Our purpose is to serve customers well. We are building a safe, simple and customer-focused bank. To do so we are doing business in a way that aligns with our values and considers the longer-term impacts of our decisions and actions. Underpinning that ambition is our blueprint for lasting success.
Notes: (1) c.14% at the end of 2021, previous target stated as >13%. (2) Excluding strategic costs and conduct and litigation costs.
Many shareholders are now benefitting from more accessible information and helping the environment too. If you haven’t already tried it, visit our online Annual Report.
The scope of work performed by the Group’s independent auditor as part of their review of other information included in the 2018 Annual Report and Accounts is described in the Independent auditor’s report to the members of The Royal Bank of Scotland Group plc on pages 166 to 175. In addition, The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to provide limited independent assurance over selected sustainability content marked with (*) within the Strategic Report, as at and for the period ended 31 December 2018. The assurance engagement was planned and performed in accordance with the International Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. An opinion was issued and is available on rbs.com. This opinion includes details of the scope, respective responsibilities, work performed, limitations and conclusions.
An overview of our business performance, including our external operating environment and how we are building a more sustainable bank.
Note: (1) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
Female representation in our top c.4,000 roles Women in FinanceEmployee engagement score 2018 ‘Women in Finance Awards Employer of the Year’
The only UK Bank to be included in the DJSI World and Europe Indices.
In 2018 the bank delivered a good financial performance, despite an uncertain economic outlook and a highly competitive environment. Paying a dividend for the first time in a decade showed continued progress in building a stronger, safer bank that is capable of delivering improving returns for shareholders.
With the bank financially stronger and the largest legacy issues resolved, the Board and Management Team are focused on delivering a more consistent and improved level of customer service across all areas. Customers’ expectations of all service providers are high and the range of competitors in the market using diverse delivery mechanisms is as wide as it has ever been.
Shareholder returns and privatisation Our stronger financial position has enabled us to provide clarity on how we intend to return excess capital to shareholders. We believe that to sustain a sound bank of this kind we need a strong capital base. We paid our first ordinary dividend in a decade of 2 pence per share at our 2018 interim results. We are pleased to announce that, subject to shareholder approval being obtained at the 2019 Annual General Meeting, we will pay a final dividend of 3.5 pence per share and a special dividend of 7.5 pence per share. Together this will mean over £1.6 billion in capital returns to shareholders for the Financial Year 2018. We expect to maintain ordinary dividends of around 40% of attributable profit.
The journey towards a return to private ownership continues and further progress was made in 2018. In June, the government undertook a further sell down of its majority stake in the bank, selling 925 million shares, raising total proceeds of £2.5 billion, and reducing its stake to 62.3%. In addition, the Chancellor indicated in the Autumn Budget that the UK government plans fully to exit its ownership of RBS by 2024.
As a predominantly UK and RoI focused bank, our performance and lending growth will broadly reflect those economies. UK economic growth remained behind its long term average in 2018. While the inflationary pressure induced by sterling’s depreciation post the EU referendum subsided, consumer confidence remains muted. It remains to be seen what fiscal and monetary policy levers the Bank of England will pull in the event of an economic downturn, but lower interest rates for longer would affect the bank’s ability to deliver significant income growth.
We have seen good progress on the revised scheme to satisfy our remaining State Aid obligations. In 2017, Her Majesty’s Treasury agreed with the European Commission a two part scheme comprising of a Capability & Innovation Fund, and an incentivised transfer of some of our Small and Medium sized Enterprise customers who were due to move to Williams & Glyn. We welcome the progress that the independent body Banking Competition Remedies Ltd has made and are operationally ready to fully support the switching scheme and impacted customers at its launch.
Ring-fence regulation In 2018, we continued to reshape the bank in response to UK ring-fencing legislation. This involved transferring 4.5 million customers between different legal entities. In July, we reached a key milestone when the Scottish Court approved the bank’s request to transfer the customers who were affected by a change in legal entity. We also introduced some significant changes to the way our Boards operate to comply with regulatory requirements. We met the PRA deadline on 1 January 2019 and are fully ring-fence compliant. This has been a complex project and I am pleased it has been undertaken with minimal impact on customers.
Shareholders We have continued to engage actively with our shareholders. A resolution to establish a formal Shareholder Committee was requisitioned by a group of shareholders at our AGM in 2018. It did not receive approval, in part, we believe, because we have made efforts to engage with shareholders large and small. Our investor relations efforts are highly rated. Our Sustainable Banking Committee has met a wide range of stakeholders for a number of years. Last year we held retail shareholder events in Glasgow and Birmingham. The events gave shareholders the opportunity to meet with our Board and ask questions on performance and strategy. Feedback was positive and we plan to hold more events in 2019.
Diversity and inclusion In 2014, we set ourselves a target to have at least 30% of roles in the three most senior levels of each of our businesses filled by women by 2020. In 2018, on aggregate across the bank, this representation stands at 37%. We also are aspiring to achieve full gender balance at all levels of our business by 2030.
Penny Hughes resigned as a nonexecutive director on 30 May and Ewen Stevenson resigned as Chief Financial Officer and Director on 30 September. I would like to thank Penny and Ewen for all their hard work and dedication to RBS.
Chief Executive’s review Ross McEwan Chief Executive 2018 was a year of strong progress on our strategy - we settled our remaining major legacy issues, paid our first dividend in ten years and delivered another full year bottom line profit. However, while our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are fully focused on closing this gap.
Today we are reporting a pre-tax operating profit of £3.4 billion and a bottom line attributable profit of £1.6 billion for 2018. In addition, we are pleased to propose a full year ordinary dividend of 3.5 pence per share, and a special dividend of 7.5 pence per share. These are in addition to the ordinary dividend we paid at our interim results. Together, we will have returned £1.6 billion to shareholders, and around £1 billion to the UK taxpayer in dividends. We also have shareholder approval to participate in a directed buyback should the government seek to dispose of a portion of its shares.
The UK economy faces a heightened level of uncertainty related to the ongoing Brexit negotiations. We have continued to support our customers, providing £30.4 billion in gross new UK mortgage lending in 2018, and Commercial Banking made or renewed commitments of around £30 billion of term lending facilities to mainly UK businesses. Our Commercial and
Business Banking businesses supported total lending of more than £100 billion in 2018.
We have also committed an additional £2 billion to our Growth Fund to support British business, taking the total fund to £3 billion. This fund is helping businesses manage their supply chains in what is a very uncertain time. These actions help maintain our position as the largest supporter of UK business.
Our long-term target remains to reach a cost to income ratio of below 50%, however we note that as an industry we are required to carry additional costs to deal with Brexit and the ongoing operational obligations of ringfencing. Given the continued low rate environment and highly competitive mortgage market, coupled with the uncertainty in the economy, income remains under pressure. We continue to focus on cost reduction to ensure we are preparing our business for the future and to meet our customers and shareholders needs.
In 2019, we are committing to reducing our operating costs by c.£300 million. Our consistent delivery on cost targets in recent years gives me the confidence we will achieve this.
Strength and Sustainability The bank’s financial strength is much improved. Our Common Equity Tier 1 ratio has increased from 8.6% at the end of 2013 to 16.2% at the end of 2018. This progress helped us to obtain a clear pass in the 2018 Bank of England stress test - a very important milestone. Alongside our financial strength we have continued to build greater resilience into our systems, helping to protect our customers who are at greater risk of fraud and scams more than ever before. We are the first and only UK bank to partner with National Trading Standards on their Friends Against Scams initiative. More than 31,000 colleagues completed the training in 2018 and we have committed to training a million customers by 2020.
Customer Experience While our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are very aware that we need to deliver
better service, more consistently. The Competition and Markets Authority (CMA) results, which now provide the public with a ranking of banks’ performance for customers, bring this into sharp focus. With the large major legacy issues behind us, we are putting all of our focus into improving our customer experience.
Innovating and investing to improve customer service We have taken a dual approach to innovation by transforming our core banking services and delivering new products and services outside of traditional banking. In 2018, we continued to invest in our existing infrastructure, improving system resilience and migrating to latest in cloud technologies. Last year we experienced 19 Criticality 1 Incidents, compared to 318 four years ago.
Our customers continued to migrate to our mobile app during 2018. In UK PBB we now have 6.4 million regular mobile customers, 16% higher than 2017. Today close to three quarters of active current account customers in UK PBB are regular digital users. Sales through our digital channels in UK PBB are up 19% on last year and now represent almost half of all product sales. Four years ago this figure would have been 26%.
We are learning a lot from these innovations and applying our findings back into the core bank.
2019, a year of focusing forward In 2019, we will focus forward, into a rapidly changing market. We have set annual goals for 2019 based around our five priorities in order to keep up momentum on the delivery of our strategic plan. There are two areas in particular that we need to focus on – customer experience and simplifying the bank. This year we aim to spend £1 billion on upgrading legacy infrastructure, improving systems, processes and delivering new innovations which will improve our customers’ experience. We will simplify the bank further in 2019, given this we have set a operating cost reduction target of c.£300 million for 2019, and continue to strive for a sub 50% cost to income ratio.
Cora can answer most customer queries and is available to chat 24/7, meaning customers can always get a response in seconds, whatever the time of day.
This 24/7 approach to customer service and Cora’s ability to learn quickly are resulting in great feedback, with 83 per cent of customers giving a 4 or 5 star rating.
UK GDP grew by 1.4% in 2018, down from a 1.8% rise in 2017. Weaker business investment has been a contributing factor. Between Q3 2018 and Q4 2018, business investment fell by 1.4%, the fourth consecutive quarterly decline, meaning investment was 3.7% lower in Q4 2018 compared with a year previously. Business borrowing increased slightly towards the end of 2018, with loans to non-financial companies up 2.6% in the year to December 2018, compared with 2.1% at the end of 2017. However, within that, it was larger firms who were primarily responsible for the growth in lending (up 4% in the year to December 2018). In comparison, SMEs loan growth was 0.1% year on year. Annual inflation hovered just above the Monetary Policy Committee’s target in December 2018, at 2.1%.
The programme won Gold for Best Educational Programme at the Corporate Engagement Awards in 2018 and, as MoneySense enters its 25th year, we are proud of the difference it’s making to young people and our communities.
Vianney Heeren, Corporate Treasurer says: ‘The transaction reflects Schiphol’s ambition to be the most sustainable airport. Proceeds of the bond issue will be used to invest in clean transportation and green buildings. NatWest Markets did an outstanding job in making this deal a success.’
In 2018 the key influences review involved interviews with internal and external stakeholders and a cross-bank workshop.
For more on our key influences process refer to the Sustainable Banking pages on rbs.com
Generating sustained returns To generate sustained returns to its stakeholders, RBS needs to have a robust business model with a wellmanaged cost base that adapts and responds to changing socio-economic and environmental factors.
Competition Regulators continue to encourage competition in the banking sector, with January 2018 seeing the arrival of Open Banking and Payment Services Directive 2 (PSD2).
Cyber security With the increasing possibility of significant scale attacks resulting in data breaches and ultimately, damaging consumer trust, RBS must continue to build on a multi-layered approach to cyber security and continue to take part in industry-wide initiatives to monitor and anticipate developments.
Operational resilience 2018 has seen heightened media coverage on the operational competency of UK banks, including data breaches and technology failures. To provide continuity of service for customers with minimal disruption, RBS must continue to monitor and assess a diverse array of threats, both external and internal, as well as developing, strengthening or adapting existing control capability to be able to absorb and adapt to such disruptions.
Banking regulation RBS continues to operate in an increasingly complex regulatory environment. Regulatory and legislative focus is broadening from banking regulation to include non-banking specific regulation, for example relating to artificial intelligence and climate change.
Culture, engagement & wellbeing A healthy culture and engagement are critical drivers for overall performance and wellbeing, underpinning the bank’s long-term success.
Skills, capabilities & reward RBS faces competition for skilled people. Recruiting, developing and retaining talent remains a key priority.
Climate and sustainable finance As the scientific evidence on climate change becomes even clearer, RBS needs to further embed climate risk in its existing risk management framework and proactively assist its customers and clients with the transition to a low carbon economy.
Financial capability Against a backdrop of increased focus on debt, fraud and customers in vulnerable situations, RBS has a key role to play in supporting customers to use our various banking channels and manage money well on a day to day basis, through significant life events and during periods of financial difficulty.
Having an understanding of our impact across all stakeholders, and engaging them in ways that allow their views to be heard, continues to help inform our strategy.
Colleague Advisory Panel Set up as a pro-active response to changes in the UK Corporate Governance Code, the panel is an additional channel for colleagues to engage directly with the Board. Approximately twenty colleagues from across the Group will meet twice a year to discuss key issues.
Climate and sustainable finance Engaging with investors, regulators, academics and campaigning NGOs was key to advancing our climate strategy in 2018. Their views fed into our policy changes on mining, power and oil and gas sectors.
“The strengthened energy financing policies of RBS implement many of ShareAction’s recommendations for more robust management of climaterelated risks. They also make RBS the bank with the strongest energy sector policies out of the top five UK banks.”
Customer sentiments and opinions were captured by film and external experts presented their views and gave insight.
“The strategy should be to collaborate, map everything out on AI in a systematic way – and engage.”
"The evening was a another great opportunity to engage directly with our customers outside of our day to day interaction. Listening to, and acting on customer feedback is vital in our efforts to improve customer service."
Our opinion survey has shown the highest ever score when asking colleagues if they feel safe to speak up, as well as understanding the process of how they do that. In 2018, 480 cases were raised compared to 290 in 2017.
Developing Skills and Capabilities We have launched the NextGen talent development programme for high potential colleagues at managerial level, helping them become the future leaders we need. The learning opportunities available through the programme align to the bank’s Critical People Capabilities. There are five people capabilities that we have identified that will help build the right knowledge, skills and behaviours and help the bank to be successful now and in the future. We have developed a Capability Checker to support our colleagues in identifying the capabilities most relevant to their current and future roles, aligning learning to those capabilities.
Sales Excellence is our complete bank-wide sales programme. It teaches the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. It covers both core and advanced techniques that help to uncover the full financial needs and goals of customers and present compelling options on the ways we can help. Over 60% of the appropriate colleagues have already completed a Sales Knowledge Assessment level 1 and training for all front line sales colleagues, sales specialists and sales leaders is underway.
We are proud to be building an inclusive bank which is a great place for all colleagues to work. Our inclusion guidelines apply to all our colleagues globally to make sure everyone feels included and valued, regardless of their background. As at 31 December 2018 our permanent headcount was 67,400. 49% were male and 51% female.
Disability Smart: • We have plans in place for all segments of our pan-bank disability plan. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting accessibility checks into our key processes and practices.
• A key focus during 2018 was the roll out of a Disability Career and Personal Development Programme for colleagues with disabilities which specifically supports development and career progression by addressing common barriers colleagues with disabilities can face.
• We introduced formal UK targets in 2017 to improve the representation of non white/BAME colleagues in our top four leadership layers to at least 14% (in line with the working age UK BAME population identified by the Office for National Statistics) by 2025.
• As at the 31 December 2018 we have on aggregate 8% non-white colleagues in our top four leadership layers. We employ 14% non-white/BAME staff across the UK.
• Given our focus on becoming more ethnically diverse and desire to be transparent, we have used the same methodology as gender pay gap reporting to look at our ethnicity pay gap.
• The bank’s mean ethnicity pay gap in Great Britain is 10.7% (median 15.8%). The figures also show a mean ethnicity bonus gap of 24.7% (median 0.00%).
LGBT Innovative: • Our LGBT agenda continues to deliver a better experience for our LGBT colleagues and customers, reflected within our policies and ways of working, across our locations globally. While reflecting local legislation and jurisdictional requirements, these are clear that LGBT colleagues and customers are welcome at RBS and will be supported.
• We attended 19 Prides globally in 2018, including in India and Poland where we want to show our support to our LGBT colleagues and customers in countries where LGBT inclusion is not as progressed as in the UK.
Inclusive Culture: • We continue to support our c.20,000strong colleague led networks.
• We have flexible working practices in place across the organisation and externally we are a Top Ten Employer for Working Families.
Financial Health Checks are fast, free and can be the stepping stone to a brighter financial future.
The customer had four credit cards with different banks, and when she discovered their combined balance was more than £18,500, she was shocked.
There were 376 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries.
Human rights and Modern Slavery Act At RBS we are committed to our responsibilities to respect and uphold human rights across our business and sphere of influence. The Modern Slavery Act 2015 (MSA) forms part of our approach to human rights. Our second statement is available on our corporate website alongside our Human Rights Position Statement. Our approach covers our customers, our people and our suppliers.
The bank also has policies and processes such as ‘Our Code’, the ‘Yes Check’ and ‘Speak Up’ and is an early adopter of the Living Wage to support the banks position on Modern Slavery.
Moving house is seen as one of the most stressful things you can do in life but our new paperless mortgage process is helping to change that.
Whether customers are buying a new home, re-mortgaging or switching from another provider, they can now get a mortgage without having to post a single piece of paper.
Now they can apply at a time and place to suit them, whether that’s at home, on the move, or even waiting for the kids to finish their swimming lesson.
He regularly attends bank events which allow business owners to network whilst also learning how to grow and manage their business. And he’s a big advocate of FreeAgent – accountancy software that’s available for free for our business customers.
No-one likes waiting – especially now we can do so much with just a click or a swipe. That’s why our partnership with Qudini is proving so successful.
When customers arrive in a branch, we explore what they’re hoping to do, and whether it’s something they can or want to do online, on the spot or at home. If not, their details are added to Qudini and they’re immediately given an indication of waiting time – something customers tell us they appreciate.
Qudini means less waiting time and no standing in line. Because customers receive notifications as they move up the queue, they can even pop into a shop without missing their turn.
And the data we’re gathering helps us understand customer behaviour so we can make long-term improvements too. Cutting queues is just the start.
