01 Essential reading 02 Chairman’s statement 04 Group Chief Executive’s review 06 Q&As on progress 07 Our key targets 08 Our business and our strategy 10 Our approach to business 12 Progress on our Strategic Plan 14 Our Core businesses 16 The economic environment 17 Our approach to risk management 20 Divisional review 22 UK Retail 24 UK Corporate 26 Wealth 28 Global Transaction Services 30 Ulster Bank 32 US Retail & Commercial 34 Global Banking & Markets 36 RBS Insurance 38 Business Services and Central Functions 40 Non-Core Division 41 Asset Protection Scheme (APS)
42 Sustainability 44 Sustainability in practice 45 Our five key themes 45 Our community programmes 47 Highlights of how we focus action across our businesses 48 Report and accounts 49 Business review 225 Governance 266 Financial statements 386 Additional information 423 Shareholder information
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Notes: (1) Group operating profit/(loss) before tax, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, Asset Protection Scheme credit default swap – fair value changes, gains on pensions curtailment, write-down of goodwill and other intangible assets and RFS Holdings minority interest and excluding movement in the fair value of own debt (FVOD). Statutory operating loss before tax of £399 million for the year ended 31 December 2010.
Philip Hampton, Chairman d Watch or listen to Philip Hampton at www.rbs.com/AnnualReport
Business achievements There are two dimensions to the internal rebuilding process at RBS: reducing our exposure to certain assets and risks, and strengthening our core businesses. On asset and risk reduction, we are ahead of schedule. Our programme of business disposals has attracted the most attention, with 20 agreements signed or completed in 2010. But our asset restructuring deals and run-off programme are also contributing to making RBS a stronger and safer bank, with a greatly improved capital position and lower funding needs.
This progress means we can increasingly focus on the core businesses that will drive our future. It has been pleasing to see the early results of our efforts to strengthen them. For example, we have increased our share of the mortgage and savings markets in the UK, with account numbers rising by 44,000 and 579,000, respectively. We are investing heavily in our core businesses, with a strong emphasis on serving customers better and improving our efficiency.
Economic backdrop – getting better The global economy rebounded strongly in 2010, but the strength of the recovery was unevenly spread across countries, and over time. Among our core markets, the UK and the US both returned to fairly modest growth. Conditions in Ireland remained very challenging.
Public policy – lending and remuneration In the public policy debate, two issues attracted controversy for UK banks in 2010: lending to companies, especially small and medium enterprises; and remuneration. In February 2011, the leading UK banks reached an agreement with the UK Government with the intention of reducing public controversy and improving constructive relationships.
The agreement involves a series of commitments by the larger banks, including on lending, remuneration and capital support, which are a positive reaction to issues of concern in our communities. We welcome the UK Government’s recognition of the contribution of financial services to the economy, and its commitment to support the creation of a level international playing field to promote effective competition.
There was a step-change in our overall financial performance last year. The return to operating profit(1) reflects both the internal rebuilding process at RBS and the external recovery in market and economic conditions. We are still a good way from where we want to be in terms of our performance but 2010 represents another big stride towards that goal.
Our lending goals to businesses will now continue in 2011, with additional capacity available to support further growth if demand is higher than expected. This time, we will be joined by the other large UK banks. We hope this initiative will help give confidence to stimulate economic growth. In addition, the banks have agreed to support a new major equity fund targeted at small businesses, and provide capital to the UK Government’s “big society” bank.
Our support for business extends beyond lending. This is particularly true in tough economic times when it is even more important to preserve economic activity and jobs. A 500-strong team of our most experienced relationship managers provides intensive support to new and fast-growing companies, who may be experiencing a recession and its aftermath for the first time. We have also grown our team of restructuring specialists who help struggling businesses back to health. We helped around 950 UK businesses to restructure successfully in 2010. We work with companies of all shapes and sizes across the country – from a small road haulage business to higher-profile examples, such as Liverpool Football Club, and large multinationals.
On remuneration, we have been a leading advocate of international, industry-wide reform in the banking sector over the last two years, having focused early on the need for deferrals, clawback and strong alignment of rewards to shareholders’ interests by using equity instead of cash.
Following an extensive consultation with both our institutional shareholders and UK Financial Investments, the Board has decided our approach on the key aspects of 2010 remuneration, including performance-related awards, and has balanced the need to attract and retain talented people to serve customers effectively with other key drivers, including regulatory compliance and the control of costs. It will again include a £2,000 cap on immediate cash bonuses.
Governance – building on the changes we made last year We made comprehensive changes to the Board and the Executive Management team in 2009, so last year was one of relative stability. I remain confident that the Board has the right blend of skills and experience to succeed. Our management team, under the experienced leadership of Stephen Hester, is doing an excellent job in moving RBS forward.
Sustainable Banking – serving local communities Financial services provide important benefits to society when they are delivered responsibly and efficiently. Having learned the lessons from the past, the challenge for RBS is to deliver these services in a way that our communities value and that our people can be proud of. I am confident that the changes we are making at RBS in the way we do business, as well as the business we do, will help to achieve this. Much of this work is overseen by the Group’s Sustainability Committee, which is chaired by our Senior Independent Director, Sir Sandy Crombie, and reports to our Board.
For example, NatWest and RBS introduced Customer Charters in 2010. These are based on the issues that customers have told us are important to them, such as making banking easy (we will extend our opening hours in our busiest branches). Similarly, Ulster Bank in Ireland and Citizens in the US launched their own commitments, which are already delivering tangible benefits to our customers.
We are also committed to investing in and developing our community programmes. Our long-running MoneySense programme continues to provide education on basic financial matters to thousands of schoolchildren in the UK, and is actively supported by employee volunteers. The Citizens ‘Gear for Grades’ programme in the US provides school supplies for children whose families are unable to afford them. Since the programme’s inception in 2003, Citizens has served over 150,000 school children in the US. Our community activities also include business start-up support and microfinance programmes. Our annual Sustainability Report contains extensive information on our activities in this key area for us in the UK, USA, India and many other countries where we operate.
Value for our shareholders It is vital that we make a proper financial return on the large amounts of new capital that RBS has raised in recent years, mainly from the UK Government. To make that return, we know that we have to run the businesses efficiently and support our customers effectively. An intrinsic part of our effectiveness comes from being a healthy and safe bank, with sufficient capital and liquidity to meet the demands of customers, markets and regulation. Many banks in the UK and elsewhere, including RBS, operated for a number of years with levels of capital and liquidity which, certainly in hindsight, left them weak and vulnerable. Our job is to make sure RBS remains strong and safe, but also to reward shareholders appropriately through improving financial results. I hope you will agree that the progress we have made is evident in our 2010 Results. Much remains to be done, but we are another important step closer to realising the potential in the businesses that make up the RBS Group.
Stephen Hester, Group Chief Executive d Watch or listen to Stephen Hester at www.rbs.com/AnnualReport
• to rebuild sustainable value for all shareholders, and in so doing to enable the UK Government to sell its holding profitably over time.
The weaknesses uncovered by the financial crisis – of leverage, risk concentration and business stretch – are being fixed. The successful and continuing run-down and sale of assets which weakened us, or businesses where we have no competitive advantage, illustrates this. These assets were placed in our Non-Core Division and give a focus to our risk reduction objectives. We are changing a balance sheet which could not withstand the crisis and, importantly, the culture that created it.
In each of our retail businesses we have re-energised and invested in our customer offering around the organising thought of ‘helpful banking’. The proposition in each market is tailored to suit local customers: NatWest has ‘Helpful Banking’; RBS has ‘Here for You’; Citizens has ‘Good Banking is Good Citizenship’, and; Ulster Bank has ‘Help For What Matters’. This is supporting improved customer attraction and retention and has resonated positively with staff, customers, and the broader communities we serve.
Risk: Excellent progress has been made on the journey towards bringing RBS’s risk profile in line with the highest standards of our industry. Our funding and liquidity profile is much improved and no longer an outlier for our industry. Non-Core assets are down a further £63 billion, the loan-to-deposit ratio is 117%, down from 154% at peak and our Core businesses now take in over £1 of deposits for every £1 of loans
RBS has strong capital ratios – with a Core Tier 1 ratio of 10.7%. The additional protection of the Asset Protection Scheme, as expected, is unlikely to be called upon and we target scheme exit by the end of 2012, subject to continued progress on risk reduction and to regulatory approvals.
Shareholder value: This vital part of our goals is on track but inevitably will take the most time to deliver fully. The potential is there and the performance of the Bank will increasingly speak for itself. 2010 results were a large improvement on 2009 and our budgets for the year. At Group level RBS posted £1.9 billion of operating profits, excluding fair value of own debt (from a £6.1 billion loss in 2009). It was only after the post tax effect of APS (£1.1 billion) that we reported a net attributable loss of £1.1 billion. We are taking significant steps toward repaying the support we have received.
2010 results were achieved with strong attention to efficiency – beating our cost targets and allowing vital investment right across the Group to enhance future growth and business quality.
People Our people are doing a great job in producing the turnaround we have targeted despite great stresses and challenges. I thank all of my colleagues at RBS for this.
Our ability to attract, retain and motivate the best people is still not what we want it to be. Our business challenges and the external environment lead to management compromises that add risk to the achievement of our business goals. We are working hard to move forward and balance staff motivation with external acceptance that past mistakes have been addressed.
2011 will be noteworthy in the UK for the conclusion of the Independent Commission on Banking (ICB). The ICB has the opportunity to reflect on all of the change under way and to determine if additional measures would be beneficial. There are traps to avoid in areas where UK reform, which is not followed elsewhere, might bring more cost than benefit, hamper banks and the economy and give the illusion of more safety without its reality. The Commission’s work is continuing thoughtfully and we are co-operating fully to give insights wherever helpful.
We are alert to the risks facing our businesses. In 2010, our results were accomplished despite eurozone market volatility, additional Irish impairments and higher than expected insurance provisioning. 2011 will doubtless have its own challenges as the global economic recovery seeks a firmer footing. Our plans might also face further substantial impacts from national and international regulatory changes.
x Where are you in the impairment cycle? The level of Group impairments fell by 33 per cent in 2010, reflecting improvements in the economic environment. Impairments fell in all core businesses, except Ulster Bank, where asset default levels and loss rates remained high in both the retail and corporate portfolios, reflecting difficult economic conditions in Ireland.
We currently expect impairments in Ulster Bank to stabilise in 2011, and to continue falling in our other businesses, assuming the global economic recovery is sustained.
x When will the UK Government sell its shareholding? The UK Government set up UK Financial Investments Ltd (UKFI) to manage its investments in financial institutions, including RBS. UKFI has been given a clear mandate by the Government, to protect and create value for the taxpayer as shareholder. As such, decisions around the timing of any sale are outside the remit of the RBS Group. We are acutely aware of our responsibility as part of this process. By successfully implementing our Strategic Plan, we will serve our customers well and achieve the business success needed to attract new investors.
rose by 25 basis points to 2.01 per cent. This improvement was driven by the Retail & Commercial business, where asset margins recovered across a number of markets, primarily due to the run-off of older business written at unsustainably lower margins.
x What recommendations have you made to the Independent Commission on Banking (ICB)? The Commission inquiry is a major event for our industry in the UK, and we have sought to engage thoughtfully. Our response was published on the ICB website.
In our view, the debate about banking size and structure can often generate more heat than light. The banks that failed during the crisis didn’t fail because they were too big, or because they had an investment bank. They failed because they had some form of concentration risk: in funding, in lending to property, in geography or in proprietary trading.
We should aim for a financial system where the probability of future crises is substantially reduced and there is an effective resolution regime for those institutions that do still fail. If this can be achieved then the size and shape of banks can be driven by the choices of customers and shareholders, within the context of strong and effective regulation.
We cannot achieve a 15% RoE without cost control and margin re-pricing to ensure income is efficiently generated.
We target a much lower leverage ratio than before. A <20x ratio means that our assets are less than 20 times as large as our equity capital.
We cannot succeed without a team of motivated employees working towards a common set of goals. Engagement has improved but further progress is required.
(3) Cost:income ratio excluding fair value of own debt and net of insurance claims.
(9) Eligible assets held for contingent liquidity purposes including cash, Government issued securities and other eligible securities with central banks.
In the second year of our five-year plan, we made progress on all three counts.
Rebuilding sustainable value will enable the UK Government to sell its holding profitably over time. We are acutely aware of our responsibility to repay the support we’ve received from the UK taxpayer. By successfully implementing our Strategic Plan, we will achieve the business success needed to attract new investors.
Income growth Focus on businesses capable of delivering sustainable growth and achieve market-level growth in each.
Funding programme Limit over-reliance on wholesale markets to meet the Group’s funding requirements, while building up an appropriate liquidity reserve.
Stable and robust capital support Focus on implementing state of the art risk controls, run-off of excess risk concentrations and maintenance of strong equity capital.
Sustain focused customer-driven wholesale banking GBM’s strategic plan is progressing well. Having refocused the business on its core franchises, disciplined deployment of capital, technology and human resources support our targeted global client base.
Publish targets for risk/return balance Demonstrate execution effectiveness by setting clear performance targets for risk and returns, and give regular updates on progress against them.
Improve levels of disclosure Rebuild confidence and trust with investors by combining clear performance targets with improved disclosure.
All our main Core businesses sustain positions amongst the leaders in their markets
Group loan:deposit ratio of c.100% Short-term wholesale funding <£150 billion Liquidity reserves of c.£150 billion
Two-thirds of Group profit and revenue to come from retail and commercial banking
GBM to account for approximately one-third of Group profit and revenue
In 2009, each business was made fully accountable for the costs it incurs and capital it requires through the implementation of divisional level targets for risk weighted assets, return on equity and cost:income ratios. In 2010, this enabled us to focus accurately on the individual performance of our divisions as well as capture the benefits of our universal banking model.
Our Core Tier 1 capital ratio was 10.7% at the end of 2010, which although marginally lower than a year earlier, is above our 2013 target and positions the Group well to deal with future regulatory changes in capital requirements.
GBM reported 2010 performance that was down from a highly unusual 2009. The division sustained its core product and market strengths, supporting its target customer franchises whilst continuing to implement its substantial change programme and invest for future growth. GBM third party assets, excluding derivatives, were down £15.5 billion compared with 31 December 2009 and its proportion of our Core operating profit has reduced during 2010 to 45%.
We made substantial progress in our disposal programme over the course of 2010; 20 business disposals were signed or completed. The disposal programme reduced Non-Core funded assets by £33 billion over the course of 2010, with a further £12 billion of Non-Core disposals signed and due to complete in the course of 2011. By 31 December 2010 the Group had also completed the sales of GMS and substantially all of its interest in RBS Sempra Commodities, and had agreed the sale of RBS England and Wales and NatWest Scotland branch-based businesses to Santander. This demonstrates solid progress towards the achievement of our EC divestment commitments.
We have announced clearly defined financial targets, at both individual division and Group level which we report against on a quarterly basis. Performance against the Group’s strategy, as announced in 2009, can be tracked at our “Changing the bank” website (
We continue to track customer satisfaction scores and market position metrics, for each of our core businesses, to make sure we achieve our goal of serving customers well.
RBS Risk Management is aligned to support the Group’s stated objective of standalone strength by 2013, as measured by reaching, and retaining, a standalone credit rating in line with the strongest international peer group. For an overview of how this is working in practice, see pages 17 to 19.
Bus ines s Servi ces provides a diverse range of services to the cu sto mer-fa cing operations of the Group.
Target 2013 Our 2009 settlement with the European Commission requires that we must divest, at least, the controlling interest in RBS Insurance by the end of 2013.
Target 2013 Leading global player, serving Group clients and with a central role in deposit gathering.
Target 2013 Leading UK provider with global reach, providing growth and substantial funding to the Group.
Our Non-Core businesses are the areas that are now separately managed and will be wound down or sold, with the proceeds reducing Group debt.
We are the leading provider of banking, finance and risk management services to the corporate and SME sector. We offer a full range of banking products and related financial services.
We provide private banking and investment services in the UK through Coutts & Co and Adam & Company; offshore banking through RBS International, NatWest Offshore and Isle of Man Bank; and international private banking through RBS Coutts.
We provide financing, risk management and advisory services to major corporations, financial institutions and public sector clients in 39 countries.
We sell and underwrite retail and SME insurance over the telephone and internet, as well as through brokers and partnerships. Our brands include Direct Line, Churchill, Privilege, Green Flag and NIG.
Current position • UK and US economies in recovery • Outlook for gradual improvement • Indebtedness still a headwind • Emerging economics still outperforming
Possible risks • Interest rates stay near zero bound, or rise too rapidly
Our markets In the UK, which is our largest market, economic conditions improved in 2010. Total economic activity, as measured by gross domestic product (GDP), grew by 1.3 per cent in 2010. This followed a contraction of 4.9 per cent in 2009. However, a fall in activity in the final quarter of 2010 served as a timely reminder that, while conditions are generally improving, the recovery is fragile.
The recovery has helped many of our customers. Company trading profits grew for the first time since 2008. The unemployment rate levelled off at around 8 per cent, which is much higher than at the start of the recession, but still relatively low compared with the peak in other recessions. These factors supported commercial property prices, which were 6 per cent higher in December 2010 than they were a year earlier, according to International Property Databank. Most of those gains came in the first half of the year. The residential market was less robust: house prices fell in the second half of the year, dragging the year-on-year growth rate to -1 per cent in December 2010, according to the Nationwide index.
The US economy registered the fastest growth among our main markets. GDP grew by 2.8 per cent, following a contraction of 2.6 per cent in 2009. Despite this, the unemployment rate remained stubbornly high, which prompted a further loosening of monetary and fiscal policy. In Ireland, GDP contracted by an estimated 0.5 per cent in 2010, following a 7.6 per cent reduction in 2009, though there were tentative signs of strengthening towards the end of the year.
The general improvement in economic conditions must be viewed against a backdrop of financial market turbulence at various points in the year, most notably the sovereign debt crisis that affected the Eurozone periphery. This led to a marked fall in risk appetite in Q2 and, again, in Q4. Equity prices fell in the banking sector and there was a ‘flight to quality’, which pushed down long-term interest rates on government debt in some countries. This included the UK, where the 10-year gilt rate fell from more than 4 per cent at the start of 2010, to less than 3 per cent in October. UK gilt yields subsequently rose in the final months of 2010, in anticipation of interest rate rises in 2011.
Appropriate and effectively implemented policy standards are a prerequisite to achieving a standalone credit rating in line with the strongest in our international peer group, and unless we maintain an upper quartile control framework we will not succeed in this objective. In 2010, we began work on a revised Group Policy Framework (GPF) and this will continue to be rolled out as a key component of Risk Appetite during 2011. It has two very specific but correlated objectives which will apply at the individual policy level as well as the aggregate policy standard level: • to ensure that Risk Appetite is set in accordance with strong standalone credit ratings on a consistent basis; and
• to ensure an upper quartile control environment is maintained against relevant external benchmarks.
An enhanced approach to embedding policies will form an integral part of our communication and training with both our frontline staff and across RBS Risk Management. Our revised GPF is structured to require policy standard owners and policy sponsors to re-assess their policies on a regular basis and where shortfalls against industry practice are identified these are documented and addressed within an agreed timeframe.
Equally important as improved governance is strengthening the capabilities of our people and rebuilding trust with our external stakeholders to convince them that the culture which allowed the old RBS to fail has changed and changed for good. Our people agenda is tackling this through our performance management process and the way we incentivise our people as well as our risk skills and capabilities programme. These are as important for our customer facing staff as they are for our risk and control functions.
• Quantitative: encompassing capital, funding and liquidity, credit, country, market, operational, regulatory and business risks underpinned by stress testing.
• Qualitative: ensuring that the Group applies the correct principles, policies and procedures, manages reputational risk with sound controls and a strong risk culture.
• Governance • Organisation, people and culture • One risk community • Regulatory and operational risk coverage
The risk that the Group will incur losses owing to the failure of customers to meet their financial obligations to the Group.
The risk that the value of an asset or liability may change as a result of a change in market factors.
Asset quality has broadly stabilised, resulting in aggregate loan impairments 33% lower than in 2009. However, weakness in the Irish economy and falling property values have resulted in the doubling of Ulster Bank Group impairments (Core and Non-Core) in 2010.
