The New York Stock Exchange As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the “NYSE”), RBSG plc is not required to comply with all of the NYSE governance standards applicable to US domestic companies (the “NYSE Standards”) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards.
RBSG plc is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE Standards.
The directors present their report together with the audited accounts for the year ended 31 December 2019.
Other information incorporated into this report by reference can be found at: Page/Note Strategic Report 2
RBS Group structure During 2018 in preparation for ring-fencing a number of changes were made to the RBS Group structure. Following these changes the company owns three main subsidiaries, NatWest Holdings Limited (the parent of the ring-fenced group which includes National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Ireland DAC), NatWest Markets Plc (the investment bank and the parent of NatWest Markets N.V.) and The Royal Bank of Scotland International (Holdings) Limited (the parent of The Royal Bank of Scotland International Limited).
Further details of the principal subsidiary undertakings are shown in Note 6 and a full list of subsidiary undertakings and overseas branches is shown in Note 10 of the parent company accounts.
At 31 December 2019, HMT’s holding in the company’s ordinary shares was 62.1%.
The profit attributable to the ordinary shareholders of RBSG plc for the year ended 31 December 2019 amounted to £3,133 million compared with a profit of £1,622 million for the year ended 31 December 2018, as set out in the consolidated income statement on page 202.
In 2019 RBSG plc announced and paid an interim dividend of £241 million, or 2.0p per ordinary share (2018 - £241 million, or 2.0p per ordinary share) and a special dividend of £1,449 million, or 12.0p per ordinary share (2018 – nil). In addition, the company announced that the directors have recommended a final dividend of £364 million, or 3.0p per ordinary share (2018 – £422 million, or 3.5p per ordinary share), and a further special dividend of £606 million, or 5.0p per ordinary share (2018 – £904 million, or 7.5p per ordinary share).
Having reviewed RBS’s forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS and the company will continue in operational existence for the foreseeable future. Accordingly, the financial statements of RBS and of the company have been prepared on a going concern basis.
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). At the 2018 Annual General Meeting, shareholders gave authority to directors to offer a scrip dividend alternative on any dividend paid up to the conclusion of the Annual General Meeting in 2021. Pursuant to the UK Listing Rules, certain employees of the company require the approval of the company to deal in the company’s shares.
The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company. A number of the company’s employee share plans include restrictions on transfers of shares while shares are subject to the plans. Note 3 sets out a summary of the plans.
Under the rules of certain employee share plans, voting rights are exercised by the Trustees of the plan on receipt of participants’ instructions. If a participant does not submit an instruction to the Trustee no vote is registered.
For shares held in the company’s other Employee Share Trusts, the voting rights are exercisable by the Trustees. However, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation. The Trustees have chosen to waive their entitlement to the dividend on shares held by the Trusts. The total amount of dividends waived during the year ended 31 December 2019 was £4.8 million.
Brendan Nelson resigned from the Board on 25 April 2019. Ross McEwan resigned from the Board on 31 October 2019.
Political donations At the Annual General Meeting in 2019, shareholders gave authority under Part 14 of the Companies Act 2006, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2019, RBS made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that RBS’s longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2020.
Auditors Ernst & Young LLP (EY LLP) are the auditors and have indicated their willingness to continue in office. A resolution to re-appoint EY LLP as the company’s auditors will be proposed at the forthcoming Annual General Meeting.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of RBS Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also responsible for safeguarding the assets of RBS Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy.
Katie Murray Frank Dangeard Alison Davis Patrick Flynn Morten Friis Robert Gillespie Baroness Noakes Mike Rogers Mark Seligman Lena Wilson
Risk culture Risk culture is at the centre of both the risk management framework and risk management practice. RBS’s risk culture target is to make risk part of the way employees work and think.
A focus on leaders as role models and action to build clarity, develop capability and motivate employees to reach the required standards of behaviour are key to achieving the risk culture target. Colleagues are expected to:  Take personal responsibility for understanding and proactively managing the risks associated with individual roles.
The target risk culture behaviours are embedded in Our Standards and are clearly aligned to the core values of “serving customers”, “working together”, “doing the right thing” and “thinking long term”. These act as an effective basis for a strong risk culture because Our Standards are used for performance management, recruitment and development.
Code of Conduct RBS’s Code of Conduct provides guidance on expected behaviour and sets out the standards of conduct that support the values. The code explains the effect of decisions that are taken and describes the principles that must be followed.
Risk management framework continued Risk governance Committee structure The diagram illustrates RBSG plc’s risk committee structure in 2019 and the main purposes of each committee.
Acts on referrals from business and function risk committees, reviewing decisions which have significant reputational implications.
Board- approved strategy and risk appetite, under normal and under stress conditions.
Acts on all material and/or enterprise-wide risk and control matters across RBS. Reviews the risk appetite framework and strategic risk appetite and recommends them for submission to the Board Risk Committee.
Assists the Board in carrying out its accounting, internal control and financial reporting responsibilities. Reviews and monitors the effectiveness of internal controls systems relating to financial management and compliance with financial reporting, asset safeguarding and accounting laws.
Considers the financial strategy, risk management, balance sheet, remuneration and policy implications of RBS’s pension schemes. Approves material compliance, policy or remuneration-related changes.
Risk management framework continued Risk management structure The diagram illustrates RBS’s risk management structure in 2019 and key risk management responsibilities.
Notes: (1) The Group Chief Executive Officer also performs the NWH Chief Executive Officer role. (2) The NWH Risk function provides risk management services across NWH, including to the NWH Chief Risk Officer and – where agreed – to NWM and RBSI
Specialist Risk Directors and Chief Operating Officer) to facilitate effective management of the risks facing NWH. Risk committees in the customer businesses and key functional risk committees oversee risk exposures arising from management and business activities and focus on ensuring that these are adequately monitored and controlled. The directors of Risk, Personal Banking; Risk, Commercial & Private Banking; Risk, Services & Functions and Operational Risk; Compliance & Conduct; Financial Risk & Analytics and Restructuring as well as the Chief Operating Officer report to the NWH Chief Risk Officer. The Chief Financial Crime Officer reports to the NWH Chief Risk Officer, along with a secondary reporting line to the Group Chief Risk Officer. The Director of Risk, Ulster Bank Ireland DAC and the Director of Compliance, Ulster Bank Ireland DAC, report to the Ulster Bank Ireland DAC Chief Executive; they also have a reporting line to the NWH Chief Risk Officer.
(4) The Chief Risk Officers for NWM and RBSI have dual reporting lines into the Group Chief Risk Officer and the respective chief executive officers of their entities. There are additional reporting lines to the NWM and RBSI Board Risk Committee chairs and a right of access to the committee.
Leads the RBSI Risk function. Responsibilities include policy, governance, frameworks, oversight and challenge, risk culture and reporting. Contributes to RBSI strategy as a member of the RBSI
Risk management framework continued Three lines of defence RBS uses the industry-standard three lines of defence model to articulate accountabilities and responsibilities for managing risk. It supports the embedding of effective risk management throughout the organisation. All roles below the CEO sit within one of these three lines. The CEO ensures the efficient use of resources and the effective management of risks as stipulated in the risk management framework and is therefore considered to be outwith the three lines of defence principles.
First line of defence The first line of defence incorporates most roles in RBS, including those in the customer-facing franchises, Technology and Services as well as support functions such as Human Resources, Legal and Finance.
 The first line of defence is responsible for managing its direct risks. With the support of specialist functions such as Legal, HR and Technology, it is also responsible for managing its consequential risks by identifying, assessing, mitigating, monitoring and reporting risks.
 The second line of defence is empowered to design and maintain the risk management framework and its components. It undertakes proactive risk oversight and continuous monitoring activities to confirm that the Group engages in permissible and sustainable risk-taking activities
Third line of defence The third line of defence is the Internal Audit function and is independent of the first and second lines.
 The third line of defence is responsible for providing independent and objective assurance to the Board, its subsidiary legal entity boards and executive management on the adequacy and effectiveness of key internal controls, governance and the risk management in place to monitor, manage and mitigate the key risks to RBS and its subsidiary companies achieving their objectives.
 The third line of defence executes its duties freely and objectively in accordance with the Institute of Internal Auditor’s Code of Ethics & Standards.
Risk appetite Risk appetite defines the level and types of risk RBS is willing to accept, within risk capacity, in order to achieve strategic objectives and business plans. It links the goals and priorities to risk management in a way that guides and empowers staff to serve customers well and achieve financial targets.
 Ensuring the framework remains effective as a strong control environment for risk appetite.
Establishing risk appetite In line with RBS’s risk appetite framework, risk appetite is communicated across RBS through risk appetite statements. The risk appetite statements provide clarity on the scale and type of activities that can be undertaken in a manner that is easily conveyed to staff.
Risk appetite statements consist of qualitative statements of appetite supported by risk limits and triggers that operate as a defence against excessive risk-taking. They are established at RBS-wide level for all strategic risks and material risks, and at legal entity, business, and function level for all other risks.
The Board sets risk appetite for the most material risks to help ensure RBS is well placed to meet its priorities and long-term targets even under challenging economic environments. It is the basis on which RBS remains safe and sound while implementing its strategic business objectives.
 Monitoring of the risks associated with lending and credit exposures.
 Review of potential risks in new business activities and processes.
 Analysis of potential risks in any complex and unusual business transactions.
The financial and non-financial risks that RBS faces each day are detailed in the Risk Directory. This provides a common risk language to ensure consistent terminology is used across RBS. The Risk Directory is subject to annual review. This ensures that it continues to provide a comprehensive and meaningful list of the inherent risks within the businesses.
The adequacy and effectiveness of selected key controls owned and operated by the second line of defence are also tested (with a particular focus on credit risk controls). Selected controls within the scope of Section 404 of the US Sarbanes-Oxley Act 2002 as well as selected controls supporting risk data aggregation and reporting are also reviewed.
Stress testing Stress testing – capital management Stress testing is a key risk management tool and a fundamental component of RBS’s approach to capital management. It is used to quantify and evaluate the potential impact of specified changes to risk factors on the financial strength of RBS, including its capital position.
Stress testing includes:  Scenario testing, which examines the impact of a hypothetical future state to define changes in risk factors.
 Assess impact to current and projected P&L and balance sheet.
 Scenario results and management actions are reviewed and agreed by senior management through senior committees including the Executive Risk Committee, the Board Risk Committee and the Board.
Risk management framework continued Specific areas that involve capital management include:  Strategic financial and capital planning – by assessing the impact of sensitivities and scenarios on the capital plan and capital ratios.
 Based on a forecast of future business performance under adverse economic and market conditions over the forecast period. Scenarios of different severity may be examined.
The examination of capital requirements under normal economic and adverse market conditions enables RBS to determine whether its projected business performance meets internal and regulatory capital requirements.
The examination of capital requirements under adverse economic and market conditions is assessed through stress testing. The results of stress tests are not only used widely across RBS but also by the regulators to set specific capital buffers. RBS takes part in stress tests run by regulatory authorities to test industry-wide vulnerabilities under crystallising global and domestic systemic risks. In 2019, RBS took part in the Bank of England stress test exercise. Details are set out on page 119.
A market stress event affecting all participants in a market through contagion, potential counterparty failure and other market risks. RBS is affected under this scenario but no more severely than any other participants with equivalent exposure.
Risk management framework continued Stress testing – recovery and resolution planning The RBS recovery plan explains how RBS and its subsidiaries – as a consolidated group – would identify and respond to a financial stress event and restore its financial position so that it remains viable on an ongoing basis.
The plan is intended to enable RBS Group to maintain critical services and products it provides to its customers, maintain its core business lines and operate within risk appetite while restoring RBS Group’s financial condition. It is assessed for appropriateness on an ongoing basis and is updated annually. The plan is reviewed and approved by the Board prior to submission to the PRA each year. Individual recovery plans are also prepared for NatWest Holdings Limited, NatWest Markets Plc, RBS International (Holdings) Limited, Ulster Bank Ireland DAC and NatWest Markets N.V. These plans detail the recovery options, recovery indicators and escalation routes for each entity.
Stress testing – market risk Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis as part of the Stress Testing Data Framework. This provides the regulator with an overview of RBS’s banking book interest rate exposure. The report includes detailed product information analysed by interest rate driver and other characteristics – including accounting classification, currency and, counterparty type.
Non-traded exposures are capitalised through the ICAAP. It covers gap risk, basis risk, credit spread risk, pipeline risk, structural foreign exchange risk, prepayment risk and accounting volatility risk. The ICAAP is completed with a combination of value and earnings measures. The total non-traded market risk capital requirement is determined by adding the different charges for each sub risk type. The ICAAP methodology captures at least ten years of historical volatility, produced with 99% confidence level. Methodologies are reviewed by RBS Model Risk and the results are approved by the Capital Management & Stress Testing Committee.
Stress testing – climate RBS will be carrying out climate scenario and stress-testing analysis as part of the Bank of England’s 2021 biennial exploratory scenario. The exercise will explore three distinct climate scenarios over a 30year horizon to test the financial system’s resilience to climate-related risks
Risk management framework continued Regulatory stress testing In 2019, RBS took part in the regulatory stress tests conducted by the Bank of England. The scenario was hypothetical in nature and does not represent a forecast of RBS’s future business or profitability. The results of the regulatory stress tests are carefully assessed by RBS and form part of the wider risk management of RBS.
 The 2019 stress test examined the impact over five years of deep simultaneous recessions in the UK and global economies – including sharp falls in asset prices and a 30% depreciation in sterling, leading to a rise in inflation and a rise in bank rate. The economic scenario in the test was more severe than the global financial crisis.
 After the impact of management actions, RBS’s low point CET1 ratio increased to 10.3%. This was significantly above the hurdle rate of 7.2%.
 The stress was based on an end-of-2018 balance sheet starting position. Since then, RBS has continued to take actions to further improve its capital position stress resilience, including the continued reduction in certain credit portfolios and the resolution of various litigation cases and regulatory investigations.
 In light of the outcomes from the stress test, the Bank of England did not require RBS to submit a revised capital plan.
Capital adequacy risk is the risk that there is or will be insufficient capital and other loss-absorbing debt instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.
Liquidity consists of assets that can be readily converted to cash within a short timeframe at a reliable value. Liquidity risk is the risk of being unable to meet financial obligations as and when they fall due.
∆ Sources of risk (audited) Capital The eligibility of instruments and financial resources as regulatory capital is laid down by applicable regulation. Capital is categorised under two tiers (Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency and the ranking of absorbing losses on either a going or gone concern basis. There are three broad categories of capital across these two tiers:  CET1 capital. CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary shares issued and retained earnings.
Minimum requirement for own funds and eligible liabilities (MREL) In addition to capital, other specific loss-absorbing instruments, including senior notes issued by RBS Group, may be used to cover certain gone concern capital requirements which, in the EU, is referred to as MREL. Gone concern refers to the situation in which resources must be available to enable an orderly resolution, in the event that the Bank of England (BoE) deems that RBS Group has failed, or is likely to fail.
Liquidity resources are divided into primary and secondary liquidity as follows:  Primary liquid assets include cash and balances at central banks, Treasury bills and other high quality government and US agency bonds.
Funding RBS maintains a diversified set of funding sources, including customer deposits, wholesale deposits and term debt issuance. RBS also retains access to central bank funding facilities. For further details on capital constituents and the regulatory framework covering capital, liquidity and funding requirements, please refer to the RBS Pillar 3 Report 2019 on page 6. For MREL refer to page 8.
 RWAs reduced by £9.5 billion to £179.2 billion primarily driven by the legacy business in NatWest Markets, the impact of capital initiatives in Commercial Banking and the impact of the nonperforming loan sale and improvement in credit metrics in Ulster Bank RoI.
 In 2019, RBSG plc issued approximately £4 billion MREL compliant senior debt bringing the total MREL senior debt issues to approximately £20 billion relative to the end state (1 January 2022) requirements of approximately £24 billion. In addition, RBSG plc also issued a £0.6bn Tier 2 subordinated note.
 The liquidity portfolio increased by £1 billion in 2019 to £199 billion, with primary liquidity reducing by £3 billion to £125 billion. The reduction in primary liquidity is driven by reduced customer surplus within NatWest Holdings, dividend payments in the year and Term Funding Scheme (TFS) repayment, offset by increased net term issuance. The increase in secondary liquidity is driven primarily by repayment of TFS, resulting in the return of previously encumbered assets.
 The net stable funding ratio is 141% (2018 – 141%) above the minimum target of 100%.
 The regulatory agenda continues to evolve rapidly in the UK, Europe and internationally. RBS manages its capital, liquidity and funding to meet both current and future regulatory requirements whilst ensuring that RBS continues to serve customers well.
Capital, liquidity and funding risk continued Capital management Capital management ensures that there is sufficient capital and other loss-absorbing instruments to operate effectively including meeting minimum regulatory requirements, operating within Board-approved risk appetite, maintaining its credit rating and supporting its strategic goals.
 Capital plans are produced for RBS Group, its key operating entities and its businesses over a five year planning horizon under expected and stress conditions. Stressed capital plans are produced to support internal stress testing in the ICAAP for regulatory purposes.
 Capital plans are developed to maintain capital of sufficient quantity and quality to support RBS Group’s business, its subsidiaries and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requirements.
Capital planning is one of the tools that RBS Group uses to monitor and manage capital risk on a going and gone concern basis, including the risk of excessive leverage.
Liquidity risk management RBS manages its liquidity risk taking into account regulatory, legal and other constraints to ensure sufficient liquidity is available where required to cover liquidity stresses. The principal levels at which liquidity risk is managed are:  RBS Group
Funding risk management RBS manages funding risk through a comprehensive framework which measures and monitors the funding risk on the balance sheet.
Capital, liquidity and funding risk continued Minimum requirements Capital adequacy ratios RBS Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios of capital to RWAs that the consolidated Group is expected to meet. Different minimum capital requirements may apply to individual legal entities or sub-groups.
(3) Additional capital requirements under Pillar 2A may be specified by the PRA as a ratio or as an absolute value. The table sets out an implied ratio to cover the full value of Pillar 2A requirements.
(5) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If RBS Group fails to meet the combined buffer requirement, it is subject to restrictions on distributions on CET1 instruments, discretionary coupons on AT1 instruments and on payment of variable remuneration or discretionary pension benefits. These restrictions are calculated by reference to RBS Group’s Maximum Distributable Amount (MDA). Where a PRA buffer is applicable, the MDA trigger is below the PRA buffer and MDA restrictions are not automatically triggered if RBS Group fails to meet its PRA buffer. The MDA is calculated as the amount of interim or year-end profits not yet incorporated into CET1 capital multiplied by a factor ranging from 0 to 0.6 depending on the size of the CET1 shortfall against the combined buffer.
(6) For more information on potential changes to regulation which may impact the RBS Group’s capital requirements, refer to the Summary of changes table in the Disclosure Framework section of the 2019 RBS Group Pillar 3 disclosure.
