The table below shows the fair value of available-for-sale debt securities that were in an unrealised loss position at 31 December 2009.
Fair value losses Fair value losses Fair value losses 2009 £m £m £m £m £m £m
Gross gains of £1,288 million (2008 – £1,633 million; 2007 – £60 million) and gross losses of £1,255 million (2008 – £1,411 million; 2007 – £12 million) were realised on the sale of available-for-sale securities.
Notes on the accounts 299RBS Group Annual Report and Accounts 2009 15 Equity shares Group
Notes on the accounts continued 16 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: Company £m £m £m
(2) Coutts & Company is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS.
The above information is provided in relation to the principal related undertakings as permitted by Section 410 (2) of the Companies Act 2006. Full information on all related undertakings will be included in the Annual Return delivered to the Registrar of Companies for Scotland.
Net book value at 31 December 2009 14,264 991 1,562 1,030 17,847
Currency translation and other adjustments 8,905 680 961 214 10,760 Acquisition of subsidiaries 524 — — — 524
Impairment review The Group’s goodwill acquired in business combinations is reviewed annually at 30 September for impairment by comparing the recoverable amount of each cash generating unit (CGU) to which goodwill has been allocated with its carrying value.
Changes were made to the Group’s reporting structure in the first half of 2009, which is detailed on page 341. Following the reorganisation of the Group structure, ABN AMRO and NatWest goodwill was reallocated to the appropriate CGUs.
The recoverable amounts for all CGUs in September 2009 were based on the value in use test, using management’s latest five-year forecasts. The long-term growth rates have been based on respective country GDP rates adjusted for inflation. The risk discount rates are based on observable market long-term government bond yields and average industry betas adjusted for an appropriate risk premium based on independent analysis.
The recoverable amount of Global Transaction Services, based on a 3% (2008 – 3%) terminal growth rate and a 16.7% (2008 – 15.7%) pre tax discount rate, exceeded its carrying value by more than 100% (2008 – 100%) and was insensitive to a reasonably possible change in key assumptions.
The recoverable amount of US Retail & Commercial, based on a 5% (2008 – 5%) terminal growth rate and a 14.8% (2008 – 18%) pre tax discount rate, exceeded its carrying value by £2.1 billion (2008 – impairment of £4.4 billion). A 1% change in the discount rate or similar change in the terminal growth rate would change the recoverable amount by approximately £1.0 billion (2008 – £1 billion) and £0.8 (2008 – £0.7 billion) respectively. In addition, a 5% change in the forecast pre tax earnings would change the recoverable amount by approximately
A further £1.4 billion (2008 – £1.5 billion) of goodwill is attributable to the State of the Netherlands minority interest arising on the acquisition of ABN AMRO. The recoverable amount based on latest management forecasts, a 0% terminal growth rate and a 17.5% pre-tax discount rate supported the carrying amount of the goodwill. In 2008, a £14.5 billion impairment charge was recorded.
In 2008, the recoverable amounts for all CGUs were based on value in use tests. Goodwill write downs were recorded in Global Banking & Markets, US Retail & Commercial, Europe & Middle East Retail & Commercial Banking and Asia Retail & Commercial Banking divisions.
Goodwill Recoverable prior to Goodwill at amount write down Write down 31 December 2008 based on: £m £m £m
UK Retail & Commercial Banking Value in use 6,009 — 6,009 Global Banking & Markets Value in use 8,946 (8,946) — Global Transaction Services Value in use 3,121 — 3,121 Europe & Middle East Retail & Commercial Banking Value in use 1,201 (1,201) — Asia Retail & Commercial Banking Value in use 970 (863) 107 US Retail & Commercial Banking Value in use 7,405 (4,382) 3,023 RBS Insurance Value in use 935 — 935
Notes on the accounts continued 18 Property, plant and equipment Group
Long Short Computers Operating Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2009 £m £m £m £m £m £m £m
Cost or valuation: At 1 January 2008 3,431 3,645 215 1,688 3,929 11,437 24,345 Transfers to disposal groups — (262) — (188) (349) — (799) Currency translation and other adjustments 320 452 5 149 436 1,313 2,675 Acquisition of subsidiaries — — — 30 31 — 61
Expenditure on investment properties 8 — — — — — 8 Change in fair value of investment properties (86) — — — — — (86) Disposals and write-off of fully depreciated assets (222) (113) (18) (68) (645) (2,188) (3,254)
Write-off of property, plant and equipment — 19 — — 7 — 26 Disposals and write-off of fully depreciated assets — (22) — (31) (539) (544) (1,136)
Investment property acquired during 2009 includes £1,336 million arising on assumption by the Group of control of properties for which it provided finance to a customer.
The fair value of investment properties includes £84 million (2008 – £172 million; 2007 – £234 million) of appreciation since purchase.
Property, plant and equipment, excluding investment properties, include £213 million (2008 – £1,132 million; 2007 – £717 million) assets in the course of construction.
Freehold and long leasehold properties with a net book value of £5 million (2008 – nil; 2007 – £451 million) were sold subject to operating leases.
Long Short Computers Operating Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2007 £m £m £m £m £m £m £m
Cost or valuation: At 1 January 2007 4,885 2,579 310 1,254 3,069 11,589 23,686 Currency translation and other adjustments 96 65 1 11 12 (10) 175
Pension schemes in net surplus 58 36 575 — — —
Discontinued operations: Total income — 2,571 749 Operating expenses — (1,407) (493) Insurance net claims — — (28) Impairment losses — (564) (160) Profit before tax — 600 68 Gain on disposal — 3,859 — Operating profit before tax — 4,459 68 Tax on profit — (204) (8) Tax on gain on disposal — (33) — Profit after tax — 4,222 60
(b) Cash flows attributable to discontinued operations Included within the Group’s cash flows are the following amounts attributable to discontinued operations: £m £m £m
(c) Assets and liabilities of disposal groups £m £m £m £m £m
Assets of disposal groups Cash and balances at central banks — 129 129 — — Loans and advances to banks 314 74 388 — — Loans and advances to customers 306 2,910 3,216 — — Debt securities and equity shares 56 848 904 — —
Settlement balances 950 — 950 — — Subordinated liabilities — 6 6 — —
Discontinued operations and other disposal groups 10,993 7,846 18,839 — — Assets acquired exclusively with a view to disposal — 51 51 859 29,228
Notes on the accounts continued 21 Settlement balances and short positions Group £m £m £m
Settlement balances (amortised cost) 10,413 11,741 17,520 Short positions (held-for-trading): Debt securities – Government 26,647 32,519 41,048 22 Accruals, deferred income and other liabilities Group Company £m £m £m £m £m £m
Note: (1) Other liabilities include £5 million (2008 – £1 million; 2007 – £9 million) in respect of share-based compensation.
Transfers to disposal groups — — 2 — — (2) — — — — — 11 11 Acquisitions/(disposals)
of subsidiaries — — — — — — — — — — — (8) (8) Charge/(credit) to
Life assurance business: Unit linked insurance contracts 292 256 364 Index linked insurance contracts 1,090 1,331 1,490
Cash paid for claims settled in the year (3,812) 69 (3,743) Increase/(decrease) in liabilities
– arising from current year claims 4,383 (23) 4,360 – arising from prior year claims (79) (53) (132)
Increase in the year 1,747 (63) 1,684 Release in the year (1,813) 75 (1,738) Disposal of subsidiary (145) — (145) Exchange differences (10) — (10)
Premiums received 868 330 Fees and expenses (21) (38) Investment return 17 (970) Actuarial adjustments (233) — Account balances paid on surrender and other terminations in the year (734) (455) Transfers to disposal groups (686) — Exchange and other adjustments 591 904
Premiums received 528 349 Fees and expenses (16) (13) Investment return 400 442 Actuarial adjustments (205) — Account balances paid on surrender and other terminations in the year (546) (712) Exchange and other adjustments (180) (263)
Estimate of ultimate claims costs: At end of accident year 2,395 3,013 3,658 3,710 4,265 4,269 4,621 4,080 4,383 34,394
Seven years later 6 (14) (8) Eight years later 4 4 Current estimate of
Liability in respect of earlier years 109 Claims handling costs 104 Gross general insurance claims liability 5,802
Reinsurance of risks above the Group’s risk appetite is only effective if the reinsurance premium is economic and the counterparty is financially secure. Acceptable reinsurers are rated A- or better unless specifically authorised.
Accident year net of reinsurance £m £m £m £m £m £m £m £m £m £m
Liability in respect of earlier years 62 Claims handling costs 104 Net general insurance claims liability 5,516
The following table shows loss ratios for each major class of business, gross and net of reinsurance.
Other commercial insurance contracts Other commercial claims come mainly from business interruption and loss arising from the negligence of the insured (liability insurance). Business interruption losses come from the loss of income, revenue and/or profit as a result of property damage claims. Liability insurance includes employers’ liability and public/products’ liability. Liability insurance is written on an occurrence basis, and is subject to claims that are identified over a substantial period of time, but where the loss event occurred during the life of the policy.
The following table shows the expected maturity of insurance liabilities up to 20 years excluding those linked directly to the financial assets backing these contracts, £4,175 million (2008 – £4,189 million; 2007 – £4,398 million).
Life business The Group’s three UK regulated life companies, National Westminster Life Assurance Limited (NatWest Life), Royal Scottish Assurance plc (RSA) and Direct Line Life Insurance Company Limited, are required to meet minimum capital requirements at all times under the UK Financial Service Authority’s Prudential Sourcebook. The capital resources covering the regulatory requirement are not transferable to other areas of the Group. To ensure that the capital requirement is satisfied at all times, each company holds an additional voluntary buffer above the regulatory minimum.
Group 2009 – final redemption £m £m £m £m £m £m £m
In April 2009, the Group concluded a series of exchange offers and tender offers with the holders of a number of Tier 1 and Upper Tier 2 securities. The exchanges involving instruments classified as liabilities all met the criteria in IFRS for treatment as the extinguishment of the original liability and the recognition of a new financial liability. Gains on these exchanges, and on the redemption of securities classified as liabilities for cash, totalling £3,790 million were credited to income. No amounts have been recognised in income in relation to the redemption of securities classified as equity or minority interest in the Group financial statements. The difference between the consideration and the carrying value for these securities amounting to £829 million has been recorded in equity.
