Notes: (1) Operating profit before tax, own credit adjustments, gain on redemption of own debt, write-down of goodwill, strategic disposals and RFS Holdings minority interest (RFS MI) and includes the results of Citizens on a non-statutory basis, which are included in discontinued operations in the statutory results.
(6) Tangible equity is equity attributable to ordinary and B shareholders less intangible assets.
(7) Cost:income ratio is based on total income excluding own credit adjustments, gain on redemption of own debt, strategic disposals, and RFS MI, and operating expenses excluding litigation and conduct costs, restructuring costs, write down of goodwill and RFS MI. Total income and operating expenses both include Citizens which is included in discontinued operations in the statutory results.
RBS reported an attributable loss of £3.5 billion, following a £4.0 billion writedown on Citizens.
Operating profit(1) was £3.5 billion. Significant progress was made towards building a bank that is stronger, simpler and better for both customers and shareholders.
RBS reported an attributable loss of £3,470 million in 2014, compared with a loss of £8,995 million in 2013. The result included a loss from discontinued operations of £3,445 million, which reflected a £3,994 million fair value write-down in relation to the reclassification of Citizens to disposal groups, and a tax charge of £1.9 billion which included a £1.5 billion write-off of deferred tax assets.
Operating profit totalled £3,503 million for 2014, compared with an operating loss of £7,500 million in 2013. This reflected improved operating results from the core domestic businesses together with significant impairment releases in Ulster Bank and RBS Capital Resolution (RCR). These results include £1,257 million of restructuring costs compared with £656 million in 2013, and £2,194 million of litigation and conduct costs compared with £3,844 million in the prior year.
UK Personal & Business Banking (UK PBB) delivered a good performance built on strong growth from a reinvigorated mortgage business. Commercial Banking’s efforts to stimulate demand resulted in a resumption of loan book growth; together with active management of cost and capital, this supported a significant improvement in profitability. Corporate & Institutional Banking (CIB) made good progress towards a lower risk model with a further £40 billion reduction in risk-weighted assets (RWAs) on an endpoint CRR basis.
Statutory operating profit before tax, which excludes results from discontinued operations, was £2,643 million compared with an operating loss of £8,849 million in 2013.
• Reached agreement with HM Treasury on the restructuring of the Dividend Access
• Completed a strategic review of Ulster Bank and the wealth businesses, launching a sales process for the international private banking activities(1).
• Continued to rationalise, simplify and strengthen operating systems and processes, with a more secure mobile banking platform, faster overnight batch processing and key services available to customers 99.96% of the time.
These changes will create a more focused corporate and institutional bank built on existing product and service strengths. RBS will have a strong, client-focused product offering in sterling, US dollar and euro, including: • Debt financing, with debt capital markets, structured finance and loans.
This CIB strategy leaves RBS well-placed to meet the ring-fencing requirements of the Banking Reform Act 2013. As previously indicated, RBS intends to place most banking services inside the ring fence. CIB’s remaining “Markets” activities, the operations of RBS International and some corporate banking activity are expected to remain outside the ring-fenced bank in separate legal entities.
CET1(1), with risk-weighted assets below £300 billion and £2 billion Additional Tier 1 capital raised.
• Reduce costs by a further £800 million(2), taking RBS towards a long term cost:income ratio of under 50%.
• Raise employee engagement index to within 8% of the global benchmark so that staff are fully motivated to contribute to RBS’s long-term success.
shareholders was £3,470 million, compared with a loss of £8,995 million in 2013. The result included a loss from discontinued operations of £3,445 million, which reflected an accounting write-down of £3,994 million taken in relation to Citizens, which has been written down to fair value less costs to sell as a consequence of it being reclassified as ‘held-for-sale’ in the statutory results. This write-down does not affect RBS’s capital position.
• The tax charge included a net write-off of deferred tax assets of £1.5 billion relating to the UK (£850 million) and the US (£775 million), reflecting the impact of the decision to scale back the CIB operations. This was partially offset by write-backs relating to Ulster Bank.
