
Write down of goodwill and other intangible assets (see Note 15) 29 159 1,332
There were no people employed in discontinued operations at 31 December 2017 (2016 - nil; 2015 - nil).
Share-based payments As described in the Remuneration report on page 103, the Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award Vesting conditions (1) Settlement
Value at Shares Value at Shares Value at Shares grant awarded grant awarded grant awarded £m (million) £m (million) £m (million)
Less: deferral of charge for amounts awarded for current year (133) (103) (97)
Income statement charge for amounts awarded in current year 209 240 276
Add: current year charge for amounts deferred from prior years 96 147 140
Income statement charge for amounts deferred from prior years 89 41 38
Variable compensation deferred from 2015 and earlier 140 147 16 6 1
Defined contribution schemes The Group sponsors a number of defined contribution pension schemes in different territories, which new employees are offered the opportunity to join.
The Main scheme corporate trustee is RBS Pension Trustee Limited (the Trustee), a wholly owned subsidiary of National Westminster Bank Plc, Principal Employer of the Main scheme. The Board of the Trustee comprises four member trustee directors selected from eligible active staff, deferred and pensioner members who apply and six appointed by the Group. Under UK legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities (the pensions that have been promised to members).
Investment strategy The assets of the Main scheme, which represent 90% of plan assets at 31 December 2017 (2016 - 89%), are invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including real estate and infrastructure.
The Main scheme employs derivative instruments to achieve a desired asset class exposure and to reduce the scheme’s interest rate, inflation and currency risk. This means that the net funding position is considerably less sensitive to changes in market conditions than the value of the assets or liabilities in isolation.
Major classes of plan assets as a percentage of total plan assets
Quoted equities - Consumer industry 6.7 4.6 - Manufacturing industry 1.8 1.8 - Energy and utilities 3.6 2.7 - Financial institutions 7.8 8.3 - Technology and telecommunications 1.9 2.3 - Other 0.1 0.8 Private equity 4.0 3.4 Index-linked bonds 30.6 31.4 Government fixed interest bonds 9.2 5.9 Corporate fixed interest bonds 15.8 17.9
The Main scheme’s holdings of derivative instruments are summarised in the table below: 2017 2016 Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities £bn £m £m £bn £m £m
At 31 December 2017, the gross notional value of the swaps was £57 billion (2016 - £56 billion) and had a net positive fair value of £3,045 million (2016 - £3,629 million).
Collateral is required on all swap transactions. The counterparty banks had delivered a net amount of £3,436 million of collateral at 31 December 2017 (2016 - £3,991 million).
The schemes do not invest directly in the Group but can have exposure to the Group within their investment programmes through indirect exposure to ordinary shares of the Group through index tracking investments, swaps contracts (before allowing for collateral posted against the mark value of the swaps) and cash deposits placed with National Westminster Bank Plc. The trustees of the respective schemes are responsible for ensuring that indirect investments in the Group do not exceed the 5% regulatory limit.
At 1 January 2016 30,703 30,966 2,981 3,244 34,708 35,152 3,130 3,574 Currency translation and other adjustments — — — — 533 602 — 69 Income statement
Current service cost — 199 — 199 — 264 — 264 Past service cost — 28 — 28 — 8 — 8 Loss on curtailments or settlements — — — — — 1 — 1
Contributions by plan participants and other scheme members — — — — 12 12 — — Liabilities extinguished upon settlement — — — — (43) (130) — (87)
At 1 January 2017 43,824 38,851 4,973 — 49,229 43,990 5,326 87 Currency translation and other adjustments — — — — 46 46 3 3 Income statement
Loss on curtailments or settlement — — — — — 66 — 66
4 Pensions continued Funding and contributions by the Group In the UK, the Trustees of defined benefit pension schemes are required to perform funding valuations every three years. The Trustees and the Company, with the support of the Scheme Actuary, agree the assumptions used to value the liabilities and a Schedule of Contributions required to eliminate any funding deficit. The funding assumptions incorporate a margin for prudence over and above the expected cost of providing the benefits promised to members, taking into account the sponsor’s covenant and the investment strategy of the scheme. Similar arrangements apply in the other territories where the Group sponsors defined benefit pension schemes. The last funding valuation of the Main scheme was at 31 December 2015 and next funding valuation is due at 31 December 2018, to be agreed by 31 March 2020.