The Group has undertaken that, unless otherwise agreed with the European Commission, neither the company nor any of its direct or indirect subsidiaries (excluding companies in the ABN AMRO Group) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from a date starting not later than 30 April 2010 and for a period of two years thereafter ("the deferral period"), or exercise any call rights in relation to these capital instruments between 24 November 2009 and the end of the deferral period, unless there is a legal obligation to do so. Hybrid capital instruments issued after 24 November 2009 will generally not be subject to the restriction on dividend or coupon payments or call options.
Currently 2010 2011 2012-2014 2015-2019 Thereafter Perpetual Total 2009 – call date £m £m £m £m £m £m £m £m
US$1,250 million floating rate subordinated notes 2014 (redeemed July 2009) — 862 630 AUD590 million 6% subordinated notes 2014 (callable April 2010) 330 281 254 AUD410 million floating rate subordinated notes 2014 (callable April 2010) 229 195 182 CAD700 million 4.25% subordinated notes 2015 (callable March 2010) 419 409 358
RBS Holdings USA Inc. US$170 million subordinated loan capital floating rate notes 2009 (redeemed October 2009) — 116 85 US$100 million 5.575% senior subordinated revolving credit 2009 (redeemed October 2009) — 69 50 US$500 million subordinated loan capital floating rate notes 2010 (callable on any interest payment date) 311 342 249
ABN AMRO and subsidiaries €182 million 6.00% fixed rate subordinated notes 2009 (redeemed April 2009) — 169 132 €182 million 6.13% fixed rate subordinated notes 2009 (redeemed June 2009) — 165 127 €1,150 million 4.63% fixed rate subordinated notes 2009 (redeemed May 2009) — 1,104 848 €250 million 4.70% CMS linked subordinated notes 2019 189 195 131 €800 million 6.25% fixed rate subordinated notes 2010 733 795 598 €100 million 5.13% flip flop Bermudan callable subordinated notes 2017 (callable December 2012) 84 89 75 €500 million floating rate Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 426 455 350 €1,000 million floating rate Bermudan callable subordinated lower tier 2 notes 2016 (callable September 2011) 862 923 710 €13 million zero coupon subordinated notes 2029 (callable June 2010) 4 8 2 €82 million floating rate subordinated notes 2017 68 72 55 €103 million floating rate subordinated lower tier 2 notes 2020 83 89 68 €170 million floating rate sinkable subordinated notes 2041 190 205 184 €15 million CMS linked floating rate subordinated lower tier 2 notes 2020 10 10 11 €1,500 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable June 2010) 1,326 1,419 1,087 €5 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 4 5 4 €65 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 58 62 48 US$12 million floating rate subordinated notes 2008 — — 6 US$12 million floating rate subordinated notes 2008 — — 6
US$500 million floating rate Bermudan callable subordinated notes 2013 — — 232 US$1,500 million floating rate Bermudan callable subordinated notes 2015 (callable March 2010) 887 982 717 US$100 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 62 68 50 US$36 million floating rate Bermudan callable subordinated lower tier 2 notes 2015 (callable October 2010) 22 25 18 US$1,000 million floating rate Bermudan callable subordinated lower tier 2 notes 2017 (callable January 2012) 598 661 479 AUD575 million 6.50% Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 318 286 231 AUD175 million 7.46% Bermudan callable subordinated lower tier 2 notes 2018 (callable May 2013) 93 79 73 €256 million 5.25% fixed rate subordinated notes 2008 — — 190 €13 million floating rate subordinated notes 2008 — — 9 £25 million 9.18% amortising MTN subordinated lower tier 2 notes 2011 8 9 15 £750 million 5% fixed rate Bermudan callable subordinated upper tier 2 notes 2016 727 728 642 US$250 million 7.75% fixed rate subordinated notes 2023 155 173 127 US$150 million 7.13% fixed rate subordinated notes 2093 93 104 76 US$250 million 7.00% fixed rate subordinated notes 2008 — — 127 US$68 million floating rate subordinated notes 2009 (6) — — 34 US$12 million floating rate subordinated notes 2009 (6) — — 6 BRL50 million floating rate subordinated notes 2013 (6) — — 14 BRL250 million floating rate subordinated notes 2013 (6) — — 71 BRL250 million floating rate subordinated notes 2014 (6) — — 71 BRL885 million floating rate subordinated notes 2014 (6) — — 251 BRL300 million floating rate subordinated notes 2014 (6) — — 85 PKR0.80 million floating rate subordinated notes 2012 — 7 6 MYR200 million zero coupon subordinated notes 2017 36 40 30 TRY60 million floating rate callable subordinated notes 2012 (redeemed September 2009) — 34 25 * In addition, the company has in issue €166 million (2008 and 2007 – €500 million) subordinated loan notes of €1,000 each, US$827 million (2008 and 2007 – US$1,950 million) subordinated loan notes of US$1,000 each and £93 million (2008 and 2007 – £400 million) subordinated loan notes of £1,000 each. These loan notes are included in the company balance sheet as loan capital but are reclassified as minority interest trust preferred securities on consolidation (see Note 26).
(4) Except as stated above, claims in respect of the Group’s dated loan capital are subordinated to the claims of other creditors. None of the Group’s dated loan capital is secured.
(5) Interest on all floating rate subordinated notes is calculated by reference to market rates.
(callable on any interest payment date) (3) 101 240 175 US$762 million (2008 and 2007 – US$1,200 million) 7.648% perpetual regulatory tier one securities
The Royal Bank of Scotland plc £150 million 5.625% undated subordinated notes (callable June 2032) 144 144 144 £96 million (2008 and 2007 – £175 million) 7.375% undated subordinated notes (callable August 2010) (3) 101 190 183 €152 million 5.875% undated subordinated notes — — 114 £117 million (2008 and 2007 – £350 million) 6.25% undated subordinated notes (callable December 2012) (3) 126 380 354 £138 million (2008 and 2007 – £500 million) 6% undated subordinated notes (callable September 2014) (3) 143 565 517 €197 million (2008 and 2007 – €500 million) 5.125% undated subordinated notes (callable July 2014) (3) 194 516 371 €243 million (2008 and 2007 – €1,000 million) floating rate undated subordinated notes (callable July 2014) (3) 214 966 742 £178 million (2008 and 2007 – £500 million) 5.125% undated subordinated notes (callable March 2016) (3) 189 556 499 £200 million 5.125% subordinated upper tier 2 notes (callable September 2026) 210 210 210 £260 million (2008 and 2007 – £600 million) 5.5% undated subordinated notes (callable December 2019) (3) 272 677 595 £174 million (2008 and 2007 – £500 million) 6.2% undated subordinated notes (callable March 2022) (3) 206 614 543 £145 million (2008 and 2007 – £200 million) 9.5% undated subordinated bonds (callable August 2018) (3, 4) 176 253 228 £400 million 5.625% subordinated upper tier 2 notes (redeemed April 2009) — 397 397 £83 million (2008 and 2007 – £300 million) 5.625% undated subordinated notes (callable September 2026) (3) 90 431 318 £51 million (2008 and 2007 – £350 million) 5.625% undated subordinated notes (callable June 2032) (3) 55 364 363 £190 million (2008 and 2007 – £400 million) 5% undated subordinated notes (callable March 2011) (3) 197 424 402 JPY25 billion 2.605% undated subordinates notes (callable November 2034) 173 217 103 CAD700 million 5.37% fixed rate undated subordinated notes (callable May 2016) 452 464 363
National Westminster Bank Plc US$293 million (2008 and 2007 – US$500 million) primary capital floating rate notes, Series A
(callable on any interest payment date) (3) 182 347 256 US$332 million (2008 and 2007 – US$500 million) primary capital floating rate notes, Series C
(callable on any interest payment date) (3) 192 346 255 €400 million 6.625% fixed/floating rate undated subordinated notes (callable April 2010) 358 388 303 €100 million floating rate undated step-up notes (callable April 2010) 90 97 74 £162 million (2008 and 2007 – £325 million) 7.625% undated subordinated step-up notes (callable January 2010) (3) 174 363 357 £127 million (2008 and 2007 – £200 million) 7.125% undated subordinated step-up notes (callable October 2022) (3) 127 201 205 £68 million (2008 and 2007 – £200 million) 11.5% undated subordinated notes (callable December 2022) (3, 5) 79 269 269
First Active plc £20 million 11.75% perpetual tier two capital 26 26 23 €38 million 11.375% perpetual tier two capital 51 52 39 £1.3 million floating rate perpetual tier two capital 2 2 2
(5) Exchangeable at the option of the issuer into 200 million 8.392% (gross) non-cumulative preference shares of £1 each of National Westminster Bank Plc at any time.
(6) Except as stated above, claims in respect of the Group’s undated loan capital are subordinated to the claims of other creditors. None of the Group’s undated loan capital is secured.
Series F US$200 million 7.65% (redeemable at option of issuer) 123 137 100 Series H US$300 million 7.25% (redeemable at option of issuer) 185 205 150 Series L US$850 million 5.75% (redeemable December 2049) 524 582 421
Series 1 US$1,000 million 9.118% (redeemable March 2010) 630 698 510 Non-cumulative convertible preference shares of £0.01 (1)
Notes: (1) Further details of the contractual terms of the preference shares are given in Note 27 on pages 326 and 327.
Notes: (1) The trust preferred securities issued by subsidiaries have no maturity date and are not redeemable at the option of the holders at any time. These securities may, with the consent of the UK Financial Services Authority, be redeemed, by the issuer on the dates specified above or on any interest payment date thereafter. They may also be redeemed in whole, but not in part, upon the occurrence of certain tax and regulatory events. The company classifies its obligations to these subsidiaries as dated loan capital.
(2) Partially redeemed following the completion of the exchange and tender offers in April 2009.