We made further enhancements to the Group’s credit risk frameworks as well as the systems and tools that support credit risk management processes. We reduced the risk associated with legacy exposures through further reductions in Non-Core assets.
We strengthened the structural integrity of the balance sheet through active management of both asset and liability portfolios. Also, we have constructed a significant centrally-managed liquidity portfolio (£155 billion).
Due to the extended period of market volatility since August 2007, the level of modelled market risk has increased, despite a reduction in trading book exposure.
We have continued to enhance our market risk management framework. We have reduced trading and banking book exposures (with asset sales and write-downs within Non-Core and banking book available-for-sale assets in Core).
There were significant losses as a result of bodily injury claims in the UK motor insurance business impacting RBS Insurance.
The main risk types facing the Group, which are covered by the risk appetite framework are shown below:
The scale and scope of regulatory change remains at unprecedented levels, particularly in the area of prudential regulation (capital, liquidity, governance and risk management). Increased attention was paid to the treatment of systemically important areas such as recovery and resolution plans, remuneration and capital.
We manage regulatory change through active engagement with the FSA, other regulators and governments.
The most material risks from new regulations, or changes to existing legislation, are assigned an executive sponsor.
The Group, other global financial institutions and the banking industry have faced increased legal, regulatory and public scrutiny. We have continued to engage in discussions with relevant stakeholders regarding our Group’s efforts to satisfy all relevant standards and ensure compliance with applicable existing and prospective laws, rules and regulations.
We continue to review and enhance our regulatory policies, procedures and operations. During 2010, there has been specific, targeted focus on enhancing arrangements for handling customer complaints and managing the risks associated with Money Laundering and Sanctions and Terrorism Financing.
In 2010, we established the Group Sustainability Committee. We have also developed a framework for managing environmental, social and ethical risks to support our lending decisions. Businesses consider potential reputational risks and appropriate mitigants.
The triennial funding valuation for the main scheme was undertaken in 2010 with a schedule of contributions to be agreed with the Trustees.
The risks arising from the failure to meet stakeholders’ perceptions and expectations.
The risk that the Group may have to make additional contributions to its defined benefit pension schemes.
The changes we are making to strengthen the Core business further can drive RBS to success as a leading bank in its markets for many years to come.
M For biographies see pages 226-229 2010 was another challenging year for our customers and for UK Retail, against a backdrop of slow economic recovery, but our results reflect solid progress. We are open for business and we are here to help. Customer lending is up and we are on course to achieve our £8 billion mortgage net lending target for the period to February 2011. Mortgage balances increased by 9% during the year. At the same time, our impairments are down substantially because of our commitment to responsible lending. Customer deposits grew by 10%, faster than the market average, and savings balances grew by 13%. We have lowered our cost to serve by helping our customers understand and make better use of direct channels, as well as addressing inefficiencies through the roll-out of Lean techniques in our branches.
Changing how we work so that we serve our customers better As part of our determination to become Britain’s most helpful bank, in 2010 we changed the way we work: • we created a single Consumer Distribution business, reflecting the importance we place on delivering a great multi-channel experience to our customers; • we reorganised our Retail Centre so it’s now better set up to support the people serving our customers; and
2013 >15 c.50 <105target growth in customer deposits £1,372m operating profit
Listening is what a helpful bank does and we now have a programme in place to ensure our staff, including our Executives, hear first hand about the needs and frustrations of our customers. Through our Customer Charter we will show clearly what we’re doing as a result of what our customers tell us. In 2010, we opened early morning and late evening in our 200 busiest branches. In addition, we open 846 branches on a Saturday because customers told us that would make life easier. They also told us to keep things simple so this year we have rewritten all our banking hall literature and improved our customer review process, making it easier for customers to choose the right product for them. We have also simplified our overdraft charging structure for customers who go overdrawn without agreement and introduced ‘Act Now' pre-emptive text and e-mail alerts.
Highlights of their findings include: • answering 91.4% of calls in under 60 seconds in our UK telephone banking call centres against a target of 90%; • meeting a commitment to maintain local banking services where we are ‘last bank in town’, keeping 146 ‘last bank’ branches open across the country, against a target of 100; and
• against a target of simplifying and rewriting all our branch literature in line with customer feedback, we managed to make available the new literature from end of February 2011.
Resolving customer complaints fairly, consistently and promptly The treatment of complaints was a big focus for the industry in 2010. We worked hard to get better at this. We have trained over 10,000 designated complaint handlers so that we can resolve customer complaints more fairly and consistently and address the root causes of complaints. Through our Customer Charter we are also going one step further by committing to be completely transparent about the top five customer complaints.
We launched the Start-Up Hotline, which received nearly 1,700 calls by the end of 2010. It provides practical help and advice to budding entrepreneurs. Business experts can discuss with potential start-ups the factors that affect their market. Our Business Planning Software enables new firms to prepare a business plan, and our free business plan review service provides constructive feedback on its development.
Our SME Business Knowledge Hub provides free access to a range of excellent business guides and support materials, including an Online Business Review tool. We recognise that financial management is important for our customers and have produced a practical guide with information on cashflow management. It also highlights the factors the Bank will look at when assessing credit requests.
UK Corporate is the leading provider of banking, finance and risk management services to the corporate and SME sector in the United Kingdom. It offers a full range of banking products and related financial services through a nationwide network of relationship mangers, and also through telephony and online channels. The product range includes asset finance through the Lombard brand and invoice finance through RBS Invoice Finance.
For the period from March 2010 to February 2011, RBS Group had agreed to make £50 billion of gross new lending facilities available to customers through its Business & Commercial, Corporate and Institutional Banking and GBM businesses. We launched a number of initiatives to ensure firms and their advisers know we are making lending available.
In January, we announced our Manufacturing Fund, pledging to make £1 billion of new loans available on competitive and flexible terms to UK manufacturing businesses.
The Manufacturing Fund won the ‘Innovation in Product Design – Business Banking’ category at the Financial World Financial Innovation Awards. We also created £2.15 billion of specific lending programmes to support infrastructure and public sector developments, including social housing, local authorities and renewable energies.
We supported the creation of the Enterprise Finance Guarantee (EFG) in 2008, which aims to improve the availability of working capital to SME firms. Initially available until March 2010, it was extended to March 2011. By December 2010, we led the field in taking applications for the EFG, accounting for over 40% of all loans drawn under the scheme.
In 2008, we agreed a £250 million funding agreement with the European Investment Bank, whereby funds were provided to eligible customers at preferential borrowing rates. The success of the scheme led to a second £300 million tranche being agreed in July 2010.
We remain a leader in helping UK corporate clients to raise funds from the stock market, as well as a range of debt products. In 2010, we led on the arrangements for two of the top three UK corporate equity deals.
However, we continue to look for ways to improve how we deliver services. A major contribution to that is our transformation programme, which we call Genesis. When we put it together, we spent over 4,000 hours listening to our customers and people in developing the programme’s design. We believe that Genesis will make our customers’ banking experience simpler, more responsive and better suited to their needs.
We also took steps to deal with the legacy of the past. In line with the EU’s divestment requirements, in August 2010 we announced a sale agreement with Santander UK plc for 318 branches. This includes the SME accounts attached to these branches, as well as our Direct SME business and certain mid-sized corporate customers. Our plans for separating and segregating this business are well advanced and we expect the process to be completed by the end of March 2012. We will try to keep any disruption for customers and staff to a minimum.
Investing to improve service to our clients In 2010, we took a hugely important step to enhance the service we give clients by investing in a new IT platform. Although it is invisible to our clients, it will transform how we do business and free our private bankers to spend more time providing a high quality service. This significant investment reflects the Group’s commitment to the division, something further demonstrated by support for our ambitious hiring strategy, which enabled us to recruit high quality people across all of our businesses.
2010 also saw Coutts embrace social media. A Twitter service was launched in January and the Coutts YouTube channel went live in December. These steps on the social media ladder enable us to share our knowledge around investments and financial markets faster then ever before.
2013 <50 <30target c.£1m donated to worthwhile causes by Coutts Charitable Trust >£68bn of assets under management
Wealth and the Coutts24 team pride themselves in ‘going the extra mile’ when responding to enquiries. This was evident during the volcanic ash cloud restrictions. Stranded clients experienced a range of financial and travel issues but received support from Coutts24 with payments, short-term credit sanctioning, booking new journeys and reserving hotels.
Supporting entrepreneurs In 2010, we hosted our 5th annual Coutts Prize for Family Businesses, with MI Dickson and Shepherd Neame winning the top awards in their turnover category.
Our launch of the Coutts Social Enterprise Advisory service demonstrated our commitment to entrepreneurs. It aims to match clients with social entrepreneurs looking for funding and/or mentoring. The Entrepreneurs’ magazine and Coutts Entrepreneur’s video were launched – the former reached 1,500 clients, the latter showcased the breadth of industries across which our entrepreneurs work. In RBS Coutts, our businesses on the Isle of Man and Jersey continued to focus on entrepreneurs, sponsoring awards and events to raise our profile. And our sponsorship of London Fashion Week was part of a programme designed to build our profile with entrepreneurs from the creative industries, which play such a vital role in their contribution to our economy.
Focusing on women clients We ran more than 60 events solely for women, which were attended by around 1,900 clients and prospects. The continuing success of the Coutts Woman website has led to plans for a global roll-out in 2011. The RBS Coutts FT “Women in Asia” awards helped us to build on the launch of the RBS Coutts Woman initiative and lay the foundations for a global approach to targeting this valuable segment. The year also saw the creation of the Coutts Women Network (CWN), a series of tailored events. Using mentoring and professional development programmes, it aims to create an inclusive and supportive environment for women.
Being recognised for the quality of our service RBS International launched its three customer promises in 2010, a campaign which saw the business achieve world class levels of Net Promoter Scores. It was also shortlisted in five categories at the National Customer Service awards, with a Jersey employee winning ‘Frontline Professional of the Year’. In addition, two RBS International products, Autopilot and Navigator, won the Innovation Award in the 2010 Investment Life and Pensions Moneyfacts awards.
Supporting good causes In 2010, the Coutts Charitable Trust donated around £1 million to worthwhile causes and Wealth Management staff in the UK have raised around £300,000 for charities like the NSPCC, Maggie’s Cancer Centres and the Prince’s Trust. The Coutts Senior Client Partners chose ChildLine as their nominated charity in 2010, raising over £215,000, which would fund a ChildLine supervisor for three years.
Our tradition of supporting the performing arts goes back over 150 years and continued in 2010. This included Coutts’ principal sponsorship of the Almeida Theatre in London (for the eighth successive year) and Adam & Company’s sponsorship of the Scottish Ballet’s Autumn Season, Geometry and Grace, for which it received a Commendation in the Arts & Business Scotland Awards. These sponsorships are an important element of our client centric service. It’s an approach that has helped us to acquire new clients across Wealth Management. In Coutts for example, there were 4,833 new clients in 2010. And of these, over 1,000 were referred to us from other divisions within RBS, demonstrating the breadth of relationships we have across the Group.
Our sponsorship of London Fashion Week is part of a programme designed to build our profile with young entrepreneurs.
Our investment in new systems is designed to improve the service we give our clients.
Healthy income growth, combined with lower impairments and good cost control led to an increase in operating profit of 12%. With a 21% loan-to-deposit ratio, GTS remains an important source of liquidity for the wider Group.
We worked closely with colleagues in Global Banking & Markets (GBM), Citizens, Ulster Bank and UK Corporate to develop and fine-tune our products and services. Following its 2009 launch, our Global Network Banking (GNB) business, a joint initiative with GBM, has concentrated on fast-growing markets, such as China and India, and set up an international network advisory team. It also introduced a joint programme with UK Corporate to showcase our business capabilities in China.
Global Transaction Services (GTS) ranks among the top tier of global transaction banks, offering payments, cash and liquidity management, trade finance, and commercial card products and services. Through our network and our extensive partner bank agreements we are able to support and connect customers across 128 countries and we offer Merchant Acquiring Services via our association with WorldPay.
2013 <50 <20target >4.6bn worldwide payments per year product innovations in the year
• MaxTrad Digisuite provides a secure online service for firms with global supply chains and reduces the need for expensive documentation and courier services.
Being recognised for the quality of our service Our awards in 2010 reflect the quality and international coverage of our businesses. Global Finance magazine awarded us: • Best Bank for Liquidity Management (Western Europe) • Best Continuous Linked Settlement Bank (Western Europe and North America)
• Best Trade Finance Bank (Netherlands) • Best Supply Chain Finance Provider
In April, we completed the legal separation and integration of the former ABN AMRO NV businesses. The parts acquired by RBS now operate under a unified brand which gives us greater opportunities for our business and our clients. Our new banking platform in the Netherlands successfully migrated more than 40,000 corporate accounts to RBS.
In line with the settlement agreed with the EC in 2009, we announced and completed the divestment of our Global Merchant Services (‘WorldPay’) business to Advent International and Bain Capital. Under the terms of the sale, RBS will retain a 19.99% stake in the business, and will refer our customers to WorldPay for merchant acquiring products and services.
Going onto the front foot The launch of our new customer proposition highlights the strengths of our business, enhances our market profile and helps to differentiate us from the competition. The combined strengths of our business include our global reach, product expertise, customer service, technology platforms and most importantly our people. These are underpinned by our continuing commitment to customers and our ability to generate new ideas and products.
In 2011, we will continue to build on the momentum of 2010 and to position GTS as a stable and powerful transaction bank for our customers and our shareholders. GTS will move forward under new leadership, with Scott Barton taking over as CEO in January 2011. Brian Stevenson will work with Scott in his new capacity as Chairman, GTS.
We partnered with the Government’s UK Trade & Investment initiative, through their Asia Task Force, to present a series of events entitled Doing Business in Asia: Meet the Experts.
Conditions in Ireland’s economy remained very challenging indeed throughout 2010 and our results reflect that. Continuing stresses in property markets, together with pressure on borrowers who depend on consumer spending resulted in increased losses on corporate lending. Higher unemployment and lower disposable incomes contributed to higher mortgage impairments. In Northern Ireland too, the economy was weak and unemployment increased over the year.
Lower costs was one objective of the five-year strategy we published in 2009. We will continue to make changes inside our business to help us achieve those aims. But we recognise that if 2010 was tough for us, it was just as difficult for our customers and we have tried hard to support them. In 2010, we said that we wanted to become Ireland’s most helpful bank, across the whole island. Helping our customers helps our business too, making it stronger and more resilient for the future.
Listening to customers and providing ‘Help For What Matters’ In September, we launched the ‘Help For What Matters’ programme. We listened to what our customers need and developed commitments that focus on the issues that matter to them.
Ulster Bank is a leading bank in Northern Ireland and the Republic of Ireland. It provides a comprehensive range of financial services through both its Retail Markets division, which has a network of branches and operates in the personal and bancassurance sectors, and its Corporate Markets division which provides services to business customers, corporates and institutional markets.
• understanding and support for businesses, including two-year free transactional banking for start-ups and an on-line business support programme.
Focusing on customers and service We are working with our personal and business customers every day to support them in dealing with any financial difficulties they may be experiencing. Initiatives such as Flex and Breathing Space in retail banking demonstrate to our customers that we are committed to them over the long-term. Our smallbusinesscan online community in business banking is well received and continues to grow. It now attracts over 15,000 small and medium enterprise visitors each month, allowing them to access knowledge and share insights, ideas and experiences with like-minded peers to assist the survival and growth of their businesses.
In 2010, we increased the numbers of new retail customers to Ulster Bank and made strong progress in growing our deposit franchise. We also extended our Private Banking business into the Republic of Ireland, with new relationship managers based in Dublin and Cork.
We became the first bank in the Republic of Ireland to launch an iPhone mobile banking application. In October, we extended our mobile phone banking services to a wider range of mobile phones, enabling our customers to manage their money on the move and helping them reduce avoidable current account charges.
In business banking, over the course of 2010 we achieved an average Customer Satisfaction Index of 89% for all our business banking touchpoints. We continued to forge strong links with key small business support and lobbying bodies island-wide through our business engagement programme.
In September, we launched a new campaign to support early-stage businesses, including access to a Start Up Knowledge Centre and Start Up Live events in 14 different locations.
Getting fit for the future The ‘Lean’ programme is part of our strategy to transform the way we do business so that we can serve customers better. It will also help us to become more efficient. Behind every interaction with a customer is a process and it is important to get this process right from start to finish. If we do that, it will help us to be Ireland’s most helpful bank.
We became the first bank in the Republic of Ireland to launch an iPhone mobile banking application.
Our online business resource initiative www.smallbusinesscan.com attracts over 15,000 SME visitors each month.
We have seen a return to operating profitability and a substantial increase in new accounts opened. We are better placed to respond to external factors, such as regulatory changes and a subdued and uncertain US economic recovery. Though we are still at the early stages of our plan, momentum is building towards our aim of being a leading super-regional bank.
US Retail & Commercial added more than 52,500 new customer accounts and 12,500 small business accounts in the year to 30 September 2010. Commercial Banking has expanded its reach into niche markets with significant growth opportunities, including Commercial Enterprise Banking, Health-Care Banking, Capital Markets/Debt Syndication and Franchise Finance.
US Retail & Commercial provides financial services primarily through the Citizens Bank, Charter One and RBS Citizens brands. It is engaged in retail and corporate banking activities through its 1,500 branch network in 12 states in the northeastern quadrant of the United States and through non-branch offices in other states. It ranks among the top five banks in New England (based on deposit market share).
US Retail & Commercial launched the Student Money Bundle, a new packaged account offering a range of services and incentives for students. GoalTrack Savings is a programme that allows customers to set their own savings goals and earn a bonus for achieving them. Since it was introduced in December 2009 it has seen over 26,000 new enrolments, with more than $42 million in committed savings goals.
Restructuring for the future In line with the settlement agreed with the EC in 2009, we announced and completed the divestment of our Global Merchant Services (GMS) business, including RBS WorldPay in Atlanta. Under the terms of the sale to Advent International and Bain Capital, RBS will retain a 19.9% stake in the business, and can refer its customers to them for global merchant products and services. In May 2010, we also completed the exit of our joint arrangement with Kroger Personal Finance.
Commercial Banking has partnered with Business Services to implement AFS, our new loan origination and servicing platform. This will enhance our relationship managers’ ability to respond quickly to their customers’ needs. We also invested in over 150 days of training programmes aimed at enhancing sales management skills across different products and areas. More than 700 staff from Commercial Banking, GTS and Foreign Exchange desks participated in the training.
Citizens was named second in the US in delivering the best experience for small business customers, moving up from No.10 in 2009.
“Only by truly understanding our clients’ needs can we apply our expertise to its best effect. That is why long-term customer relationships are so important at RBS.”
GBM had a reasonable set of financial results. Even as the make-up of our business made the revenue environment challenging, we reduced costs and impairments to post an above-target return on equity of 16.6 per cent. We invested in reinforcing our core platforms and contributed to the restructure of the RBS Group, working with the Non-Core Division on the sale of a GBP1.4 billion portfolio of primarily senior leveraged loans and of GBP3.9 billion of project finance assets.
• Cheung Kong Infrastructure and Power Assets Holdings: Sole financial advisor and lead mandated arranger in the GBP5.8 billion purchase of EDF’s UK electricity distribution networks.
• RWE: Joint bookrunner on the largest ever euro corporate hybrid bond sale.
• CIBC: Inaugural USD2 billion three-year and USD1.85 billion five-year covered bonds, which re-opened the US market after a three-year hiatus.
Global Banking & Markets (GBM) provides financing, risk management and advisory services to major corporations, financial institutions and public sector clients in 39 countries.
• Operating profit excluding fair value of own debt fell by 42%, reflecting sharply reduced revenue, partially offset by lower costs and a significant improvement in impairment losses
GBM engaged with regulators to help our clients, and our own people, fully understand the various changes proposed to banking supervision. We invited expert regulatory speakers to client meetings in cities in Europe, Asia Pacific and the US, giving our customers the rare opportunity to ask technical questions on how changes will affect their businesses. We also acted as bookrunner on the first Solvency IIcompliant issue in the market.
