42 Corporate Sustainability 44 Fair banking 45 Supporting enterprise 45 Employee engagement 46 Safety and security 46 Global citizenship 47 Community Investment 48 Report and accounts 49 Business review 207 Governance 239 Financial statements 349 Additional information 371 Shareholder information
We are one year into our five year turnaround plan and have taken significant steps along the path to recovery.
We are delivering our Strategic Plan ahead of schedule on both value creation (improvement of Core Bank) and risk reduction (Non-Core run-off).
Significantly lower loss attributable to ordinary and B shareholders £3.6 billion
• A universal bank, anchored by retail and commercial activities with strong, complementary investment banking capability
• Consistently profitable, with sustainable shareholder returns targeted at 15% on our tangible equity capital
(2) Indicative Core attributable profit, taxed at 28% on attributable core spot tangible equity (circa 70% of Group tangible equity based on risk-weighted assets).
2009 was a year of profound change and substantial challenges for RBS. But, in the course of the year, we have put in place the building blocks of our recovery plan and have begun the process of restoring the company to good health. The Group now has appropriate levels of new capital and our job is to make it work on behalf of shareholders.
More positively, the economic environment started to improve in the second half of the year, with the USA and UK emerging from recession, and many asset prices rising sharply. Expectations for growth in 2010 are muted, and important adjustments still need to take place in the global economy. We plan for the future on a conservative basis. But we take comfort from the fact that we appear to be moving into the recovery phase.
This support has come at a price, most notably the divestments we are required to make as part of our settlement with the European Commission. These partly relate to the Commission’s views on market share, with a particular focus on our small and medium-sized enterprise (SME) business in the UK, and will lead to the sale of the RBS branch network in England and Wales, and, the NatWest branches in Scotland. Other divestments are intended to act as a deterrent to companies seeking state aid, most notably the required sale of our insurance business.
This is not how we would have chosen to change RBS, because our absolute priority is restoring value for investors, including the UK taxpayer. Collectively, the businesses we will sell represent under 15% of the Group, and the disposals are a distraction we would have preferred to avoid. However, we have four years to make all our disposals. In that time frame, we are confident we can minimise any adverse impact and we expect to get proper value for shareholders.
Shareholders – rebuilding confidence and trust We know that we have to rebuild confidence and trust with investors. We believe the best way to do that is to combine clear performance targets with improved disclosure. Enhanced transparency will enable shareholders – both government and private – to measure and judge performance as we work to restore the Group’s financial performance. UK Financial Investments has been a demanding, engaged and active shareholder, most prominently on remuneration issues. However, it has at all times acted in a manner consistent with its status as an arm’s length, commercial investor, which intends to sell its interests in RBS at the earliest attractive time.
The losses the Group has recorded this year are driven by the legacy of actions taken in the past for which responsibility has been allocated. The relevant people are no longer with the Group. The bonus payments made this year are targeted at the staff who are tasked with the job of returning the Group to profitability by delivering sustainable growth in our Core business and managing down the legacy exposures in our Non-Core Division.
With regard to our Group Chief Executive, Stephen Hester was recruited 15 months ago to lead the RBS turnaround. The Board’s Remuneration Committee considers that Stephen Hester significantly outperformed the targets he was set for 2009 and intended to award a bonus commensurate with that view. He decided to waive this bonus award, given public controversy on banking pay and the potential for his bonus to divert attention from and weaken support for the RBS turnaround and recovery. However, it remains the Board’s intention over the course of the recovery period to reward the Chief Executive fairly, appropriately and at market levels for achievement against the targets we have published to make the bank safe, successful and valuable again. Gordon Pell, Deputy Chief Executive, who retires at the end of March 2010, also waived any bonus award for 2009.
Serving our communities We are acutely aware of our responsibility to repay the support we’ve received and to enable the UK taxpayer to exit from the investment in RBS. But there is more we can do to support our customers and the wider communities we serve. For example, we’ve been at the forefront of measures taken to minimise mortgage repossessions and to guarantee overdraft prices for small businesses.
Moreover, the withdrawal of foreign lenders has been less pronounced than anticipated, there has been a sharp increase in capital market issuance and demand has been weak in the teeth of the recession. As a result we have not achieved our £16 billion net lending target. Even so, we are ready, willing and able to lend, and approved 85% of loan applications during 2009, a rate consistent with previous years.
Goals Put simply, we have three overriding objectives: • to serve our customers well; • to restore the Bank to undoubted standalone strength; and
The riskiest part of RBS’s journey is now behind us. There are four years left of our recovery plan. Each year we expect to report strong, measurable progress.
We are concentrating RBS around the competitive strengths we enjoy in each of our Core business Divisions. We are focusing on what we are good at and making it better. At the same time we are reducing our balance sheet, risk and funding exposures through massive restructuring and are reducing both scale and scope in areas where we are not naturally strong. We are re-engineering cost structures and have embarked on overdue business investment. Cross-cutting management and cultural change has also been comprehensive.
Customers In 2009, our Core businesses sustained their market positions, with customer numbers steady or growing across the Group’s major retail and corporate business lines, thereby confirming the essential health and value that underpins RBS’s businesses. This is also a testimony to the efforts and endurance of our people. We can and must do better still, however. The new RBS will be known for its unswerving focus on customers.
Group Chief Executive’s review peak to 135%, and in our Core business is just 104% compared with our 2013 target of c.100%. Our Core Tier 1 capital ratio is a robust 11.0%, which we expect to be enough to meet the further challenges we anticipate in 2010 before the expected recovery takes stronger hold in 2011, and to take account of the direction of regulatory change.
UK Government support has enabled our capital improvement. This support also encompasses the Asset Protection Scheme (APS) and related Contingent Capital Line finalised in December, and accompanied by European Union sign-off, subject to agreed remedies.
Profits Goal number three, restoration of sustainable shareholder value, will take the longest, though its prospect is becoming clearer. To achieve this goal we need to make sure that our Core business improvement measures succeed and to complete the Non-Core exit; we also need economic recovery. Nevertheless, progress in 2009 was encouraging. Our Core business posted operating profit of £8.3 billion (up 89% on 2008). £5.7 billion of these profits came from Global Banking & Markets (GBM), our investment banking arm, which successfully took advantage of buoyant markets despite the handicaps of its own radical restructuring. While we expect this level of core profits to decrease in 2010 as GBM’s markets normalise, our retail and commercial businesses, which we believe reached their cyclical trough in 2009, should bounce back in the coming years, eventually constituting a stable two-thirds of Group profits.
• Thirdly, as the prospect of share sales becomes more realistic, RBS can transition from financial ‘problem’ to ‘opportunity’. This will also help underpin the message to staff, shareholders and customers that RBS is being run commercially on behalf of all shareholders.
We needed to make comprehensive changes at the top and throughout our organisation, and we have implemented these changes decisively. On-going challenges from efficiency measures and business reduction are manifest. Finally, the sheer magnitude and intensity of institutional change, the pressure on morale of backward-looking commentary and customer uncertainty, the dents to pride and personal savings all take a toll. Our people face significant headwinds. Yet good, motivated, wellmanaged people are a vital necessity for achieving each of our three overriding goals.
RBS’s recovery is a work in progress. Management’s greatest task is human renewal and motivation. We have experienced damaging losses of skilled people and will continue to do so. But to date the overall signs are positive. The transition we need to make is ahead of schedule. Our people, new and old, are doing their jobs, and doing them well. Compliments are due to them for this.
Regulation Change is needed and is happening. As a large, diversified, systemic bank, and as a poster child for what needed reforming, RBS is both affected and constructively engaged. Three strands of change are discernible. The changes in process around the Basel rules on quality and quantity of capital, on risk weighting and on liquidity are generally well conceived and appropriate. However, their combination needs careful calibration to ensure the right balance between effectiveness and jeopardising economic growth and industry stability. Similarly, a measured timetable for implementation is vital. Done properly, we welcome the direction of change; it fits our own self-administered change and should be accommodated within our plans for the coming years.
The Basel changes are designed to reduce the probability of default in financial services. That leaves another critical strand of work around what happens in the case of default, even if much less likely to happen than before. We must make sure that our industry does not need the
The economic backdrop was difficult, despite a gradual improvement as the year wore on.
At the beginning of 2009, the global economy was in the grip of a recession described by the International Monetary Fund as “unprecedented in the post-World War II era”. This prompted a coordinated policy response by central banks and governments around the world. Interest rates were cut sharply and some countries took the extra step of introducing quantitative easing – including the UK. Fiscal policy was also loosened.
Commercial property valuations took longer to recover. Having fallen by 44% over the previous two years, UK valuations started to rise again in August 2009, and have since rebounded by 9%, according to International Property Databank (IPD). However, valuations were still falling in Ireland and the US as at Q4.
Policy loosening also led to an improvement in economic performance, with the rate of decline in gross domestic product (GDP) easing, then reversing in our core economies as 2009 progressed. The US emerged from technical recession in Q3 2009, and the UK in Q4 2009. Even so, the whole year growth outturns confirm that 2009 was, on balance, a challenging year for our core markets: • UK GDP shrank by 4.8% – the largest decline on record, and a much worse outturn than economists were expecting when we reported our 2008 Results (-2.6%, according to Consensus Economics). The recession hurt many of our customers, with unemployment rising and corporate profitability falling.
• In Ireland, the recession was even more pronounced. GDP fell by an estimated 7.3%, according to Consensus Economics. That’s mainly because property and construction are more prominent in the Irish economy, and suffered even sharper corrections.
The economic outlook The nascent recovery has more to do with policy stimulus than a reduction in the global imbalances that helped cause the recession. Savings rates have risen in the US and UK, but households, government and – to a lesser extent – companies still have a way to go to get debt down to more comfortable levels.
M Keep up-to-date with our latest economic research and analysis at www.rbs.com/economics level of systemic and specific support called upon in 2008/09 in any future crisis. To enable banks to fail without a seizing-up of our financial system or a disastrous domino effect is a complex re-engineering challenge, especially when the scenario in question is not individual bank failure but systemic threat to many banks. I believe the answer lies in devising a ‘Chapter 11’ regime for banks, a clearer and swifter loss attribution mechanism beyond equity and a reduction in counterparty risk. Size and shape of themselves are a red herring, as surely all the facts of the crisis bear out. In any event, change in the area of crisis resolution is a must. But the consequences may be far-reaching and may have unforeseen side effects. We need thoughtful, purposeful dialogue leading to reform that works and we need to avoid rushed measures that distract.
Shareholders RBS is being restructured and run to serve customers well, to be safe and stable and to restore sustainable shareholder value for all. It is our legal duty. It is our intention and desire. It is also the only way by which taxpayers will recover the support they have entrusted us with.
As we go through implementation of RBS’s Strategic Plan, RBS’s value will be determined by the improved sustainable earnings power of our Core business. The losses from the Non-Core wind-down will continue for a time, but should increasingly be seen as catered for in our financial structure. As confidence grows, we will be able to resolve the complexities in our capital structure and the Government will have opportunities to sell down its stake, thereby adding clarity and reducing the risk discount that is perceived today.
When we speak to our investors, some questions are asked more often than others. Below we provide a selection of those frequently asked questions – and answers.
We will look to conclude some of the disposals quickly. For example, RBS Sempra Commodities agreed to sell its Metals, Oil and European Energy business lines to J.P. Morgan for $1.7 billion, as announced on 16 February 2010. Others will take longer. We are making good progress on the divestment of RBS branches in England and Wales, and NatWest branches in Scotland; we have a target to agree a buyer in 2010, though the complex separation issues mean we don’t expect to complete until 2011. We are considering our options on the RBS Insurance divestment, including an IPO in the second half of 2012.
x Where are you in the impairment cycle? We believe impairment losses are likely to have peaked in 2009, having increased to £13,899 million from £7,432 million in 2008. There are complementary indications that the pace of downwards credit rating migration for corporates is slowing. Nonetheless, the financial circumstances of many consumers and businesses remain fragile, and rising refinancing costs, whether as a result of monetary tightening or of increased regulatory capital requirements, could expose some customers to further difficulty.
x What has been happening to margins, and why? Our net interest margin has now shown two quarters of improvement, despite the continued squeeze on liability margins and higher liquidity costs. In 2009 overall, net interest income declined by 14%, as the Group net interest margin narrowed by 32 basis points to 1.76%. Deposit margins remain under pressure, with strong competition particularly for longer term deposits and rates on many products already at floors in the current low interest rate environment. However, asset margins were gradually rebuilt over the course of the year, leading to a recovery beginning in overall net interest margins in the Core retail and commercial banking Divisions in the second half.
The ability to motivate and retain our best employees is critical to the future success of RBS so, first and foremost, we need to make sure the percentage of highly-rated people leaving us doesn’t rise any further. Ideally, we need to reverse that trend, though this will partly depend on our ability to convince staff and recruits that RBS is being run commercially.
Key to pictures 1. Philip Hampton, Chairman 2. Stephen Hester, Group Chief Executive 3. Bruce Van Saun, Group Finance Director 4. Colin Buchan 5. Sandy Crombie 6. Archie Hunter 7. Joe MacHale 8. Penny Hughes 9. John McFarlane 10. Arthur “Art” Ryan 11. Philip Scott 12. Miller McLean
Abbreviations A member of the Group Audit Committee N member of the Nominations Committee R member of the Remuneration Committee Ri member of the Board Risk Committee * independent non-executive director
Stephen Hester (age 49) Group Chief Executive Appointed to the Board on 1 October 2008 and as Group Chief Executive on 21 November 2008, Stephen Hester was chief executive of The British Land Company PLC. He was previously chief operating officer of Abbey National plc and prior to that he held positions with Credit Suisse First Boston including Chief Financial Officer, Head of Fixed Income and co-Head of European Investment Banking. Between February and October 2008, he was non-executive deputy chairman of Northern Rock plc. He is also a trustee of The Foundation and Friends of the Royal Botanical Gardens, Kew.
Gordon Pell (age 60) (not pictured) FCIBS, FCIB Deputy Group Chief Executive Appointed to the Board in March 2000, Gordon Pell was formerly group director of Lloyds TSB UK Retail Banking before joining National Westminster Bank Plc as a director in February 2000 and then becoming Chief Executive, Retail Banking. He is also a director of Race for Opportunity and a member of the FSA Practitioner Panel. He was appointed chairman of the Business Commission on Racial Equality in the Workplace in July 2006 and deputy chairman of the Board of the British Bankers Association in September 2007. He will retire from the Board on 31 March 2010.
Miller McLean (age 60) FCIBS, FIB Miller McLean was appointed Group Secretary in August 1994. He is a trustee of the Industry and Parliament Trust, non-executive chairman of The Whitehall and Industry Group, and immediate past president of the Chartered Institute of Bankers in Scotland. He will retire from the Group on 30 April 2010.
Archie Hunter* (age 66) A (Chairman), N, Ri Appointed to the Board in September 2004, Archie Hunter is a chartered accountant. He was Scottish senior partner of KPMG between 1992 and 1999 and president of The Institute of Chartered Accountants of Scotland in 1997/98. He has extensive professional experience in the UK and North and South America. He is currently chairman of Macfarlane Group plc, a director of Edinburgh US Tracker Trust plc and a governor of the Beatson Institute for Cancer Research.
Arthur ‘Art’ Ryan* (age 67) N Appointed to the Board on 1 October 2008, Art Ryan is the former chairman, chief executive officer and president of Prudential Financial Inc. Previously he held senior positions with Chase Manhattan Bank NA. He is currently a non-executive director of Regeneron Pharmaceuticals Inc. and an active member of numerous community boards. He was a founding member of the Financial Services Forum.
Stephen Hester, Group Chief Executive Gordon Pell, Deputy Group Chief Executive Bruce Van Saun, Group Finance Director
Brian Hartzer (age 43) Chief Executive, UK Retail, Wealth and Ulster Bank Brian Hartzer joined The RBS Group in 2009. A Princeton graduate, he is a joint US and Australian citizen. Brian joined ANZ in 1999 and ran its Consumer Finance business (credit cards, merchant services and personal loans) until 2004. He then took over the full Retail bank portfolio (including SME and Wealth), and in 2008 added the role of Chief Executive Australia for all ANZ business lines, as well as Global Segment Lead for Retail. Before joining ANZ, Brian was a financial services consultant in New York, San Francisco and Melbourne for 10 years.
Chris Sullivan (age 52) Chief Executive, UK Corporate Chris Sullivan was appointed Chief Executive of the UK Corporate Banking Division and the GTS Division in August 2009. His previous role was Chief Executive of RBS Insurance, the second largest general insurance provider in the UK. Prior to this, Chris was Chief Executive of Retail and Deputy Chief Executive of Retail Markets. Chris is Vice Chairman of the Association of British Insurers, Chairman of the General Insurance Council and a member of the CBI President’s Committee. He spent five years as Chief Executive of Lombard Asset Finance where he developed the business to a leadership position in the UK and Europe. Chris Sullivan earned his Fellowship of Chartered Institute of Bankers Scotland for his services to Scottish Banking.
John Hourican (age 39) Chief Executive, Global Banking & Markets Prior to his recent appointment as Chief Executive, Global Banking & Markets, John Hourican was the Chief Financial Officer and Board Member responsible for Group Finance after his appointment to the ABN AMRO Managing Board in November 2007. Before his Managing Board appointment, John was Head of Leveraged Finance, Global Banking & Markets. In this role, John was responsible for leading RBS’s market leading Leveraged Finance and High Yield business in Europe and Asia Pacific. John joined RBS in 1997 and held a variety of senior positions within RBS’s wholesale banking Division, notably on the Division’s board as Finance Director and more recently as Chief Operating Officer where he was responsible for managing 3,000 people globally.