Currency translation and other adjustments 8,098 1,158 9,256 Acquisition of outstanding ABN AMRO ordinary shares 356 — 356 (Loss)/profit attributable to minority interests (11,244) 412 (10,832) Dividends paid — (285) (285) Losses on available-for-sale financial assets, net of tax (144) (1,303) (1,447) Movements in cash flow hedging reserves, net of tax (831) — (831) Actuarial losses recognised in retirement benefit schemes, net of tax (478) — (478) Equity raised — 1,071 1,071
Shares issued in respect of the rights issue 6,123,010 — Shares issued in respect of the capitalisation issue 403,468 — Shares issued in respect of the placing and open offer 22,909,776 — Other shares issued 13,536 —
In April 2009, the company issued 16.9 billion ordinary shares at 31.75p each through a placing and open offer. The placing and open offer was fully underwritten by HM Treasury. The net proceeds were £5.4 billion.
Following the issue of B shares, HM Treasury's holding of ordinary shares of the company remained at 70.3% although its economic interest rose to 84.4%. HM Treasury has agreed not to convert its B shares into ordinary shares to the extent that its holding of ordinary shares following the conversion would represent more than 75% of the company's issued ordinary share capital.
The contingent capital commitment agreement can be terminated in whole or in part by the company, with the FSA’s consent, at any time. It expires at the end of five years or, if earlier, on its termination in full.
Following the Placing and Open Offer in April 2009, the company redeemed the five million non-cumulative sterling preference shares of £1 issued at £1,000 each (£5 billion in total) held by HM Treasury at 101 per cent of their issue price plus the dividend accrued on the preference shares from 1 December 2008 to the date of redemption and the commissions payable to HM Treasury under the Second Placing and Open Offer Agreement. In accordance with the Articles of Association of the company, the nominal amount of these shares was, upon redemption of the shares, divided into and reclassified as 20 million new ordinary shares of 25p each.
(2) The whole of each series of preference share is issued or redeemed at the same time.
Notes on the accounts continued 28 Reserves On 1 January 2007, the merger reserve comprised the premium on shares issued to acquire NatWest less goodwill amortisation charged under previous GAAP. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act 1985.
Paid-in equity represents notes issued under the company’s euro medium term note programme with par value of US$1,600 million and CAD600 million that are classified as equity under IFRS. The notes attract coupons of 6.99% and 6.666% respectively until October 2017 when they change to 2.67% above the London interbank offered rate for 3-month US dollar deposits and 2.76% above the Canadian dollar offered rate respectively. US$1,036 million of this capital was redeemed in April 2009.
Under the arrangements for accession to APS in December 2009, the company issued B shares in exchange for shares in Aonach Mor Limited. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act 2006. The subsequent redemption of some of these shares gave rise to distributable profits of £9,950 million which have been transferred from merger reserve to retained earnings.
Finance lease contracts Hire purchase agreements assets: future Unearned Unearned minimum
Finance lease contracts and hire purchase agreements Accumulated allowance for uncollectable minimum receivables 313 213 222
Notes on the accounts continued 30 Collateral and securitisations Securities repurchase agreements and lending transactions The Group enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level.
Note: (1) The table above includes assets used as collateral for central bank liquidity schemes.
Securitisations and other asset transfers Continued recognition The table below sets out the asset categories together with the carrying amounts of the assets and associated liabilities for those securitisations (see pages 201 and 202) and other asset transfers where substantially all the risks and rewards of the asset have been retained by the Group.
Assets Liabilities Assets Liabilities Asset type £m £m £m £m * revised
Continuing involvement At 31 December 2009, securitised assets were £3.1 billion (2008 – £1.1 billion); retained interest £101.9 million (2008 – £50 million); subordinated assets £90.7 million (2008 – £9 million); and related liabilities £32.7 million (2008 – £9 million).
Preference shares 11,265 16,655 Innovative Tier 1 securities 5,213 7,383 Tax on the excess of expected losses over provisions 1,020 308 Less deductions from Tier 1 capital (601) (689) Total Tier 1 capital 76,421 69,847
Note: (1) The Group adopted Basel II with effect from 1 January 2008; data for 2007 has not been provided as it is not directly comparable.
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. The Group’s maximum exposure to credit loss, in the event of non-performance by the other party and where all counterclaims, collateral or security proves valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to the Group’s normal credit approval processes.
Commitments Commitments to lend – under a loan commitment the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Trustee and other fiduciary activities In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group’s financial statements. The Group earned fee income of £1,355 million (2008 – £1,442 million; 2007 – £695 million) from these activities.
FSCS has borrowed from HM Treasury to fund the compensation costs associated with Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki ‘Icesave’ and London Scottish Bank plc. These borrowings are on an interest-only basis until September 2011. The annual limit on the FSCS management expenses levy for the three years from September 2008 in relation to these institutions has been capped at £1 billion per annum.
The FSCS will receive funds from asset sales, surplus cash flow, or other recoveries in relation to these institutions which will be used to reduce the principal amount of the FSCS's borrowings. Only after the interest only period, which is expected to end in September 2011, will a schedule for repayment of any remaining principal outstanding (after recoveries) on the borrowings be agreed between the FSCS and HM Treasury. It is expected that, from that point, the FSCS will begin to raise compensation levies (principal repayments). No provision has been made for these levies as the amount is not yet known and is unlikely to be determined before 2011.
The Group has accrued £135 million for its share of FSCS management expenses levies for the 2009/10 and 2010/11 scheme years.
Litigation As a participant in the financial services industry, the Group operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, the company and other members of the Group are involved in various disputes and legal proceedings in the United Kingdom, the United States and other jurisdictions, including litigation. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, particularly in the earlier stages of a case.
Other than as set out in this section, so far as the Group is aware, neither the company nor any member of the Group is or has been engaged in or has pending or threatened any governmental, legal or arbitration proceedings which may have or have had in the recent past (covering the 12 months immediately preceding the date of this document) a significant effect on the Group’s financial position or profitability.
(3) Of which due within 1 year: £480 million (2008 – £1,129 million; 2007 – £1,448 million)
Unarranged overdraft charges In common with other banks in the United Kingdom, the Royal Bank and NatWest have received claims and complaints from a large number of customers in the United Kingdom seeking refunds of unarranged overdraft charges (the “Charges”). The vast majority of these claims and complaints have challenged the Charges on the basis that they contravene the Unfair Terms in Consumer Contracts Regulations 1999 (the “Regulations”) or are unenforceable under the common law penalty doctrine (or both).
The putative class is composed of (1) all persons who purchased or otherwise acquired Group securities between 1 March 2007 and 19 January 2009; and/or (2) all persons who purchased or otherwise acquired Series Q, R, S, T and/or U non-cumulative dollar preference shares issued pursuant or traceable to the 8 April 2005 SEC registration statement and were damaged thereby. Plaintiffs seek unquantified damages on behalf of the putative class.
World Online International NV. In November 2009 the Supreme Court in the Netherlands gave a declaratory judgment against World Online International NV, Goldmans Sachs International and ABN AMRO Bank NV in relation to claims arising out of the World Online initial public offering of 2000. It held that these defendants had committed certain wrongful acts in connection with the initial public offering. The judgment does not establish liability or the amount of any loss. The Group does not believe that any final liability or loss will have a significant effect on the Group’s financial position or profitability.
Investigations The Group’s businesses and financial condition can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The Group has engaged, and will continue to engage, in discussions with relevant regulators, including in the United Kingdom and the United States, on an ongoing and regular basis informing them of operational, systems and control evaluations and issues as deemed appropriate or required and it is possible that any matters discussed or identified may result in investigatory actions by the regulators, increased costs being incurred by the Group, remediation of systems and controls, public or private censure or fines. Any of these events or circumstances could have a material adverse impact on the Group, its business, reputation, results of operations or the price of securities issued by it.
MasterCard appealed against the decision to the European Court of First Instance on 1 March 2008, and the Group has intervened in the appeal proceedings. In addition, in Summer 2008, MasterCard announced various changes to its scheme arrangements. The European Commission was concerned that these changes might be used as a means of circumventing the requirements of the infringement decision. In April 2009 MasterCard agreed an interim settlement on the level of cross-border MIF with the European Commission pending the outcome of the appeal process and, as a result, the European Commission has advised it will no longer investigate the non-compliance issue (although MasterCard is continuing with its appeal).
Visa’s cross-border MIFs were exempted in 2002 by the European Commission for a period of five years up to 31 December 2007 subject to certain conditions. On 26 March 2008, the European Commission opened a formal inquiry into Visa’s current MIF arrangements for cross border payment card transactions with Visa branded debit and consumer credit cards in the European Union and on 6 April 2009 the European Commission announced that it had issued Visa with a formal Statement of Objections. At the same time Visa announced changes to its interchange levels and introduced some changes to enhance transparency. There is no deadline for the closure of the inquiry.
The FSA has been conducting a broad industry thematic review of PPI sales practices and in September 2008, the FSA announced that it intended to escalate its level of regulatory intervention. Substantial numbers of customer complaints alleging the mis-selling of PPI policies have been made to banks and to the FOS and many of these are being upheld by the FOS against the banks.
Personal current accounts On 16 July 2008, the OFT published the results of its market study into personal current accounts in the United Kingdom. The OFT found evidence of competition and several positive features in the personal current account market but believes that the market as a whole is not working well for consumers and that the ability of the market to function well has become distorted.
On 22 December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the personal current account market in the United Kingdom, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes are required for the market to work in the best interests of bank customers. The OFT stated that it would discuss these issues intensively with banks, consumer groups and other organisations, with the aim of reporting on progress by the end of March 2010.