Making global connections We maximised our 39-country network to help customers manage risks between regions and access funding around the world, cementing our position in the world’s biggest economies and increasing our presence in high-growth markets.
In Europe, we delivered some of the largest transactions of the year. These included Switzerland-based Glencore’s USD2.5 billion repurchase of the Prodeco coal mine in Colombia and the EUR3.6 billion sale of German drugs producer Ratiopharm. Improvements in the equities business led to Greenwich Associates ranking us number one in Overall Service Quality for retail structured products in Europe.
Investing in risk management We continued to improve how we manage risk, introducing systems and processes that optimised capital and made us more efficient. We improved the way in which we manage our exposure to derivatives and introduced an Operational Data Cache, which consolidated all sources of data into a single real-time database. A global investment programme, launched in 2009, is nearly complete and on target to deliver its objective of establishing front-to-back systems that improve client transactions and support business growth. We envisage further investment.
We helped GBM reach out in our local communities and make a difference to young people from disadvantaged backgrounds. The GBM in the Community programme, launched in September, provided an avenue through which employees volunteered their time and donated money. Together we gave GBP1.7 million to communities in which we operate and donated more than 16,000 hours of employee time.
Our clients voted us in the global top five for foreign exchange and one of the top five dealers for derivatives.
Our debt and capital markets business was voted Euromoney Best Debt House in the UK and the Netherlands.
RBS Insurance 2010 was a disappointing year financially. A 2% fall in income and increased claims, offset partly by a 7% reduction in expenses led to a loss of £295 million. However, the actions we took to deal with the challenging environment contributed to a clear improvement in our underlying financial performance in the final quarter.
Working hard for customers 2010 saw some of the worst weather conditions in the UK for over 20 years. Drivers got stuck in the snow, cars failed to start and the treacherous conditions led to traffic collisions. Our accident repair centres concentrated on getting customers back on the road, repairing nearly 60,000 vehicles in January and February alone. Green Flag was called out over 220,000 times in January and February, battling through difficult conditions to reach and help stranded customers.
It was a challenging year for air travellers, too. The volcanic ash cloud brought air travel to a temporary standstill in Europe, while several holiday companies and airlines went out of business. Our travel insurance brands assisted over 12,000 customers by taking a flexible approach to their policies’ terms and conditions.
• Performance was adversely affected by significant weather events in Q1 and Q4 and the impact of bodily injury claims
We implemented pricing changes that reflect the increased risk and frequency of bodily injury claims. To reduce this risk further, a new ‘rating engine’ was implemented in the own brands motor business. It dramatically increases the flexibility in pricing risk, reducing the time required to deliver new risk and pricing strategies. It will continue to be rolled out among other products.
A pro-active programme of investment in people, processes and technology ensured that we were ready for the introduction in April of the Ministry of Justice’s new insurance claims handling procedure. The reforms enable genuine personal injury claimants to receive fair compensation more quickly and provides greater control over costs for insurers.
We are committed to protecting customers from the scourge of uninsured drivers. In November, Direct Line hosted a seminar with the industry, politicians and police to promote wider discussion about the impact of uninsured drivers and potential measures to stop it.
NIG extended its free Risk Aware risk management service to new customer areas. It provides a tailored assessment of risk management procedures and assists with the implementation of any recommended improvements. NIG also rolled out a new mapping tool, covering the whole of the UK, which provides underwriters with specific geographical data on issues such as the risks of flood.
Refocusing for the future We announced plans to restructure our UK office network to create new Centres of Excellence. This will help to make better use of our properties, lower costs and promote best practice across our functions. Fewer sites will enhance our ability to serve customers by allowing new technology and telephony systems to be introduced at a faster pace in the future.
Our ‘Lean’ programme is designed to become embedded in how people work, looking for ways to improve customer experience and staff engagement, whilst eliminating activities that don’t add value. It has achieved significant results, including an increase in the volume of GBM customer calls handled at first point of contact by our Corporate Service Centres from 55% to 94%.
Managing change RBS is undertaking one of the largest ever corporate restructurings, so we face a huge and varied change agenda. Helping divisions to plan, implement and adapt to change is hugely important. In 2010, Business Services provided specialist support for the processes involved with the EU mandated divestments, including the sale of 318 UK branches and associated infrastructure.
The level of restructuring that is required unfortunately involves some difficult decisions. As part of our own strategic review, we announced plans in 2010 for a further 3,500 potential redundancies in the UK, to be implemented over the next two years. We have committed to be open and transparent, communicating upfront with our staff. We have engaged with UNITE in the UK and other partners globally to explain the rationale for the change and to gain their co-operation in how it is implemented.
To minimise the need for compulsory redundancies, we try hard to redeploy affected staff within the Group.
Innovating We focus on innovation in our operations. We use leading edge technologies in service innovation. New consumer devices and networking technologies enhance the connections between our customers and employees. Since its launch in 2009, our ‘Mobile Money’ application has attracted over 600,000 users and we have helped to launch similar products across other areas of the Group.
Managing operational risks Our Security & Risk team aims to protect our customers, our information and our people against security and fraud threats. We help the business and our customers to understand the operational threats and to take action to minimise risks. For example, our ‘Trusteer Rapport’ free software has been downloaded by over four million customers, helping to protect their online banking details and reduce the risk of identity theft and fraud.
389,000m2 reduction in property footprint since 2009 of GBM calls handled at first point of contact by our Corporate Services Centre
We provide business continuity support, enabling the Group to continue to deliver key products and services in the event of disruption.
RBS Risk Management RBS Risk Management is responsible for developing and embedding risk policy, measurement and frameworks to ensure that risk is identified, managed and controlled across the Group. The management of risk is a fundamental activity performed throughout all the Group's Businesses. It underpins the Group's performance and future success. It is critically important that the adequacy and effectiveness of our risk management processes are of the highest standard and subject to continuous review and enhancement.
The Treasury function has focused on driving improvements to the Group’s liquidity, funding and capital position. In 2010, Finance has played a central role in the initiative to dispose of EU-mandated divestments as well as assessing the implications of changes in the regulatory environment.
Finance’s key objectives include a transformation programme to improve the efficiency of the function over the next three years. The programme envisages the creation of a world class finance function through a number of initiatives including substantial investment in finance and risk systems infrastructure.
Group Strategy and Group Corporate Finance Our Group Strategy and Corporate Finance team supports the Chief Executive, Chief Financial Officer and the Executive Committee in the development of the Group’s strategy. Its objective is to ensure that the Group has the right portfolio of businesses, active in the right markets, supported by the appropriate allocation of capital and other resources. The team plays a key role in the Group’s disposal activity.
Group Legal, Secretariat and Regulatory Affairs & Compliance Our Group Legal, Secretariat and Regulatory Affairs & Compliance functions play a vital role in setting a framework within which the Group can deliver long term sustainable returns. The team works in partnership with the businesses it supports. It adopts a commercial approach but retains its independence and professional judgement in order to drive a culture of compliance and good governance designed to protect the Group's franchise.
RBS Communications RBS Communications manages our relationships with external stakeholders and makes sure we keep our employees informed about developments in the business. RBS wants to be open to stakeholders and during the year RBS Communications helped elected officials, commentators and others gain a better understanding of our business and our plans.
Helping to deliver the Strategic Plan The Non-Core Division is a central pillar of the Group’s Strategic Plan, helping to make RBS stronger and safer. We help to lower the Group’s risk exposure, strengthen its funding position and allow management to focus on the Core Bank. As we approach the mid-point of our five-year journey, we have achieved significant progress and are on-track to meet our targets.
While our disposal programme has attracted the most attention, the runoff programme and asset restructuring deals have also been important.
• International Businesses & Portfolios made huge progress in the disposal of non-core country or whole businesses. Sale agreements were reached for our Non-Core businesses in Latin America, India, Kazakhstan, Pakistan and the United Arab Emirates, as well as for part of our Asset Management business and for our Invoice Finance businesses in Germany and France. We completed the transfer of assets in six Asian countries to ANZ Group.
• Across all areas, our run-off programme has helped to deliver significant reductions through holding assets to maturity, exploring ways to achieve earlier repayment and identifying options for assets to be refinanced elsewhere.
• In line with the settlement agreed with the EC in 2009, we completed the sale of substantially all of RBS’s interest in RBS Sempra Commodities.
The Non-Core Division separately manages assets that the Group intends to exit from by 2013. The division contains a range of businesses and asset portfolios, primarily originating from GBM, linked to proprietary trading, higher risk profile asset portfolios (including excess risk concentrations) and other illiquid portfolios. It also includes a number of portfolios and businesses that the Group has concluded are no longer part of its core strategy.
The active management of our market risk exposures helped to achieve a significant improvement in income from trading activities, turning a £5.2 billion loss in 2009 into a £31 million loss in 2010. Our exposure to monoline insurers has been managed down, while hedging and credit protection helped to reduce day-to-day swings even when market volatility was high.
Impairments continued to fall, reflecting the reduction in assets and improvements in the underlying quality of the remaining portfolio. Impairments totalled £5.5 billion in 2010, down from £9.2 billion in 2009.
However, there was upward pressure on Risk Weighted Assets from procyclical increases in risk weights and from regulatory changes. Offsetting this has been the progress achieved in asset disposals, run-offs and strengthened risk management. As a result, RWAs have reduced from £171 billion at the start of the year to £154 billion at year-end.
We are ahead of our plan and gathering momentum for the further work ahead. We are confident that we have the team in place to continue to deliver one of the largest corporate restructurings ever undertaken.
We passed the £100 billion milestone in our journey, reducing third party assets to £138 billion at year-end.
Following the agreement of the terms of the Scheme in December 2009, we have enhanced and widened our training programme for staff and have restructured our operating procedures to accommodate the
It is our opinion that the APS continues to provide valuable support during our restructuring, providing additional confidence to the market against the backdrop of economic uncertainty. But we continue to target an exit from the APS within the last two years of the Strategic Plan (2012-13), subject to regulatory approval.
Building a sustainable RBS ‘Sustainability is fundamental to how RBS is changing the way we operate. It is a core part of our thinking and we have made improvements in this area over the last year. However, we are mindful that there is still a long way to go.’
At RBS, sustainability means two things. First, we consider the environmental, social and ethical consequences of our activities and then we manage our business appropriately. Secondly, we look to capitalise on the opportunities for our businesses that sustainable technologies present.
We work actively with stakeholders to find out what they think about us and how we do business. The table below outlines some of the ways we consulted stakeholders in 2010.
The Group Sustainability Forum is a network of senior managers from each division that makes sure we put into practice the priorities the GSC sets. The executive-led Environment Working Group monitors environmental developments, commercial opportunities, operational impacts, and communications and engagement.
Our Employee Opinion Survey gathered the views of over 119,000 employees, a response rate of 81%.
The Group is involved in a number of industry forums including both the Equator Principles (EPs) and UN Global Compact (UNGC) which have a specific focus on sustainability issues. Last year we took the lead in one of the EPs working groups and became Chair of the UK Network of the UNGC.
Fair banking We are committed to treating our customers to the highest of standards, and being transparent about the products and services they can expect from us. This theme covers: responsible lending practices, customer service (including dealing with customer complaints), access to financial services, and financial education.
Employee engagement Our employees are the core of our organisation and it is very important that we treat them fairly and responsibly. It has been a difficult year for some of them as we continue to restructure the Group. So it’s vital that as we build the new RBS we support our people throughout these changes by involving and listening to them as much as possible.
How others have judged us Every year independent, external bodies judge our performance and compare us with our peers.
We have participated in the Carbon Disclosure Project since its inception and in 2010 received the joint highest score for financial services globally, scoring 93 and an ‘A’ rating for performance, a significant improvement since 2009. We were also included in the Dow Jones Sustainability Index for the third year running, scoring 75%, and in the FTSE4Good index.
Building on its commitment to widen access to financial education, Ulster Bank launched its own MoneySense for Single Parents Guide in 2010. This was produced with OPEN in the Republic of Ireland and Gingerbread in Northern Ireland. This is the first in a set of financial ‘life guides’ designed to give more practical support based on people’s specific circumstances.
We introduced a new magazine called Pocket Money for families, reaching an audience of over 600,000 people in the UK. New Business Start-Up Guides were launched on NatWest.com, and our MoneySense booklets for adults were revised and written in plain English as part of the UK Customer Charter commitment to make banking easier.
The Community Reinvestment Act in the US encourages banks to lend to low and moderate income communities. In 2010, Citizens and Charter One provided more than 275 financial literacy programmes, educating over 13,000 people. Citizens has also partnered with the Federal Deposit Insurance Corporation to provide Money Smart Training, helping people outside the financial mainstream enhance their money skills and create positive banking relationships. Citizens’ ‘Gear for Grades’ programme provides school supplies for children whose families cannot afford them. Since its inception in 2003, ‘Gear for Grades’ has served over 150,000 school children.
Supporting enterprise Our Supporting enterprise programme works with partners to support potential business start-ups and helps to build the capability of alternative means of finance and support for would-be entrepreneurs who would not normally qualify for direct support from banks.
We have a long standing relationship with The Prince’s Trust. We are the largest corporate sponsor of The Prince’s Trust Enterprise Programme, which helped nearly 5,000 young people in 2010. We are proud sponsors of their new practical guide to starting up your own business. This book condenses the years of expertise The Prince’s Trust has gained when helping young people in business and includes real life stories of success and advice from business leaders. This is just one of the ways we have supported them through our corporate partnership. We also provide support for The Prince’s Scottish Youth Business Trust.
This programme provides simple and practical tools to help small businesses gain insights and build a network of trusted contacts, enabling start ups to progress and promote growth.
Our microfinance programme in India goes further than simply lending to Microfinance Institutions (MFIs). We have also invested in 'technical assistance' to create and sustain robust, creditworthy MFIs in underserved regions. This programme has supported 37 MFIs, facilitating access to finance for over 200,000 households. Also in India, our Livelihood projects improve communities' income generating abilities through a range of interventions including training, investment and market linkages. We currently have 17 Livelihood projects across 14 states, reaching over 63,000 households.
2010 also saw the launch of the RBS SE100 Index, a unique report that provides information on the growth and impact of the top 100 social enterprises in the UK. This will play a vital role in promoting the success and diversity of this sector.
Employee and community engagement Our Employee and community engagement programme supports the great work that our employees already do in their communities and encourages further involvement to strengthen our support for the communities we live in.
Our Global Banking and Markets division launched a new, bespoke volunteering programme across all of its businesses, targeting four areas where it hopes to have a lasting impact on the lives of children and young people: education, health, social welfare and enterprise and employability. In 2010, over 1,000 employees volunteered their time in support of this programme.
We sponsored the launch of The Prince’s Trust’s first start-up guide book – Make It Happen. Years of expertise and knowledge have been distilled into this highly practical book, designed to get young entrepreneurs started. Our sponsorship will ensure that The Trust will be able to give a free copy to every young person they start up in business for the next three years, around 6,000 copies in total.
The Group Customer Charter set out 14 clear commitments to our UK retail customers in 2010. Within these, we set ourselves 25 specific and stretching goals and we achieved 20 of these outright in the first 6 months.
The Citizens CollegeSaver account rewards customers who save money for a child with a $1,000 bonus plus the accrued interest when the child turns 18. The enrolment age was extended from 6 to 12 years in 2010.
We work with a range of Community Development Finance Institutions and Credit Unions as part of the Trusted Partner programme.
In 2010, 774 employees helped to deliver our MoneySense programme throughout the UK by devoting their time to give lessons in schools.
We support youth enterprise through sponsoring the Prince’s Trust Enterprise Programme, the Prince’s Scottish Youth Business Trust and Youth Business International in Hong Kong, France and Russia.
In 2010, 380 employees volunteered for The Prince’s Trust, raising a total of over £250,000.
Through our supply chain we spend nearly £8.5 billion each year on goods and services, of which £6.2 billion is spent in the UK.
Our free online data protection software, Rapport, currently protects 4.6 million online customers from fraud.
The Security and Risk team work closely with authorities to share information and help prevent financial crime. This includes a focused intelligence sharing partnership with Greater Manchester Police, UK.
A number of employees get involved in Safety, Health and Wellbeing programmes.
Every year we review our suppliers to ensure that the appropriate controls are in place to ensure customer information is protected.
BTCV is an environmental charity and one of our nine charity partners that provides volunteering opportunities for employees to get involved in.
We are actively involved in the management of the United Nations Global Compact and Equator Principles initiatives.
We are sponsoring Climate week in the UK, a national awareness raising campaign.
We have over 600 environmental champions in the Group helping to engage colleagues and make a difference to our carbon footprint at a local level.
The Group Community Cashback scheme allows employees to claim cash for the charities they support by volunteering or fundraising in their own time. In 2010, 4,300 awards totalling £1.2 million were given to over 2,500 charities. We continue to match donations our employees make to charity via their salary, and this year we supported over 3,000 charities directly in this way.
Overall, more than 39,500 employees gave their skills, time and money to make a difference in the communities that we operate in. The Group supported those efforts financially and by giving employees almost 170,000 hours off work to volunteer.
The geographic analysis in the Business Review, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have been compiled on the basis of location of office - UK and overseas. Management believes that this presentation provides more useful information on the Group's yields, spreads and margins of the Group's activities than would be provided by presentation on the basis of the domestic and foreign activities analysis used elsewhere in this report as it more closely reflects the basis on which the Group is managed. ‘UK’ in this context includes domestic transactions and transactions conducted through the offices in the UK which service international banking transactions.
International Financial Reporting Standards As required by the Companies Act 2006 and Article 4 of the European Union IAS Regulation, the consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together ‘IFRS’) as adopted by the European Union. They also comply with IFRS as issued by the IASB.
RBS Holdings N.V. (formerly ABN AMRO Holding N.V.) In 2007, RFS Holdings B.V., which was jointly owned by RBSG, the Dutch State (successor to Fortis) and Santander (the “Consortium Members”) completed the acquisition of ABN AMRO Holding N.V..
RFS Holdings B.V. has now substantially completed the separation of the business units of ABN AMRO Holding N.V.. As part of this reorganisation, on 6 February 2010, the businesses of ABN AMRO Holding N.V. acquired by the Dutch State were legally demerged from those acquired by the Group and were transferred into a newly established company, ABN AMRO Bank N.V. (save for certain assets and liabilities acquired by the Dutch State that were not part of the legal separation and which will be transferred to the Dutch State as soon as possible).
Following legal separation, RBS Holdings N.V. has one direct subsidiary, The Royal Bank of Scotland N.V. (RBS N.V.), a fully operational bank within the Group. RBS N.V. is independently rated and regulated by the Dutch Central Bank. Certain assets within RBS N.V. continue to be shared by the Consortium Members.
In future periods, there will be no significant differences between pro forma and statutory results other than presentation aspects discussed below.
Statutory results The statutory results of the Group include the results and financial position of RFS Holdings, the entity that acquired ABN AMRO (see page 50). The interests of the State of the Netherlands and Santander are included in non-controlling interests.
Glossary A glossary of terms is detailed on pages 434 to 439.
Description of business Introduction The Royal Bank of Scotland Group plc is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, the Group operates in the United Kingdom, the United States and internationally through its two principal subsidiaries, the Royal Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing banks whose origins go back over 275 years. In the United States, the Group's subsidiary Citizens is a large commercial banking organisation. Globally, the Group has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers in over 50 countries.
During the year, the company converted non-cumulative convertible preference shares into ordinary shares in the company. As a result, HM Treasury’s holding in the company’s ordinary shares reduced to 67.8% and its economic interest reduced to 82.8%.
Organisational structure and business overview The Group’s activities are organised on a divisional basis as follows: UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through the RBS and NatWest networks of branches and ATMs in the United Kingdom, and also through telephone and internet channels. UK Retail launched the Retail Customer Charter in June 2010 and progress against the commitments made will be formally reported in March 2011.
Global Banking & Markets (GBM) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit and mortgage markets and portfolio management & origination.
Competition The Group faces strong competition in all the markets it serves. Banks’ balance sheets have strengthened whilst loan demand has been subdued as many customers have sought to de-lever and the UK economy has proved slow to recover. Competition for retail deposits remains intense as institutions continue to target strong and diverse funding platforms for their balance sheets.