Notes: (1) The countercyclical leverage ratio buffer is set at 35% of RBS Group’s CCyB. As noted above the UK CCyB is currently 1.0%, increasing to 2.0% from
December 2020. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions. (2) The PRA minimum leverage ratio requirement is supplemented with a G-SII additional leverage ratio buffer of 0.35%. From 1 January 2020 RBS will be released from the global systemic buffer.
Note: (1) The CRR2 amendments to the CRR will introduce a binding NSFR requirement from 28 June 2021.
Capital, liquidity and funding risk continued Measurement Capital, risk-weighted assets and leverage: Key metrics The table below sets out the key Capital and Leverage ratios. Refer to Note 25 on the consolidated accounts for a more detailed breakdown of regulatory capital.
Notes: (1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases. (2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items.
Cash and balances at central banks 77.9 88.9 Trading assets 76.7 75.1 Derivatives 150.0 133.3 Loans 399.1 377.5 Other assets 19.3 19.4 Total assets 723.0 694.2
Notes: (1) The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions. (2) RBS's stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in accordance with PRA guidance. Note that a methodology change was applied to the Stressed Outflow Coverage calculation during 2019 to incorporate surplus liquidity held across all Group entities for the RBS metric, as well as incorporate all intra-group cashflows for the UK DoLSub. This resulted in a 7% improvement in the Stressed Outflow Coverage ratio for RBS and a 5% reduction in the ratio for UK DoLSub at 31 December 2019.
Undrawn commitments <1 year which may not be cancelled 1.7 1.7 Other off-balance sheet items with 20% credit conversion factor (CCF) 0.4 0.6 Items with a 20% CCF 2.1 2.3
Revolving credit risk facilities 25.8 27.1 Term loans 3.1 3.5 Mortgages 0.1 0.2 Other undrawn commitments >1 year which may not be cancelled & off-balance sheet 1.5 2.2 Items with a 50% CCF 30.5 33.0 Items with a 100% CCF 4.4 5.9 Total 42.5 50.3
Capital, liquidity and funding risk continued Loss-absorbing capital The following table illustrates the components of estimated loss-absorbing capital (LAC) in RBSG plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet MREL criteria. For further details regarding regulatory requirements in relation to MREL, refer to page 120.
Par sheet Regulatory LAC Par sheet Regulatory LAC value (1) value value (2) value (3) value (1) value value (2) value (3)
Tier 1 capital: end-point CRR compliant AT1 of which: RBSG plc (holdco) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 of which: RBSG plc operating subsidiaries (opcos) — — — — — — — —
Tier 1 capital: end-point CRR non compliant of which: holdco 1.4 1.6 1.4 0.5 1.4 1.6 1.4 0.5 of which: opcos 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Notes: (1) Par value reflects the nominal value of securities issued. (2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation; to the extent they meet the MREL criteria. (3) LAC value reflects RBS’s interpretation of the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such RBS’s estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem.
Notes: (1) Based on final contractual instrument maturity. (2) Based on first call date of instrument, however this does not indicate RBS’s strategy on capital and funding management. The table above does not include debt accounted Tier 1 instruments although those instruments form part of the total subordinated debt balance. (3) The weighted average spread reflects the average net funding cost to RBS and is calculated on an indicative basis. (4) The roll-off table is based on sterling-equivalent balance sheet values.
Counterparty Credit risk credit risk Market risk Operational risk Total RWAs £bn £bn £bn £bn £bn
At 1 January 2019 137.9 13.6 14.8 22.4 188.7 Foreign exchange movement (1.2) (0.3) — — (1.5) Business movements 1.6 (0.8) (1.1) 0.2 (0.1) Risk parameter changes (1) (0.3) — — — (0.3) Methodology changes — — — — — Model updates (1.7) — (0.7) — (2.4) Other movements (2) (5.3) 0.1 — — (5.2) At 31 December 2019 131.0 12.6 13.0 22.6 179.2
Notes: (1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines. (2) The movement in the Other category primarily reflected a £4.6billion reduction in credit risk reflecting the completion of the merger of Alawwal bank and SABB, a £2.0 billion reduction reflecting revision of the treatment of nostros in line with CRR requirements, partially offset by a £1.3 billion increase following the adoption of IFRS 16.
UK Personal Ulster Commercial Private NatWest Central items Banking Bank RoI Banking Banking RBSI Markets & other Total
Credit risk 30.2 11.9 63.3 8.9 5.7 9.6 1.4 131.0 Counterparty credit risk 0.1 — 0.2 0.1 — 12.2 — 12.6 Market risk — 0.1 0.1 — — 12.8 — 13.0 Operational risk 7.5 1.0 8.9 1.1 0.8 3.3 — 22.6 Total RWAs 37.8 13.0 72.5 10.1 6.5 37.9 1.4 179.2 Notes: (1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines. (2) The movement in the Other category primarily reflected a £4.6 billion reduction in credit risk reflecting the completion of the merger of Alawwal bank and SABB, a £2.0 billion reduction reflecting revision of the treatment of nostros in line with CRR requirements, partially offset by a £1.3 billion increase following the adoption of IFRS 16. Other also reflects transfers between segments with £1.2 billion transferring from Commercial Banking to NatWest Markets and £1.1 billion transferring from Commercial Banking to Central items & other.
 RWAs decreased by £9.5 billion in 2019, with credit risk reducing by £6.9 billion, market risk by £1.8 billion and counterparty credit risk by £1.0 billion.
RBS Group (1) UK DoLSub (2) RBS Group (1) UK DoLSub (2) £m £m £m £m
2019 2018 Short-term Long-term Short-term Long-term less than more than less than more than 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m
Bank deposits — Repos 2,598 — 2,598 941 — 941 Other bank deposits (1) 6,688 11,207 17,895 6,497 15,859 22,356 9,286 11,207 20,493 7,438 15,859 23,297 Customer deposits Repos 1,765 — 1,765 3,774 — 3,774 Non-bank financial institutions 48,759 352 49,111 46,115 149 46,264 Personal 183,124 1,210 184,334 178,087 1,499 179,586 Corporate 133,450 587 134,037 131,173 117 131,290 367,098 2,149 369,247 359,149 1,765 360,914 Trading liabilities (2) Repos (3) 27,885 27,885 25,645 — 25,645 Derivative collateral 21,509 21,509 20,187 20,187 Other bank and customer deposits 710 896 1,606 1,342 446 1,788 Debt securities in issue - Medium term notes 659 1,103 1,762 56 847 903 50,763 1,999 52,762 47,230 1,293 48,523 Other financial liabilities Customer deposits — 212 — 212 Debt securities in issue: Commercial papers and certificates of deposit 4,272 6 4,278 3,157 — 3,157 Medium term notes 4,592 29,262 33,854 4,872 24,749 29,621 Covered bonds 3,051 2,897 5,948 — 5,367 5,367 Securitisations — 1,140 1,140 — 1,375 1,375
Notes: (1) Includes £10.0 billion (2018 - £14.0 billion) relating to Term Funding Scheme participation and £1.7 billion (2018 - £1.8 billion) relating to RBS’s participation in central bank financing operations under the European Central Bank’s targeted long-term financing operations. (2) Excludes short positions of £21.2 billion (2018 - £23.8 billion). (3) Comprised central & other bank repos of £6.6 billion (2018 - £5.0 billion), other financial institution repos of £19.0 billion (2018 - £20.1billion) and other corporate repos of £2.3 billion (2018 - £0.6 billion). (4) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consist of £19.2 billion (2018 - £16 billion) under debt securities in issue (senior MREL) and £6.9 billion (2018 - £7 billion) under subordinated liabilities.
Capital, liquidity and funding risk continued Contractual maturity (audited) This table shows the residual maturity of financial instruments, based on contractual date of maturity of RBS’s banking activities, including hedging derivatives. Trading activities comprising ,mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
Banking activities Less than 6 months More than Trading 1 month 1-3 months 3-6 months - 1 year Subtotal 1-3 years 3-5 years 5 years Total activities Total 2019 £m £m £m £m £m £m £m £m £m £m £m
Central bank balances 77,858 — — — 77,858 — — — 77,858 — 77,858 Trading assets — — — — — — — — — 76,745 76,745 Derivatives 22 — — 5 27 42 68 65 202 149,827 150,029 Settlement balances 4,387 — — — 4,387 — — — 4,387 — 4,387 Loans to banks 9,469 178 998 31 10,676 5 8 — 10,689 — 10,689 Loans to customers (1) 37,069 13,591 11,565 19,201 81,426 59,120 43,200 146,885 330,631 — 330,631 Personal 6,155 2,566 3,545 6,645 18,911 25,609 19,247 125,360 189,127 — 189,127 Corporate 24,577 4,608 4,284 7,947 41,416 27,884 21,781 20,113 111,194 — 111,194 NBFI 6,337 6,417 3,736 4,609 21,099 5,627 2,172 1,412 30,310 — 30,310 Other financial assets 1,171 3,360 2,385 3,193 10,109 15,116 8,883 26,629 60,737 715 61,452 Total financial assets 129,976 17,129 14,948 22,430 184,483 74,283 52,159 173,579 484,504 227,287 711,791
Capital, liquidity and funding risk continued Senior notes and subordinated liabilities - residual maturity profile by instrument type (audited)
The table below shows RBS Group’s debt securities in issue and subordinated liabilities by residual maturity. Trading liabilities Other financial liabilities
Less than 1 year 659 4,272 4,592 3,051 — 160 12,075 12,734 1-3 years 321 3 10,452 — — 2,393 12,848 13,169 3-5 years 217 3 10,212 2,897 — 4,931 18,043 18,260 More than 5 years 565 — 8,598 — 1,140 2,495 12,233 12,798 Total 1,762 4,278 33,854 5,948 1,140 9,979 55,199 56,961
Commercial paper and CDs 2,266 401 1,572 39 4,278 MTNs 1,573 15,287 16,445 2,311 35,616 Covered bonds 3,105 — 2,843 — 5,948 Securitisation 672 — 468 — 1,140 Subordinated liabilities 697 8,353 929 — 9,979 Total 8,313 24,041 22,257 2,350 56,961
Contractual maturity (1) Behavioural maturity Loans to customers Customer accounts Net surplus/(gap) Net surplus/(gap)
Less Greater Less Greater Less Greater Less Greater than 1-5 than than 1-5 than than 1-5 than than 1-5 than 1 year years 5 years Total 1 year years 5 years Total 1 year years 5 years Total 1 year years 5 years Total 2019 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
 The net customer funding surplus has reduced by £1 billion during 2019 to £48 billion driven by £11 billion deposit growth and £12 billion loan growth.
 The net funding surplus in 2019 is concentrated in the longer dated buckets, reflecting the stable characteristics of customer deposits and lending that is behaviourally shorter dated.
 Ring-fenced to meet regulatory requirement, where RBS has in place an operational continuity in resolution (OCIR) investment mandate wherein PRA requires critical service providers to hold segregated liquidity buffers covering at least 50% of their annual fixed overheads.
Balance sheet encumbrance (audited) The table shows the retained encumbrance assets of RBS Group.
Collateral Unencumbered assets not pre-positioned counterparties other than central banks & encumbered ring - fenced with central banks Covered SFT, assets held to meet reg debts & derivatives at central requirement Readily Other Cannot and similar (2) Total (3) banks (4)
(3) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not available to secure funding or to meet other collateral needs.
(8) Cannot be used includes: (a) Derivatives, reverse repurchase agreements and trading related settlement balances. (b) Non-financial assets such as intangibles, prepayments and deferred tax. (c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation. (d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral. (9) In accordance with market practice, RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
The principal sources of credit risk for RBS are lending, off-balance sheet products, derivatives and securities financing, and debt securities. RBS is also exposed to settlement risk through foreign exchange, trade finance and payments activities.
The Personal credit risk appetite framework sets limits that measure and control the quality and concentration of both existing and new business for each relevant business segment. The actual performance of each portfolio is tracked relative to these limits and management action is taken where necessary. The limits apply to a range of credit risk-related measures including expected loss at both portfolio and product level, projected credit default rates across products and the loan-to-value (LTV) ratio of the Personal mortgage portfolios.
∆ Risk models Credit risk models is the collective term used to describe all models, frameworks and methodologies used to calculate probability of default (PD), exposure at default (EAD), loss given default (LGD), maturity and the production of credit grades.
Credit risk models are designed to provide:  An assessment of customer and transaction characteristics.
 Accurate internal default, loss and exposure at default estimates that are used in the capital calculation or wider risk management purposes.
Counterparty credit risk Counterparty credit risk arises from the obligations of customers under derivative and securities financing transactions.
RBS mitigates counterparty credit risk through collateralisation and netting agreements, which allow amounts owed by RBS to a counterparty to be netted against amounts the counterparty owes RBS.
The valuation methodologies for residential mortgage collateral and CRE are detailed below.
Residential mortgages – RBS takes collateral in the form of residential property to mitigate the credit risk arising from mortgages. RBS values residential property during the loan underwriting process by either appraising properties individually or valuing them collectively using statistically valid models. RBS updates residential property values quarterly using the relevant residential property index namely: Region Index used UK Halifax quarterly regional house price index Northern Ireland
Wholesale Wholesale customers – including corporates, banks and other financial institutions – are grouped by industry sectors and geography as well as by product/asset class and are managed on an individual basis. Customers are aggregated as a single risk when sufficiently interconnected.
Credit risk continued Collections When a customer exceeds an agreed limit or misses a regular monthly payment the customer is contacted by RBS and requested to remedy the position. If the situation is not regularised then, where appropriate, the Collections team will become more fully involved and the customer will be supported by skilled debt management staff who endeavour to provide customers with bespoke solutions. Solutions include shortterm account restructuring, refinance loans and forbearance which can include interest suspension and ‘breathing space’. In the event that an affordable/sustainable agreement with a customer cannot be reached, the debt will transition to the Recoveries team. For provisioning purposes, under IFRS 9, exposure to customers managed by the Collections team is categorised as Stage 2 and subject to a lifetime loss assessment, unless it is 90 days past due, in which case it is categorised as Stage 3.
Recoveries The Recoveries team will issue a notice of intention to default to the customer and, if appropriate, a formal demand, while also registering the account with credit reference agencies where appropriate. Following this, the customer’s debt may then be placed with a thirdparty debt collection agency, or alternatively a solicitor, in order to agree an affordable repayment plan with the customer. An option that may also be considered, is the sale of unsecured debt. Exposures subject to formal debt recovery are defaulted and categorised as Stage 3 impaired.
Wholesale Early problem identification Each segment and sector has defined early warning indicators to identify customers experiencing financial difficulty, and to increase monitoring if needed. Early warning indicators may be internal, such as a customer’s bank account activity, or external, such as a publiclylisted customer’s share price. If early warning indicators show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty, they may decide to classify the customer within the Risk of Credit Loss framework.
Appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt (refer to Heightened Monitoring characteristics). Corrective actions may include granting a customer various types of concessions. Any decision to approve a concession will be a function of specific appetite, the credit quality of the customer, the market environment and the loan structure and security. All customers granted forbearance are classified Heightened Monitoring as a minimum.
Restructuring For the Wholesale problem debt portfolio, customer relationships are mainly managed by the Restructuring team. The purpose of Restructuring is to protect RBS’s capital. Restructuring does this by working with corporate and commercial customers in financial difficulty on their restructuring and repayment strategies. Restructuring will always aim to recover capital fairly and efficiently.
Forbearance takes place when a concession is made on the contractual terms of a loan/debt in response to a customer’s financial difficulties.
A loan/debt may be forborne more than once, generally where a temporary concession has been granted and circumstances warrant another temporary or permanent revision of the loan’s terms.
In the Personal portfolio, loans are considered forborne until they meet the exit criteria set out by the European Banking Authority. These include being classified as performing for two years since the last forbearance event, making regular repayments and the loan/debt being less than 30 days past due. Exit criteria are not currently applied for Wholesale portfolios.
Wholesale In the Wholesale portfolio, forbearance may involve covenant waivers, amendments to margins, payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears, and debt forgiveness or debt-for-equity swaps.
Provisioning for forbearance Personal The methodology used for provisioning in respect of Personal forborne loans will differ depending on whether the loans are performing or nonperforming and which business is managing them due to local market conditions.
Granting forbearance will only change the arrears status of the loan in specific circumstances, which can include capitalisation of principal and interest in arrears, where the loan may be returned to the performing book if the customer has demonstrated an ability to meet regular payments and is likely to continue to do so.
In the case of non-performing forborne loans, an individual loan impairment provision assessment generally takes place prior to forbearance being granted. The amount of the loan impairment provision may change once the terms of the forbearance are known, resulting in an additional provision charge or a release of the provision in the period the forbearance is granted.
 Model application: o The assessment of the significant increase in credit risk and the formation of a framework capable of consistent application.
 Republic of Ireland – The economy is expected to continue on its positive trajectory with growth expected to revert closer to long run averages in the medium term. Job growth is expected to moderate with unemployment remaining around 5%. Meanwhile house prices are expected to grow at a low single-digit pace. As always, a small open economy such as RoI remains very sensitive to the global economic environment and expectations can change at short notice.
Use of the central base case in Wholesale As in Personal the primary input is the central base case scenario but a further adjustment is applied to the aggregate credit cycle conditions arising from the base case to explicitly enforce a gradual reversion to long run average conditions starting from the first projected year onwards.
 Personal – In addition to the central base case a further four bespoke scenarios are taken into account – a base case upside and downside – and an additional upside and downside. The overall MES ECL is calculated as a probability weighted average across all five scenarios (refer to the Probability weightings of scenarios section for further details).
The ECL impact on the Personal portfolio arising from the systematic application of MES over the single, central base case was relatively low at less than 1%, in line with 2018. Losses are expected to increase on a non-linear basis in the event of an economic downturn, and for UK Personal Banking, this effect was included within the overlay for UK economic uncertainty detailed on page 138. At the end of 2018, an overlay of £26 million covering non-linearity of losses had been held separately. For Ulster Bank RoI, a separate overlay of £25 million (2018 – £26 million) covering non-linearity of losses continued to be held.
The simulation of alternative scenarios does not occur on the level of the individual economic loss drivers but operates on the aggregate Credit Cycle Indices (CCI) that underpin the Wholesale credit models. CCIs measure portfolio level default rate conditions expressed as an index value. An index value of zero represents long run average default rates. Negative and positive index values represent default rates above and below long run averages respectively. The Monte Carlo MES approach increases Wholesale modelled ECL for Stage 1 and Stage 2 by approximately 7% (2018 – 5%) above the single, central scenario outcomes. No additional non-linearity overlay was applied for Wholesale, similar to 2018, with the final reported ECL inclusive of the systematic MES uplift from the Monte Carlo modelling and also the overlay for economic uncertainty detailed below.
For both Personal and Wholesale, the impact from MES is factored into account level PDs through scalars. These MES-adjusted PDs are used to assess whether a significant increase in credit risk has occurred. The MES impact on the size of Stage 2 is proportionate to the MES ECL impacts across Personal and Wholesale, as set out above.