US dollar clearing activities In connection with a previously disclosed investigation of ABN AMRO’s New York Branch by US regulatory authorities, ABN AMRO and members of ABN AMRO’s management continue to provide information to the United States Department of Justice relating to ABN AMRO’s dollar clearing activities, United States Department of Treasury compliance procedures and other Bank Secrecy Act of 1970 compliance matters. ABN AMRO has reached an agreement in principle with the United States Department of Justice that would resolve all presently known aspects of the ongoing investigation, although no written agreement has yet been reached and negotiations continue. Under the terms of the agreement in principle, ABN AMRO and the United States would enter into a deferred prosecution agreement in which ABN AMRO would waive indictment and agree to the filing of information in the United States District Court charging it with certain violations of federal law based on information disclosed in an agreed factual statement. ABN AMRO would also agree to continue cooperating in the United States’ ongoing investigation and to settle all known civil and criminal claims currently held by the United States for the sum of US$500 million. The precise terms of the deferred prosecution agreement are still under negotiation.
In April 2009 the FSA notified the Group that it was commencing a supervisory review of the acquisition of ABN AMRO in 2007 and the 2008 capital raisings and an investigation into conduct, systems and controls within the Global Banking & Markets division of the Group. The company and its subsidiaries are cooperating fully with this review and investigation.
In November 2009, the FSA informed the Group that it was commencing an investigation into certain aspects of the policies of, and training and controls within, certain of the Group’s UK subsidiaries relating to compliance with UK money laundering regulations during the period from December 2007 to December 2008. The company and its subsidiaries are cooperating fully with this investigation.
In the United States, the company and certain subsidiaries have received requests for information from various governmental agencies, self-regulatory organisations, and state governmental agencies including in connection with sub-prime mortgages and securitisations, collateralised debt obligations and synthetic products related to subprime mortgages. In particular, during March 2008, the Group was advised by the US Securities and Exchange Commission that it had commenced a non-public, formal investigation relating to the Group’s United States sub-prime securities exposures and United States residential mortgage exposures. The company and its subsidiaries are cooperating with these various requests for information and investigations.
(Decrease)/increase in accruals and deferred income (1,538) 3,961 (818) (1) 7 — Provisions for impairment losses 14,950 8,072 1,968 — — — Loans and advances written-off net of recoveries (6,540) (2,829) (1,669) — — — Unwind of discount on impairment losses (408) (194) (164) — — — Profit on sale of property, plant and equipment (43) (167) (741) — — — Profit/(loss) on sale of subsidiaries and associates 135 (943) (67) — (487) — Profit on sale of securities (294) (342) (544) — — — Charge for defined benefit pension schemes 659 490 489 — — — Pension scheme curtailment gains (2,148) — — — — — Cash contribution to defined benefit pension schemes (1,153) (810) (599) — — — Other provisions utilised (159) (32) (211) — — — Depreciation and amortisation 2,809 3,154 1,932 — — — Gain on redemption of own debt (3,790) — — (238) — — Write down of goodwill and other intangible assets 363 32,581 — — — — Write down of investment in subsidiaries — — — 5,139 14,321 — Elimination of foreign exchange differences 12,217 (41,874) (10,282) (753) 1,778 (58) Elimination of non-cash items on discontinued activities — 592 62 — — —
Pre-acquisition Recognised carrying Disposal Fair value acquisition amounts groups(1) adjustments values £m £m £m £m
Cash and balances at central banks 7,263 (186) — 7,077 Loans and advances to banks 120,120 (3,646) — 116,474 Loans and advances to customers 314,287 (26,158) (2,542) 285,587 Treasury and other eligible bills and debt and equity securities 166,018 (3,804) — 162,214
Liabilities of disposal groups (1) (2,377) (24,123) — (26,500) Net identifiable assets and liabilities 21,630 — 3,336 24,966 Minority interests (242) Goodwill on acquisition 23,851 Consideration 48,575
It is estimated that the Group would have reported total income of £37.2 billion and profit after tax of £7.7 billion from continuing operations for the year ended 31 December 2007 had all acquisitions occurred on 1 January 2007.
Fair value given for businesses acquired (115) (1,810) (280) Cash and cash equivalents acquired — — 5 Non-cash consideration — (17) — Net outflow of cash in respect of purchases (115) (1,827) (275)
Cash and cash equivalents in businesses sold — — 21 Other assets sold 896 739 16 Non-cash consideration — (103) (2) (Loss)/profit on disposal (135) 943 67 Net inflow of cash in respect of disposals 761 1,579 102 Dividends received from joint ventures 21 89 11 Cash expenditure on intangible assets (562) 2,411 (435) Net inflow/(outflow) 105 2,252 (597)
The Group’s reported result from continuing operations for 2009 and 2008 would not have been materially affected had all acquisitions occurred on 1 January 2008 or 1 January 2009. The profit on disposal arises on the sales of Angel Trains, Tesco Personal Finance and the European Consumer Finance business during 2008.
35 Interest received and paid Group Company £m £m £m £m £m £m
Comprising: Cash and balances at central banks 51,811 12,007 17,428 — — — Treasury bills and debt securities 15,818 15,623 6,818 — — — Loans and advances to banks 76,557 107,295 124,709 16,448 5,069 1,573
Certain subsidiary undertakings are required to maintain balances with the Bank of England which, at 31 December 2009, amounted to £450 million (2008 – £393 million; 2007 – £439 million). Certain subsidiary undertakings are required by law to maintain reserve balances with the Federal Reserve Bank in the US. Such reserve balances were nil at 31 December 2009 (2008 – nil; 2007 – US$1 million). ABN AMRO had mandatory reserve deposits of €6 million at 31 December 2009 (2008 – €3 million; 2007 – €6 million).
Following a comprehensive strategic review, changes have been made to the Group’s operating segments in 2009. A Non-Core division has been created comprising those lines of business, portfolios and individual assets that the Group intends to run off or sell. Furthermore, Business Services (formerly Group Manufacturing) is no longer reported as a separate division and its costs are now allocated to the customer-facing divisions along with certain central costs. UK Retail & Commercial Banking has been split into three segments (UK Retail, UK Corporate and Wealth). Ulster Bank has become a specific segment. The remaining elements of Europe & Middle East Retail & Commercial Banking, Asia Retail & Commercial Banking and Share of shared assets form part of Non-Core. The segment measure is now Operating profit/(loss) before tax which differs from Contribution used previously; it excludes certain infrequent items and RFS Holdings minority interest, which is not an operating segment of the Group. Comparative data have been restated accordingly.
Non-Core Division manages separately assets that the Group intends to run off or dispose. The division contains a range of businesses and asset portfolios primarily from the GBM division, including RBS Sempra Commodities, linked to proprietary trading, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of other portfolios and businesses, including regional markets businesses, that the Group has concluded are no longer strategic.
Operating Net Non- expenses and Depreciation interest interest Total insurance and Impairment Operating income income income claims amortisation losses profit/(loss)
Gains on pensions curtailment — — — 2,148 — — 2,148 Bonus tax — — — (208) — — (208)
Amortisation of purchased intangible assets — — — (40) (222) — (262) Integration and restructuring costs — — — (48) (60) — (108)
Gain on redemption of own debt 3,790 — 3,790 — — — — — —
Note: (1) Segmental results for 2008 and 2007 have been restated to reflect transfers of businesses between segments in 2009.
UK UK Banking Transaction Ulster Retail & RBS Non- minority Retail Corporate Wealth & Markets Services Bank Commercial Insurance Core interest Total £m £m £m £m £m £m £m £m £m £m £m
Goodwill written off — — — — — — — — (40) — (40)
Transfers to disposal groups — — — — — — — — (238) — (238) Currency translation
Write-down of goodwill — — — — — — — (66) (297) — (363)
Insurance premium income (net of reinsurers’ share) 4,872 – 672 – 5,544
Insurance premium income (net of reinsurers’ share) 5,190 — 1,136 — 6,326
Rest of UK USA Europe the World Total 2007 £m £m £m £m £m
Insurance premium income (net of reinsurers’ share) 5,562 — 525 — 6,087
Cost to acquire property, plant and equipment and intangible assets 3,305 238 1,793 225 5,561 39 Directors’ and key management remuneration Group
– amounts receivable under long-term incentive plans 1,103 646 – gains on exercise of share options — 77
40 Transactions with directors and key management (a) At 31 December 2009, the amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £3,596,978 in respect of loans to 15 persons who were directors of the company at any time during the financial period.
The Group enters into transactions with many of these bodies on an arms' length basis. The principal transactions during 2009 were: in April 2009, the redemption of its non-cumulative sterling preference shares and the placing and open offer underwritten by HM Treasury and in December 2009 the issue of B shares to HM Treasury (see Note 27); as well as the Asset Protection Scheme, Bank of England facilities and the issue of debt guaranteed by the UK Government described below. Other transactions include the payment of: taxes including UK corporation tax and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies; together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships. The volume and diversity of these transactions are such that disclosure of their amounts is impractical.
Assets Balances at central banks 16,617 — — 16,617 393 — — 393 Loans and advances to banks — — 664 664 — — 1,081 1,081 Loans and advances to customers 53 1,231 340 1,624 5 721 468 1,194
No impairment losses were recognised by the Group in 2009 or 2008 in respect of balances with UK Government and UK Government controlled bodies.
The APS is a single contract providing credit protection in respect of a portfolio of financial assets. Under IFRS, credit protection is treated either as a financial guarantee contract or as a derivative financial instrument depending on the terms of the agreement and the nature of the protected assets and exposures. The Group has concluded, principally because the covered portfolio includes significant exposure in the form of derivatives, that the APS does not meet the criteria to be treated as a financial guarantee contract. The contract has therefore been accounted for as a derivative financial instrument: it was recognised initially and measured subsequently at fair value with changes in fair value recognised in profit or loss. There is no change in the recognition and measurement of the covered assets as a result of the APS. Impairment provisions on covered assets measured at amortised cost are assessed and charged in accordance with the Group’s accounting policy; held-for-trading assets, assets designated at fair value and available-for-sale assets within the APS portfolio continue to be measured at fair value with no adjustments to reflect the protection provided by the APS. There is no change in how gains and losses on the covered assets are recognised in the income statement or in other comprehensive income.
Bank of England facilities include: • Open market operations – these provide market participants with funding at market rates on a tender basis in the form of short and long-term repos on a wide range of collateral and outright purchases of high-quality bonds to enable them to meet the reserves that they must hold at the Bank of England.