RBS Insurance competes in personal lines insurance and, to a more limited extent, in commercial insurance. There is strong competition from a range of insurance companies which now operate telephone and internet direct sales businesses. Competition in the UK motor market remains intense, and price comparison internet sites now play a major role in the marketplace. These sites are now extending their scope to home insurance and other lines. RBS Insurance also competes with local insurance companies in the direct motor insurance markets in Italy and Germany.
The Group’s ability to implement its strategic plan depends on the success of its efforts to refocus on its core strengths and its balance sheet reduction programme. As part of the Group’s strategic plan and implementation of the State Aid restructuring plan agreed with the EC and HM Treasury, the Group is undertaking an extensive restructuring which may adversely affect the Group’s business, results of operations and financial condition and give rise to increased operational risk and may impair the Group’s ability to raise new Tier 1 capital due to restrictions on its ability to make discretionary dividend or coupon payments on certain securities.
The actual or perceived failure or worsening credit of the Group’s counterparties (including monolines or other credit insurers) or borrowers and depressed asset valuations resulting from poor market conditions have adversely affected and could continue to adversely affect the Group.
The Group is subject to substantial regulation and oversight, and any significant regulatory or legal developments could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition. In addition, the Group is and may be subject to litigation and regulatory investigations that may impact its business, results of operations and financial condition.
As a result of the UK Government’s majority shareholding in the Group they can, and in the future may decide, to exercise a significant degree of influence over the Group including suspending dividends and certain coupon payments, modifying or cancelling contracts or limiting the Group’s operations. The offer or sale by the UK Government of all or a portion of its shareholding in the company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the Group from the Official List.
Total assets 1,452,634 1,522,481 2,218,693 1,453,576 1,696,486 2,401,652 Funded balance sheet (6) 1,025,557 1,084,282 1,227,198 1,026,499 1,255,032 1,409,093 Loans and advances to customers 555,260 595,694 731,265 555,260 728,393 874,722 Deposits 609,370 636,252 781,070 609,483 756,346 897,556 Owners' equity 75,132 77,736 58,879 75,132 77,736 58,879 Risk asset ratio - Core Tier 1 10.7% 11.0% 5.9% 10.7% 11.0% 6.6% - Tier 1 12.9% 14.4% 9.9% 12.9% 14.1% 10.0% - Total 14.0% 16.3% 14.2% 14.0% 16.1% 14.1%
Overview of results The results of RFS Holdings B.V., the entity that acquired ABN AMRO, are fully consolidated in the Group’s financial statements. The interests of the State of the Netherlands and Santander in RFS Holdings are included in non-controlling interests. Legal separation of ABN AMRO Bank N.V. took place on 1 April 2010. As a result, RBS presents the interests of its Consortium Members in ABN AMRO as discontinued operations and has re-presented prior periods accordingly.
Pro forma results have been prepared to include only those business units of RBS N.V. that will be retained by RBS and to reclassify certain non-operating items. The basis of preparation of the pro forma results is detailed on page 51.
Summary consolidated income statement for the year ended 31 December 2010 In the pro forma income statement set out below, fair value of own debt, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, gains on pensions curtailment, Asset Protection Scheme credit default swap - fair value changes and write-down of goodwill and other intangible assets are shown separately. In the statutory consolidated income statement set out below and on page 268, these items are included in non-interest income and operating expenses, as appropriate.
Insurance net premium income 5,128 5,266 5,709 5,128 5,266 5,709 Non-interest income 18,462 16,000 3,603 17,659 19,638 5,248 Total income 32,662 29,567 19,367 31,868 33,026 20,730 Operating expenses (16,710) (17,401) (16,188) (18,228) (17,417) (35,065) Profit/(loss) before other operating charges 15,952 12,166 3,179 13,640 15,609 (14,335)
Operating profit/(loss) before fair value of own debt (1) 1,913 (6,090) (8,170) (399) (2,647) (25,691) Fair value of own debt 174 (142) 1,232 — — —
Amortisation of purchased intangible assets (369) (272) (443) — — — Integration and restructuring costs (1,032) (1,286) (1,357) — — — Gain on redemption of own debt 553 3,790 — — — —
Operating profit/(loss) Group operating profit, excluding fair value of own debt, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, gains on pensions curtailment, fair value changes in the Asset Protection Scheme credit default swap and write-down of goodwill and other intangible assets, was £1,913 million, compared with a loss of £6,090 million in 2009. The improvement in performance is primarily driven by stronger Core Retail & Commercial operating profits offsetting more normal results from Global Banking & Markets, coupled with lower impairments in the Non-Core division.
After fair value of own debt, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, gains on pensions curtailment and writedown of goodwill and other intangible assets, the Group recorded a loss before tax of £249 million, compared with a loss before tax of £2,291 million in 2009.
Total income Total income, excluding fair value of own debt, gain on redemption of own debt, strategic disposals and fair value changes in the Asset Protection Scheme credit default swap, increased by 10% to £32,662 million, primarily reflecting growth in net interest income coupled with lower Non-Core trading losses as underlying asset prices recovered and credit spreads tightened. Whilst income was down in Global Banking & Markets to more normal levels compared with the favourable market conditions seen in 2009, this was offset by good growth in Core Retail & Commercial and the improvement in Non-Core.
Non-interest income Non-interest income increased to £18,462 million from £16,000 million in 2009, largely reflecting the sharp improvement in Non-Core from reduced trading losses. This was partially offset by lower trading revenues in Global Banking & Markets, which had seen unusually buoyant market conditions in 2009 as rapidly falling interest rates generated significant revenue opportunities.
Impairments represented 1.7% of gross loans and advances, excluding reverse repos, in 2010 compared with 2.3% in 2009.
In 2010 the Group recorded a gain of £553 million, compared with £3,790 million in 2009, on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities. In addition, the overall gain on strategic disposals, £171 million, primarily relates to gains on the sale of Global Merchant Services partially offset by provisions for losses on the sales of other businesses undertaken as part of the Group’s strategic plan.
Tax The Group recorded a tax charge of £663 million in 2010, compared with a tax credit of £339 million in 2009.
Net interest income Net interest income increased by 6% to £14,209 million.
Operating loss Group operating loss, excluding fair value of own debt, amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment and bonus tax was £6,090 million, compared with a loss of £8,170 million in 2008. The reduction in the loss is primarily a result of a substantial increase in noninterest income partially offset by a significant increase in impairment losses and lower net interest income.
Net interest income Net interest income fell by 14% to £13,567 million, with average loans and advances to customers down 4% and average customer deposits down 7%. Group net interest margin fell from 2.08% to 1.76% largely reflecting the pressure on liability margins, given rates on many deposit products already at floors in the low interest rate environment, and strong competition, particularly for longer-term deposits and the build up of the Group's liquidity portfolio.
Non-interest income Non-interest income increased to £16,000 million from £3,603 million in 2008, largely reflecting the sharp improvement in income from trading activities, as improved asset valuations led to lower credit market losses and GBM benefited from the restructuring of its business to focus on core customer franchises. However, fees and commissions fell as a result of the withdrawal of the single premium payment protection insurance product and the restructuring of UK current account overdraft fees.
Risk elements in lending and potential problem loans at 31 December 2009 represented 6.2% of loans and advances, excluding reverse repos, compared with 2.7% a year earlier. Provision coverage was 43%, compared with 50% at 31 December 2008 as a consequence of the growth in risk elements in lending being concentrated in secured, property-related loans. These loans require relatively lower provisions in view of their collateralised nature.
Non-operating items Integration and restructuring costs decreased, primarily as ABN AMRO integration activity neared completion, partly offset by restructuring activity following the conclusion of the strategic review.
In 2009 the Group recorded a gain of £3,790 million on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities. In addition, the overall gain on strategic disposals, £132 million, primarily relates to gains on the sale of Bank of China and Linea Directa partially offset by losses arising from the sale of the Retail and Commercial Asian businesses and Latin America asset portfolio.
Tax The Group recorded a tax credit of £339 million in 2009, compared with a tax credit of £1,280 million in 2008.
Operating loss Operating loss before tax for the year was £2,647 million compared with a loss of £25,691 million in 2008.
Net interest income Net interest income decreased by 14% to £13,388 million.
Operating expenses Operating expenses decreased from £35,065 million in 2008 to £17,417 million of which integration and restructuring costs were £1,286 million compared with £1,357 million in 2008. Write-down of goodwill and other intangible assets was £363 million compared with £16,911 million in 2008.
Provision coverage of risk elements in lending and potential problem loans was 45% (2008 - 51%).
Tax The Group recorded a tax credit of £429 million in 2009, compared with a tax credit of £2,167 million in 2008.
Earnings Basic earnings per ordinary and B share, including discontinued operations, improved from a loss of 146.7p to a loss of 6.4p.
Gross yield on interest-earning assets of the banking business (3) 3.29 3.50 5.72 3.29 3.51 5.63 Cost of interest-bearing liabilities of the banking business (1.48) (1.95) (3.88) (1.48) (1.96) (3.84) Interest spread of the banking business (4) 1.81 1.55 1.84 1.81 1.55 1.79 Benefit from interest-free funds 0.20 0.21 0.24 0.19 0.19 0.20 Net interest margin of the banking business (5) 2.01 1.76 2.08 2.00 1.74 1.99
Notes: (1) Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance long-term assets and liabilities attributable to policyholders, in view of their distinct nature. As a result, net interest receivable has been increased by £6 million (2009 - £20 million; 2008 - £84 million). (2) Interest receivable has been increased by £11 million (2009 - £46 million; 2008 - £332 million) and interest payable has been decreased by £30 million (2009 - £350 million increase; 2008 - £860 million increase) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted.
Assets Loans and advances to banks - UK 22,578 223 0.99 21,373 278 1.30 - Overseas 30,143 369 1.22 30,384 553 1.82 Loans and advances to customers - UK 311,060 11,907 3.83 333,408 11,864 3.56 - Overseas 197,340 6,936 3.51 242,065 9,493 3.92 Debt securities - UK 66,734 1,467 2.20 53,955 1,466 2.72 - Overseas 62,103 1,791 2.88 71,851 2,736 3.81 Interest-earning assets - UK 400,372 13,597 3.40 408,736 13,608 3.33 - Overseas 289,586 9,096 3.14 344,300 12,782 3.71 Total interest-earning assets - banking business (2,3,5) 689,958 22,693 3.29 753,036 26,390 3.50 - trading business (4) 276,330 291,092 Interest-earning assets 966,288 1,044,128 Non-interest-earning assets (2,3) 657,095 815,468 Total assets 1,623,383 1,859,596
Liabilities Deposits by banks - UK 45,123 1,507 3.34 - Overseas 109,705 4,630 4.22 Customer accounts: demand deposits - UK 99,840 2,794 2.80 - Overseas 36,108 672 1.86 Customer accounts: savings deposits - UK 42,870 1,691 3.94 - Overseas 23,753 570 2.40 Customer accounts: other time deposits - UK 95,181 3,964 4.16 - Overseas 88,570 3,426 3.87 Debt securities in issue - UK 114,234 5,281 4.62 - Overseas 106,207 4,734 4.46 Subordinated liabilities - UK 26,799 1,369 5.11 - Overseas 8,068 413 5.12 Internal funding of trading business - UK (85,664) (3,445) 4.02 - Overseas (18,090) (729) 4.03 Interest-bearing liabilities - UK 338,383 13,161 3.89 - Overseas 354,321 13,716 3.87 Total interest-bearing liabilities - banking business (2,3,6) 692,704 26,877 3.88 - trading business (4) 466,610 Interest-bearing liabilities 1,159,314 Non-interest-bearing liabilities: Demand deposits - UK 19,262 - Overseas 14,759 Other liabilities (3,4) 572,296 Owners' equity 58,544 Total liabilities and owners' equity 1,824,175
Liabilities Deposits by banks - UK 21,816 334 1.53 24,837 676 2.72 - Overseas 59,799 999 1.67 105,877 2,222 2.10 Customer accounts: demand deposits - UK 120,796 621 0.51 109,758 559 0.51 - Overseas 39,127 607 1.55 38,414 411 1.07 Customer accounts: savings deposits - UK 68,142 935 1.37 54,048 772 1.43 - Overseas 25,587 213 0.83 26,996 473 1.75 Customer accounts: other time deposits - UK 42,818 431 1.01 68,039 827 1.22 - Overseas 45,080 914 2.03 60,430 1,719 2.84 Debt securities in issue - UK 123,729 2,186 1.77 130,002 3,162 2.43 - Overseas 72,247 1,065 1.47 96,075 1,652 1.72 Subordinated liabilities - UK 19,998 480 2.40 26,710 852 3.19 - Overseas 9,336 252 2.70 10,333 457 4.42 Internal funding of trading business - UK (41,451) (140) 0.34 (60,284) (317) 0.53 - Overseas (6,864) (41) 0.60 (14,845) (192) 1.29 Interest-bearing liabilities - UK 355,848 4,847 1.36 353,110 6,531 1.85 - Overseas 244,312 4,009 1.64 323,280 6,742 2.09 Total interest-bearing liabilities - banking business (2,3,6) 600,160 8,856 1.48 676,390 13,273 1.96 - trading business (4) 293,993 331,380 Interest-bearing liabilities 894,153 1,007,770 Non-interest-bearing liabilities: Demand deposits - UK 29,022 16,456 - Overseas 23,994 27,149 Other liabilities (3,4) 648,129 914,802 Owners' equity 76,906 57,303 Liabilities and owners' equity 1,672,204 2,023,480
Notes: (1) The analysis into UK and Overseas has been compiled on the basis of location of office. (2) Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance long-term assets and liabilities attributable to policyholders, in view of their distinct nature. As a result, net interest receivable has been increased by £6 million (2009 - £20 million; 2008 - £84 million). (3) Interest receivable has been increased by £11 million (2009 - £46 million; 2008 - £332 million) and interest payable decreased by £30 million (2009 - £350 million increase; 2008 - £860 million increase) to record interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (4) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (5) Interest receivable has been decreased by £90 million for 2010 in respect of a non-recurring receivable (2009 and 2008 - nil). (6) Interest payable has been increased by £319 million for 2010 in respect of non-recurring adjustments (2009 and 2008 - nil).
Analysis of change in net interest income - volume and rate analysis Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements. 2010 over 2009 - pro forma 2010 over 2009 - statutory Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average volume
Overseas 23 237 260 24 236 260 Customer accounts: other time deposits
UK 300 1,363 1,663 343 1,341 1,684 Overseas 1,505 1,084 2,589 1,564 1,169 2,733 1,805 2,447 4,252 1,907 2,510 4,417 Movement in net interest income
UK (253) 2,488 2,235 (253) 2,488 2,235 Overseas (38) 302 264 (35) 305 270 Customer accounts: savings deposits
UK (359) 1,278 919 (359) 1,278 919 Overseas (70) 167 97 (71) 168 97 Customer accounts: other time deposits
UK 87 430 517 5 512 517 Overseas (106) 61 (45) 14 132 146 Internal funding of trading business
UK (475) 7,126 6,651 (550) 6,702 6,152 Overseas 1,219 5,900 7,119 2,106 6,037 8,143 744 13,026 13,770 1,556 12,739 14,295 Movement in net interest income
2010 compared with 2009 - pro forma Net fees and commissions increased by £35 million to £5,983 million primarily due to improved performance in GBM (£160 million), driven by higher portfolio management and origination income, and UK Corporate (£94 million), principally reflecting strong refinancing levels and increased operating lease activity. These increases were partially offset by reduced fees in UK Retail (£144 million) and Ulster Bank (£72 million) due to the restructuring of current account overdraft fees in the final quarter of 2009 and a non-recurring gain in 2009 respectively.
Insurance net premium income fell by £138 million to £5,128 million principally reflecting lower general insurance premiums, driven by a managed reduction in the risk of the UK motor book, largely offset by price increases.
Income from trading activities, excluding fair value movements in the Asset Protection Scheme credit default swap, rose substantially during the year by £2,306 million to £6,067 million. Trading revenues in GBM were lower than 2009, which saw unusually buoyant market conditions as rapidly falling interest rates generated significant revenue opportunities. This was more than offset by the improvement in Non-Core trading losses from £5,161 million for 2009 to £31 million for 2010 as underlying asset prices recovered and monoline spreads tightened. The unwinding of some banking book hedges also helped reduce trading losses.
Insurance net premium income fell by £443 million reflecting lower bancassurance fees, £288 million, and lower general insurance premiums, £155 million.
2009 compared with 2008 - statutory Net fees and commissions fell by £463 million primarily due to the withdrawal of the single premium payment protection insurance product and the restructuring of current account overdraft fees within UK Retail during the year, as well as to reduced fees received in Non-Core. This was partially offset by improved performance in GBM (£112 million) and US Retail & Commercial (£50 million).
Income from trading activities rose substantially during the year by £12,786 million, principally due to lower credit market losses reflecting improved underlying asset prices compared with 2009. Increased market volatility and strong customer demand in a positive trading environment also contributed to this improvement.
In the second quarter of 2009 the Group recorded a gain of £3,790 million on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities.
Other operating income decreased by £1,280 million. This reflected changes in the fair value of own debt of £926 million together with lower profits on sales of securities and properties and reduced dividend income. Included in 2008 is a gain of £600 million on the sale of Angel Trains.
Staff costs - excluding gains on pensions curtailment 8,956 9,081 7,990 9,671 9,993 8,898 - gains on pensions curtailment — — — — (2,148) — Premises and equipment 2,276 2,468 2,099 2,402 2,594 2,163 Other 3,716 3,979 4,267 3,995 4,449 4,716 Administrative expenses 14,948 15,528 14,356 16,068 14,888 15,777 Depreciation and amortisation 1,762 1,873 1,832 2,150 2,166 2,377 Write-down of goodwill and other intangible assets — — — 10 363 16,911 Operating expenses 16,710 17,401 16,188 18,228 17,417 35,065
Staff costs as a percentage of total income 27% 31% 41% 30% 30% 43%
Staff costs fell by £125 million to £8,956 million, principally driven by savings in Global Banking & Markets, UK Retail and Non-Core.
Premises and equipment costs fell by 8% in the year to £2,276 million largely driven by efficiency cost savings, significant one-off property impairments recognised in 2009 and country exits following Non-Core disposals.
Other expenses fell by £263 million to £3,716 million principally reflecting continued savings from the Group’s efficiency programme.
2010 compared with 2009 - statutory The main driver of a 7% decrease in operating expenses, excluding gains on pensions curtailment, is the recognition of benefits from the Groupwide efficiency programme. The programme continues to deliver material savings which have been funding investments to strengthen our Core franchises. Annualised savings are now just ahead of the £2.5 billion target for 2011 and are forecast to exceed £3 billion by 2013.
2009 compared with 2008 - pro forma Staff costs were up £1,091 million with most of the movement relating to adverse movements in foreign exchange rates and some salary inflation. Changes in incentive compensation, primarily in Global Banking & Markets, represented most of the remaining change.
Premises and equipment costs rose by £431 million primarily due to the impact of expanded Group premises in London and the US.
At 31 December 2009 statement the year 2010 £m £m £m £m
Accruals in relation to restructuring costs are set out below. At Charge Utilised At 31 December to income during 31 December 2009 statement the year 2010 £m £m £m £m
Staff costs 51 — — Premises and equipment 6 — — Other administrative expenses 25 — —
Comprising: Loans and advances 9,144 13,090 6,478 9,144 13,090 6,478 Securities 112 809 954 112 809 961 Charge to income statement 9,256 13,899 7,432 9,256 13,899 7,439 2010 compared with 2009 - pro forma and statutory Impairment losses were £9,256 million, compared with £13,899 million in 2009. The 33% decrease reflects an overall improvement in the economic environments in which the Group operates.
A significant proportion of the reduction in Core impairments relates to lower specific and latent provisions in UK Corporate, US Retail & Commercial and GBM.
Non-Core impairments fell by 41% in 2010 reflecting the gradual improvement in the economic environment through 2010 and lower specific provisions, alongside a non-repeat of the large single name losses seen in 2009.
2009 compared with 2008 - statutory Impairment losses were £13,899 million compared with £7,439 million. Impairment losses in the Core divisions increased by £2,182 million, NonCore losses increased by £4,285 million off-set by a decrease in RFS Holdings minority interest of £7 million.