We track customer advocacy for our key brands using the net-promoter score (NPS), a commonly used metric in banking and other industries across the world. This is measured through independent customer surveys in which customers are asked how likely they would be to recommend their bank to a friend or colleague, on a scale of 0-10, with a score of 10 being ‘extremely likely’ and 0 being ‘extremely unlikely’.
Improvements in customer service have been offset by branch closures which have reduced customer advocacy. This has been most keenly felt for the Royal Bank of Scotland whose reputation continues to be impacted by legacy issues.
NatWest and Royal Bank of Scotland data sourced from Ipsos MORI FRS using 6 month rolling data. Latest base sizes: 3,111 for NatWest (England & Wales); 421 for Royal Bank of Scotland (Scotland). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“ Base: Claimed main banked current account customers. Ulster Bank data sourced from Coyne Research using 12 month rolling data. Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”. Latest base sizes: 274 Northern Ireland; 297 Republic of Ireland.
Business Banking continues to be affected by operating model charges. Our Business Banking customers have also been heavily impacted by branch closures.
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: 1134 for NatWest (England & Wales), 455 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes: 558 for NatWest (England & Wales), 103 for Royal Bank of Scotland (Scotland). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
Financial We make use of shareholder capital and other forms of financial capital, including £360.9 billion in customer deposits.
Prevented 598,174 cases of attempted fraud amounting to £251.7 million in the UK(*).
Trained over 150,000 colleagues and customers as part of Friends Against Scams’ commitment to provide training to one million people across the UK by end 2020.
Over one million Financial Health Checks with our personal, private and business customers(*).
More than 390 jobs created by businesses participating in NatWest’s Entrepreneur Accelerator programme since April 2018(*).
Our Skills & Opportunities Fund distributed £1.35 million (from a total of £2.5 million) to support people to start or develop a business now or in the future.
We have a TechXpert in every branch empowering customers to take advantage of digital and mobile banking.
We enhanced our energy lending policies to reduce fossil fuel exposures.
Commercial Banking Commercial Banking offers comprehensive banking and financing solutions to commercial and corporate customers in the UK. This includes financing business assets and invoices, as well as providing specialist finance and transaction services, through a dedicated network of relationship managers. We continue to digitise the customer experience, through our growing digital channels and propositions.
Private Banking Private Banking serves UK connected high net worth individuals and their business interests. We continue to focus on delivering the best client experience through a pro-active engagement model which supports clients across both sides of their balance sheet. Our client-centric strategy is focused on improving returns by deepening client relationships and improving our digital banking capabilities to make it easier for clients to deal with us.
Despite a highly uncertain economic outlook, and a continued low interest rate environment, we delivered an operating profit of £2,458 million in 2018 as we delivered an operating expense reduction of £347 million in 2018, or 9% compared with 2017.
Gross new mortgage lending in 2018 was £30.4 billion, giving a market share of 11.3% and supporting stock share of around 10%. In achieving this, the business has maintained a prudent approach to risk and pricing, in a very competitive market.
We were the first bank to launch a paperless mortgage process with customers continuing to embrace the simplicity and ease of our market leading innovation. Approximately half of all mortgage applications in Q4 2018 were paperless. As a proactive bank we are using automation and technology to simplify and streamline our key customer journeys. We are also continuing to invest in roles such as Community Banker and TechXperts to help customers get the most from our award-winning digital services including our mobile banking app which now has 6.4 million regular users and was awarded ‘Best Banking App’ at the British Banking Awards in 2018.
We are focused on our strategic ambition to become the number one bank in the Republic of Ireland for customer service, trust and advocacy. We have continued to deliver on growth in new lending, building lasting relationships with customers and on digital and technological innovation that creates benefits for customers and operational efficiency.
The ‘Help for what matters’ initiative and ‘First Five’ mortgage campaign continued to support lending growth in 2018. New mortgage lending increased by 13% to €1.13 billion, compared to 2017, supported by a positive uptake on the market leading two, four and seven year fixed rate products.
In the year, we made £10.5 billion RWA reductions through active capital management activity, leading also to lower impairment loss rates.
This is the largest value offered by a UK commercial bank, giving customers rapid, digital access to funding decisions, with around 50% of loan applications given a decision in principle in under 24 hours.
Through the Coutts and Adam & Company brands, our business provides private banking and wealth management services to UK connected high net worth clients with domestic and international needs. Coutts is recognised as one of the leading private banks, wealth and investment managers in the UK with a 325 year history. A strategy of providing a personal approach to private banking and wealth management, combined with outstanding brand recognition, drove strong customer volumes in 2018.
Our mobile app has been further developed to include new functionality, allowing customers to manage their finances more effectively and we have 23% more users compared with 2017 with NPS at +59.
2018 was a very successful year for community investment activities across all of our jurisdictions due to the commitment and generosity of our colleagues who supported our Do Good Feel Good Campaign.
Note: (1) Comparisons with prior periods are impacted by the transfers in relation to ring-fencing. The net impact of the transfers on 2017 would have increased income by £151 million and increase operating expenses by £14 million. The net impact on the 2017 balance sheet would have been to increase net loans to customers by £4.5 billion. The variances in the commentary have been adjusted for the impact of these transfers.
We continue to put customers at the centre of the way we do business and have focused on the core products and markets where we have a strong track record, longstanding relationships and market leading positions.
Operating expenses decreased by £595 million, or 27.1%. This reflects reductions in other expenses(1) across both the core and legacy businesses, down £313 million to £1,213 million, lower strategic costs, down £198 million to £238 million, and reduced litigation and conduct costs, down £84 million to £153 million.
NatWest Markets is increasingly using technology to enhance the way it provides innovative financial solutions to its customers and partners. For example, FXmicropay makes it simpler for businesses operating globally to accept payments in multiple currencies, reducing costs and increasing revenues for our customers. Our success in harnessing technology has been recognised with the award for Best in Service Globally among Corporates for Algorithmic trading in the 2018 Euromoney FX Survey.
Note: (1) Comparisons with 2017 are impacted by the transfer of business activities in preparation for ring-fencing. The net impact of the transfers would have been to increase total income by £104 million in 2017 and reduce operating expenses by £2 million in 2017. The commentary has been adjusted for the impact of these transfers.
2018 saw a continuation of the period of benign economic conditions with low defaults and strong cash recoveries. However, the potential impact on the real economy of ongoing political uncertainties and geopolitical tensions could affect our credit loss outcome. As a result, impairments are expected to increase in 2019 but remain below our through-the-cycle loss rate assumption of 30-40 basis points. The threat from single name and sector driven events remains.
Our previous guidance on RWAs beyond 2020 was an estimated 10% increase in 2021 relating to Basel 3 amendments, in addition to RWA inflation as a result of IFRS 16, which requires lease obligations to be brought on balance sheet, of £1.3 billion in 2019 and Bank of England mortgage floors of £10.5 billion in 2020. We now expect the overall impact of Basel 3 amendments to be in the range of 5-10% and phased across 2021 to 2023, with the details still subject to significant regulatory uncertainty.
Pro-forma for the introduction of IFRS16 - Leases, the CET1 ratio was 16.0%, with the c.20 basis points reduction reflecting a £1.3 billion increase in RWAs and £0.3 billion charge against reserves.
We have shareholder and regulatory approval to carry out directed buybacks of the UK government stake in RBS, but recognise that any exercise of this authority would be dependant upon HMT’s intentions and is limited to 4.99% of issued share capital in any 12 month period. As a reminder, we have also committed to make further pre tax contributions to the pension scheme of up to £1.5 billion in aggregate from 1 January 2020 linked to future distributions to RBS shareholders.
Note: (1) The targets, expectations and trends discussed in this section represent RBSG and NWM’s management’s current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” section on pages 253 to 263 of the RBSG 2018 Annual Report and Accounts and pages 125 to 134 of the NWM 2018 Annual Report and Accounts. These statements constitute forward-looking statements; refer to Forward-looking statements in this document.
RBS operates an integrated framework that facilitates effective risk management. The framework – which is centred around the embedding of a strong risk culture – ensures that the tools are in place to identify and manage both internal and external threats, including top and emerging risks. Risk appetite, which defines the level and types of risk RBS is willing to accept, is set in line with overall strategy and approved by the RBS Group board.
An emphasis on prudent risk management has a key role in positioning RBS to prepare for, and respond to, developments in the wider competitive, economic and regulatory environment.
All RBS employees share ownership of the way risk is managed.
Progress in 2018 RBS continued to reduce risk and strengthen both the balance sheet and the capital position in 2018. While continuing progress against the Group’s strategic objectives, there was also a significant focus on a number of key themes. These included wider economic uncertainty relating to the UK’s exit from the European Union, the accelerating evolution of the technological landscape and regulatory change.
The final settlement with the US Department of Justice (DoJ) in relation to the RBS Group’s issuance and underwriting of US Residential Mortgage-Backed Securities (RMBS) during the period 2005 to 2007 brought to an end a major legacy issue, leading to further improvement of the risk profile.
The termination recognised RBS’s multi-year programme to establish a robust, sustainable OFAC Sanctions compliance framework. In March 2018, the Federal Reserve Board also terminated a Cease & Desist Order originally imposed in July 2011 in relation to RBS’s US operations.
There was a continuing emphasis on refining risk appetite during the year. Significant work was done to enhance the approach at both Group and subsidiary levels in advance of compliance with the UK’s ring-fencing rules. Limits and triggers for material risks were reviewed and refined as part of the continuous improvement of the risk appetite framework. Limits and triggers were also set for material subsidiaries.
Continuity of service for customers also remained a key area of focus. A number of activities aimed at minimising the impact of disruptive events – such as system outages – on overall service were undertaken. These included preventative measures, control improvements and work to calibrate limits or triggers for the most critical processes. RBS continues to monitor and assess a diverse array of threats – both external and internal – as well as developing, strengthening or adapting existing control capability to protect continuity of service.
Brexit RBS maintained a consistent focus on risks arising as a result of uncertainties related to the UK’s planned exit from the European Union. Oversight of planning for regulatory and legislative impacts – as well as economic impacts – remained a critical part of forwardlooking risk management throughout the year. This included stress testing and scenario modelling as well as capital planning. In view of continued uncertainty, RBS is implementing plans to ensure continuity of service for its customers in the event of an immediate loss of access to the European Single Market. This includes finalising a third-country licence for the Frankfurt branch of its National Westminster Bank subsidiary to allow for continued clearing of eurodenominated payments.
Prudent risk management is central to the successful delivery of the RBS strategy.
Risk-weighted assets (RWAs) RWAs reduced by £12.2 billion. This was driven by decreases across credit and counterparty credit risk of £8.6 billion, market risk of £2.2 billion and a £1.4 billion decrease in operational risk as a result of the annual recalculation in Q1 2018. The credit risk decrease was primarily due to reduced asset size resulting from repayments, partially offset by increases reflecting various loss given default (LGD) model changes.
Common Equity Tier 1 ratio The CET1 ratio increased by 30 basis points to 16.2% as a result of lower RWAs, £1,622 million attributable profit and the 30 basis point impact at 1 January 2018 on the implementation of IFRS9 partially offset by the impact of the pension contribution in Q2 2018. CET 1 capital reflects the 2p interim dividend, the final dividend of 3.5p and the foreseeable 7.5p special dividend paid to ordinary shareholders.
Stress testing In the Bank of England 2018 stress test, RBS met its CET1 capital requirements under the hypothetical adverse scenario. The Group’s CET1 ratio was 9.6% at its lowest point – well above the hurdle rate of 7.3%. The Tier 1 leverage ratio remained above the minimum requirement throughout the test. In the European Banking Authority (EBA) 2018 stress test, the low-point CET 1 ratio was 9.9% at 31 December 2019. The low point leverage ratio was 4.8% at 31 December 2018.
Liquidity and funding RBS maintained a robust liquidity and funding risk profile in 2018. The liquidity portfolio increased £12 billion in 2018 to £198 billion and the liquidity coverage ratio and stressed coverage ratio were 158% and 154% at 31 December 2018, compared with 152% and 168% at 2017 respectively.
Litigation and conduct Litigation and conduct costs of £1,282 million included a £1,207 million provision in relation to various investigations and litigation matters, including additional provisions in respect of PPI, the FCA's review of RBS’s treatment of SMEs and settlement of the US Department of Justice investigation into RBS’s issuance and underwriting of US Residential Mortgage Backed Securities.
Financial crime The financial crime threat continues to evolve in line with changes in technology, the economy and wider society. As risks relating to money laundering, terrorist financing, tax evasion, sanctions, bribery and corruption develop, understanding and responding to them appropriately remains a key area of focus. In 2018, RBS continued its journey of improvement in relation to the policies, processes and systems used to combat financial crime. RBS also maintained an emphasis on ensuring proportionate, risk-focused customer due diligence standards were in place, particularly for higher-risk customer segments. In addition, improvements to the financial crime control environment remained a key focus in accordance with the evolving nature of the risk.
Climate risk The impact of multiple risks relating to climate change continues to be assessed. This includes physical risks – such as those resulting from extreme weather events and a more unstable climate – as well as economic and regulatory risks.
RBS supports the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures and has established a climate risk working group.
LIBOR transition The UK regulators have reiterated the intention to move from LIBOR to alternative interest-rate benchmarks by the end of 2021. A significant number of transactions across the industry reference LIBOR and, as a result, the transition will be a major undertaking. RBS is conducting risk assessments of the likely impact across each of its franchises and the Risk function will continue to provide oversight as the programme develops.
The factors discussed on page 32 and elsewhere in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing RBS. Refer to the Risk Factors section.
Operational and IT resilience Risk Mitigation - RBS’s information technology systems are complex, making recovery from failure challenging.
- RBS continues to innovate – including the development of a number of digital initiatives designed to meet evolving customer needs – and monitor the competitive environment as well as associated regulatory, technological and strategic developments in order to make adjustments as appropriate.
Legal regulatory and conduct risk Risk Mitigation - RBS expects government and regulatory intervention in the financial services industry to remain high for the foreseeable future, and also subject to increasing regulation in new areas such as financial risks relating to climate change and artificial intelligence. - RBS has for a number of years been involved in conduct-related reviews and redress projects, including a review of certain historical customer connections in its former Global Restructuring Group (GRG). RBS is likely to remain engaged in the management of GRG-related complaints until at least the end of 2020. - Implementation of the Alternative Remedies Package (regarding the business previously described as Williams & Glyn) brings a range of risks for RBS including significant costs, loss of customers/deposits and associated execution risks. - The impacts of past business conduct resulting in future litigation and conduct charges could be substantial. RBS is involved in a number of investigations, including: ongoing class action litigation, investigations into foreign exchange trading and rate-setting activities, continuing LIBOR-related litigation and investigations, into the treatment of small and medium-sized business customers in financial difficulty, anti-money laundering, sanctions, mis-selling (including mis-selling of payment protection insurance products). Settlements may result in additional financial penalties, non-monetary penalties or other consequences, which may be material. - The transition from LIBOR and other IBOR rates to alternative risk-free rates may lead to heightened legal, business and conduct risks.
The Board has governance oversight on climate via the Sustainable Banking Committee. From 2019 this will be shared with the Board Risk Committee. A Climate Change Working Group (CCWG) has been established with the accountable executive being the Chief Risk Officer. The CCWG is responsible for addressing climaterelated regulation, risks, opportunities, metrics and analysis. Membership includes senior representatives from Risk, Sustainable Banking, Corporate Governance, Regulatory Affairs and Legal. Frontline business representatives will join in 2019. The Sustainable Energy Forum (SEF) also co-ordinates products and services that help business and corporate customers to transition to a low carbon economy.
Climate risk management covers both physical and transitional risks. RBS employs a continuous process for identifying and managing top and emerging risks (refer to page 32), including climate-related risks. The nature and timing of the far-reaching commercial, technological and regulatory changes the low carbon transition will bring are currently uncertain, for our customers and business. The impact of such changes may be disruptive, especially if such changes do not occur in an orderly or timely manner or are ineffective in reducing emissions sufficiently. Whilst these risks are significant and growing, they are not inconsistent with our strategy to be a leading UK-focused banking service provider to personal and business customers. To help manage climate related risks around individual lending decisions, we use sector-specific Environmental, Social and Ethical risk policies (refer to rbs. com). The Power Generation, Mining and Metals, Oil & Gas and Forestry, Fisheries and Agribusiness policies were updated in 2018 in relation to climate-related risks. To help us manage operational risks, we joined RE100, committing to purchase 100% global renewable energy by 2020.
RBS uses a range of metrics and targets to assess our climate-related financial impacts, including operational emissions figures, (refer to the table below (*) and rbs.com), volumes of sustainable energy sector financing, and proportion of lending associated with high carbon or high climate risk sectors. Our greenhouse gas (GHG) emissions are independently verified each year by an external auditor. As at 31 December 2018, our exposure to the Power and Oil & Gas sectors remains at 1.2% of our total lending exposures. The PRA report ‘Transition in Thinking’ highlighted the energy, transport, property (domestic
Climate change presents both risks and opportunities to our business across our customers, operations and suppliers.
Scope 1* CO2e emissions (tonnes) 30,695 25,578 29,959 Scope 2** Market-based*** CO2e emissions (tonnes)
Total energy use (GWh) 862 693 619 and non-domestic) and agriculture sectors as having particular exposure to climate risks and opportunities and these equated to approximately 44% of total RBS exposures in 2018(*). These were calculated using Exposure at Default (EAD).
We were recognised by InfraDeals as the leading lender to the UK renewables sector by number of transactions over the past ten years (2008- 2018). Between 2014 and 2018 we reduced our operational greenhouse gas emissions (Scopes 1, 2 and 3 – Business Travel) by 49%, exceeding our Science Based Target of 45% by 2020.
Our Board commitees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. The work of the Board committees is discussed in their individual reports. The terms of reference for each of these committees is available on rbs.com.