Ellen Alemany (age 54) Chief Executive, Citizens and Head of Americas Ellen Alemany joined The RBS Group in June 2007 from Citigroup, where she was CEO for Global Transaction Services. She was also a member of the Citigroup Operating Committee, Corporate and Investment Planning Group, and Global Banking Operating Committee. Ellen began her banking career at Chase Manhattan Bank in 1977, working in Operations, Structured Trade, and the Media and Electronics Department as a Senior Lender. In October 2009, she was listed 17th on US Banker’s list of the 25 Most Powerful Women in Banking.
Our strategy is simple and its concepts are well tested in this and other industries. Its implementation, however, constitutes one of the largest and most far reaching company restructurings yet seen globally.
We aim to remake RBS as one of the world’s most admired, valuable and stable universal banks. Driven by market-leading businesses in large customer-driven markets, RBS targets a 15%+ sustainable return on equity from a stable AA category risk profile and balance sheet.
For years Andrew has wanted to ride his motorbike across South Africa. This time last year he came to see us and we helped him put a savings plan together. Soon he’ll be on his way for real.
RBS to generate a sustainable 15%+ return on equity, powered by market-leading businesses in large customer-driven markets
Income growth Focus on businesses capable of delivering sustainable growth and achieve market-level growth in each
Cost control Deliver more than £2.5 billion efficiency savings by 2011 through the Group’s new cost programme, whilst making essential investments in our businesses. Achieve a cost:income ratio that places RBS among the most efficient of its global peers
Reduced balance sheet scale De-risk and shrink the Group’s balance sheet, including careful control of future asset growth
Funding programme Plans to 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
Refocus on the core strength of GBM GBM’s strategic plan is the most radical in The RBS Group, and will refocus the business on its core franchises, with disciplined deployment of capital to support its targeted client base
Publish targets for risk/return balance Demonstrate execution effectiveness by setting clear performance targets for risk and return, 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
Set customer franchise targets for every business Maintain excellent customer service as a core objective of the Group, now defined with reference to a series of targets
Management change At the centre of its efforts to rebuild standalone strength, RBS has completely restructured its Board and its senior management team
Group loan:deposit ratio of c.100% Wholesale funding reliance <£150 billion Liquidity reserves of c.£150 billion
2009 was not a normal year. Volatility and unprecedented, unconventional monetary policy interventions produced strong income growth in some businesses, while the recession depressed it in others. All the Core business franchises have shown their resilience through difficult economic conditions, and are well positioned as the major economies in which they operate start to recover.
During 2009 total assets were cut by £696 billion with funded assets declining by £143 billion. Non-Core reduced its total third party assets, excluding derivatives, to £201 billion. Tier 1 leverage ratio declined from 21.2x in 2008 to 17.0x in 2009.
In the UK, the number of Retail current accounts increased by more than 3% on the year and the number of mortgage accounts by 10%. UK Corporate Banking opened 100,000 start-up accounts in the nine months to September 2009. Ulster Bank held SME and corporate customer numbers stable over the last year and increased consumer accounts by 3%, compared with December 2008. US Retail added 58,000 personal checking accounts over the course of the year.
RBS has published a series of financial targets, for the Group as a whole and for individual Divisions (see page 18). We are delivering our Strategic Plan ahead of schedule on both value creation (improvement of Core Bank) and risk reduction (Non-Core run-off).
RBS set a new benchmark for disclosure among UK banks, in terms of both level and frequency (e.g. only UK bank to do full quarterly reporting).
Each Division is being monitored against a variety of market position metrics and customer satisfaction scores. Good progress was made last year. For example, our share of the UK mortgage lending market (gross) increased to 12% from 7% in 2008. Also, Business & Commercial Banking and Corporate & Institutional Banking both maintained their market-leading customer satisfaction scores. Progress on intra-Group connectivity/cross sales is also assessed. For example, 500,000 insurance policies were sold via the branch networks of RBS and NatWest.
The Group Board has been significantly changed with a new Chairman, Group Chief Executive, Group Finance Director, Senior Independent Director and several new members. The new Executive Committee was established in 2009 comprising the chief executives of the customer-facing Divisions of the Group, as well as the Chief Financial Officer, Head of Restructuring and Risk, and the Chief Administration Officer.
UK Retail We offer a range of banking and financial services to over 15 million personal customers. We also serve small business customers through our branches.
Target 2013 Unlocking the value of our customer franchise as the most helpful retail bank in the UK.
Target 2013 Strong wholesale bank, built around clients in chosen markets, with much lower risk.
Target 2013 Becoming UK’s leading and most profitable general insurance business.
• We offer Structured Retail Products to retail clients across Europe and Asia through our GBM business. RBS listed products can be traded like a share through a stockbroker or IFA. GBM works with our internal sales network to distribute these products through RBS Private Banking, NatWest Private Banking, Coutts, RBS Coutts and Ulster Bank.
• GBM helps agricultural customers hedge their Common Agricultural Policy payments from the EU. The payments are set in euros and UK farmers can be exposed to fluctuations in exchange rates. GBM offers services which give farmers certainty over the payment they will receive.
• Our Retail Division hosts services for business banking in branches.
We need a high capital ratio to meet society’s expectations of a safer banking system.
We want to reduce this vulnerability, so that wholesale funding is predominantly used for non-loan assets.
We target a conservative leverage ratio, at a level consistent with other leading banks.
We cannot achieve a 15% RoE without cost control and asset margin re-pricing.
The risk arising from the possibility that the Group will incur losses owing to the failure of customers to meet their financial obligations to the Group.
The risk of financial, customer or reputational loss resulting from: fraud; human error; ineffective, or inadequately designed, processes or systems; improper behaviour; or external events.
•Additional regulation can be introduced as a result of other risk losses
• Pension risk arises because of the uncertainty of future investment returns and the projected value of schemes’ liabilities
Asset quality deteriorated in all portfolios in 2009, with higher impairments impacting our earnings and weaker assets incurring increased capital requirements. In both cases, the impact was greatest in corporate portfolios and the rate of decline was highest in the first half of the year.
Reopening of credit markets, increased market focus on building up liquidity reserves, and marketwide liquidity provided to the banking system through central bank quantitative easing.
Increasing losses due to bodily injury claims in the motor insurance business affecting both RBS Insurance and the UK motor insurance industry as a whole.
On reputation, government support brings heightened public scrutiny of our wider Corporate Sustainability agenda e.g. how we manage customers, data, diversity, and our environmental impact.
We have reduced trading book exposure with sales, reclassification of assets to the non-trading book and write-downs.
We have taken various steps to address the current and future impact of bodily injury trends, including: rating and pricing changes; sales optimisation; and claims management.
We have enhanced control frameworks and policy standards to improve the identification and management of operational risk within each of our Divisions. Material events are escalated to Divisional and Group Executive.
We have a proactive engagement strategy with the FSA and other regulators, driven by a no-surprises culture, and a well developed Regulatory Developments framework, which assigns Senior Executive responsibility for all material risks.
On reputation, we established the Group Corporate Sustainability Committee in January 2010, chaired by one of our Non-Executive Directors.
We have taken steps to mitigate the cost and risk of our main UK pension scheme and other UK and Republic of Ireland schemes by capping pensionable salary growth.
During the year, we changed the opening hours of more than 600 branches so that we could better meet customers’ needs.
The recession made 2009 a very difficult year for our customers and for UK Retail. Although the bottom-line figures are disappointing, we continued to make the kind of progress that we need to return to good health. In Branch Banking, customer deposits grew 11% on 2008, reflecting the strength of our franchises. Customers opened an extra 2.2 million savings accounts – a 20% rise – and savings balances were up by 11%. The number of current accounts increased by 3%. In Private Banking & Advice, we also saw resilient returns, with performance for mortgages and savings particularly good. Overall investment sales increased by 3% on the previous year and our Independent Financial Services business experienced a similar trend. Our Financial Planning business also performed robustly, with a market share of 14%.
increase in customer deposits in the year increase in mortgage customers in the year
We’re already putting Helpful and Sustainable banking into practice. In September, we cut the price of un-arranged borrowing and reduced the fee we charge for unpaid items from £38 to £5 and the maximum monthly charge was halved. We also decreased referral fees, maintenance charges and interest rates for un-arranged borrowing on most accounts.
Over 5.5 million accounts have chosen to convert to paperless banking. Receiving their statements online rather than through the post is better for the environment and has saved postage and printing costs.
To increase the service options available to our customers we introduced almost 450 Cash Deposit Machines to more than 250 branches. This enables customers to make deposits without queuing and, so far, more than £2 billion has been deposited in this way, which has freed up a significant amount of our employees’ time to serve customers even better.
Shortly after he became Chief Executive of our Corporate Banking Division in August 2009, Chris Sullivan told a gathering of colleagues, “The thing we are here to do is to support business customers to run successful businesses.”
The recession and the need to rebuild our own business could have distracted us from that task. But it didn’t. Instead, we knew that as more start–ups choose RBS over any other bank we had a responsibility to support our customers in difficult times – and that is exactly what we did.
At its busiest times, Business Hotline has taken over 100 calls a day. Although we believe that RBS and NatWest get it right most of the time, we have changed a number of our decisions not to lend as a result of calls to Business Hotline and we’ve also been able to lend to companies who contacted us having been turned down by other banks.
In November, we published our first ever SME Customer Charter. It tells businesses what they can expect from us and how we will behave. It reaffirmed our Committed Overdraft Promise, extending it to the end of 2010. That means customers’ committed facilities will remain in place for at least 12 months. We also promised not to increase overdraft pricing unless there is a material increase in the risk associated with lending. Where the risks fall, we will reduce SMEs’ prices.
We offer our customers a combination of a committed overdraft and a price promise. As a result, nine out of 10 small business customers have had their overdraft facilities renewed at the same or a lower margin.
We are providing new loans to over 5,000 businesses per week
One of the ways we respond to customers’ needs is by finding better methods of serving them. In 2008, we piloted a branch dedicated to business customers, in Colchester. It worked well, so we rolled out a further four business branches in 2009. Each branch has two business experts positioned at the front of the banking hall, supported by teams who have been specially trained to meet our business customers’ needs.
During a recession some customers need extra help. We have a Specialised Relationship Management team made up of 500 experienced bankers, many of whom have worked through previous downturns. They monitor how customers are doing and can spot when a customer seems to be facing particularly difficult trading conditions. That allows us to give these customers close, one-to-one help until their business is returned to health.
And, of course, we continue proactively to look for ways to help SMEs. We are currently approving 85% of all business applications for credit and providing new loans to over 5,000 businesses each week. But demand has been weak, making our Commitments tough to meet. If all of our business customers had fully utilised the facilities we offered them, we would comfortably have exceeded our Commitments target.
We are investing in our people and technology, and our impairments programme is allowing us to manage the impact of bad debts and asset write-downs. We have enhanced how we manage risk, by introducing improved governance and risk management models.
Some of our most famous brands – Coutts, RBS Coutts, Adam & Company and RBS International – make up our Wealth Management business. They have an international presence and offer a proven suite of products. Most importantly, in each of our businesses, clients come first.
Coutts is a prime example of that philosophy. We listen to clients and deliver what they want, from direct wealth management services to advice about how to manage their philanthropic activities.
While clients sometimes want to speak to us, at times they prefer to do their business online. An average of 2,000 clients each day logged onto our online banking service. They completed 350,000 payments and transfers during 2009, over 50 per cent of all such transactions across the business.
Our website has also become a very effective tool for attracting new clients. We converted 41% of enquiries that came to us via the Coutts.com website into new clients for Coutts.
At Coutts, we work with many of the UK’s leading entrepreneurs and we are committed to growing our share of that market. One of the ways we did this in 2009 was by publishing new research about an issue that is hugely important to our entrepreneurial clients: how they exit from their business. ‘The Long Goodbye – myths, realities and insights into the business exits process’ drew on the experiences of some of the UK’s successful entrepreneurs as well as experts from academia and Coutts. The report’s key message was simple: plan ahead. More than that, ‘The Long Goodbye’ included concrete guidance about the practical steps you need to take if you are looking to leave a business that you have built-up.
Coutts has a tradition of supporting the performing arts that goes back 300 years. We continued this in 2009 as we became the principal sponsor of the Almeida Theatre for the seventh year running. Also in 2009, we sponsored the National Theatre’s sold-out performance of Phedre, which starred Dame Helen Mirren.
4th in foreign exchange, GBM improved its ranking from 5th £6,349 million operating profit before impairment losses
As well as serving customers, we had to deal with the problems of the past and make sure we are in the best shape to compete in future. Our balance sheet needed to be reduced and we carried too many Risk Weighted Assets. We had to tackle those issues as a matter of urgency and we did, making good progress. We improved our liquidity profile in the early part of the year, leaving us less susceptible to extreme fluctuations in the wholesale money markets.
During the year, we launched a major, two-year global investment programme. This will improve the quality and efficiency of the control environment, help us to meet revenue targets and optimise how we use our technology. The programme will establish class-leading front-to-back systems to improve the management of client transactions and process infrastructure that will support business growth in the coming years. It will also enhance GBM’s capability to respond to increasingly sophisticated regulatory requirements worldwide. We made progress in the initial phases and the programme is on track to deliver its objectives.
As part of the agreement we reached with the European Commission we are selling our stake in RBS Sempra Commodities (RBSSC), a joint venture with a US energy company. In February 2010, we announced the sale of RBSSC’s Metals, Oils and European Energy business lines to J.P. Morgan. Discussions continue with our joint venture partner Sempra Energy on a range of ownership alternatives for the remainder of the business.
In 2009, we demonstrated that we can compete at the highest level in our core franchises and provide value added services to our clients around the world. We have a clear, client-focused strategy in place and we intend to maintain this momentum, execute the plan and enable The RBS Group to return to self-sufficiency.
At Global Transaction Services (GTS) we help customers to manage their cash and liquidity, and to make and receive payments. Globally we are a Top Five player. Our businesses – trade finance, merchant acquiring, corporate card services and cash management – are closely linked to other parts of RBS, notably Corporate Banking, Citizens, Ulster Bank and Global Banking & Markets (GBM).
We process over one billion payments and collections each year. Our domestic cash management business handles over three billion BACS transactions in the UK annually. In trade finance we process one million collections, guarantees and letters of credit each year. Our cards business processes 6.4 billion transactions per annum worth £236 billion.
During the year we developed and began to implement our strategic plan. We formed Global Network Banking (GNB) with GBM to ensure that together we deliver network services effectively to the international subsidiaries of the Group’s customers. We will build on GNB in the future. In Global Trade Finance, we’re working to bring the benefits of the MaxTrad global trading platform to the UK market. 2009 also saw us take steps towards launching GTS SalesLine in the UK. It is a telephone sales service for Business & Commercial Banking clients that delivers cash management and trade solutions through a team of experienced specialists.
In 2009, we began to market our new e-invoicing product to UK clients. e-invoicing can significantly reduce our customers’ costs and increase efficiencies in both trade receivables and procurement activities. It improves the user-experience for all participants in the supply chain.
Global Transaction Services ranks among the top five global transaction services providers, offering global payments, cash and liquidity management, and trade finance and commercial card products and services. It includes the Group’s corporate money transmission activities in the UK and the US as well as Global Merchant Services, the Group’s United Kingdom and international merchant acquiring business.
countries in the GTS network >3 billion BACS transactions processed in the UK annually
£236 billion Our cards businesses process 6.4 billion transactions annually worth £236 billion
We took a leading role in developing and implementing the UK’s Faster Payments arrangements. We were quick to recognise the benefits it offered customers and made sure that our own implementation allowed the maximum number of customers to benefit from it immediately from its launch. We swiftly switched our standing orders to use Faster Payments instead of the old BACS system. The service is available to our retail customers through online and telephone banking, as well as in our branches. Our small and medium-sized enterprise customers can use it online or by telephone. For GTS customers, we have made Faster Payments available 24 hours a day and 365 days a year as a standard element of our Bankline online banking service. This has been very popular, as it allows customers to maximise the value of both Bankline and Faster Payments while it can be a convenient alternative or fallback option for occasional or unplanned use.
We built on our successful 2008 trial of contactless payments in London with a further trial on Stagecoach buses in Liverpool in 2009 working with Mastercard. This ‘Tap and Go’ trial brought contactless debit or credit card payments to UK bus users for the first time and it reinforced our position as a leading innovator in a market which we believe has high potential.
We were named the fifth most used international cash manager by companies in the 2009 Euromoney survey. Our international cash management offering also won other awards, including these from Global Finance Magazine: • Best Bank for Liquidity Management Western Europe; and
• 2009 Deal of the Year for J Sainsbury from Trade and Forfaiting.
In response to these difficult operating conditions, Ulster Bank took decisive and timely action. At the beginning of the year, we announced a programme of initiatives designed to position the business to meet the challenges of our markets, enabling us to continue to serve the needs of our customers and to strengthen our business and its all-Ireland reach.
In addition, we also improved efficiency across all areas of our businesses through the implementation of a number of cost management initiatives. We announced a voluntary redundancy programme in January, which was oversubscribed and under which around 700 people left the organisation with a further 300 or so due to leave in early 2010.
Ulster Bank is a leading retail and commercial 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.
>54,000 retail customers acquired during the year €1.25 billion in business deposits taken during the year
We also launched our MoneySense for Adults programme during the year, which offers free and balanced information to customers to help them better understand and manage their money. The MoneySense programme is delivered online, in print and face-to-face in all Ulster Bank branches across the island of Ireland. Specially trained and dedicated MoneySense Officers are available in all of our branches to provide practical one-to-one support to both customers and non-customers who want help with budgeting and money management. The programme built on our successful MoneySense for Schools programme, which we rolled out to 19 schools during the year.