Non-Core losses also increased substantially, particularly across the corporate and property sectors.
Notes: (1) Included in 'Income from trading activities', significantly all in Non-Core. (2) Credit derivative product companies.
The increase in CVA resulting from the credit quality deterioration was partially offset by the decrease in CVA requirement following the reduction in gross exposure due to higher prices of underlying reference instruments. Consequently the net losses incurred in this regard were lower than in 2008 when there was both an increase in gross exposure and deterioration in credit quality.
The gross exposure to CDPC counterparties has reduced primarily due to a combination of tighter credit spreads of the underlying reference loans and bonds, and a decrease in the relative value of senior tranches compared with the underlying reference portfolios.
The decrease in CVA requirement following the reduction in gross exposure was partially offset by the increase in CVA requirement resulting from the credit quality deterioration. Consequently there were net gains in this regard in 2009 compared with losses in 2008 when there was both an increase in gross exposure and deterioration in credit quality.
Net losses were incurred in 2009 due to hedges put in place at the end of 2008 and during 2009 which effectively cap the exposure to certain CDPCs. As the exposure to these CDPCs has reduced, losses have been incurred on the hedges.
Losses on other mortgage backed securities were greatly reduced in 2009 as many of these positions were sold or substantially written down in 2008 resulting in reduced net exposure in 2009.
Losses relating to other credit exotics were £558 million in 2009 compared with £947 million in 2008. These losses were reduced in 2009 as hedges were put in place to mitigate the risk.
Leveraged finance assets were reclassified on 1 July 2009. Changes in the fair value of these assets are only recognised in the income statement to the extent that they are considered impairments.
The actual tax (charge)/credit differs from the expected tax credit computed by applying the standard rate of UK corporation tax as follows: £m £m £m £m £m £m
- other 341 410 491 341 410 491 Taxable foreign exchange movements 4 1 (80) 4 1 (80) Foreign profits taxed at other rates (516) (332) (271) (517) (276) (509) UK tax rate change - deferred tax impact (82) — — (82) — — Losses in year where no deferred tax asset recognised (450) (715) (942) (450) (780) (942) Losses brought forward and utilised 2 94 11 2 94 11 Adjustments in respect of prior years 355 (118) 352 355 (118) 352 Actual tax (charge)/credit (663) 339 1,280 (634) 429 2,167 2010 compared with 2009 - pro forma The high tax charge in 2010 reflects profits in high tax regimes and losses in low tax regimes, together with £450 million relating to losses in overseas subsidiaries for which a deferred tax asset has not been recognised, and £299 million mainly in respect of losses on disposal of businesses for which no tax relief if available. This was offset in part by the non-taxable gain arising on the disposal of 80.01% of the Global Merchant Services (GMS) business.
2010 compared with 2009 - statutory The high tax charge in 2010 reflects profits in high tax regimes and losses in low tax regimes, together with £450 million relating to losses in overseas subsidiaries for which a deferred tax asset has not been recognised, and £311 million mainly in respect of losses on disposal of businesses for which no tax relief is available. This was offset in part by the non-taxable gain arising on the disposal of 80.01% of the GMS business.
Divisional performance The results of each division on a pro forma basis are set out below. The results are stated before fair value of own debt, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, Asset Protection Scheme credit default swap - fair value changes, gains on pensions curtailment, write-down of goodwill and other intangible assets and RFS Holdings minority interest.
UK Retail 1,160 1,679 1,019 UK Corporate 761 927 319 Wealth 18 33 16 Global Transaction Services 9 39 54 Ulster Bank 1,161 649 106 US Retail & Commercial 517 702 437 Retail & Commercial 3,626 4,029 1,951 Global Banking & Markets 151 640 522 RBS Insurance — 8 42 Central items 3 1 (19) Core 3,780 4,678 2,496 Non-Core 5,476 9,221 4,936 9,256 13,899 7,432 Group before RFS Holdings minority interest RFS Holdings minority interest — — 7
UK Retail 23,800 25,500 28,400 UK Corporate 13,100 12,300 13,400 Wealth 5,200 4,600 5,200 Global Transaction Services 2,600 3,500 3,900 Ulster Bank 4,200 4,500 5,400 US Retail & Commercial 15,700 15,500 16,200 Retail & Commercial 64,600 65,900 72,500 Global Banking & Markets 18,700 17,900 17,500 RBS Insurance 14,500 13,900 14,500 Central items 4,700 4,200 4,300 Core 102,500 101,900 108,800 Non-Core 6,900 15,100 19,000 109,400 117,000 127,800 Business services 38,800 43,100 46,600 Integration 300 500 900 RFS Holdings minority interest — 300 200 Group 148,500 160,900 175,500 79RBS Group 2010
Operating profit before impairment losses 2,532 1,908 1,742 Impairment losses (1,160) (1,679) (1,019)
Analysis of income by product Personal advances 993 1,192 1,244 Personal deposits 1,102 1,349 2,037 Mortgages 1,984 1,214 500 Bancassurance 229 246 217 Cards 962 869 831 Other 135 77 109 Total income 5,405 4,947 4,938
£bn £bn £bn Capital and balance sheet Loans and advances to customers (gross) - mortgages 90.6 83.2 72.2 - personal 11.7 13.6 15.3 - cards 6.1 6.2 6.3 108.4 103.0 93.8 Customer deposits (excluding bancassurance) 96.1 87.2 78.9 Assets under management (excluding deposits) 5.7 5.3 5.7 Risk elements in lending 4.6 4.6 3.8 Loan:deposit ratio (excluding repos) 110% 115% 116% Risk-weighted assets 48.8 51.3 45.7
Notes: (1) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions). (2) Adjusted cost:income ratio is based on total income after netting insurance claims, and operating expenses.
The Customer Charter reflects the views and expectations of more than 30,000 customers. We are working hard to deliver on the commitments we have made. This won't happen overnight but the Customer Charter is our pledge that we will be regularly held to account against the progress we make. As part of this we will publish an independently-assured report on our performance every six months.
Non-interest income declined 11% to £1,327 million, principally reflecting the restructuring of current account overdraft fees in the final quarter of 2009.
The division has focused in 2009 on growing secured lending to meet its Government targets while at the same time building customer deposits, thereby reducing the Group's reliance on wholesale funding. Loans and advances to customers grew 10%, with a change in mix from unsecured to secured as the Group sought actively to reduce its risk profile, with 15% growth in mortgage lending and an 8% reduction in unsecured lending.
Non-interest income declined 15% to £1,495 million, principally reflecting the withdrawal of the single premium payment protection insurance product and the restructuring of current account overdraft fees in the final quarter of 2009, with the annualised impact of the overdraft fee restructuring further affecting income in 2010. The weak economic environment presented little opportunity in 2009 to grow credit card, private banking and bancassurance fees.
Expenses decreased by 5%, with the cost:income ratio improving from 62% to 60%.
The mortgage impairment charge was £124 million (2008 - £31 million) on a total book of £83.2 billion. Mortgage arrears rates stabilised in the second half of 2009 and remain well below the industry average, as reported by the Council of Mortgage Lenders. Repossessions show only a small increase on 2008, as the Group continues to support customers facing financial difficulties.
The unsecured lending impairment charge was £1,555 million (2008 - £988 million) on a book of £19.8 billion. Industry benchmarks for cards arrears showed a slightly improving trend in the final quarter of 2009, which is consistent with the Group's experience. RBS continues to perform better than the market on arrears.
Risk-weighted assets increased by 12% to £51.3 billion due to higher lending and the upward pressure from procyclicality, more than offsetting the adoption of a through-the-cycle loss given default approach for mortgages.
Net interest income 2,572 2,292 2,448 Net fees and commissions 952 858 829 Other non-interest income 371 432 460 Non-interest income 1,323 1,290 1,289 Total income 3,895 3,582 3,737 Direct expenses
Operating profit before impairment losses 2,224 2,052 2,100 Impairment losses (761) (927) (319)
Analysis of income by business Corporate and commercial lending 2,598 2,131 2,094 Asset and invoice finance 617 501 312 Corporate deposits 728 986 1,266 Other (48) (36) 65 Total income 3,895 3,582 3,737
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Banks and financial institutions 0.3% 0.2% 0.2% Hotels and restaurants 0.8% 1.5% 0.4% House building and construction 2.9% 2.5% 0.8% Manufacturing — 0.9% 0.3% Other 0.4% 0.5% 0.1% Private sector education, health, social work, recreational and community services 0.3% 0.9% 0.2% Property 0.8% 0.8% 0.1% Wholesale and retail trade, repairs 0.9% 0.7% 0.4% Asset and invoice finance 0.6% 1.3% 1.2% 0.7% 0.8% 0.3%
Note: (1) Divisional return on equity is based on divisional operating profit after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions).
Capital and balance sheet Total third party assets 114.6 114.9 121.0 Loans and advances to customers (gross) - banks and financial institutions 6.1 6.3 5.4 - hotels and restaurants 6.8 6.7 6.1 - housebuilding and construction 4.5 4.3 5.2 - manufacturing 5.3 5.9 5.3 - other 31.0 29.9 38.1 - private sector education, health, social work, recreational and community services 9.0 6.5 7.4 - property 29.5 33.0 31.8 - wholesale and retail trade, repairs 9.6 10.2 9.1 - asset and invoice finance 9.9 8.8 8.5 111.7 111.6 116.9 Customer deposits 100.0 87.8 82.0 Risk elements in lending 4.0 2.3 1.3 Loan:deposit ratio (excluding repos) 110% 126% 142% Risk-weighted assets 81.4 90.2 85.7 2010 compared with 2009 Operating profit grew by £338 million, 30%, compared with 2009, driven by strong income growth and significantly lower impairments, partially offset by higher costs.
Total costs increased 9% (£141 million) or 5% excluding the OFT penalty in 2010, legal recovery in 2009 and the normalisation of staff compensation phasing.
Non-interest income was flat, with stable fee income from refinancing and structuring activity.
Total income was up 5% (1% in constant currency terms), with strong growth in net interest income, up 12% in constant currency terms reflecting the increased internal pricing applied to Wealth's deposit base. This was offset by a marked decrease in investment income year on year as assets under management decreased by 8% at constant exchange rates during 2009, with investors turning to more liquid assets and away from longer term investments.
Expenses were down 6% (10% lower on a constant currency basis), reflecting a rigorous focus on cost management, with staff costs decreasing by 5% as a result of planned headcount reduction. The cost:income ratio improved from 66% to 59%.
Operating profit before impairment losses 1,097 1,012 1,056 Impairment losses (9) (39) (54)
Performance ratios Return on equity (1) 42.8% 42.2% 44.6% Net interest margin 6.73% 9.22% 8.25% Cost:income ratio 57% 59% 57%
£bn £bn £bn Capital and balance sheet Total third party assets 25.2 18.4 22.2 Loans and advances 14.4 12.7 14.8 Customer deposits 69.9 61.8 61.8 Risk elements in lending 0.1 0.2 0.1 Loan:deposit ratio (excluding repos) 21% 21% 25% Risk-weighted assets 18.3 19.1 17.4
Expenses were up 7% in headline terms but flat in constant currency terms, as cost savings and efficiencies helped to mitigate the impact of investment in infrastructure. Staff expenses were 2% lower in constant currency terms, with headcount down 5%. The cost:income ratio was 59%, a deterioration of 2.7 percentage points or 1.9 percentage points in constant currency terms.
Impairment losses were £39 million, down £15 million versus 2008. Overall defaults remain modest at 0.3% of loans and advances.
Operating profit before impairment losses 400 281 324 Impairment losses (1,161) (649) (106)
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 1.4% 0.5% 0.1% Corporate - property 6.9% 3.0% 0.3% - other corporate 4.9% 1.8% 0.1% Other lending 3.7% 2.7% 2.1% 3.1% 1.6% 0.2% Performance ratios Return on equity (1) (21.0%) (11.7%) 8.9% Net interest margin 1.84% 1.87% 1.89% Cost:income ratio 59% 73% 69%
Note: (1) Divisional return on equity is based on divisional operating (loss)/profit after tax divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions).
Ulster Bank continued 2010 2009 2008 £bn £bn £bn Capital and balance sheet Loans and advances to customers (gross) - mortgages 21.2 16.2 18.1 - corporate - property 5.4 10.1 10.9 - other corporate 9.0 11.0 12.9 - other lending 1.3 2.4 2.1 36.9 39.7 44.0 Customer deposits 23.1 21.9 24.3 Risk elements in lending - mortgages 1.5 0.6 0.3 - corporate - property 0.7 0.7 0.5 - other corporate 1.2 0.8 0.3 - other lending 0.2 0.2 0.1 3.6 2.3 1.2 Loan:deposit ratio (excluding repos) 152% 177% 179% Risk-weighted assets 31.6 29.9 24.5 2010 compared with 2009 Overall performance deteriorated in 2010, largely as a result of an increase in impairment losses of £512 million. Operating profit before impairment increased to £400 million, up 50% in constant currency terms, driven by the culmination of a bank-wide cost saving programme during 2010.
Despite intense competition, customer deposit balances increased by 8% in constant currency terms over the year with strong growth across all deposit categories, driven by a focus on improving the bank’s funding profile.
Customer numbers increased by 3% during 2010, with a strong performance in current and savings accounts switchers.
Impairment losses increased to £649 million from £106 million driven by the continued deterioration in the Irish economic environment and resultant impact on loan performance across the retail and wholesale portfolios.
Necessary fiscal budgetary action allied to the well-entrenched downturn in property markets in Ireland has fed through to higher loan losses. Mortgage impairments have been driven by rising unemployment and lower incomes. Loans to the property sector experienced a substantial rise in defaults as the Irish property market declined, reflecting the difficult economic backdrop and the uncertainty surrounding the possible effect of the Irish Government's National Asset Management Agency on asset values. Sectors driven by consumer spending have been affected by the double digit decline in 2009 with rising default rates evident.
Net interest income 2,962 2,777 3,200 1,917 1,775 1,726 Net fees and commissions 1,126 1,119 1,231 729 714 664 Other non-interest income 465 368 362 300 235 197 Non-interest income 1,591 1,487 1,593 1,029 949 861 Total income 4,553 4,264 4,793 2,946 2,724 2,587 Direct expenses
Operating profit before impairment losses 1,272 925 1,788 823 589 965 Impairment losses (799) (1,099) (811) (517) (702) (437)
Analysis of income by product Mortgages and home equity 786 781 695 509 499 375 Personal lending and cards 735 706 617 476 451 333 Retail deposits 1,397 1,296 1,853 903 828 1,000 Commercial lending 896 848 751 580 542 405 Commercial deposits 495 624 698 320 398 377 Other 244 9 179 158 6 97 Total income 4,553 4,264 4,793 2,946 2,724 2,587
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Residential mortgages 1.0% 1.1% 0.5% 1.0% 1.1% 0.4% Home equity 0.8% 1.0% 0.5% 0.8% 1.1% 0.4% Corporate and commercial 1.0% 1.6% 1.0% 1.0% 1.7% 0.8% Other consumer 1.4% 1.8% 1.9% 1.4% 1.8% 1.5% 1.0% 1.4% 0.9% 1.0% 1.4% 0.7%
Performance ratios Return on equity (1) 3.6% (1.3%) 7.9% 3.6% (1.3%) 7.8% Net interest margin 2.85% 2.37% 2.68% 2.85% 2.37% 2.68% Cost:income ratio 72% 78% 63% 72% 78% 63%
Total expenses were down 2%, reflecting a $113 million credit related to changes to the defined benefit pension plan, and lower Federal Deposit Insurance Corporation (FDIC) deposit insurance levies, partially offset by the impact of changing rates on the valuation of mortgage servicing rights and litigation costs.
Impairment losses declined 27%, following significant loan reserve building in 2009 and a gradual improvement in the underlying credit environment, offset by higher impairments related to securities. Loan impairments as a percentage of loans and advances decreased from 1.4% to 1.0%.
2009 compared with 2008 The recessionary economic environment, historically low interest rates and deteriorating credit conditions resulted in an operating loss of $174 million. However, the business has now successfully refocused on its core customer franchises in New England, the Mid-Atlantic region and the Midwest.
Net interest income was down 13%. Net interest margin was down 31 basis points for the full year, reflecting the decline in deposit margins resulting from the low interest rate environment, though margins have been partially rebuilt in the second half from the lows experienced in the first half, as the business repriced lending rates and aggressively reduced pricing on term and time deposits.
Net interest income from banking activities 1,276 2,243 2,440 Net fees and commissions receivable 1,495 1,335 1,223 Income from trading activities 4,982 7,812 (1,100) Other operating income (net of related funding costs) 159 (332) (206) Non-interest income 6,636 8,815 (83) Total income 7,912 11,058 2,357 Direct expenses
Operating profit/(loss) before impairment losses and fair value of own debt 3,515 6,398 (1,631)
Analysis of impairment by sector Manufacturing and infrastructure (51) 91 39 Property and construction 74 49 12 Banks and financial institutions 177 348 186 Other (49) 152 285 Total impairment losses 151 640 522 Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) 0.2% 0.6% 0.3%
Increased revenue from Portfolio Management was driven by disciplined lending alongside a reduction in balance sheet management activities and associated costs.
Portfolio management and origination grew 39% as financial institutions and corporate clients refinanced through the debt capital markets. The refocused credit and mortgage markets delivered a much improved result from greater liquidity and a more positive trading environment.
Total third party assets, excluding derivatives, were down 17%, or 13% at constant exchange rates, compared with 31 December 2008, driven by a 43% reduction in loans and advances as customers took advantage of favourable capital market conditions to raise alternative forms of finance to bank debt. This reduction was partially offset by an increase in liquid assets.
Risk-weighted assets decreased 19%, or 15% at constant exchange rates, reflecting the fall in third party assets and the Group's continued focus on reducing its risk profile and balance sheet usage.
Net premium income 4,311 4,354 4,306 Fees and commissions (409) (366) (396) Instalment income 144 142 131 Other income 46 25 7 Total income 4,092 4,155 4,048 Net claims (3,961) (3,635) (3,032)
RBS Insurance continued 2010 2009 2008 Performance ratios Return on equity (3) (7.9%) 1.7% 18.3% Loss ratio (4) 92% 84% 70% Commission ratio (5) 10% 9% 10% Expense ratio (6) 13% 14% 14% Combined operating ratio (7) 115% 106% 94% Balance sheet General insurance reserves - total (£m) 7,559 7,030 6,673
The International business continued to invest in growth in 2010 with gross written premiums of £425 million up 20% on 2009. The Italian business successfully grew to a market share approaching 30% of the direct insurer market. The German business grew 7% and is well positioned to take advantage of the emerging shift to direct/internet distribution in that market.
Underwriting income declined by £63 million, with lower motor premium income, driven by rating action. Increased fees and commissions reflected profit sharing arrangements with UK Retail in relation to insurance distribution to bank customers. Investment income was £28 million lower, reflecting the impact of low interest rates on returns on the investment portfolio as well as lower gains realised on the sale of investments.
Expenses were down 7%, driven by lower industry levies and marketing costs.
Income grew by 3%, with premium income stable but lower reinsurance costs. Investment income was 20% lower, reflecting the impact of low interest rates and returns on the investment portfolio partially offset by gains realised on the sale of equity investments.
2010 compared with 2009 Central items not allocated before fair value of own debt, including available-for-sale (AFS) gains of £237 million and one-off VAT recovery in 2010 of £170 million, amounted to a net credit of £577 million, an increase of £192 million on 2009.