As at 31 December 2009, the Group’s utilisation of these facilities amounted to £21.4 billion (2008 – £41.8 billion).
Other related parties (a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm’s-length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.
(c) In accordance with IAS 24, transactions or balances between Group entities that have been eliminated on consolidation are not reported.
Profit/(loss) before other operating charges and impairment losses 27,827 17,212 (28,334) 16,424 15,522 13,956
(Loss)/profit from continuing operations (3,595) (2,224) (38,513) 7,788 6,497 5,558 (Loss)/profit from discontinued operations, net of tax (160) (99) 3,971 (76) — — (Loss)/profit for the year (3,755) (2,323) (34,542) 7,712 6,497 5,558
(2) Includes gain on redemption of own debt of £3,790 million in 2009.
(4) Includes integration and restructuring costs of £1,286 million in 2009 (2008 – £1,357 million; 2007 – £108 million; 2006 – £134 million; 2005 – £458 million).
(5) Includes purchased intangibles amortisation of £607 million in 2009 (2008 – £919 million; 2007 – £234 million; 2006 – £94 million; 2005 – £97 million).
(7) Includes gains on pensions curtailment of £2,148 million in 2009.
Debt securities and equity shares 463,641 286,782 293,879 347,682 146,246 135,804
The dollar financial information included below has been converted from sterling at a rate of £1.00 to US$1.6167, being the Noon Buying Rate on
(Loss)/earnings per ordinary and B share from continuing operations – pence (6.3) (146.2) 64.0 54.4 47.3 Diluted (loss)/earnings per ordinary and B share from continuing operations – pence (1) (6.3) (146.2) 63.4 53.9 47.0 Adjusted (loss)/earnings per ordinary and B share – pence (13.2) (43.1) 65.5 55.8 49.1 Dividends per ordinary share – pence — 19.3 27.0 21.6 17.0
(5) Adjusted return on average ordinary and B shareholders’ equity represents profit attributable to ordinary and B shareholders before discontinued operations, amortisation of purchased intangibles, integration and restructuring costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment, bonus tax and write-downs of goodwill and other intangible assets expressed as a percentage of average ordinary and B shareholders’ equity.
After 1 Within but within After 2009 £m £m £m £m £m £m £m £m
Finance leases and instalment credit 3,024 6,012 7,150 16,186 17,363 15,632 14,218 13,909
Loan impairment provisions For a discussion of the factors considered in determining the amount of the provisions, see ‘Risk elements and impairments’ on page 142 and ‘Critical accounting policies – Loan impairment provisions’ on pages 255 and 256.
Closing customer provisions as a % of gross loans and advances to customers (3)
Customer charge to income statement as a % of gross loans and advances to customers
(2) Includes closing provisions against loans and advances to banks of £157 million (2008 – £127 million; 2007 – £3 million; 2006 – £2 million; 2005 – £3 million).
Finance leases and instalment credit 341 2.2 194 2.0 132 1.9 103 3.0 88 3.3
Analysis of write-offs The following table analyses amounts written-off by geographical area and type of domestic customer.
Note: (1) Includes £2 million written-off in respect of loans and advances to banks in 2005.
Total — — — — 2 Total risk elements in lending 38,249 21,261 10,731 6,337 5,937
(5) Gross of provisions and excluding reverse repurchase agreements. Includes gross lending relating to disposal groups in 2009.
Gross income not recognised but which would have been recognised under the original terms of non-accrual and restructured loans: Interest on non-accrual and restructured loans included in net interest income: Financial summary continued
The following table shows the estimated amount of loans that would be reported using the SEC’s classifications. The figures are stated before deducting the value of security held or related provisions.
Analysis of deposits – product analysis The following table shows the distribution of the Group’s deposits by type and geographical area.
Total UK offices 392,718 456,443 527,246 Overseas Demand deposits – interest-free 36,458 29,253 27,959
Rest of the World 237,553 287,950 315,087 Total overseas offices 363,628 441,113 467,411
Average interest rates during the year are computed by dividing total interest expense by the average amount borrowed. Average interest rates at year end are average rates for a single day and as such may reflect one-day market distortions which may not be indicative of generally prevailing rates. Original maturities of commercial paper are not in excess of one year. ‘Other short-term borrowings’ consist principally of borrowings in the money markets included within ‘Deposits by banks’ and ‘Customer accounts’ in the financial statements and generally have original maturities of one year or less.
UK based companies and branches Certificates of deposit 13,329 6,673 2,795 3,240 26,037 Other time deposits 50,913 8,083 4,484 21,609 85,089
The Group’s undrawn formal facilities, credit lines and other commitments to lend were £291,634 million (2008 – £352,398 million). While the Group has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown.
(3) On 23 February 2010, the Noon Buying Rate was £1.00 = US$1.5432.
Economic and monetary environment Conditions remained difficult across much of the world economy in 2009. In the first three months of the year, the global slowdown intensified, with many industrialised economies recording the fastest contraction in output for a generation. The synchronised nature of the downturn resulted in a marked deterioration in international trade, as firms pared back inventories and cut orders. Financial market conditions remained turbulent, with equity prices touching a low of 60% below their 2007 peak in March, as rising job losses added to pressure on consumer spending. Policymakers took unprecedented steps to combat the decline, augmenting earlier fiscal stimulus packages and embarking on extraordinary monetary policy actions. A number of central banks cut interest rates further, made significant asset purchases and provided additional liquidity to financial markets. Growth in emerging markets held up moderately well by comparison, with the exception of Eastern European states that suffered acutely from balance of payments difficulties.
The Bank Rate was reduced from 5.0% in October 2008 to 0.5% in March 2009. This brought the base rate to its lowest level in the Bank of England’s 316-year history. With interest rates approaching the zero bound, policymakers embarked on an asset purchase programme, know as quantitative easing (QE), to provide further support to the economy. Initially £75 billion was allocated for asset purchases, which was expanded to £200 billion over the course of the year. The impact of QE has been credited with reducing the long-term cost of borrowing for corporates and preventing deflation in the wider economy, though the counterfactual – the prevailing state of the world if QE was not undertaken – is unknown.
The Federal Reserve had lowered policy rates to 0.25% in December 2008, leaving no room for further rate cuts. Programmes to help normalise conditions in financial markets and support liquidity were extended in 2009. In an effort to lower long-term market interest rates, the Federal Reserve announced that it would purchase $200 billion of Government Sponsored Enterprise debt, $1.25 trillion of mortgage backed securities, and $300 billion of long-term treasury securities. Long yields fell somewhat in the middle of the year but recovered by year end.
The Eurozone entered 2009 on a similar footing to other developed economies, contracting sharply in the first quarter before returning to growth in the three months to September. However, there was significant variation in the performance of economies within the region. Germany’s downturn was deep, with activity contracting by 6.7% between the second quarter of 2008 and the first quarter of 2009. Growth returned in the second quarter of 2009. The recession in France was similarly short but not as deep (with a 3.5% contraction in output during the recession). Peripheral economies with higher debt levels, like Ireland and Spain, were hit hard by rapid and steep rises in unemployment and an extended period of contraction.
The European Central Bank reduced its main policy rate from 2.5% at the beginning of the year to 1% by May 2009, and embarked on a modest programme of asset purchases (€60 billion of covered bond purchases were announced in May to reduce longer rates). It also adopted a policy of unlimited liquidity provision to euro area banks. Nevertheless, lending to households and businesses fell, reducing the rate of money supply growth to almost zero at year end. Consumer price inflation across the single currency area was negative for six months, before returning to positive territory in October. The euro's strength helped to put downward pressure on import costs, but also threatened to act as a drag on the recovery by reducing the competitiveness of the region's exports in global markets.
The retrenchment in international trade in late 2008 had severe consequences for the economies in Asia Pacific, some of which saw exports fall in excess of 50% year on year. The intensification of the downturn in the first three months of 2009 further exacerbated this contraction, reducing industrial output and leading to rapid rises in unemployment. Government stimulus packages introduced at the end of 2008 bore fruit in the second quarter of the year, combining with industry restocking to mark a return to moderate growth across much of the region. Expansionary fiscal policy in China helped the economy to bounce back to 9% growth year on year in the third quarter of 2009, but here, as in many neighbouring economies, private sector demand remained soft, leaving economies reliant on government support in 2010.
Supervision United Kingdom The UK Financial Services Authority (FSA) is the consolidated supervisor of the Group. As at 31 December 2009, 30 companies in the Group (excluding subsidiaries of ABN AMRO), spanning a range of financial services sectors (banking, insurance and investment business), were authorised to conduct financial activities regulated by the FSA.
The Group’s US bank and non-bank subsidiaries and the Royal Bank’s US branches are also subject to supervision and regulation by a variety of other US regulatory agencies. RBS Citizens NA is supervised by the Office of the Comptroller of the Currency, which is charged with the regulation and supervision of nationally chartered banks. Citizens Bank of Pennsylvania is subject to the regulation and supervision of the US Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Insurance. These banks represents approximately 80 percent and 20 percent of the assets of Citizens Financial Group, respectively. Citizens Financial Group is under the supervision of the Federal Reserve as a bank holding company. The Royal Bank’s New York branch is supervised by the New York State Banking Department, and its Connecticut branch is supervised by the Connecticut Department of Banking. Both branches are also subject to supervisory oversight by the Federal Reserve, through the Federal Reserve Bank of Boston.
The Group’s US broker dealer, RBS Securities Inc. (RBSSI), formerly known as Greenwich Capital Markets, Inc., is subject to regulation and supervision by the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) with respect to its securities activities. The futures activities of RBSSI are subject to regulation and oversight by the US Commodity Futures Trading Commission (CFTC) and the Chicago Board of Trade (CBOT). The Group's US commodities business, RBS Sempra Commodities, has as its primary regulator the Federal Reserve Bank of Boston, with additional supervision provided by the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC).
Netherlands The consolidated supervisor of ABN AMRO is the Dutch Central Bank, De Nederlandsche Bank (DNB). The DNB operates as prudential supervisor of banks, insurance companies and pension funds, and also as part of the European System of Central Banks.