Group Executive Committee The Board is supported by the Group Executive Committee, comprising the executive directors and the Group Chief Risk Officer. It supports the Chief Executive in managing RBS’s businesses. It is responsible for managing strategic, financial, capital, risk and operational issues affecting RBS. It reviews and debates relevant items before consideration by the Board.
UK Corporate Governance Code Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
The demand for home-grown renewable energy continues to grow. Which is why Triton Knoll Offshore Wind Farm Ltd matters.
With up to 90 wind turbines providing a total installed capacity of circa. 860MW, it will be capable of supplying the equivalent of over 800,000 UK households with renewable electricity a year.
We are market leaders in this growing sector. This project is one of six offshore wind farms that we have financed in the UK in the past 2 years.
On the basis of this robust assessment of the principal risks facing the group, the Board’s review of the business and strategic plans and other matters considered and reviewed during the year, and the results of the stress tests undertaken, the Board has a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of the assessment.
Page Presentation of information 36 Financial summary 37 Segment performance 41
Presentation of information In the Report and Accounts, unless specified otherwise, the terms ‘company’ and ‘RBSG’ mean The Royal Bank of Scotland Group plc, ‘RBS’, ‘RBS Group’ and the ‘Group’ mean the company and its subsidiaries; ‘the Royal Bank’ and ‘RBS plc’ mean The Royal Bank of Scotland plc; ‘NWH Ltd’ means NatWest Holdings Limited; ‘NatWest’ means National Westminster Bank Plc and ‘NWM Plc’ means NatWest Markets Plc.
Segmental reporting RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders.
Key operating indicators RBS prepares its financial statements in accordance with IFRS as issued by the IASB and as adopted by the European Union, which constitutes a body of generally accepted accounting principles (‘GAAP’). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measures exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures include:  Performance, funding and credit metrics such as ‘return on tangible equity’, and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets) and net interest margin (NIM) adjusted for items designated as fair value through profit or loss (non-statutory NIM), cost:income ratio, loan:deposit ratio and impairment provision ratios. These are internal metrics used to measure business performance.
 Personal & Business Banking franchise, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI and Commercial & Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking and Private Banking.
RBS Group ring-fencing The UK ring-fencing legislation requires the separation of essential banking services from investment banking services from 1 January 2019. RBS Group has placed the majority of the UK and Western European banking business in ring-fenced banking entities under an intermediate holding company, NatWest Holdings. NatWest Markets Plc (NWM Plc) and RBS International (RBSI) are separate banks outside the ring-fence, both subsidiaries of RBSG. Key activities in 2018 included:  NatWest Group Holdings Corporation (NWGH) which owns NatWest Markets Securities Inc. (NWMSI) was transferred to NWM Plc (formerly RBS plc). NWGH was previously a direct subsidiary of NatWest.
 The majority of NWM Plc’s (formerly RBS plc) PBB and CPB business, and certain parts of Central items and the NatWest Markets segment to be a part of the ring-fenced bank, were transferred to subsidiaries of NatWest Holdings. The second phase of ring-fencing which related to the transfer, of certain markets products from NatWest to NWM Plc, was completed in the third quarter of 2018.
 NatWest Markets N.V. (formerly Royal Bank of Scotland N.V.), the Group’s banking entity in the Netherlands, continues to implement its plan to be operationally ready to serve European Economic Area (EEA) customers [when the UK leaves the European Union on 29 March 2019], in the event that there is a loss of access to the EU Single Market. In October 2018 approval was received from the Dutch regulator (DNB) for the repurposing of the existing NatWest Markets N.V. banking licence. NatWest Markets N.V. is expected to become a subsidiary of NWM Plc in 2019 subject to regulatory approval.
Operating profit/(loss) before tax 3,359 2,239 (4,082) (2,703) 2,643 Tax charge (1,275) (824) (1,166) (23) (1,909)
Profit/(loss) from continuing operations 2,084 1,415 (5,248) (2,726) 734 Profit/(loss) from discontinued operations, net of tax — — — 1,541 (3,445)
Performance key metrics and ratios 2018 2017 Variance Return on tangible equity (%) 4.8 2.2 2.6 Net interest margin (%) (1) 1.98 2.13 (0.15) Average interest earning assets (£m) 436,957 422,337 14,620 Cost:income ratio (%) 71.7 79.0 (7.3) Earning per share (pence) - basic 13.5p 6.3p 7.2p
Cash and balances at central banks 88,897 98,337 74,250 79,404 74,872 Trading assets 75,119 85,991 86,660 103,972 150,005 Derivatives 133,349 160,843 246,981 262,514 353,590 Settlement balances 2,928 2,517 5,526 4,116 4,667 Loans to banks and customers - amortised cost 318,036 321,633 320,016 297,020 325,954 Other financial assets 59,485 51,929 48,637 47,004 38,298 Other assets 16,421 16,806 16,586 21,378 103,633
Deposits 384,211 391,712 357,173 338,326 346,172 Trading liabilities 72,350 81,982 84,536 92,299 130,920 Settlement balances, derivatives, and other financial liabilities 182,230 200,398 267,257 288,023 402,829 Other liabilities 8,954 14,871 40,286 42,613 112,389 Owners' equity 45,736 48,330 48,609 53,431 55,763 Non-controlling interests 754 763 795 716 2,946
Net interest income 5,098 444 2,040 518 466 112 (22) 8,656 Non-interest income 1,184 166 1,334 257 128 1,330 347 4,746
Cost:income ratio (2) 55.4% 95.6% 53.8% 61.7% 43.8% 111.2% nm 71.7% Third party customer asset rate (3) 3.40% 2.41% 2.87% 2.89% 2.15% nm nm nm Third party customer funding rate (0.30%) (0.20%) (0.36%) (0.25%) (0.09%) nm nm nm
Net fees and commissions 2,357 2,455 (98) (4.0%) Income from trading activities 1,415 703 712 101.3% Other non-interest income 974 988 (14) (1.4%)
Notes: (1) Negative interest on net loans to customers is classed as interest payable and on customer deposits is classed as interest receivable. (2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. 2018 compared with 2017
 Total income increased by £269 million, or 2.0%. Excluding notable items, income decreased by £650 million, or 4.8%, primarily reflecting lower NatWest Markets income and reduced net interest income. Excluding notable items, NatWest Markets and Central items, income was stable.
 Structural hedges of £159 billion generated £0.9 billion of incremental net interest income for the year, compared with £1.5 billion of incremental net interest income on a balance of £149 billion in 2017.
 Operating expenses decreased by £756 million, or 7.3%, primarily reflecting £561 million lower strategic costs and a £192 million reduction in other expenses, with litigation and conduct costs remaining broadly stable despite the US Department of Justice charge in the year. Excluding £86 million of one-off VAT releases in 2017, other expenses decreased by £278 million, or 3.6%, and FTEs reduced by 5.8%.
 Strategic costs of £1,004 million included: a £195 million direct charge in NatWest Markets relating to both the wind-down of the legacy business and ongoing development of the core business infrastructure; £177 million in respect of implementing ring-fencing requirements; £171 million of technology costs; a £133 million charge relating to the reduction in our property portfolio; a £76 million net settlement relating to the International Private Bank pension scheme; with the remaining charge largely relating to restructuring costs to achieve cost efficiencies across front and back office operations.
 Litigation and conduct costs of £1,282 million largely comprises the £1,040 million charge relating to the settlement with the Department of Justice and a £200 million charge relating to Payment Protection Insurance, partially offset by a £241 million provision release relating to a RMBS litigation indemnity.
 The cost:income ratio of 71.7% is elevated due to the inclusion of the net RMBS related conduct charge. Excluding this item the cost:income ratio, including strategic costs, would be 65.7%.
Notes: (1) The table above summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and on an IAS 39 basis at 31 December 2017. (2) 2018 ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities, and amount to £28 million, of which £5 million was FVOCI. (3) 2018 ECL charge balance in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at
FVOCI; and a £31 million release related to contingent liabilities. (4) 2017 comprises loan impairment losses of £530 million and releases on securities of £37 million.
Loans to banks - amortised cost 12,947 11,517 1,430 12.4% Loans to customers - amortised cost 305,089 310,116 (5,027) (1.6%)
Note: (1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue
 Total assets of £694.2 billion as at 31 December 2018 were down £43.8 billion, 5.9%, compared with 31 December 2017. This was primarily driven by reductions in trading assets and derivatives reflecting the wind-down of the legacy business and management of the leverage exposure.
 Loans to customers - amortised cost, decreased by £5.0 billion, 1.6%, to £305.1 billion including £2.2 billion in Commercial Banking due to active capital management, activity and approximately £0.7 billion, in Ulster Bank RoI, primarily in relation to the sale of a portfolio of non-performing loans.
 Customer deposits decreased by £0.4 billion, 0.1% to £360.9 billion with increases in UK PBB, Ulster Bank RoI and Private Banking offset by decreases in Commercial Banking and RBS International.
 Other liabilities included deferred awards, deferred income, notes in circulation and accruals and decreased by £5.9 billion, 39.8% to £9.0 billion mainly due to the reduction in provisions in the year, primarily in relation to the settlement with the US Department of Justice.
Note: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of segmental RWAes, assuming 28% tax rate.
Loans to customers (amortised cost) - personal advances 7.6 7.1 0.5 7.0%
 Operating expenses decreased by £347 million, or 9.1%. Excluding strategic, litigation and conduct costs, operating expenses were £167 million, or 5.3%, lower driven by reduced back-office operations costs and lower headcount reflecting continued operating efficiencies, partially offset by increased technology investment spend as we continue to build our digital capability.
 Impairments were £107 million higher driven by fewer provision releases and lower recoveries following debt sales in prior years, as well as increased provisioning requirements under IFRS 9. The underlying default rate remained broadly stable with asset growth also accounting for an element of the uplift.
 Ulster Bank RoI continued to strengthen its digital proposition in 2018 through enhancements to digital and mobile customer offerings. 69% of our active personal current account customers are choosing to bank with us through digital channels. A faster, more convenient and secure digital application experience was introduced for customers who are applying for current accounts and personal loans and further enhancements were made to the mobile app during the year. Mobile payments and transfers increased 36% compared with 2017, reflecting the continued customer migration from physical to digital channels.
Other expenses increased by €37 million primarily reflecting: the investment made into strengthening the risk, compliance and control environment; increased bank levies and regulatory fees; and higher spend on technology and innovation.
Notes: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11% of the monthly average of segmental RWAe, assuming 28% tax rate. (2) Comparisons with prior periods are impacted by preparations for ring-fencing, including the transfer of shipping and other activities from NatWest Markets, the transfer of whole business securitisations and Relevant Financial Institutions and other activities to NatWest Markets and the transfer of the funds and trustee depositary business to RBS International. The net impact of transfers on 2017 would have been to reduce income by £246 million, operating expenses by £10 million, impairments by £72 million, net loans to customers by £5.3 billion, customer deposits by £1.2 billion and RWAs by £2.2 billion. There is an additional £1.4 billion reduction in 2017 net loans to customers as a result of 2018 asset reclassifications under IFRS9. The variances in the commentary below have been adjusted for the impact of these items excluding net interest margin.
 Impairments decreased by £146 million, or 50.3%, mainly reflecting lower single name charges.
 Customer deposits decreased by £1.2 billion, or 1.2%, supporting a broadly stable loan:deposit ratio of 92%.
Loan:deposit ratio 50% 50% 0% Risk-weighted assets 9.4 9.1 0.3 3.3%
Dependency and the International Client Group Jersey to RBS International. The net impact of the transfers on 2017 would have been to increase income by £24 million and operating expenses by £15 million and reduce net loans to customers by £0.1 billion, customer deposits by £0.5 billion and assets under management by £0.7 billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
 Approximately 60% of clients bank with us digitally and 94% of clients positively rate our Coutts24 telephony service. Private Banking also recently launched Coutts Connect, a social platform which allows clients to network and build working relationships with one another.
 Total income increased by £73 million, or 10.4%, largely due to increased lending, higher funding benefits from deposit balances and higher investment income. Net interest margin increased by 5 basis points as higher deposit income was partially offset by asset margin pressure.
 Net loans to customers increased by £0.9 billion, or 6.7%, primarily in mortgages.
 Assets under management decreased by £1.0 billion, or 4.8%, reflecting market movements partially offset by new business inflows of £0.6 billion.
 RWAs increased by £0.3 billion, or 3.3%, relative to 6.7% growth in net loans to customers.
Net interest margin 1.71% 1.36% 0.35% Cost:income ratio 43.8% 56.3% (12.5%)
Loans to customers (amortised cost) - corporate 10.2 5.7 4.5 78.9%
prior to November 2017) of the monthly average of segmental RWAes (2) Comparisons with prior periods are impacted by the transfer of the funds and trustee depositary business from Commercial Banking and by the transfer of
Coutts Crown Dependency and the International Client Group from Private Banking. The net impact of the transfers on 2017 would have been to increase income by £151 million and operating expenses by £14 million, net loans to customers by £4.5 billion, customer deposits by £1.7 billion and RWAs by £1.9 billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
 Operating expenses increased by £27 million, or 11.6%, due to £39 million higher back-office costs associated with becoming a non ring-fenced bank and £5 million of remediation costs, partially offset by lower conduct and litigation costs.
Revenue share paid to other segments (217) (246) 29 (11.8%) Core income excluding OCA 1,259 1,665 (406) (24.4%)
Performance ratios Return on equity (2) (2.0%) (9.0%) 7.0% Net interest margin 0.40% 0.65% (0.25%)
Notes: (1) The NatWest Markets operating segment should not be assumed to be the same as the NatWest Markets Plc legal entity or group. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate. (3) Comparisons with prior periods are impacted by the transfer of shipping and other activities to Commercial Banking and the transfer of whole business securitisations and Relevant Financial Institutions from Commercial Banking in preparation for ring-fencing. The net impact of the transfers on 2017 would have been to increase income by £104 million, reduce operating expenses by £2 million, reduce the net release of impairments by £72 million and increase funded assets by £1.3 billion and RWAs by £0.4 billion. The variances in the full year commentary below have been adjusted for the impact of these transfers.
 Operating expenses decreased by £595 million, or 27.1%. This reflects reductions in other expenses across both the core and legacy businesses, down £313 million to £1,213 million, lower strategic costs, down £198 million to £238 million, and reduced litigation and conduct costs, down £84 million to £153 million.
 Funded assets decreased by £8.6 billion, or 7.2%, reflecting the wind down of the legacy business.
Group performance and remuneration committee Group Board risk committee Group Sustainable banking committee Technology and innovation committee Committee Chairman
1 Howard Davies Appointed: 14 July 2015 (Board), 1 September 2015 (Chairman) Experience: Howard was chair of the UK Airports Commission between 2012 and 2015; Director of the London School of Economics and Political Science from 2003 until May 2011; Chairman of the UK Financial Services Authority from 1997 to 2003; and Deputy Governor of the Bank of England from 1995 to 1997.
External appointment(s): Independent director of Prudential plc and chair of the Risk Committee; Member of the Regulatory and Compliance Advisory Board of Millennium Management LLC; Chair of the International Advisory Council of the China Securities Regulatory Commission; and Member of the International Advisory Council of the China Banking Regulatory Commission.
3 Katie Murray Appointed: 1 January 2019 Experience: Katie joined RBS as Director of Finance in November 2015 and was appointed as Deputy Chief Financial Officer in March 2017. Katie has worked in Finance and Accounting for nearly 30 years with experience in capital management, investor relations, financial planning and all areas of financial services. Katie was previously the Group Finance Director for Old Mutual Emerging Markets, based in Johannesburg from 2011 to 2015, having held various roles in Old Mutual from 2002. Prior to this Katie worked at KPMG for 13 years. Katie is a Chartered Accountant having trained in Scotland and is a member of The Institute of Chartered Accountants of Scotland.
5 Alison Davis Appointed 1 August 2011 Experience: Previously, Alison served as a director of City National Bank, First Data Corporation, Xoom, Presidio Bank and Diamond foods, and as a non-executive director and chair of the board of LECG Corporation. She has also worked at McKinsey & Company; AT Kearney; as Chief Financial Officer at Barclays Global Investors (now BlackRock); and as managing partner of Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.
External appointments: Non-executive director, and member of the audit committee of Fiserv Inc; and non-executive director and chair of the audit committee of Ooma Inc.
Patrick is a Chartered Accountant; a Fellow of the Institute of Chartered Accountants Ireland; and a member of the Association of Corporate Treasurers in the UK.
7 Morten Friis Appointed 10 April 2014 Experience: Previously, Morten had a 34 year financial services career. He held various roles at Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank; Vice President, Business Banking; and Vice President, Financial Institutions. In 1997, he was appointed as Senior Vice President, Group Risk Management and served as the Chief Credit Officer, then Chief Risk Officer, from 2004 to 2014. He was also previously a Director of RBC Bank (USA); Westbury Life Insurance Company; RBC Life Insurance Company; and RBC Dexia Investor Services Trust Company.
9 Brendan Nelson Appointed 1 April 2010 Experience: Brendan is a non-executive director of NatWest Markets Plc and chair of its audit committee. Previously Brendan was global chairman, financial services for KPMG. He held senior leadership roles within KPMG, including as a member of the KPMG UK board from 1999 to 2006 and as vicechairman from 2006 until his retirement in 2010. He was Chairman of the Audit Committee of the Institute of Chartered Accountants of Scotland from 2005 to 2008 and President of the Institute of Chartered Accountants of Scotland 2013/14.
External appointments: Non-executive director and Chairman of the audit committee and member of the remuneration, nominations & governance committee and chairman’s committees of BP plc; and member of the Financial Reporting Review Panel.
External appointments: Member of the House of Lords Select Committee on the European Union and its sub-committee on the internal market.
11 Mike Rogers Appointed 28 January 2016 Experience: Mike was previously Chief Executive of Liverpool Victoria Group for 10 years. Mike has extensive experience in retail banking and financial services. He joined Barclays in 1986 where he undertook a variety of roles in the UK and overseas across business banking, wealth management and retail banking and was Managing Director of Small Business, Premier Banking and UK Retail Banking.