In Northern Ireland, under the Enterprise Finance Guarantee (EFG) scheme, the government guarantees 75% of the value of a small firm’s loan up to the value of £1 million. Ulster Bank provided some 75% of the total value of EFG loans drawn down in Northern Ireland in 2009.
We understand that supporting businesses means more than just providing financial support. That is why we facilitate Small Business Can.com, our social network for small businesses. Launched in May 2009, this is an interactive online resource designed to help the SME community across the island of Ireland successfully navigate through the economic downturn. Small Business Can.com was established by entrepreneurs for entrepreneurs and aims to help business people grow their enterprises by sharing knowledge, experience and contact networks. Open to all businesses free of charge, the site attracted 66,000 hits during the year.
The PricewaterhouseCoopers Business Banking Tracker Survey, published in November 2009, provides an indication of our commitment to our customers. It shows that, compared with other leading banks, we received higher ratings from our customers across the island of Ireland in the areas of customer satisfaction, loyalty and advocacy. All of this was achieved against a tough trading background and gives us a strong platform to build on in 2010.
We focussed on increasing customer deposits and our share of new corporate deposits increased to 18% in Northern Ireland and 22% in the Republic of Ireland. In the retail market, we introduced a range of initiatives including Bonus Saver, eSavings Plus, Pathway and a number of fixed term and fixed rate products which saw retail customer deposits increase by almost £1 billion during the year.
While the global economy is showing some signs of recovery, conditions in Ireland remain challenging. However the early actions we have taken have positioned us well to operate through these difficult economic conditions and to take maximum advantage of the upturn as it emerges. Throughout, we will maintain our commitment to engage with our people and serve the needs of our customers.
We started this job during 2009 and embarked on a plan that takes us to our goal by 2013. But we also had to deal with weaknesses from our past, as well as the effects on us and our customers of the most acute recession. We took some very significant steps to bolster Citizens Financial Group’s capital by converting $1.730 billion of subordinated debt and $1.585 billion of preferred equity into common equity, which when combined with lower risk-weighted assets, increased our Tier 1 risk-based capital to 11.62% from 9.15% at December 2008.
During 2009, we achieved Top 20 status in retail mortgage lending and Top Five in auto finance among bank lenders to prime customers. We also launched the TruFit Student Loan on 1 July. We designed this new private student loan product to fill the gap after students exhaust their federal student loan eligibility.
Our Commercial Banking market penetration increased, with lead bank share of business increasing from 6% to 7% in the $5 million to $25 million business segment and from 6% to 8% in the Middle Market and Specialized Lending segment, for companies with $25 million to $500 million in annual sales.
$6.5 million Our Green$ense programme rewarded retail customers with more than $6.5 million
We took a number of steps to reward our customers’ loyalty and to give them incentives to spend more with us, while they reach their own savings goals. HomeBuyer Savings, College Saver and GoalTrack Savings help customers to save for major events in their lives and their families lives and to set their savings plans, and we give them bonuses when they reach their goals.
We try our best to serve our customers and it is rewarding when other people recognise our efforts. Informa Research Services, an independent research firm, named our Green$ense and Everyday Points rewards programmes best in class in its 2009 Retail Relationship and Reward Programs Account Acquisition and Summary.
We have invested in our online banking service and that has paid off. More than 3.7 million Citizens and Charter One customers were converted to our upgraded online platform. It gives customers access to more accounts and provides them with more information, including mobile alerts. Customers can open new accounts, view pending transactions, pay bills and transfer money between their various Citizen Bank and Charter One accounts, as well as accounts with other financial institutions.
The Dave Thomas Foundation for Adoption honoured Citizens for the third consecutive year as the Best Adoption-Friendly Workplace in the financial services industry, as well as number two on the foundation’s top 100 US employers in 2009. Conceive is a national publication devoted to pre-pregnancy health and fertility. It ranks companies that continue to help employees build their families and it placed us as the top company in offering family-building benefits.
While it remains part of RBS, we will manage RBS Insurance with the same care and attention as if we were keeping it. That’s the right thing to do for our customers and if we serve them well we will maximise the price we get when we sell the business.
As the floods loomed in Cumbria, we sent text messages to 29,000 customers who live in areas that the Met Office had said were at high risk of severe weather, with tips and advice on how to protect their homes from flooding. After the floods, we tried to give our customers support when they needed it most. A dedicated team of advisers was on the ground helping customers to cope with their losses and assisting them to make claims.Target Return on equity Cost: income less claims %
Introduced in 2008, Telephony Virtualisation, a smart piece of technology that allows 27 contact centres in the UK to act as one, was especially useful during the floods. If one of our call centres was operating at full capacity, the call could be picked up at another centre. It enabled customers’ calls to be answered more quickly and our people and premises to be utilised more efficiently.
The snows that saw out 2009 gave Green Flag its busiest month of the year. We received more than 237,000 calls from customers in December. Our UK network of recovery vehicles meant that we were able to get to customers in need.
If your car gets bumped, you need to know you can rely on your insurer and you want to know that the repair job will be done as well as possible. In June, RBS Insurance introduced PAS 125 Kite Mark to all 16 of our repair centres. PAS 125 is a standard of quality for vehicle body repair and it carries the Kite Mark symbol awarded by BSI, the independent British standards organisation. The PAS 125 Kite Mark provides an auditable process which ensures that cars are safely repaired back to their original Euro New Car Assessment Programme - NCAP - safety ratings. That means that all of our vehicle repairs should meet the highest standards of workmanship and service.
NIG introduced a property-based insurance policy designed for SME businesses. This product allows underwriters to reflect a customer’s positive risk features, which means improved prices for buyers.
Our commitment to customers and to innovation shows through in our customer satisfaction results. In December, The Leadership Factor, a research company, surveyed customers and found that we scored 86% on the Satisfaction Index for Sales & Service and 85% for Claims.
Business Services Business Services is the shared services Division of the RBS Group. We provide a range of high quality support services to the customerfacing businesses of the Group.
• Technology Services designs, builds, implements and supports global technology solutions for our Divisions and Group functions.
• Group Operations shapes and executes service delivery and transaction processing for our customers, in the most efficient, secure and effective way possible.
• Property Services provides portfolio management and workplace design solutions as well as day-to-day facilities management services across our global footprint.
• Group Sourcing & Vendor Management selects, manages and develops the best and most suitable supplier relationships, making sure that the current and future purchasing needs of the Group are delivered across all locations and brands.
• Security & Risk provides support and advice to protect our customers, our information and our people against key security and fraud threats.
Business Services creates value through economies of scale, the application of shared platforms, specialised knowledge and working in partnership with each of the customer-facing divisions. Our close working relationships across the Group ensure an alignment of the core business priorities with a better understanding of the allocation of costs, service pricing and business driven investment prioritisation. Our focus is to deliver high quality service for the customer and continually to make the things we’re good at, even better.
In 2009, we embarked on a comprehensive ‘Lean’ review of all of our processes in Business Services. That is now driving one of the biggest customer focused efficiency programmes ever delivered in RBS. Lean teams assess the nuts and bolts of our business, and identify and implement opportunities to eliminate wasteful processes, continually focusing on how we can improve our service to our customers. We have embedded Lean thinking in how our people work.
Intelligent Working was another key programme in Business Services in 2009, looking at how we employ people, technology and property in a way that makes best use of our assets and at the same time improves the quality and efficiency of our services. So far, globally, we have removed nearly 40,000 square metres of office space, equivalent to five Wembley football pitches.
In Technology Services, state-of-the-art but proven technologies such as desktop virtualisation, IP networking and data centre consolidation are used to restructure the cost base whilst developing improved levels of agility and flexibility. During the year, we consolidated the Chicago based data centre functions (trade and international payment systems) into the core data centres in Edinburgh. More than 17 million payments a day and 4.3 billion payments annually now pass through Edinburgh. By relocating this work, we increased utilisation of our existing data centre capability and generated economies of up to £100 million a year of cost savings.
Central Functions Risk We have made significant progress to meet the post Walker Review requirements for an independent risk function within banks. A Board Risk
Committee made up of non-executive directors is now in place. We have agreed a revised structure for risk management which will strengthen areas identified as weaknesses in recent years. These include functional reporting for the risk function, the appointment of a Deputy Chief Risk Officer, a Head of Firm Wide Risk and a Global Head of Market Risk, as well as a Chief Administrative Officer. We have created a new post of Head of Operational Risk which recognises the additional execution risk associated with the delivery of one of the largest restructurings ever undertaken by a bank globally.
Group Strategy Our Group Strategy team supports the Chief Executive 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.
Our Non-Core Division is central to the strategy that will return RBS to self-sufficiency.
We manage Non-Core & APS together, under the leadership of Nathan Bostock and Rory Cullinan, who joined us during the year.
• Portfolio & Banking is responsible for the wholesale banking assets transferred from GBM and accounts for the largest percentage of the assets in Non-Core.
• Non-Core Markets includes trading assets from GBM, principally our exotic credit derivatives, monoline and asset-backed securities positions and is responsible for the most volatile assets placed in Non-Core Division.
In addition, we have a small number of standalone businesses, such as Aviation Capital.
Non-Core Division manages separately assets that the Group intends to run off or dispose. The Division contains a range of businesses and asset portfolios primarily from GBM, including RBS Sempra Commodities, linked to proprietary trading, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of portfolios and businesses, including regional markets businesses, that the Group has concluded are no longer strategic.
Operating loss before other operating charges & impairment losses (4,748) (5,715)
£56.9 billion decline in Third Party Assets, excluding derivatives £12.6 billion of disposals during the year
We delivered training to more than 3,000 employees around the globe about the APS
Our disposal programme developed momentum during 2009. We successfully completed a number of asset sales in the year, including the RBS equity stakes in Bank of China and Linea Directa, the sale to ANZ of the Retail & Commercial and wholesale banking businesses in non-core businesses in six countries in Asia, as well as the sale to Aberdeen Asset Management of our Asset Management business.
Non-Core Division was also responsible for setting up APS. The task of setting up the governance and controls, training and equipping staff in order to implement the scheme was an exceptional achievement. We delivered training to more than 3,000 employees across the globe.
We continue to work closely with the Treasury and the newly formed Asset Protection Agency in developing our approach to the day-to-day stewardship of the APS assets, and the appropriate governance to ensure compliance.
Sustainability sits at the heart of how we aim to do business.
Our Technical Assistance programme has extended the reach of Microfinance to an additional 114,000 households in India.
First and foremost, we drive action on these themes through the day-to-day work of our business units, to ensure that we are operating on a socially sustainable basis. Over the next few pages, we outline what that means in practice, with a selection of examples for each of our five themes of sustainability.
Fair banking We are committed to developing customer relationships that last. There are four key strands to doing this: responsible lending practices; customer service; financial education; and financial inclusion.
• In July 2009, we voluntarily extended the credit card 30 Day Breathing Space commitment to all NatWest and RBS unsecured personal loans and overdrafts, which provides time for customers struggling to make their regular repayments to receive money advice and consider their options.
• We will launch a Customer Charter in 2010 that makes clear commitments to our customers about how we will deal with them to deliver ‘helpful banking’ and how we will support the communities we serve.
• We launched the UK’s first mobile phone banking application for the iPhone for NatWest, RBS and Ulster Bank (Northern Ireland). Thousands of customers already use mobile phone banking to check their balance directly from their mobile handset and this is the next step to develop this service.
• Our award-winning MoneySense programme was extended to ensure that everyone has access to sound and impartial money guidance. In 2009, MoneySense for Schools had a presence in nearly 60% of UK secondary schools.
• We launched YouthBank MoneySense in Ireland through Ulster Bank, with a €150,000 financial learning fund provided as part of the initiative.
• The Citizens Charitable Foundation provided approximately $1 million to support more than 300 financial literacy initiatives throughout our footprint in America.
Financial inclusion Ensuring that everyone has access to financial services has long been a priority of The RBS Group.
• In 2009, numerous communities were impacted by unprecedented flooding and we took immediate action to send mobile banks so that customers had continued access to banking services.
• In Ireland, we extended our offering to first-time home buyers by teaming up with Habitat for Humanity. This programme offers customers with a housing need the opportunity to step on the property ladder in an affordable manner.
Supporting enterprise This covers how we help businesses get started, how we support those who get into difficulty, our investment in social enterprise and our Microfinance programme.
• Our Microfinance lending programme in India continues to go from strength to strength. Widening financial access for more than two million households in rural areas relying on robust and creditworthy Microfinance Institutions (MFIs) as a distribution network.
Employee engagement The engagement of our employees depends on giving our people an environment at work that encourages them to go the extra mile for our customers. It is influenced by how we recruit, motivate and support our people, focusing on issues such as diversity, training and reward.
• Remuneration is one of the most challenging issues that RBS currently faces, and one which has a significant impact on employee engagement. In response to this, we have revised our reward framework. For more information on this, please see the letter from the Chairman of the Remuneration Committee.
• We continue to achieve a strong response rate for our annual Employee Opinion Survey (87% in September 2009), and use the results to identify where we need to invest more time and energy to create a positive employment experience. Although our 2009 results demonstrated our employees’ resilience in areas like customer focus and efficiency, responses around security and engagement decreased. We responded to this by launching a number of initiatives to engage and develop our staff across the Group.
• To improve opportunities for all groups of employees, a Group diversity and inclusion programme was launched in 2009 to deliver industry-leading performance. The programme is supported and enabled by our internal networks, Focussed Women Network, and Rainbow, both of which aim to inspire, lead, coach, motivate and create opportunities to fulfil employees’ potential.
• To equip the senior employees of the Group to understand, execute and sustain the strategic business plan, a new Leadership Development Programme has been launched. In addition, we launched the Harvard Business Publishing Online product across the Group, tailored for the use of all employees.
Safety and security We are committed to making banking safer and our ongoing investment in new security and technology continuously works towards this goal. We also ensure that a safe and secure environment is provided for our staff.
• In 2009, we rolled out a ‘Safer Banking’ brochure in branches throughout the UK, outlining the possible risks of financial crime as well as fraud prevention tactics.
• We increased controls that protect customer information by completing a global assurance review of more than 800 of our highrisk third parties in 2009, agreeing actions to manage identified risks.
The number of employees engaged by Fairbridge, a charity that works with young people in some of the most disadvantaged areas in the UK.
Responsible lending We provide financial services to a number of large global companies who have operations in areas with potentially high environmental and social risks. We provide services only to those whose operations meet all necessary legal requirements and standards set by the relevant regulatory bodies, and comply with our own environmental, social and ethical (ESE) risk guidance.
Our Group Community Investment programmes relate broadly to financial education, supporting enterprise and Microfinance and the charitable endeavours of our employees. In addition to these core programmes, we run a broad range of other community investment activities across our businesses. Altogether, we invest more than £63 million a year in the communities we serve.
The charitable endeavours of our employees Under the theme of Employee Engagement, we support the charitable endeavours of our colleagues. We do this in three ways. First, we match the donations they make to charity via their salary. Second, we make cash grants to the causes they give their time to, either as volunteers or fundraisers. By directing our resources in this way we support around 3,800 charities and good causes around the world. Third, we run a sizeable employee volunteering programme, where we encourage employees to participate in team-building opportunities during work time, in partnership with a range of charities. For example, over the last five years our partnership with Fairbridge, a charity that works with young people in some of the most disadvantaged areas of the UK, has engaged over 2,500 RBS employees. In total, more than 50,000 RBS employees give their skills, time and money to make a difference in the communities that we operate in. The Group supports those efforts financially and by giving employees almost 155,000 hours off work to volunteer each year.
The results, assets and liabilities of individual business units are classified as trading or non-trading based on their predominant activity. Although this method may result in some non-trading activity being classified as trading, and vice versa, the Group believes that any resulting misclassification is not material.
In preparation for the divestment of the ABN AMRO businesses to be acquired by the Dutch State, on 6 February 2010, these businesses were legally demerged from the RBS acquired businesses. As a result, there are now two separate banks within ABN AMRO Holding N.V.: The Royal Bank of Scotland N.V. and a new entity named ABN AMRO Bank N.V., each licensed separately by the Dutch Central Bank. Both banks continue to be governed by the current managing and supervisory boards of ABN AMRO Holding N.V. until the legal separation of the new ABN AMRO Bank N.V. from ABN AMRO Holding N.V..
Pro forma results Pro forma results have been prepared that include only those business units of ABN AMRO that will be retained by RBS. The financial review and divisional performance in the Business review include the pro forma results. The basis of preparation of the pro forma results is detailed on page 113.
Given the significant write-down of goodwill and other intangible assets in 2008, and in order to provide a basis for comparison of underlying performance, these write-downs and other one-off items are shown separately in the pro forma income statement.
Statutory results RFS Holdings is jointly owned by the consortium members. It is controlled by the company and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the Group include the results of ABN AMRO. The interests of Fortis, and its successor the State of the Netherlands, and Santander in RFS Holdings are included in minority interests.
Restatements Divisional results for 2008 have been restated to reflect the Group’s new organisational structure that includes a Non-Core division comprising individual assets, portfolios and lines of business that the Group intends to run off or dispose. The Non-Core division is reported separately from the divisions which form the Core Group. In addition, separate reporting of Business Services (formerly Group Manufacturing) and Centre results has changed and, with the exception of certain items of a one off nature, costs incurred are now allocated to the customer-facing divisions and included in the measurement of the returns which they generate. The changes do not affect the Group’s results. Comparatives have been restated accordingly.