Regulatory developments and reviews The Group works with domestic and international trade associations and proactively engages with regulators and other authorities such as the Basel Committee, the Committee of European Banking Supervisors and the EU Commission in order to understand the implications of proposed regulatory change and to contribute to the development of regulatory policy.
UK regulated firms within the Group are members of the Financial Services Compensation Scheme (FSCS), which provides compensation to eligible customers of authorised financial services firms that are unable to meet their obligations. The FSCS is funded through annual levies charged to UK regulated firms. These levies are apportioned between firms on the basis of their shares of the FSCS tariff base: in the case of deposit takers, this means that levies are determined by their share of protected deposits. As a result of FSCS involvement in a number of bank failures in 2008, there has been a significant impact on levies charged to deposit takers, as reflected in the accounts. Also a significant aspect of RBS’ response to regulatory developments during the year was addressing new requirements for banks to develop a ‘single customer view’ systems capability, tailored to generate information required by FSCS in order to facilitate the early payment by the Scheme of compensation to depositors. The industry is expected to have the prescribed Single Customer View in place by end-2010.
Other jurisdictions The Group is active in monitoring regulatory developments in each country in which it operates to ensure internal policies are sufficient to ensure the effective management of regulatory risk.
Total capital expenditure on premises (excluding investment properties), computers and other equipment in the year ended 31 December 2009
At 24 February 2010, the directors of the company had options to purchase a total of 12,138,546 ordinary shares of the company.
First Placing and Open Offer Agreement Pursuant to a placing and open offer agreement effective as of 13 October 2008 entered into between the company, UBS, Merrill Lynch International and HM Treasury, (i) the company agreed to invite qualifying shareholders to apply to acquire new shares at the issue price of 65.5 pence by way of the First Open Offer, (ii) UBS and Merrill Lynch International were appointed as joint sponsors, joint bookrunners and joint placing agents and agreed to use reasonable endeavours to procure placees to acquire the new shares at not less than the issue price of 65.5 pence on such terms as agreed by HM Treasury on the basis that the new shares placed were subject to clawback to the extent they were taken up under the First Open Offer and (iii) HM Treasury agreed that, to the extent not placed or taken up under the First Open Offer and subject to the terms and conditions set out in the First Placing and Open Offer Agreement, HM Treasury would acquire such new shares itself at the issue price of 65.5 pence.
The undertakings relating to SME and mortgage lending have been superseded by the Lending Commitments Letter outlined in the Lending Commitments Letter section below. In addition, the company agreed to limit its activities to the higher of: (i) the annual rate of growth of UK nominal GDP in the preceding year; and (ii) the average historical growth of the balance sheets in the UK banking sector during the period 1987-2007, unless there is evidence that the thresholds are exceeded for reasons unrelated to the provision of the aid.
Sale of Bank of China Investment On 14 January 2009, pursuant to (i) a placing agreement entered into between the company, RBS China Investments S.à r.l. (a Luxembourg incorporated subsidiary of the company) and ABN AMRO Bank N.V., Hong Kong Branch, (ii) a placing agreement entered into between the company, RBS China Investments S.à r.l., ABN AMRO Bank N.V., Hong Kong Branch and Morgan Stanley & Co. International plc, and (iii) a share purchase agreement entered into between RBS China Investments S.à r.l., Primestar Resource Holdings Limited and Orientmax Capital Limited, the company (through RBS China Investments S.à r.l.) sold its entire 4.26 per cent. investment in Bank of China for HKD 18.4 billion.
Pursuant to the terms of the Second Placing and Open Offer Agreement, the aggregate proceeds of the Second Placing and Open Offer (net of expenses) were used in full to fund the redemption on Admission (as defined in the Second Placing and Open Offer Agreement) of the preference shares held by HM Treasury at 101 per cent. of their issue price (£5.05 billion) together with the accrued dividend on the preference shares (from and including 1 December 2008 to but excluding the date of Admission (as defined in the Second Placing and Open Offer Agreement)) and the commissions payable to HM Treasury under the Second Placing and Open Offer Agreement.
In consideration of the provision of its services under the Second Placing and Open Offer Agreement, the company paid to HM Treasury (i) a commission of 0.5 per cent. of the aggregate value of the new shares at the issue price of 31.75 pence per new share, payable on the earlier of Admission (as defined in the Second Placing and Open Offer Agreement) and the second business day after the day on which the Second Placing and Open Offer Agreement is terminated and (ii) a further commission of 1 per cent. of the aggregate value of the new shares subscribed for by placees at the issue price of 31.75 pence per new share payable on the date of Admission (as defined in the Second Placing and Open Offer Agreement).
The company paid to each of HM Treasury, UBS and Merrill Lynch International all legal and other costs and expenses (properly incurred in the case of UBS and Merrill Lynch International) and those of HM Treasury’s financial advisers, incurred in connection with the Second Placing and Open Offer, the redemption of the preference shares or any arrangements referred to in the Second Placing and Open Offer Agreement.
The company also bore all costs and expenses relating to the Second Placing and Open Offer and the preference share redemption, including (but not limited to) the fees and expenses of its professional advisers, the cost of preparation, advertising, printing and distribution of the prospectus dated 16 March 2009 and all other documents connected with the Second Placing and Open Offer and the preference share redemption, the listing fees of the FSA, any charges by CREST and the fees of the London Stock Exchange and Euronext.
The company gave certain representations and warranties and indemnities to each of HM Treasury, UBS and Merrill Lynch International under the Second Placing and Open Offer Agreement. The liabilities of the company are unlimited as to time and amount.
The company also gave HM Treasury the following undertakings: (i) to extend the lending commitments made to HM Treasury in the First Placing and Open Offer Agreement in respect of the UK mortgage and SME lending markets. These commitments will now also apply to the company’s lending to larger commercial and industrial companies in the United Kingdom; and
(ii) a commitment to increase the level at which competitively priced lending is made available and actively marketed by the Group in the United Kingdom by £6 billion.
The company’s commitments described at (i) and (ii) above have been superseded by the Lending Commitments Letter (see below) pursuant to which the company has agreed, among other things, to lend £16 billion above the amount the company has budgeted to lend to UK businesses and £9 billion above the amount the company has budgeted to lend to UK homeowners in the year commencing 1 March 2009, with a commitment to lend at similar levels in the year commencing 1 March 2010. For further details see the Lending Commitments Letter section below.
(iii) the company agreed to allot and issue the new shares to those persons entitled thereto in consideration of Merrill Lynch International or UBS, as applicable, transferring its holding of redeemable preference shares and ordinary shares in Encuentro Limited to the company.
Accordingly, instead of receiving cash as consideration for the issue of the new shares, at the conclusion of the First Placing and Open Offer, the company owned the entire issued ordinary and redeemable preference share capital of Encuentro Limited whose only assets were its cash reserves, which represented an amount equivalent to the net proceeds of the First Placing and Open Offer. The company was able to utilise this amount equivalent to the First Placing and Open Offer net proceeds by exercising its right of redemption over the redeemable preference shares it held in Encuentro Limited.
(iii) provide, as promptly as practicable, information and data relating to the Proposed Assets reasonably requested for due diligence purposes and to provide certain other information concerning the Group’s business and the financial performance and risk of the Proposed Assets; (iv) provide access to the Group’s premises, books, records, senior executives, relevant personnel and professional advisers on reasonable terms; (v) consult with HM Treasury regarding the management and operations of the Proposed Assets and to ensure that the management of the Proposed Assets is in accordance with usual business practices and also without regard to the possible benefits under the APS; (vi) develop and, subject to market conditions, implement a liability management plan which is designed to enable the Group to meet certain Core Tier 1 Capital targets for 2009; and
In addition, the Royal Bank agreed in principle that, if and only if the Royal Bank accedes to the APS, it would not claim, and would disclaim, certain UK tax losses and allowances arising to members of the Group in respect of any accounting period ending on or after 31 December 2008, provided that this undertaking would not apply in respect of any such tax benefits arising in the earlier of (a) the first accounting period beginning more than five years after the relevant accession date and (b) the first accounting period beginning after the relevant accession date in which the Group becomes profitable.
The company’s commitments, described in this section have been superseded by the Scheme Rules and the Accession Agreement, (for details of the Accession agreement, see below), with the exception of a commitment to inform the Department for Business, Innovation and Skills prior to making significant reductions in the level of lending being made available to certain borrowers or counterparties, which will apply until 28 February 2011, in line with the duration of the commitments under the Lending Commitments Letter described below.
We are currently in discussions with HM Treasury on potential adjustments to the lending commitments to reflect economic circumstances over the coming 12 months from March 2010.
B Share Acquisition and Contingent Capital Agreement On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Capital Agreement pursuant to which HM Treasury subscribed for the initial B shares and the Dividend Access Share (the “Acquisitions”) and agreed the terms of HM Treasury’s subscription for an additional £8 billion in aggregate in the form of further B Shares (the “Contingent B Shares”), which will be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
HM Treasury has agreed to waive its statutory pre-emption rights arising out of the B shares and the Dividend Access Share in respect of any future issue of equity securities by the company other than B shares and has agreed to vote its B shares and the Dividend Access Share, as applicable, in favour of each special resolution to disapply its preemption rights under the B shares and/or the Dividend Access Share then held by HM Treasury every time they arise. The pre-emption rights arising out of the B shares and the Dividend Access Share will also be disapplied in the Articles of Association.
Accession Agreement The company acceded to the APS through an accession agreement (the “Accession Agreement”) entered into with HM Treasury, which became effective on 22 December 2009. The Accession Agreement incorporates the terms and conditions of the APS set out in the document entitled ‘UK Asset Protection Scheme Terms and Conditions’ which is available on HM Treasury’s website (the ‘Scheme Conditions’). The Accession Agreement which incorporates the Scheme Conditions is accounted for as a credit derivative and it tailors the APS to the company (by, amongst other things, setting applicable bank-specific thresholds and addressing a limited number of other bank-specific issues).