The triennial funding valuation of the Main scheme as at 31 December 2015 determined the funding level to be 84%, pension liabilities to be £37 billion and the deficit to be £5.8 billion, subsequently reduced by a £4.2 billion cash payment in March 2016. Investment returns over the next 10 year period were forecast to absorb the £1.6 billion balance of the deficit. The average cost of the future service of current members is 35% of basic salary before contributions from those members; it includes the expenses of running the scheme.
Assumptions Placing a value on the Group’s defined benefit pension schemes’ liabilities requires the Group’s management to make a number of assumptions, with the support of independent actuaries who provide advice and guidance to the Group. The ultimate cost of the defined benefit obligations to the Group will depend upon actual future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be higher or lower than expected.
Inflation assumption (RPI) 3.1 3.2 Retail price index RPI swap yield curve
4 Pensions continued The table below shows how the present value of the defined benefit obligation would change if the key assumptions used were changed. The sensitivity analysis presented below may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
0.25% additional rate of increase in pensions in payment 1,328 1,339
The experience history of Group schemes is shown below: Main Scheme All schemes
Experience gains/(losses) on plan assets 1,580 8,562 (415) 4,629 986 1,728 9,254 (458) 5,171 1,097
Actual return on plan assets 2,735 9,872 703 5,766 1,997 3,013 10,708 749 6,485 2,270
Fees payable for the audit of the Group’s annual accounts 4.0 4.0 - the audit of the company’s subsidiaries 22.9 20.7
Other assurance services — 0.1 Corporate finance services (6) — 1.3
Notes: (1) Includes fees for the period EY were principal Group auditor (2016 - 1 January 2016 – 31 December 2016; Deloitte 2016 to effective resignation on 24 March 2016.) (2) Comprises fees of £1.1 million (2016 - £1.1 million) in relation to reviews of interim financial information, £2.5 million (2016 - £2.2 million) in respect of reports to the Group’s regulators in the UK and overseas, £0.7 million (2016 - £0.7 million) in relation to non-statutory audit opinions. (3) Comprises fees of £0.2 million (2016 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the
Group. (4) Includes fees for the period Deloitte were principal Group auditor (2016 1 January 2016 to effective resignation on 24 March 2016) (5) Comprises no fees (2016 - nil) in relation to revenues of interim financial information, no fees (2016 - £10 million) in respect of reports to the Group’s regulators in the UK and overseas, no fees (2016 - £0.2 million) in respect of internal controls assurance, and no fees in relation to non-statutory audit opinions. (6) Comprises no fees (2016 £1.4 million) in respect of work performed by the auditors as reporting accountants as debt and equity issuances undertake by the Group, including securitisations, no fees (2016 - £0.1 million), and no fees (2016 – nil) in relation to working capital report in correction with a circular to shareholders.
Reduction in the carrying value of deferred tax assets (30) (317) —
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 19.25% (2016 – 20.00%; 2015 – 20.25%) as follows: 2017 2016 2015 £m £m £m
Notes: (1) In recent years, the UK government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 20% with effect from 1 April 2015, 19% from 1 April 2017 and 17% from 1 April 2020. The Finance (No 2) Act 2015 restricts the rate at which tax losses are given credit in future periods to the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by this Act. Deferred tax assets and liabilities at 31 December 2017 take into account the reduced rates in respect of tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
7 Earnings per ordinary share Earnings per ordinary share have been calculated based on the following: £m £m £m
Loss from discontinued operations attributable to ordinary shareholders — — (1,207)
An agreement on 25 June 2014 between RBS and Her Majesty’s Treasury (HMT) set out the terms for the retirement of the Dividend Access Share (DAS).
On 22 March 2016 the DAS was retired on payment the final dividend of £1,193 million to HMT; the DAS was re-designated as a single B share which was then cancelled.
Held-for- through profit Hedging Available- Loans and Held-to- Other trading or loss derivatives for-sale receivables maturity assets £m £m £m £m £m £m £m £m
Note: (1) Includes items in the course of collection from other banks of £1,017 million (2016 - £781 million).
Notes: (1) Includes items in the course of transmission to other banks of £214 million (2016 - £295 million). (2) The carrying amount of other customer accounts designated as at fair value through profit or loss is £114 million (2016 - £155 million) higher than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively. Measured as the change in fair value from movements in the period in the credit risk premium payable.