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which the Group has significant business activities or investments, including the United States; developments in the current crisis in the global financial markets, and their impact on the financial industry in general and on the Group in particular; the full nationalisation of the Group or other resolution procedures under the Banking Act 2009; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal
Reserve System and other G7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes, including changes in regulatory capital regulations; a change of UK Government or changes to UK Government policy; changes in the Group’s credit ratings; the Group’s participation in the APS and the effect of such Scheme on the Group’s financial and capital position; the conversion of the B Shares in accordance with their terms; the ability to access the contingent capital arrangements with HM Treasury; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in the Group; changes in competition and pricing environments; the financial stability of other financial institutions, and the Group’s counterparties and borrowers; the value and effectiveness of any credit protection purchased by the Group; the extent of future write-downs and impairment charges caused by depressed asset valuations; the ability to achieve revenue benefits and cost savings from the integration of certain of ABN AMRO’s businesses and assets; natural and other disasters; the inability to hedge certain risks economically; the ability to access sufficient funding to meet liquidity needs; the ability to complete restructurings on a timely basis, or at all, including the disposal of certain non-core assets and assets and businesses required as part of the EC State Aid approval; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of the Group in managing the risks involved in the foregoing.
For a further discussion of certain risks faced by the Group, see Risk factors on pages 55 to 71.
In December 2009, the company issued £25.5 billion of new capital to HM Treasury. This new capital took the form of B shares, which do not generally carry voting rights at general meetings of ordinary shareholders but are convertible into ordinary shares and qualify as core tier one capital.
Following the issuance of B shares, HM Treasury’s holding of ordinary shares of the company remained at 70.3% although its economic interest rose to 84.4%.
The Group had total assets of £1,696.5 billion and owners’ equity of £77.7 billion at 31 December 2009. The Group’s capital ratios, which included the equity minority interest of the State of the Netherlands and Santander in ABN AMRO, were a total capital ratio of 16.1 per cent., a core Tier 1 capital ratio of 11.0 per cent. and a Tier 1 capital ratio of 14.1 per cent., as at 31 December 2009.
Organisational structure and business overview Following a comprehensive strategic review, changes have been made to the Group’s operating segments in 2009. A Non-Core division has been created comprising those lines of business, portfolios and individual assets that the Group intends to run off or sell. Furthermore, Business Services (formerly Group Manufacturing) is no longer reported as a separate division and its costs are now allocated to the customer-facing divisions along with certain central costs. UK Retail & Commercial Banking has been split into three segments (UK Retail, UK Corporate and Wealth). Ulster Bank has become a specific segment. The remaining elements of Europe & Middle East Retail & Commercial Banking, Asia Retail & Commercial Banking and Share of shared assets form part of Non-Core. The segment measure is now Operating profit/(loss) before tax which differs from Contribution used previously; it excludes certain infrequent items and RFS Holdings minority interest, which is not an operating segment of the Group. Comparative data have been restated accordingly.
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.
Wealth provides 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.
Ulster Bank is the leading retail and commercial bank in Northern Ireland and the third largest banking group on the island 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 SME business customers, corporates and institutional markets.
Business Services (formerly Group Manufacturing) supports the customer-facing businesses and provides operational technology, customer support in telephony, account management, lending and money transmission, global purchasing, property and other services. Business Services drives efficiencies and supports income growth across multiple brands and channels by using a single, scalable platform and common processes wherever possible. It also leverages the Group’s purchasing power and is the Group’s centre of excellence for managing large-scale and complex change.
Non-Core Division manages separately assets that the Group intends to run off or dispose. The division contains a range of businesses and asset portfolios primarily from the GBM division including RBS Sempra Commodities, linked to proprietary trading, higher risk profile asset portfolios including excess risk concentrations, and other illiquid portfolios. It also includes a number of other portfolios and businesses including regional markets businesses that the Group has concluded are no longer strategic.
Competition The Group faces strong competition in all the markets it serves. However, the global banking crisis has reduced either the capacity or appetite of many institutions to lend and has resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the US and UK. Competition for retail deposits has intensified significantly as institutions have reorientated their funding strategies following the difficulties experienced in the wholesale markets since late 2007.
In the UK credit card market large retailers and specialist card issuers, including major US operators, are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and the internet.
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 particularly intense, and price comparison internet sites now play a major role in the marketplace. RBS Insurance also competes with local insurance companies in the direct motor insurance markets in Italy and Germany.
In Ireland, Ulster Bank competes in retail and commercial banking with the major Irish banks and building societies, and with other UK and international banks and building societies active in the market.
The purpose of the stabilisation options is to address the situation where all or part of the business of a relevant entity has encountered, or is likely to encounter, financial difficulties. Accordingly, the stabilisation options may only be exercised if the FSA is satisfied that (i) a relevant entity such as the company’s UK banking subsidiaries, including the Royal Bank and NatWest, is failing, or is likely to fail, to satisfy the threshold conditions set out in Schedule 6 to the FSMA, and (ii) having regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation options) action will be taken that will enable the relevant entity to satisfy those threshold conditions. The threshold conditions are conditions which an FSA authorised institution must satisfy in order to retain its FSA authorisation. They are relatively wide-ranging and deal with most aspects of a relevant entity’s business, including, but not limited to, minimum capital resource requirements. It is therefore possible that the FSA may trigger one of the stabilisation options before an application for an insolvency or administration order could be made.
The stabilisation options may be exercised by means of powers to transfer property, rights or liabilities of a relevant entity and shares and other securities issued by a relevant entity. HM Treasury may also take the parent company of a relevant entity (such as the company) into temporary public ownership provided that certain conditions set out in Section 82 of the Banking Act are met. Temporary public ownership is effected by way of a share transfer order and can be actioned irrespective of the financial condition of the parent company.
Accordingly, there can be no assurance that the taking of any such actions would not adversely affect the rights of holders of securities and/or adversely affect the price or value of their investment or that the ability of the company to satisfy its obligations under contracts related to securities would be unaffected. In such circumstances, such holders may have a claim for compensation under one of the compensation schemes currently existing under, or contemplated by, the Banking Act if any action is taken in respect of securities (for the purposes of determining an amount of compensation, an independent valuer must disregard actual or potential financial assistance provided by the Bank of England or HM Treasury). There can be no assurance that holders of securities would thereby recover compensation promptly and/or equal to any loss actually incurred.
If the company was taken into temporary public ownership and a partial transfer of its or any relevant entity’s business was effected, or if a relevant entity were made subject to the SRR and a partial transfer of its business to another entity was effected, the nature and mix of the assets and liabilities not transferred may adversely affect the company’s financial condition and increase the risk that the company may eventually become subject to administration or insolvency proceedings pursuant to the Banking Act.
The Group’s businesses, earnings and financial condition have been and will continue to be affected by the global economy and instability in the global financial markets.
Despite such measures, the volatility and disruption of the capital and credit markets have continued, and global economic conditions are expected to remain challenging in the near to medium term, with many forecasts predicting only modest levels of GDP growth over the course of 2010. Similar conditions are likely to exist in a number of the Group’s key markets, including those in the United States and Europe, particularly Ireland. These conditions have exerted, and may continue to exert, downward pressure on asset prices and on availability and cost of credit for financial institutions, including the company, and will continue to impact the credit quality of the Group’s customers and counterparties. Such conditions, alone or in combination with regulatory changes or actions of other market participants, may cause the Group to incur losses or to experience further reductions in business activity, increased funding costs and funding pressures, lower share prices, decreased asset values, additional write-downs and impairment charges and lower profitability.
The Group was required to obtain State aid approval for the aid given to the Group by HM Treasury as part of the First Placing and Open Offer, the issuance of £25.5 billion of B shares to HM Treasury, a commitment by HM Treasury to acquire up to an additional £8 billion of B shares if certain conditions are met and the Group’s participation in the Asset Protection Scheme (APS) (the “State aid”).
It is possible a third party could challenge the approval decision in the European Courts (within specified time limits). The Group does not believe that any such challenge would be likely to succeed but, if it were to succeed, the Commission would need to reconsider its decision, which may result in an adverse outcome for the Group, including a prohibition or amendment to some or all of the terms of the State aid. The Commission could also impose conditions that are more disadvantageous, potentially materially so, to the Group than those in the State aid restructuring plan.
The implementation of the State aid restructuring plan may result in the emergence of one or more new viable competitors or a material strengthening of one or more of the Group’s competitors in the Group’s markets. The effect of this on the Group’s future competitive position, revenues and margins is uncertain and there could be an adverse effect on the Group’s operations and financial condition and its business generally. If any or all of the risks described above, or any other currently unforeseen risks, materialise, there could be a materially negative impact on the Group’s business, operations, financial condition, capital position and competitive position.
Lack of liquidity is a risk to the Group’s business and its ability to access sources of liquidity has been, and will continue to be, constrained. Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of enterprise specific factors, including an over-reliance on a particular source of funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Since the second half of 2008, credit markets worldwide have experienced a severe reduction in liquidity and term-funding. During this time, perception of counterparty risk between banks also increased significantly. This increase in perceived counterparty risk also led to reductions in inter-bank lending, and hence, in common with many other banking groups, the Group’s access to traditional sources of liquidity has been, and may continue to be, restricted.
The Group’s liquidity management focuses on maintaining a diverse and appropriate funding strategy for its assets, controlling the mismatch of maturities and carefully monitoring its undrawn commitments and contingent liabilities. However, the Group’s ability to access sources of liquidity (for example, through the issue or sale of financial and other instruments or through the use of term loans) during the recent period of liquidity stress has been constrained to the point where it, like other banks, has had to rely on shorter term and overnight funding with a consequent reduction in overall liquidity, and to increase its recourse to liquidity schemes provided by central banks. While during the course of 2009 money market conditions improved, with the Group seeing a material reduction of funding from central banks and the issuance of non-government guaranteed term debt, further tightening of credit markets could have a negative impact on the Group.
The governments of some of the countries in which the Group operates have taken steps to guarantee the liabilities of the banks and branches operating in their respective jurisdiction. Whilst in some instances the operations of the Group are covered by government guarantees alongside other local banks, in other countries this may not necessarily always be the case. This may place the Group’s subsidiaries operating in those countries, such as Ulster Bank Ireland Ltd, which did not participate in such government guarantee schemes, at a competitive disadvantage to the other local banks and therefore may require the Group to provide additional funding and liquidity support to these operations.
The Group’s ability to engage in routine funding transactions has been and will continue to be adversely affected by the actual or perceived failure or worsening credit of its counterparties, including other financial institutions and corporate borrowers. The Group has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. As a result, defaults by, or even the perceived creditworthiness of or concerns about, one or more corporate borrowers, financial services institutions or the financial services industry generally, have led to market-wide liquidity problems, losses and defaults and could lead to further losses or defaults by the Group or by other institutions. Many of these transactions expose the Group to credit risk in the event of default of the Group’s counterparty or client and the Group does have significant exposures to certain individual counterparties (including counterparties in certain weakened sectors and markets). In addition, the Group’s credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those recently experienced. Any such losses could have a material adverse effect on the Group’s results of operations and financial condition or result in a loss of value in its securities.
The Group has credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), which are carried at fair value. The fair value of these CDSs, as well as the Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Since 2007, monoline and other insurers and other market counterparties (including credit derivative product companies) have been adversely affected by their exposure to residential mortgage linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness has deteriorated rapidly, which may continue. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates further, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs in addition to those already recorded and such adjustments may have a material adverse impact on the Group’s financial condition and results of operations.
Effective management of the Group’s capital is critical to its ability to operate its businesses, to grow organically and to pursue its strategy of returning to standalone strength. The Group is required by regulators in the United Kingdom, the United States and in other jurisdictions in which it undertakes regulated activities, to maintain adequate capital resources. The maintenance of adequate capital is also necessary for the Group’s financial flexibility in the face of continuing turbulence and uncertainty in the global economy. Accordingly, the purpose of the issuance of the £25.5 billion of B shares, the Contingent Subscription and the previous placing and open offers was to allow the company to strengthen its capital position. The FSA’s recent liquidity policy statement articulates that firms must hold sufficient eligible securities to survive a liquidity stress and this will result in banks holding a greater amount of government securities, to ensure that these institutions have adequate liquidity in times of financial stress.
In addition, on 17 December 2009, the Basel Committee on Banking Supervision (the “Basel Committee”) proposed a number of fundamental reforms to the regulatory capital framework in its consultative document entitled “Strengthening the resilience of the banking sector”. If the proposals made by the Basel Committee are implemented, this could result in the Group being subject to significantly higher capital requirements. The proposals include: (a) the build-up of a counter-cyclical capital buffer in excess of the regulatory minimum capital requirement, which is large enough to enable the Group to remain above the minimum capital requirement in the face of losses expected to be incurred in a feasibly severe downturn; (b) an increase in the capital requirements for counterparty risk exposures arising from derivatives, repo-style transactions and securities financing transactions; (c) the imposition of a leverage ratio as a supplementary measure to the existing Basel II risk-based measure; (d) the phasing out of hybrid capital instruments as Tier 1 capital and the requirement that the predominant form of Tier 1 capital must be common shares and retained earnings; and (e) the imposition of global minimum liquidity standards that include a requirement to hold a stock of unencumbered high quality liquid assets sufficient to cover cumulative net cash outflows over a 30 day period under a prescribed stress scenario. The proposed reforms are subject to a consultative process and an impact assessment and are not likely to be implemented before the end of 2012. The Basel Committee will also consider appropriate transition and grandfathering arrangements. These and other future changes to capital adequacy and liquidity requirements in the jurisdictions in which it operates may require the Group to raise additional Tier 1 capital and Core Tier 1 capital by way of further issuances of securities, including in the form of ordinary shares or B shares. The requirement to raise additional Core Tier 1 capital could have a number of negative consequences for the company and its shareholders, including impairing the company’s ability to pay dividends on or make other distributions in respect of the ordinary shares and diluting the ownership of existing shareholders. If the Group is unable to raise the requisite capital, it may be required to further reduce the amount of its risk-weighted assets and engage in the disposition of core and other non-core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group. In addition, pursuant to the agreement reached with the Commission, should the
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.
The Group’s ability to implement its strategic plan depends on the success of the Group’s refocus on its core strengths and the balance sheet reduction programme arising out of its previously announced non-core restructuring plan and the State aid restructuring plan.
In light of the changed global economic outlook, the Group has embarked on a financial and core business restructuring which is focused on achieving appropriate risk-adjusted returns under these changed circumstances, reducing reliance on wholesale funding and lowering exposure to capital intensive businesses. A key part of this restructuring is the programme to run down and sell the Group’s non-core assets announced in February 2009, which targets a gross reduction in funded assets of £251 billion, and the continued review of the Group’s portfolio to identify further disposals of certain non-core assets. This balance sheet reduction programme will continue alongside the disposals under the State aid restructuring plan approved by the Commission.
Furthermore, in the context of implementing the State aid restructuring plan, the Group is subject to certain timing and other restrictions which may result in the sale of assets at prices below those which the Group would have otherwise agreed had the Group not been required to sell such assets as part of the State aid restructuring plan or if such sale were not subject to the restrictions contained in the terms of the State aid conditions.
The Group operates in markets that are highly competitive and consolidating. If the Group is unable to perform effectively, its business and results of operations will be adversely affected.
Furthermore, increased government ownership of, and involvement in, banks generally may have an impact on the competitive landscape in the major markets in which the Group operates. Although, at present, it is difficult to predict what the effects of this increased government ownership and involvement will be or how they will differ from jurisdiction to jurisdiction, such involvement may cause the Group to experience stronger competition for corporate, institutional and retail clients and greater pressure on profit margins. Future disposals and restructurings by the Group and the compensation structure and restrictions imposed on the Group may also have an impact on its ability to compete effectively. Since the markets in which the Group operates are expected to remain highly competitive in all areas, these and other changes to the competitive landscape could adversely affect the Group’s business, margins, profitability and financial condition or result in a loss of value in its securities.
The Group is also altering certain of the pension benefits it offers to staff. In addition to the effects of such measures on the Group’s ability to retain senior management and other key employees, the marketplace for skilled personnel is becoming more competitive, which means the cost of hiring, training and retaining skilled personnel may continue to increase. The failure to attract or retain a sufficient number of appropriately skilled personnel could place the Group at a significant competitive disadvantage and prevent the Group from successfully implementing its strategy, which could have a material adverse effect on the Group’s financial condition and results of operations or result in a loss of value in its securities.
In addition, certain of the Group’s employees in the United Kingdom, continental Europe and other jurisdictions in which the Group operates are represented by employee representative bodies, including trade unions. Engagement with its employees and such bodies is important to the Group and a breakdown of these relationships could adversely affect the Group’s business, reputation and results. As the Group implements cost-saving initiatives and disposes of, or runs-down, certain assets or businesses (including as part of its expected restructuring plans), it faces increased risk in this regard and there can be no assurance that the Group will be able to maintain good relations with its employees or employee representative bodies in respect of all matters. As a result, the Group may experience strikes or other industrial action from time to time, which could have a material adverse effect on its business and results of operations and could cause damage to its reputation.
The Group is subject to financial services laws, regulations, corporate governance requirements, administrative actions and policies in each location in which it operates. All of these are subject to change, particularly in the current market environment, where there have been unprecedented levels of government intervention and changes to the regulations governing financial institutions, including recent nationalisations in the United Kingdom, the United States and other European countries. As a result of these and other ongoing and possible future changes in the financial services regulatory landscape (including requirements imposed by virtue of the Group’s participation in the APS and any other government or regulator-led initiatives), the Group expects to face greater regulation in the United Kingdom, the United States and other countries in which it operates, including throughout the rest of Europe. Compliance with such regulations may increase the Group’s capital requirements and costs and have an adverse impact on how the Group conducts its business, on the products and services it offers, on the value of its assets and on its results of operations and financial condition or result in a loss of value in its securities.