In connection with its participation in the APS, the company has agreed to a number of behavioural commitments in respect of lending for businesses in the UK, personal current accounts in the UK as well as to develop and implement a capital optimisation exercise designed to increase the Group’s Core Tier 1 capital.
Second Subscription and Transfer Agreements In connection with the B share Issue which took place on 22 December 2009, the company, HM Treasury and Aonach Mor Limited entered into several agreements, in respect of the subscription and transfer of ordinary shares and redeemable preference shares in Aonach Mor Limited. Under the terms of these agreements: (i) the company and HM Treasury acquired ordinary shares in Aonach Mor Limited and entered into put and call options in respect of the ordinary shares in Aonach Mor Limited subscribed for by HM Treasury that would have been exercisable if the B share issue had not proceeded; (ii) HM Treasury applied monies paid under the B share issue to subscribe for redeemable preference shares in Aonach Mor Limited to an aggregate value equal to such monies; and
(iii) the company alloted and issued the B shares to HM Treasury in consideration of HM Treasury transferring its holding of redeemable preference shares and ordinary shares in Aonach Mor Limited to the company.
The Tax Loss Waiver On 26 November 2009, the company entered into three agreements (together comprising the Tax Loss Waiver) which provide the right, at the company‘s option, subject to HM Treasury consent, to satisfy all or part of the annual fee in respect of the APS or the Contingent Subscription arrangement, and the exit fee payable in connection with any termination of the Group’s termination in the APS (but not the refund of the net payments it has received from HM Treasury under the APS), by waiving the entitlement to certain UK tax reliefs that are treated as deferred tax assets. The Tax Loss Waiver contains undertakings designed to prevent the Group from engaging in arrangements which have a main purpose of reducing the net cost to the Group of any waiver of tax reliefs pursuant to the Tax Loss Waiver.
The State Aid Commitment Deed also provides that if the European Commission adopts a decision that the UK Government must recover any State aid (a “Repayment Decision”) and the recovery order of the Repayment Decision has not been annulled or suspended by the Court of First Instance or the European Court of Justice, then the Group must repay HM Treasury any aid ordered to be recovered under the Repayment Decision.
State Aid Costs Reimbursement Deed Under the State Aid Costs Reimbursement Deed, the Group has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State aid and State aid approval.
Agreement by RBS Sempra Commodities to sell its metals, oil and European energy business lines On 16 February 2010, the company announced that RBS Sempra Commodities, a joint venture owned by RBS plc and Sempra Energy, had agreed to sell to J.P. Morgan its metals, oils and European energy business lines for a total cash consideration equal to tangible net asset value plus a premium of US$468 million, US$1.7 billion as at 30 November 2009 (unaudited), of which RBS's share post partner distributions will be approximately 47 per cent. Completion of the transaction is subject to certain conditions including regulatory approvals.
Dividends Payment dates: Cumulative preference shares 28 May and 31 December 2010
For further information on the payment of dividends, see page 377.
Shareholders may also download forms via the ‘Shareholder Services’ section of our website (www.rbs.com/shareholder).
Should you wish to donate your shares to charity in this way you should contact ShareGift for further information: ShareGift, The Orr Mackintosh Foundation, 17 Carlton House Terrace, London SW1Y 5AH
It is not just the novice investor that has been duped in this way; many of the victims had been successfully investing for several years. Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you receive any unsolicited investment advice: • Make sure you get the correct name of the person and organisation; • Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/pages/register; • Report the matter to the FSA either by calling +44 (0)300 500 5000 or visiting www.moneymadeclear.fsa.gov.uk; and
Analyses of ordinary shareholders Number of shares At 31 December 2009 Shareholdings – millions %
• the 15 September 2008 capitalisation issue, the adjusted 31 March 1982 base value of one ordinary share held currently is 83.3p. Further adjustments will be necessary for shareholders who took up their basic entitlement under the 1 December 2008 and/or 14 April 2009 open offers.
For shareholders who held NatWest ordinary shares at 31 March 1982, the market vale of one ordinary share held was 91.2p for shareholders who accepted the basic terms of the RBS offer. This takes account of the following: • the August 1984 rights issue of NatWest ordinary shares; • the June 1986 rights issue of NatWest ordinary shares; • the June 1989 bonus issue of NatWest ordinary shares; • the bonus issue of Additional Value Shares on 12 July 2000; • the 8 May 2007 bonus issue; • the 6 June 2008 rights issue; and
PROs In August 2001, the company issued US$1.2 billion of perpetual regulatory tier one securities (PROs) in connection with a public offering in the United States. The PROs are listed on the NYSE.
The following table shows, for the periods indicated, the high and low sales prices for each of the outstanding ADSs representing non-cumulative dollar preference shares and PROs, as reported on the NYSE or NASDAQ: Series F Series H Series L Series M Series N Series P Series Q Series R Series S Series T Series U Figures in US$ ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs PROs(1)
By quarter 2009: Fourth quarter High 17.06 15.90 13.65 11.36 11.29 11.16 11.69 11.06 11.25 12.47 54.00 69.25
On 23 February 2010, the closing price of the ordinary shares on the London Stock Exchange was £0.36, equivalent to $0.56 per share translated at the Noon Buying Rate of $1.5432 per £1.00 on 23 February 2010.
ADSs The following table shows, for the periods indicated, the high and low sales prices for the company’s ordinary ADSs, as reported on the NYSE composite tape and restated for the effect of the rights issue in June 2008 and the capitalisation issue in September 2008.
2009: Fourth quarter High 16.00 Low 9.17 2009: Third quarter High 18.95 Low 11.45 2009: Second quarter High 14.85 Low 7.35 2009: First quarter High 16.70 Low 3.33 2008: Fourth quarter High 66.00 Low 12.20 2008: Third quarter High 93.85 Low 55.00 2008: Second quarter High 129.96 Low 83.71 2008: First quarter High 149.05 Low 105.18
Non-cumulative preference shares of £1 – Series 1 131.96 81.62 80.73 — — —
Taxation for US Holders The following discussion summarises certain US federal and UK tax consequences of the acquisition, ownership and disposition of ordinary shares, non-cumulative dollar preference shares, ADSs representing ordinary shares (ordinary ADSs), ADSs representing non-cumulative dollar preference shares (preference ADSs) or PROs by a beneficial owner that is a citizen or resident of the United States or that otherwise will be subject to US federal income tax on a net income basis in respect of the ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs (a US Holder). This summary assumes that a US Holder is holding ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference ADSs or PROs, as applicable, as capital assets. This summary does not address the tax consequences to a US Holder (i) that is resident (or, in the case of an individual, ordinarily resident) in the UK for UK tax purposes, (ii) that carries on a trade, profession or vocation through a branch, agency or permanent establishment in the UK in connection with which their ordinary shares, non-cumulative preference shares, ordinary ADSs, preference ADSs or PROs, are held, used or acquired, or (iii) generally, that is a corporation which alone or together with one or more associated companies, controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address the tax consequences to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-tomarket method of tax accounting, persons holding ordinary shares, non-cumulative dollar preference shares, ordinary ADSs, preference
ADSs or PROs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to such securities, persons whose functional currency for US federal income tax purposes is not the US dollar, entities classified as partnerships for US federal income tax purposes, tax-exempt entities or persons that own or are deemed to own 10% or more of the voting stock of the company.
2009 2008 2007 2006 2005 Amount per share and American Depository Share (1) pence pence pence pence pence
Subject to applicable limitations that may vary depending upon a holder’s individual circumstances, dividends paid to certain noncorporate US Holders in taxable years beginning before 1 January 2011 will be taxable at a maximum tax rate of 15%. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.
Taxation of capital gains A US Holder that is not resident (or, in the case of an individual, ordinarily resident) in the UK will not normally be liable for UK tax on capital gains realised on the disposition of an ordinary share, a noncumulative dollar preference share, an ordinary ADS or a preference ADS unless at the time of the disposal, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in the UK through a UK branch or agency and, in each case, such ordinary share, noncumulative dollar preference share, ordinary ADS or preference ADS is or has been used, held or acquired by or for the purposes of such trade (or profession or vocation), carried on through such permanent establishment, branch or agency. Special rules apply to individuals who are temporarily not resident or ordinarily resident in the UK.
Estate and gift tax Subject to the discussion of the Estate Tax Treaty in the next paragraph, ordinary shares, non-cumulative dollar preference shares, ordinary ADSs or preference ADSs beneficially owned by an individual may be subject to UK inheritance tax (subject to exemptions and reliefs) on the death of the individual or in certain circumstances, if such shares or ADSs are the subject of a gift (including a transfer at less than market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. Ordinary shares, non-cumulative dollar preference shares, ordinary ADSs or preference ADSs held by the trustees of a settlement may also be subject to UK inheritance tax. Special rules apply to such settlements.
Subject to applicable limitations that may vary depending upon a holder’s individual circumstances, dividends paid to certain noncorporate US Holders in taxable years beginning before 1 January 2011 will be taxable at a maximum tax rate of 15%. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate. A US Holder will, upon the sale, exchange or redemption of a PRO, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding any amount in respect of mandatory interest and any missed payments which are to be satisfied on a missed payment satisfaction date, which would be treated as ordinary income) and the US Holder’s tax basis in the PRO.
United Kingdom Taxation of payments on the PROs Payments on the PROs will constitute interest rather than dividends for UK withholding tax purposes. However, the PROs will constitute ‘quoted eurobonds’ within the meaning of section 987 of the Income Tax Act 2007 and therefore payments of interest will not be subject to withholding or deduction for or on account of UK taxation as long as the PROs remain at all times listed on a ‘recognised stock exchange’ within the meaning of section 1005 of the Income Tax Act 2007, such as the main market of the New York Stock Exchange. In all other cases, an amount must be withheld on account of UK income tax at the basic rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation does not apply to payments to persons who the company reasonably believes are within the charge to corporation tax or fall within various categories enjoying a special tax status (including charities and pension funds), or are partnerships consisting of such persons (unless HM Revenue & Customs directs otherwise). Where interest has been paid under deduction of UK withholding tax, US Holders may be able to recover the tax deducted under the Treaty.