Key economic loss drivers The tables and commentary below provide an update on the base case economics used at 31 December 2019, and also the MES used for Personal portfolios. The average over the five year horizon (2020 to 2024) for the central base case and two upside and downside scenarios used for ECL modelling, are set out below. It is compared with the five year average (2019 to 2023) of the 2018 scenarios. The graph shows the quarterly GDP year-on-year growth rates across the MES. Subsequently, the annual figures for key variables across the UK and Republic of Ireland are shown. Finally, the extreme points table show the best and worst readings for three key variables in the two upside and two downside scenarios, highlighting the most challenging points in the downside scenarios and the strongest points in the upside scenarios.
GDP - change 2.4 2.2 1.6 1.3 0.9 2.6 2.3 1.7 1.5 1.1 Unemployment 3.6 3.9 4.4 4.7 5.2 3.3 3.8 5.0 5.6 6.9 House Price Inflation - change 4.1 3.3 1.6 0.8 (1.0) 4.3 3.3 1.7 1.1 (0.5) Bank of England base rate 1.0 0.7 0.3 — — 1.7 1.3 1.1 0.5 — Republic of Ireland GDP - change 3.9 3.6 2.8 2.4 1.9 4.3 3.6 3.0 3.1 2.8 Unemployment 3.9 4.3 4.8 5.7 6.9 4.2 4.6 5.2 6.0 6.8 House Price Inflation - change 5.3 4.7 2.9 2.2 1.0 9.2 6.8 4.0 3.2 0.8 European Central Bank base rate 1.6 0.9 — — — 1.3 0.8 0.3 — —
UK House Price Inflation - annual growth Upside 2 Upside 1 Base case Downside 1 Downside 2
Republic of Ireland GDP - annual growth Upside 2 Upside 1 Base case Downside 1 Downside 2 2019 4.1 4.1 3.9 3.8 3.7 2020 6.3 5.9 3.4 1.7 (0.1) 2021 5.1 4.5 2.8 2.2 0.5 2022 3.3 2.9 2.7 3.2 3.1 2023 2.4 2.4 2.6 2.6 3.2 2024 2.2 2.2 2.4 2.4 2.7 Republic of Ireland unemployment rate
Q4 2019 4.6 4.7 4.9 5.1 5.3 Q4 2020 3.8 4.0 4.8 5.8 7.0 Q4 2021 3.6 4.0 4.8 5.8 7.3 Q4 2022 3.8 4.2 4.8 5.5 6.9 Q4 2023 4.3 4.6 4.9 5.7 6.9 Q4 2024 4.5 4.9 5.0 5.8 6.9 Republic of Ireland House Price Inflation - annual growth
Upside 2 Upside 1 Upside 2 Upside 1 Downside 1 Downside 2 Downside 1 Downside 2
 Severity assessment – Having selected the most appropriate scenarios, their severity is then assessed based on the behaviour of UK GDP, by calculating a variety of measures such as average growth, deviation from baseline and peak to trough falls. These measures are compared against a set of 1,000 model runs, following which, a percentile in the distribution is established which most closely corresponds to the scenario.
 Probability assignment – Having established the relevant percentile points, probability weights are assigned to ensure that the scenarios produce an unbiased result.
PD estimates Personal models Personal PD models use the Exogenous, Maturity and Vintage (EMV) approach to model default rates. The EMV approach separates portfolio default risk trends into three components: vintage effects (quality of new business over time), maturity effects (changes in risk relating to time on book) and exogenous effects (changes in risk relating to changes in macro-economic conditions). The EMV methodology has been widely adopted across the industry because it enables forward-looking economic information to be systematically incorporated into PD estimates.
Wholesale models Wholesale PD models use the existing CCI based point-intime /through-the-cycle framework to convert one-year regulatory PDs into point-in-time estimates that reflect economic conditions observed at the reporting date across a comprehensive set of region/industry segments.
LGD estimates The general approach for the IFRS 9 LGD models is to leverage corresponding Basel LGD models with bespoke adjustments to ensure estimates are unbiased and where relevant forward-looking.
Analysis has indicated that there is minimal impact on EAD arising from changes in the economy for all Retail portfolios except mortgages. Therefore, forward-looking information is only incorporated in the mortgage EAD model (through forecast changes in interest rates).
No explicit forward-looking information is incorporated, on the basis that analysis has shown that temporal variations in CCFs are largely attributable to changes in exposure management practices rather than economic conditions.
For UK Personal Banking, these PMAs netted to a total overlay of approximately £40 million at the year end. This included £15 million in respect of the repayment risk not captured in the models, that a proportion of customers on interest only mortgages will not be able to repay the capital element of their loan at end of term. The overlay for interest only mortgages was based on an analysis of recent experience on customer repayments pre and post end of term, and modelling that forward for maturities over the next ten years. In addition, judgemental ECL overlays totalling approximately £38 million were held. In credit cards, a £30 million ECL overlay was in place in respect of a withheld systematic model release in recognition of expected future modelling developments. For mortgages, a judgmental overlay of £8 million was held in respect of the perceived forwardlooking incremental risk on buy-to-let lending.
For Ulster Bank RoI, there was a £6 million ECL reduction in their unsecured lending portfolio ahead of the underlying model parameter change being updated.
Credit risk continued Significant increase in credit risk (audited) Exposures that are considered significantly credit deteriorated since initial recognition are classified in Stage 2 and assessed for lifetime ECL measurement (exposures not considered deteriorated carry a 12 month ECL). RBS has adopted a framework to identify deterioration based primarily on movements in probability of default supported by additional backstops. The principles applied are consistent across RBS and align to credit risk management practices.
 Persistence (Personal and Business Banking customers only) – the persistence rule ensures that accounts which have met the criteria for PD driven deterioration are still considered to be significantly deteriorated for three months thereafter. This additional rule enhances the timeliness of capture in Stage 2. It is a Personal methodology feature and is applied to PD driven deterioration only.
 Stage 2 stability – the criteria should not introduce unnecessary volatility in the Stage 2 population.
Asset lifetimes (audited) The choice of initial recognition and asset duration is another critical judgement in determining the quantum of lifetime losses that apply.
 The date of initial recognition reflects the date that a transaction (or account) was first recognised on the balance sheet; the PD recorded at that time provides the baseline used for subsequent determination of significant increase in credit risk.
In the case of credit cards, the most significant judgement is to reflect the operational practice of card reissuance and the associated credit assessment as enabling a formal re-origination trigger. As a consequence, a capped lifetime approach of up to 36 months is used on credit card balances. If the approach was uncapped the ECL impact is estimated at less than £90 million, in line with analysis at the end of 2018.
The approach reflects RBS practice of a credit-based review of customers prior to credit card issuance and complies with IFRS 9. Benchmarking information indicates that peer UK banks use behavioural approaches in the main for credit card portfolios with average durations between three and ten years. Across Europe durations are shorter and are, in some cases, as low as one year.
 Mortgages – House Price Inflation (HPI) is a key economic driver and RBS have simulated a univariate scenario of a 20% decrease in HPI across the main mortgage portfolios. A univariate analysis using only HPI does not allow for the interdependence across the other key primary loss drivers to be reflected in any ECL estimate. PDs are not impacted in this scenario analysis. The simulated impact is based on 100% probability weighting to demonstrate the isolated sensitivity of HPI against base ECL estimates.
RoI 12.2 9.8% 45.3 18.5 41% 14.8% (1.9) (4.2%) 9.6% Of which: mortgages Stage 1 and Stage 2 11.7 9.3% 41.2 — — — — — — 0.6 1.5% 9.2%
Stage 3 1.9 — 580.8 22.9 3.9% Notes: (1) Reflects drawn exposure and ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds, and cash. For Personal, the analysis excludes non-modelled portfolios such as Private Banking and RBSI. (2) The ECL provision includes the ECL overlay taken to recognise elevated Brexit related economic uncertainty. (3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact at the year end balance sheet date. (4) HPI is applied to the most material mortgage portfolios only, namely UK Personal Banking and Ulster Bank RoI. The impacts for Stage 3 are included separately. (5) TTC or long-run average PDs and LGDs are applied to Wholesale portfolios only (excluding business banking exposures which reside in the Personal and business banking section). (6) Refer to page 135 for details of base case economic scenarios. (7) 2018 comparative details are not included as the sensitivity scenario analysis relates to the 2019 balance sheet position. Refer to the 2018 Annual Report and
 In the Downside 2 scenario, the ECL requirement overall was simulated to increase by £201 million on Stage 1 and 2 exposures from the current level of £1,040 million. The simulation estimates the balance sheet ECL requirement as at 31 December 2019 and assumes that the economic variables associated with the Downside 2 scenario had been RBS’s base case economic assumption at that time.
 The sensitivity of Personal portfolios to Downside 2 has reduced over time. This is mainly because compared to 2018, the path assumed for the unemployment rate in the Downside 2 scenario is lower. The RoI portfolio simulated uplift was more significant than on the other portfolios, reflecting the weight of mortgage assets in their personal lending portfolio, with the adverse movement in unemployment rates increasing the size of Stage 2. A similar effect was observed on the UK Personal Banking mortgage portfolio where the mortgage ECL was simulated to increase by just over 25%, and which impact is included within the overall Personal and Business banking, UK, simulated result.
 The Upside 2 scenario indicates a slightly lower release to ECL for Personal and Business Banking, UK, and Wholesale compared to the Downside 2 uplift. This is intuitive given the shape of the Upside 2 economics and non-linearity of losses to the downside. The reduced Upside 2 impact on the RoI mortgage portfolio is reflective of currently favourable Irish economic conditions and portfolio composition. Further improvements in Irish macro economic variables are not expected to materially impact ECL in the RoI mortgage portfolio.
 For Wholesale, the TTC scenario has the most significant impact on ECL highlighting that reverting to long run average PDs and LGDs is more severe than a switch to the Downside 2 scenario. Moving to TTC PDs requires an average PD uplift of almost 60%.
Credit risk – Banking activities Introduction This section details the credit risk profile of RBS’s banking activities.
Other financial assets - in scope 135.5 144.1 Stage 1 135.5 144.1
Out of scope of IFRS 9 ECL framework 8.8 7.1 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
The assets outside the IFRS 9 ECL framework were as follows:  Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £6.1 billion (2018 - £4.9 billion). These were assessed as having no ECL unless there was evidence that they were credit impaired.
 Fair value adjustments on loans hedged by interest rate swaps, where the underlying loan was within the IFRS 9 ECL scope – £1.1 billion (2018 - £0.9 billion).
Amounts written-off 235 85 450 1 5 16 — 792 Of which: individual — 5 345 1 5 16 — 372 Of which: collective 235 80 105 — — — — 420
Loans - amortised cost Stage 1 134,836 17,822 91,034 13,750 13,383 8,196 6,964 285,985 Stage 2 13,245 2,080 9,518 531 289 407 27 26,097 Stage 3 1,988 2,476 2,574 233 108 795 — 8,174 Of which: individual — 68 1,695 233 108 756 — 2,860 Of which: collective 1,988 2,408 879 — — 39 — 5,314 150,069 22,378 103,126 14,514 13,780 9,398 6,991 320,256 ECL provisions (1) Stage 1 101 36 129 14 6 7 4 297 Stage 2 431 115 198 10 4 14 — 772 Stage 3 677 808 1,068 27 23 179 — 2,782 Of which: individual — 29 621 27 23 150 — 850 Of which: collective 677 779 447 — — 29 — 1,932 1,209 959 1,395 51 33 200 4 3,851 ECL provisions coverage (2,3) Stage 1 (%) 0.07 0.20 0.14 0.10 0.04 0.09 0.06 0.10 Stage 2 (%) 3.25 5.53 2.08 1.88 1.38 3.44 — 2.96 Stage 3 (%) 34.05 32.63 41.49 11.59 21.30 22.52 — 34.03 0.81 4.29 1.35 0.35 0.24 2.13 0.06 1.20 Impairment losses ECL charge (4) 339 15 147 (6) (2) (92) (3) 398 Stage 1 (75) (7) (29) (5) (3) (23) (1) (143) Stage 2 248 (2) 42 — 3 1 — 292 Stage 3 166 24 134 (1) (2) (70) (2) 249 Of which: individual — 1 167 (1) (2) (69) (2) 94 Of which: collective 166 23 (33) — — (1) — 155 ECL loss rate - annualised (basis points) (3)
 Total ECL provisions reduced slightly. The increase in Stage 1 ECL was more than offset by reductions in Stage 2 and Stage 3.
 Ulster Bank RoI – the ECL reduction reflected the continued positive effects from the external environment as well as a residual benefit in 2019 from a 2018 debt sale.
balance reduced as write-offs and repayments offset new charges. Stage 2 loans and advances increased primarily due to model enhancements and increases in exposures managed in the Risk of Credit Loss framework, leading to net transfers from Stage 1.
 Provision coverage reduced slightly overall with increases in Stage 3 coverage for both individual and collectively assessed exposures, offset by a slight decrease in Stage 2.
UK Personal Banking 144,513 11,921 1,034 603 13,558 1,902 159,973 114 375 45 47 467 823 1,404 Ulster Bank RoI 18,544 1,405 104 133 1,642 2,037 22,223 29 39 6 8 53 693 775 Personal (3) 10,858 944 96 105 1,145 1,877 13,880 12 20 6 6 32 591 635 Wholesale 7,686 461 8 28 497 160 8,343 17 19 — 2 21 102 140 Commercial Banking 88,100 10,837 254 262 11,353 2,162 101,615 152 195 12 7 214 1,021 1,387 Private Banking 14,956 478 63 46 587 207 15,750 7 6 — 1 7 29 43 Personal 11,630 180 60 41 281 192 12,103 3 2 — 1 3 23 29 Wholesale 3,326 298 3 5 306 15 3,647 4 4 — — 4 6 14 RBS International 14,834 520 18 7 545 121 15,500 4 6 — — 6 21 31 Personal 2,799 27 17 6 50 65 2,914 1 1 — — 1 12 14 Wholesale 12,035 493 1 1 495 56 12,586 3 5 — — 5 9 17 NatWest Markets 9,273 176 4 — 180 169 9,622 10 5 — — 5 131 146 Central items & other 15,282 3 — — 3 — 15,285 6 — — — — — 6 Total loans 305,502 25,340 1,477 1,051 27,868 6,598 339,968 322 626 63 63 752 2,718 3,792 of which: Personal 169,800 13,072 1,207 755 15,034 4,036 188,870 130 398 51 54 503 1,449 2,082 Wholesale 135,702 12,268 270 296 12,834 2,562 151,098 192 228 12 9 249 1,269 1,710 2018*
UK Personal Banking 134,836 11,442 1,079 725 13,245 1,988 150,069 101 339 44 48 431 677 1,209 Ulster Bank RoI 17,822 1,815 153 112 2,080 2,476 22,378 36 92 11 12 115 808 959 Personal (3) 11,059 1,211 142 105 1,458 2,296 14,813 13 62 11 12 85 673 771 Wholesale 6,763 604 11 7 622 180 7,565 23 30 — — 30 135 188 Commercial Banking 91,034 8,801 286 430 9,518 2,574 103,126 129 182 8 8 198 1,068 1,395 Private Banking 13,750 307 73 151 531 233 14,514 14 4 1 5 10 27 51 Personal 10,803 125 58 25 208 211 11,222 5 2 1 — 3 24 32 Wholesale 2,947 182 15 126 323 22 3,292 9 2 — 5 7 3 19 RBS International 13,383 250 24 15 289 108 13,780 6 4 — — 4 23 33 Personal 2,855 25 24 10 59 91 3,005 3 — — — — 17 20 Wholesale 10,528 225 — 5 230 17 10,775 3 4 — — 4 6 13 NatWest Markets 8,196 407 — — 407 795 9,398 7 14 — — 14 179 200 Central items & other 6,964 27 — — 27 — 6,991 4 — — — — — 4 Total loans 285,985 23,049 1,615 1,433 26,097 8,174 320,256 297 635 64 73 772 2,782 3,851 of which: Personal 159,553 12,803 1,303 865 14,971 4,585 179,109 122 403 56 60 519 1,391 2,032 Wholesale 126,432 10,246 312 568 11,126 3,589 141,147 175 232 8 13 253 1,391 1,819 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
UK Personal Banking 0.07 2.96 4.08 6.62 3.25 34.05 0.81 339 22.59 445 Ulster Bank RoI 0.20 5.07 7.19 10.71 5.53 32.63 4.29 15 6.70 372 Personal (3) 0.12 5.12 7.75 11.43 5.83 29.31 5.20 20 13.50 343 Wholesale 0.34 4.97 — — 4.82 75.00 2.49 (5) (6.61) 29 Commercial Banking 0.14 2.07 2.80 1.86 2.08 41.49 1.35 147 14.25 572 Private Banking 0.10 1.30 1.37 3.31 1.88 11.59 0.35 (6) (4.13) 7 Personal 0.05 1.60 1.72 — 1.44 11.37 0.29 (6) (5.35) 5 Wholesale 0.31 1.10 — 3.97 2.17 13.64 0.58 — — 2 RBS International 0.04 1.60 — — 1.38 21.30 0.24 (2) (1.45) 9 Personal 0.11 — — — — 18.68 0.67 2 6.66 9 Wholesale 0.03 1.78 — — 1.74 35.29 0.12 (4) (3.71) — NatWest Markets 0.09 3.44 — — 3.44 22.52 2.13 (92) (97.89) 89 Central items and other 0.06 — — — — — 0.06 (3) (4.29) — Total loans 0.10 2.76 3.96 5.09 2.96 34.03 1.20 398 12.43 1,494 Of which: Personal 0.08 3.15 4.30 6.94 3.47 30.34 1.13 354 19.76 776 Wholesale 0.14 2.26 2.56 2.29 2.27 38.76 1.29 44 3.12 718 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details. Notes: (1) 30 DPD – 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for significant increase in credit risk. (2) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios. (3) Includes a £5 million release and a £3 million write off (2018 - £1 million charge and £3 million write-off) related to the business banking portfolio in Ulster Bank
 The UK Personal Banking charge for the year of £393 million, 25 basis points, increased slightly year-on-year (2018 – 23 basis points) reflecting a slight rise in default rates and also lower recoveries and impairment benefits from debt sales.
 In Ulster Bank RoI, there was a net impairment release of £34 million for the year driven by portfolio improvements, the impact of debt sales, write-backs on legacy defaulted stock and an IFRS 9 accounting adjustment for interest in suspense recoveries.
 In performing exposures (Stage 1 and Stage 2), materially higher ECL provision was held in credit-deteriorated Stage 2 exposures than in Stage 1. This was in line with expectations and was also reflected in provision coverage levels.
 The majority of Stage 2 exposures were less than 30 days past due. This was in line with expectations, since PD deterioration is the primary driver of credit deterioration.
 The differing cover rates between the Personal and Wholesale portfolios largely reflected differences in asset mix, including security cover, and the differing effects of external environment events.