Gains on financial assets/liabilities designated as at fair value through profit or loss 60 13 388
Losses on disposal or settlement of loans and receivables (35) (277) (558)
Offsetable instruments Offsetable potential not recognised by IFRS Effect of Net amount after Instruments master netting Other the effect of netting outside IFRS Balance and similar Cash financial arrangements and netting Balance
Loans and deposits on the balance sheet include cash collateral given or taken against the derivative portfolio. Where offset is available but not recognised under IFRS, this is reflected in the cash collateral column.
9 Financial instruments - valuation Valuation of financial instruments carried at fair value Control environment RBS's control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent of the businesses entering into the transactions. There are specific controls to ensure consistent pricing policies and procedures, incorporating disciplined price verification. RBS ensures that appropriate attention is given to bespoke transactions, structured products, illiquid products and other instruments which are difficult to price.
Independent price verification (IPV) IPV is a key element of the control environment. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team independent of those trading the financial instruments, in the light of available pricing evidence.
IPV differences are classified according to the quality of independent market observables into IPV quality bands linked to the fair value hierarchy principles, as laid out in IFRS 13 ‘Fair Value Measurement’. These differences are classified into fair value levels 1, 2 and 3 (with the valuation uncertainty risk increasing as the levels rise from 1 to 3) and then further classified into high, medium, low and indicative depending on the quality of the independent data available to validate the prices. Valuations are revised if they are outside agreed thresholds.
Governance framework IPV takes place at least each month end date, for all fair value positions. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Pricing Unit determines IPV policy, monitors adherence to that policy and performs additional independent reviews of highly subjective valuation issues.
The Modelled Product Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure being reviewed by the RBS Pricing Model Risk team. The NatWest Markets Valuation Committee is made up of valuation specialists and senior business representatives from various functions and oversee pricing, reserving and valuations issues. This committee meets monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by the NatWest Markets Valuation Committee and to discuss other relevant matters including prudential valuation.
Valuation techniques RBS derives fair value of its instruments differently depending on whether the instrument is a non-modelled or a modelled product.
Inputs to valuation models Values between and beyond available data points are obtained by interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk. The principal inputs to these valuation techniques are as follows:  Bond prices - quoted prices are generally available for government bonds, certain corporate securities and some mortgage-related products.
9 Financial instruments - valuation continued  Interest rates - these are principally benchmark interest rates such as the London Interbank Offered Rate (LIBOR), Overnight Index Swaps (OIS) rate and other quoted interest rates in the swap, bond and futures markets.
 Foreign currency exchange rates - there are observable prices both for spot and forward contracts and futures in the world's major currencies.
 Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres.
 Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time. Correlation measures the degree which two or more prices or other variables are observed to move together.
 Prepayment rates - the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, RBS considers the value of the prepayment option.
Credit valuation adjustments (CVA) CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively managed by a credit and market risk hedging process, and therefore movements in CVA are partially offset by trading revenue on the hedges.
Bid-offer, liquidity and other reserves Fair value positions are adjusted to bid (long positions) or offer (short positions) levels, by marking individual cash positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
9 Financial instruments - valuation continued Bid-offer adjustments for each risk factor (including delta (the degree to which the price of an instrument changes in response to a change in the price of the underlying), vega (the degree to which the price of an instrument changes in response to the volatility in the price of the underlying), correlation (the degree to which prices of different instruments move together) are determined by aggregating similar risk exposures arising on different products. Additional basis bid-offer reserves are taken where these are charged in the market.
Funding valuation adjustment (FVA) FVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate funding costs and benefits that arise in relation to uncollateralised derivative exposures.
The fair value of RBS's derivative financial liabilities is also adjusted to reflect RBS's own credit risk through debit valuation adjustments (DVA). Expected gains are applied to estimated potential future negative exposures, the modelling of which is consistent with the approach used in the calculation of CVA. Expected gains are determined from market implied probabilities of default and recovery levels. FVA is considered the primary adjustment applied to derivative liabilities. The extent to which DVA and FVA overlap is eliminated from DVA.
9 Financial instruments - valuation continued The own credit adjustments (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below. The cumulative adjustments below represent reductions/(increases) to the balance sheet liability amounts.