Net interest income 1,959 1,534 2,156 Net fees and commissions 471 510 912 Loss from trading activities (31) (5,161) (7,739) Insurance net premium income 702 784 986 Other operating income
Operating profit/(loss) before other operating charges and impairment losses 708 (4,748) (5,715) Insurance net claims (737) (588) (700)
Performance ratios Net interest margin 1.16% 0.69% 0.87% Cost:income ratio 77% (106%) (88%) Adjusted cost:income ratio 101% (85%) (72%)
Non-Core continued 2010 2009 2008 £m £m £m (Loss)/income from trading activities Monoline exposures (5) (2,387) (3,121) Credit derivative product companies (139) (947) (615)
Impairment losses Banking & portfolios 1,311 4,215 938 International businesses & portfolios 4,217 4,494 1,832 Markets (52) 512 2,166 Total impairment losses 5,476 9,221 4,936
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) (3) Banking & portfolios 2.2% 4.9% 0.9% International businesses & portfolios 7.9% 6.6% 2.3% Markets 0.1% 5.2% 9.4% 4.9% 5.7% 2.2%
£bn £bn £bn Gross customer loans and advances Banking & portfolios 55.6 82.0 97.0 International businesses & portfolios 52.5 65.6 79.9 Markets 0.3 1.9 14.5 108.4 149.5 191.4
Risk-weighted assets Banking & portfolios 51.2 58.2 63.1 International businesses & portfolios 37.5 43.8 50.1 Markets 65.0 69.3 57.7 153.7 171.3 170.9
Commercial real estate 51.3 (6.2) (1.4) 3.2 (4.6) 0.3 42.6 Corporate 82.6 (12.0) (13.0) 2.0 (0.2) 0.4 59.8 SME 3.9 (0.2) — 0.1 (0.1) — 3.7 Retail 19.9 (7.7) (2.6) 0.1 (0.6) (0.1) 9.0 Other 4.7 (2.1) (0.4) 0.3 — — 2.5 Markets 24.4 (3.0) (9.8) 1.3 — 0.7 13.6 Total (excluding derivatives) 186.8 (31.2) (27.2) 7.0 (5.5) 1.3 131.2 Markets - RBS Sempra Commodities JV 14.2 (1.7) (6.3) — — 0.5 6.7 Total (4) 201.0 (32.9) (33.5) 7.0 (5.5) 1.8 137.9
Notes: (1) Asset-backed products include super senior asset-backed structures and other asset-backed products. (2) Includes profits in RBS Sempra Commodities JV of £19 million (2009 - £770 million; 2008 - £764 million). (3) Includes disposal groups. (4) £12 billion of disposals have been signed as of 31 December 2010 but are pending closing (2009 - £3 billion; 2008 - nil).
US Retail & Commercial Auto and consumer 82 136 140 Cards 23 130 63 SBO/home equity 277 452 321 Residential mortgages 4 54 6 Commercial real estate 185 224 54 Commercial and other 17 83 20 Total US Retail & Commercial 588 1,079 604
Global Banking & Markets Manufacturing and infrastructure (290) 1,404 1,280 Property and construction 1,296 1,413 710 Transport 33 178 12 Telecoms, media & technology 9 545 55 Banks and financials 196 620 870 Other 14 567 177 Total Global Banking & Markets 1,258 4,727 3,104
Other Wealth 51 251 174 Global Transaction Services — 49 (2)
Ulster Bank Mortgages — 6.0 6.5 Commercial investment and development 5.6 3.0 2.9 Residential investment and development 7.1 5.6 5.9 Other 1.9 1.1 1.1 Other EMEA 0.4 1.0 1.3 Total Ulster Bank 15.0 16.7 17.7
US Retail & Commercial Auto and consumer 2.6 3.2 4.2 Cards 0.1 0.5 0.7 SBO/home equity 3.2 3.7 5.2 Residential mortgages 0.7 0.8 1.1 Commercial real estate 1.5 1.9 3.0 Commercial and other 0.5 0.9 1.4 Total US Retail & Commercial 8.6 11.0 15.6
Global Banking & Markets Manufacturing and infrastructure 8.7 17.5 Property and construction 19.6 25.7 Transport 5.5 5.8 Telecoms, media and technology 0.9 3.2 Banks and financials 12.0 16.0 Other 9.0 13.5 Total Global Banking & Markets 55.7 81.7 104.8
Gross loans and advances to customers (excluding reverse repurchase agreements) 108.2 147.3 184.7
Losses from trading activities declined from £5,161 million for 2009 to £31 million for 2010 as underlying asset prices recovered, offset by continuing weakness in credit spreads. The division has recorded profits on the disposal of many asset-backed securities positions. In addition, a significantly smaller loss of £161 million was recorded on banking book hedges as spreads tightened, compared with £1,728 million in 2009.
Wholesale country exits completed during 2010 were Chile, Colombia, Pakistan and Taiwan.
Risk-weighted assets decreased by £18 billion (10%), reflecting active management to reduce trading book risk and disposals, partially offset by the impact of regulatory changes (£30 billion) and more conservative weightings applied to large corporate exposures.
2009 compared with 2008 Losses from trading activities have declined significantly as underlying asset prices rallied. Mark-to-market values for exposures such as monolines, super senior high grade collateralised debt obligations, and many negative basis trade asset classes have risen over the course of 2009. However, the £1.6 billion gain recorded on banking book hedging in 2008 unwound over the course of the year to a loss of £1.6 billion in 2009, as spreads continued to tighten throughout the year, ending almost in line with origination levels.
Third party assets, excluding derivatives, decreased by £56.9 billion in the year as the division has run down exposures and pursued opportunities to dispose of loan portfolios. Sales of equity stakes, including Bank of China, were concluded while further disposals announced in 2009, including Asian retail and commercial operations, are moving towards completion in 2010.
Assets Cash and balances at central banks 57,014 51,548 11,830 57,014 52,261 12,400 Net loans and advances to banks 57,909 48,777 70,728 57,911 56,656 79,426 Reverse repurchase agreements and stock borrowing 42,607 35,097 58,771 42,607 35,097 58,771 Loans and advances to banks 100,516 83,874 129,499 100,518 91,753 138,197 Net loans and advances to customers 502,748 554,654 691,976 502,748 687,353 835,409 Reverse repurchase agreements and stock borrowing 52,512 41,040 39,289 52,512 41,040 39,313 Loans and advances to customers 555,260 595,694 731,265 555,260 728,393 874,722
Repurchase agreements and stock lending 32,739 38,006 83,666 32,739 38,006 83,666
Repurchase agreements and stock lending 82,094 68,353 58,143 82,094 68,353 58,143
Accruals, deferred income and other liabilities 23,074 24,624 24,140 23,089 30,327 31,482
Cash and balances at central banks were up £5.5 billion, 11%, to £57.0 billion due to an improvement in the Group's structural liquidity position during 2010.
Debt securities in issue were down £28.0 billion, 11% to £218.4 billion. Reductions in the level of certificates of deposit and commercial paper in Global Banking & Markets were partially offset by a programme of new term issuances totalling £38.4 billion.
Owner’s equity decreased by £2.6 billion, 3%, to £75.1 billion. This was driven by the partial redemption of preference shares and paid-in equity, £3.1 billion less related gains of £0.6 billion, the attributable loss for the period, £1.1 billion, together with an increase in own shares held of £0.7 billion and higher losses in available-for-sale reserves, £0.3 billion. Offsetting these reductions were the issue of £0.8 billion ordinary shares on conversion of US dollar and Sterling denominated non-cumulative preference shares classified as debt and exchange rate and other movements, £1.2 billion.
Debt securities were down £49.8 billion, 19%, to £217.5 billion, or £31.6 billion, 13%, adjusting for the disposal of the RFS minority interest, driven mainly by reductions in Global Banking & Markets.
The reduction in assets and liabilities of disposal groups resulted from the completion of disposals of certain of the Group’s Asian and Latin American businesses, and substantially all of the RBS Sempra Commodities JV business.
2009 compared with 2008 Total assets of £1,522.5 billion at 31 December 2009 were down £696.2 billion, 31%, compared with 31 December 2008, principally reflecting substantial repayments of customer loans and advances, as corporate customer demand fell and corporates looked to deleverage their balance sheets. Lending to banks also fell in line with significantly reduced wholesale funding activity. There were also significant falls in the value of derivative assets, with a corresponding reduction in derivative liabilities.
Movements in the value of derivative assets, down £553.3 billion, 56%, to £438.2 billion, and liabilities, down £547.9 billion, 57%, to £421.5 billion, reflect the easing of market volatility, the strengthening of sterling and significant tightening in credit spreads in the continuing low interest rate environment.
Deposits by banks declined by £109.0 billion, 41%, to £153.6 billion, due to a decrease in repurchase agreements and stock lending (‘repos’), down £45.7 billion, 55%, to £38.0 billion and reduced inter- bank deposits, down £63.3 billion, 35%, to £115.6 billion, principally in Global Banking & Markets reflecting reduced reliance on wholesale funding.
Debt securities in issue were down £23.1 billion, 9% to £246.3 billion, mainly as a result of movements in exchange rates together with reductions in Global Banking & Markets and Non-Core.
Equity non-controlling interests decreased by £3.2 billion, 59%, to £2.2 billion. Equity withdrawals of £3.1 billion, due to the disposal of the investment in the Bank of China attributable to minority shareholders and the redemption, in part, of certain trust preferred securities, the recycling of related available-for-sale reserves to income, £0.4 billion, and dividends paid of £0.3 billion, were partially offset by attributable profits of £0.6 billion.
Loans and advances to banks decreased by £46.4 billion, 34%, to £91.8 billion with reverse repurchase agreements and stock borrowing (‘reverse repos’) down by £23.7 billion, 40% to £35.1 billion and lower bank placings, down £22.7 billion, 29%, to £56.7 billion largely as a result of reduced wholesale funding activity in Global Banking & Markets.
Debt securities were flat at £267.3 billion and equity shares decreased by £6.8 billion, 26%, to £19.5 billion, principally due to the sale of the Bank of China investment and lower holdings in Global Banking & Markets and Non-Core, largely offset by growth in Group Treasury, in part reflecting an £18.0 billion increase in the gilt liquidity portfolio, and in the RFS Holdings minority interest.
Movements in the value of derivative assets, down £551.1 billion, 56%, to £441.5 billion, and liabilities, down £547.2 billion, 56%, to £424.1 billion, reflect the easing of market volatility, the strengthening of sterling and significant tightening in credit spreads in the continuing low interest rate environment.
Increases in assets and liabilities of disposal groups reflect the inclusion of the RBS Sempra Commodities JV business and the planned sale of a number of the Group's retail and commercial activities in Asia and Latin America.
Customer accounts were down £25.3 billion, 4%, to £614.2 billion. Within this, repos increased £10.2 billion, 18%, to £68.4 billion. Excluding repos, deposits were down £35.5 billion, 6%, to £545.8 billion, primarily due to; reductions in Global Banking & Markets, down £43.6 billion; Non-Core, £13.0 billion; including the transfer of £8.9 billion to disposal groups; and Ulster Bank, £1.2 billion; together with exchange rate movements, £21.3 billion, offset in part by growth across all other divisions, up £23.0 billion, and in the RFS Holdings minority interest, up £20.6 billion.
Subordinated liabilities were down £11.5 billion, 23% to £37.7 billion, reflecting the redemption of £5.0 billion undated loan capital, £1.5 billion trust preferred securities and £2.7 billion dated loan capital, together with the effect of exchange rate movements and other adjustments, £2.9 billion, partly offset by the issue of £2.3 billion undated loan capital within the RFS Holdings minority interest.
Equity non-controlling interests decreased by £4.7 billion, 22%, to £16.9 billion. Equity withdrawals of £3.1 billion, due to the disposal of the investment in the Bank of China attributable to minority shareholders and the redemption, in part, of certain trust preferred securities, exchange rate movements of £1.4 billion, the recycling of related available-for-sale reserves to income, £0.5 billion, and dividends paid of £0.3 billion, were partially offset by attributable profits of £0.3 billion.
Owners' equity increased by £18.9 billion, 32% to £77.7 billion. The issue of B shares to HM Treasury in December 2009 raised £25.1 billion, net of expenses, and was offset in part by the creation of a £1.2 billion reserve in respect of contingent capital B shares. The placing and open offer in April 2009 raised £5.3 billion to fund the redemption of the £5.0 billion preference shares issued to HM Treasury in December 2008. Actuarial losses, net of tax, of £2.7 billion; the attributable loss for the period, £2.7 billion; exchange rate movements of £1.9 billion; the payment of other owners dividends of £0.9 billion including £0.3 billion to HM Treasury on the redemption of preference shares, and partial redemption of paid-in equity £0.3 billion were partly offset by increases in available-for-sale reserves, £1.8 billion; cash flow hedging reserves, £0.6 billion; and the equity owners gain on withdrawal of non-controlling interests, net of tax, of £0.5 billion arising from the redemption of trust preferred securities.
Net cash flows from operating activities 19,291 (992) (75,338) Net cash flows from investing activities 3,351 54 16,997 Net cash flows from financing activities (14,380) 18,791 15,102 Effects of exchange rate changes on cash and cash equivalents 82 (8,592) 29,209 Net increase/(decrease) in cash and cash equivalents 8,344 9,261 (14,030)
Proceeds on disposal of discontinued activities of £20,113 million was the largest element giving rise to net cash flows of investing activities of £16,997 million. Outflow from net purchases of securities of £1,839 million and net disposals of property, plant and equipment, £3,529 million less the net cash inflow of £2,252 million in respect of other acquisitions and disposals represented the other principal factors.
Risk-weighted assets (1) Credit risk 385,900 513,200 551,300 Counterparty risk 68,100 56,500 61,100 Market risk 80,000 65,000 46,500 Operational risk 37,100 33,900 36,900 571,100 668,600 695,800 Asset Protection Scheme relief (105,600) (127,600) n/a 465,500 541,000 695,800
Note: (1) The data for 2010, 2009 and 2008 are on a Basel II basis; prior periods are on a Basel I basis.
banking sector, comparing a bank's capital resources with its riskweighted assets (the assets and off-balance sheet exposures are 'weighted' to reflect the inherent credit and other risks); by international agreement, the RAR should be not less than 8% with a Tier 1 component of not less than 4%. At 31 December 2010, the Group's total RAR was 14.0% (2009 - 16.1%) and the Tier 1 RAR was 12.9% (2009 - 14.1%).
Group operating profit/(loss) on a pro forma basis excludes: amortisation of purchased intangible assets; integration and restructuring costs; gain on redemption of own debt; strategic disposals; bonus tax; Asset Protection Scheme credit default swap - fair value changes; gains on pensions curtailment; write-down of goodwill and other intangible assets; and other Consortium Members’ interest in shared assets.
Income statement for the year ended 31 December 2010 RFS Reallocation minority of one-off Pro forma interest items Statutory £m £m £m £m
Net interest income 14,200 9 — 14,209 Non-interest income (excluding insurance net premium income) 13,334 (151) (652) 12,531 Insurance net premium income 5,128 — — 5,128 Non-interest income 18,462 (151) (652) 17,659 Total income 32,662 (142) (652) 31,868 Operating expenses (16,710) (8) (1,510) (18,228) Profit before other operating charges 15,952 (150) (2,162) 13,640 Insurance net claims (4,783) — — (4,783) Operating profit before impairment losses 11,169 (150) (2,162) 8,857 Impairment losses (9,256) — — (9,256) Operating profit/(loss) before fair value of own debt 1,913 (150) (2,162) (399) Fair value of own debt 174 — (174) — Operating profit/(loss) 2,087 (150) (2,336) (399) Amortisation of purchased intangible assets (369) — 369 — Integration and restructuring costs (1,032) — 1,032 — Gain on redemption of own debt 553 — (553) — Strategic disposals 171 — (171) — Bonus tax (99) — 99 — Asset Protection Scheme credit default swap - fair value changes (1,550) — 1,550 — Write-down of goodwill and other intangible assets (10) — 10 — Loss before tax (249) (150) — (399)
Operating loss before fair value of own debt (8,170) (484) (17,037) (25,691) Fair value of own debt 1,232 — (1,232) — Operating loss (6,938) (484) (18,269) (25,691) Amortisation of purchased intangible assets (443) — 443 — Integration and restructuring costs (1,357) — 1,357 — Strategic disposals 442 — (442) — Write-down of goodwill and other intangible assets (16,911) — 16,911 — Loss before tax (25,207) (484) — (25,691) Tax credit 1,995 172 — 2,167 Loss from continuing operations (23,212) (312) — (23,524) Loss from discontinued operations, net of tax (86) (10,932) — (11,018) Loss for the year (23,298) (11,244) — (34,542) Non-controlling interests (412) 11,244 — 10,832 Preference share and other dividends (596) — — (596) Loss attributable to ordinary shareholders (24,306) — — (24,306)
Balance sheet as at 31 December 2010 Pro forma Transfers (1) Statutory £m £m £m Assets Cash and balances at central banks 57,014 — 57,014 Net loans and advances to banks 57,909 2 57,911 Reverse repurchase agreements and stock borrowing 42,607 — 42,607 Loans and advances to banks 100,516 2 100,518 Net loans and advances to customers 502,748 — 502,748 Reverse repurchase agreements and stock borrowing 52,512 — 52,512 Loans and advances to customers 555,260 — 555,260 Debt securities 217,480 — 217,480 Equity shares 22,198 — 22,198 Settlement balances 11,605 — 11,605 Derivatives 427,077 — 427,077 Intangible assets 14,448 — 14,448 Property, plant and equipment 16,543 — 16,543 Deferred tax 6,373 — 6,373 Prepayments, accrued income and other assets 12,568 8 12,576 Assets of disposal groups 11,552 932 12,484 Total assets 1,452,634 942 1,453,576
Liabilities Bank deposits 65,938 113 66,051 Repurchase agreements and stock lending 32,739 — 32,739 Deposits by banks 98,677 113 98,790 Customer deposits 428,599 — 428,599 Repurchase agreements and stock lending 82,094 — 82,094 Customer accounts 510,693 — 510,693 Debt securities in issue 218,372 — 218,372 Settlement balances 10,991 — 10,991 Short positions 43,118 — 43,118 Derivatives 423,967 — 423,967 Accruals, deferred income and other liabilities 23,074 15 23,089 Retirement benefit liabilities 2,288 — 2,288 Deferred tax 2,111 31 2,142 Insurance liabilities 6,794 — 6,794 Subordinated liabilities 27,053 — 27,053 Liabilities of disposal groups 8,940 488 9,428 Total liabilities 1,376,078 647 1,376,725
Non-controlling interests 1,424 295 1,719 Owners’ equity 75,132 — 75,132 Total equity 76,556 295 76,851
Liabilities Bank deposits 178,943 (4,565) 174,378 Repurchase agreements and stock lending 83,666 — 83,666 Deposits by banks 262,609 (4,565) 258,044 Customer deposits 460,318 121,051 581,369 Repurchase agreements and stock lending 58,143 — 58,143 Customer accounts 518,461 121,051 639,512 Debt securities in issue 269,458 30,831 300,289 Settlement balances 11,728 13 11,741 Short positions 42,536 — 42,536 Derivatives 969,409 1,955 971,364 Accruals, deferred income and other liabilities 24,140 7,342 31,482 Retirement benefit liabilities 1,564 468 2,032 Deferred tax 3,177 988 4,165 Insurance liabilities 7,480 2,496 9,976 Subordinated liabilities 43,678 5,476 49,154 Liabilities of disposal groups 138 721 859 Total liabilities 2,154,378 166,776 2,321,154
Non-controlling interests 5,436 16,183 21,619 Owners’ equity 58,879 — 58,879 Total equity 64,315 16,183 80,498
These strategic risk objectives are the bridge between the Group level business strategy and the frameworks, measures and metrics which are used to set appetite and manage risk in the business divisions. The risk appetite framework is aligned with business objectives, with underlying and cascading frameworks and limits, which are described in this section. Enhancements have been made through the year and are ongoing.
Risk appetite Risk appetite is an expression of the level of risk that the Group is prepared to accept to deliver its business objectives. Risk and balance sheet management across the Group is based on the risk appetite approved by the Board, who will agree targets for each division and regularly review and monitor the Group's performance in relation to risk.
qualitative: ensuring that the Group applies the correct principles, policies and procedures, manages reputational risk and develops risk control and culture.
Introduction* continued Governance Risk and balance sheet management strategies are owned and set by the Group's Board of directors, and implemented by executive management led by the Group Chief Executive. There are a number of committees and executives that support the execution of the business plan and strategy, as set out below. Representation by, and interaction between, the individual risk disciplines is a key feature of the governance structure, with the aim of promoting cross-risk linkages. The roles and responsibilities fulfilled by the key risk committees have been reviewed and more clearly defined during the course of 2010.