Mortgages (1) Cards personal Total Property Corporate FI Sovereign Total 2018* £m £m £m £m £m £m £m £m £m £m
Loans by residual maturity 165,302 4,218 9,589 179,109 36,790 72,370 25,020 6,967 141,147 320,256 - <1 year 11,260 919 4,966 17,145 9,555 29,860 17,608 6,362 63,385 80,530 - 1-5 year 35,233 3,299 3,820 42,352 18,839 30,815 6,170 245 56,069 98,421 - 5 year 118,809 — 803 119,612 8,396 11,695 1,242 360 21,693 141,305 Other financial assets by asset quality (2) — — — — 105 652 8,838 134,546 144,141 144,141 - AQ1-AQ4 — — — — 105 10 8,110 134,546 142,771 142,771 - AQ5-AQ8 — — — — — 642 721 — 1,363 1,363 - AQ9 — — — — — — 4 — 4 4 - AQ10 — — — — — — 3 — 3 3 Off-balance sheet (5) 13,228 16,613 12,229 42,070 16,044 52,730 28,761 29,277 126,812 168,882 - Loan commitments 13,228 16,613 12,229 42,070 15,335 48,569 26,684 29,276 119,864 161,934 - Financial guarantees — — — — 709 4,161 2,077 1 6,948 6,948 Off-balance sheet by asset quality (2,5) 13,228 16,613 12,229 42,070 16,044 52,730 28,761 29,277 126,812 168,882 - AQ1-AQ4 12,116 422 9,103 21,641 11,945 36,134 27,364 29,262 104,705 126,346 - AQ5-AQ8 1,101 15,900 3,116 20,117 3,928 16,390 1,397 15 21,730 41,847 - AQ9 1 8 10 19 6 46 — — 52 71 - AQ10 10 283 — 293 165 160 — — 325 618 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) Includes a portion of secured lending in Private Banking, in line with ECL calculation methodology. (2) AQ bandings are based on Basel PDs and mapping is as follows: Internal asset quality band
£0.3 billion (2018 – £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(3) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for significant increase in credit risk. (4) Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit.
(5) Off-balance sheet exposures are managed in line with regulatory requirements. Therefore, any change in regulatory treatment is considered a business change. The decrease of £41.0 billion during the year primarily relates to revision of the treatments of nostros in line with the CRR requirements.
(6) AQ10 includes £0.6 billion (2018 - £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3.
Wholesale forbearance The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed on page 153.
Forbearance (flow) 14 305 — 2,247 2,566 Forbearance (stock) 15 477 — 2,756 3,248 Heightened Monitoring and Risk of Credit Loss 100 503 16 4,145 4,764
Credit risk – Banking activities continued Portfolio summary – sector analysis (audited) Key points
 Geography – The vast majority of exposures were in the UK and the Republic of Ireland. Other exposures in Europe and the rest of the world were Wholesale in nature. Mortgages, the vast majority of which are in the UK, accounted for more than half of the total exposure.
 Asset quality – Measured against RBS’s asset quality scale, 53% of lending exposure was rated in the AQ1-AQ4 bands at 31 December 2019, compared to 54% in 2018. This equated to an indicative investment rating of BBB- or above. Specifically, 54% of Personal (2018 – 59%) and 52% of Wholesale lending exposure (2018 – 48%) were in the AQ1-AQ4 category respectively. The movement in Personal was primarily driven by UK mortgages, with a movement in assets from AQ4-AQ5, which was reflective of a slight increase in the portfolio default rate from a low level that included the effect of the natural seasoning of strong business growth in prior years.
 ECL provision by geography – In line with exposures by geography, the vast majority of ECL related to exposures in the UK and the Republic of Ireland. The ECL in the Republic of Ireland, was mainly in Stage 3 impaired assets in the legacy Ulster Bank RoI mortgage portfolio which reduced during the year.
Credit risk – Banking activities continued Credit risk enhancement and mitigation (audited) The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and mitigation (CREM).
Financial assets Cash and balances at central banks 76.1 — 76.1 — — — — — — 76.1 — Loans - amortised cost (3) 340.0 3.8 336.2 3.9 11.5 212.1 28.3 251.9 3.4 84.3 0.5 Personal (4) 188.9 2.1 186.8 2.6 0.1 172.7 — 172.8 2.4 14.0 0.2 Wholesale (5) 151.1 1.7 149.4 1.3 11.4 39.4 28.3 79.1 1.0 70.3 0.3 Debt securities 59.4 — 59.4 — — — — — — 59.4 — Total financial assets 475.5 3.8 471.7 3.9 11.5 212.1 28.3 251.9 3.4 219.8 0.5
Contingent liabilities and commitments Personal (6,7) 43.4 — 43.4 0.3 — 4.4 — 4.4 — 39.0 0.3 Wholesale 84.5 — 84.5 0.3 0.6 6.3 6.3 13.2 — 71.3 0.3 Total off-balance sheet 127.9 — 127.9 0.6 0.6 10.7 6.3 17.6 — 110.3 0.6 Total exposure 603.4 3.8 599.6 4.5 12.1 222.8 34.6 269.5 3.4 330.1 1.1 2018*
(4) Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through on-going engagement with customers.
2019 2018* UK Personal Ulster Private RBS UK Personal Ulster Private RBS
Personal lending Banking Bank RoI Banking International Total Banking Bank RoI Banking International Total £m £m £m £m £m £m £m £m £m £m
Mortgages 147,489 13,598 9,955 2,620 173,662 138,250 14,503 9,089 2,687 164,529 Of which: Owner occupied 132,698 12,593 8,714 1,747 155,752 122,642 13,235 7,959 1,784 145,620
 Total mortgage lending grew by £9.1 billion with new lending partly offset by redemptions and repayments.
 Interest only – By value, the proportion of mortgages on interest only and mixed terms (capital and interest only) reduced. This was driven by low proportions of buy to-let and owner occupied interest only new business.
 Other lending asset quality – Overall new lending quality was stable in 2019, with observed deterioration in loans addressed by management actions. Credit card new business quality improved in 2019 due to the introduction of credit enhancements to online marketing controls and new product offers.
Ulster Bank RoI Not within Of which: IFRS 9 ECL gross new Stage 1 Stage 2 Stage 3 scope Total lending Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Notes: (1) Excludes a non-material amount of provisions held on relatively small legacy portfolios. (2) ECL provisions coverage is ECL provisions divided by mortgages.
Credit risk – Banking activities continued Personal portfolio (audited) UK Personal Banking Mortgage LTV distribution by region 50% 80% 100% Weighted ≤50% ≤80% ≤100% ≤150% >150% Total average LTV Other Total Total
South East 14,699 17,147 2,843 8 — 34,697 53 27 34,724 25 Greater London 12,928 9,614 1,298 3 — 23,843 48 19 23,862 17 Scotland 3,205 5,612 1,844 11 — 10,672 60 8 10,680 8 North West 4,163 7,756 1,970 6 — 13,895 59 12 13,907 10 South West 4,231 6,843 1,292 8 — 12,374 57 9 12,383 9 West Midlands 3,036 5,642 1,192 4 — 9,874 58 7 9,881 7 Rest of the UK 8,942 17,548 6,056 217 16 32,779 62 34 32,813 24 Total 51,204 70,162 16,495 257 16 138,134 56 116 138,250 100
∆ Commercial real estate (CRE) The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and the building materials sub sector). The sector is reviewed regularly by senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. All disclosures in the CRE section are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives – the markto -market value, netted where netting agreements exist and net of legally enforceable collateral.
Development Residential (2) 2,464 165 5 2,634 2,732 122 124 2,978 Office (3) 78 17 — 95 192 — — 192 Retail (4) 134 2 1 137 95 7 1 103 Industrial (5) 85 2 — 87 119 2 12 133 Mixed/other (6) 16 2 — 18 32 2 — 34 *2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) Geographical splits are based on country of collateral risk. (2) Properties including houses, flats and student accommodation. (3) Properties including offices in central business districts, regional headquarters and business parks. (4) Properties including high street retail, shopping centres, restaurants, bars and gyms. (5) Properties including distribution centres, manufacturing and warehouses. (6) Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
Credit risk – Banking activities continued Commercial real estate (CRE) CRE LTV distribution by stage (audited) The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2) ECL provisions ECL provisions coverage (4) Not within
Stage 1 Stage 2 Stage 3 scope (3) Total Stage 1 Stage 2 Stage 3 Total (1) Stage 1 Stage 2 Stage 3 Total 2019 £m £m £m £m £m £m £m £m £m % % % %
≤50% 8,787 468 40 837 10,132 8 8 11 27 0.1 1.7 27.5 0.3 >50% and ≤70% 4,945 252 148 846 6,191 7 6 33 46 0.1 2.4 22.3 0.9 >70% and ≤80% 269 38 51 9 367 1 1 19 21 0.4 2.6 37.3 5.9 >80% and ≤90% 61 19 15 2 97 — 1 3 4 — 5.3 20.0 4.2 >90% and ≤100% 50 81 22 1 154 — 2 15 17 — 2.5 68.2 11.1 >100% and ≤110% 18 13 52 — 83 — — 5 5 — — 9.6 6.0 >110% and ≤130% 20 26 46 1 93 — 1 16 17 — 3.8 34.8 18.5 >130% and ≤150% 3 6 18 — 27 — — 7 7 — — 38.9 25.9 >150% 63 6 37 — 106 — 1 24 25 — 16.7 64.9 23.6
Total with LTVs 14,216 909 429 1,696 17,250 16 20 133 169 0.1 2.2 31.0 1.1 Total portfolio average LTV% 46% 55% 101% 48% 48% — — — — — — — — Other (5) 658 149 123 1,905 2,835 5 4 54 63 0.8 2.7 43.9 6.8 Development (6) 2,377 272 144 178 2,971 8 4 73 85 0.3 1.5 50.7 3.0 Total 17,251 1,330 696 3,779 23,056 29 28 260 317 0.2 2.1 37.4 1.6 2018*
Notes: (1) Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio. (2) The exposure in Stage 3 mainly related to legacy assets. (3) Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives. (4) ECL provisions coverage is ECL provisions divided by current exposure. (5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven by a single large exposure, which has been written down to the expected recoverable amount. (6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
 The retail property market continued to be affected by structural change which resulted in a significant number of CVA’s and material capital value falls. In contrast, the office and industrial sectors remained generally positive with solid demand and stable or rising values. An unfavourable Brexit remains the key risk, most notably to the London office market. The mainstream residential housing market was relatively resilient, however a continual slowing of sales was evident particularly for properties above the Help to Buy threshold. Price growth slowed, with some areas softening, most notably in London and the Southeast.
 Credit quality – Heightened Monitoring inflows are stable from a volume perspective but have increased in value due to some larger CRE retail exposures that have entered the framework. The subsector was monitored on a regular basis and despite the challenges in the sub-sector, the CRE retail portfolio had a manageable default rate, with a limited number of new defaults.
Credit risk – Banking activities continued Flow statements (audited) The flow statements that follow show the main ECL and related income statement movements. They also show the changes in ECL as well as the changes in related financial assets used in determining ECL. Due to differences in scope, exposures in this section may therefore differ from those reported in other tables in the credit risk section, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL impact. Other points to note:  Financial assets include treasury liquidity portfolios, comprising balances at central banks and debt securities, as well as loans. Both modelled and non-modelled portfolios are included.
 Other (P&L only items) includes any subsequent changes in the value of written-down assets (for example, fortuitous recoveries) along with other direct write-off items such as direct recovery costs. Other (P&L only items) affects the income statement but does not affect balance sheet ECL movements.
 Reporting enhancements since 31 December 2018, now mean all movements are captured monthly and aggregated. Previously, for example, the main Personal portfolios were prepared on a six month movement basis. Additionally, as noted earlier, interest suspended post default is now included within Stage 3 ECL, with 2018 data restated. The movement in the value of suspended interest during the year is reported under currency translation and other adjustments.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL
At 1 January 2019 127,671 10 10,241 74 1,286 202 139,198 286 Currency translation and other adjustments — — — — 21 21 21 21 Transfers from Stage 1 to Stage 2 (7,536) (1) 7,536 1 — — — — Transfers from Stage 2 to Stage 1 5,866 15 (5,866) (15) — — — — Transfers to Stage 3 (14) — (662) (20) 676 20 — — Transfers from Stage 3 21 1 409 32 (430) (33) — — Net re-measurement of ECL on stage transfer (15) 31 15 31 Changes in risk parameters (model inputs) 2 (6) 58 54 Other changes in net exposure 9,617 — (1,375) (11) (247) (15) 7,995 (26) Other (P&L only items) — — (28) (28) Income statement (releases)/charges (13) 14 30 31 Amounts written-off — — — — (17) (17) (17) (17) Unwinding of discount — — (36) (36) At 31 December 2019 135,625 12 10,283 86 1,289 215 147,197 313 Net carrying amount 135,613 10,197 1,074 146,884 At 1 January 2018 124,180 11 10,621 64 1,353 157 136,154 232 2018 movements 3,491 (1) (380) 10 (67) 45 3,044 54 At 31 December 2018* 127,671 10 10,241 74 1,286 202 139,198 286 Net carrying amount 127,661 10,167 1,084 138,912 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 In Stage 3, the increase included the effect of an accounting methodology change relative to the treatment of interest suspended post default. The value of suspended interest is now reported within the ECL balance and has naturally grown during the year. Under IAS 39, low LTV exposures continued to have interest recognised to income rather than being suspended; under IFRS 9 from the start of 2018, all Stage 3 mortgages irrespective of LTV have interest suspended. The value of suspended interest within the reported ECL is therefore expected to naturally grow over the initial years of IFRS 9, until it reaches a steady state.
 In Stage 3, the ECL cost within changes in risk parameters reflected the monthly assessment of the loss requirement, capturing underlying portfolio movements.
UK Personal Banking - credit cards £m £m £m £m £m £m £m £m
 ECL increased overall during the period. In Stage 3, the natural flow of new defaults, which reduced slightly year-on-year, have been higher than customer repayments and debt write-offs. The sale of Stage 3 impaired debt in 2018 reduced the ongoing business-asusual flow of write-offs, and the level of debt sales in 2019 was significantly lower than in 2018.
 The rise in Stage 2 ECL included the effect of an increase in ECL related to forward-looking economic uncertainty.
 The portfolio continued to experience cash recoveries after write-off which are reported in other (P&L only items). These benefited the income statement without affecting ECL. The level was lower compared to the prior year reflecting the debt sales executed in 2018.
UK Personal Banking - other personal unsecured £m £m £m £m £m £m £m £m
 The overall increase in ECL was primarily in Stage 3, including the effect of a modest increase in the rate of default during the year, however, the trend flattened in the second half of the year as a result of risk appetite tightening. Additionally, there was a loss rate model adjustment that increased ECL.
 The increase in Stage 1 and Stage 2 balances and ECL was a result of a combination of portfolio growth and a small increase in default rates being reflected in slightly increased ECL requirements.
Ulster Bank RoI - mortgages £m £m £m £m £m £m £m £m
At 1 January 2019 10,782 11 1,394 75 2,278 657 14,454 743 Currency translation and other adjustments (548) (1) (63) (2) (91) (18) (702) (21) Transfers from Stage 1 to Stage 2 (1,329) (4) 1,329 4 — — — — Transfers from Stage 2 to Stage 1 1,480 22 (1,480) (22) — — — — Transfers to Stage 3 (40) (2) (278) (27) 318 29 — — Transfers from Stage 3 13 — 294 33 (307) (33) — — Net re-measurement of ECL on stage transfer (17) 2 4 (11) Changes in risk parameters (model inputs) 2 (30) 27 (1) Other changes in net exposure 245 — (110) (1) (266) (9) (131) (10) Other (P&L only items) — — 19 19 Income statement (releases)/charges (15) (29) 41 (3) Amounts written-off — — (2) (2) (57) (57) (59) (59) Unwinding of discount — — (19) (19) At 31 December 2019 10,603 11 1,084 30 1,875 581 13,562 622 Net carrying amount 10,592 1,054 1,294 12,940 At 1 January 2018 10,650 8 1,532 72 3,167 881 15,349 961 2018 movements 132 3 (138) 3 (889) (224) (895) (218) At 31 December 2018* 10,782 11 1,394 75 2,278 657 14,454 743 Net carrying amount 10,771 1,319 1,621 13,711 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 The overall ECL reduction reflected the completion of the remainder of Ulster Bank RoI’s 2018 sale of non-performing loans in H1 2019 and ongoing improvements in underlying portfolio performance.
 The transfers into Stage 3 were reflective of the implementation of the broader Stage 3 definition, with £230 million of exposures re-classified as Stage 3 assets under the new definition.
 The reduction in Stage 2 ECL was driven by the implementation of the broader Stage 3 definition and the re-allocation of postmodel adjustments to Stage 3 assets.
 Write-off generally occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding which has been deemed irrecoverable. There is no set time period within which write-offs can occur.
 The distribution of assets across stages remained broadly in line with 2018, with model enhancements and increases in exposures managed in the Risk of Credit Loss framework driving the majority of the net movement from Stage 1 to Stage 2.
 The ECL increase overall was mainly due to an uplift in Stage 3 reflective of loss rate model adjustments. The flow of new defaults increased in 2019 compared to 2018 reflecting an uplift in default rates (particularly for low value, unsecured lending which represented 18% of stock), which has been addressed through a tightening of risk appetite.
 Stage 1 ECL increased slightly. Stage 2 ECL remained broadly unchanged despite the reduction in Stage 2 exposure, and included the effect of an increase in ECL relating to economic uncertainty.
NatWest Markets (1) £m £m £m £m £m £m £m £m
At 1 January 2019 32,758 7 732 14 775 179 34,265 200 Currency translation and other adjustments (1,394) — (16) — (27) (14) (1,437) (14) Inter-group transfers 324 1 72 1 — (16) 396 (14) Transfers from Stage 1 to Stage 2 (235) — 235 — — — — — Transfers from Stage 2 to Stage 1 464 2 (464) (2) — — — — Net re-measurement of ECL on stage transfer (2) 1 — (1) Changes in risk parameters (model inputs) (4) — (2) (6) Other changes in net exposure 975 6 (371) (9) (549) — 55 (3) Other (P&L only items) — — (41) (41) Income statement releases — (8) (43) (51) Amounts written-off — — — — (16) (16) (16) (16) At 31 December 2019 32,892 10 188 5 183 131 33,263 146 Net carrying amount 32,882 183 52 33,117 At 1 January 2018 9,089 2 1,276 42 456 190 10,821 234 2018 movements 23,669 5 (544) (28) 319 (11) 23,444 (34) At 31 December 2018* 32,758 7 732 14 775 179 34,265 200 Net carrying amount 32,751 718 596 34,065 *2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
 Stage 3 financial assets included £4 million (2018 – £166 million) purchased or originated credit impaired (POCI) assets. No ECL impairment was held on these positions and a £35 million impairment recovery was recognised on these POCI assets during the year (included in other (P&L only items)).