Operational risks are inherent in the Group’s operations. The Group’s operations are dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations where it does business. The Group has complex and geographically diverse operations and operational risk and losses can result from internal and external fraud, errors by employees or third parties, failure to document transactions properly or to obtain proper authorisation, failure to comply with applicable regulatory requirements and conduct of business rules (including those arising out of anti-money laundering and anti-terrorism legislation, as well as the provisions of applicable sanctions programmes), equipment failures, natural disasters or the inadequacy or failure of systems and controls, including those of the Group’s suppliers or counterparties. Although the Group has implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, to identify and rectify weaknesses in existing procedures and to train staff, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by the Group. Any weakness in these systems or controls, or any breaches or alleged breaches of applicable laws or regulations, could have a materially negative impact on the Group’s business, reputation and results of operations and share price. Notwithstanding anything contained in this risk factor, it should not be taken as implying that the company will be unable to comply with its obligations as a company with securities admitted to the Official List of the UKLA or as a supervised firm regulated by the FSA.
UKFI manages HM Treasury’s shareholder relationship with the company. Although HM Treasury has indicated that it intends to respect the commercial decisions of the Group and that the Group will continue to have its own independent board of directors and management team determining its own strategy, should its current intentions change, HM Treasury’s position as a majority shareholder (and UKFI’s position as manager of this shareholding) means that HM Treasury or UKFI may be able to exercise a significant degree of influence over, among other things, the election of directors and the appointment of senior
In the United Kingdom, the Financial Services Compensation Scheme (the “Compensation Scheme”) was established under the FSMA and is the United Kingdom’s statutory fund of last resort for customers of authorised financial services firms. The Compensation Scheme can pay compensation to customers if a firm is unable, or likely to be unable, to pay claims against it and may be required to make payments either in connection with the exercise of a stabilisation power or in exercise of the bank insolvency procedures under the Banking Act. The Compensation Scheme is funded by levies on firms authorised by the FSA, including the Group. In the event that the Compensation Scheme raises funds from the authorised firms, raises those funds more frequently or significantly increases the levies to be paid by such firms, the associated costs to the Group may have a material impact on its results of operations and financial condition. As at 31 December 2009, the Group has a provision of £135 million related to a levy by the Compensation Scheme for the 2009/10 and 2010/11 Compensation Scheme years.
The performance of the Group is significantly influenced by the geopolitical and economic conditions prevailing at any given time in the countries in which it operates, particularly the United Kingdom, the United States and other countries in Europe and Asia. For example, the Group has a presence in countries where businesses could be exposed to the risk of business interruption and economic slowdown following the outbreak of a pandemic, or the risk of sovereign default following the assumption by governments of the obligations of private sector institutions. Similarly, the Group faces the heightened risk of trade barriers, exchange controls and other measures taken by sovereign governments which may impact a borrower’s ability to repay. Terrorist acts and threats and the response to them of governments in any of these countries could also adversely affect levels of economic activity and have an adverse effect upon the Group’s business.
The restructuring proposals for ABN AMRO are complex and may not realise the anticipated benefits for the Group.
In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent that it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and allowable losses. Failure to generate sufficient future taxable profits or changes in tax legislation or accounting standards may reduce the recoverable amount of the recognised deferred tax assets.
Since the APS is a unique form of credit protection over a complex range of diversified Covered Assets in a number of jurisdictions and there is significant uncertainty about the duration and severity of the current economic recession, there may be unforeseen issues and risks that may arise as a result of the Group’s participation in the APS and the impact of the APS on the Group’s business, operations and financial condition cannot be predicted with certainty. Such issues or risks may have a material adverse effect on the Group. Moreover, the Group’s choice of assets or exposures covered by the APS was based on predictions at the time of its accession to the APS regarding the performance of counterparties and assumptions about market dynamics and asset and liability pricing, all or some of which may prove to be inaccurate. There is, therefore, a risk that the Covered Assets will not be those with the greatest future losses or with the greatest need for protection and, as a result, the Group’s financial condition, income from operations and the value of any securities may still suffer due to further impairments and credit write-downs.
The Group’s participation in the APS, together with the recent issue of £25.5 billion of B shares and, if required, the £8 billion Contingent B shares, has improved its consolidated capital ratios. However, the Group remains exposed to a substantial first loss amount of £60 billion in respect of the Covered Assets and for 10 per cent. of Covered Assets losses after the first loss amount. In addition, as mentioned in the previous risk factor, the assets or exposures to be covered by the APS may not be those with the greatest future losses or with the greatest need for protection. Moreover, the Group continues to carry the risk of losses, impairments and write-downs with respect to assets not covered by the APS. Therefore, there can be no assurance that any regulatory capital benefits and the additional Core Tier 1 capital will be sufficient to maintain the Group’s capital ratios at the requisite levels in the event of further losses (even with the £8 billion Contingent B shares). If the Group is unable to improve its capital ratios sufficiently or to maintain its capital ratios in the event of further losses, its business, results of operations and financial condition will suffer, its credit ratings may fall, its ability to lend and access funding will be further limited and its cost of funding may increase. The occurrence of any or all of such events may cause the company’s share price to decline substantially and may result in intervention by the Authorities, which could include full nationalisation or other resolution procedures under the Banking Act. Any compensation payable to shareholders would be subject to the provisions of the Banking Act, and shareholders may receive no value for their shares.
In the event that the Group’s Core Tier 1 capital ratio declines to below 5 per cent., HM Treasury is committed to subscribe for up to an additional £8 billion of Contingent B shares if certain conditions are met. If such conditions are not met, and the Group is unable to issue the £8 billion Contingent B shares, the Group may be unable to find alternative methods of obtaining protection for stressed losses against severe or prolonged recessionary periods in the economic cycle and improving its capital ratios, with the result that the Group may face increased risk of full nationalisation or other resolution procedures under the Banking Act. In the event that the Group’s Core Tier 1 capital ratio declines to below 5 per cent., HM Treasury is committed to subscribe for up to an additional £8 billion of Contingent B shares if certain conditions are met. Such conditions include that the Commission’s decision that the State aid is compatible with article 87 of the consolidated version of the Treaty establishing the European Community continues to be in force, that the Commission has not opened a formal investigation under article 88(2) of such Treaty in relation to the possible misuse of State aid, that there has been no breach by the company of the State Aid Commitment Deed and that no Termination Event has occurred.
If such conditions are not met, and the Group is unable to issue the £8 billion Contingent B shares, the Group may be unable to find alternative methods of obtaining protection for stressed losses against severe or prolonged recessionary periods in the economic cycle and improving its capital ratios, with the result that the Group may face increased risk of full nationalisation or other resolution procedures under the Banking Act.
The Covered Assets comprise a wide variety and a very large number of complex assets and exposures. As a result of the significant volume, variety and complexity of assets and exposures and the resulting complexity of the Scheme Documents, there is a risk that the Group may have included assets or exposures within the Covered Assets that are not eligible for protection under the APS, with the result that such assets or exposures may not be protected by the APS. Furthermore, if Covered Assets are not correctly or sufficiently logged or described for the purposes of the APS, protection under the APS may, in certain circumstances and subject to certain conditions, not be available or may be limited, including by potentially being limited to the terms of the assets “as logged”. If a Covered Asset is disposed of prior to the occurrence of a Trigger in respect of that Covered Asset, the Group will also lose protection under the APS in respect of that disposed asset or, if the Covered Asset is disposed of in part, in respect of that disposed part of the Covered Asset or in some circumstances all of the Covered Asset, in each case with no rebate of the fee payable to HM Treasury, unless an agreement otherwise is reached with HM Treasury at the relevant time. Moreover, since the terms of the credit protection available under the APS are broad and general (given the scale and purpose of the APS and the wide variety and very large number of complex assets and exposures intended to be included as Covered Assets) and also very complex and in some instances operationally restrictive, certain Scheme Conditions may not apply to particular assets, exposures or operational scenarios or their applicability may be uncertain (for example, in respect of overdrafts). In addition, many of these provisions apply from 31 December 2008 and therefore may not have been complied with between this date and the date of the company’s accession to the APS. In each case this may result in a loss or reduction of protection. There are certain limited terms and conditions of the Scheme Conditions which are framed in such a way that may give rise to lack of legal certainty. Furthermore, if a member of the Group becomes aware after due and reasonable enquiry that there has been any material or systemic criminal conduct on the part of the Group (including its directors, officers and employees) relating to or affecting any of the Covered Assets, some or all of those assets may cease to be protected by the APS. HM Treasury may also require the withdrawal or the company may itself consider it necessary to withdraw Covered Assets held in certain jurisdictions where disclosure of certain information to HM Treasury may result in a breach of banking secrecy, confidentiality, data protection or similar laws. In addition, £3 billion of derivative and structured finance assets have been included in the APS which, for technical reasons, do not currently, or are anticipated at some stage not to, satisfy the eligibility requirements specified in the Scheme Documents. HM Treasury and the Royal Bank have agreed to negotiate in good faith to establish as soon as practicable whether (and if so, to what extent) coverage should extend to certain derivative assets. In addition, the Group has issued a withdrawal notice in respect of approximately £1.2 billion of Covered Assets across a broad range of asset classes in order to take them out of the APS. The effect of (i) failures to be eligible and/or to log or correctly describe Covered Assets, (ii) disposals of Covered Assets prior to a Trigger, (iii) the uncertainty of certain Scheme Conditions and the exclusion of certain assets and exposures from the APS and potential lack of legal certainty, (iv) the occurrence of material or systemic criminal conduct on the part of the company or its representatives relating to or affecting Covered Assets or breach of banking secrecy, confidentiality, data protection or similar laws and (v) failure or potential failure of HM Treasury and the Royal Bank to reach agreement in respect of whether (and if so, to what extent) cover should extend to certain ineligible assets, may (or, in respect of assets which HM Treasury and the company have agreed are ineligible, will) impact the enforceability and/or level of protection available to the Group and may materially reduce the protection anticipated by the Group for its stressed losses. Further, there is no ability to nominate additional or alternative assets or exposures in place of those which turn out not to be covered under the APS. If the Group is then unable to find alternative methods for improving and maintaining its capital ratios, its business, results of operations and financial condition will suffer, its credit ratings may drop, its ability to lend and access funding will be further limited and its cost of funding may increase. The occurrence of any or all of such events may cause the price of the securities to decline substantially and may result in intervention by the Authorities, which could include full nationalisation or other resolution procedures under the Banking Act. Any compensation payable to holders of securities would be subject to the provisions of the Banking Act, and investors may receive no value for their securities.
Business review continued efficient procedures to deal with the requirements of the APS and to training staff, it is not possible to be certain that such actions will be effective to control each of the operational risks faced by the Group or to provide the necessary information in the necessary time periods in the context of the APS. Since the Group’s operational systems were not originally designed to facilitate compliance with these extensive continuing obligations, there is a risk that the Group will fail to comply with a number of these obligations. This risk is particularly acute in the period immediately following the APS becoming effective. Certain of the reporting requirements, in particular, are broad in their required scope and challenging in their required timing. There is, as a result, a real possibility that the company, at least initially, will not be able to achieve full compliance. Where the Group is in breach of its continuing obligations under the Scheme Conditions in respect of any of the Covered Assets, related assets or other obligations, or otherwise unable to provide or verify information required under the APS within the requisite time periods, recovery of losses under the APS may be adversely impacted, may lead to an indemnity claim and HM Treasury may in addition have the right to exercise certain step-in rights, including the right to require the company to appoint a step-in manager who may exercise oversight, direct management rights and certain other rights including the right to modify certain of the Group’s strategies, policies or systems. Therefore, there is a risk that Covered Assets in relation to which the Group has failed to comply with its continuing obligations under the Scheme Conditions, will not be protected or fully protected by the APS. As there is no ability to nominate additional or alternative assets or exposures for cover under the APS, the effect of such failures will impact the level of protection available to the Group and may reduce or eliminate in its entirety the protection anticipated by the Group for its stressed losses, in which case its business, results of operations and financial condition will suffer, its credit ratings may drop, its ability to lend and access funding will be further limited and its cost of funding may increase. The occurrence of any or all of such events may cause the price of the securities to decline substantially and may result in intervention by the Authorities, which could include full nationalisation or other resolution procedures under the Banking Act. Any compensation payable to holders of securities would be subject to the provisions of the Banking Act, and investors may receive no value for their securities.
Such modifications or replacements may be retrospective and may result in a loss of or reduction in the protection expected by the Group under the APS in relation to certain Covered Assets, an increase in the risk weightings of the Covered Assets (either in the UK or overseas), a material increase in the continuing reporting obligations or asset management conditions applicable to the Group under the Scheme Conditions or a material increase in the expenses incurred or costs payable by the Royal Bank under the APS. Modifications by HM Treasury of the Scheme Conditions could result in restrictions or limitations on the Group’s operations. The consequences of any such modifications by HM Treasury are impossible to quantify and are difficult to predict and may have a material adverse effect on the Group’s financial condition and results of operations.
Owing to the complexity of the APS and possible regulatory capital developments, the operation of the APS and the issue of £25.5 billion of B shares and, if required, the £8 billion Contingent B shares may fail to achieve the desired effect on the Group’s regulatory capital position. This may mean the Group’s participation in the APS and the issuance of £25.5 billion of B shares and, if required, the £8 billion Contingent B shares does not improve market confidence in the Group sufficiently or at all. This may result in the Group facing the risk of full nationalisation or other resolution procedures under the Banking Act.
One of the key objectives of the APS and the recent issuance of £25.5 billion of B shares and, if required, the £8 billion Contingent B shares was to improve capital ratios at a consolidated level for the Group and at an individual level for certain relevant Group members. The Royal Bank will or may in the future enter into certain back-to-back arrangements with Group members holding assets or exposures to be covered by the APS in order to ensure the capital ratios of these entities are also improved by virtue of the APS. As the APS and certain of the associated back-to-back arrangements are a unique form of credit protection over a complex range of diversified Covered Assets in a number of jurisdictions, there is a risk that the interpretation of the relevant regulatory capital requirements by one or more of the relevant regulatory authorities may differ from that assumed by the Group, with the result that the anticipated improvement to the Group’s capital ratios will not be fully achieved. There is a further risk that, given that the current regulatory capital requirements and the regulatory bodies governing these requirements are subject to unprecedented levels of review and scrutiny both globally and locally, regulatory capital treatment that differs from that assumed by the Group in respect of the APS, the treatment of the B share issuance or the back-to-back arrangement may also occur because of changes in law or regulation, regulatory bodies or interpretation of the regulatory capital regimes applicable to the Group and/or the APS and/or the B shares and/or the back-to-back arrangements described above. If participation in the APS and the issuance of £25.5 billion of B shares and, if required, the £8 billion Contingent B shares are not sufficient to maintain the Group’s
The costs of participating in the APS incurred by the Group to HM Treasury include a fee of £700 million, paid in advance for the first three years of the APS and £500 million per annum thereafter until the earlier of (i) the date of termination of the APS and (ii) 31 December 2099. The fee may be paid in cash or, subject to HM Treasury consent, by the waiver of certain UK tax reliefs that are treated as deferred tax assets (pursuant to the three agreements which provide the right, at the company’s option, subject to HM Treasury consent, to satisfy all or part of the annual fee in respect of the APS and £8 billion of B shares and the dividend payments (if made) on the £25.5 billion of B shares, and the exit fee payable in connection with any termination of the Group’s participation in the APS, by waiving the right to certain UK tax reliefs that are treated as deferred tax assets (“Tax Loss Waiver”) or be funded by a further issue of B shares to HM Treasury. On exit the fees described in the risk factor below entitled “the company may have to repay any net pay-outs made by HM Treasury under the APS in order to terminate its participation in the APS” will apply. Furthermore, the Group may be subject to additional liabilities in connection with the associated intra group arrangements. Significant costs either have been or will also be incurred in (i) establishing the APS (including a portion of HM Treasury’s costs attributed to the Royal Bank by HM Treasury), (ii) implementing the APS, including the company’s internal systems building and as a consequence of its on-going management and administration obligations under the Scheme Conditions, such as complying with (a) the extensive governance, reporting, auditing and other continuing obligations of the APS and (b) the asset management objective which is generally applied at all times to the Covered Assets and will require increased lending in certain circumstances and (iii) paying the five-year annual fee for the initial B shares and the Contingent Subscription of £320 million less 4 per cent. of: (a) the value of any B shares subscribed for under the Contingent Subscription; and (b) the amount by which the Contingent Subscription has been reduced pursuant to any exercise by the company of a partial termination of the Contingent Subscription (payable in cash or, with HM Treasury’s consent, by waiving certain UK tax reliefs that are treated as deferred tax assets (pursuant to the Tax Loss Waiver), or funded by a further issue of B shares to HM Treasury). In addition, there will be ongoing expenses associated with compliance with the Scheme Conditions, including the Royal Bank and HM Treasury’s professional advisers’ costs and expenses. These expenses are expected to be significant due to the complexity of the APS, the need to enhance the Group’s existing systems in order to comply with reporting obligations required by the APS and the Royal Bank’s obligations under the Scheme Conditions to pay HM Treasury’s and its advisers’ costs in relation to the APS. In addition, the Group has certain other financial exposures in connection with the APS including (i) an obligation to indemnify HM Treasury, any governmental entity or their representatives and (ii) for the minimum twoyear period from a Trigger until payment is made by HM Treasury under the APS, exposure to the funding costs of retaining assets and exposures on its balance sheet whilst receiving interest based on the “Sterling General Collateral Repo Rate” as displayed on the Bloomberg service, or such other rate as may be notified by HM Treasury from time to time as reflecting its costs of funds. The aggregate effect of the joining, establishment and operational costs of the APS and the ongoing costs and expenses, including professional advisers’ costs, may significantly reduce or even eliminate the anticipated amounts to be received by the Group under the APS.
The amounts received under the APS (which amounts are difficult to quantify precisely) may be less than the costs of participation, as described above. There are other, non-cash, anticipated benefits of the Group’s participation, which include the regulatory capital benefits referred to above and the potential protection from future losses, which are themselves also difficult to quantify.