External appointments: Non-executive Chairman of Aegon UK; Director of Experian plc; and Chairman of its Remuneration Committee.
13 Dr Lena Wilson, CBE Appointed 1 January 2018 Experience: Lena is an experienced CEO with an international career, who spent a significant proportion of her executive career with Scottish Enterprise, latterly as Chief Executive from 2009 until 2017. Prior to that, Lena held the role of Senior Investment Advisor to The World Bank in Washington DC. She is a visiting Professor at the University of Strathclyde and has previously served as a member of Scotland's Financial Services Advisory Board and as Chair of Scotland's Energy Jobs Taskforce. In June 2015 she received a CBE for services to economic development in Scotland. Lena is Chair of the Colleague Advisory Panel established by RBS during 2018.
Aileen is a fellow of the Chartered Institute of Bankers in Scotland and a member of the European Corporate Governance Council and the GC 100. She is also a member of the FCA’s Listing Authority Advisory Panel.
Chairman’s introduction Dear Shareholder, I am pleased to present the corporate governance report. During 2018 the Board considered a range of key strategic, financial, regulatory and risk matters, including:  Future strategy, including RBS’s purpose and long term future, technology and innovation
 Group Pension Fund: MoU on structural changes and additional related funding contribution
 Risks associated with the transition of LIBOR and other IBOR rates to alternative risk free rates
The Board also dedicated time to engagement with employees, shareholders, customers and other stakeholders, as set out in more detail on page 51.
NatWest Holdings Limited (NWH Ltd) is now the holding company for our ring-fenced operations. NWH Ltd shares a common board membership with NatWest, the Royal Bank and Ulster Bank Limited (together, the “NWH Ltd sub-group”) and the four boards meet concurrently.
RBS’s principal subsidiary entities outside the ring-fence, including NatWest Markets Plc, operate separate board and committee meeting cycles. In April 2018 Frank Dangeard stood down from the NWH Ltd sub-group boards and assumed the role of Chairman of NatWest Markets Plc.
Other Board changes Penny Hughes resigned as a non-executive director on 30 May 2018, and Ewen Stevenson resigned as Chief Financial Officer and director on 30 September 2018. I would like to thank Penny and Ewen for all their hard work and dedication to RBS during their time with us.
In addition, Brendan Nelson will step down as Chairman of the Group Audit Committee with effect from close of business on 31 March 2019, and as a non-executive director with effect from the end of the 2019 Annual General Meeting. Patrick Flynn will assume the role of Chairman of the Group Audit
2018 UK Corporate Governance Code and Statutory Reporting Changes In July 2018 the Financial Reporting Council published the 2018 UK Corporate Governance Code (‘the 2018 Code’), which applies to accounting periods beginning on or after 1 January 2019. Having conducted a comprehensive impact analysis we believe we are well placed to report on our application of the new 2018 Code’s principles in our 2019 report. We have also noted the new statutory reporting requirements (as set out in the Companies (Miscellaneous Reporting) Regulations 2018) that apply to the company for accounting periods beginning on or after 1 January 2019. We will make the relevant disclosures in our 2019 Annual Report and Accounts although we have opted for early disclosure on certain remuneration reporting requirements which can be found in the Directors’ Remuneration Report on page 62.
Chairman and Chief Executive The role of Chairman is distinct and separate from that of the Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Chief Executive managing business day to day. Details of the key responsibilities of the Chairman and the Chief Executive are available on rbs.com.
Senior Independent Director Throughout 2018 Mark Seligman, as Senior Independent Director, acted as a sounding board for the Chairman and as an intermediary for other directors when necessary. He was also available to shareholders to discuss any concerns they may have had, as appropriate.
Board Oversight Committees GRG Board Oversight Committee The GRG Board Oversight Committee was established in 2015 in relation to the Financial Conduct Authority review of the treatment of SME customers and continued to meet during 2018. The Committee oversees and provides advice to the Board in relation to the review, the external independent review of GRG instigated by the Group and other matters generally related to GRG.
2019 Board Committee Changes Mark Seligman was appointed to the Group Audit Committee on 1 January 2019.
At a “Meet the Board” event for employees in May we announced the creation of our new Colleague Advisory Panel. In creating the Panel we are complying early with one of the key features of the new UK Corporate Governance Code 2018. Further information about the Panel can be found in the Strategic Report on page 14 and the Report of the directors on page 85.
We held dedicated events for retail shareholders in Glasgow and Birmingham, which provided an opportunity for shareholders to meet board members and ask questions. Further details on our relations with investors can be found on page 52.
Our annual event for subsidiary non-executive directors took place in November, enabling attendees to focus on topics of mutual interest, including stakeholder engagement, culture and purpose. A Board reception was also held in Edinburgh, providing a further opportunity for some directors to meet and spend time with customers and other stakeholders and influencers.
Board effectiveness Skills and experience of the Board The Board is structured to ensure that the directors provide RBS with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of RBS’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area. In addition, our directors have relevant experience of government and regulatory matters; mergers & acquisitions; corporate restructuring; stakeholder management; technology, digital and innovation; finance and accountancy; risk; and change management.
Induction and professional development Each new director receives a formal induction on joining the Board, which is co-ordinated by the Company Secretary and tailored to suit the requirements of the individual concerned. This includes visits to RBS’s major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate.
The directors have access to a wide range of briefing and training sessions and other professional development opportunities. Internal training relevant to the business of RBS is also provided. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors. Directors may also request individual in-depth briefings from time to time on areas of particular interest.
Information All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Company Secretary. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.
Performance evaluation In accordance with the Code, an external evaluation of the Board, its Committees and individual directors takes place every 3 years. An internal evaluation takes place in the intervening years.
 enhancing the quality of information the Board receives through revised formats for regular reporting.
This was the first performance evaluation undertaken since the introduction of our ringfencing governance arrangements. It considered the effectiveness of both the RBSG and NWH Ltd Boards, but was predominantly focused on RBSG. The relatively early stage nature of the feedback was acknowledged, given the Boards were transitioning to the new operating model during the review period.
 the induction programme had proved a positive experience for new non-executive directors, and a small number of improvements were suggested.
Actions An action plan has been developed in response to the 2018 Board evaluation report, and its implementation will be overseen by the Group Nominations and Governance Committee during 2019. The plan includes measures to:  agree key objectives, drive a focused board agenda for 2019, and prioritise board time accordingly (including between RBSG and NWH Ltd);  support a healthy Boardroom culture, focused on the development of effective working relationships between the directors and senior management;  improve the quality of Board papers and presentations;  proactively review Board and committee composition and succession plans; and
Relations with investors The Chairman is responsible for ensuring effective communication with shareholders.
Shareholders are given the opportunity to ask questions at the AGM and any General Meetings held or can submit written questions in advance.
Financial Officer undertake an extensive annual programme of meetings with the company’s largest institutional shareholders;  the Senior Independent Director is available if any shareholder has concerns that they feel are not being addressed through the normal channels; and
Role and responsibilities The Committee is responsible for reviewing the structure, size and composition of the Board, and membership and chairmanship of Board Committees and recommends appointments to the Board. In addition, the Committee monitors the Group’s governance arrangements to ensure that best corporate governance standards and practices are upheld and considers developments relating to banking reform and analogous issues affecting the Group. The Committee makes recommendations to the Board in respect of any consequential amendments to the Group’s operating model.
Principal activity during 2018 As highlighted in the Board’s 2017 effectiveness review, the Committee acknowledges the tenure of a number of current Board directors and therefore made succession planning a priority in 2018. Ringfencing also gave rise to a requirement to recruit additional non-executive directors to the boards of our material regulated subsidiaries, which the Committee has overseen.
Membership and meetings Penny Hughes stepped down from the Committee with effect from 30 May 2018, meaning that for most of 2018 the Committee comprised the Chairman of the Board and four independent non-executive directors. Graham Beale also attends meetings of the Committee in an observer capacity, following his appointment as Senior Independent Director of NatWest Holdings Limited.
Board and Committee membership Both Spencer Stuart and Hay Korn Ferry have been engaged during the year to support the search for new executive and non-executive directors. Spencer Stuart and Hay Korn Ferry are also members of the retained executive search panel of suppliers (managed by RBS Executive Search) and provide leadership advisory and senior executive search and assessment services to the Human Resources function within RBS. During 2018, the Committee considered a number of potential candidates. In June 2018, Patrick Flynn was appointed to the Board as a nonexecutive director and at the same time was appointed to the Board’s Risk, Audit and Technology and Innovation Committees. The Committee also oversaw the search for a successor to Ewen Stevenson who stepped down from the Board on 30 September 2018. On 1 January 2019, Katie Murray joined the Board as executive director and Chief Financial Officer.
Howard Davies Chairman of the Group Nominations and Governance Committee 14 February 2019
Detailed reports from management on the key assumptions and accounting judgements behind RBS’s financial results, IFRS 9 expected credit losses and the conclusions of the External Auditor and other management reports, enabled the Committee to scrutinise disclosures in the financial statements and the underlying judgements and estimates were appropriate.
Membership Full biographical details of the GAC members are set out on pages 47 and 48. With effect from 1 January 2019 Mark Seligman was also appointed to the GAC. The members are all independent non-executive directors and each sit on other Board Committees (as shown on pages 47 and 48) in addition to the GAC. This cross committee membership helps facilitate effective governance, ensures agendas are aligned and avoids overlap of responsibilities.
The effectiveness of RBS’s standards of internal control, in particular controls relating to financial management, reporting and accounting issues, was another key focus of the Committee.
During 2018 RBS resolved significant legacy issues, in particular the settlement of the US Department of Justice’s investigation into Residential Mortgage Backed Securities. The GAC was closely engaged to ensure this was appropriately disclosed and provided for. Similarly, the GAC kept existing provisions for liabilities under close review throughout the year.
2018 also saw significant developments in relation to Brexit. Whilst Brexit was largely discussed at Board level, given its potential strategic impact, the Committee considered the potential impact on the economic environment and, subsequently on RBS’s financial results.
Regular attendees at GAC meetings included: the RBS Chairman; Chief Executive; Chief Financial Officer; Deputy Chief Financial Officer; Chief Accountant; Chief Legal Officer and General Counsel; and the Internal and External Auditors. The GAC also met privately with the external auditors and separately with Internal Audit management.
Meetings and visits The GAC held seven scheduled meetings in 2018, four of which were held shortly prior to submission of the quarterly financial statements to the Board. During 2018 all members attended the meetings scheduled during their term as Committee members.
Brendan Nelson Chairman of the Group Audit Committee 14 February 2019
Evaluations of the External Auditor and Internal Audit function are conducted each year. The 2018 Internal Audit evaluation was conducted by KPMG who assessed Internal Audit against the Institute of Internal Audit International Standards and also against relevant regulatory guidance. The overall findings were positive and recommendations for improvement are being progressed by Internal Audit and overseen by the GAC. The 2018 evaluation of the External Auditor was conducted internally. It concluded that the external auditor was operating effectively. Some recommendations for continuous improvement were identified and are being implemented by the External Auditor.
The GAC focused on a number of accounting judgements and reporting issues in the preparation of the Group’s financial results throughout 2018.
Provisions and disclosures – The GAC debated the level and appropriateness of significant provisions for regulatory, litigation and conduct issues including; provisions for the US RMBS investigations; Payment Protection Insurance claims; the FCA’s investigation into RBS’s former Global Restructuring Group; and items relating to the Central Bank of Ireland’s review of Irish Tracker mortgages. During 2018 RBS recognised £2,014 million of litigation and conduct provisions. The GAC also carefully reviewed the quality and transparency of RBS’s financial and risk disclosures. Expected Credit Loss – Judgements in relation to credit impairments and the impact of macroeconomic risks on the credit environment were discussed throughout the year. GAC focused on the methodology applied to provisions under IFRS 9. In particular the GAC considered the potential impact of Brexit and related negotiations on the economic environment and agreed an additional £100 million impairment charge in this respect in Q3 2018. The Committee was satisfied that the overall loan impairment provisions and underlying assumptions and methodologies adopted by RBS were reasonable and applied consistently. Valuation methodologies – The GAC considered valuation methodologies and assumptions for financial instruments carried at fair value and scrutinized judgements made by management in relation to the carrying value of intangible assets. Management’s assessment of the adequacy of internal controls over financial reporting – The GAC noted that control improvements were required in relation to the translation of the Expected Credit Loss data under IFRS 9 and FX Reserves in discontinued operations in NatWest Markets plc. The Committee noted the action being taken by management to address these. There were no Material Weaknesses reported in relation to RBS Group at the year-end. Viability statement and the going concern basis of accounting – GAC considered evidence of RBS’s capital, liquidity and funding position and considered the process to support the assessment of principal risks. The GAC reviewed the company’s prospects in light of its current position and the identified principal risks. The GAC reviewed RBS’s viability and going concern statements on behalf of the Board. (Refer to the Report of the directors for further information). Fair balanced & understandable – The GAC oversaw the review process which supports the GAC and Board in concluding that the disclosures in the Annual Report and Accounts, taken as a whole, were fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The process included: central co-ordination of the Annual Report and Accounts by the Finance function; review of the Annual Report and Accounts by the Executive Disclosure Committee prior to consideration by the GAC; and a management certification process. The External Auditor also considered the fair balanced and understandable statement as part of the audit process.
Control Environment Certification – The GAC received bi-annual updates on control environment ratings of RBS’s franchises, functions and material subsidiaries and management’s plans to address areas of weakness. Management’s plans to address certain control issues are covered in more detail in the report of the Group Board Risk Committee on page 57. Sarbanes-Oxley Act of 2002 – The GAC considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002 and was satisfied in this respect. No Material Weaknesses were reported in RBS Group at the year-end. The GAC provided oversight of the drive to continue to improve SOX processes and received a number of updates in this regard. The GAC are monitoring enhancements in controls in relation to: reporting of credit exposures specifically under the newly implemented IFRS9 accounting standard and the processes around the accounting for foreign currency reserves. Legal Reports – Quarterly reports on the material current and emerging legal risks and developments affecting RBS enabled the GAC to assess the related disclosures in RBS’s financial statements. Notifiable Event Process – The GAC considered semi-annual reports on control breaches, captured by RBS’s notifiable event process. All Board directors were alerted to the most significant breaches. Whistleblowing – The GAC received updates on the volume of whistleblowing reports, any discernible trends and staff awareness of the processes. GAC also monitored the effectiveness of whistleblowing procedures. The GAC Chairman acts as RBS’s Whistleblowing Champion, in line with PRA and FCA regulations and meets regularly with RBS’s whistleblowing team. Complaints – Updates were provided to the GAC on customer complaints. GAC focusses in particular on any fraud related complaints, the process for managing executive complaints and complaints relating to accounting, internal accounting controls or auditing matters. Taxation – The GAC received an update on RBS’s tax position including the impact of ring-fencing on tax governance, material tax risks and disputes, compliance with RBS’s tax obligations and the main projects and external developments impacting RBS’s tax position. Annual Risk and Control Report – The GAC also reviewed RBS’s disclosure on internal control matters in conjunction with the related guidance from the Financial Reporting Council.
The Committee has responsibility for overseeing the Internal Audit function. In addition to considering quarterly opinions from Internal Audit, GAC is required to monitor the function’s effectiveness and confirm its independence and was fully satisfied in this regard.
Ernst & Young LLP (EY) has been RBS’s external auditor since 2016. The GAC has responsibility for monitoring EY’s independence and objectivity, the effectiveness of the audit process and for reviewing RBS’s financial relationship with the External Auditor and fixing remuneration.
RBS has a policy in relation to the engagement of the external auditors to perform audit and non-audit services (the policy). GAC reviews the policy annually to ensure it remains fit for purpose. All audit and non-audit services are pre-approved by the Committee to safeguard the external auditor’s independence and objectivity.
After the successful legal restructuring of the RBS Group on 30 April 2018, RBS began to operate under a transitional governance structure and BRC continued to oversee the subsequent stages of the ring-fencing implementation work
A large part of the Group BRC’s work is the review of reports and regulatory submissions on behalf of the Board and recommending them for approval. Where this is the case, the Report below is annotated with an asterix (*).
The Committee also held an in-depth session on risk reporting and held a teach-in on capital and liquidity.
Performance Evaluation The annual review of the effectiveness of the Board and its senior Committees, including the Board Risk Committee, was conducted externally in 2018 by independent Board Evaluation. Overall the review concluded that the BRC continued to operate effectively. The Committee was described as very capable with robust, well-established processes. The review also made a number of recommendations including reducing the length of meetings and level of detail considered by the Committee and transitioning to a more strategic mode over time. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings.
Risk Management Reports – Top and emerging risks were presented in quarterly Risk Management Reports, supplemented by shorter reports from the Chief Risk Officer at intervening meetings. Key topics discussed included the macro-economic and UK credit environments, cyber security and the implications for RBS of Brexit, geopolitical tensions and trade issues. Reports on legal and regulatory developments, including RBS’s General Data Protection Regulation compliance programme and significant litigation risks were also frequently considered. Updates from Management and Subsidiary Risk Committees – Updates were received from the Executive Risk Committee and Technical Executive Risk Forum (before it was disbanded in June 2018), as the BRC relies on the effective executive oversight of risk. In addition, quarterly reports were received from the chairmen of the risk committees of the franchises and material regulated subsidiaries. Emerging Risks – Emerging risks likely to impact RBS over the next decade were considered at each meeting and in more detail mid-year. The Committee noted three key areas of change: new technology, competitive challenge and the geopolitical landscape.
The BRC oversaw the delivery of the separation of RBS’s core banking business from activities that are required to be outside the ring-fence which involved many complex activities. BRC also monitors the development of plans which would allow RBS to be dealt with effectively in the event of financial failure.
BRC devoted considerable time to stress testing including the European Banking Authority (EBA) and Bank of England stress tests in addition to its own internal stress tests. BRC subjected the outputs of the tests to a high degree of scrutiny and challenge.