Shown below are the specialist risk sub-committees that report into the Group Risk Committee.
Committee Focus Membership Group Board The Group Board is the main decision making forum at Group level.
It ensures that the Group manages risk effectively through approving and monitoring the Group’s risk appetite, considering Group stress scenarios and agreed mitigants and identifying longer term strategic threats to the Group’s business operations.
Group Chief Executive Group Finance Director Chief Administrative Officer Chief Executive Officers: US Retail & Commercial and Head of Americas; RBS Insurance; Global Banking & Markets; UK Corporate; and UK Retail, Wealth and Ulster Head of Restructuring and Risk
The Board Risk Committee provides oversight and advice to the Group Board in relation to current and potential future risk exposures of the Group and risk strategy, including determination of risk appetite and tolerance. It reviews the performance of the Group relative to risk appetite and provides oversight of the effectiveness of key Group policies, referred to as the Group Policy Framework.
At least three independent non-executive directors, one of whom is the chairman of the Group Audit Committee
The Remuneration Committee is responsible for the overview of the Group’s remuneration policy and remuneration governance framework, ensuring that remuneration arrangements are consistent with and promote effective risk management. The committee also makes recommendations to the Board on the remuneration arrangements for executive directors.
Group A members Head of Restructuring and Risk Deputy Chief Risk Officer Group Chief Credit Officer/Chief Credit Officer RBS N.V. Head of Global Restructuring Group Chief Risk Officer, Non-Core division/APS (alternate)
Identifies, manages and controls Group balance sheet risks. Group Finance Director Director, Group Finance Head of Restructuring and Risk Chief Executive Officer from each division Group Chief Accountant Group Treasurer Group Head of Capital Management Global Head of Balance Sheet Management, Group Treasury Global Head of Markets Head of Non-Core division
The Board Risk Committee considers and recommends for approval by the Group Board, the Group's risk appetite framework and tolerance for current and future strategy, taking into account the Group's capital adequacy and the external risk environment.
The Executive Risk Forum is responsible for ensuring that the implementation of strategy and operations are in line with the risk appetite determined by the Board with a particular focus on identifying and debating macro risks that could, if not managed effectively, impact adherence to the Group’s strategic plan. This is reinforced through policy and limit frameworks ensuring that all staff within the Group make appropriate risk and reward trade-offs within pre-agreed boundaries.
S tr a te gy an d hi gh le ve lR
Against a backdrop of further market instability, progress was made in meeting the Group’s strategic objectives: reduced reliance on shortterm wholesale funding; expanded customer deposit franchise; and increased maturity of term debt issuance.
The Group strengthened the structural integrity of the balance sheet through active management of both asset and liability portfolios including a centrallymanaged liquidity portfolio of £155 billion.
Further enhancements were made to the Group’s credit risk frameworks as well as the systems and tools that support credit risk management processes. The Group continues to reduce the risk associated with legacy exposures through further reductions in Non-Core assets.
Markets have remained both volatile and uncertain since 2007 resulting in a higher level of market risk, despite a reduction in trading book exposure.
The Group has continued to enhance its market risk management framework and reduced trading and banking book exposures, with asset sales and writedowns within Non-Core and banking book available-for-sale assets in Core.
The Group, other global financial institutions and the banking industry have faced increased legal, regulatory and public scrutiny.
The Group has continued to review and enhance its regulatory policies, procedures and operations. During 2010, there has been specific, targeted focus on enhancing arrangements for handling customer complaints and managing the risks associated with money laundering, and sanctions and terrorism financing.
Failure of the business to provide an experience which meets customers, regulators and other stakeholders’ expectations.
Government support brings heightened public scrutiny of the way the Group manages its business including: staff remuneration; how customers are managed; and the levels of lending in the UK and environmental impact.
In 2010, the Group established the Group Corporate Sustainability Committee, and also developed a framework for managing environmental, social and ethical risks to support its lending decisions. Businesses consider potential reputational risks and appropriate mitigants.
Pension risk The risk that the Group may have to make additional contributions to its defined benefit pension schemes.
Since the financial crisis of 2008/2009 there has been an increased focus, both amongst regulators and senior management, on stress testing as a means of identifying vulnerabilities within a financial institution and within the financial system as a whole.
The Executive Risk Forum is the main body overseeing the stress testing approach, processes and results. The forum is primarily responsible for reviewing and challenging the results of any Group-wide stress tests and ensuring, where necessary, appropriate management actions are initiated.
Industry wide scenarios RBS has taken part in a number of industry wide stress tests such as an EU-wide stress testing exercise, the results of which were published in July 2010.
The test confirms RBS remains well capitalised with a strong Tier 1 capital ratio under both the benchmark and adverse scenarios.
In addition to the EU stress test, during the second half of 2010 RBS has undertaken the FSA anchor scenario test.
More details on stress and scenario testing are set out in various sub sections in the following pages.
Capital* It is the Group’s policy to maintain a strong capital base and to utilise it efficiently throughout its activities to optimise the return to shareholders, while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the FSA.
The FSA uses risk asset ratio (RAR) as a measure of capital adequacy in the UK banking sector, comparing a bank’s capital resources with its RWAs (the assets and off-balance sheet exposures are weighted to reflect the inherent credit and other risks); by international agreement the RAR should be not less than 8% with a Tier 1 component of not less than 4%.
Key points Credit and counterparty RWAs fell by £15.8 billion principally due to Non-Core disposals partially offset by regulatory and modelling changes.
Market risk increased by £15.0 billion during the year principally due to an event risk.
The reduction in APS RWA relief relates to the run-off of covered assets.
The benefit of the APS to the Core Tier 1 ratio is 1.2% at 31 December 2010 (2009 - 1.6%).
In May 2010, the Group concluded a series of exchange and tender offers with the holders of a number of Tier 1 and upper Tier 2 securities. As a result of the exchange and tender offers, the Group realised an aggregate post-tax gain of £1.2 billion, which increased the Group’s Core Tier 1 capital ratio by approximately 0.3% and resulted in a reduction in the Group’s Total Tier 1 capital ratio of approximately 0.5%.
Individual Capital Adequacy Assessment Process (ICAAP) In addition to the calculation of minimum capital requirements for credit, market and operational risk, banks are required to undertake an ICAAP for other risks. The Group’s ICAAP, in particular, focuses on pension fund risk, interest rate risk in the banking book together with stress tests to assess the adequacy of capital over one year and the economic cycle.
Capital resources - proportional In addition to the fully consolidated basis monitored by the FSA for regulatory purposes, the Group also monitors its regulatory capital resources on a proportional consolidation basis reflecting only those businesses of RBS N.V that are retained by RBS. The Group’s regulatory capital resources on a proportional consolidation basis, in accordance with the FSA definitions, were as follows: Composition of regulatory capital - proportional* 2010 £m
Note: (1) Includes reduction for own liabilities carried at fair value (1,182) (1,057) (1,159)
Tier 1 Ordinary and B shareholders' equity 70,388 69,890 45,525 Non-controlling interests 1,719 16,895 21,619 Adjustments for: - goodwill and other intangible assets - continuing businesses (14,448) (17,847) (20,049) - goodwill and other intangible assets - discontinued businesses — (238) — - unrealised losses on available-for-sale (AFS) debt securities 2,061 1,888 3,687 - reserves arising on revaluation of property and unrealised gains on AFS equities (25) (207) (984) - reallocation of preference shares and innovative securities (548) (656) (1,813)
Operational risk Total APS Total 2010 £bn £bn £bn £bn £bn £bn £bn
UK Retail 41.7 — — 7.1 48.8 (12.4) 36.4 UK Corporate 74.8 — — 6.6 81.4 (22.9) 58.5 Wealth 10.4 — 0.1 2.0 12.5 — 12.5 Global Transaction Services 13.7 — — 4.6 18.3 — 18.3 Ulster Bank 29.2 0.5 0.1 1.8 31.6 (7.9) 23.7 US Retail & Commercial 52.0 0.9 — 4.1 57.0 — 57.0 Retail & Commercial 221.8 1.4 0.2 26.2 249.6 (43.2) 206.4 Global Banking & Markets 53.5 34.5 44.7 14.2 146.9 (11.5) 135.4 Other 16.4 0.4 0.2 1.0 18.0 — 18.0 Core 291.7 36.3 45.1 41.4 414.5 (54.7) 359.8 Non-Core 91.3 31.8 34.9 (4.3) 153.7 (50.9) 102.8 Group 383.0 68.1 80.0 37.1 568.2 (105.6) 462.6 129RBS Group 2010
Following the accession to the APS, HM Treasury provides loss protection against potential losses arising in a pool of assets. HM Treasury also subscribed to £25.5 billion of capital in the form of B shares and a Dividend Access Share, with a further £8 billion of capital in the form of B shares potentially available as contingent capital. The Group pays annual fees in respect of the protection and contingent capital. The Group has the option, subject to HM Treasury consent, to pay the annual premium, contingent capital and the exit fee payable in connection with any termination of the Group’s participation in the APS in whole or in part, by waiving the entitlements of members of the Group to certain UK tax reliefs.
Regulatory capital impact of the APS Methodology The regulatory capital requirements for assets covered by the Scheme are calculated using the securitisation framework under the FSA prudential rules. The calculation is as follows (known as ‘the uncapped amount’): First loss - the residual first loss, after impairments and write-downs, to date, is deducted from available capital split equally between Core Tier 1 and Tier 2 capital; HM Treasury share of covered losses - after the first loss has been deducted, 90% of assets covered by HM Treasury are risk-weighted at 0%; and
RBS share of covered losses - the remaining 10% share of loss is borne by RBS and is risk-weighted in the normal way.
Impact The Group calculates its capital requirements in accordance with the capped basis. Accordingly, the APS has no impact on the Pillar 1 regulatory capital requirement in respect of the assets covered by the APS. It does, however, improve the Core Tier 1 total capital ratio, of the Group as a whole. The protection afforded by the APS assists the Group in satisfying the forward looking stress testing framework applied by the FSA.
Future regulatory capital effects As impairments or write-downs on the pool of assets are recognised, they reduce Core Tier 1 capital in the normal way. This will reduce the first loss deduction for the Scheme, potentially leading to a position where the capital requirement on the uncapped basis would no longer, for the assets covered by the APS, exceed the Non-APS requirement and as a result, the Group would expect to start reporting the regulatory capital treatment on the uncapped basis.
Regulatory developments Basel III and CRD IV The Basel Committee released the final text on the new Basel III Capital and Liquidity Frameworks in December 2010, the contents of which were broadly as expected. Whilst most of the new rules are ‘final’ there are lengthy observation periods for the more novel elements (the liquidity coverage ratio, the net stable funding ratio and the leverage ratio) designed to identify any unintended consequences prior to full implementation and it is possible that some of the detail may be amended. The capital requirements for credit valuation adjustments (CVAs) with respect to counterparty risk are subject to a final impact assessment which is being carried out in the first quarter of 2011. The Committee’s guidance on the countercyclical capital buffers allows for significant judgement which will need to be clarified by national regulators. The potential impacts for RBSG are set out below.
Contingent capital and loss absorbency The Basel Committee issued its final rules on the requirements to ensure all classes of capital instruments fully absorb losses at the point of nonviability, before tax payers are exposed to loss. These are designed to combat the experience during the crisis where holders of Tier 2 capital instruments did not suffer any losses when banks were bailed out by the public sector. Debate continues, meanwhile, over possible requirements for bailing-in senior debt holders, as a further means of protecting the taxpayer.
Implementation by the Group RBS is advanced in its planning to implement these new measures and is appropriately well-capitalised with tangible equity of £56 billion, Core Tier 1 capital of £49 billion and a Core Tier 1 ratio of 10.7% at 31 December 2010.
Set out below are indicative impacts and timings of the major Basel 2.5 and Basel III proposals on the Group’s Core Tier 1 ratio. The estimates are still subject to change; a high degree of uncertainty still remains around implementation details as the guidelines are not fully finalised and must still be converted into rules by the FSA.
Basel III Counterparty risk: Proposed implementation date 1 January 2013 The impact on RWAs on implementation in 2013 is currently estimated at £45 to £50 billion post mitigation and deleveraging, although there may still be movement in the final framework around this risk.
Basel III Securitisations: Proposed implementation date 1 January 2013 Under the proposals, current deductions under Basel II (50% Core Tier 1, 50% Tier 2) for securitisation positions are switched to RWAs weighted at 1,250%. Post the run-off of securitisation positions and mitigating actions, the impact on implementation in 2013, on RWAs is estimated to be an increase of £30 billion to £35 billion with a corresponding reduction in deductions from Core Tier 1 and Tier 2 capital of £1.2 billion to £1.5 billion each. The impact net RWA equivalent of this change assuming a 10% Core Tier 1 ratio would be an increase in net RWA equivalents of £18 billion to £20 billion.
Summary impacts The extent of the individual areas of impact, as set out above, may continue to change over time. As previously indicated, however, the overall impact on RWAs of CRD III and CRD IV after mitigation and deleveraging is estimated to be £100 billion to £115 billion, before allowing for the offsetting reduction in deductions.
Other regulatory developments Treatment of Systemically Important Financial Institutions (SIFIs) Policy development around contingent capital and loss absorbency forms part of a wider policy initiative on addressing systemic institutions. A Financial Stability Board outline framework and plan of action was endorsed by G20 leaders at the November 2010 Seoul Summit. This now forms the main focus of global policy making following the finalisation of the Basel III framework. Policy initiatives in this area may include proposals for greater loss absorbency for systemic firms, the development of enhanced supervision and resolution frameworks, as well as recovery and resolution plans.
Markets in Financial Instruments Directive Review The EU Commission published a consultation on revising the Directive on Markets in Financial Instruments (MiFID2). The main proposals in the consultation are the extension of the transparency rules to include bonds and over the counter derivatives, measures to reinforce regulation of commodity derivatives and high frequency trading, strengthening investor protection and detailing the role of the new European Securities and Markets Authority.
Financial activities tax In a recent speech, the EU Tax Commissioner talked about the introduction of a potential Financial Activities Tax at a European level. There will be an impact assessment in 2011 to review the cumulative impact on financial institutions of new regulation, bank levy and taxes, as part of the Commission's on-going examination of possible tax measures.
Dodd-Frank In the United States the Dodd-Frank Wall Street Reform and Consumer Reform Act (Dodd-Frank) contains very significant reforms the full effect of which can only be assessed when the implementation rules are finalised. There have also been numerous derivative proposals from the Commodity Futures Exchange Commission (CFTC) and the Securities and Exchange Commission (SEC) plus joint agency proposals to implement minimum capital standards (Collins Amendment) and market risk capital guidelines.
Project Merlin On 9 February 2011, the UK Government and the major British banks including the Group, announced the creation of an accord, known as Project Merlin, aimed at demonstrating the clear and shared intent to work together to help the UK economy recover and grow. The banks: will work to foster credit demand, particularly among small and medium-sized businesses, and will make available additional lending capacity if demand should materialise above their current expectations; expect to contribute more in UK tax as their performance strengthens and their profits grow and will jointly contribute an additional £1 billion to the Business Growth Fund; confirm that the aggregate 2010 bonus pool including deferrals for their UK-based staff will be lower than that of 2009 and will reflect the engagement each bank has had with the Financial Services Authority, the UK Government and its shareholders, as well as their duty to manage pay policy to protect and enhance the long-term interests of shareholders; and will extend disclosure of remuneration details of their most senior executives beyond international norms.
The Government has in the light of the banks’ statements affirmed its commitment to maintaining a strong, resilient, stable and globally competitive UK financial services sector, and to implementing and applying European and international regulation to create a level playing field in both policy and practice.
Independent Commission on Banking The Independent Commission on Banking has published responses from banks, academics and other interested parties to its initial consultation. In its summary of the evidence received the Commission noted that there was considerable interest, both positive and negative, in the question of splitting retail and investment banks. The Commission plans to publish its interim report in April.
The Group is required to be compliant with the FSA Remuneration Code with effect from 1 January 2011: as a “Tier 1” organisation, the Code applies to all employees on a global basis; there are specific remuneration and governance requirements in relation to “Code Staff”; and following an ongoing review of our remuneration arrangements and discussions with the FSA, 2011 RBS remuneration arrangements are fully compliant with the FSA Remuneration Code.
Balance sheet management: Funding and liquidity risk All disclosures in this section (pages 134 to 145) are audited unless indicated otherwise with an asterisk (*).
Liquidity reserves The Group maintains liquidity reserves sufficient to satisfy cash requirements in the event of a severe disruption in its access to either wholesale or retail funding sources. The reserves consist of high quality unencumbered government securities and cash held on deposit at central banks. Government securities vary by type and jurisdiction based on local regulatory considerations. The currency mix of the reserves reflects the underlying balance sheet composition.
The Group's lead regulator is the Financial Services Authority (FSA). The FSA implemented a new liquidity regime on 1 June 2010. The new rules provide a standardised approach applied to all UK banks. At RBS, the rules focus on the RBS UK Defined Liquidity Group (a subset comprising the Group’s five main UK banks, The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Company and Adam & Company) and cover adequacy of liquidity resources, controls, stress testing and the Individual Liquidity Adequacy Assessment (ILAA) process. The ILAA informs the Board and FSA of the assessment and quantification of the Group’s liquidity risks and their mitigation, and how much current and future liquidity is required. The ILAA was approved by the Board in November 2010. The FSA is expected to issue ‘Individual Liquidity Guidance’ to the Group in 2011.
In December 2010, the BCBS issued the ‘International framework for liquidity risk measurement, standards and monitoring’ which confirmed the introduction of two liquidity ratios, the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). The introduction of both of these will be subject to an observation period, which includes review clauses to address and identify any unintended consequences.
Deposits by banks - cash collateral 28,074 3.8 32,552 4.0 45,783 4.8
Key points The Group has continued to reduce reliance on wholesale funding and diversify funding sources. Deposits by banks were reduced by 43% since 31 December 2009.
The Group has increased the proportion of its funding from customer deposits during 2010, from 51% at 31 December 2009 to 58% at 31 December 2010.
The proportion of debt instruments with a remaining maturity of greater than one year has increased in 2010 from 50% at 31 December 2009 to 61% at 31 December 2010.
Short-term borrowings* The table below shows details of the Group’s short-term borrowings.
At year end - balance (£bn) 115 42 26 38 221 242 347
Long-term debt issuances The table below shows debt securities issued by the Group with an original maturity of one year or more. The Group also executes other long-term funding arrangements (predominately term repurchase agreements) not reflected in the tables below.
1-2 years 1,698 4.4 2-3 years 3,772 9.8 3-4 years 5,910 15.4 4-5 years 559 1.5 5-10 years 14,187 37.0 > 10 years 12,252 31.9 38,378 100.0
Execution was strong across G10 currencies and diversified across the yield curve.
There were term issuances of £4.5 billion in January and February 2011.
Key points The Group had £41.5 billion outstanding at 31 December 2010 (2009 - £45.2 billion) of which £20.1 billion matures in 2011.
The Group’s funding plan for 2011 incorporates these maturities along with other structural balance sheet changes.
Special Liquidity Scheme* The Group does not use the Special Liquidity Scheme (SLS) to fund its business activities. The Group’s outstanding liabilities under the SLS are used to fund elements of its liquidity portfolio. Balances under the SLS continued to reduce in 2010.
Notes: (1) Includes FSA eligible government bonds of £34.7 billion at 31 December 2010. (2) Includes AAA rated US government guaranteed agencies. (3) Includes secured assets which are eligible for discounting at central banks, comprising loans and advances and debt securities.
The liquidity portfolio at the end of 2009 reflects the build up of liquid assets ahead of the legal separation of RBS N.V. and ABN AMRO in April 2010. Following the separation, the liquid assets and associated short-term wholesale funding were managed down to business as usual levels.
The Group anticipates that the composition of the liquidity portfolio will vary over time based on changing regulatory requirements and internal evaluation of liquidity needs under stress.
Funding and liquidity metrics The Group continues to improve and augment funding and liquidity risk management practices in light of market experience and emerging regulatory and industry standards. The Group monitors a range of funding and liquidity indicators for the consolidated Group as well as its principal subsidiaries. These metrics encompass short and long-term liquidity requirements under stress and normal operating conditions. Two important structural ratios are described below.