• Income totalled £18,197 million, down 6% from 2013, with improvements in net interest income in PBB and CPB offset by lower income from trading activities in CIB, in line with its smaller balance sheet and reduced risk profile. Net interest margin was 2.23%, up from 2.01% in 2013, with improved liability margins partially offset by pressure on mortgage and corporate lending margins and by the continuing shift in mix towards lower margin secured lending.
• Net impairment releases of £1,155 million were recorded in 2014 compared with impairment losses of £8,432 million in 2013, which included £4,490 million of charges recognised in connection with the creation of RCR. Provision releases arose principally in Ulster Bank and in the Irish portfolios managed by RCR, which benefited from improving Irish economic and property market conditions and proactive debt management.
• Statutory operating profit before tax was £2,643 million compared with an operating loss of £8,849 million in 2013.
• Tangible net asset value per ordinary and B share was 387p at 31 December 2014 compared with 363p at end 2013. Positive movements in cash flow hedge reserves (+9p) and available-for-sale reserves (+5p) were offset by the attributable loss for the year (-30p). The attributable loss is adjusted for a loss provision attributed to Citizens’ intangible assets (+35p) and goodwill and other intangible assets (+5p).
• Commercial Banking balances rose by £1 billion, with a planned reduction in real estate finance offset by good growth in lending to other sectors.
• Total net lending flows reported within the scope of the Funding for Lending Scheme were minus £2.28 billion in Q4 2014, of which net lending to SMEs was minus £567 million.
(2) Excluding restructuring, conduct and litigation costs, write off of intangible assets and operating expenses of CFG and Williams & Glyn.
Reduce costs Reduce costs by a further £800 million (2), taking RBS towards a long term cost:income ratio of under 50%.
Our people Raise employee engagement index to within 8% of GFS norm (3).
Our progress in 2014 We have a clear ambition to become No.1 for customer service, trust and advocacy. In 2014, our focus has been on Cost, Capital, Restructuring and Resilience. We have also begun the process of making RBS a simpler place to work and an easier bank to do business with.
We’ve reduced our current account opening times for RBS and NatWest customers from five days to one.
Online loans We launched a new online loan application process for small businesses.
SME funding Gross new lending to SMEs totalled £10.3 billion, exceeding our 2014 target by 10%.
Launch of Citizens IPO The biggest bank initial public offering in US history successfully delivered.
Simplified product range Personal & Business Banking reduced the number of on sale products by 50%.
Mobile record Our mobile app regularly supports around 4 million logins a day, with a record being set on ‘Black Friday’ 2014 of 4.86 million.
Living Our Values We launched a recognition programme – Living Our Values, reducing over 200 local schemes into one and creating a bank-wide way of recognising a colleague.
GPL system redesign We simplified our Group Policy Learning system (GPL). As a result we’ve seen a 62% reduction in the total hours required to complete modules, letting us spend more time on customers.
(2) Excludes restructuring, conduct, litigation and intangible write-off charges as well as the operating costs of Citizens Financial Group and Williams & Glyn.
The bank has delivered a good operating profit of £3.5 billion for 2014, but the costs associated with completing the restructuring of RBS mean we are still reporting a bottom line attributable loss. Although the huge changes to the size, shape and risk profile of the business since the financial crisis are largely complete or in hand, the further substantial restructuring of our markets operations and international spread will require careful management in 2015.
I would like to thank my colleagues on the RBS Board for their support and dedication in dealing with the unusual challenges of being a majority government-owned listed company.
In particular, I would like to thank Nathan Bostock, Tony Di Iorio and Philip Scott, who all stepped down from the Board in 2014 after providing valuable service, and to welcome Morten Friis and Ewen Stevenson, who have joined the Board.
Last year we identified the areas we needed to improve in order to deliver our strategy - cost, complexity, capital, and trust from our customers. The energy and resolve of our people has resulted in significant progress on these, and we have delivered on the goals we set for 2014.
• We said we would reduce waste and inefficiency and reorganise ourselves around the needs of our customers, moving from seven operating divisions to three customer businesses. This reorganisation is complete and we have removed £1.1 billion of cost from the business.
• We outlined a programme to rationalise, simplify and bolster our operating systems and processes to make them less complex, more resilient and easier to use. Significant progress has been made in this area with our key services available to customers 99.96% of the time during 2014.