The extensive governance, asset management and information requirements under the Scheme Conditions and HM Treasury’s step-in rights may serve to limit materially the Group’s operations. In addition, the market’s reaction to such controls and limitations may have an adverse impact on the price of the company’s securities.
Under the Scheme Conditions, the Group has extensive governance, asset management, audit and information obligations aimed at ensuring (amongst other things) that (i) there is no prejudice to, discrimination against, or disproportionate adverse effect on the management and administration of Covered Assets when compared with the management and administration of other assets of the Group that are outside of the APS and (ii) HM Treasury is able to manage and assess its exposure under the APS, perform any other functions within HM Treasury’s responsibilities or protect or enhance the stability of the UK financial system. Any information obtained by HM Treasury through its information rights under the APS may be further disclosed by
The payment obligations of HM Treasury under the Scheme Documents are capable of being transferred to any third party (provided the transfer does not affect the risk weightings the company is entitled to apply to its exposures to Covered Assets). The step-in rights, together with all other monitoring, administration and enforcement rights, powers and discretions of HM Treasury under the Scheme Documents, are capable of being transferred to any government entity.
The obligations of the Group and the rights of HM Treasury may, individually or in the aggregate, impact the way the Group runs its business and may serve to limit the Group’s operations with the result that the Group’s business, results of operations and financial condition will suffer.
Business review other votes which HM Treasury is entitled to cast in respect of any other ordinary shares held by or on behalf of HM Treasury, would exceed 75 per cent. of the total votes eligible to be cast on a resolution presented at a general meeting of the company.
The issue by the company to HM Treasury of £25.5 billion of B shares at the time it acceded to the APS increased HM Treasury’s economic interest in the company to 84.4 per cent. In addition, HM Treasury has committed to subscribe for up to an additional £8 billion in aggregate amount of Contingent B shares for the Contingent Period, if certain conditions are met. Following such additional issuance, and assuming no other dilutive issuances, HM Treasury’s economic interest in the company would increase further to 86.4 per cent. In addition, HM Treasury’s economic interest in the company would also increase if the company elects to issue B shares to HM Treasury as a means of paying the annual fee due under the APS or the Contingent Subscription (both of which would require the consent of HM Treasury), or to fund dividend payments under the terms of the Dividend Access Share. As the B shares rank pari passu with the ordinary shares on a winding-up and the Dividend Access Share entitles HM Treasury to an enhanced dividend calculated on the basis of the number of B shares issued, any increase in HM Treasury’s economic interest in the company will have a corresponding dilutive effect on other shareholders in the event of a winding-up and in respect of the payment of dividends.
It is difficult to value accurately the cost to the Group if the company opts, subject to HM Treasury consent, to satisfy the annual fee in respect of both the APS and the Contingent Subscription and any exit fee (payable to terminate the Group’s participation in the APS) by waiving certain UK tax reliefs that are treated as deferred tax assets pursuant to the Tax Loss Waiver. The cost will depend on unascertainable factors including the extent of future losses, the extent to which the Group regains profitability and any changes in tax law. In addition to suffering greater tax liabilities in future years as a result of the Tax Loss Waiver, the Group may also be subject to further tax liabilities in the UK and overseas in connection with the APS and the associated intra-group arrangements which would not otherwise have arisen. The Tax Loss Waiver provides that the Group will not be permitted to enter into arrangements which have a main purpose of reducing the net cost of the Tax Loss Waiver. It is unclear precisely how these restrictions will apply, but it is possible that they may limit the operations and future post-tax profitability of the Group.
In order to fulfil its disclosure obligations under the APS, the Group may incur the risk of civil suits, criminal liability or regulatory actions. The Scheme Conditions require that certain information in relation to the Covered Assets be disclosed to HM Treasury to enable HM Treasury to quantify, manage and assess its exposure under the APS. The FSA has issued notices to the Royal Bank requiring the information that HM Treasury requires under the Scheme Documents prior to the Group’s accession to and participation in the APS (and certain other information which HM Treasury required under the Scheme Documents following the Group’s accession), be provided to it through its powers under the FSMA and the Banking Act. To the extent regulated by the FSA, the Group has a legal obligation to comply with these disclosure requests from the FSA. However, in complying with these disclosure obligations and providing such information to the FSA, the Group may, in certain jurisdictions, incur the risk of civil suits or regulatory action (which could include fines) to the extent that disclosing information related to the Covered Assets results in the Group breaching common law or statutory confidentiality laws, contractual undertakings, data protection laws, banking secrecy and other laws restricting disclosure. There can be no guarantee that future requests for information will be made by the FSA in the same manner. Requests made directly by HM Treasury pursuant to the terms of the APS are likely to expose the Group to a greater risk of such suits or regulatory action. Adverse regulatory action or adverse judgments in litigation could result in a material adverse effect on the Group’s reputation or results of operations or result in a loss of value in the securities. Alternatively, in order to avoid the risk of such civil suits or regulatory actions or to avoid the risk of criminal liability, the Group may choose to or (in the case of criminal liability) be required to remove Covered Assets from the APS so as not to be required to disclose to HM Treasury, such information, with the result that such assets will not be protected by the APS. The effect of the removal of such Covered Assets will impact the level of protection available to the Group and may materially reduce the protection anticipated by the Group for its stressed losses, in which case its business, results of operations and financial condition will suffer.
Where the Group discloses information to HM Treasury as set out above, HM Treasury may disclose that information to a number of third parties for certain specified purposes. Such disclosures by HM Treasury may put the Group in breach of common law or statutory confidentiality laws, contractual undertakings, data protection laws, banking secrecy or other laws restricting disclosure.
Notes: (1) The pro forma and statutory results for 2008 have been restated for the amendment to IFRS 2 ‘Share-based Payment’. This has resulted in an increase in staff costs amounting to £169 million in both the pro forma and statutory results.
(2) Pro forma total income excludes gain on redemption of own debt and strategic disposals. In the statutory consolidated income statement on page 241, these items are included in total income.
(4) Pro forma excludes write-down of goodwill and other intangible assets.
Summary consolidated income statement for the year ended 31 December 2009 In the pro forma income statement set out below, 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 are shown separately. In the statutory consolidated income statement set out below and on page 241, these items are included in non-interest income and operating expenses, as appropriate.
Profit/(loss) before other operating charges and impairment losses 12,024 4,411 17,212 (28,334)
Amortisation of purchased intangible assets (272) (443) — — Integration and restructuring costs (1,286) (1,357) — — Gain on redemption of own debt 3,790 — — — Strategic disposals 132 442 — — Gains on pensions curtailment 2,148 — — — Bonus tax (208) — — — Operating loss before tax (1,928) (8,296) (2,595) (40,836)
Preference shares and other dividends (935) (596) (935) (596) Loss attributable to ordinary and B shareholders before write-down of goodwill and other intangible assets (3,244) (8,110) (3,607) (24,306) Write-down of goodwill and other intangible assets (363) (16,196) — — Loss attributable to ordinary and B shareholders (3,607) (24,306) (3,607) (24,306)
Basic loss per ordinary and B share from continuing operations (6.3p) (146.2p) (6.3p) (146.2p)
Note: (1) The pro forma and statutory results for 2008 have been restated for the amendment to IFRS 2 ‘Share-based Payment’. This has resulted in an increase in staff costs amounting to £169 million in both the pro forma and statutory results.
After tax, minority interests and preference share and other dividends, the loss attributable to ordinary and B shareholders was £3,607 million, compared with an attributable loss of £24,306 million in 2008.
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 £15,858 million from £4,835 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.
Operating expenses Total operating expenses, excluding amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gains on pensions curtailment and bonus tax, increased by 7% to £17,401 million, largely resulting from increased staff costs. Staff costs were up 14% 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. The Group cost:income ratio improved to 59%, compared with 79% in 2008.
Impairment losses Impairment losses increased to £13,899 million from £7,432 million in 2008, with Core bank impairments rising by £2,182 million and NonCore by £4,285 million. Signs that impairments might be plateauing appear to have been borne out in the latter part of the year, and there are indications that the pace of downwards credit rating migration for corporates is slowing. Nonetheless, the financial circumstances of many consumers and businesses remain fragile, and rising refinancing costs, whether as a result of monetary tightening or of increased regulatory capital requirements, could expose some customers to further difficulty.
Impairments represented 2.3% of gross loans and advances, excluding reverse repos, in 2009 compared with 0.9% in 2008.
Pension curtailment gains of £2,148 million were recognised during the fourth quarter of 2009 arising from changes to prospective pension benefits in the defined benefit scheme and certain other subsidiary schemes. A charge related to the UK Government’s bonus tax proposals of £208 million was reflected in 2009 with a further £160 million deferred until 2010 and 2011.
Earnings Basic loss per ordinary and B share from continuing operations improved from 146.2p to a loss of 6.3p. Adjusted loss per ordinary and B share improved from 43.1p to a loss of 13.2p per share. The number of ordinary shares in issue increased to 56,366 million at 31 December 2008, compared with 39,456 million in issue at 31 December 2008, reflecting the placing and open offer in April 2009. The Group also issued 51 billion B shares to Her Majesty’s Treasury in December 2009.
Balance sheet 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.
Following accession to the Asset Protection Scheme and the issue of B shares to the UK Government in December 2009, the Group’s Core Tier 1 capital ratio on a proportionally consolidated basis increased to 11.0%, from 5.9% at 31 December 2008. The Core Tier 1 ratio benefited from 260 basis points of risk-weighted asset relief provided by the APS. The Tier 1 ratio was 14.4% at 31 December 2009 (2008 – 9.9%) and the total capital ratio 16.3% (2008 – 14.2%).
2009 compared with 2008 – statutory Operating loss Operating loss before tax for the year was £2,595 million compared with a loss of £40,836 million in 2008.
Total income Total income increased 50% to £38,690 million in 2009.
Non-interest income Non-interest income increased to £22,186 million from £7,193 million in 2008. This included a gain on redemption of own debt of £3,790 million. Excluding the gain on redemption of own debt, non-interest income increased by £11,203 million primarily due to the increase in income from trading activities.
Net insurance claims Bancassurance and general insurance claims, after reinsurance, increased by 10% to £4,857 million.
Impairment losses Impairment losses were £14,950 million, compared with £8,072 million in 2008.
Risk elements in lending and potential problem loans represented 5.5% of gross loans and advances to customers excluding reverse repos at
Taxation The effective tax rate for 2009 was 14.3% compared with 5.7% in 2008.
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.
Gross yield on interest-earning assets of the banking business (3) 3.50 5.72 3.75 5.63 Cost of interest-bearing liabilities of the banking business (1.95) (3.88) (2.16) (3.81) Interest spread of the banking business (4) 1.55 1.84 1.59 1.82 Benefit from interest-free funds 0.21 0.24 0.20 0.23 Net interest margin of the banking business (5) 1.76 2.08 1.79 2.05
(2) Interest income has been increased by £46 million (2008 – £332 million) and interest expense by £350 million (2008 – £860 million) 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.
Average balance sheet and related interest Pro forma 2009 Pro forma 2008
Assets Loans and advances to banks – UK 21,373 278 1.30 19,049 978 5.13
Loans and advances to customers – UK 333,408 11,864 3.56 321,177 19,085 5.94
Total interest-earning assets 1,044,128 1,163,547 Non-interest-earning assets (2, 3) 815,468 660,628
Customer accounts: demand deposits – UK 109,756 559 0.51 99,840 2,794 2.80
Total interest-bearing liabilities – banking business (2, 3) 672,449 13,107 1.95 692,704 26,877 3.88
Total interest-bearing liabilities 1,003,829 1,159,314 Non-interest-bearing liabilities: Demand deposits – UK 16,446 19,262
Notes: (1) The analysis into UK and Overseas has been compiled on the basis of location of office.
(3) Interest income has been increased by £46 million (2008 – £332 million) and interest expense by £350 million (2008 – £860 million) 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.
Loans and advances to customers – UK 333,707 11,952 3.58 321,066 19,066 5.94
Customer accounts: savings deposits – UK 54,270 780 1.44 42,870 1,708 3.98
Debt securities in issue – UK 130,002 3,162 2.43 111,099 4,617 4.16
Total interest-bearing liabilities – banking business (2, 3) 818,422 17,682 2.16 832,350 31,707 3.81
Owners’ equity 57,303 58,544 Total liabilities and owners’ equity 2,023,480 2,040,685
(2) Interest-earning assets and interest-bearing liabilities exclude the Retail bancassurance assets and liabilities attributable to policyholders, in view of their distinct nature. As a result, net interest income has been increased by £20 million (2008 – £84 million).
Total interest payable of the banking business 744 13,026 13,770 938 13,087 14,025 Movement in net interest income
Note: (1) Pro forma excludes gain on redemption of own debt and strategic disposals.
Income from trading activities rose substantially during the year by £12,635 million, principally due to lower credit market losses reflecting improved underlying asset prices compared with 2008. Increased market volatility and strong customer demand in a positive trading environment also contributed to this improvement.
Insurance net premium income fell by £443 million principally reflecting lower bancassurance fees, £288 million, and lower general insurance premiums, £155 million.
Other operating income increased by £63 million. This improvement reflected a small gain in the fair value of securities and other assets and liabilities compared with a loss of £1.4 billion in 2008. This was partially offset by lower profits on sales of securities and properties and reduced dividend income, together with a loss on sale of subsidiaries and associates of £0.1 billion compared with a profit of £0.9 billion in 2008, which included a gain of £600 million on the sale of Angel Trains.
Insurance net premium income fell by £782 million principally reflecting lower bancassurance fees, and lower general insurance premiums.
Premises and equipment costs rose by £369 million due to the impact of expanded Group premises in London and the US.
Other expenses fell by £120 million due to integration benefits in GBM partially offset by increased deposit insurance levies in the US.
– excluding gains on pensions curtailment 9,081 7,990 11,783 10,410 – gains on pensions curtailment — — (2,148) —
(2) The pro forma and statutory results for 2008 have been restated for the amendment to IFRS 2 ‘Share-based Payment’. This has resulted in an increase in staff costs amounting to £169 million in both the pro forma and statutory results.
Accruals in relation to integration costs are set out below. At Currency Charge Utilised At 31 December translation to income during 31 December 2008 adjustments statement the year 2009 £m £m £m £m £m
Staff costs 365 503 Premises and equipment 78 25 Other administrative expenses 398 486 Depreciation and amortisation 18 36
At Currency Charge Utilised At 31 December translation to income during 31 December 2008 adjustments statement the year 2009 £m £m £m £m £m
In the Core business, the biggest increases were in UK Retail, UK Corporate and Ulster Bank, reflecting the difficult economic environment.
Impairment of available-for-sale securities 809 954 816 981 Charge to income statement 13,899 7,432 14,950 8,072
Business review continued 2009 compared with 2008 Losses relating to monoline exposures were £2,387 million in 2009 compared with £3,093 million in 2008.
• 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 reported in 2009 primarily relate to super senior CDOs. The significant price declines of the underlying predominantly mortgagebacked securities seen in 2008 were not repeated in 2009.
• 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 banking book hedges were £1,727 million in 2009 compared with profits of £1,642 million in 2008. These trades hedge counterparty risk that arises from loans and bonds on the regulatory banking book. As credit spreads have generally tightened in 2009 the value of these hedges has decreased resulting in losses. These hedges gave rise to gains in 2008 due to credit spreads generally widening.
Other non-deductible items (508) (371) (508) (378) Non-taxable items: – gain on redemption of own debt 693 — 693 —
On a statutory basis, the effective tax rate for the year was 14.3% (2008 – 5.7%). The tax credit is lower than that arising from applying the standard rate of UK corporation tax of 28% to the loss for the period, principally due to certain carried forward losses on which no tax relief has been recognised. The effective tax rate on a pro forma basis was 17.6% (2008 – 15.4%).
Additional disclosures on these and other related exposures can be found in the following sections: Disclosure Section Sub-section Page
Global Banking & Markets 5,709 (1,796) Global Transaction Services 973 1,002 Ulster Bank (368) 218 US Retail & Commercial (113) 528 RBS Insurance 58 584 Central items 292 1,025
Non-Core (14,557) (11,351) Operating loss (6,232) (6,938) Amortisation of purchased intangible assets (272) (443) Integration and restructuring costs (1,286) (1,357) Gain on redemption of own debt 3,790 — Strategic disposals 132 442 Gains on pensions curtailment 2,148 — Bonus tax (208) — Operating loss before tax (1,928) (8,296)
The performance of each of the divisions is reviewed on pages 88 to 107.
Global Banking & Markets 640 522 Global Transaction Services 39 54 Ulster Bank 649 106 US Retail & Commercial 702 437 RBS Insurance 8 42 Central items 1 (19)
Group Centre directly attributable costs have been allocated to the operating divisions, based on their service usage. Where services span more than one division, the costs are allocated on a basis management considers reasonable. The residual unallocated costs remaining in the Group centre relate to volatile corporate items that do not naturally reside within a division.
Global Banking & Markets 1.38 1.34 Global Transaction Services 9.22 8.25 Ulster Bank 1.87 1.89 US Retail & Commercial 2.37 2.68 Non-Core 0.69 0.87
Global Banking & Markets 123.7 151.8 Global Transaction Services 19.1 17.4 Ulster Bank 29.9 24.5 US Retail & Commercial 59.7 63.9
Net interest income 3,452 3,187 Net fees and commissions – banking 1,244 1,524 Other non-interest income (net of insurance claims) 251 227 Non–interest income 1,495 1,751 Total income 4,947 4,938 Direct expenses
Operating profit before impairment losses 1,908 1,742 Impairment losses (1,679) (1,019) Operating profit 229 723
Analysis of income by product Personal advances 1,192 1,244 Personal deposits 1,349 2,037 Mortgages 1,214 500 Bancassurance 246 217 Cards 869 831 Other 77 109 Total income 4,947 4,938
Analysis of impairment by sector Mortgages 124 31 Personal 1,023 568 Cards 532 420 Total impairment 1,679 1,019
Loan impairment charge as % of gross customer loans and advances by sector
Performance ratios Return on equity (1) 4.2% 13.1% Net interest margin 3.59% 3.58% Cost:income ratio 59.8% 62.4%
Customer deposits (excluding bancassurance) 87.2 78.9 Assets under management (excluding deposits) 5.3 5.7 Risk elements in lending 4.6 3.8 Loan:deposit ratio (excluding repos) 115% 116% Risk-weighted assets 51.3 45.7
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.