UK mortgages RoI mortgages Other mortgages Credit cards Other Total Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL
Personal Currently in arrears (>30 DPD) 528 14 21 3 — — 16 6 92 19 657 42 Currently up-to-date 9,860 73 1,056 28 — — 1,243 126 2,218 234 14,377 461 - PD deterioration 4,184 60 208 15 — — 727 92 1,482 188 6,601 355 - Up-to-date, PD persistence 1,812 5 252 4 — — 422 20 540 29 3,026 58 - Other driver (adverse credit, forbearance etc) 3,864 8 596 9 — — 94 14 196 17 4,750 48 Total Stage 2 10,388 87 1,077 31 — — 1,259 132 2,310 253 15,034 503
 Overall, Stage 2 balances remained broadly stable with some variances by product type. The reduction in the Other driver category reflected an enhancement to the treatment of certain credit bureau data items. As expected, ECL coverage was higher on accounts that are more than 30 days past due. Also, in line with expectations, up-to-date accounts exhibiting PD deterioration have a higher ECL coverage than accounts in Stage 2 for other reasons.
Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL 2019 £m £m £m £m £m £m £m £m £m £m
Wholesale Currently in arrears (>30 DPD) 57 2 219 6 7 — — — 283 8 Currently up-to-date 2,523 45 9,485 192 539 4 4 — 12,551 241 - PD deterioration 1,386 28 6,083 144 368 3 3 — 7,840 175 - Up-to-date, PD persistence 45 1 183 5 2 — — — 230 6 - Other driver (adverse credit, forbearance etc) 1,092 16 3,219 43 169 1 1 — 4,481 60 Total Stage 2 2,580 47 9,704 198 546 4 4 — 12,834 249
 The increase in exposures reported as Stage 2 was due to model enhancements and increases in exposures managed in the Risk of Credit Loss framework, which led to a net transfer of balances from Stage 1.
UK mortgages RoI mortgages Other mortgages Credit cards Other Total 2019 £m % £m % £m % £m % £m % £m %
 The primary driver of credit deterioration was PD, which including persistence, accounted for the majority of movements into Stage 2. High risk back-stops, for example, forbearance and adverse credit bureau, provide additional valuable discrimination particularly on mortgages. The reduction in the Other driver category reflected an enhancement to the treatment of certain credit bureau data items, with this reduction offset by an increase in the level of accounts triggering PD deterioration.
 The primary driver of credit deterioration was PD, which including persistence, accounted for 63% of Stage 2. The Risk of Credit Loss framework accounted for a further 26%, highlighting the importance of expert judgement being used to identify deterioration. The increase in Stage 2 exposure balances was primarily as a result of modelling changes and increases in exposures managed in the Risk of Credit Loss framework, led to a net transfer of exposure from Stage 1.
Banking Ulster Bank RoI Banking Ulster Bank RoI mortgages mortgages Wholesale mortgages mortgages Wholesale
 Mortgages – The proportion of the Stage 3 defaulted population who have been in default for over five years reflected RBS’s support for customers in financial difficulty. When customers continue to engage constructively with RBS, making regular payments, RBS continues to support them. RBS’s provisioning approach retains customers in Stage 3 for a life-time loss provisioning calculation, even when their arrears status reverts to below 90 days past due.
Asset quality (audited) The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio.
Credit risk – Banking activities continued Asset quality (audited) The table below shows asset quality bands of gross loans and ECL, by stage, for the Wholesale portfolio.
7,410 4 5 7,419 7 — — 7 0.09 — — 0.09 Total AQ1-AQ4 77,528 1,258 — 78,786 33 18 — 51 0.04 1.43 — 0.06 AQ5-AQ8 57,949 11,237 — 69,186 158 207 — 365 0.27 1.84 — 0.53 AQ9 225 339 — 564 1 24 — 25 0.44 7.08 — 4.43 AQ10 — — 2,562 2,562 — — 1,269 1,269 — — 49.53 49.53
Master netting arrangements (562) (562) — (562) (562) — Securities collateral (33,178) (33,178) — (29,211) (29,211) — Potential for offset not recognised under IFRS (33,740) (33,740) — (29,773) (29,773) — Net 1,169 361 808 2,474 — 2,474
UK 2,052 3,153 1,935 1,304 Europe 1,393 1,898 1,308 1,465 US 428 331 588 298 RoW 482 228 350 375 Net exposure 4,355 5,610 4,181 3,442
(3) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating. (4) Mainly large corporates with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting. (5) Sovereigns and supranational entities with one-way collateral agreements in their favour.
Traded on Settled Not settled Traded on Traded Traded on Traded recognised by central by central recognised over the recognised over the 2019 exchanges counterparties counterparties Total exchanges counter exchanges counter £bn £bn £bn £bn £m £m £m £m
Interest rate 1,593 7,090 2,610 11,293 — 104,957 — 99,331 Exchange rate 3 — 3,747 3,750 — 44,792 — 47,141 Credit — — 17 17 — 280 — 359 Equity and commodity 1 — 2 3 — — — 48 Total 1,597 7,090 6,376 15,063 — 150,029 — 146,879 2018
Central and local government Financial UK US Other institutions Corporate Total
AAA — — 2,197 1,188 5 3,390 AA to AA+ 4,897 5,458 2,824 333 87 13,599 A to AA- — — 3,297 755 109 4,161 BBB- to A- — — 6,508 872 895 8,275 Non-investment grade — — 76 298 150 524 Unrated — — — 420 48 468 Total 4,897 5,458 14,902 3,866 1,294 30,417
Western Europe 21,121 19,003 16,741 56,865 14,103 42,762 Of which: France 3,396 10,209 1,579 15,184 1,626 13,558 Germany 8,023 3,086 1,145 12,254 5,397 6,857 Italy 2,179 248 584 3,011 1,796 1,215 Netherlands 1,142 675 3,739 5,556 985 4,571 Spain 891 450 1,848 3,189 1,164 2,025 United States 13,558 5,458 8,379 27,395 2,103 25,292 Japan 1,857 2,327 405 7,589 11 7,578 Jersey — 5 3,064 3,069 2 3,067
Market risk (audited) RBS is exposed to non-traded market risk through its banking activities and to traded market risk through its trading activities. Non-traded and traded market risk exposures are managed and discussed separately. The non-traded market risk section begins below. The traded market risk section begins on page 180. Pension-related activities also give rise to market risk. Refer to page 185 for more information on risk related to pensions.
∆ Non-traded market risk Definition (audited) Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.
The key sources of non-traded market risk are: interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
 Following the Alawwal bank merger, RBS holds a minority equity holding in SABB. This investment in the newly merged entity is held in NWM Plc. The investment is held at fair value. Changes in value are recognised in reserves. This exposure is now captured in the VaR table below.
 The disposal of the lender-option/borrower-option (LOBO) loan portfolio was completed during 2019, reducing RBS’s exposure to changes in the credit spread compared to the 2018 year-end.
RBS’s net interest earnings sensitivity was consistently positively sensitive to higher interest rates.
 After a period of weakness, sterling strengthened in the fourth quarter of 2019 against both the US dollar and the euro. Against the US dollar, sterling was 1.32 at 31 December 2019 compared to 1.28 at 31 December 2018. Against the euro, sterling was 1.18 at 31 December 2019 compared to 1.12 at 31 December 2018.
 RBS continued to manage the sensitivity of its CET1 capital ratio to exchange rate movements, mainly through its net investment hedging programme. Increased capitalisation of NWM Plc’s US branch reduced the branch’s debt funding and NWM Plc’s regulatory exposure to fluctuations in the US dollar exchange rate against sterling.
∆ Risk appetite RBS’s qualitative appetite is set out in the non-traded market risk appetite statement.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments. To ensure approved limits are not breached and that RBS remains within its risk appetite, triggers at RBS and lower levels have been set and are actively managed. For further information on risk appetite, refer to page 115.
Interest rate 11.0 14.0 8.0 8.2 14.4 28.2 7.3 11.6 Euro 1.3 2.3 0.7 1.3 2.1 3.9 1.0 1.0 Sterling 10.8 14.1 8.0 8.0 14.5 26.0 7.9 13.3 US dollar 4.6 6.0 3.4 5.2 4.7 8.7 1.4 8.7 Other 0.4 0.7 0.2 0.7 0.5 0.7 0.3 0.7 Credit spread 55.6 59.7 49.2 59.7 59.7 77.8 49.4 77.8 Structural foreign exchange rate 15.2 23.8 7.2 8.6 13.4 32.7 5.9 13.0 Equity 34.5 38.6 31.6 33.5 — — — — Pipeline risk (1) 0.4 0.9 0.2 0.2 0.6 1.3 0.3 0.4 Diversification (2) (57.1) — — (45.6) (24.9) (20.5) Total 59.6 64.6 48.1 64.6 63.0 82.3 54.9 82.3 Notes: (1) Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest rate changes may result in greater or fewer customers than anticipated taking up the committed offer. (2) RBS benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Non-traded market risk continued Interest rate risk Non-traded interest rate risk (NTIRR) arises from the provision to customers of a range of banking products with differing interest rate characteristics. When aggregated, these products form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market interest rates. Mismatches can give rise to volatility in net interest income as interest rates vary.
Structural hedging aims to reduce gap risk and the sensitivity of earnings to interest rate shocks. It also provides some protection against prolonged periods of falling rates. Structural hedging is explained in greater detail below, followed by information on how RBS measures NTIRR from both an economic value-based and an earnings-based perspective.
Equity structural hedges refer to income allocated primarily to equity and reserves. As a result of ring-fencing in the UK, equity structural hedges were allocated to NatWest Holdings Group and NatWest Markets. At 31 December 2019, the equity structural hedge notional was allocated between the two businesses in a ratio of approximately 80/20 respectively.
Product structural hedges refer to income allocated to customer products by NWH Treasury, mainly current accounts and customer deposits in Commercial Banking and UK Personal Banking (excluding Ulster Bank). Other structural hedges refer to hedges managed by UBI DAC, Private Banking, Ulster Bank Limited, and RBS International Limited.
The table below presents the incremental income associated with product structural hedges at segment level.
UK Personal Banking 85 166 Commercial Banking 98 200 Other — 2 Total 183 368 Note: (1) 2018 data restated as presented in the H1 2019 Company Announcement.
Key points  Incremental income in excess of three-month LIBOR fell in 2019 compared to 2018. This was primarily due to three-month LIBOR fixings rising by approximately 0.15% on average, resulting in less income benefit from the hedge.
 The equity hedge notional decreased in 2019, partly due to the impact of individual banks reviewing their hedge notionals at ringfencing, but also other impacts, including PPI. In 2019, Private Banking and UBI DAC increased the tenor of some hedges from five to ten years reflecting the equity component. The total weighted average life of the structural hedge at 31 December 2019 was approximately three years.
Non-traded market risk continued NTIRR can be measured from either an economic value-based or earnings-based perspective, or a combination of the two. Value-based approaches measure the change in value of the balance sheet assets and liabilities including all cash flows. Earnings-based approaches measure the potential impact on the income statement of changes in interest rates over a defined horizon, generally one to three years.
RBS uses VaR as its value-based approach and sensitivity of net interest earnings as its earnings-based approach.
These two approaches provide complementary views of the impact of interest rate risk on the balance sheet at a point in time. The scenarios employed in the net interest earnings sensitivity approach may incorporate assumptions about how RBS and its customers will respond to a change in the level of interest rates. In contrast, the VaR approach measures the sensitivity of the balance sheet at a point in time. Capturing all cash flows, VaR also highlights the impact of duration and repricing risks beyond the one-to-three-year period shown in earnings sensitivity calculations.
The non-traded interest rate risk VaR metrics for RBS’s retail and commercial banking activities are included in the banking book VaR table presented earlier in this section. The VaR captures the risk resulting from mismatches in the repricing dates of assets and liabilities.
Sensitivity of net interest earnings Net interest earnings are sensitive to changes in the level of interest rates, mainly because maturing structural hedges are replaced at higher or lower rates and changes to coupons on managed rate customer products do not match changes in market rates of interest or central bank policy rates.
Earnings sensitivity is derived from a market-implied forward rate curve. Assumptions are applied to this curve to derive central bank policy rates. A simple scenario is shown that projects forward earnings over a 12-month period based on the 31 December 2019 balance sheet. A base-case earnings forecast is derived from the marketimplied rate curve, which is then subject to interest rate shocks. The difference between the base-case forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
Non-traded market risk continued The tables below show the net interest earnings sensitivity of structural hedges and managed rate accounts on a one-year, two-year and threeyear forward-looking basis to a parallel upward or downward shift in interest rates of 25 basis points. The projection is a simple sensitivity in which the balance sheet is assumed to be constant, with no change in customer behaviour or margin management strategy as a result of rate changes. The impact of structural hedges increases as more maturing hedges are reinvested over the three-year period.
+25 basis points parallel upward shift -25 basis points parallel downward shift
Structural hedges 31 97 168 (27) (90) (154) Managed margin (2) 195 195 196 (158) (127) (128) Other (14) 15 Total 212 292 364 (170) (217) (282) 2018
Structural hedges 32 98 170 (32) (98) (167) Managed margin (2) 150 171 170 (177) (189) (163) Other 15 — — (2) — — Total 197 269 340 (210) (287) (330)
Notes: (1) The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management. (2) Primarily current accounts and savings accounts.
Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements RBS holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective hedge accounting relationships) are recognised in FVOCI reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest rates have not been floored at zero. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds in the liquidity portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would result in some deviation from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored and the effectiveness of cash flow and fair value hedge relationships is regularly tested in accordance with IFRS requirements. Note that a movement in the FVOCI reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
+25 basis points -25 basis points +100 basis points -100 basis points 2019 £m £m £m £m
FVOCI reserves (56) 55 (227) 210 Cash flow hedge reserves (153) 155 (597) 638 Total (209) 210 (824) 848
 The sensitivity of cash flow hedge reserves to upward and downward shocks in the yield curve fell in 2019. This partly reflected increased customer demand for five-year fixed-rate mortgage terms. This reduced RBS’s requirement to hedge liabilities over five years with interest rate swaps.
Non-traded market risk continued Credit spread risk Credit spread risk arises from the potential adverse economic impact of a change in the spread between bond yields and swap rates, where the bond portfolios are accounted at fair value through equity.
 Forecast earnings or costs in foreign currencies – RBS assesses its potential exposure to forecast foreign currency income and expenses. RBS hedges forward some forecast expenses.
The most material non-traded open currency positions are the structural foreign exchange exposures arising from investments in foreign subsidiaries, branches and associates and their related currency funding. These exposures are assessed and managed to predefined risk appetite levels under delegated authority from the Asset & Liability Management Committee. RBS seeks to limit the potential volatility impact on its CET1 ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity reserves and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals the CET1 ratio.
US dollar 1,519 — 1,519 — 1,519 (1,519) — Euro 5,914 — 5,914 (650) 5,264 — 5,264 Other non-sterling 1,498 — 1,498 (651) 847 — 847 Total 8,931 — 8,931 (1,301) 7,630 (1,519) 6,111
US dollar 553 — 553 (4) 549 (549) — Euro 6,428 33 6,395 (853) 5,542 — 5,542 Other non-sterling 2,600 710 1,890 (1,249) 641 (81) 560 Total 9,581 743 8,838 (2,106) 6,732 (630) 6,102
 RBS’s equity shareholding in SABB is held as FVOCI equity shares by NWM Plc and is therefore not included in the above table. Please refer to the equity risk table. The SABB equity shares are not hedged for foreign exchange risk.
 The increase in equity investments reflects the SABB FVOCI equity shares acquired by NWM Plc from NWM N.V. following the Alawwal bank and SABB merger.
Accounting volatility risk Accounting volatility risk arises when an exposure is accounted for at amortised cost but economically hedged by a derivative that is accounted for at fair value. Although this is not an economic risk, the difference in accounting between the exposure and the hedge creates volatility in the income statement.
Traded market risk mainly arises from RBS’s trading activities. These activities provide a range of financing, risk management and investment services to clients − including corporations and financial institutions − around the world. From a market risk perspective, activities are focused on rates; currencies; securitised products; and traded credit. RBS undertakes transactions in financial instruments including debt securities, as well as securities financing and derivatives.
 Geopolitical risk resulted in periods of market volatility during the year as a result of increased political and economic risks and uncertainty in the UK and global markets.
 Despite this volatility, traded VaR remained well within appetite throughout the year.
For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions. The desk-level mandates comprise qualitative limits related to the product types within the scope of each desk, as well as quantitative metrics specific to the desk’s market risk exposures. These additional limits and metrics aim to control various risk dimensions such as exposure size, aged inventory, currency and tenor.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments. The limit review has been enhanced to improve the alignment between traded market risk exposure and capital usage. This is done by analysing the relationship between VaR and SVaR and the NWM Plc solo CET1 ratio.
To ensure approved limits are not breached and that RBS remains within its risk appetite, triggers at RBS and lower levels have been set such that if exposures exceed a specified level, action plans are developed by the relevant business and the Market Risk function and implemented. For more detail on risk appetite, refer to page 115.
Risk controls For information on risk controls, refer to page 115.
Risk monitoring and mitigation Traded market risk is identified and assessed by gathering, analysing, monitoring and reporting market risk information at desk, business, franchise and RBS-wide levels. Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks. Traded market risk exposures are monitored against limits and analysed daily by market risk reporting and control functions. A daily report summarising the position of exposures against limits at desk, business, franchise and RBS levels is provided to senior management and market risk managers across the function. Limit reporting is supplemented with regulatory capital and stress testing information as well as ad hoc reporting.
Value-at-risk For internal risk management purposes, VaR assumes a time horizon of one trading day and a confidence level of 99%.
The internal VaR model – which captures all trading book positions including those products approved by the regulator – is based on a historical simulation, utilising market data from the previous 500 days on an equally-weighted basis.
Testing of the performance and adequacy of the VaR model is done on a regular basis through the following processes:  Back-testing – Internal and regulatory back-testing is conducted on a daily basis. (Information on internal back-testing is provided in this section. Information on regulatory back-testing appears in the Pillar 3 report).
 Model Risk Management review – As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure the model is still fit for purpose given current market conditions and portfolio profile. For further detail on the independent model validation carried out by Model Risk Management refer to page 189. More information relating to pricing and market risk models is presented in the Pillar 3 report.
Interest rate 9.7 16.9 6.3 10.6 14.3 27.3 9.2 13.0 Credit spread 10.5 14.5 7.0 10.6 11.0 24.2 6.9 8.2 Currency 4.0 10.5 1.6 3.2 3.1 7.6 1.4 5.3 Equity 0.7 2.2 0.3 0.9 0.8 1.6 0.3 0.8 Commodity 0.2 0.5 0.0 0.1 0.3 1.0 0.1 0.1 Diversification (1) (10.3) (11.3) (10.5) (8.8) Total 14.8 21.5 10.1 14.1 19.0 35.6 11.7 18.6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec £m
Total Trading VaR Interest Rate VaR Credit VaR FX VaR Equity VaR Commodity VaR
. The table below shows internal back-testing exceptions in the major NatWest Markets businesses for the 250-business-day period to 31 December 2019. Internal back-testing compares one-day 99% traded internal VaR with Actual and Hypo P&L.