Cumulative own credit adjustment (2) HFT DFV liabilities DFV Derivatives Total £m £m £m £m £m
Notes: (1) The OCA does not alter cash flows and is not used for performance management. (2) Includes wholesale and retail note issuances. (3) The reserve movement between periods will not equate to the reported profit or loss or other comprehensive income related to own credit. RBS has early adopted the provisions within IFRS 9 Financial Instruments in respect of the presentation of gains and losses on financial liabilities designated at fair value through profit and loss from 1 January 2017. The balance sheet reserve is stated by converting underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.
(4) The cumulative adjustment for debt securities in issue is opposite to that for subordinated liabilities: debt securities in issue were issued relatively recently at wider than current spreads, whilst many of the subordinated liabilities were issued before the financial crisis at significantly tighter spreads.
 RBS five year CDS credit spreads tightened to 75 basis points at 31 December 2017 (31 December 2016 – 125 basis points).
9 Financial instruments: carried at fair value - valuation hierarchy continued
Level 1 Level 2 Level 3 Total Level 3 sensitivity (5) 2016 £bn £bn £bn £bn Favourable (£m) Unfavourable (£m)
Level 2 instruments include non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives.
Level 3: instruments valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, asset-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
(3) For an analysis of debt securities (by issuer, measurement classification and analysis of asset backed securities) and derivatives (by type of contract) refer to Capital and risk management - Credit risk.
(5) Sensitivity represents the favourable and unfavourable effect on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs in RBS’s valuation techniques or models. Level 3 sensitivities are calculated on a trade or low level portfolio basis and hence these aggregated figures do not reflect the correlation between some of the sensitivities. In particular, for some portfolios, the sensitivities may be negatively correlated where a downward movement in one asset would produce an upward movement in another, but due to the additive presentation above, this correlation cannot be shown.
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that have a material impact on the valuation of level 3 financial instruments.
DCF based on recoveries Correlation (29%) 86.05% Interest rate delta (0.38%) 2.61%
Credit 0.2 0.1 DCF based on recoveries Credit spreads 0.1 bps 500 bps Option pricing model Correlation (50%) 80%
Upfront points 0% 99% Recovery rate 10% 40% Interest and foreign exchange contracts 1.4 1.5 Option pricing model Correlation (75%) 100%
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected pay-outs. Similarly to price, an instrument’s yield may be compared with other instruments’ yields either directly or indirectly.
(5) Valuation: for private equity investments, risk may be measured by beta, estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value.
(6) Correlation: measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(7) Volatility: a measure of the tendency of a price to change with time. (8) Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve. (9) Upfront points: where CDS contracts are standardised, the inherent spread of the trade may exceed the standard premium paid or received under the contract. Upfront points will compensate for the difference between the standard premium and the actual premium at the start of the contract. (10) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
9 Financial instruments - valuation continued The Level 3 sensitivities on the previous page are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the non-correlated sum of the additive figures as shown in the above table.
Non-modelled products Non-modelled products are generally quoted on a price basis and can therefore be considered for each of the three levels. This is determined by the market activity, liquidity and valuation uncertainty of the instruments which is in turn measured from the availability of independent data used by the IPV process to allocate positions to IPV quality levels.
The availability and quality of independent pricing information are considered during the classification process. An assessment is made regarding the quality of the independent information. For example, where consensus prices are used for non-modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be Level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating. However, where an instrument is generally considered to be illiquid, but regular quotes from market participants exist, these instruments may be classified as Level 2 depending on frequency of quotes, other available pricing and whether the quotes are used as part of the IPV process or not.
Level 3 The following table shows the movement in level 3 assets and liabilities in the year. 2017 2016
FVTPL AFS Total Total FVTPL AFS Total Total assets (2) assets assets liabilities assets (2) assets assets liabilities £m £m £m £m £m £m £m £m
Amount recorded in the income statement (1) (654) 82 (572) (341) (124) 5 (119) (70)
Amount recorded in the statement of comprehensive income — 2 2 — — 71 71 —
Notes: (1) There were £240 million net losses on HFT instruments (2016 - £45 million) recorded in income from trading activities in continuing operations. Net gains on other instruments of £9 million (2016 - £4 million losses) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued operations.