ICAAPs and Budget Stress Tests - In Q1, the BRC considered the results of the 2017 ICAAPs and ILAAs and the Reverse Stress tests for the RBS Group, NWH Ltd and NWM Plc, in addition to feedback from the Bank of England in relation to its 2017 stress test. The scope of the stress testing scenarios and legal entity analysis for RBS’s 2018 Budget stress test and 2018 ICAAP and the actions being undertaken to de-risk these deliverables were considered in Q3. Bank of England and EBA Stress Test – During the year the Committee provided challenge and scrutiny in relation to the scenarios and traded risk factor expansions before considering the key assumptions and judgements deployed by management in the Bank of England and EBA stress tests. A detailed review of the outputs of the tests was carried out prior to submission to the regulator*.
BRC continued to provide oversight over the risk dimension of performance and remuneration arrangements, working closely with the Performance and Remuneration Committee.
“Engagement sessions continue to provide a valuable opportunity for the Board to listen to the external perspective.”
Dear Shareholder, I am delighted to present my first report as Chairman of the Group Sustainable Banking Committee (the Committee or SBC).
2018 Highlights I can report that good progress was made in 2018 with some particular areas to highlight set out below.
 Culture and people remain two areas where the Committee focuses its efforts via a regular culture update as well as spotlights on wellbeing, inclusion and how we are supporting colleagues to develop skills and capabilities needed for the future.
 The Committee has considered the Environmental strategy, with a focus on activity relating to colleagues and suppliers as well as being updated on the approach to climate change.
Stakeholder engagement The Committee has continued with its stakeholder engagement programme and during 2018 met with 16 external stakeholders over four sessions. Topics were:  Sustainable credit;  Ethics of artificial intelligence;  Purpose; and
A Sustainable Banking Committee of NatWest Holdings Limited (NWH Ltd SBC) was established, with its focus on customer and people matters within the ring-fenced bank.
The outcomes of the evaluation have been reported to the Group Board and the Committee will follow up during the year through the development of the pillars of sustainable banking as described below.
I would also like to record my thanks to Penny Hughes, my predecessor, as Chairman of the Committee who stood down at the AGM in May 2018. Penny was a champion for sustainable banking and stakeholder engagement and I look forward to building further on the progress made under her direction.
In preparation for 2019, the Committee has spent time considering its remit and how best to continue to have a long-term and strategic focus. In future, the Committee’s work will be structured under four pillars of: Customers and Brands; People and Culture; the Competitive Environment; and Society and Environment.
Mike Rogers Chairman of the Group Sustainable Banking Committee 14 February 2019
“In this digital era, technology and innovation is fundamental to the bank’s strategy and customers”
Authority is delegated to TIC by the Board and a regular report of the Committee’s activities is provided to the Board. The terms of reference are available on rbs.com and these are reviewed annually and approved by the Group Board.
Board Committee structures were reviewed in preparation for ring-fencing and the TIC has remained a Group-level Committee, given the strategic nature of its remit.
I am confident that the mix of relevant skills, knowledge and commercial experience contributed by the Committee’s members has greatly enhanced the quality of our discussions.
The Committee is supported by management and the Chief Executive, Chief Administrative Officer, Chief Risk Officer, Chief Financial Officer, CEO Special Projects, Director of Innovation and Director of Strategy and Corporate Development are all standing attendees.
The Committee held six meetings during 2018. Details of meeting attendance can be found at page 50 of the Governance Report.
Principal activity during 2018 We know that the nature of banking services and the way they are provided is changing and the Committee agendas are therefore focused across three key themes:  Digitising the core – the Committee considered how the Group is using new technology to improve the core business, including how it enhances the customer value proposition and reduces the cost base. Each of the franchises and functions were invited to present an update on steps being taken to digitise their area. The Committee has also considered data strategy; GDPR; cyber security; technology modernisation; and the core infrastructure under this theme.
Conclusion I am delighted to chair the TIC, which supports the Board in an area so crucial to the future of the organisation. RBS needs to remain relevant to customers in a changing world and the Committee will continue to support the Board in considering how we can use technology and innovation to advance the bank for our customers and shareholders. I want to take the opportunity to thank the Committee members and attendees for their contribution, enthusiasm and support in 2018.
We believe that having an engaged and inclusive workforce is a key element of a successful business. This is why it is one of the areas included in the performance assessment for executive directors. The latest opinion survey shows engagement is at its highest level since we started measuring it and inclusion is our highest scoring category. We are now above the Global Financial Services (GFS) norms in all comparable survey categories.
We are confident we pay our employees fairly and our policies and processes are kept under review to ensure we continue to do so.
On pensions, action was taken during the year to significantly address the deficit in the main defined benefit pension scheme. Employees are provided with a range of flexible, market-leading benefits and wellbeing support. Over 23,000 employees have chosen to participate in share plans, which provide direct alignment with the company’s success and shareholders’ interests.
Transparency – Ahead of new reporting regulations coming into force next year, we have included the Chief Executive to employee pay ratios in this report along with broader disclosures on employee remuneration. Gender and ethnicity pay gap information can be found in the Strategic Report section, as well as the steps we are taking to address the position.
The policy is based around a restrained pay position, with lower levels of LTI awards, reasonable performance expectations and significant shareholdings. Shares must be retained for the long-term, both during and after employment. I believe this creates a simple way of aligning executive directors’ interests with shareholders.
Executive director changes during 2018 Ewen Stevenson resigned as Chief Financial Officer (CFO) during the year. In line with policy, he continued to receive fixed pay until his departure date and all outstanding LTI awards were forfeited. No payment was made in lieu of notice.
Remuneration structures are designed to support our strategic aims, one of which is building a safe and sustainable business. Capital strength has been one of the key performance measures for executive directors and I am delighted that progress in this area has enabled RBS to resume paying dividends to our ordinary shareholders.
Looking ahead One of the main priorities for the Committee during 2019 will be preparing the executive directors’ remuneration policy for its renewal at the 2020 AGM. The new Code requirements and engagement with our stakeholders will be part of that process. The Committee will also look at how it can enhance its existing role in considering wider workforce remuneration.
The ‘at a glance’ section summarises the key features of the executive directors’ remuneration policy and arrangements for 2018 and 2019.
Summary of the remuneration policy for executive directors approved at the 2017 AGM Alignment with strategy of building a strong, simple and fair bank
Built around a restrained pay position for executives, with variable pay delivered entirely in LTI awards.
Performance assessed on factors that executive directors would reasonably be expected to achieve, encouraging safe and secure growth.
Aligns executives with shareholders predominantly through holding shares, both during and after employment.
LTI awards will be adjusted for underperformance or risk failings and are released over eight years with malus and clawback for a long-term view of performance.
Reduced complexity and quantum, in line with the Executive Remuneration Working Group and Government announcements on executive pay.
Reflects emerging investor guidelines with their common themes of restraint, meaningful shareholdings and flexibility of pay design.
 Pre-grant and pre-vest performance assessments along with risk and stakeholder underpins.
 Vests in equal amounts between years three to seven after grant.
 Customer service results, however, are not consistently where they need to be to achieve our long-term ambition.
Performance assessed against pre-set objectives for 2016 – 2018, covering:  Economic Profit – 0% vesting.
The performance assessment resulted in a total vesting percentage of 27.5% due to progress in capital strength, customer trust scores and employee engagement. The other elements did not meet the required performance levels for vesting. Full details can be found in the annual report on remuneration.
Performance assessed against pre-set objectives for 2018, covering core areas of:  Finance & Business – capital and RoTE targets met, ring-fencing structure in place.
 Customers – Net Promoter Score was mixed, some but not all segments on target.
While overall performance was strong, the Committee concluded that a reduction of around 6% to the maximum grant would be appropriate for the Chief Executive to recognise that some areas were not fully at the desired level. A further assessment will take place prior to any vesting taking place. Full details can be found in the annual report on remuneration.
Any variable pay awards for performance year 2019 onwards (to be made in early 2020) will be delivered as LTI awards, with a maximum award of 200% of salary. For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with arrangements in place at that time.
Salary Pension & Benefits Fixed Share Allowance LTI award (vesting value)
LTI award granted in further assessment made before any vesting takes place 20% vests over 2022 to 2026 with a 12 month retention period post vesting 20%
Variable pay awarded to Katie Murray in 2019 for performance year 2018, a period prior to appointment to the Board, will be subject to deferral over seven years and retention periods in line with regulatory requirements.
Element of pay Operation Maximum potential value Salary To provide a competitive level of fixed cash remuneration and aid recruitment and retention of high performing individuals.
Executive directors are also entitled to travel assistance in connection with company business including the use of a car and driver. RBS will meet the cost of any tax on the benefit.
The maximum award for current directors at the time of grant is capped at:  Chief Executive - 175% of salary.
The vesting level of the award can vary between 0% and 100% of the original number of shares granted, dependent on the delivery of sustained performance.
Shareholding requirements To ensure executive directors build and continue to hold a significant shareholding over the long-term.
Individuals will only qualify for good leaver treatment if they leave due to ill-health, injury, disability, death, retirement (as agreed with RBS), redundancy, the employing company ceasing to be a member of RBS, transfer of the employing business, or any other reason if, and to the extent, the Committee decides in any particular case. If good leaver treatment does not apply then LTI awards will be forfeited on leaving.
Approach to the new UK Corporate Governance Code (the new Code) Ahead of its formal application in 2019, detailed analysis of the new Code was undertaken in 2018 with findings presented to the Committee. The majority of the changes are in line with existing practice at RBS. A summary of the main provisions is set out below. The Committee will continue to monitor and reflect on best practice for these new requirements.
Area Description of provision RBS position Workforce remuneration and alignment with culture
Remuneration Committee to review workforce remuneration and related policies, and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive director remuneration.
The Committee will review relevant culture developments and consider the potential impact on remuneration policy. The aim is to assist the Board in its responsibility to monitor how well culture is being embedded across the organisation and the role that remuneration plays in that.
The FRC guidance recognises that it may not be appropriate to reduce the pension provision for existing directors. However, good practice is for the rates to move over time to be aligned with those of the wider workforce.
As noted earlier in this report, RBS has already taken steps in this area with the pension rate for the new Chief Financial Officer set at 10% of salary, rather than the 25% of salary allowed for under the policy for new executive directors. The rate at 10% is the same as that applicable to the majority of the wider workforce. The position for the Chief Executive will be reviewed as part of the renewal of the directors’ remuneration policy at the 2020 AGM.
The Committee already takes many of these factors into account when determining executive director policy. The current policy was designed around themes of simplicity, alignment with company strategy and culture, and ensuring rewards are supported by sustainable, risk-adjusted long-term performance.
In 2018, we established a Colleague Advisory Panel, chaired by a designated nonexecutive director. The aim of the Panel is to provide direct engagement between colleagues and Board members. The Panel includes colleagues who volunteered to be involved, existing representatives from trade union bodies and works councils, our colleague-led networks and junior management teams.
There is broad discretion under RBS remuneration arrangements and the Committee has used discretion in the past to apply downwards adjustment to the formulaic outcome of LTI vestings.
The remuneration policy and share plan rules contain malus and clawback provisions to adjust or recover awards where appropriate. Details of the process and the circumstances in which RBS can apply malus and clawback are set out on page 80.
Employees are provided with salary and pension funding and certain roles are eligible for benefit funding and variable pay awards. Further details on the policy and remuneration levels for 2018 including pay ratios can be found later in this report.
Flexible working is offered where this is possible and appropriate. This allows colleagues to explore working patterns with their line manager and select a more flexible approach to work that meets their current needs.
Inclusion and diversity is another key element of creating a great place to work and also understanding the needs of our customers. RBS supports a variety of colleague-led groups that help influence strategy and employees also undertake unconscious bias training and mandatory annual inclusion training.
The inclusion category in our colleague opinion survey is the highest scoring category. Targets are in place to improve the proportion of women and ethnic minority leaders across all business areas and RBS is on track to meet these aspirations. Inclusion targets are also part of the measures that impact executive remuneration.
In June 2018, RBS was awarded the ‘Employer of the Year’ award at the Women in Finance Awards.
Fairness is built around a number of themes. A full pay review is undertaken each year for all salary ranges. Pay is compared against the external market so that pay and benefits are competitive. RBS is a fully accredited Living Wage Employer in the UK and our rates of pay continue to exceed the Living Wage Foundation Benchmarks.
RBS has also implemented a more transparent approach by moving more employees to published salary ranges. Improvements have been made to starting salaries with faster progression to the rate for the job. Investment in pay levels in recent years has focused mostly on junior employees, while not increasing fixed pay for executive directors.
We are confident that we pay our employees fairly and keep our HR policies and processes under review to ensure we do so.
RBS continues to work closely with the Chartered Banker Institute and Chartered Banker Professional Standards Board to improve professional standards across the industry.
A Good Leader RBS is continuing to develop great leaders and supporting the development of talent across the Group. Part of this commitment is delivering and embedding our flagship leadership programme – Determined to lead (Dtl). It teaches the skills to lead, manage and coach people so they make positive behaviour changes and improve their performance. By the end of 2018, around 11,000 leaders had completed their Dtl training.
Our colleague opinion survey provides everyone with the opportunity to have a say on what it feels like to work at RBS. Feedback in terms of engagement and leadership has a direct impact on executive pay. A survey by the Banking Standards Board, an independent body, is also used to help raise standards of behaviour and competence across the UK banking sector.
Regular engagement takes place with colleagues and representative bodies throughout the year. Board members visit business areas to hear directly from colleagues and there are regular townhall meetings and online forums to facilitate question and answer sessions with senior executives.
Benefits (2) 117 113 20 26 Pension (3) 350 350 210 280 Total fixed remuneration 2,467 2,463 1,430 1,906 Annual bonus n/a n/a n/a n/a
2016 LTI award – final assessment of performance measures (audited) An assessment of performance of each relevant element was provided by internal control functions and PwC assessed relative Total Shareholder Return (TSR) performance against a peer group of comparator banks.
Relative TSR (25%) TSR at median 20% TSR at upper quartile
Vesting between 0% - 100%* CET1 ratio target: 13% or above
Vesting between 0% - 100%* NPS target: Gap to number 1 of 2.3
* Vesting in the Safe & Secure and Customers & People categories can be qualified by Committee discretion taking into account changes in circumstances over the period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
Economic Profit was defined as profit after tax and preference share charges less tangible net asset value multiplied by the cost of equity. The companies in the relative TSR group for this award were: Barclays, Lloyds, HSBC, Standard Chartered, BBVA, BNP Paribas, Crédit Agricole, Santander, Société Générale, Unicredit, ING, Intesa San Paolo and Nordea Bank.
2016 LTI vesting amounts included in the total remuneration table (audited) LTI awards were granted in March 2016. The award held by Ewen Stevenson lapsed on 30 November 2018, his final date of employment. The performance period ended on 31 December 2018 and the performance conditions have been assessed as set out on the previous page. While performance has been assessed, the shares will not vest until March 2020 and March 2021 and remain subject to employment conditions.
Performance category % vesting Maximum shares (1) Shares due to vest Estimated value (2)
Relative TSR 0% 442,987 — Safe & Secure Bank 50% 442,987 221,493
Notes: (1) The maximum number of shares for the performance assessment is calculated in line with the underlying award structure, however the actual number of shares received will never exceed the number of shares capped under the approved policy and the regulatory maximum at the time of grant. Each performance category can vest up to 100% of salary at grant as shown above. For the 2016 award, the number of shares capped at grant was 1,187,207 and therefore the vesting outcome falls within the cap.
2017 LTI awards to executive directors – current assessment The table represents an early indication of the potential vesting outcome as at 31 December 2018. Details of the final performance assessment against targets at the end of the three year period and any use of discretion will be disclosed in the 2019 remuneration report. The Committee may consider the proximity of legacy items to the executive directors when assessing the vesting level.
Relative TSR Relative Total Shareholder Return 25% Relative TSR performance between median and upper quartile against comparator group results in vesting between 20% and 100%.
Note: (1) There are six chosen customer segments for advocacy and five customer segments for Trust. Customer advocacy is measured by Net Promoter Score and Trust is measured by the percentage of customers that trust RBS to ‘do the right thing’. Chosen segments reflect RBS’s key products, service channels and customer groups. There are targets for each segment and full details will be disclosed in the 2019 report prior to any vesting. LTI awards granted in 2018 onwards have been made under the new remuneration construct. See overleaf for further details.
Ross McEwan 7 March 2018 1,575 592,328 Between 0% - 100% with no set minimum vesting
The awards were subject to a pre-grant performance assessment and a further assessment will take place at the end of three years. Full details can be found in the 2017 Report and Accounts and the performance assessment framework is also set out overleaf.
Note: (1) Awards were granted as conditional share awards. The number of shares was calculated in line with the approved policy with the maximum potential award being 175% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer. The award price of £2.659 was based on the average share price over five business days prior to grant. The award levels reflected a reduction of 10% to the maximum award following the pre-grant assessment of performance over 2017. Ewen Stevenson’s award was forfeited on 30 November 2018, his final date of employment. For Ross McEwan, subject to the pre-vest assessment, the award will be eligible to vest in equal amounts between years 2021 and 2025. Malus provisions will apply up until vest and clawback provisions will also apply for a period of at least seven years from the date of grant. Further details on malus and clawback can be found on page 80.
Performance assessment framework for LTI awards granted from 2018 onwards For each of the core performance areas, the Committee will consider whether the executive director has achieved what would reasonably have been expected over the relevant period. The Committee will follow a robust process to review performance against pre-set objectives relevant to RBS’s strategic aims, but will apply its judgement without reference to formulaic targets and weightings. Performance will be assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception underpins will also apply under which the Committee, with input from the Board Risk Committee and Sustainable Banking Committee, can consider if there are any other factors that would lead to a downwards adjustment.