Key points  Statistically RBS would expect to see back-testing exceptions 1% of the time over the 250-day period.  The exceptions in the Rates business were mainly driven by market moves in sterling and euro rates.
A simulation of 99% VaR is run on the current portfolio for each 250-day period from 2005 to the current VaR date, moving forward one day at a time. The SVaR is the worst VaR outcome of the simulated results.
This is in contrast with VaR, which is based on a rolling 500-day historical data set. A time horizon of ten trading days is assumed with a confidence level of 99%.
Risks not in VaR (RNIVs) The RNIV framework is used to identify and quantify market risks that are not fully captured by the internal VaR and SVaR models.
Stress testing For information on stress testing, refer to page 116.
In the UK, the Sterling Overnight Index Average (SONIA) has been selected as the preferred near Risk Free Rate (RFR) for the sterling markets. This rate is based on the overnight interest rates in wholesale markets and can be compounded over a lending period, which allows a term structure to be built.
The transition to RFR means that, in line with the transition provisions and to deal with the basis risk between the IBOR-based benchmark rates and the RFRs, a spread had to be added to the preferred RFR to maintain the original economics of the contract. This is dependent on the tenor of the original IBOR based rate.
RBS is fully engaged in the IBOR replacement discussions in the key markets where it operates. Meanwhile, it continues to implement plans to appropriately mitigate the risks associated with the expected discontinuation of certain unsecured IBOR-referenced benchmark interest rates, including the LIBOR. In this regards, RBS:  has reviewed, or is in the process of reviewing, the fall-back language for LIBOR-linked instruments, notably floating-rate notes, capital instruments, LIBOR-referenced syndicated loans, assetbacked securities and LIBOR-referenced bilateral loan arrangements – in line with the recommendations of the Alternative Reference Rates Committee, the International Swaps and Derivatives Association and the International Organisation of Securities Commissions and the requirements of the EU benchmarks Regulation.
 continues to engage with regulators and standard setters in relation to the additional items for which relief is being considered, notably accounting for modifications of financial instruments.
 continues to liaise with regulators, standard setters, industry groups and customers on other relevant matters as the transition to riskfree rates progresses.
 is in the process of adjusting its products, processes and information systems to deal with the expected effects of the discontinuation of LIBOR, notably the transition and calculation rules.
Market risk – other disclosures continued The following tables show the balance sheet categories by average contractual maturity.
Average contractual maturity GBP LIBOR USD LIBOR EURO (IBOR) Other IBOR Non Sensitive Total
Asset derivatives < 1 year 5% 3% 9% — 83% 100% 1-2 years 8% 17% 21% 3% 51% 100% 3-5 years 9% 16% 41% 2% 32% 100% > 5 years 22% 16% 29% 1% 32% 100%
Loans to customers - amortised cost < 1 year 49% 20% 30% 1% — 100% 1-2 years 62% 13% 23% 2% — 100% 3-5 years 67% 11% 20% 2% — 100% > 5 years 5% — 1% — 94% 100%
Other financial assets 61.5 61.5 — 59.5 59.5 — Interest rate, credit spreads, equity
 During 2019, the Scheme Actuary’s annual funding update, undertaken as at 31 December 2018, showed that the Main section was fully funded on the basis used for formal triennial funding valuations. This funding position was reached following the £2 billion sponsor contribution made in 2018 while the Trustee reduced the investment risk in the Main section and added further protection against the potential impact of interest rate and inflation movements on the Main section’s liabilities, as agreed through the Memorandum of Understanding in 2018.
Sources of risk Compliance and conduct risks exist across all stages of RBS’s relationships with its customers and arise from a variety of activities including product design, marketing and sales, complaint handling, staff training, and handling of confidential insider information. As set out in Note 26 on the consolidated accounts, RBS and certain members of staff are party to legal proceedings and are subject to investigation and other regulatory action in the UK, the US and other jurisdictions.
 Policies were simplified and enhanced to reflect regulatory changes and technical training delivered across the lines of defence.
Risk governance RBS defines appropriate standards of compliance and conduct and ensures adherence to those standards through its risk management framework. Relevant compliance and conduct matters are escalated through Executive Risk Committee and Board Risk Committee.
Risk controls A range of controls is operated to ensure the business delivers good customer outcomes and is conducted in accordance with legal and regulatory requirements. A suite of policies addressing compliance and conduct risks set appropriate standards across RBS. Examples of these include the Complaints Management Policy, Client Assets & Money Policy, and Product Lifecycle Policy as well as policies relating to customers in vulnerable situations, cross-border activities and market abuse. Continuous monitoring and targeted assurance is carried out as appropriate.
Risk monitoring and measurement Compliance and conduct risks are measured and managed through continuous assessment and reporting to RBS’s senior risk committees and at Board level. The compliance and conduct risk framework facilitates the consistent monitoring and measurement of compliance with laws and regulations and the delivery of consistently good customer outcomes. The first line of defence is responsible for effective risk identification, reporting and monitoring, with oversight, challenge and review by the second line. Compliance and conduct risk management is also integrated into RBS’s strategic planning cycle.
Financial crime risk Definition Financial crime risk is the risk presented by criminal activity in the form of money laundering, terrorist financing, bribery and corruption, sanctions and tax evasion. It does not include fraud risk management.
 Enhanced financial crime risk assessment processes were implemented to enable improved identification and mitigation of financial crime risks.
 Improvements were made to transaction monitoring alert processes, including the use of risk-based artificial intelligence to facilitate focus on activity of higher concern.
Risk appetite There is no appetite to operate in an environment where systems and controls do not enable the identification, assessment, monitoring, management and mitigation of financial crime risk. RBS’s systems and controls must be comprehensive and proportionate to the nature, scale and complexity of its businesses. There is no tolerance to systematically or repeatedly breach relevant financial crime regulations and laws.
Sources of risk Physical risks can arise from climate and weather-related events such as heatwaves, droughts, floods, storms and sea level rises. They can potentially result in financial losses, impairing asset values and the creditworthiness of borrowers. RBS could be exposed to physical risks directly by the impacts on its property portfolio and, indirectly, by the impacts on the wider economy as well as impacts on the property and business interests of its customers.
Transition risks can arise from the process of adjustment towards a low-carbon economy. Changes in policy, technology and sentiment could prompt reassessment of customers’ financial risk and may lead to falls in the value of a large range of assets. RBS could be exposed to transition risks directly through the costs of adaptation within economic sectors and markets as well as supply chain disruption leading to financial impacts on RBS and its customers. Potential indirect effects include the erosion of RBS’s competitiveness, profitability, or potential reputation damage.
 A strategy has been developed to embed the financial risks arising from climate change in RBS’s risk management framework.
Climate-related financial risk continued Risk governance The RBS Board is responsible for addressing and overseeing the financial risks from climate change within RBS’s overall business strategy and risk appetite. The potential impact, likelihood and preparedness of climate-related financial risk is reported quarterly to the Board and Board Risk Committee.
The Chief Risk Officer is accountable for ensuring the financial risks from climate change are captured in RBS’s risk management framework and for ensuring RBS can measure, monitor, manage and report those risks.
In H2 2019, RBS’s climate change working group was formalised into an RBS-wide Climate Change Programme (GCCP), with an executive steering group co-chaired by the Chief Risk Officer. The GCCP steering group, which includes cross-franchise and functional representation from RBS’s subsidiary entities, provides executive-level support, advice and resource direction on climate change strategy, including both risk management and climate-related business opportunities.
Risk appetite As part of RBS’s strategy for managing climate-related financial risk, it will be incorporated in the setting of appetite for all relevant risk disciplines. If it is deemed to have a material impact on a particular risk discipline then changes to relevant policies and procedures will be made accordingly. Availability of data and the robustness of risk measurement methodologies will influence the timing of any proposed changes.
Risk monitoring and measurement Plans have been developed to ensure climate-related financial risks are considered in the tools made available to risk disciplines for risk monitoring and measurement purposes.
A process is underway to identify where climate risk requires the use of new key data elements, new risk metrics and enhancement of risk methodologies. The outputs of the Bank of England’s 2021 biennial exploratory scenario will be used to further enhance RBS’s capabilities for the measurement of climate-related risks.
Operational risk Definition Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events. It arises from day-to-day operations and is relevant to every aspect of the business.
 There was an improvement in the operational risk profile, indicated by an improved control environment, with residual elements under close management.
The Operational Risk function is responsible for the execution and continuous improvement of the operational risk management framework, reporting and escalating key concerns to Executive Risk Committee and Board Risk Committee.
Operational risk continued The RBS-wide operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, businesses and functions.
Risk controls and mitigation The Control Environment Certification (CEC) process is a half yearly self-assessment by the CEOs of RBS’s principal businesses, functions and legal entities, providing a consistent and comparable view on the adequacy and effectiveness of the internal control environment.
Risk monitoring and measurement Risk and control assessments are used across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to RBS’s Risk Directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks and also ensure risks are reassessed.
The process is designed to confirm that risks are effectively managed in line with risk appetite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively to reduce identified risks.
Operational resilience RBS manages and monitors operational resilience through its risk and control assessments methodology. This is underpinned by setting and monitoring risk indicators and performance metrics for key business services. Progress continues on the response to regulator expectations on operational resilience, with involvement in a number of industry wide operational resilience forums. This enables a more holistic view of RBS’s operational resilience risk profile and the pace of ongoing innovation and change, internally and externally.
Event and loss data management The operational risk event and loss data management process ensures RBS captures and records operational risk financial and nonfinancial events that meet defined criteria. Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk. The most serious events are escalated in a simple, standardised process to all senior management, by way of a Group Notifiable Event Process.
All financial impacts associated with an operational risk event are reported against the date they were recorded in RBS’s financial accounts. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2019 may relate to events that occurred, or were identified in, prior years. RBS purchases insurance against specific losses and to comply with statutory or contractual requirements.
The decrease in CBPB reflected a fall in losses associated with legacy conduct-related matters, with the increase in fraud primarily due to the introduction of the Contingent Reimbursement Model in May 2019, which resulted in RBS having increased liability for reimbursing customers impacted by Authorised Push Payment scams.
Fraud 51 33 5% 2% 93% 89% Clients, products and business practices 1,026 1,581 94% 98% 3% 6% Execution, delivery and process management 7 5 1% — 3% 4% Employment practices and workplace safety 1 — — — 1% 1% Technology and infrastructure failures 1 — — — — —
Sources of risk RBS uses a variety of models as part of its risk management process and activities. Key examples include the use of model outputs to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of risk-weighted assets and impairment provisions. Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stress-testing purposes also play a key role in ensuring RBS holds sufficient capital, even in stressed market scenarios.
Risk appetite Model risk appetite is defined in the model risk appetite statement and approved by the Board. Model owners and model users are responsible for monitoring performance against appetite, reporting on the model population and carrying out any necessary remediation for positions outside appetite.
Risk monitoring and measurement The appropriateness of approved risk models is reassessed on a periodic basis. Each periodic review begins with an initial assessment. Based on the initial assessment, an internal model governance committee will decide to re-ratify a model or to carry out additional work. The initial assessment considers factors such as a change in the size or composition of the portfolio, market changes, the performance of – or any amendments to – the model and the status of any outstanding issues or scheduled activities carried over from previous reviews.
Risk appetite RBS manages and articulates its appetite for reputational risk through a qualitative reputational risk appetite statement and quantitative measures. RBS seeks continuous improvement in the identification, assessment and management of customers, transactions, products and issues that present a material reputational risk.
Risk monitoring and measurement Primary reputational risk measures are in place to assess internal activity relating to the management of reputational risk, including training. A number of secondary risk measures – including measures also used in the management of operational, conduct and financial risks – are used to assess relevant external factors. Quarterly reports on performance against these measures are provided to the Executive Risk Committee and Board Risk Committee.
Risk mitigation Reputational risk is mitigated through the policy and governance framework, with ongoing staff training to ensure early identification, assessment and escalation of material issues. External, unexpected, events that could cause reputational damage are generally mitigated through RBS’s Top and Emerging Risks process.
Opinion We have audited the financial statements (see table below) of The Royal Bank of Scotland Group plc (the Parent Company) and its subsidiaries (together, the ‘Group’) for the year ended 31 December 2019. In our opinion:  the Group and Parent Company’s financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended;  the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;  the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and
 Consolidated balance sheet as at 31 December 2019;  Consolidated income statement for the year then ended;  Consolidated statement of comprehensive income for the year then ended;  Consolidated statement of changes in equity for the year then ended;  Consolidated cash flow statement for the year then ended;  Accounting policies;  Related Notes 1 to 33 to the financial statements;  Information identified as ‘audited’ in the Annual report on remuneration; and
 Balance sheet as at 31 December 2019;  Statement of changes in equity for the year then ended;  Cash flow statement for the year then ended; and
Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to,
The recognition and carrying value of deferred tax assets, goodwill and, in the parent company accounts, investments in subsidiaries are based on estimates of future profitability, which require significant management judgement and include the risk of management bias. The recognition of deferred tax assets considers the future profit forecasts of the legal entities as well as interpretation of recent changes to tax rates and laws.
Key observations communicated to the Group Audit Committee We are satisfied that management methodologies, judgements and assumptions supporting the carrying value of goodwill, deferred tax assets and, in the parent company accounts, investments in subsidiaries, were reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  The macroeconomic assumptions were materially consistent with independent base case forecasts;  While the long-term growth rate decreased in the year and the discount rate remained constant, both these assumptions were within our reasonable range;  There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to the impact of a continuing low interest rate environment, the outcome of Brexit and new trade agreements, the ability to achieve new strategic objectives and planned cost reduction, the impact of regulatory and climate change developments, and the impact of competition and disruption in banking business models over an extended period. These uncertainties also present challenges in achieving certain key performance metrics and ratios such as net interest margin, the cost-to-income ratio and cost reduction targets;  The director`s assessment resulted in no impairment of RBSG`s investment in NWH, with no further headroom available, and an impairment of RBSG’s investment in NWM which was consequently written down to its recoverable amount. The sensitivity analysis and stress testing we inspected, and our independent procedures supported these assessments; and
The continued litigious environment and heightened regulatory scrutiny give rise to a high level of management judgement in determining appropriate provisions and disclosures. Management judgement is needed to determine whether a present obligation exists, and a provision should be recorded at 31 December 2019 in accordance with the accounting criteria set out under IAS 37.
 Judgement is required to assess the adequacy of disclosures of provision for contingent liabilities given the underlying estimation uncertainty in the provisions.
We evaluated the design and operating effectiveness of controls over the identification, estimation, monitoring and disclosure of provisions related to legal and conduct matters considering the potential for management override of controls. The controls tested, among others, included those designed and operated by management to identify and monitor claims, and to ensure the completeness and accuracy of data used to estimate provisions.
In evaluating the adequacy of these provisions, we considered regulatory developments and, for significant cases, assessed the reasonableness of the assumptions used by management by comparing to the results of our independently performed benchmarking and sensitivity analysis. Where appropriate, we involved our conduct risk specialists to assist us in evaluating the provision. We also analysed historical relevant data and whether it supported current estimates. We performed a test for unrecorded provisions to determine if there were cases not considered in the provision estimate by assessing against external legal confirmations and discussing with internal counsel.
Impairment of loans At 31 December 2019 the Group reported total gross loans of £340.0 billion (2018: £320.3 billion) and £3.8 billion of expected credit loss provisions (2018: £3.9 billion), which includes an overlay of £170 million for economic uncertainty.
 Measurement of individual provisions including the assessment of multiple scenarios.
We also considered the complexity of management’s process to design and create financial statement disclosures given their granularity and complexity.
We evaluated the design and operating effectiveness of controls across the processes relevant to ECL, including the judgements and estimates noted involving specialists to assist us in performing our procedures where appropriate. These controls, among others, included controls over the allocation of assets into stages including management’s monitoring of stage effectiveness, model monitoring including the need for post model adjustments, model validation, data accuracy and completeness, credit monitoring, multiple economic scenarios, individual provisions and production of journal entries and disclosures.
We evaluated the criteria used to allocate a financial asset to stage 1, 2 or 3 in accordance with IFRS 9; this included peer benchmarking to assess staging levels. We recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the appropriate stage and performed sensitivity analysis to assess the impact of different criteria on the ECL.
We involved economic specialists to assist us to evaluate the base case and alternative economic scenarios, including evaluating probability weights and comparing to other scenarios from a variety of external sources, as well as EY internally developed forecasts. This included assessing whether forecasted macroeconomic variables were appropriate, such as GDP, unemployment rate, interest rates and the House Price Index. With the support of our modelling specialists we assessed the correlation and the overall impact of the macroeconomic factors to the ECL.
We assessed the completeness and appropriateness of post model adjustments and recalculated a sample. Based on current economic conditions and market circumstances, we considered the need for sector or systemic adjustments. We assessed the scenarios used and calculation of the overlay in response to economic uncertainty.
Key observations communicated to the Group Audit Committee We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We highlighted the following matters to the Group Audit Committee:  Overall provision levels were reasonable which also considered available peer information and our understanding of the credit environment;  The economic uncertainty overlay was within our independently established reasonable range;  Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated these differences and were satisfied that the overall estimate recorded was reasonable;  We recalculated the staging of all retail and wholesale exposures in material portfolios and noted no material differences. We also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria to result in a material difference; and
We evaluated the design and operating effectiveness of controls relating to financial instrument valuation and related measurement including independent price verification, model review and approval, collateral management, and income statement analysis and reporting. Among other procedures, we involved our financial instrument valuation and modelling specialists to assist us in performing procedures including the following:  Testing complex model-dependent valuations by performing independent calculations to assess the appropriateness of models and the adequacy of assumptions and inputs used by the Group;  Independently re-pricing instruments that had been valued using illiquid pricing inputs, using alternative pricing sources to evaluate management’s valuation; and
 Comparing the methodology used for fair value adjustments to current market practice. We re-valued a sample of counterparty level FVA and CVAs, compared funding spreads to third party data and independently challenged illiquid CVA inputs.
Where differences between our independent valuation and management’s valuation were outside our thresholds, we performed additional testing over each variance to assess the valuation of financial instruments with higher risk characteristics including related income from trading activities.
We also performed back-testing analysis of recent trade activity to evaluate the drivers of significant differences between book value and trade value and to assess the impact on the fair value of similar instruments within the portfolio. We considered the implications of changes to the business on the valuation of financial instruments in accordance with the relevant accounting standards.
Key observations communicated to the Group Audit Committee We are satisfied that the assumptions used by management to reflect the fair value of financial instruments with higher risk characteristics and the recognition of related income is reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  Complex-model dependent valuations were appropriate based on the output of our independent re-valuations, analysis of trade activity and peer benchmarking;  The fair value estimates of hard-to-price portfolios appropriately reflected pricing information available at 31 December 2019; and
 Valuation adjustments applied on derivative portfolios for credit, funding and other risks were appropriate based on our assessment of trade activity for positions with common risk characteristics, analysis of market data and peer benchmarking.
Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Accounting policies Note 12 on the financial statements
 Whether the overall FX reserves recorded against the relevant investments were supportable.
In addition, we assessed the determination of the amount of FX reserve being recycled for these transactions by independently recalculating the historical reserves based on all information available.
 Equalisation adjustments due to the court ruling in respect of Guaranteed Minimum Pensions (GMP).
We involved actuarial specialists to test the estimation of the augmentation cap and GMP equalisation adjustments including the inputs used in the calculation. We also assessed the methodology and judgements made in calculating these estimates and the associated accounting treatment in accordance with IAS 19 and IFRIC 14.
We assessed the adequacy of the disclosures made in the financial statements, including the appropriateness of the assumptions and sensitivities disclosed.
Key observations communicated to the Group Audit Committee We are satisfied that the valuation and disclosure of the net pension balance are reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee: Our benchmarking of key actuarial assumptions including the discount rate, inflation, longevity and pension payments concluded that assumptions tested were within a reasonable range;  No material issues were identified through our independent valuation testing for a sample of pension assets; and
 Evaluation of IT control environment at third party service providers.
We evaluated the design and operating effectiveness of IT controls over the applications, operating systems and databases that are relevant to financial reporting.
We tested system migrations and related technology changes (including where relevant new systems) resulting from transformation programmes that were material to financial statement reporting. This included verifying the completeness of information transferred to new systems as well as testing the controls in place for both the migration and the new system.
We identified an increasing number of systems outsourced to third party service providers. For these systems, we tested IT general controls through evaluating the relevant Service Organisation Controls reports produced by third parties by assessing the timing of the reporting and the controls tested. We also tested required complementary controls performed by management.
 As the Bank continues to increase the use of third, and 4th parties, (including cloud service providers), focus on the identification of and accountability for, internal controls over financial reporting, will be essential.
NatWest Holdings Full United Kingdom NatWest Markets Full United Kingdom, United States, and Singapore RBS International Specific Channel Islands
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total equity and total income to verify we had appropriate overall coverage on the income statement.
Notes: (1) Full scope: audit procedures on all significant accounts (2) Specific scope: audit procedures on selected accounts (3) Other procedures: considered in analytical procedures
The audit scope of Specific scope components may not have included testing of all significant accounts within the component. However, the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
Performance materiality The application of materiality at the individual account or balance level is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
Audit work of component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component team is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated by the primary audit engagement team to components was between £30 million and £80 million.
We agreed with the Group Audit Committee that we would report to them all uncorrected audit misstatements in excess of £8 million (2018: £10 million), which is set at 5% of planning materiality, as well as misstatements below that threshold that, in our view, warranted reporting on qualitative grounds.
Other information The other information comprises the information included in the Annual Report and Accounts including the Strategic Report, Business Review, Corporate Governance, Report of the Group Nominations and Governance Committee, Report of the Group Audit Committee, Report of the Group Board Risk Committee, Report of the Group Sustainable Banking Committee, Report of the Technology and Innovation Committee, Report of the Directors, Capital and Risk Management, Non-IFRS financial measures, Risk Factors, Material Contracts, Shareholder Information, and Forward Looking Statements, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.
 Group Audit Committee reporting– the section describing the work of the Group Audit Committee does not appropriately address matters communicated by us to the audit committee; or
 the Strategic report and the Report of the directors have been prepared in accordance with applicable legal requirements.
 the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
 Following the recommendation of the Group Audit Committee we were appointed by the Group at its annual general meeting on 4 May 2016 to audit the financial statements of the Group for the period ending 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 4 years, covering periods from our appointment through 31 December 2019.
Jonathan Bourne (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London, United Kingdom 13 February 2020
Notes: (1) The maintenance and integrity of the RBS web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.
Attributable to: Ordinary shareholders 3,133 1,622 752 Preference shareholders 39 182 234 Paid-in equity holders 367 355 487 Non-controlling interests 261 (8) 35
Earnings per ordinary share 8 26.0p 13.5p 6.3p Earnings per ordinary share - fully diluted 8 25.9p 13.4p 6.3p *Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
Profit for the year 3,800 2,151 1,508 Items that do not qualify for reclassification Remeasurement of retirement benefit schemes 5 - contributions in preparation for ring-fencing (1) — (2,053) — - other movements (142) 86 90 (Loss)/profit on fair value of credit in financial liabilities designated at fair value through profit or loss due to own credit risk (189) 200 (126) FVOCI financial assets (71) 48 — Tax 28 502 (10)
(1,726) (75) (687) Other comprehensive loss after tax (2,100) (1,292) (733) Total comprehensive income for the year 1,700 859 775
Liabilities Bank deposits 11 20,493 23,297 Customer deposits 11 369,247 360,914 Settlement balances 4,069 3,066 Trading liabilities 9 73,949 72,350 Derivatives 10 146,879 128,897 Other financial liabilities 18 45,220 39,732 Subordinated liabilities 19 9,979 10,535 Other liabilities 20 9,647 8,954 Total liabilities 679,483 647,745
Ordinary shareholders' interests 38,993 41,182 Other owners' interests 4,554 4,554 Owners’ equity 21 43,547 45,736 Non-controlling interests 9 754 Total equity 43,556 46,490
Called-up share capital - at 1 January 12,049 11,965 11,823 Ordinary shares issued 45 84 142 At 31 December 12,094 12,049 11,965
Paid-in equity - at 1 January 4,058 4,058 4,582 Redeemed/reclassified (1) — — (524) At 31 December 4,058 4,058 4,058
Share premium account - at 1 January 1,027 887 25,693 Ordinary shares issued 67 140 235 Redemption of debt preference shares (2) — — 748 Capital reduction (3) — — (25,789) At 31 December 1,094 1,027 887
FVOCI reserve - at 1 January (4) 343 255 238 Implementation of IFRS 9 on 1 January 2018 — 34 — Unrealised (losses)/gains (107) 97 202 Realised gains (90) (42) (176) Tax (8) (1) (9) At 31 December 138 343 255
Cash flow hedging reserve - at 1 January (191) 227 1,030 Amount recognised in equity (5) 573 (63) (277) Amount transferred from equity to earnings (6) (279) (518) (792) Tax (68) 163 266 At 31 December (7) 35 (191) 227
Foreign exchange reserve - at 1 January 3,278 2,970 2,888 Retranslation of net assets (428) 195 111 Foreign currency gains/(losses) on hedges of net assets 83 (33) (6) Tax (110) 23 (1) Recycled to profit or loss on disposal of businesses (8) (1,480) 123 (22) At 31 December (7) 1,343 3,278 2,970
Retained earnings - at 1 January 14,312 17,130 (12,936) Implementation of IFRS 9 on 1 January 2018 (4) — (105) — Implementation of IFRS 16 on 1 January 2019 (9) (187) — — Profit attributable to ordinary shareholders and other equity owners 3,539 2,159 1,473 Equity preference dividends paid (39) (182) (234) Paid-in equity dividends paid (367) (355) (487) Ordinary dividends paid (3,018) (241) — Capital reduction (3) — — 30,331 Redemption of debt preference shares (2) — — (748) Redemption of equity preference shares (10) — (2,805) — Redemption/reclassification of paid-in equity — — (196) Realised gains in period on FVOCI equity shares 112 6 — Remeasurement of the retirement benefit schemes - contributions in preparation for ring-fencing (11) — (2,053) — - other movements (142) 86 90 - tax 24 539 (28) Changes in fair value of credit in financial liabilities designated at fair value through profit or loss - gross (189) 200 (126) - tax 20 (33) 18 Shares issued under employee share schemes (6) (2) (5) Share-based payments (113) (32) (22) At 31 December 13,946 14,312 17,130 *Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
(3) On 15 June 2017, the Court of Session approved a reduction of RBSG plc’s capital so that the amounts which stood to the credit of share premium account and capital redemption reserve were transferred to retained earnings.
(4) Years ended 31 December 2019 and 31 December 2018 prepared under IFRS 9. Year ended 31 December 2017 prepared under IAS 39. (5) The amount credited to the cash flow hedging reserve comprised £585 million (2018 - £166 million debit) in relation to interest rate hedges lesser debit of £12 million (2018 - £103 million credit) in relation to foreign exchange hedges. (6) The cash flow hedging reserve was reduced by £243 million in relation to interest rate hedges (2018 - £493 million) credited net interest income and reduced by £36 million (2018 - £25 million) in relation to foreign exchange hedging which was credited to net interest income. (7) The hedging element of the cash flow hedging reserve and foreign exchange reserve relates mainly to de-designated hedges. (8)
Includes £290 million recycled on completion of the Alawwal bank merger in June 2019 (with a further £48m shown in Tax), £1,102 million recycled on the subsequent liquidation of RFS Holdings B.V. (with a further £65m shown in Tax), and £67m attributable to the capital repayment by UBI DAC. The Alawwal bank merger resulted in the derecognition of the associate investment in Alawwal bank and recognition of a new investment in SABB held at FVOCI. The recycling gains arising from the liquidation of RFS Holdings B.V. and capital repayment by UBIDAC, have been calculated using the step-by-step method in IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ and by reference to the absolute reduction in ownership interest respectively. Amount recycled also includes £2,661 million related with historical hedge relationship taken to non interest income.
(9) Year ended 31 December 2019 prepared under IFRS 16 Leases. Years ended 31 December 2018 and 31 December 2017 prepared under IAS 17 Leases. Refer to Note 22 for further information on the impact of IFRS 16 implementation.
(10) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed. (11) On 17 April 2018 RBS Group agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
Cash flows from financing activities Issue of ordinary shares 17 144 306 Redemption of other equity instruments — (2,826) (779) Own shares disposed/(acquired) (21) 22 89 Issue of subordinated liabilities 577 — — Redemption of subordinated liabilities (1,108) (2,258) (5,747) Redemption of debt preference shares — — (748) Service cost of other equity instruments (3,429) (803) (612) Interest on subordinated liabilities (510) (566) (717) Issuance of MRELs 3,640 6,996 3,612 Redemption and maturity of MRELs (1,285) — (774) Interest on MRELs (428) (237) (139) Net cash flows from financing activities (2) (2,547) 472 (5,509) Effects of exchange rate changes on cash and cash equivalents (1,983) 676 (16)
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review: Capital and risk management on pages 112 to 189 form an integral part of these financial statements
RBS – Annual Report and Accounts 2019 208 1. Presentation of accounts The accounts, set out on pages 202 to 276, including these accounting policies on pages 208 to 212, and the audited sections of the Financial review: Capital and risk management on pages 112 to 189, are prepared on a going concern basis (see the Report of the directors, page 108) and in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and interpretations as issued by the IFRS Interpretations Committee of the IASB and adopted by the European Union (EU) (together IFRS). The significant accounting policies and related judgments are set out below.
IAS 39 ‘Financial Instruments: Recognition and Measurement’, IFRS 9 ‘Financial Instruments’ and IFRS 7 ‘Financial Instruments: Disclosures’ - In September 2019, the IASB published amendments to address the issues arising from the replacement of existing IBOR based interest rate benchmarks with alternative nearly riskfree interest rates (RFRs) in the context of hedge accounting. These amendments allow hedging relationships affected by the IBOR reform to be accounted for as continuing hedges. RBS has early adopted these amendments for the annual reporting period ending on 31 December 2019.
4. Assets held for sale A non-current asset (or disposal group) is classified as held for sale if RBS Group will recover its carrying amount principally through a sale transaction rather than through continuing use and is measured at the lower of its carrying amount or fair value less cost to sell.
For defined benefit pension schemes, the net of the recognisable scheme assets and obligations is reported in the balance sheet. The defined benefit obligation is measured on an actuarial basis. The charge to profit or loss for pension costs (mainly the service cost and the net interest on the net defined benefit asset or liability) is recognised in operating expenses.
RBS – Annual Report and Accounts 2019 209 available to RBS Group in the form of refunds from the plan or reduced contributions to it.
7. Impairment of intangible assets, rights of use and property, plant and equipment At each balance sheet date, RBS Group assesses whether there is any indication that its intangible assets, rights of use or property, plant and equipment are impaired. If any such indication exists, RBS Group estimates the recoverable amount of the asset and the impairment loss, if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
An impairment loss is recognised if the recoverable amount of an intangible or tangible asset is less than its carrying value. The carrying value of the asset is reduced by the amount of the loss and a charge recognised in profit or loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment can be recognised when an increase in service potential arises provided the increased carrying value is not greater than it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
8. Foreign currencies Transactions in foreign currencies are recorded in the functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 20).
9. Leases RBS Group has adopted IFRS 16 ‘Leases’ with effect from 1 January 2019, replacing IAS 17 ‘Leases’. RBS Group has applied IFRS 16 on a modified retrospective basis without restating prior years. The effect is set out in Note 22.
Loans to customers include finance lease receivables measured at the net investment in the lease, comprising the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Interest receivable includes finance lease income recognised at a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review; if there is a reduction in their value, income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
RBS – Annual Report and Accounts 2019 210 implement the plan or by announcing its main features.
RBS Group recognises any onerous cost of the present obligation under a contract as a provision. An onerous cost is the unavoidable cost of meeting RBS Group’s contractual obligations that exceed the expected economic benefits. When RBS Group vacates a leasehold property, the right of use asset would be tested for impairment and a provision may be recognised for the ancillary occupancy costs, such as rates.
Current tax is income tax payable or recoverable in respect of the taxable profit or loss for the year arising in profit or loss, other comprehensive income or equity. Provision is made for current tax at rates enacted, or substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where RBS Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual RBS Group company or on RBS Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis or on a gross basis simultaneously.
Accounting for taxes is judgmental and carries a degree of uncertainty because tax law is subject to interpretation, which might be questioned by the relevant tax authority. RBS Group recognises the most likely current and deferred tax liability or asset, assessed for uncertainty using consistent judgments and estimates. Current and deferred tax assets are only recognised where their recovery is deemed probable, and current and deferred tax liabilities are recognised at the amount that represents the best estimate of the probable outcome having regard to their acceptance by the tax authorities.
12. Financial instruments Financial instruments are classified either by product, by business model or by reference to the IFRS default classification.
The product classifications apply to financial assets that are either designated at fair value through profit or loss (DFV), or to equity investments designated as at fair value through other comprehensive income (FVOCI). Financial assets may also be irrevocably designated at fair value through profit or loss upon initial recognition if such designation eliminates, or significantly reduces, accounting mismatch. In all other instances, fair value through profit or loss (MFVTPL) is the default classification and measurement category for financial assets.
Business model assessment of assets is made at portfolio level, being the level at which they are managed to achieve a predefined business objective. This is expected to result in the most consistent classification of assets because it aligns with the stated objectives of the portfolio, its risk management, manager’s remuneration and the ability to monitor sales of assets from a portfolio.
All financial instruments are measured at fair value on initial recognition.
Judgement is exercised as follows:  Models – in certain low default portfolios, Basel parameter estimates are also applied for IFRS 9.
 Non-modelled portfolios, mainly in Private Banking, RBSI and Lombard, use a standardised capital requirement under Basel II. Under IFRS 9, they have bespoke treatments for the identification of significant increase in credit risk. Benchmark PDs, EADs and LGDs are reviewed annually for appropriateness. The ECL calculation is based on expected future cash flows, which is typically applied at a portfolio level.
14. Financial guarantee contracts Under a financial guarantee contract, RBS Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 13.
15. Loan commitments Provision is made for expected credit loss on loan commitments, other than those classified as held-for-trading. Syndicated loan commitments in excess of the level of lending under the commitment approved for retention by RBS Group are classified as held-fortrading and measured at fair value through profit or loss.
16. Derecognition A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. Conversely, an asset is not derecognised by a contract under which RBS Group retains substantially all the risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred, RBS Group does not derecognise an asset over which it has retained control but limits its recognition to the extent of its continuing involvement.
17. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by RBS Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which RBS Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset. Sale and repurchase transactions that are not accounted for at fair value through profit or loss are measured at amortised cost. The difference between the consideration paid or received and the repurchase or resale price is treated as interest and recognised in interest income or interest expense over the life of the transaction.
18. Netting Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, RBS Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. RBS Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented gross.
20. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. RBS Group’s approach to determining the fair value of financial instruments is set out in the Critical accounting policies section and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Notes 10 and 12 on the accounts.
Gains and losses arising from changes in the fair value of derivatives that are not the hedging instrument in a qualifying hedge are recognised as they arise in profit or loss. Gains and losses are recorded in Income from trading activities except for gains and losses on those derivatives that are managed together with financial instruments designated at fair value; these gains and losses are included in Other operating income. RBS Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or unrecognised firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation (net investment hedges).
RBS – Annual Report and Accounts 2019 212 hedging instrument and details of the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued. Hedge accounting is also discontinued if RBS Group revokes the designation of a hedge relationship.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to profit or loss in the same periods in which the hedged forecast cash flows affect profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuation of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss is reclassified from equity to profit or loss when the hedged cash flows occur or, if the forecast transaction results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affect profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is reclassified from equity to profit or loss immediately.
Hedge of net investment in a foreign operation - In the hedge of a net investment in a foreign operation, the portion of foreign exchange differences arising on the hedging instrument determined to be an effective hedge is recognised in other comprehensive income. Any ineffective portion is recognised in profit or loss. Non-derivative financial liabilities as well as derivatives may be the hedging instrument in a net investment hedge. On disposal or partial disposal of a foreign operation, the amount accumulated in equity is reclassified from equity to profit or loss.
22. Cash and cash equivalents In the cash flow statement, cash and cash equivalents comprises cash and deposits with banks with an original maturity of less than three months together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
Critical accounting policies and key sources of estimation uncertainty The reported results of RBS Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing RBS Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial Reporting’. The judgements and assumptions involved in RBS Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by RBS Group would affect its reported results
RBS Group is assessing the effect of adopting these standards on its financial statements
RBS – Annual Report and Accounts 2019 213 1 Net interest income £m £m £m
Loans to banks - amortised cost 726 522 277 Loans to customers - amortised cost 9,795 9,993 10,409 Other financial assets 854 534 348 Interest receivable (1) 11,375 11,049 11,034
Balances with banks 319 250 175 Customer deposits: demand 282 223 99 Customer deposits: savings 771 510 445 Customer deposits: other time 203 116 179 Other financial liabilities 1,102 791 554 Subordinated liabilities 483 461 572 Internal funding of trading businesses 168 42 23 Interest payable (1) 3,328 2,393 2,047
Note: (1) Negative interest on loans is classed as interest payable and on customer deposits is classed as interest receivable.