9 Financial instruments - fair value of financial instruments not carried at fair value continued
9 Financial instruments: fair value of financial instruments not carried at fair value continued
Loans and advances to banks and customers In estimating the fair value of loans and advances to banks and customers measured at amortised cost, RBS’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing. This method is used for portfolios where counterparties have external ratings: institutional and corporate lending in NatWest Markets.
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. This approach is adopted for lending portfolios in UK PBB, Ulster Bank RoI, Commercial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios.
For certain portfolios where there are very few or no recent transactions, such as Ulster Bank RoI’s portfolio of lifetime tracker mortgages, a bespoke approach is used.
Loans and advances to banks 30,153 98 30,251 30,078 60 30,138
Loans and advances to customers 108,990 240,929 349,919 115,925 236,025 351,950
Settlement balances and short positions 4,938 26,433 31,371 5,010 20,712 25,722
Cash and balances at central banks 98,337 — — — — —
Loans and advances to banks 10,792 633 94 — — —
Settlement balances and other liabilities 5,030 — — — — —
10 Financial instruments – maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2016 £m £m £m £m £m £m
Unwind of discount (recognised in interest income) (24) (62) — (86) (113)
Notes: (1) Includes nil relating to loans and advances to banks (2016 - nil). (2) The table above excludes impairments relating to securities.
Note: (1) Impairment provisions individually assessed on balances of £3,418 million (2016 - £4,186 million).
Financial and non-financial assets recognised on the balance sheet, obtained during the year by taking possession of collateral or calling on other credit enhancements, were £30 million (2016 - £30 million).
For cash flow hedging relationships, the initial and ongoing effectiveness is assessed by comparing movements in the fair value of the expected highly probable forecast interest cash flows with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management feels appropriate. The method of calculating hedge ineffectiveness is the hypothetical derivative method.
For fair value hedge relationships of interest rate risk, the hedged items are typically large corporate fixed-rate loans, government securities, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. At 31 December 2017, fixed rate financial assets of £36 billion (2016 - £29 billion) and fixed rate financial liabilities of £22 billion (2016 - £23 billion) were hedged by interest rate swaps in fair value hedge relationships.
Cash flow hedging Interest rate contracts 1,989 1,295 3,079 1,419 Exchange rate contacts 63 37 259 —
Gross gains of £58 million (2016 - £115 million) and gross losses of £12 million (2016 - £107 million) were realised on the sale of available-for-sale securities in continuing operations.
The following table analyses available-for-sale debt securities and the related yield (based on weighted averages) by remaining maturity and issuer. 0-1 years 1-5 years 5-10 years Over 10 years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Gross gains of £89 million (2016 - £73 million) and gross losses of £1 million (2016 - £10 million) were realised on the sale of availablefor -sale equity shares in continuing operations. There were no gains or losses in discontinued operations.
Dividend income from available-for-sale equity shares was £13 million (2016 - £13 million) in continuing operations and nil (2016 - nil) in discontinued operations.
Currency translation and other adjustments 283 (3) 280 1,273 76 1,349
Net book value at 31 December 5,558 985 6,543 5,558 922 6,480
The recoverable amounts for all CGUs at 31 December 2017 were based on value in use, using management's latest five-year revenue and cost forecasts. The long-term growth rates have been based on expected nominal growth of the CGUs. The pretax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
The analysis of goodwill by reportable segment is shown in Note 37.
Other intangible assets are reviewed for indicators of impairment. In 2017 £29 million (2016 - £159 million) of previously capitalised software was impaired primarily as a result of software which is no longer expected to derive future economic benefit.
Accumulated impairment, depreciation and amortisation At 1 January — 1,177 72 799 1,784 588 4,420 Transfers to disposal groups — (223) (5) (1) (18) — (247) Currency translation and other adjustments — (35) — — (18) — (53) Reclassifications — 57 — (57) — — — Write down of property, plant and equipment — 122 — — 3 — 125 Disposals and write-off of fully depreciated assets — (34) (14) (176) (159) (266) (649) Charge for the year — 88 5 64 161 143 461 At 31 December — 1,152 58 629 1,753 465 4,057
Net book value at 31 December 1,093 1,863 75 356 616 599 4,602
Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2016 £m £m £m £m £m £m £m
Change in fair value of investment properties (11) — — — — — (11) Disposals and write-off of fully depreciated assets (52) (175) (35) (118) (228) (496) (1,104)
Rental income from investment properties was £84 million (2016 - £79 million). Direct operating expenses of investment properties in continuing operations were £9 million (2016 - £16 million).