EU Directive on taxation of savings income The European Union has adopted a directive regarding the taxation of savings income. The Directive requires member states of the European Union to provide to the tax authorities of other member states details of payments of interest and other similar income paid by a person to an individual or certain other persons resident in another member state, except that Luxembourg and Austria may instead impose a withholding system for a transitional period unless during such period they elect otherwise.
A transfer of PROs by a US Holder will not give rise to a charge to UK tax on accrued but unpaid interest payments, unless the US Holder is an individual or other non-corporate taxpayer and at any time in the relevant year of assessment or accounting period carries on a trade, profession or vocation in the UK through a branch or agency to which the PROs are attributable.
Memorandum and Articles of Association The company’s Memorandum and Articles of Association as in effect at the date of this annual report are registered with the Registrar of Companies of Scotland. The Articles of Association were last amended on 15 December 2009.
Incorporation and registration The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited. On 10 March 1982, it changed its name to its present name and was registered under the Companies Acts 1948 to 2006 as a public company with limited liability. The company is registered under Company No. SC 45551.
Arrears are the aggregate of contractual payments due on a debt that have not been met by the borrower. A loan or other financial asset is said to be ’in arrears’ when payments have not been made.
Asset-backed commercial paper (ABCP) – a form of asset-backed security generally issued by a commercial paper conduit.
Assets under management are assets managed by the Group on behalf of clients.
Collectively assessed loan impairment provisions – impairment loss provisions in respect of impaired loans, such as credit cards or personal loans, that are below individual assessment thresholds. Such provisions are established on a portfolio basis, taking account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends.
Commercial mortgage backed securities (CMBS) are asset-backed securities for which the underlying asset portfolios are loans secured on commercial real estate.
Core Tier 1 capital – called-up share capital and eligible reserves plus equity non-controlling interests, less intangible assets and other regulatory deductions.
Covered mortgage bonds are debt securities backed by a portfolio of mortgages that is segregated from the issuer’s other assets solely for the benefit of the holders of the covered bonds.
Credit derivative product company (CDPC) is a special purpose entity that sells credit protection under credit default swaps or certain approved forms of insurance policies. Sometimes they can also buy credit protection. CDPCs are similar to monoline insurers. However, unlike monoline insurers, they are not regulated as insurers.
Credit valuation adjustments are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty.
Currency swap – an arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged.
Customer accounts comprise money deposited with the Group by counterparties other than banks and classified as liabilities. They include demand, savings and time deposits; securities sold under repurchase agreements; and other short term deposits. Deposits received from banks are classified as deposits by banks.
Deferred tax liability – income taxes payable in future periods as a result of taxable temporary differences (temporary differences between the accounting and tax base of an asset or liability that will result in taxable amounts in future periods).
Deposits by banks comprise money deposited with the Group by banks and recorded as liabilities. They include money-market deposits, securities sold under repurchase agreements, federal funds purchased and other short term deposits. Deposits received from customers are recorded as customer accounts.
Discontinued operation is a component of the Group that either has been disposed of or is classified as held for sale. A discontinued operation is either: a separate major line of business or geographical area of operations or part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or a subsidiary acquired exclusively with a view to resale.
Exposure at default (EAD) – an estimate of the expected level of utilisation of a credit facility at the time of a borrower’s default. The EAD may be higher than the current utilisation (e.g. in the case where further drawings may be made under a revolving credit facility prior to default) but will not typically exceed the total facility limit.
Fannie Mae (Federal National Mortgage Association) is a US Government Sponsored Enterprise. It buys mortgages, principally issued by banks, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government.
FICO score – a FICO score is calculated using proprietary software developed by the Fair Isaac Corporation in the US from a consumer’s credit profile. The scores range between 300 and 850 and are used in credit decisions made by banks and other providers of credit.
Forward contract – a contract to buy (or sell) a specified amount of a physical or financial commodity, at an agreed price, at an agreed future date.
Futures contract is a contract which provides for the future delivery (or acceptance of delivery) of some type of financial instrument or commodity under terms established at the outset. Futures differ from forward contracts in that they are traded on recognised exchanges and rarely result in actual delivery; most contracts are closed out prior to maturity by acquisition of an offsetting position.
G10 - the Group of Ten comprises the eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) that have agreed to participate in the IMF’s General Arrangements to Borrow.
Gross yield is the interest rate earned on average interest-earning assets i.e. interest income divided by average interest-earning assets.
Guaranteed mortgages are mortgages that are guaranteed by a government or government agency. In the US, government loan guarantee programmes are offered by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture’s Rural Housing Service. In the Netherlands, the Gemeentegarantie programme is run partly by the central government and partly by the municipalities.
Home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. A home equity loan creates a charge against the borrower’s house.
Impaired loans – a loan or other financial asset or portfolio of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
Impairment losses – for impaired financial assets measured at amortised cost, impairment losses – the difference between carrying value and the present value of estimated future cash flows discounted at the asset’s original effective interest rate – are recognised in profit or loss and the carrying amount of the financial asset reduced by establishing a provision (allowance). For impaired available-for-sale financial assets, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss as an impairment loss.
Interest rate swap – a contract under which two counterparties agree to exchange periodic interest payments on a predetermined monetary principal, the notional amount.
Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities.
Investment grade generally represents a risk profile similar to a rating of a “BBB-”/”Baa3” or better, as defined by independent rating agencies.
Master netting agreement is an agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any one contract.
Medium term notes (MTNs) are debt securities usually with a maturity of five to ten years, but the term may be less than one year or as long as 50 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed maturity date (non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior, unsecured debt.
Monoline insurers are entities that specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default. This protection is typically in the form of derivatives such as credit default swaps.
Mortgage-backed securities – are asset-backed securities for which the underlying asset portfolios are loans secured on property. See residential mortgage backed securities and commercial mortgage backed securities.
Mortgage vintage – the year in which a mortgage loan was made to the customer.
Negative equity mortgages – mortgages where the value of the property mortgaged is less than the outstanding balance on the loan.
Net interest income is the difference between interest receivable on financial assets classified as loans and receivables or available-for-sale and interest payable on financial liabilities carried at amortised cost.
Net principal exposure is the carrying value of a financial asset after taking account of credit protection purchased but excluding the effect of any counterparty credit valuation adjustment to that protection.
Non-accrual loans comprise all loans for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in non-accrual loans.
Non-conforming mortgages – mortgage loans that do not meet the requirements for sale to US Government agencies or US Government sponsored enterprises. These requirements include limits on loan-tovalue ratios, loan terms, loan amounts, borrower creditworthiness and other requirements.
Potential problem loans – are loans other than non-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings where known information about possible credit problems of the borrower causes management to have serious doubts about the borrower’s ability to meet the loan’s repayment terms.
Pro forma cost:income ratio – operating expenses excluding purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration and restructuring costs and share of shared assets expressed as a percentage of total income excluding credit market write-downs and one-off items.
Regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
Renegotiated loans – loans are generally renegotiated (‘restructured’) either as part of the ongoing banking relationship with a creditworthy customer or in response to a borrower’s financial difficulties. In the latter case renegotiation may result in an extension of the due date of payment, a concessionary rate of interest or other changes in the terms of the loan; the loan continues to be overdue and will be individually impaired if the renegotiated payments of interest and principal are insufficient to recover the loan’s original carrying amount.
Reverse repurchase agreement (Reverse repo) – see Sale and repurchase agreements.
Risk elements in lending (REIL) comprise non-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings.
Risk-weighted assets – assets adjusted for their associated risks using weightings established in accordance with the Basel Capital Accord as implemented by the FSA. Certain assets are not weighted but deducted from capital.
Sale and repurchase agreements – in a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, at the same time the seller agrees to reacquire, and the buyer to resell, the asset at a later date. From the seller’s perspective such agreements are repurchase agreements (repos) and from the buyer’s reverse repurchase agreements (reverse repos).
Securitisation is a process by which assets or cash flows are transformed into transferable securities. The underlying assets or cash flows are transferred by the originator or an intermediary, typically an investment bank, to a special purpose entity which issues securities to investors. Asset securitisations involve issuing debt securities (assetbacked securities) that are backed by the cash flows of incomegenerating assets (ranging from credit card receivables to residential mortgage loans). Liability securitisations typically involve issuing bonds that assume the risk of a potential insurance liability (ranging from a catastrophic natural event to an unexpected claims level on a certain product type).
Special purpose entity (SPE) is an entity created by a sponsor, typically a major bank, finance company, investment bank or insurance company. An SPE can take the form of a corporation, trust, partnership, corporation or a limited liability company. Its operations are typically limited for example in a securitisation to the acquisition and financing of specific assets or liabilities.
Structured Investment Vehicle (SIV) is a limited-purpose operating company that undertakes arbitrage activities by purchasing highly rated medium and long-term, fixed-income assets and funding itself with short-term, highly rated commercial paper and medium-term notes.
Sub-prime – sub-prime mortgage loans are designed for customers with one or more high risk characteristics, such as: unreliable or poor payment histories; loan-to-value ratio of greater than 80%; high debt-toincome ratio; the loan is not secured on the borrower’s primary residence; or a history of delinquencies or late payments on the loan.
Tier 1 capital – core Tier 1 capital plus other Tier 1 securities in issue, less material holdings in financial companies.
Tier 2 capital – qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves less certain regulatory deductions.
Unaudited – unaudited financial information is information that has not been subjected to the audit procedures undertaken by the Group’s auditors to enable them to express an opinion on the Group’s financial statements.
Write down – a reduction in the carrying value of an asset to record a decline in its fair value or value in use.
ADR Depositary Bank BNY Mellon Shareowner Services PO Box 358516 Pittsburgh, PA 15252-8516 Telephone: +1 888 269 2377 (US callers)
Group Secretariat The Royal Bank of Scotland Group plc PO Box 1000 Gogarburn Edinburgh EH12 1HQ
RBS Holdings N.V. Gustav Mahlerlaan 10, PO Box 12925 1100 AX Amsterdam The Netherlands