Net fees and commissions 2,511 2,357 2,455 Loss on redemption of own debt — — (7) Income from trading activities Foreign exchange 448 643 525 Interest rate 532 695 (50) Credit 32 45 197 Changes in fair value of own debt and derivative liabilities attributable to own credit risk - debt securities in issue (60) 72 12 - derivative liabilities (20) 20 (81) Equities, commodities and other — 32 31
Other operating income Operating lease and other rental income 250 256 276 Changes in the fair value of financial assets and liabilities designated at fair value through profit or loss (17) (26) 60 Changes in fair value of other financial assets at fair value through profit or loss 58 18 — Hedge ineffectiveness 48 (65) 39 Profit/(loss) on disposal of amortised cost assets 42 44 (35) (Loss)/profit on disposal of fair value through other comprehensive income assets (22) 34 226 Profit on sale of property, plant and equipment 58 50 75 Share of (losses)/profits of associated entities (14) 83 104 Profit/(loss) on disposal of subsidiaries and associates (1) 2,224 (72) 245 Other income (2) 136 560 74
(2) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
RBS – Annual Report and Accounts 2019 214 £m £m £m
Premises and equipment (1) 1,259 1,383 1,565 UK bank levy (2) 134 179 215 Depreciation and amortisation (3) 1,176 731 808 Other administrative expenses (4) 2,694 3,193 3,108 Administrative expenses 5,263 5,486 5,696 Impairment of goodwill and other intangible assets 44 37 29
Notes: (1) Includes a £161 million charge relating to the reduction in property portfolio. (2) Includes a prior period rebate of £31 million. (3) Includes a £292 million charge relating to the reduction in property portfolio. (4) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 26 for further details.
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 64,200 (2018 - 67,600; 2017 - 73,400). The average number of temporary employees during 2019 was 4,100 (2018 - 4,000; 2017 - 5,000). The number of persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows: UK Personal Banking 21,800 23,400 19,500 Ulster Bank RoI 2,700 2,900 2,600 Commercial Banking 10,100 10,200 6,900 Private Banking 1,900 1,900 1,500 RBS International 1,600 1,600 1,600 NatWest Markets 5,000 4,500 5,300 Central items & other 19,800 20,900 32,300 Total 62,900 65,400 69,700
Share-based payments As described in the Remuneration report, RBS Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award Vesting conditions (1) Settlement
Average Shares exercise price under option exercise price under option exercise price under option
At 1 January 2.18 75 2.38 60 2.46 56 Granted 1.78 25 1.89 28 2.27 21 Exercised 2.83 (4) 2.44 (4) 2.46 (3) Cancelled 2.25 (12) 2.46 (9) 2.49 (14) At 31 December 2.01 84 2.18 75 2.38 60
At 1 January 85 32 2 102 37 2 119 38 4 Granted 15 6 — 12 5 — 35 15 — Vested/exercised (12) (4) — (5) (2) — (22) (7) — Lapsed (25) (9) (2) (24) (8) — (30) (9) (2) At 31 December 63 25 — 85 32 2 102 37 2
Non-deferred cash awards (1) 40 37 8 Total non-deferred bonus awards 40 37 8 Deferred bond awards 184 191 (4) Deferred share awards 83 107 (22) Total deferred bonus awards 267 298 (10) Total bonus awards (2) 307 335 (8)
Bonus awards as a % of operating profit before tax (3) 7% 9% Proportion of bonus awards that are deferred 87% 89% of which - deferred bond awards 69% 64% - deferred share awards 31% 36%
RBS – Annual Report and Accounts 2019 216 3 Operating expenses continued
Bonus awarded 307 335 342 Less: deferral of charge for amounts awarded for current year (110) (130) (133) Income statement charge for amounts awarded in current year 197 205 209
Add: current year charge for amounts deferred from prior years 127 86 96 Less: forfeiture of amounts deferred from prior years (25) (66) (7) Income statement charge for amounts deferred from prior years 102 20 89
Effective from 1 January 2019 Business Banking was transferred from UK Personal & Business Banking (UK PBB) to Commercial Banking, as the nature of the business, including distribution channels, products and customers were more closely aligned to the Commercial Banking business. Following the transfer, UK PBB was renamed UK Personal Banking. Comparatives have been restated.
Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
Private Banking serves UK connected high net worth individuals and their business interests.
NatWest Markets helps global financial institutions and corporates manage their financial risks and achieve their short and long-term financial goals while navigating changing markets and regulation.
Net Net fees Other Depreciation Impairment interest and non-interest Total Operating and (losses)/ Operating income commissions income income expenses amortisation releases profit/(loss)
UK Personal Banking 4,130 696 40 4,866 (3,618) — (393) 855 Ulster Bank RoI 400 109 58 567 (552) — 34 49 Commercial Banking 2,842 1,312 164 4,318 (2,458) (142) (391) 1,327 Private Banking 521 226 30 777 (482) (4) 6 297 RBS International 478 106 26 610 (254) (10) (2) 344 NatWest Markets (188) 85 1,445 1,342 (1,406) (12) 51 (25) Central items & other (136) (23) 1,932 1,773 621 (1,008) (1) 1,385 Total 8,047 2,511 3,695 14,253 (8,149) (1,176) (696) 4,232
UK Personal Banking 4,342 724 216 5,282 (3,241) — (207) 1,834 Ulster Bank RoI 421 94 89 604 (676) — (60) (132) Commercial Banking 3,074 1,405 200 4,679 (2,458) (144) (390) 1,687 Private Banking 464 179 35 678 (529) — (6) 143 RBS International 325 42 22 389 (217) (2) (3) 167 NatWest Markets 203 24 823 1,050 (2,250) 49 174 (977) Central items & other 158 (13) 306 451 (222) (711) (1) (483) Total 8,987 2,455 1,691 13,133 (9,593) (808) (493) 2,239 *2018 and 2017 data has been restated for the business re-segmentation.
Fees and commissions payable (480) (12) (104) (40) (2) (360) 149 (849) Net fees and commissions 696 109 1,312 226 106 85 (23) 2,511 2018*
Fees and commissions receivable - Payment services 227 34 556 33 25 3 — 878 - Credit and debit card fees 402 22 175 13 — — — 612 - Lending (credit facilities) 408 29 415 2 29 88 — 971 - Brokerage 62 6 — 5 — 85 — 158 - Investment management, trustee and fiduciary services 49 4 — 191 42 — — 286 - Trade finance — 2 122 1 4 3 — 132 - Underwriting fees 13 — 17 — — 144 — 174 - Other 2 1 60 16 2 67 (141) 7 Total 1,163 98 1,345 261 102 390 (141) 3,218
Fees and commissions receivable - Payment services 194 30 543 37 24 1 — 829 - Credit and debit card fees 451 27 175 12 — — — 665 - Lending (credit facilities) 436 30 497 2 10 83 2 1,060 - Brokerage 69 10 — 6 — 63 — 148 - Investment management, trustee and fiduciary services 72 4 35 133 4 1 — 249 - Trade finance — 2 164 1 3 3 — 173 - Underwriting fees — — — — — 157 — 157 - Other 1 — 51 15 2 132 (144) 57 Total 1,223 103 1,465 206 43 440 (142) 3,338
Fees and commissions payable (499) (9) (60) (27) (1) (416) 129 (883) Net fees and commissions 724 94 1,405 179 42 24 (13) 2,455 *2018 and 2017 data has been restated for the business re-segmentation.
UK Personal Banking 182,305 153,999 171,011 148,792 166,560 145,104 Ulster Bank RoI 25,385 21,012 25,193 21,189 24,564 19,853 Commercial Banking 165,399 140,863 166,478 139,804 173,621 143,450 Private Banking 23,304 28,610 21,983 28,554 20,290 27,049 RBS International 31,738 30,330 28,398 27,663 25,867 29,077 NatWest Markets 263,885 246,907 244,531 227,399 277,886 248,553 Central items & other 31,023 57,762 36,641 54,344 49,268 75,877 Total 723,039 679,483 694,235 647,745 738,056 688,963 *2018 and 2017 data has been restated for the business re-segmentation.
At 1 January 2018* 2,653 2,606 — 300 5,559 Acquisitions 48 — — — 48 Inter-segment transfers (9) — 9 — — At 31 December 2018* 2,692 2,606 9 300 5,607 At 31 December 2019 2,692 2,606 9 300 5,607 *2018 data has been restated for the business re-segmentation.
UK USA Europe RoW Total 2019 £m £m £m £m £m
Interest receivable 10,589 — 430 30 11,049 Interest payable (2,366) — (26) (1) (2,393) Net fees and commissions 2,183 12 102 60 2,357 Income from trading activities 1,308 124 68 7 1,507 Other operating income 467 119 229 67 882 Total income 12,181 255 803 163 13,402
RBS – Annual Report and Accounts 2019 220 5 Pensions Defined contribution schemes RBS Group sponsors a number of defined contribution pension schemes in different territories, which new employees are offered the opportunity to join.
Defined benefit schemes RBS Group sponsors a number of pension schemes in the UK and overseas, including the Main section of The Royal Bank of Scotland Group Pension Fund (the “Main section”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
The Main section corporate trustee is RBS Pension Trustee Limited (the Trustee), a wholly owned subsidiary of NWB Plc, Principal Employer of the Main section. The Board of the Trustee comprises four member trustee directors selected from eligible active staff, deferred and pensioner members who apply and six appointed by RBS Group. Under UK legislation, a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities (the pensions that have been promised to members).
Equities 3.9 4.8 8.7 3.7 5.2 8.9 Index linked bonds 47.8 — 47.8 40.1 — 40.1 Government bonds 9.3 — 9.3 12.9 — 12.9 Corporate and other bonds 11.6 5.0 16.6 12.2 5.2 17.4 Real estate — 4.8 4.8 — 5.5 5.5 Derivatives — 7.8 7.8 — 6.1 6.1 Cash and other assets — 5.0 5.0 — 9.1 9.1
Present value Asset Net Present value Asset Net Fair of defined ceiling/ pension Fair of defined ceiling/ pension value of benefit minimum (asset)/ value of benefit minimum (asset)/
Changes in value of net pension (asset)/liability plan assets obligation funding (1) liability plan assets obligation funding (1) liability £m £m £m £m £m £m £m £m
1,245 1,156 242 153 1,374 1,307 255 188 Statement of comprehensive income Return on plan assets excluding recognised interest income 3,021 — — (3,021) 3,556 — — (3,556) Experience gains and losses — (275) — (275) — (279) — (279) Effect of changes in actuarial financial assumptions — 5,565 — 5,565 — 6,189 — 6,189 Effect of changes in actuarial demographic assumptions — (465) — (465) — (482) — (482) Asset ceiling adjustments — — (1,696) (1,696) — — (1,730) (1,730)
Contributions by employer 261 — — (261) 473 — — (473) Contributions by plan participants and other scheme members 10 10 — — 15 15 — — Liabilities extinguished upon settlement — — — — (188) (194) — (6) Benefits paid (1,788) (1,788) — — (1,972) (1,972) — — At 31 December 2019 46,555 39,669 6,886 — 51,925 44,115 7,315 (495)
(2) RBS Group expects to make contributions to the Main section of £247 million in 2020. Additional contributions of up to £500 million will be paid to the Main section, should RBS Group make distributions in 2020, in line with the ring-fencing agreement with the Trustee.
Fund assets at fair value 51,925 48,752 Present value of fund liabilities 44,115 39,607 Funded status 7,810 9,145 Asset ceiling/minimum funding 7,315 8,790
In 2018, the Group recognised an updated estimate of the impact of guaranteed minimum pension equalisation (£102m) following the clarity provided by the October 2018 Court ruling and the impact of any future conversion exercise. This has been revised in 2019 to reflect changes in financial assumptions.
The most significant assumptions used for the Main section are shown below: Principal IAS 19 actuarial assumptions 2019 2018 Principal assumptions of 2017 triennial valuation % %
Discount rate The IAS 19 valuation uses a single discount rate set by reference to the yield on a basket of ‘high quality’ sterling corporate bonds. For the triennial valuation discounting is by reference to a yield curve.
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2019 is 21 years (2018 – 20 years).
Significant judgement is required when setting the criteria for bonds to be included in the basket of bonds that is used to determine the discount rate used in the IAS 19 valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is assumed. Sensitivity to the main assumptions is presented below.
Change in life expectancies -2 years -1 years No change + 1 year + 2 years 2019 £bn £bn £bn £bn £bn
Change in credit spreads +50 bps 5.8 4.5 3.2 1.9 0.7 No change 3.0 1.4 — (1.4) (3.0) -50 bps (0.4) (2.1) (3.8) (5.5) (7.3)
The experience history of RBS Group schemes is shown below: Main section All schemes
History of defined benefit schemes 2019 2018 2017 2016 2015 £m £m £m £m £m £m £m £m £m £m
Experience gains/(losses) on plan liabilities 275 (122) (107) 658 233 279 (81) (93) 794 258 Experience gains/(losses) on plan assets 3,021 (1,891) 1,580 8,562 (415) 3,556 (2,090) 1,728 9,254 (458) Actual return on plan assets 4,266 (768) 2,735 9,872 703 4,930 (848) 3,013 10,708 749 Actual return on plan assets 9.7% (1.7%) 6.2% 32.2% 2.3% 10.1% (1.7%) 6.1% 30.9% 2.2%
6 Auditor’s remuneration Amounts paid to RBS Group's auditors for statutory audit and other services are set out below. All audit-related and other services are approved by the Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by the provision of other services. The Group Audit Committee recognises that for certain assignments, the auditors are best placed to perform the work economically; for other work, RBS Group selects the supplier best placed to meet its requirements. RBS Group’s auditors are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
Amounts paid to RBS Group's auditors for statutory audit and other services are set out below: Fees payable for: - the audit of RBS Group’s annual accounts (1) 3.8 3.5 4.0 - the audit of RBSG plc’s subsidiaries (1) 25.7 27.5 22.9 - audit-related assurance services (1,2) 3.2 2.9 4.3 Total audit and audit-related assurance services fees 32.7 33.9 31.2
Other assurance services 1.2 1.3 1.7 Corporate finance services (3) 0.6 0.2 0.2 Total other services 1.8 1.5 1.9
Group audit fees. (2) Comprises fees of £1.1 million (2018 - £1.1 million) in relation to reviews of interim financial information, £1.4 million (2018 - £1.1 million) in respect of reports to
RBS Group’s regulators in the UK and overseas, and £0.7 million (2018 - £0.7 million) in relation to non-statutory audit opinions. (3) Comprises fees of £0.6 million (2018 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by RBS Group.
(551) (900) (698) Deferred tax Credit/(charge) for the year 38 (280) 108 Increase/(reduction) in the carrying value of deferred tax assets 62 7 (30) Over/(under) provision in respect of prior years 19 (35) (111) Tax charge for the year (432) (1,208) (731)
*Restated for IAS12 ‘Income taxes’. Refer to Accounting policy 1, Other amendments to IFRS.
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 19% (2018 – 19%; 2017 – 19.25%) as follows: Expected tax charge (804) (638) (431) Losses and temporary differences in year where no deferred tax asset recognised (4) (55) (303) Foreign profits taxed at other rates 23 (8) 104 UK tax rate change impact — — (7) Items not allowed for tax: - losses on disposals and write-downs (71) (44) (69) - UK bank levy (26) (38) (45) - regulatory and legal actions (165) (203) (56) - other disallowable items (62) (63) (110) Non-taxable items: - Alawwal bank merger gain disposal 215 — — - FX recycling on the liquidation of RFS Holdings 279 — — - other non-taxable items 80 47 134 Taxable foreign exchange movements (1) (27) 27 Losses brought forward and utilised 27 14 11 Increase/(decrease) in the carrying value of deferred tax assets in respect of: - UK losses 129 7 (30) - Ireland losses (67) — — Banking surcharge (199) (357) (165) Tax on paid-in equity 73 67 93 Adjustments in respect of prior years (1) 141 90 116 Actual tax charge (432) (1,208) (731)
Note: (1) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. Current taxation balances include provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to agreement with the relevant tax authorities.
Deferred tax asset (1,011) (1,412) Deferred tax liability 266 454 Net deferred tax asset (745) (958)
Implementation of IFRS16 on 1 January 2019 — — — — — (60) (60) Acquisitions and disposals of subsidiaries (1) (1) — 18 — — 16 Charge/(credit) to income statement 28 (43) 41 (81) (28) (36) (119) Charge/(credit) to other comprehensive income 362 — — 30 — (20) 372 Currency translation and other adjustments — (4) — (1) 13 (4) 4 At 31 December 2019 (139) 172 (118) 315 (951) (24) (745)
UK tax losses carried forward - NWM Plc 75 151 - NWB Plc 530 505 - RBS Plc 150 — - Ulster Bank Limited 15 19 Total 770 675 Overseas tax losses carried forward Ulster Bank Ireland DAC 181 261
Estimate - These estimates are partly based on forecast performance beyond the horizon for management’s detailed plans. They have regard to inherent uncertainties, such as Brexit and climate change. The deferred tax asset in NWM Group is supported by way of future reversing temporary timing differences on which deferred tax liabilities are recognised at 31 December 2019.
UK tax losses - Under UK tax rules, tax losses can be carried forward indefinitely. As the recognised tax losses in RBS Group arose prior to 1 April 2015, credit in future periods is given against 25% of profits at the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by The Finance (No. 2) Act 2015. Deferred tax assets and liabilities at 31 December 2019 take into account the reduced rates in respect of tax losses and temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
Unrecognised deferred tax Deferred tax assets of £4,653 million (2018 - £5,118 million; 2017 - £6,356, million) have not been recognised in respect of tax losses and other temporary differences carried forward of £23,555 million (2018 - £25,597 million; 2017 - £30,049 million) in jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £839 million expire within five years and £4,798 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
Weighted average number of shares (millions) Weighted average number of ordinary shares outstanding during the year 12,067 12,009 11,867 Effect of dilutive share options and convertible securities 35 52 69 Diluted weighted average number of ordinary shares outstanding during the year 12,102 12,061 11,936 9 Trading assets and liabilities Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.
Loans Reverse repos 24,095 24,759 Collateral given 20,579 19,036 Other loans 1,947 1,308 Total loans 46,621 45,103 Securities Central and local government - UK 4,897 6,834 - US 5,458 4,689 - other 14,902 13,498 Financial institutions and Corporate 4,867 4,995 Total securities 30,124 30,016 Total 76,745 75,119
2019 2018 Notional Assets Liabilities Notional Assets Liabilities £bn £m £m £bn £m £m
Exchange rate contracts 3,750 44,792 47,141 3,426 36,545 38,230 Interest rate contracts 11,293 104,957 99,331 10,536 96,410 90,444 Credit derivatives 17 280 359 16 346 208 Equity and commodity contracts 3 — 48 1 48 15
Cash flow hedges of interest rate risk relate to exposures to the variability in future interest payments and receipts due to the movement of benchmark interest rates on forecast transactions and on recognised financial assets and financial liabilities. This variability in cash flows is hedged by interest rate swaps, fixing the hedged cash flows. For these cash flow hedge relationships, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to the relevant benchmark rate LIBOR, EURIBOR, SONIA, the Bank of England Official Bank Rate or the European Central Bank Refinance Rate. The variability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of RBS. This risk component comprises the majority of cash flow variability risk.