17 Prepayments, accrued income and other assets 2017 2016 £m £m
Pension schemes in net surplus (refer to Note 4) 392 276
Note: (1) Interests in associates includes interest in Alawwal Bank £1,052 million (2016 - £1,083 million) and Business Growth Fund £316 million (2016 - £256 million).
(a) Profit/(loss) from discontinued operations, net of tax 2017 2016 2015 £m £m £m
Total profit from discontinued operations, net of tax — — 1,541
Total protection customer mortgage backed and other Property insurance (1) redress securities (2) regulatory (3) and other (4) (5) £m £m £m £m £m £m
Currency translation and other movements — 4 (541) (31) 35 (533)
The principal assumptions underlying RBS’s provision in respect of PPI sales are: assessment of the total number of complaints that RBS will receive before 29 August 2019; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of RBS’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FCA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FCA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
policy exists. (2) Average uphold rate per customer initiated claims received directly by RBS to end of timebar for both PPI (mis-sale) and Plevin (commission), excluding those for which no PPI policy exists. (3) Average redress for PPI (mis-sale) and Plevin (commission) pay-outs. (4) Processing costs per claim on a valid complaints basis, includes direct staff costs and associated overhead - excluding FOS fees.
Background information in relation to PPI claims is given in Note 31.
(2) In the US, RBS is subject to civil litigation and various investigations relating to its issuance and underwriting of US mortgage-backed securities (RMBS). An additional charge of US$650 million (£492 million) was taken in Q4 2017 in connection with these matters, resulting in a year to date charge of US$971 million (£714 million). Detailed descriptions of RBS’s legal proceedings and discussion of the associated uncertainties are given in Note 31.
In July 2017, RBS reached a settlement with the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae and Freddie Mac, to resolve claims by FHFA in relation to RBS's issuance and underwriting of approximately US$32 billion (£25 billion) of RMBS in the US. As part of the settlement, FHFA's outstanding litigation against RBS relating to those securities was withdrawn.
(4) RBS recognised a £750 million provision in 2016 as a consequence of the announcement that HM Treasury is seeking a revised package of remedies that would conclude its remaining State Aid commitments. An additional charge of £50 million was taken in Q2 2017 following further revisions to the package, taking the total provision to £800 million.
Overseas tax losses carried forward - Ulster Bank Ireland DAC 259 249
National Westminster Bank plc – A deferred tax asset of £541 million has been recognised in respect of total losses of £3,092 million. The losses arose principally as a result of significant impairment and conduct charges between 2009 and 2012 during challenging economic conditions in the UK banking sector. National Westminster Bank plc returned to tax profitability during 2015 and expects the deferred tax asset to be substantially consumed by future taxable profits by the end of 2024. A reduction in annual profits by £120 million would extend the recovery of the deferred tax asset by one year.
Deferred tax liabilities of £255 million (2016 - £258 million; 2015 - £256 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Dividends received from overseas are largely exempt from UK tax.
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 2006.
2017 - final redemption £m £m £m £m £m £m £m
Currently 2018 2019 2020-2022 2023-2027 Thereafter Perpetual Total 2017 - call date £m £m £m £m £m £m £m £m 2016 - final redemption £m £m £m £m £m £m £m
US$ 1,000 million series 1 non cumulative convertible preference shares of US$ 0.01 9.118% (partial redemption) Ineligible 48 —
$242 million 7.25% Series H non-cumulative preference shares (callable) Ineligible 186 —
$751 million 5.75% Series L non-cumulative preference shares (callable) Ineligible 577 —
CHF124 million 9.375% subordinates notes March 2022 Tier 2 101 —
€100 million floating rate subordinated notes 2017 Tier 2 90 —
US$ 300 million 8.6250% non-cumulative preference shares (callable) Tier 1 178 —
RBS NV and subsidiaries €15 million floating rate notes 2022 (partial redemption) Tier 2 2 —
€38 million 11.375% perpetual tier two capital (partial redemption) Tier 2 6 —
Note: (1) 46 million shares with a total nominal value of £0.3 million were redeemed in September and December 2017. (2016 – 61.4 million shares with a total nominal value of £0.3 million were redeemed).