The majority of the performance variation will normally take place under the pre-grant assessment, with a further assessment prior to any vesting taking place. Overall, the achievement of reasonable or ‘target’ performance expectations will deliver full or nearly full payout of the LTI awards, as long as executives deliver good, sustainable performance. This approach reflects the significantly reduced level of awards compared to the previous policy, creating more predictable outcomes and encouraging safe and secure growth within risk appetite. Each year, the performance factors will be determined in light of RBS’s priorities for that year.
Year-on-year improvement in engagement and leadership indices, with a one point increase in each.
Engagement score increased by three points and the leadership score increased by two points since 2017, exceeding the targets.
Year-on-year improvement in Culture index, with a target of a one point increase.
Progress towards target of at least 30% women in ‘senior roles’ by 2020 in each franchise and function.
Progress towards 2025 target of number of Black Asian Minority Ethnic (BAME)/non-white UK employees in the top four layers of RBS, of at least 14% (UK only).
 Operated in an environment in which risk is seen as part of the way we work and think?
In addition, the Committee will consider the potential application of Risk & Control and Stakeholder Perception underpins following advice from the Board Risk Committee and Sustainable Banking Committee. This provides scope to consider significant risk, stakeholder or reputational matters not already captured in the performance assessment. The underpins allow the Committee to consider events arising during the period between grant and the end of year three.
Performance Goals for 2019 (for the pregrant assessment of LTI awards to be made in 2020) The table below forms the basis of the pregrant assessment for LTI awards to be made in early 2020. Further details on the 2019 goals and targets and the assessment of performance against these will be set out in the 2019 Directors’ Remuneration Report.
Core area Performance Goals for 2019 Measures for assessing pre-grant performance for 2020 LTI awards
Achieve planned RoTE targets for Group and NatWest Holdings (NWH Ltd).
Improve or maintain control environment. Group and NWH Ltd achievement/maintenance and embedding of desired control environment rating.
Compliance with ring-fencing rules. Compliance with the minimum controls for the effective management of compliance with ring-fencing rules.
Achievement of targets for brands against Competition and Markets Authority (CMA) rankings and Net Promoter Scores (NPS).
Build a strong internal customer service. Achievement of Group and NWH Ltd targets for internal NPS and Core Service Behaviour scores.
Build up and strengthen a healthy culture. Based on the Banking Standards Board assessment and achieving the culture target for Group and NWH Ltd.
Progress on the number of BAME/non-white UK employees in the top four layers of RBS.
No other remuneration payment was made in connection with his departure and all outstanding long-term incentive awards were forfeited on his final date of employment.
Total remuneration for the Chairman and non-executive directors for 2018 As part of the implementation of ring-fencing arrangements during 2018, a number of additional Boards and Board Committees were established for key legal entities. The increase in governance structures results in additional responsibilities and time commitment, particularly for non-executive directors serving on the Group Board Risk Committee and Group Audit Committee.
For RBSG Board directors who also serve on the boards and committees of NatWest Holdings Limited, The Royal Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited, the fees below reflect membership of all five boards and their respective board committees.
Total single figure of remuneration for the Chairman and non-executive directors during 2018 (audited) Fees Benefits Total
(4) Penny Hughes stepped down from the Board on 30 May 2018. Yasmin Jetha’s fees are until 30 April 2018, the date she stepped down from the RBSG Board but she continues to receive fees as a member of the boards of NatWest Holdings Limited. Patrick Flynn joined the Board on 1 June 2018.
Group BRC Board Risk Committee UBI DAC BOC Board Oversight Committee for the Ulster Bank Ireland business
Notes: (1) Fixed share allowance payable broadly in arrears, currently in two instalments per year, with shares released in equal tranches over a three year period. (2) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements and the Chief Executive receives a flight allowance and assistance with tax returns as part of his relocation arrangements. The value of benefits received will be disclosed each year. (3) The first LTI award will be made to Katie Murray in her capacity as an executive director in 2020, following a pre-grant assessment of performance over 2019.
For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with arrangements in place at that time.
Chairman and non-executive directors’ annual fees for 2019 Fees for RBSG Board (1) Rates from 1 January 2019
Other fees for RBSG Board directors Chairman of NatWest Markets Plc (composite fee to cover all boards and committees) £260,000 Chairman of the Colleague Advisory Panel £15,000
Note: (1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, The Royal
Directors’ interests in RBS shares and shareholding requirements (audited) The shareholding requirement is to hold shares to the value of 400% of salary for the Chief Executive and 250% of salary for the Chief Financial Officer. Unvested shares from LTI awards count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place, at the end of the three year period. Once the respective retention periods have passed, directors can only sell up to 25% of the shares received until the requirement is met. There are no shareholding requirements for non-executive directors.
Notes: (1) Shares owned beneficially as at 31 December 2018 or date of stepping down from the Board if earlier. The interests shown above include shares held by persons closely associated with the directors. As at 14 February 2019, there were no changes to the shares held shown above. Katie Murray joined the Board on 1 January 2019 and held 34,282 shares as at 14 February 2019.
Shares owned outright Shares subject to conditions Total shares purchased voluntarily by the Chief Executive shares from vested LTI awards and fixed share allowances released from retention periods shares from fixed share allowances still subject to retention periods unvested LTI award from 2015 - performance assessment has taken place but subject to further deferral and employment conditions prior to vesting unvested LTI awards from 2016 to 2018 – subject to performance assessment, deferral and employment conditions the vesting dates for LTI awards are shown in the table below.
Directors’ interests under the company’s share plans (audited) Long-term incentive awards
Notes: (1) The performance period ended on 31 December 2017 resulting in the lapse of 46,388 shares due to the performance conditions not being met in full. The remaining 371,098 shares will vest in two equal amounts in 2019 and 2020, subject to continued employment conditions. (2) The performance period ended on 31 December 2018 as set out earlier in this report. Following the assessment in January 2019, it was agreed that 487,285 shares would vest in 2020 and 2021, subject to continued employment conditions. The remaining shares will be lapsed and reflected in the 2019 report. (3) Ewen Stevenson ceased to be an employee on 30 November 2018, at which point all outstanding awards were forfeited.
Total Shareholder Return (TSR) performance The graph below shows the performance of RBS over the past ten years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added for comparison. Source: Datastream 2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE 2017 YE 2018 YE
Notes: (1) 2013 remuneration includes Stephen Hester (SH) as Chief Executive for the period to 30 September and Ross McEwan (RM) for October to December 2013. (2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
CEO to employee pay ratios We are including the table below ahead of new reporting requirements formally applying next year. The ratios compare the total remuneration of the Chief Executive, as set out in this report, against the remuneration of the median UK employee as well as employees at the lower and upper quartiles. The disclosure will build up over time to cover a rolling 10-year period.
 Vesting levels for LTI awards granted in 2015 and the interim assessment of 2016/17 LTI awards.
 The implications of the UK Corporate Governance Code changes and new pay ratio disclosures.
Annual Report on Remuneration – 2018 Vote No of shares Percentage
This section contains a number of disclosures which are required in accordance with Article 450 of the Capital Requirements Regulation. This section should be read in conjunction with the Directors’ Remuneration Report starting on page 62.
Independent control functions exist for key legal entities outside the ring-fence (NatWest Markets Plc and RBS International), with dual solid reporting lines into both the legal entity Chief Executive Officer and the Group Control Function Head.
Risk in our remuneration process 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 and reflective of performance and can be riskadjusted. Fixed pay is set at an appropriate level to avoid incentives that are adverse to sound risk management, and at a level which would allow RBS to pay zero variable pay.
Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pay pools, and incentive plan design as well as the application of malus and clawback. The Committee is supported by the Group Board Risk Committee (BRC) and the RBS Risk function.
The assessment process for LTI awards to executive directors and other recipients is founded on the balanced scorecard approach used for the multi-step bonus pool process, reflecting a consistent risk management performance assessment.
The governance of culture is clearly laid out with Senior Management Function roles having clearly defined accountabilities. The Board and Sustainable Banking Committee also play key roles in building our cultural priorities. Clear measurement frameworks are in place to measure progress.
During 2018 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including: reduction and forfeiture of unvested awards through malus; dismissal with forfeiture of unvested awards; and suspension of awards pending further investigation.
Other Business Areas 2.65 14.66 17.31 3. Amounts and form of fixed and variable remuneration Fixed remuneration consisted of salaries, allowances, pension and benefit funding.
Where required, remuneration is constrained within the limit of variable to fixed remuneration in accordance with EBA rules.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US. RBS complies with all applicable sections of the US Sarbanes-Oxley Act of 2002, subject to a number of exceptions available to foreign private issuers.
Work continued throughout 2018 to strengthen the control environment and progress was made across all areas. Additionally, there was significant management focus on Brexit planning, readiness for the introduction of the UK’s ringfencing rules and the ongoing work to enhance customer due diligence standards. While enhancements to the wider control environment were made, the journey of improvement remains a continued area of focus. RBS also continues to progress the embedding of a strong risk culture.
RBS has assessed the effectiveness of its internal control over financial reporting as of 31 December 2018 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of ‘Internal Control - Integrated Framework'.
Based on its assessment, management has concluded that, as of 31 December 2018, RBS’s internal control over financial reporting is effective.
The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. In April 2018 RBS submitted its required annual written affirmation to the NYSE, and in June 2018 it submitted an interim written affirmation, both confirming RBS’s full compliance with those and other applicable provisions. More detailed information about the Group Audit Committee and its work during 2018 is set out in the Group Audit Committee report on pages 54 to 56.
Group structure During 2018 in preparation for ring-fencing a number of changes were made to the Group structure. Following these changes the company owns three main subsidiaries, NatWest Holdings Limited (the parent of the ring-fenced group which includes, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Ireland DAC), NatWest Markets Plc (the investment bank) and The Royal Bank of Scotland International (Holdings) Limited (the parent of The Royal Bank of Scotland International Limited).
At 31 December 2018, HMT’s holding in the company’s ordinary shares was 62.3%.
NatWest Markets N.V. (formerly Royal Bank of Scotland N.V. renamed in 2018) NatWest Markets N.V. (NWM N.V.), the RBS Group’s banking entity in the Netherlands, continues to implement its plan to be operationally ready to serve our European Economic Area customers when the UK leaves the European Union on 29 March 2019, in the event that there is a loss of access to the EU Single Market. NWM N.V. is expected to become a subsidiary of NatWest Markets Plc, subject to regulatory approvals.
Employees As at 31 December 2018, RBS employed 67,000 people (full-time equivalent basis, including temporary workers). Details of related costs are included in Note 3 on the consolidated accounts.
Our Values, which guide the way RBS identifies the right people to serve customers well, and how it manages, engages and rewards colleagues, are at the heart of Our Code (the bank-wide Code of Conduct).
Rewarding employees RBS’s approach to performance management provides clarity for employees about how their contribution links to RBS’s ambition.
Developing colleagues RBS offers a wide range of additional learning opportunities. In 2018 the NextGen talent development programme was launched for high potential colleagues at managerial level, helping them become the future leaders RBS will need.
RBS also has a range of Female Development Programmes supporting women to reach their full potential, and helping RBS to become fully gender balanced by 2030.
Youth Employment In 2018, RBS welcomed 516 people across the Graduate and Apprenticeship schemes as well as around 150 Interns into internship programmes.
Health and wellbeing of colleagues As a strong component of making RBS a great place to work, wellbeing has successfully delivered against three pillars – physical, mental, and social; and in 2018 built momentum on the fourth pillar, financial wellbeing. Further details can be found on page 16 of the Strategic Report and on the Sustainable Banking pages on rbs.com.
Employee consultation RBS recognises employee representatives such as trade unions and work councils in a number of businesses and countries, and management regularly discuss developments and updates on the progress of its strategic plans with the European Employee Council (EEC). RBS has ongoing engagement and discussion with those bodies, given the scale of change taking place across RBS.
UK Finance disclosure code RBS’s 2018 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers' Association in 2010 and adopted by UK Finance. The Code sets out five disclosure principles together with supporting guidance. The principles are that RBS and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures, acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
Enhanced Disclosure Task Force (EDTF) and Disclosures on Expected Credit Losses (DECL) Taskforce recommendations The EDTF, established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012, with an update in November 2015 covering IFRS 9 expected credit losses (ECL). In November 2018, the DECL Taskforce, jointly established by the Financial Conduct Authority, Financial Reporting Council and the Prudential Regulatory Authority, published its phase 1 report, further articulating EDTF (2015) recommendations. RBS’s 2018 Annual Report and Accounts and Pillar 3 Report reflect EDTF and have regard to DECL Taskforce recommendations.
At the Annual General Meeting in 2018 shareholders authorised the company to make market purchases of up to 1,199,376,674 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
On 6 February 2019 RBS held a General Meeting and shareholders approved a special resolution to give authority for the Company to make off-market purchases of up to 4.99 per cent of the Company’s ordinary share capital in issuance from HM Treasury (or its nominee) at such times as the Directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting available on www.rbs.com. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). At the 2018 Annual General Meeting, shareholders gave authority to directors to offer a scrip dividend alternative on any dividend paid up to the conclusion of the Annual General Meeting in 2021.
Pursuant to the UK Listing Rules, certain employees of the company require the approval of the company to deal in the company’s shares.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment, are set out in our Articles of Association. It will be proposed at the 2019 Annual General Meeting that the directors’ authorities to allot shares under the Companies Act 2006 (the “Companies Act”) be renewed. The Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
Patrick Flynn was appointed on 1 June 2018 and Katie Murray was appointed on 1 January 2019.
All directors of the company are required to stand for election or re-election annually by shareholders at the Annual General Meeting and, in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders.
As at 14 February 2019, there were no changes to the shareholdings shown in the table above.
Political donations At the Annual General Meeting in 2018, shareholders gave authority under Part 14 of the Companies Act 2006, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2018, RBS made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that RBS’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to:  select suitable accounting policies and then apply them consistently;  make judgements and estimates that are reasonable and prudent; and
RBS understands and communicates the financial and non-financial risks it is taking RBS has the tools and capability to support risk management and decision-making across the organisation
Ensuring RBS is confident the right decisions are being taken, by the right people, at the right time
Presentation of information Where indicated in the section headers, information in the Capital and risk management section (pages 89 to 164) is within the scope of the Independent auditor’s report. Where a main section header, presented in bold, is marked as audited all sub sections are also audited.
Risk management framework Introduction RBS operates an integrated risk management framework, centred around the embedding of a strong risk culture, which is designed to achieve compliance with 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 decisionmaking 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 the 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 decision-making at senior management committees, which informs management strategies across the organisation.
Measurement, evaluation and transparency are also fundamental elements of the framework, providing robust analysis of the materiality and likelihood of specific threats as well as supporting understanding and communication of the financial and non-financial risks to which RBS is exposed.
RBS also has a strong focus on continually improving the way risk is managed, particularly in terms of how threats are anticipated or responded to, but also in terms of simplifying or enhancing existing controls, policies and practice.
Essential to this is the ability to scan both the medium and long-term horizon for risks. Stress testing is used to quantify, evaluate and understand the potential impact that changes to risks may have on the financial strength of RBS, including its capital position. In turn, the results of stress tests can be used to inform and shape strategy.
Given the evolving landscape, including the structural reform required by the UK’s ring-fencing requirements, in 2018 there was an emphasis on enhancing both the risk culture and risk appetite elements of the framework – as well as the interconnectivity between framework components.
Risk management framework continued 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.
The methodology for setting, governing and embedding risk appetite across RBS is being further enhanced with the aim of simplifying current risk appetite processes and increasing alignment with strategic planning and external threat assessments.
Risk culture A strong risk culture is essential if RBS is to achieve its ambition to build a truly customer-focused bank. RBS’s risk culture target is to make risk simply part of the way that employees work and think.
A risk culture measurement and reporting approach has been developed, enabling RBS to benchmark both internally and externally. This allows RBS to assess progress in embedding its target risk culture where risk is simply part of the way staff work and think.
Code of Conduct Aligned to RBS’s values is the Code of Conduct. The code provides guidance on expected behaviour and sets out the standards of conduct that support the values. It explains the effect of decisions that are taken and describes the principles that must be followed.
Provides oversight and advice on: current and potential future risk exposures, and future risk strategy, including determination of risk appetite and tolerance; and the effectiveness of the risk management framework.
Reviews and challenges the end-to-end capital management process. It is the focal point for prudential regulatory requests regarding asset quality reviews and stress testing.
Responsible for setting the limits, policies and controls relating to financial balance sheet risks, including funding and liquidity, intra-group exposures, non-traded market risk and structural foreign currency risks.
Leads the NatWest Holdings Risk function by defining and delivering its risk, conduct, compliance and financial crime strategies and service propositions to support NatWest Holdings’ ambition, strategy and risk appetite, and is aligned to RBS Group strategy. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Delivers risk services across the Group in line with service level agreements. Contributes to NatWest Holdings strategy as a member of NatWest Holdings Limited Executive Committee.
Leads the NatWest Markets Risk function by defining and delivering its risk, conduct, compliance and financial crime strategies and service propositions to support NatWest Markets’ ambition, strategy and risk appetite, and is aligned to RBS Group strategy. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to NatWest Markets strategy as a member of NatWest Markets Executive Committee.
Leads the RBSI Risk function by defining and delivering its risk, conduct, compliance and financial crime strategies and service propositions to support RBSI’s ambition, strategy and risk appetite, and is aligned to RBS Group strategy. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to RBSI strategy as a member of RBSI Executive Committee.
 Providing senior executives with relevant management information and reports, and escalating concerns where appropriate.
Third line of defence – Internal Audit Responsibilities include:  Providing assurance to the Group Audit Committee on the appropriateness of the design and operational effectiveness of governance, risk management and internal controls to monitor and mitigate material risks.
Risk appetite statements consist of qualitative statements of appetite supported by risk limits and triggers that operate as a defence against excessive risk-taking. They are established at RBS-wide level for all strategic risks and material risks, and at legal entity, franchise, and function level for all other risks.