The table below shows the Group’s net stable funding ratio (NSFR) estimated by applying the Basel III guidance issued in December 2010. This measure seeks to show the proportion of structural term assets which are funded by stable funding including customer deposits, long-term wholesale funding, and equity.
Note: (1) Excludes repurchase agreements, bancassurance deposits to 31 March 2010 and loans are net of provisions. For Group before RFS MI only.
Assets and liabilities by contractual cashflow maturity The table below shows the contractual undiscounted cash flows receivable and payable up to a period of twenty years including future receipts and payments of interest of on-balance sheet assets by contractual maturity. The balances in the table below do not agree directly to the consolidated balance sheet, as the table includes all cash flows relating to principal and future coupon payments presented on an undiscounted basis.
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2010 £m £m £m £m £m £m Assets by contractual maturity Cash and balances at central banks 56,988 — — 1 — 25 Loans and advances to banks 33,809 1,377 711 120 193 79 Debt securities 11,247 9,816 25,059 22,400 40,600 22,128 Settlement balances 11,334 231 — — 41 — Other financial assets 458 221 207 15 405 — Total maturing assets 113,836 11,645 25,977 22,536 41,239 22,232 Loans and advances to customers 112,465 86,592 120,139 69,304 78,131 63,015 Derivatives held for hedging 530 1,588 2,612 638 210 101 226,831 99,825 148,728 92,478 119,580 85,348
Maturity gap (34,051) (38,474) (13,834) (9,205) 7,322 10,529 Cumulative maturity gap (34,051) (72,525) (86,359) (95,564) (88,242) (77,713)
Guarantees and commitments notional amount Guarantees (1) 31,026 — — — — — Commitments (2) 266,822 — — — — —
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2009 £m £m £m £m £m £m Assets by contractual maturity Cash and balances at central banks 52,239 — — 1 25 — Loans and advances to banks 42,615 1,757 966 282 868 71 Debt securities 17,581 14,484 29,675 26,788 52,104 30,335 Settlement balances 12,020 6 1 — 8 1 Other financial assets 265 215 402 127 421 — Total maturing assets 124,720 16,462 31,044 27,198 53,426 30,407 Loans and advances to customers 126,238 65,946 130,323 101,984 180,595 202,809 Derivatives held for hedging 488 1,547 3,049 1,076 751 10 251,446 83,955 164,416 130,258 234,772 233,226
Maturity gap (55,443) (50,371) (33,552) (6,085) 5,072 20,388 Cumulative maturity gap (55,443) (105,814) (139,366) (145,451) (140,379) (119,991)
Balance sheet management: Funding and liquidity risk continued Assets and liabilities by contractual cashflow maturity continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2008 £m £m £m £m £m £m Assets by contractual maturity Cash and balances at central banks 12,333 25 — — 2 29 Loans and advances to banks 61,630 19,369 2,673 921 111 70 Debt securities 26,006 12,895 24,629 23,927 57,846 24,535 Settlement balances 17,830 — — — 2 — Other financial assets 621 193 58 111 343 — Total maturing assets 118,420 32,482 27,360 24,959 58,304 24,634 Loans and advances to customers 195,553 81,054 138,378 125,621 160,271 152,084 Derivatives held for hedging 266 1,796 2,281 1,359 1,517 649 314,239 115,332 168,019 151,939 220,092 177,367
Liabilities by contractual maturity Deposits by banks 154,614 14,347 3,345 2,754 2,048 34 Debt securities in issue 131,714 48,652 40,067 38,223 38,667 5,626 Subordinated liabilities 1,753 4,271 6,824 5,793 24,503 13,030 Settlement balances and other liabilities 13,351 5 12 6 10 6 Total maturing liabilities 301,432 67,275 50,248 46,776 65,228 18,696 Customer accounts 523,268 33,450 6,577 6,337 7,298 5,319 Derivatives held for hedging 394 2,216 2,543 1,334 2,682 1,373 825,094 102,941 59,368 54,447 75,208 25,388
The tables above have been prepared on the following basis: The contractual maturity of on-balance sheet assets and liabilities above highlight the maturity transformation which underpins the role of banks to lend long-term but funded predominantly by short-term liabilities such as customer deposits. This is achieved through the diversified funding franchise of the Group across an extensive retail, wealth and SME customer base, and across a wide geographic network. In practice, the behavioural profile of many assets and liabilities exhibit greater stability and longer maturity than the contractual maturity.
Interest rate risk The banking book consists of interest bearing assets, liabilities and derivative instruments used to mitigate risks which are accounted for on an accrual basis, as well as non-interest bearing balance sheet items which are not subjected to fair value accounting.
Group Treasury aggregates exposures arising from its own external activities and positions transferred in from divisions. Where appropriate, Group Treasury nets offsetting risk exposures to determine a residual exposure to rate movements. Hedging transactions using cash and derivative instruments are executed to manage within the GALCO approved VaR limits.
IRRBB VaR for the Group's retail and commercial banking activities at a 99% confidence level was as follows: Average Period end Maximum Minimum £m £m £m £m
A breakdown of the Group's IRRBB VaR by currency is shown below.
In general, actions taken throughout 2010 to mitigate earnings sensitivity from interest rate movements were executed in US dollars, hence the year on year shift in VaR by currency.
Balance sheet management: Sensitivity of net interest income* The Group seeks to mitigate the effect of prospective interest rate movements which could reduce future net interest income through the movement of market rates in the Group’s retail and commercial businesses, whilst balancing the cost of such hedging activities on the current net revenue stream. Hedging activities also consider the impact on market value sensitivity under stress.
The following table shows the sensitivity of net interest income over the next twelve months to an immediate up and down 100 basis points change to all interest rates. In addition the table includes a 100 basis points steepening and flattening of the yield curves over a one year horizon.
Actions taken during the year increased the current base level of net interest income, while reducing the Group’s overall asset sensitivity.
US dollar 15,589 (2) 15,591 (3,846) 11,745 (5,696) 6,049 Euro 21,900 13,938 7,962 (2,351) 5,611 (3,522) 2,089 Other non-sterling 5,706 511 5,195 (4,001) 1,194 — 1,194 53,439 17,931 35,508 (15,298) 20,210 (11,915) 8,295 Note: (1) The economic hedges represent US dollar and euro preference shares in issue that are treated as equity under IFRS, and do not qualify as hedges for accounting purposes.
Structural foreign currency exposures have increased in sterling terms due to exchange rate movements and reduced hedging. The increased exposures more effectively offset retranslation movements in RWAs, reducing the sensitivity of the Group’s capital ratios to exchange rate movements.
The table below sets out the Group's banking book equity positions.
Risk management: Credit risk All the disclosures in this section (pages 146 to 165) are audited unless otherwise indicated by an asterisk (*).
GCR is additionally responsible for verifying compliance by the divisions with all Group credit policies. It is assisted in this by a credit quality assurance function owned by the Group Chief Credit Officer and housed within the divisions.
Wholesale: formal policies, specialised tools and expertise, tailored monitoring and reporting and in certain cases specific limits and thresholds are deployed to address certain lines of business across the Group where the nature of credit risk incurred could represent a concentration or a specific/heightened risk in some other form. Such portfolios are subject to formal governance, including periodic review, at either Group or divisional level, depending on materiality.
Sector Across wholesale portfolios, exposures are assigned to, and reviewed in the context of, a defined set of industry sectors. Through this sector framework, appetite and portfolio strategies are agreed and set at aggregate and more granular levels where exposures have the potential to represent excessive concentration or where trends in both external factors and internal portfolio performance give cause for concern. Formal periodic reviews are undertaken at Group or divisional level depending on materiality; these may include an assessment of the Group’s franchise in a particular sector, an analysis of the outlook (including downside outcomes), identification of key vulnerabilities and stress/scenario tests. Specific reporting on trends in sector risk and on status versus agreed appetite and portfolio strategies is provided to senior management and to the Board.
A formal single name concentration framework addresses the risk of outsized exposure to a borrower or borrower group. The framework includes specific and elevated approval requirements; additional reporting and monitoring; and the requirement to develop plans to address and reduce excess exposures over an appropriate timeframe.
Credit approval authority is discharged by way of a framework of individual delegated authorities that requires at least two individuals to approve each credit decision, one from the business and one from the credit risk management function. Both parties must hold sufficient delegated authority under the Group-wide authority grid. Whilst both parties are accountable for the quality of each decision taken, the credit risk management approver holds ultimate sanctioning authority. The level of authority granted to individuals is dependent on their experience and expertise with only a small number of senior executives holding the highest authority provided under the framework. Daily monitoring of individual counterparty limits is undertaken.
At a minimum, credit relationships are reviewed and re-approved annually. The renewal process addresses: borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; and compliance with terms and conditions. For certain counterparties, early warning indicators are also in place to detect deteriorating trends of concern in limit utilisation or account performance.
Single name concentrations Reducing the risk arising from concentrations to single names remains a key focus of management attention. Notwithstanding continued market illiquidity and the impact of negative credit migration caused by the current economic environment, significant progress was made in 2010 and credit exposures in excess of single name concentration limits fell by over 40% during the year.
Global Restructuring Group The Global Restructuring Group (GRG) manages problem and potential problem exposures in the Group's wholesale credit portfolios. Its primary function is to actively manage the exposures to minimise loss for the Group and, where feasible, to return the exposure to the Group’s mainstream loan book.
On transfer of the relationship, GRG devises a bespoke strategy that optimises recoveries from the debt. This strategy may also involve GRG reviewing the business operations and performance of the customer. A number of alternative approaches will typically be considered including: Covenant relief: the temporary waiver or recalibration of covenants may be granted to mitigate a potential or actual covenant breach. Such relief is usually granted in exchange for fees, increased margin, additional security, or a reduction in maturity profile of the original loan. Amendment of restrictive covenants: restrictions in loan documents may be amended or waived as part of an overall remedial strategy to allow: additional indebtedness; the granting of collateral; the sale of a business; the granting of junior lien on the collateral; or other fundamental change in capital or operating structure of the enterprise.
Payment holidays and loan rescheduling: payment holidays or changes to the contracted amortisation profile including extensions in contracted maturity or roll-overs may be granted to improve customer liquidity. Such concessions often depend on the expectation that liquidity will recover when market conditions improve or from capital raising initiatives that access alternative sources of liquidity. Recently, these types of concessions have become more common in commercial real estate transactions in situations when a shortage of market liquidity rules out immediate refinancing and short-term forced collateral sales unattractive.
Forgiveness of all or part of the outstanding debt: debt may be forgiven or exchanged for equity where a fundamental shift in the customer’s business or economic environment means that other forms of restructuring strategies are unlikely to succeed in isolation and the customer is incapable of servicing current debt obligations. Debt forgiveness is often an element in leveraged finance transactions which are typically structured on the basis of projected cash flows from operational activities rather than underlying tangible asset values. Maintaining the business as a going concern with a sustainable level of debt is the preferred option rather than realising the underlying assets, provided that the underlying business model and strategy are considered viable.
The following are generally considered as options of last resort: Enforcement of security or otherwise taking control of assets: where the Group holds underlying collateral or other security interest and is entitled to enforce its rights, it may take ownership or control of the assets. The Group’s preferred strategy is to consider other possible options prior to exercising these rights.
Insolvency: where there is no suitable restructuring option or the business is no longer regarded as sustainable, insolvency will be considered. Insolvency may be the only option that ensures that the assets of the business are properly and efficiently distributed to relevant creditors.
The total above exceeds 100% as an individual case can involve more than one type of arrangement.
Transfer of restructured loans to the performing book follows assessment by relationship managers in GRG. All cases are individually assessed; when no further losses are expected the loan is returned to performing status. Restructured loans that carry an impairment provision remain classified as impaired. Of the £3.5 billion of corporate loans that were transferred to the performing book with a concession during 2010, loans amounting to £1.8 billion had a negotiated margin increase as compensation for concessions granted.
Forbearance* The Group’s retail forbearance activities involve granting various contract revisions not normally available, such as reduced repayments, payment moratoriums and the roll up of arrears, principally to retail customers with secured lending that are experiencing temporary financial difficulties.
Loans are identified for forbearance primarily as a result of contact from the customer or payment arrears and it is only granted following an assessment of the customer’s ability to pay. For those loans that are classified as impaired, the Group’s objective is to minimise the loss on these accounts; for currently performing loans the aim is to enable the customer to continue to service the loan.
Forbearance lending for which an impairment loss provision has been recognised remains classified as non-performing. Where the customer met the loan terms prior to modification and where there is an expectation that the customer will meet the revised terms, these loans are classified as performing loans.
Retail loan forbearance arrangements during 2010 totalled £3.3 billion (residential mortgages £3.1 billion), of which £1.0 billion were classified as impaired. The incidence of the main types of retail forbearance is analysed below. % of loans
Credit risk mitigation* The Group employs a number of structures and techniques to mitigate credit risk. Netting of debtor and creditor balances will be undertaken in accordance with relevant regulatory and internal policies; exposure on over-the-counter derivative and secured financing transactions is further mitigated by the exchange of financial collateral and documented on market standard terms. Further mitigation may be undertaken in a range of transactions, from retail mortgage lending to large wholesale financing, by structuring a security interest in a physical or financial asset; credit derivatives, including credit default swaps, credit linked debt instruments, and securitisation structures; and guarantees and similar instruments (for example, credit insurance) from related and third parties are used in the management of credit portfolios, typically to mitigate credit concentrations in relation to an individual obligor, a borrower group or a collection of related borrowers.
The use and approach to credit risk mitigation varies by product type, customer and business strategy. Minimum standards applied across the Group cover: general requirements, including acceptable credit risk mitigation types and any conditions or restrictions applicable to those mitigants; the means by which legal certainty is to be established, including required documentation and all necessary steps required to establish legal rights; acceptable methodologies for the initial and any subsequent valuations of collateral and the frequency with which they are to be revalued (for example, daily in the trading book); actions to be taken in the event the current value of mitigation falls below required levels; management of the risk of correlation between changes in the credit risk of the customer and the value of credit risk mitigation; management of concentration risks, for example, setting thresholds and controls on the acceptability of credit risk mitigants and on lines of business that are characterised by a specific collateral type or structure; and collateral management to ensure that credit risk mitigation remains legally effective and enforceable.
Credit risk measurement Credit risk models are used throughout the Group to support the quantitative risk assessment element of the credit approval process, ongoing credit risk management, monitoring and reporting and portfolio analytics. Credit risk models used by the Group may be divided into three categories, as follows.
Loss given default These models estimate the economic loss that may be experienced (the amount that cannot be recovered) by the Group on a credit facility in the event of default. The Group’s loss given default (LGD) models take into account both borrower and facility characteristics for unsecured or partially unsecured facilities, as well as the quality of any risk mitigation that may be in place for secured facilities, plus the cost of collections and a time discount factor for the delay in cash recovery.
Credit risk assets consist of: Lending: cash and balances at central banks and loans and advances to banks and customers (including overdraft facilities, instalment credit and finance leases); Rate risk management (RRM); and
Key points All Core divisions either broadly maintained or reduced credit risk assets over the period. The exception, ‘Other’, is driven by exposures in Group Treasury. Growth here has occurred within the highest asset quality bands reflecting exposure to central banks in US, UK and Germany.
Non-Core exposure reduced in line with targets during 2010 as a result of disposals and active run-down of assets. Key reductions include the country exits in Asia & Latin America, material reductions in the Leveraged Finance business through asset sales and restructurings and unwinding of trades within the Markets business.
Credit risk assets: Asset quality* Using the PD models described previously, customers are assigned credit grades and scores, which are used for internal management reporting across portfolios, including a Group level asset quality scale, as shown below.
Internal reporting and oversight of risk assets is principally differentiated by credit grades. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across the Group map to both a Group level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Accordingly, measures of risk exposure may be readily aggregated and reported at increasing levels of granularity depending on stakeholder or business need.
Asset quality band PD range Core £m Non-Core £m Total £m %
AQ10 credit risk assets AQ10 £m % of divisional credit risk assets AQ10 £m % of divisional credit risk assets
UK Retail 5,017 4.6 4,846 4.7 UK Corporate 5,130 4.8 5,604 5.1 Wealth 9 — 11 0.1 Global Transaction Services 349 1.0 242 0.7 Ulster Bank 4,348 10.7 2,741 6.5 US Retail & Commercial 599 1.2 506 1.0 Retail & Commercial 15,452 4.3 13,950 3.9 Global Banking & Markets 2,551 1.5 2,806 1.4 Core 18,003 3.2 16,756 3.0 Non-Core 25,005 19.9 22,666 14.3 43,008 6.2 39,422 5.5
The table below provides a breakdown of AQ10 credit risk assets by sector.
Personal 7,620 6,955 Property 23,672 20,145 Banks and financial institutions 1,981 1,928 Transport and storage 1,689 1,026
Key points The Core divisions have generally seen an improvement in asset quality within the performing book during 2010 as the economic environment has slowly improved.
Country risk Under the Group's country risk framework, country exposures are actively managed both for countries that represent a larger concentration and for those which, under the country watch list process, have been identified as exhibiting signs of actual or potential stress.
Key points Credit risk assets relating to most of the countries above declined in 2010, reflecting active exposure management. In addition to the overall exposure reductions, granular portfolio reviews have been and continue to be undertaken with a view to adjusting the tenor profile and better alignment of the Group’s country risk appetite to the risk of adverse economic and political developments.
Republic of Ireland (ROI): lending fell by £4.3 billion in 2010, resulting from reductions in personal lending by £2.1 billion, central banks and other financial institutions by £0.5 billion and corporate clients by £1.6 billion. An increase was seen in Ulster Bank’s central bank exposure due to higher cash balances as part of its liquidity portfolio. The general trend in exposure remains downward. Divisional analysis is set out below: Ulster Bank represents more than 95% (£32 billion) of the Group’s Core lending to ROI and has seen a minimal increase of £0.64 billion in 2010, largely because of a rise of £0.3 billion in central bank placing due to increased cash holdings. Ulster Bank Core provisions at 31 December 2010 increased by 70% due to the continuing deterioration in the Irish economy.
Non-Core lending to ROI (£10.8 billion) declined by £4.2 billion in 2010, mainly due to a reduction in exposure to corporate and financial institutions of £3 billion during the year. In addition, customer advances in Lombard Ireland decreased by 30% during the year to £0.9 billion. Overall default levels have continued to show signs of stabilisation.
Portugal: lending decreased slightly by £0.1 billion related to reductions in corporate activity. Non-Core represents 41% of the total exposure; the structure of the exposure was enhanced through a shift to short-term and collateralised products to support the hedging needs of customers.
Total exposure to Egypt was £253 million at 31 December 2010, including lending of £124 million. The Group has minimal exposures to North African countries.
Other financial institutions 14,800 14,125 17,697 4,820 8,441 1,473 61,356 43,762 17,594 Sovereign (3) 18,172 27,421 4,038 3,950 414 2,217 56,212 53,595 2,617 Property 72,768 35,558 11,221 3,507 3,127 1,440 127,621 74,892 52,729 Natural resources 7,876 9,460 9,817 3,029 3,523 4,972 38,677 26,058 12,619 Manufacturing 11,197 14,875 8,718 3,695 1,306 2,633 42,424 33,400 9,024 Transport (4) 14,097 7,033 7,287 5,294 2,604 7,140 43,455 28,362 15,093 Retail and leisure 25,811 8,236 6,148 3,602 1,205 1,691 46,693 35,580 11,113 Telecommunication, media and technology 6,128 8,340 4,854 2,040 680 1,409 23,451 13,645 9,806 Business services 20,497 6,772 6,950 1,137 1,439 903 37,698 32,375 5,323 319,389 192,122 119,385 41,569 24,180 26,912 723,557 565,058 158,499
Notes: (1) Based on new sector mappings which are aligned to the sector concentration framework. (2) ‘Other’ comprises Central and Eastern Europe, Middle East, Central Asia and Africa. (3) Sovereign includes central bank exposures. (4) Excludes net investment in operating leases in shipping and aviation portfolios as they are accounted for as property, plant and equipment; however, operating leases are included in the monitoring and management of these portfolios.
Key points Exposure reductions occurred across most industry sectors and geographic regions.