Ordinary shares There is no authorised share capital under the company’s constitution. At 31 December 2017, the directors had authority granted at the 2017 Annual General Meeting to issue up to £1,184 million nominal of ordinary shares other than by preemption to existing shareholders.
During 2017, the company allotted and issued the following new ordinary shares of £1 each: Month
The B shares carried no voting rights at general meetings of ordinary shareholders and were convertible at any time at HM Treasury’s option into ordinary shares at the rate of ten B shares for each ordinary share. In October 2015, all of the B shares were converted into ordinary shares of £1 each.
Other securities Certain of RBS's subordinated securities in the legal form of debt are classified as equity under IFRS.
In December 2017, the company redeemed in whole the Series F, H, L and 1 non-cumulative preference shares of US$0.01 and Series 1 non-cumulative convertible preference shares of £0.01. In September 2016, the company redeemed in whole the Series R and T, non-cumulative preference shares of US$0.01.
Under existing arrangements, no redemption or purchase of any non-cumulative preference shares may be made by the company without the prior consent of the Prudential Regulation Authority.
Additional Tier 1 notes (1) US$2.0 billion 7.5% notes callable August 2020 (2) 1,278 1,278 US$1.15 billion 8% notes callable August 2025 (2) 734 734 US$2.65 billion 8.625% notes callable August 2021 (3)
(5) Preferred securities in issue - £93 million RBS Capital Trust D, fixed/floating rate non-cumulative trust preferred securities.
Capital redemption reserve - under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company’s paid up share capital. On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of the capital redemption reserve were transferred to retained earnings.
Own shares held - at 31 December 2017, 16 million ordinary shares of £1 each of the company (2016 - 39 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts purchased 30 million ordinary shares and delivered 53 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans.
After 1 year but within 5 years 4,686 (444) (94) — 4,148 257
Total Within 1 but within but within After 5 Within 1 but within but within After 5 year 2 years 5 years years year 2 years 5 years years £m £m £m £m £m £m £m £m £m £m - cars and light commercial vehicles 5 7 7 — 19 5 5 12 — 22
The table below analyses the asset categories for those ownasset securitisations where the transferred assets continue to be recorded on RBS balance sheet.
Held by third Held by Held by third Held by Assets parties RBS (1) Total Assets parties RBS (1) Total £m £m £m £m £m £m £m £m
Note: (1) Debt securities retained by RBS may be pledged with central banks.
28 Structured entities continued Unconsolidated structured entities RBS’s interests in unconsolidated structured entities are analysed below.
Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level.
Note: (1) Associated liabilities were £23,692 million (2016 - £17,975 million).
Assets pledged as collateral The Group pledges collateral with its counterparties in respect of derivative liabilities and bank and other borrowings.
30 Capital resources RBS's regulatory capital resources in accordance with PRA definitions were as follows: PRA transitional basis £m £m
Qualifying instruments issued by subsidiaries and held by third parties 140 339
It is RBS policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its riskweighted assets (the assets and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. RBS has complied with the PRA’s capital requirements throughout the year.
31 Memorandum items Contingent liabilities and commitments The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2017. Although RBS is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of RBS's expectation of future losses. More than More than 1 year but 3 years but Less than less than less than Over 1 year 3 years 5 years 5 years £m £m £m £m £m £m
Standby facilities, credit lines and other commitments 60,079 22,884 36,511 5,467 124,941 138,645
Guarantees - RBS gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that RBS will meet a customer's specified obligations to third party if the customer fails to do so. The maximum amount that RBS could be required to pay under a guarantee is its principal amount as in the table above. RBS expects most guarantees to expire unused.
Notes: (1) Predominantly property leases. (2) Of which due within 1 year: £276 million (2016 - £231 million).
RBS Group has accrued £11.6 million for its share of estimated FSCS levies.
Litigation, investigations and reviews The Royal Bank of Scotland Group plc (the ‘company’ or RBSG) and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action (‘Matters’) in the United Kingdom (UK), the United States (US), the European Union (EU) and other jurisdictions.
In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a result of adverse impacts or restrictions on RBS’s reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. RBS cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.