• 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.
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.
Private sector education, health, social work, recreational and community services 0.80% 0.20%
– Banks and financial institutions 5.2 5.4 – Hotels and restaurants 5.6 6.1 – Housebuilding and construction 3.4 5.2 – Manufacturing 3.7 5.3 – Other 42.0 38.1 – Private sector education, health, social work, recreational and community services 7.4 7.4 – Property 28.0 31.8 – Wholesale and retail trade, repairs 7.8 9.1 – Asset and invoice finance 8.5 8.5
Customer deposits 87.8 82.0 Risk elements in lending 2.3 1.3 Loan:deposit ratio 126% 142% Risk-weighted assets 90.2 85.7
Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 8% of divisional risk-weighted assets, adjusted for capital deductions).
Loans and advances increased by 10% over 2008, primarily in the UK. Lending margins improved, particularly for mortgages, and credit metrics for new business remain satisfactory.
Expenses were down 6% (10% lower on a constant currency basis), reflecting a rigorous focus on cost management, with staff costs decreasing by 11% as a result of planned headcount reduction. The cost:income ratio improved from 65.6% to 59.2%.
Customer deposits 35.7 34.1 Assets under management (excluding deposits) 30.7 34.7 Risk elements in lending 0.2 0.1 Loan:deposit ratio 38% 36% Risk-weighted assets 11.2 10.8
Operating profit/(loss) before impairment losses 6,349 (1,274) Impairment losses (640) (522) Operating profit/(loss) 5,709 (1,796)
Analysis of income by product Rates – money markets 1,714 1,641 Rates – flow 3,142 1,386 Currencies & commodities 1,277 1,539
Credit markets 2,255 (3,435) Portfolio management and origination 1,196 858 Fair value of own debt (49) 357 Total income 11,009 2,714
Analysis of impairment by sector Manufacturing and infrastructure 91 39 Property and construction 49 12 Transport 3 — Banks and financial institutions 348 186
Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 10% of divisional risk-weighted assets, adjusted for capital deductions).
2009 compared with 2008 Operating profit improved to £5,709 million in 2009, compared with an operating loss of £1,796 million in 2008. Although the buoyant market conditions experienced in the first quarter levelled off over the course of the year, the refocusing of the business on its core franchises was successful. GBM has tightened its balance sheet management over the course of the year, with disciplined deployment of capital to support its targeted client base.
Income grew significantly, reflecting a very strong first quarter benefiting from market volatility, client activity and a marked improvement from Credit Markets. Rates flow business, up 127%, benefited from good client activity, while strong equity capital markets drove a fourfold increase in Equities.
Staff costs represented 27% of income. The Group introduced new deferral policies in 2009, which have led to changes in accrual patterns. Adjusting for both 2008 and 2009 deferrals, GBM’s compensation ratio in 2009 would have been 28%.
Higher impairments principally reflected a large individual failure recognised in the third quarter. Impairments represented 0.59% of loans and advances to customers compared with 0.29% in the prior year, reflecting the marked reduction in loans and advances.
Capital and balance sheet Loans and advances (including banks) 127.8 224.2 Reverse repos 73.3 88.8
Net interest income 912 937 Non-interest income 1,575 1,494 Total income 2,487 2,431 Direct expenses
Operating profit before impairment losses 1,012 1,056 Impairment losses (39) (54) Operating profit 973 1,002
Analysis of income by product Domestic cash management 805 795 International cash management 734 722 Trade finance 290 241 Merchant acquiring 528 554 Commercial cards 130 119 Total income 2,487 2,431
At constant exchange rates, international payment fees increased by 11%, while trade finance income increased by 8%, with improved penetration in the Asia-Pacific region. Merchant acquiring income, however, declined by 9% at constant exchange rates, as consumers continued to switch to lower margin debit card transactions in preference to using credit cards.
Net interest income 780 773 Net fees and commissions 228 238 Other non-interest income 26 28 Non-interest income 254 266 Total income 1,034 1,039 Direct expenses
Analysis of income by business Corporate 580 618 Retail 412 396 Other 42 25 Total income 1,034 1,039
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Total costs for the year were flat on a constant currency basis. Direct expenses were down 12% in constant currency terms during 2009, driven by the bank’s restructuring programme, which incorporates the merger of the First Active and Ulster Bank businesses. The rollout of the programme has resulted in a downward trend in direct expenses throughout 2009. The reduction in direct expenses has been offset by a 17% increase in indirect expenses primarily reflecting provisions relating to the bank’s own property recognised in the fourth quarter.
Operating profit before impairment losses 589 965 Impairment losses (702) (437) Operating (loss)/profit (113) 528
Analysis of income by product Mortgages and home equity 499 375 Personal lending and cards 451 333 Retail deposits 828 1,000 Commercial lending 542 405 Commercial deposits 398 377 Other 6 97 Total income 2,724 2,587
Analysis of impairment by sector Residential mortgages 72 41 Home equity 167 67 Corporate & Commercial 326 181 Other consumer 137 148 Total impairment 702 437
Loan impairment charge as % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Residential mortgages 1.11% 0.43% Home equity 1.08% 0.36% Corporate & Commercial 1.67% 0.76% Other consumer 1.84% 1.51%
– residential mortgages 10.6 13.9 – home equity 25.0 27.2 – corporate and commercial 31.6 34.7 – other consumer 12.1 14.3
Loan: deposit ratio 80% 96% Risk-weighted assets 96.9 93.2 Spot exchange rate – US$/£ 1.622 1.460
Net interest income was down 13%. Net interest margin was down 31bps 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.
Expenses increased by 11%, reflecting increased FDIC deposit insurance levies, higher employee benefit costs as well as increased costs relating to loan workout and collection activity. Successful execution of restructuring activities resulted in approximately $75 million of cost savings.
Earned premiums 4,519 4,512 Reinsurers’ share (165) (206) Insurance net premium income 4,354 4,306 Net fees and commissions (366) (396) Other income 472 520 Total income 4,460 4,430 Direct expenses
Gross claims (3,690) (3,136) Reinsurers’ share 55 104 Net claims (3,635) (3,032) Operating profit before impairment losses 66 626 Impairment losses (8) (42) Operating profit 58 584
Performance ratios Return on equity (1) 1.6% 18.3% Cost:income ratio 17.0% 17.4% Adjusted cost:income ratio (2) 92.0% 55.2%
In-force policies (000’s) – Motor own-brand 4,858 4,492 – Own-brand non-motor (home, rescue, pet, HR24) 6,307 5,560 – Partnerships and broker (motor, home, rescue, pet, HR24) 5,328 5,898 – Other (International, commercial and central) 1,217 1,206
Notes: (1) Based on divisional operating profit after tax, divided by divisional notional equity (based on regulatory capital).
Income grew by 1%, with premium income stable but lower reinsurance costs. Investment income was 16% 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.
Expenses fell by 2% in 2009, with wage inflation, higher industry levies and professional fees offset by cost efficiencies, reduction in headcount and lower marketing expenditure.
Net claims were 20% higher than in 2008 driven by a £448 million increase in bodily injury claims as well as by adverse weather experienced in the fourth quarter. Significant price increases were implemented in the latter part of the year to mitigate the industry trend of rising claims costs, and additional significant initiatives have also been undertaken to adapt pricing models and enhance claims management.
Net interest income from banking activities 1,534 2,156 Net fees and commissions receivable 510 912 Loss from trading activities (5,161) (7,739) Insurance net premium income 784 986 Other operating income 32 653 Non-interest income (3,835) (5,188) Total income (2,301) (3,032) Direct expenses
Asset backed products (2) 288 3,220 Other credit exotics 558 935
Impairment losses Banking & Portfolio 4,215 938 International Businesses & Portfolios 4,494 1,832
Loan impairment charge as % of gross customer loans and advances (3)
Banking & Portfolio 4.91% 0.90% International Businesses & Portfolios 6.56% 2.28%
Risk-weighted assets Banking & Portfolio 58.2 63.1 International Businesses & Portfolios 43.8 50.1 Markets 69.3 57.7
(2) Asset backed products include super senior asset backed structures and other asset backed products.
UK Retail Mortgages 5 1 Personal 48 42 Other — 62 Total UK Retail 53 105
UK Corporate Manufacturing & infrastructure 87 42 Property & construction 637 281 Transport 10 (3) Banks & financials 101 4 Lombard 122 61 Invoice finance 3 — Other 717 142 Total UK Corporate 1,677 527
Global Banking & Markets Manufacturing & infrastructure 1,405 1,280 Property & construction 1,413 710
Ulster Bank Mortgages 42 6 Commercial investment & development 302 9 Residential investment & development 716 229 Other 217 60 Other EMEA 107 116 Total Ulster Bank 1,384 420
US Retail & Commercial Auto & consumer 136 140 Cards 130 63 SBO/home equity 445 321 Residential mortgages 55 6 Commercial real estate 228 54 Commercial & other 85 20 Total US Retail & Commercial 1,079 604
US Retail & Commercial Auto & consumer 3.2 4.2 Cards 0.5 0.7 SBO/home equity 3.7 5.2 Residential mortgages 0.8 1.1 Commercial real estate 1.9 3.0 Commercial & other 0.9 1.4 Total US Retail & Commercial 11.0 15.6
Employee numbers at 31 December (full time equivalents rounded to the nearest hundred)
Impairment losses increased to £9.2 billion, reflecting continued weakness in the economic environment, particularly across the corporate and property sectors. There were signs of a slowdown in the rate of provisioning towards the end of the year.
Risk weighted assets increased by 0.2% in 2009, and at constant exchange rates increased by 3%. The reduction of 15% since 30 September 2009, reflects active management to reduce trading book exposures, largely offset by the impact of procyclicality, monoline downgrades and adverse market risk.
Assets Cash and balances at central banks 51,548 11,830 52,261 12,400 Net loans and advances to banks 48,777 70,728 56,656 79,426 Reverse repurchase agreements and stock borrowing 35,097 58,771 35,097 58,771 Loans and advances to banks 83,874 129,499 91,753 138,197 Net loans and advances to customers 554,654 691,976 687,353 835,409 Reverse repurchase agreements and stock borrowing 41,040 39,289 41,040 39,313 Loans and advances to customers 595,694 731,265 728,393 874,722
Prepayments, accrued income and other assets 18,604 21,573 20,985 24,402 Assets of disposal groups 18,432 480 18,542 1,581
Commentary on consolidated balance sheet – pro forma 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.
Loans and advances to banks decreased by £45.6 billion, 35%, to £83.9 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 £22.0 billion, 31%, to £48.8 billion, largely as a result of reduced wholesale funding activity in Global Banking & Markets.
Settlement balances were down £5.8 billion, 32%, at £12.0 billion as a result of lower customer activity.
Increases in assets and liabilities of disposal groups reflect the inclusion of the RBS Sempra Commodities 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 £35.9 billion, 7%, to £482.6 billion. Within this, repos increased £10.2 billion, 18%, to £68.4 billion. Excluding repos, deposits were down £46.1 billion, 10%, to £414.3 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, £11.3 billion, offset in part by growth across all other divisions, up £23.0 billion.
Equity minority 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.
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 minority interests, net of tax, of £0.5 billion arising from the redemption of trust preferred securities.
Settlement balances were down £5.8 billion, 33%, at £12.0 billion as a result of lower customer activity.
Retirement benefit liabilities increased by £0.9 billion, 46%, to £3.0 billion, with net actuarial losses of £3.7 billion, arising from lower discount rates and higher assumed inflation, partially offset by curtailment gains of £2.1 billion due to changes in prospective pension benefits.
Capital resources The following table analyses the Group’s regulatory capital resources on a fully consolidated basis at 31 December: £m £m £m £m £m
It is the Group’s policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the Financial Services Authority (FSA). The FSA uses Risk Asset Ratio (RAR) as a measure of capital adequacy in the
Basis of preparation of pro forma results The pro forma financial information shows the underlying performance of the Group including the results of the ABN AMRO businesses to be retained by RBS. This information is being provided to give a better understanding of what the results of the operations might have looked like had the acquisition of ABN AMRO as well as the transfers of businesses to the other Consortium Members occurred on 1 January 2008.
Group operating (loss)/profit on a pro forma basis excludes: • 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
Profit before other operating charges 12,024 1,247 3,941 17,212 Insurance net claims (4,357) (500) — (4,857) Operating profit before impairment losses 7,667 747 3,941 12,355
Loss from continuing operations (1,952) (272) — (2,224) Loss from discontinued operations, net of tax (72) (27) — (99) Loss for the year (2,024) (299) — (2,323)
Preference share and other dividends (935) — — (935) Loss attributable to ordinary and B shareholders (3,607) — — (3,607)
Income statement for the year ended 31 December 2008 RFS Reallocation minority of one-off Pro forma interest items Statutory £m £m £m £m
Profit/(loss) before other operating charges 4,411 (14,476) (18,269) (28,334) Insurance net claims (3,917) (513) — (4,430) Operating profit/(loss) before impairment losses 494 (14,989) (18,269) (32,764)
Amortisation of purchased intangible assets (443) — 443 — Write-down of goodwill and other intangible assets (16,911) — 16,911 — Integration and restructuring costs (1,357) — 1,357 — Strategic disposals 442 — (442) — Operating loss before tax (25,207) (15,629) — (40,836)
Loss from continuing operations (23,212) (15,301) — (38,513) (Loss)/profit from discontinued operations, net of tax (86) 4,057 — 3,971 Loss for the year (23,298) (11,244) — (34,542)
Preference share and other dividends (596) — — (596) Loss attributable to ordinary and B shareholders (24,306) — — (24,306)
Debt securities in issue 246,329 21,239 267,568 Settlement balances and short positions 50,875 1 50,876
Accruals, deferred income and other liabilities 24,624 5,703 30,327 Retirement benefit liabilities 2,715 248 2,963
Assets Cash and balances at central banks 11,830 570 12,400 Net loans and advances to banks 70,728 8,698 79,426 Reverse repurchase agreements and stock borrowing 58,771 — 58,771 Loans and advances to banks 129,499 8,698 138,197 Net loans and advances to customers 691,976 143,433 835,409 Reverse repurchase agreements and stock borrowing 39,289 24 39,313 Loans and advances to customers 731,265 143,457 874,722
Prepayments, accrued income and other assets 21,573 2,829 24,402 Assets of disposal groups 480 1,101 1,581
Debt securities in issue 269,458 30,831 300,289 Settlement balances and short positions 54,264 13 54,277
Accruals, deferred income and other liabilities 24,140 7,342 31,482 Retirement benefit liabilities 1,564 468 2,032
Overview* Conditions during the year continued to prove challenging as the ongoing deterioration in economic conditions and financial markets seen during 2008 continued into 2009. Market stress peaked during the first quarter of 2009 with broad improvement since then. This reflects a global effort by many governments and central banks to ease monetary conditions, increase liquidity within the financial system and support banks with a combination of increased capital, guarantees and strengthened deposit insurance. One resulting benefit for banks generally has been a significant improvement in the liquidity of money and debt markets. At the same time, regulatory oversight of the banking sector has increased globally and is expected to continue at a heightened level.
More recently, the major economies have started to demonstrate a gradually improving macroeconomic position, although conditions remain fragile. Areas of particular uncertainty include possible effects from governments ending their financial stimulus initiatives and central banks moving to exit from positions of historically very low interest rates, as well as reversing quantitative easing. These look likely to occur against a backdrop of heightened personal and corporate insolvency as well as rising unemployment.
The Group has been developing and adapting to an evolving economic environment, against a background of the strategic review which includes a clearly stated ambition to achieve standalone strength. The core aims of the strategic plan are to improve the risk profile of the Group and to reposition the balance sheet around the Group’s core strengths. The Group level risk appetite statements and limits have been reviewed to ensure they are in line with the strategy. Any potential areas of misalignment between risk appetite and the Group strategy have been discussed by the Executive Risk Forum and remediation plans have been put in place.
• An improved reporting programme has been implemented to increase transparency and improve the management of risk exposures.
Risk, capital and liquidity governance* The risk, capital and liquidity 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.
Risk, capital and liquidity management 119RBS Group Annual Report and Accounts 2009
The role and remit of these committees is as follows: Committee Focus Membership
Executive Committee A newly formed committee responsible for managing Group Chief Executive (ExCo) Group wide issues and those operational issues material Business and function heads, as determined by the to the broader Group. Group Chief Executive/Board Head of Restructuring and Risk Group Finance Director
Group Risk Committee Recommends limits and approves processes and major Head of Restructuring and Risk (GRC) policies to ensure the effective management of all Group Chief Risk Officer material risks across the Group. Group Head of each risk function Group Head of Country Risk Global Head of Risk Architecture Deputy Group Finance Director Chief Operating Officer, RBS Risk Management Chief Executive and Chief Risk Officer from each division
Executive Risk Forum Acts on all strategic risk and control matters across the Group Chief Executive (ERF) Group including, but not limited to, credit risk, market Head of Restructuring and Risk risk, operational risk, compliance and regulatory risk, Group Chief Risk Officer enterprise risk, treasury and liquidity risk, reputational Group Finance Director risk, insurance risk and country risk. Chief Executive Officer from each division
Note: These committees are supported at a divisional level by a risk governance structure embedded in the businesses.