RBS policies directly support 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.
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. When evaluating possible strategies, costs and benefits, residual risks (risks that are retained) and secondary risks (those caused by the risk mitigation actions) are considered. Monitoring and review processes are in place to track results. Early identification and effective management of changes in legislation and regulation are critical to the successful mitigation of conduct 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.
Model risk Model risk is the risk that a model is specified incorrectly (not achieving the objective for which it is designed), implemented incorrectly (an error in translating the model specification into the version actually used), or being used incorrectly (correctly specified but applied inappropriately).
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 stress-testing purposes also play a key role in ensuring RBS holds sufficient capital, even in stressed market scenarios.
Model Risk Governance Model Risk Governance is responsible for setting policy and providing a governance framework for all of RBS’s models and related processes. It is also responsible for defining and monitoring model risk appetite in conjunction with model owners and model users, monitoring the model risk profile and reporting on the model population as well as escalating issues to senior management, through the Model Risk Forum, and the respective franchise and function risk committees.
Stress testing Stress testing – capital management Stress testing is a key risk management tool and a fundamental component of RBS’s approach to capital management. It is used to quantify, evaluate and understand the potential impact of specified changes to risk factors on the financial strength of RBS, including its capital position. Stress testing includes:  Scenario testing, which examines the impact of a hypothetical future state to define changes in risk factors.  Sensitivity testing, which examines the impact of an incremental change to one or more risk factors. The process for stress testing consists of four broad stages: Define scenarios
 Scenario results are analysed by subject matter experts and appropriate management actions are then developed.
Risk management framework continued Stress testing is used widely across RBS. The diagram below summarises key areas of focus: Stress testing usage within
Specific areas that involve capital management include:  Strategic financial and capital planning – through assessing the impact of sensitivities and scenarios on the capital plan and capital ratios.
Reverse stress testing is also carried out. This examines circumstances that can lead to specific, defined outcomes such as business failure. Reverse stress testing allows RBS to examine potential vulnerabilities in its business model more fully.
In particular, assessments of capital requirements rely on forecasts of:  Future business performance given expectations of economic and market conditions over the forecast period.
 Future business performance under adverse economic and market conditions over the forecast period. A range of scenarios of different severity may be examined.
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 loss-absorbing debt instruments in sufficient quantity to meet regulatory timelines. The cost of issuance will be factored into business performance metrics.
The results of stress tests are not only used widely across RBS but also by the regulators to set specific capital buffers. RBS takes part in a number of stress tests run by regulatory authorities to test industrywide vulnerabilities under crystallising global and domestic systemic risks. In 2018, RBS took part in the Bank of England and European Banking Authority stress tests. Details are set out on page 93.
Under stress testing, IFRS 9 volatility can have a more material impact. This is because the peak-to-trough change in CET1 may be affected by the transitions from Stage 1 to Stage 2 in stress conditions. RBS uses stress and the peak-to-trough movements to help assess the amount of CET1 capital it needs to hold in stress conditions, in accordance with the capital risk appetite framework.
The ICAAP is used to form a view of capital adequacy separately to the minimum regulatory requirements. The ICAAP is used by the PRA to make an assessment of RBS-specific capital requirements through the Pillar 2 framework.
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.
Governance Capital management is subject to substantial review and governance. Formal approval of capital management policies is either by the Asset & Liability Management Committee or by the Board on the recommendation of the Board Risk Committee.
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 build-up of stress is detected early and the response escalated appropriately through recovery planning.
This scenario models the combined impact of an idiosyncratic and market stress occurring at once. The combined scenario reflects the contingency that a severe name-specific event occurs at RBS in conjunction with a broader market stress, causing wider damage to the market and financial sector and severely affecting funding markets and assets.
 clarifying roles, responsibilities and escalation routes to minimise uncertainty or delay
 appointing dedicated option owners to reduce the risk of delay and bandwidth concerns
Stress testing – market risk Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis as part of the Stress Testing Data Framework. The return provides the regulator with an overview of RBS’s banking book interest rate exposure, providing detailed product information analysed by interest rate driver and other characteristics – including accounting classification, currency and, counterparty type.
Non-traded market risk exposures which are not captured under Pillar 1 are capitalised through the ICAAP. The 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. The ICAAP is completed with a combination of value and earnings measures. The total non-traded market risk capital requirement is determined by adding the different charges for each sub risk type. The ICAAP methodology captures at least ten years of historical volatility, produced with 99% confidence level. Methodologies are reviewed by RBS Model Risk and the results are approved by the Technical Asset & Liability Management Committee.
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 fair value through other comprehensive income portfolios.
 The 2018 stress test examined the impact, over five years, of deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs. The economic scenario in the test was more severe than the global financial crisis.
 On an IFRS 9 transitional basis, the CET1 ratio reached a low point of 9.6%, significantly above the hurdle rate of 7.3%.
 On an IFRS 9 non-transitional basis, the CET1 ratio reached a low point of 9.2%, significantly above the hurdle rate of 6.9%.
 The 2018 EBA stress test did not contain a pass/fail threshold.  On an IFRS 9 transitional basis, RBS’s CET1 ratio under the adverse scenario reached a low point of 9.9%  On an IFRS 9 non-transitional (fully loaded) basis, RBS’s
Capital, liquidity and funding risk Definitions Capital consists of reserves and instruments issued that are available, have a degree of permanency and are capable of absorbing losses. A number of strict conditions set by regulators must be satisfied to be eligible as capital.
 Additional Tier 1 (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.
Treasury bills and other high quality government and US agency bonds.
Funding RBS maintains a diversified set of funding sources, including customer deposits, wholesale deposits and term debt issuance. RBS also retains access to central bank funding facilities. For further details on capital constituents and the regulatory framework covering capital, liquidity and funding requirements, please refer to the RBS Pillar 3 Report 2018 on page 6. For MREL refer to page 8.
 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 lossabsorbing resources of 22.9% of RWAs by 1 January 2020, rising to 26.5% by 1 January 2022. Total loss absorbing capital, based on RBS’s interpretation of the rules and including the benefit of legacy securities, was 30.7% of RWAs at 31 December 2018.
 The net stable funding ratio is 141% (2017 – 139% on estimated comparable basis) above the minimum target of 100%.
Capital planning is integrated into the Group’s wider annual budgeting process and is assessed and updated at least monthly. Regular returns are submitted to the PRA which include a two year rolling forward view. Other elements of capital management, including risk appetite and stress testing, are set out on pages 92 and 93.
 Capital plans are produced for the Group, its key operating entities and its businesses over a five year planning horizon under expected and stress conditions. Stressed capital plans are produced to support internal stress testing in the ICAAP for regulatory purposes.
 Capital plans are developed to maintain capital of sufficient quantity and quality to support the Group’s business, its subsidiaries and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requirements.
NatWest Markets Plc left the UK DoLSub during 2018 and now manages its own liquidity portfolio, as required by ring-fencing legislation.
RBS categorises its liquidity portfolio, including its locally managed liquidity portfolios, into primary and secondary liquid assets. The size of the liquidity portfolios are determined by referencing RBS’s liquidity risk appetite. RBS retains a prudent approach to setting the composition of the liquidity portfolios, which is subject to internal policies applicable to all entities and limits over quality of counterparty, maturity mix and currency mix.
RBS International, NWM N.V. and UBI DAC hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
(2) Globally systemically important banks (G-SIBs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of between 1% and 3.5%. In November 2018 the FSB announced that RBS is no longer a GSIB. From 1 January 2020, RBS will be released from this global buffer requirement.
(3) The Group will be subject to a systemic risk buffer (SRB) of between 0% and 3%. The SRB will apply from 1 January 2019 and will apply at the ring-fenced bank sub-group level rather than at the consolidated group level. The RFB SRB may require the Group to hold a minimum amount of capital at the consolidated group level beyond the levels set out in the table above.
(6) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If the Group fails to meet the combined buffer requirement, it is subject to restrictions on distributions on CET1 instruments, discretionary coupons on AT1 instruments and on payment of variable remuneration or discretionary pension benefits. These restrictions are calculated by reference to the Group’s Maximum Distributable Amount (MDA). Where a PRA buffer is applicable, the MDA trigger is below the PRA buffer and MDA restrictions are not automatically triggered if the Group fails to meet its PRA buffer. The MDA is calculated as the amount of interim or year-end profits not yet incorporated into CET1 capital multiplied by a factor ranging from 0 to 0.6 depending on the size of the CET1 shortfall against the combined buffer.
Note: (1) The countercyclical leverage ratio buffer is set at 35% of the Group’s CCyB. As noted above the UK CCyB is currently 1.0% (effective from November 2018).
Note: (1) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2
Capital, liquidity and funding risk continued Measurement Capital, risk-weighted assets and leverage: Key metrics
Credit risk 137.9 137.9 144.7 144.7 Counterparty credit risk 13.6 13.6 15.4 15.4 Market risk 14.8 14.8 17.0 17.0 Operational risk 22.4 22.4 23.8 23.8
Liquidity key metrics 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 Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.
(3) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2 NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its interpretation of the CRR2 proposals with effect from 1 January 2018. The pro forma CRR2 NSFR at 31 December 2017 under CRR2 proposals is estimated to be 139%.
Defined benefit pension fund adjustment (394) (394) (287) (287) Cash flow hedging reserve 191 191 (227) (227)
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out — 140 — 140
At 1 January 2018 31,957 4,041 6,765 42,763 Profit for the year 1,381 1,381 Own credit (315) (315)
Share capital and reserve movements in respect of employee share schemes 77 77 Ordinary shares issued 135 135 Foreign exchange reserve 308 308 FVOCI reserves 88 88 Goodwill and intangibles deduction (73) (73) Deferred tax assets 109 109 Prudential valuation adjustments 2 2 Expected loss less impairment 632 632 Pension contribution (1,476) (1,476) Capital instruments issued (89) (89) Net dated subordinated debt/grandfathered instruments (537) (537) Foreign exchange movements (734) 334 (400) Foreseeable ordinary and special dividends (1,326) (1,326)
Capital, liquidity and funding risk continued Leverage exposure The leverage exposure is based on the CRR Delegated Act.
Cash and balances at central banks 88.9 98.3 Trading assets 75.1 86.0 Derivatives 133.3 160.8 Loans 318.0 321.6 Other assets 78.9 71.4
CRR Leverage exposure 644.5 679.1 Claims on central banks (85.0) (92.0) UK leverage exposure 559.5 587.1
Undrawn commitments <1 year which may not be cancelled 1.7 1.8 Other off-balance sheet items with 20% credit conversion factor (CCF) 0.6 0.6
Revolving credit risk facilities 27.1 27.0 Term loans 3.5 3.6 Mortgages 0.2 — Other undrawn commitments >1 year which may not be cancelled & off-balance sheet 2.2 2.1
Capital, liquidity and funding risk continued Loss absorbing capital The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet MREL criteria. For further details regarding regulatory requirements in relation to MREL, refer to page 97.
Tier 1 capital: end-point CRR compliant AT1 of which: RBSG (holdco) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 of which: RBSG operating subsidiaries (opcos) — — — — — — — —
Tier 1 capital: end-point CRR non compliant of which: holdco 1.4 1.6 1.4 0.5 3.5 3.6 3.5 2.6 of which: opcos 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Tier 2 capital: end-point CRR compliant of which: holdco 6.8 6.7 6.3 5.1 6.5 6.5 6.4 4.9 of which: opcos 0.5 0.5 0.3 0.5 2.3 2.4 0.5 0.5
Senior unsecured debt securities issued by: LAC as a ratio of RWAs 30.7% 27.1% LAC as a ratio of CRR leverage exposure 9.0% 8.0%
Notes: (1) Par value reflects the nominal value of securities issued. (2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the MREL criteria. (3) LAC value reflects RBS’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem.
(4) Corresponding shareholders’ equity was £45.7 billion (2017 - £48.3 billion). (5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
Covered bonds - amount (£m) 5,367 — — 3,145 — — 2,222 - weighted average rate spread (bps) 122 — — 99 — — 156
Subordinated debt instruments roll-off profile (2) RBSG (£m) 6,815 1,003 — — — 4,049 1,763 NWM Plc (£m) 658 — 36 99 — 450 73 NatWest Plc (£m) 1,159 727 — — 343 90 — NWM N.V. (£m) 668 147 65 11 — 106 339 UBI DAC (£m) 76 — — — — — 76
Risk-weighted assets The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers.
Notes: (1) There was a £0.1 billion reduction in RWAs from 31 December 2017 to 1 January 2018 reflecting the day one impact of the adoption of IFRS 9. (2) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
The table below analyses the movement in end-point CRR RWAs by segment during the year.
At 1 January 2018 (1) 43.0 18.0 71.8 9.1 5.1 52.9 0.9 200.8 Foreign exchange movement — 0.1 0.3 — — 0.4 0.1 0.9 Business movements (0.3) (2.2) (4.9) 0.3 0.3 (8.3) 0.1 (15.0)
Credit risk 35.8 13.8 61.0 8.3 6.2 12.7 0.1 137.9 Counterparty credit risk — — — — — 13.6 — 13.6 Market risk — — — — — 14.8 — 14.8 Operational risk 9.3 0.9 6.6 1.1 0.7 3.8 — 22.4 Total RWAs 45.1 14.7 67.6 9.4 6.9 44.9 0.1 188.7
 The decrease in NatWest Markets primarily driven by the legacy business, in addition to reductions in the core business.
 Ulster Bank RoI RWAs reduced principally reflecting the impact of a non-performing loan sale and an improvement in credit metrics.
 RWAs in UK PBB increased mainly due to model updates and movements in risk parameters.
 As part of the preparation for ICB ring-fencing, assets have transferred from UK PBB, Commercial Banking and Treasury into RBSI and NatWest Markets which are shown in other movements. Other movements also reflects NWM Securities Inc. being granted the regulatory waiver to use the AIRB approach to calculate it’s counterparty credit risk capital requirements.
RBS (1) UK DoLSub (2) NWM Plc RBS UK DoLSub (2) £m £m £m £m £m
Cash and balances at central banks 83,781 59,745 11,005 93,657 91,377 Central and local government bonds AAA rated governments 8,188 4,386 615 3,944 2,760 AA- to AA+ rated governments and US agencies 35,683 25,845 5,256 26,233 24,084 43,871 30,231 5,871 30,177 26,844 Primary liquidity 127,652 89,976 16,876 123,834 118,221 Secondary liquidity (3) 70,231 69,642 344 62,555 62,144 Total liquidity value 197,882 159,618 17,220 186,389 180,365
Total carrying value 225,039 186,340 17,388 209,892 203,733 Notes: (1) RBS includes UK DoLSub, NatWest Markets plc and other significant operating subsidiaries that hold liquidity portfolios. These include RBS International, NWM
N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules. (2) UK DoLSub comprises RBS’s four licensed deposit-taking UK banks within the ring-fenced bank: National Westminster Bank Plc The Royal Bank of Scotland plc, Coutts & Co and Ulster Bank Limited. The reduction in the UK DoLSub liquidity balances during 2018 is driven by NatWest Markets and RBS International managing liquidity on a stand-alone basis, with NatWest Markets plc leaving the UK DoLSub during H2 2018 and RBS International building its own liquidity portfolio.
(3) Comprises assets eligible for discounting at the Bank of England and other central banks.
Debt securities in issue Commercial papers (CP's) and certificates of deposits (CD'S) 3,157 — 3,157 4,637 — 4,637 Medium-term notes 4,928 25,596 30,524 2,316 16,902 19,218 Covered bonds — 5,367 5,367 987 5,321 6,308 Securitisations — 1,375 1,375 — 396 396 8,085 32,338 40,423 7,940 22,619 30,559
Funding available in resolution as a % of CET1 capital 75% 50%
Funding available in resolution as a % of leverage exposure 4% 2%
Notes: (1) Includes £206 million (2017 - £190 million) of DFV deposits included in other financial liabilities on the balance sheet. (2) Includes £428 million (2017 - £691 million) of HFT deposits included in trading liabilities and nil (2017 - £561 million) of DFV deposits included in other financial liabilities on the balance sheet. (3) Includes £267 million (2017 - £68 million) of HFT deposits included in trading liabilities on the balance sheet. Includes £14.0 billion (2017 - £19.0 billion) relating to Term Funding Scheme participation and £1.8 billion (2017 - £1.8 billion) relating to RBS’s participation in central bank financing operations under the European Central Bank’s Targeted Long-term refinancing operations.
(4) Includes £1,093 million (2017 - £543 million) of HFT deposits included in trading liabilities and £7 million (2017 - £124 million) of DFV deposits included in other financial liabilities on the balance sheet.
(5) Includes held-for-trading repos of £25,645 million (2017 - £28,363 million) and amortised cost repos of £4,715 million (2017 - £10,058 million). (6) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consist of £16 billion (2017 - £8 billion) under debt securities in issue (senior MREL) and £7 billion (2017 - £8 billion) under subordinated liabilities.
Banking activities Less than 6 months More than Trading 1 month 1-3 months 3-6 months - 1 year Subtotal 1-3 years 3-5 years 5 years Total activities Total 2018 £m £m £m £m £m £m £m £m £m £m £m
Bank deposits 4,585 1,891 16 5 6,497 13,799 2,000 60 22,356 22,356 Bank repos 517 424 — — 941 — — — 941 941 Customer repos 3,774 — — — 3,774 — — — 3,774 3,774 Customer deposits 337,964 9,310 4,803 3,297 355,374 1,718 11 37 357,140 357,140
CPs and CDs 173 1,128 955 901 3,157 — — — 3,157 3,157 Medium-term notes 7 225 1,490 3,149 4,871 6,397 10,536 7,817 29,621 29,621 Covered bonds — — — — — 3,145 — 2,222 5,367 5,367 Securitisations — — — — — — — 1,375 1,375 1,375 Customer deposits DFV 22 33 54 103 212 — — — 212 212
Note: (1) Loans to customers excludes £3,318 million (2017 - £3,814 million) of Impairment provisions. (2) Represents notes in circulation.
The net behavioural funding surplus/(gap) and contractual maturity analysis is set out below.
 Customer deposits and customer loans are broadly matched from a behavioural perspective.
 The net funding surplus in 2018 is concentrated in the longer dated buckets, reflecting the stable characteristics of customer deposits and lending that is behaviourally shorter dated.
RBS evaluates the extent to which assets can be financed in a secured form (encumbrance), but certain asset types lend themselves more readily to encumbrance. The typical characteristics that support encumbrance are an ability to pledge those assets to another counterparty or entity through operation of law without necessarily requiring prior notification, homogeneity, predictable and measurable cash flows, and a consistent and uniform underwriting and collection process. Retail assets including residential mortgages, credit card receivables and personal loans display many of these features.
RBS categorises its assets into three broad groups, those that are: Already encumbered and used to support funding currently in place through own-asset securitisations, covered bonds and securities repurchase agreements. Pre-positioned with central banks as part of funding schemes and those encumbered under such schemes. Not currently encumbered. In this category, RBS has in place an enablement programme which seeks to identify assets capable of being encumbered and to identify the actions to facilitate such encumbrance whilst not affecting customer relationships or servicing.
(4) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes. (5) Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of RBS’s liquidity portfolio and unencumbered debt securities. (6) Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
Credit risk Definition Credit risk is the risk that customers fail to meet their contractual obligation to settle outstanding amounts.
 While overall credit quality remained stable in the Wholesale portfolio, risk appetite was tightened in certain sectors where it was considered appropriate based on leading indicator information.
Risk governance Credit risk management activities include:  Defining credit risk appetite for the management of concentration risk and credit policy to establish the key risks in the process of providing credit and the controls that must be in place to mitigate them.
 Approving credit limits for customers.  Oversight of the first line of defence to ensure that credit risk remains within the risk appetite set by the Board and that credit policy controls are being operated adequately and effectively.
The Chief Credit Officer, Ring-Fenced Bank, also chairs provisions committees in PBB and CPB. These committees review and approve individually assessed net expected credit losses (ECLs) above agreed approval thresholds and review and approve the adequacy of all portfolio level ECLs in the businesses. Similar provisions committees operate in Ulster Bank RoI, NatWest Markets and RBSI.
For Wholesale, the four formal frameworks used – and their basis for classification – are detailed in the following table.
Risk identification and measurement Credit stewardship Risks are identified through relationship management and/or 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.
Asset quality All credit grades map to an asset quality scale, used for external financial reporting. For Wholesale customers, a master grading scale is used for internal management reporting across portfolios. Accordingly, measures of risk exposure may be aggregated and reported at differing levels of detail depending on stakeholder or business requirements. Performing loans are defined as AQ1-AQ9 (where the PD is less than 100%) and non-performing loans as AQ10 or Stage 3 under IFRS 9 (where the PD is 100%).
In the Republic of Ireland, assets are revalued in line with the Central Bank of Ireland threshold requirements, which permits indexation for lower value assets, but demands regular Red Book valuations for distressed higher value assets. The current indexed value of the property is a component of the ECL provisioning calculation.
Credit risk continued For all other transactions credit is only granted to customers following joint approval by an approver from the business and the credit risk function. The joint business and credit approvers act within a delegated approval authority under the Wholesale Credit Authorities Framework Policy. The level of delegated authority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are accountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority.
Problem debt management Personal Early problem identification Pre-emptive triggers are in place to help identify customers that may be at risk of being in financial difficulty. These triggers are both internal, using RBS data and external information from credit reference agencies. Pro-active contact is then made with the customer to establish if they require help with managing their finances. By adopting this approach the aim is to prevent a customer’s financial position deteriorating which may then require intervention from the Collections and Recoveries teams.
Collections When a customer exceeds an agreed limit or misses a regular monthly payment the customer is contacted by RBS and requested to remedy the position. If the situation is not regularised then, where appropriate, the Collections team will become more fully involved and the customer will be supported by skilled debt management staff who endeavour to provide customers with bespoke solutions. Solutions include shortterm account restructuring, refinance loans and forbearance which can include interest suspension and ‘breathing space’. In the event that an affordable/sustainable agreement with a customer cannot be reached, the debt will transition to the Recoveries team. For provisioning purposes, under IFRS 9, exposure to customers managed by the Collections team is categorised as Stage 2 and subject to a lifetime loss assessment.
Wholesale Early problem identification Each segment and sector 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 publiclylisted 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 require pre-emptive actions (outside the customer’s normal trading patterns) to return or maintain their facilities within RBS’s current risk appetite prior to maturity.
The Risk of Credit Loss framework does not apply to problem debt management for Business Banking customers in UK PBB. These customers are, where necessary, managed by specialist problem debt management teams, depending on the size of exposure or by the Business Banking recoveries team where a loan has been impaired.
Types of forbearance Personal In the Personal portfolio, forbearance may involve payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears and, in the Republic of Ireland only, temporary interest-only conversions. Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans. This includes instances where forbearance may be provided to customers with highly flexible mortgages.
The loan would remain in forbearance for the defined probation period and be subject to performance criteria. These include making regular repayments and being less than 30 days past due.
Impairment, provisioning and write-offs (audited) In the overall assessment of credit risk, impairment, provisioning and write-offs are used as key indicators of credit quality.
The new IFRS 9 impairment provisions accounting standard was implemented with effect from 1 January 2018. Set out below is further detail regarding the impact of the transition from IAS 39 to IFRS 9 impairment provisioning, how key credit risk management activities link to IFRS 9 impairment provisioning and the key policy and modelling decisions that have been made in implementing IFRS 9 (refer also to Accounting policy 14 and Note 14 on the consolidated accounts).
Transition from IAS 39 to IFRS 9 (audited) RBS implemented IFRS 9 with effect from 1 January 2018 with no restatement of comparatives other than the Day One impact on implementation reflected in opening equity.
Cash flows and cash losses are unchanged by the change in impairment framework from IAS 39 to IFRS 9. IFRS 9 has changed the basis of loss calculation to expected loss (forward-looking), as opposed to the incurred loss model under IAS 39, which focused only on losses that had already occurred. There are a number of changes as well as judgements involved in measuring ECL. New elements include:  Move from incurred loss model to expected loss model, including all performing assets having 12-month ECL on origination – £513 million increase in provision partly offset by the IAS 39 latent loss provision of £390 million.
 Change in scope of impaired assets (Stage 3) – £73 million increase in provision primarily reflecting assets that have defaulted but with expectation of full recovery under IAS 39.
 Incorporation of forward-looking information, including multiple economic scenarios (MES). MES are assessed in order to identify non-linearity of losses in the portfolio – £64 million increase in provision.
Key differences in moving from IAS 39 to IFRS 9 on impairment loss (audited) Total £m 31 December 2017 - IAS 39 impairment provision (1) 3,832 Removal of IAS 39 latent provision (390) IFRS 9 12 month ECL on Stage 1 and Stage 2 513 Increase in Stage 2 ECL to lifetime (discounted) 356 Stage 3 loss estimation (EAD and LGD) 73 Impact of MES 64
Note: (1) Includes £3,814 million relating to loans, less £10 million on loans that were carried at fair value and £28 million relating to FVOCI and LAR debt securities.
IFRS 9 increased by £616 million – a 16% increase relative to IAS 39. The main driver of the increase was the requirement to hold a minimum of 12 months of ECL on performing assets, increasing to lifetime loss for assets that have exhibited a significant increase in credit risk.
 Non-performing assets – The IFRS 9 provisioning requirement on non-performing assets in Stage 3 was less affected. The ECL requirement of £3.6 billion was £123 million (4%) higher compared with IAS 39 impaired portfolio provisions of £3.4 billion principally on defaulted assets that did not carry a provision, reflecting the expectation of full recovery under IAS 39.
 UK PBB and Ulster Bank RoI combined – The exposures in these two segments are primarily Personal. The ECL provisioning requirement was £2.8 billion, an uplift of £384 million relative to the IAS 39 provision. This was driven by the higher provisioning requirement on performing assets, principally on the UK credit card portfolio where provisions increased by £122 million (31% of the total increase).
Credit risk continued Key elements of IFRS 9 impairment provisions (audited) IFRS 9 introduced additional complexity into the determination of credit impairment provisioning requirements. However, the building blocks that deliver an ECL calculation already existed in RBS. Existing Basel models were used as a starting point in the construction of IFRS 9 models, which also incorporate term extension and forward-looking information.
 Model application: o The assessment of the significant increase in credit risk and the formation of a framework capable of consistent application. o The determination of asset lifetimes that reflect behavioural characteristics while also representing management actions and processes (using historical data and experience).
Basel parameter estimates have been applied for IFRS 9.  Non-modelled portfolios – certain portfolios have their Basel II
 Discounting of future losses – the ECL calculation is based on expected future cash-flows. These are discounted using the effective interest rate – for practical purposes, this is typically applied at a portfolio level rather than being established and operated at an individual asset level.
 Republic of Ireland – The economy is expected to continue on its positive trajectory with growth expected to revert closer to long run averages in the medium term. Job growth is expected to moderate with the unemployment remaining around 5%. Meanwhile house price growth continues to moderate to a low single-digit pace. As always, a small open economy such as RoI remains very sensitive to the global economic environment and expectations can change at short notice.
Use of the central base case in Personal In Personal the internal base case is directly used as the central scenario for the ECL calculations by feeding the forecasted economic loss drivers into the respective PD and LGD models
The ECL impact on the Personal portfolio arising from the application of MES over the single, central base case is relatively low, and following review by the Provisions Committee, overlays were agreed to ensure the expected effect of non-linearity of losses was appropriately recognised. As at 31 December 2018, the value of the overlays was £26 million for UK PBB and £26 million for Ulster Bank RoI.
 Wholesale – the approach to MES is a Monte Carlo method that involves simulating a large number of alternative scenarios around the central scenario (adjusted for mean reversion) and averaging the losses and PD values for each individual scenario into unbiased expectations of losses (ECL) and PD.
Key economic loss drivers – average over the five year planning horizon (2019 to 2023 for 31 December 2018 and 2018 to 2022 for 1 January 2018) – in the most relevant planning cycle for the central base case and two upside and downside scenarios used for ECL modelling are set out below.
31 December 2018 1 January 2018 Upside 2 Upside 1 Base case Downside 1 Downside 2 Upside 2 Upside 1 Base case Downside 1 Downside 2
GDP - change 2.6 2.3 1.7 1.5 1.1 2.2 1.9 1.7 1.5 1.3 Unemployment 3.3 3.8 5.0 5.6 6.9 5.0 5.2 5.3 5.4 5.5 House Price Inflation - change 4.3 3.3 1.7 1.1 (0.5) 4.2 3.4 3.1 2.9 2.7 Bank of England base rate 1.7 1.3 1.1 0.5 — 1.7 1.2 0.8 0.4 0.2 Republic of Ireland GDP - change 4.3 3.6 3.0 3.1 2.8 3.6 3.2 2.9 2.6 2.3 Unemployment 4.2 4.6 5.2 6.0 6.8 5.0 5.4 5.7 5.9 6.1 House Price Inflation - change 9.2 6.8 4.0 3.2 0.8 6.7 5.4 4.4 3.7 3.0 European Central Bank base rate 1.3 0.8 0.3 — — 0.6 0.4 0.1 0.1 —
Probability weightings of scenarios (audited) RBS’s approach to IFRS 9 MES in Personal involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights to those scenarios. This has the following basic steps:  Scenario selection – for 2018 two upside and two downside scenarios from Moody’s inventory of scenarios were chosen. The aim is to obtain downside scenarios that are not as severe as stress tests, so typically have a severity of around one in ten and one in five of approximate likelihood, along with corresponding upsides.
IFRS 9 ECL model design principles To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD used in the calculations must be:  Unbiased – material regulatory conservatism has been removed to produce unbiased model estimates.  Point-in-time – recognise current economic conditions.  Forward-looking – incorporated into PD estimates and, where appropriate, EAD and LGD estimates.  For the life of the loan – all models produce a term structure to allow a lifetime calculation for assets in Stage 2 and Stage 3.
PD estimates Personal models Personal PD models use an Exogenous, Maturity and Vintage (EMV) approach to model default rates by taking into account EMV effects. The EMV approach separates portfolio default risk trends into three components: vintage effects (quality of new business over time), maturity effects (changes in risk relating to time on book) and exogenous effects (changes in risk relating to changes in macro economic conditions). This EMV methodology has been widely adopted across the industry because it enables forward-looking information to be modelled separately by isolating exogenous or macroeconomic effects. Forward-looking information is incorporated by fitting an appropriate macroeconomic model, such as the relevant stress testing model to the exogenous component and utilising forecasts of the relevant macro-economic factors.
Wholesale models Wholesale PD models use the existing CCI based point-intime /through-the-cycle framework to convert one-year regulatory PDs into point-in-time estimates that reflect current economic conditions across a comprehensive set of region/industry segments.
 Amortising products use an amortising schedule, where a formula is used to calculate the expected balance based on remaining terms and interest rates.
Significant increase in credit risk (audited) Exposures that are considered significantly credit deteriorated since initial recognition are classified in Stage 2 and assessed for lifetime ECL measurement (exposures not considered deteriorated carry a 12 month ECL). RBS has adopted a framework to identify deterioration based primarily on movements in probability of default supported by additional backstops. The principles applied are consistent across RBS and align to credit risk management practices.
The criteria are based on a significant amount of empirical analysis and seek to meet three key objectives:  Criteria effectiveness – the criteria should be effective in identifying significant credit deterioration and prospective default population.  Stage 2 stability – the criteria should not introduce unnecessary volatility in the Stage 2 population.  Portfolio analysis – the criteria should produce results which are intuitive when reported as part of the wider credit portfolio.
 For asset duration, the approach applied (in line with IFRS 9 requirements) is: o Term lending – the contractual maturity date, reduced for behavioural trends where appropriate (such as, expected prepayment and amortisation).
In the case of credit cards, the most significant judgement is to reflect the operational practice of card reissuance and the associated credit assessment as enabling a formal re-origination trigger. As a consequence a capped lifetime approach of up to 36 months is used on credit card balances. If the approach was uncapped the ECL impact is estimated at less than £90 million, compared to £75 million at transition, with the increase primarily reflecting refinements to criteria used to identify a significant increase in credit risk during the year.
Measurement uncertainty and ECL sensitivity analysis (audited) The recognition and measurement of ECL is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. The ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Set out below is the impact of some of the material sensitivities considered for 2018 year end reporting. These ECL simulations are separate to the impact arising from MES as described earlier in this disclosure, which impacts are embedded in the reported ECL. Given the current benign environment for impairments the focus is on downsides to the existing ECL provision levels.
The focus of the simulations is on ECL provisioning requirements on performing exposures in Stage 1 and Stage 2. The simulations are run on a stand-alone basis and are independent of each other; the potential ECL uplifts reflect the simulated impact as at the year end balance sheet date. As default is an observed event as at the balance sheet date, Stage 3 provisions are not subject to the same level of measurement uncertainty, and therefore have not been considered in this analysis. The following common scenarios have been applied across the key Personal and Wholesale portfolios: Personal risk bands
Risk band A <0.762% PD@DOIR + 1% Risk band B <4.306% PD@DOIR + 3% Risk band C >=4.306% 1.7 x PD@DOIR
Base case economic parameters Downside 2 economic parameters 2019 Q4 2020 Q4 2021 Q4 2022 Q4 2023 Q4 2019 Q4 2020 Q4 2021 Q4 2022 Q4 2023 Q4
 Portfolio risk – evaluation of the impact of a movement in one of the key metrics, PD, simulating a relative 25% upward shift in PDs.
RBS’s core criterion to identify a significant increase in credit risk is founded on PD deterioration, as discussed above. Under the simulations, PDs increase and result in exposures moving from Stage 1 to Stage 2 contributing to the ECL uplift.
UK PBB 155.7 9.1 589.3 186.4 31.6 11.5 174.2 29.6 10.5 Of which: mortgages 137.7 7.3 80.9 — — — — — — 5.5 6.8 7.3
Notes: (1) Reflects drawn exposure and ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds, and cash. For Personal exposures, this includes UK PBB including business banking, and also Ulster Bank RoI personal and business banking, the analysis excludes Personal exposures such as Private Banking and RBSI.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL uplift reflecting the simulated impact at the year end balance sheet date.
 In the Downside 2 scenario, the Ulster Bank RoI simulated uplift was more marked than on the other simulations reflecting the weight of mortgage assets in their personal lending portfolio, with the adverse movement in house prices increasing the LGD. A similar affect was observed on the UK PBB mortgage portfolio where the mortgage ECL was simulated to increase by just over 50%, and which impact is included within the overall PBB simulated result. The percentage of exposures simulated to move into Stage 2 in the Downside 2 scenario is notably higher than under the 25% PD increase for the Ulster Bank RoI due to the combined impact of the macro-economic variables utilised for the simulation.
 Wholesale, the TTC PD scenario has the most significant impact on
ECL highlighting that reverting to long run average PDs is more severe than a 25% increase in PDs or a switch to a downside scenario. Moving to TTC PDs requires an average PD uplift of almost 40%.
Credit risk – Banking activities All the disclosures in this section are audited with the exception of Stage 2 analysis and Stage 3 vintage analysis.
Introduction This section covers the credit risk profile of RBS’s banking activities. Exposures and credit risk measures presented as of and for year ended 31 December 2018 and at 1 January 2018 are on an IFRS 9 basis. Exposures and credit risk measures as of and for the year ended 31 December 2017 are on an IAS 39 basis.
Banking activities include a small number of portfolios that were carried at fair value, the most significant of which was the lenderoption /buyer-option portfolio of £0.5 billion (1 January 2018 – £2.0 billion). The decrease in the portfolio reflected disposals and valuation changes.