Management responsibilities All employees have a role to play in the day-to-day management of capital, liquidity and risk which is set and managed by specialist staff in: • Risk Management: credit risk, market risk, operational risk, regulatory risk, reputational risk, insurance risk and country risk, together with risk analytics; and
Group Internal Audit supports the GAC in providing an independent assessment of the design, adequacy and effectiveness of the internal controls relating to risk management.
Risk appetite Risk appetite is an expression of the maximum level of risk that the Group is prepared to accept in order to deliver its business objectives. Risk and capital management across the Group is based on the risk appetite set by the Board, who ultimately approve annual plans for each division and regularly reviews and monitors the Group’s performance in relation to risk.
Risk appetite is defined in both quantitative and qualitative terms as follows: • Quantitative: encompassing stress testing, risk concentration, VaR, liquidity and credit related metrics; and
The Risk Management function provides input to the Remuneration Committee on the remuneration policy for the Group. Each division is allocated risk objectives as part of the strategic plan and achievement of these objectives is evaluated as part of the annual performance management process.
An annual report on the risk performance of each division, including both qualitative and quantitative information is provided to the Remuneration Committee to allow consideration of adjustments relating to the compensation for the performance year.
Capital* Capital resources 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 riskweighted assets (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%. At 31 December 2009, the Group’s total RAR was 16.1% (2008 – 14.1%) and the Tier 1 RAR was
As part of the annual planning and budgeting cycle, each division is allocated capital based upon RWAs and associated regulatory deductions. The budgeting process considers risk appetite, available capital resources, stress testing results and business strategy. The budget is agreed by the Board and allocated to divisions to manage their allocated RWAs.
Tier 2 Reserves arising on revaluation of property and unrealised gains on available-for-sale equities 207 984 Collective impairment allowances 796 666 Perpetual subordinated debt 4,200 9,079 Term subordinated debt 18,120 20,282 Minority and other interests in Tier 2 capital 11 11 Less deductions from Tier 2 capital (5,241) (2,055) Less APS first loss (5,106) —
Less excess of expected losses over provisions net of tax (2,558) (770) Less securitisation positions (1,353) (663) Less APS first loss (5,106) — Core Tier 1 capital 59,524 46,190 Preference shares 11,265 16,655 Innovative Tier 1 securities 5,213 7,383 Tax on the excess of expected losses over provisions 1,020 308 Less deductions from Tier 1 capital (601) (689)
Supervisory deductions Unconsolidated investments (4,472) (4,044) Other (93) (111) Deductions from total capital (4,565) (4,155)
The Group has seen a continuation of challenging financial market and economic conditions during 2009. Although some signs of improvement have started to emerge, the performance of key economies remains uncertain and the Group has continued to experience material impairment losses and credit market write-downs, including further write-downs in respect of monoline exposures. The majority of these are in the Non-Core division, which in time will be run down, significantly reducing the size of the Group’s balance sheet and associated capital requirements.
As an interim measure pending full compliance with Basel 2, the Group, with the agreement of the regulators, consolidates the RWAs of ABN AMRO on the basis of Basel 1 plus an adjustment factor. The Group is advanced in its preparation for moving to a Basel 2 compliant approach for the ABN AMRO businesses it will retain. As part of this transition the Group has agreed with the FSA to increase the adjustment factor with effect from 31 December 2009 to reflect changing circumstances. This change has increased RWAs by approximately £8 billion thereby reducing the Core Tier 1 ratio at 31 December 2009 by 20 basis points.
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.
The Group’s policy will be to continue to maintain a strong capital base, to develop this base as appropriate and to utilise it efficiently throughout the Group’s activities in order to optimise shareholder returns while maintaining a prudent relationship between the capital base and the underlying risks of the business.
• RBS share of covered losses – the remaining 10% share of loss is borne by RBS and is risk weighted in the normal way.
Regulatory developments European Directives The Group is undertaking the necessary preparations to comply with the new European Directives which will, or are expected to, come into force on or before 1 January 2011. These deal with inter alia, the eligibility of hybrid capital; restrictions on large exposures; enhanced risk management of securitisation exposures (including a requirement that banks cannot invest in a securitisation where the originator has not retained an economic interest); higher capital requirements for resecuritisations; and strengthening capital requirements for the trading book.
Basel Committee on Banking Supervision In December 2009, the Basel Committee issued proposals to strengthen capital and liquidity of banks. The key elements include: raising the quality, consistency and transparency of regulatory capital; increased capital requirements for counterparty exposures on derivatives, repurchase agreements and securities financing activities; the introduction of a leverage ratio; promotion of countercyclical measures to encourage build up of capital buffers and a more forward-looking provisioning based on expected losses instead of the current ‘incurred loss’ provisioning model; and the introduction of a global minimum liquidity standard for internationally active banks, including a short-term liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio. The Committee is carrying out an impact assessment in the first part of 2010 to calibrate the new requirements before issuing final proposals by the end of 2010 for phased implementation commencing in 2012.
The Group is working with the trade bodies in responding to the various consultations and will participate fully in the impact assessment.
The Group manages market risk in the trading and non-trading (treasury) portfolios through the market risk management framework. The framework includes VaR limits, back-testing, stress testing, scenario analysis and position/sensitivity analysis.
For operational risk, the Group uses the Standardised Approach, which calculates operational RWAs based on gross income. In line with other banks, the Group is considering adopting the advanced measurement approach for all or part of the business.
• Divisional and risk specific stress testing is undertaken to support risk identification and management. Current examples include the daily product based stress testing using a hybrid of hypothetical and historical scenarios within market risk.
Portfolio analysis, using historic performance and forward looking indicators of change, uses stress testing to facilitate the measurement of potential exposure to events and seeks to quantify the impact of an adverse change in factors which drive the performance and profitability of a portfolio.
Funding and liquidity risk The risk of being unable to meet obligations Potential to disrupt the business model and stop normal as they fall due. functions of the Group.
Other risk The risks arising from reputation risk. Additional regulation can be introduced as a result of other risk losses.
Credit risk Credit risk is the risk arising from the possibility that the Group will incur losses owing to the failure of customers to meet their financial obligations. The quantum and nature of credit risk assumed in the Group’s different businesses varies considerably, while the overall credit risk outcome usually exhibits a high degree of correlation to the macroeconomic environment. Certain disclosures in this section (pages 127 to 148) are unaudited and are labelled with an asterisk (*).
The Group Risk Committee (GRC) considers detailed reports of credit risk performance such as monthly risk portfolio performance trend information. The Group Credit Risk Policy Committee, a subcommittee of the GRC, approves material new credit risk policy standards.
For wholesale credit portfolios, an updated Group-wide credit approval and authority framework was introduced in early 2009, replacing the previous structure of credit committees. The authority held by an individual in respect of a particular extension of credit is determined by a Group-wide credit approval grid which links total credit limit amount for a customer group with customer credit quality (expressed as a credit grade) and the individual’s credit experience and expertise (which determines the authority level assigned to them). The Executive Credit Group (ECG) considers credit decisions which exceed the delegated authorities of individuals throughout the Group.
Global Restructuring Group (GRG) GRG manages problem and potential problem exposures in the Group’s wholesale credit portfolios. Its primary function is to work closely with the Group’s customer facing businesses to support the proactive management of any problem lending. This may include assisting with the restructuring of a customer’s business and/or renegotiation of credit.
GRG reports to the Head of Restructuring and Risk and is structured with specialist teams focused on: large corporate cases (higher value, multiple lenders); small and medium size business cases (lower value, bilateral relationships); and recovery/litigations.
Originating business units liaise with GRG upon the emergence of a potentially negative event or trend that may impact a borrower’s ability to service its debt. This may be a significant deterioration in some aspect of the borrower’s activity, such as trading, where a breach of covenant is likely or where a borrower has missed or is expected to miss a material contractual payment to the Group or another creditor.
On transfer of a relationship to GRG a strategy is devised to: • Work with the borrower to facilitate changes that will maximise the potential for turnaround of their situation and return them to profitability; • Define the Group’s role in the turnaround situation and assess the risk/return dimension of the Group’s participation; • Return customers to the originating business unit in a sound and stable condition or, if such recovery cannot be achieved, avoid additional losses and maximise recoveries; and
• Ensure key lessons learned are fed back into origination policies and procedures.
Wholesale portfolios Wholesale risk limits are aggregated at the counterparty level to determine the level of credit approval required and to facilitate consolidated credit risk management.
Daily monitoring of individual counterparty limits is undertaken. For certain counterparties early warning indicators are also in place to detect deteriorating trends of concern in limit utilisation or account performance. A framework is also in place to monitor changes in credit quality at the portfolio level.
A small number of credit decisions are subject to additional manual underwriting by authorised approvers in specialist units. These include higher value more complex small business transactions and some residential mortgage applications.
Divisional risk management committees focus on portfolio level decisions which drive credit quality, changes to policy and strategy, and the setting of credit scorecard cut-offs. The divisional risk management committees are also responsible for reviewing ongoing performance of the business and, if necessary, making or recommending adjustments to risk appetite.
Probability of default/customer credit grade (PD) These models assess the probability that a customer will fail to make full and timely repayment of their obligations. The probability of a customer failing to do so is measured over a one year period through the economic cycle, although certain retail scorecards use longer periods for business management purposes.
Exposure at default (EAD) Facility usage models estimate the expected level of utilisation of a credit facility at the time of a borrower’s default. For revolving and variable draw down type products which are not fully drawn, the EAD will typically be higher than the current utilisation. The methodologies used in EAD modelling provide an estimate of potential exposure and recognise that customers may make more use of their existing credit facilities as they approach default.
Loss given default (LGD) 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 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 mitigation The Group employs a number of structures and techniques to mitigate credit risk: • Netting of debtor and creditor balances is utilised in accordance with relevant regulatory and internal policies and requires a formal agreement with the customer to net the balances and a legal right of set-off; • Under market standard documentation net exposure on over-thecounter (OTC) derivative and secured financing transactions is further mitigated by the exchange of financial collateral; • The Group enhances its position as a lender 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 are used to mitigate credit risk; and
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 maximum loan-to-value (LTV) percentages, minimum haircuts or other volatility adjustments applicable to each type of mitigant including, where appropriate, adjustments for currency mismatch, obsolescence and any time sensitivities on asset values; • 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, for example, any situations where customer default materially impacts the value of a mitigant and applying a haircut or recovery value adjustment which reflects the potential correlation risk; • 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
Credit risk assets* Credit risk assets consist of loans and advances (including overdraft facilities), instalment credit, finance lease receivables and traded instruments across all customer types. Reverse repurchase agreements and issuer risk (primarily debt securities – see page 151 are excluded. Where relevant, and unless otherwise stated, data reflects the effect of credit mitigation techniques. All the disclosures in this section (pages 130 to 141) are unaudited and are labelled with an asterisk (*).
• Total credit risk assets reduced by £146 billion, or 17% during 2009 or 13% on a constant currency basis.
• Reductions occurred across industry sectors and in most regions. The largest reductions were in lending balances and derivatives.
• As part of the strategic review, the designation of assets between Core and Non-Core divisions was completed during the first half of 2009, hence the portfolio is reported according to the divisional structure as at 31 December 2009 in the table above.
Note: (1) The 2008 analysis between Core and Non-Core is not available.
The Group has also developed a more robust approach and framework for managing sector concentrations, a major outcome of which is the regular review of the most material concentrations at the Executive Risk Forum (ERF). These reviews 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.
Country risk Country risk arises from sovereign events (for example, default or restructuring); economic events (for example, contagion of sovereign default to other parts of the economy, cyclical economic shock); political events (for example, convertibility restrictions and expropriation or nationalisation); and natural disaster or conflict. Losses are broadly defined and include credit, market, liquidity, operational and franchise risk related losses.
• This process, coupled with the Group’s strategic focus on a reduced number of countries, has yielded material reductions in exposure.
• The reductions are magnified by the relative strength of sterling in the year, when it gained 9% on a trade weighted basis against other currencies.
The country risk table below shows credit risk assets exceeding £1 billion by borrowers domiciled in countries with an external rating of A+ and below from either Standard & Poor’s or Moody’s, and is stated gross of mitigating action which may have been taken to reduce or eliminate exposure to country risk events.
India 547 5 476 2,578 3,606 2,887 719 1,020 6 738 3,800 5,564 Russia 41 — 395 2,928 3,364 2,803 561 51 — 362 5,361 5,774 South Korea 1 — 1,038 2,308 3,347 3,238 109 2 — 1,743 1,104 2,849 Turkey 11 301 590 1,906 2,808 2,412 396 25 364 603 3,035 4,027 Poland 6 62 113 1,840 2,021 1,847 174 7 38 309 1,309 1,663 China 21 49 798 1,096 1,964 1,695 269 25 61 1,146 2,027 3,259 Romania 512 47 452 874 1,885 64 1,821 584 145 160 917 1,806 Portugal 5 42 281 1,119 1,447 943 504 6 34 405 1,914 2,359 Chile — 41 447 865 1,353 526 827 — 26 384 1,251 1,661 Brazil 3 — 767 439 1,209 1,151 58 4 — 1,012 642 1,658 Mexico 1 7 227 934 1,169 740 429 4 57 211 2,000 2,272 Kazakhstan 45 15 365 646 1,071 91 980 69 17 901 859 1,846 Hungary 3 23 56 956 1,038 579 459 5 74 101 831 1,011
UK (excl. UK) America Pacific America Other (1) Total Core Total Industry sector £m £m £m £m £m £m £m £m £m
Notes: (1) ‘Other’ comprises Central and Eastern Europe, Middle East, Central Asia and Africa.
• Within the UK, exposure to corporate sectors was down 8%. Banks, financial institutions and public sector were unchanged and exposure to personal customers was up 6% in 2009.
Risk, capital and liquidity management 133RBS Group Annual Report and Accounts 2009
Core Non-Core Total % Total % Asset quality band PD range £m £m £m of total £m of total
• In addition to the overall portfolio contraction, the table above evidences the negative rating migration observed across the Group’s portfolios during the course of 2009, with the lower quality bands (AQ7 and below) all showing increased exposure.
• A significant majority of this increase occurred in the first half of 2009. Exposure in bands AQ7 and below grew by 23% in the first six months of the year and by a further 6% since 30 June 2009.
Ulster Bank: – Mortgages 22,304 24,531 – Other personal 1,172 1,350
Residential mortgages The table below analyses the distribution of residential mortgages by loan-to-value (LTV) (indexed).
Total portfolio average LTV at 31 December 59.1 54.5 62.5 54.3 72.0 69.1
Risk, capital and liquidity management 135RBS Group Annual Report and Accounts 2009
UK residential mortgages The UK mortgage portfolio totalled £85.5 billion at 31 December 2009, an increase of 15% from 31 December 2008, due to strong sales growth and lower redemption rates. Of the total portfolio, 98% is designated as Core business with the primary brands being the Royal Bank of Scotland, NatWest, the One Account and First Active. The assets comprise prime mortgage lending and include 6.6% (£5.6 billion) of exposure to residential buy-to-let. There is a small legacy self certification book (0.4% of total assets); which was withdrawn from sale in 2004.
Ulster Bank residential mortgages The residential mortgage portfolio across the Ulster Bank and First Active brands totalled £22.3 billion at 31 December 2009; 91% is in the Republic of Ireland and 9% in Northern Ireland. This represents a decline of 4% in the Republic of Ireland and an increase of 13% in Northern Ireland from 31 December 2008. 27% of the portfolio is Non-Core.
Citizens real estate Citizens total residential real estate portfolio totalled $42 billion at 31 December 2009 (2008 – $50 billion). The real estate portfolio comprises $11 billion of first lien mortgages and $31 billion of home equity loans and lines (Core portfolio 48% first lien). 83% of the portfolio is Core business; $10 billion of mortgages and $25 billion of home equity loans and lines (48% of the latter being first lien). The serviced by others (SBO) portfolio (96% second lien) is the largest component of the NonCore portfolio.
The table below details residential mortgages three months or more in arrears (by volume).
Personal lending The Group’s personal lending portfolio includes credit cards, unsecured loans, auto finance and overdrafts. The majority of personal lending exposures exist in the UK and the US. New defaults as a proportion of average loans and receivables were: Impairment Impairment Average charge as a % Average charge as a %
loans and of loans and loans and of loans and receivables receivables receivables receivables
The SBO portfolio consists of purchased pools of home equity loans and lines whose current LTV (95.6% on a weighted average basis at 31 December 2009) and geographic profiles (74% outside of Citizen’s footprint states and a 30% concentration in California, Arizona and Nevada) have, in the current economic climate, resulted in an annualised write-off rate of 10.7% in 2009. The SBO book has been closed to new purchases since the third quarter of 2007 and is in runoff, with exposure down from $7.0 billion at 31 December 2008 to $5.5 billion at 31 December 2009.
The current weighted average LTV of the real estate portfolio rose slightly during the year to 72.0% at 31 December 2009 (67.5% excluding the SBO portfolio), driven by significant price declines throughout the US. Based on the latest Case-Shiller forecast for the US market, economists still anticipate significant decreases in the first half of 2010 with improvements expected in late 2010 or early 2011.
Risk appetite continues to be actively managed across all unsecured products, reflecting the challenging economic environment. Support continues for customers in financial difficulties through breathing space initiatives on all unsecured products, whereby a thirty day period allows customers to work with a not-for-profit debt advice agency to establish a debt repayment plan. During this time the Group suspends collection activity. A further extension of thirty days can be granted if progress is made and discussions are continuing. Investment in collection and recovery processes continues, addressing both continued support for our customers and the management of impairments.