• We said we would undertake the biggest bank initial public offering in US history. Citizens Financial Group was successfully floated on the New York Stock Exchange. At the same time we substantially completed the orderly run-down and closure of our US asset-backed product business, removing £15 billion of riskweighted assets from our balance sheet.
Our 2014 performance shows a strategy that is working. It demonstrates the forensic approach we have taken to evaluate our businesses against the returns they provide to shareholders. The strong execution against the targets we set now gives us a platform to go further, faster.
As well as a review of our current performance I will set out exactly what this bank will become, what we will do and what we will not do as we seek to improve shareholder value and secure our market leading positions. It involves an acceleration of our strategy to build on our domestic strengths and a further reshaping of our CIB business as we seek to address its unacceptable returns.
We made an operating profit of £3.5 billion in 2014, the highest since 2010 and a vast improvement on 2013. Great progress on cost reduction countered a fall in total income - which primarily reflected a smaller risk profile and lower income from trading activities in CIB - and led to an overall improvement in operating efficiency.
Our attributable loss of £3.5 billion, includes £1.3 billion of restructuring charges, £2.2 billion in litigation and conduct provisions, a £1.5 billion net deferred tax asset write-off, the initial £320 million dividend for the Dividend Access Share and a write-down of £4 billion anticipating the disposal of Citizens.
It is increasingly clear what is driving underlying performance at RBS - PBB and CPB. PBB and CPB are now more important to RBS’s performance than at any time in the past decade. This year they generated 61% of our income, compared with c.37% for equivalent businesses in 2009. And they have been at the forefront of progress towards our goal of increased operating efficiency, reducing adjusted operating expense by 2.6% over the year whilst income was up 2.3%. ROEs of 17.5% and 11.9% respectively demonstrate their value to RBS today.
These franchises are also the custodians of our core strengths - serving the everyday banking needs of over 18 million personal and business customers in the UK and RoI, and helping these customers meet their ambitions. We’re investing in these franchises with a view to exceeding customers’ expectations and generating sustainable returns.
The performance of CIB reflects the big changes this business is going through, and the tough macro-economic conditions and increasingly high costs of regulation it faces. Income decreased alongside lower adjusted operating expenses as we reduced CIB’s risk profile in accordance with our strategy, with restructuring, litigation and conduct costs pushing the business to an operating loss. But CIB has a strong customer franchise serving our leading UK and Western European clients; increasingly it is these clients we intend to focus on. I will set out later in this letter the steps we will take to do this.
Now the deconsolidation of Citizens is finally within sight, accounting rules require us to write it down to its estimated disposal value. This write-down substantially represents the goodwill previously attached to Citizens. While I realise that the headlines this generates are disappointing it is important to emphasise that this particular accounting loss does not change our regulatory capital or tangible net asset value.
Safety remains a cornerstone of our strategy A core question for any bank seeking the trust of its customers is whether it’s safe and strong and focused and able to support customers and the economy. The progress we have made should mean that it is no longer in any doubt. The CET1 ratio has improved by 260 basis points to 11.2% over the course of the year, up from 8.6% as at 31 December 2013. We reached our full year 2015 CET1 target of 11% one year ahead of schedule, and we are on track to achieve a revised CET1 target of 13%, which we have set in place for the period of the CIB restructuring.
We now have considerably more high quality capital than we had when the financial crisis hit and this bank was bailed out by the taxpayer. But we need to meet and exceed the expectations of the Prudential Regulation Authority (PRA) and of our shareholders and bondholders. Stress test results show it’s not just how much capital you have, but how your balance sheet behaves under extreme economic scenarios.
This year our team in RBS Capital Resolution has managed to accelerate the removal of some of our most capital intensive assets, and we are on track to complete our 20142016 RCR run-down targets by the end of 2015, one year ahead of the original target we set for ourselves. Our capital strength will be bolstered further when Citizens Financial Group in the USA is deconsolidated from our balance sheet. This is also expected in 2015.
In 2015, we also plan to start a programme of issuing Basel III compliant Additional Tier 1 capital instruments.
We are determined to learn the lessons from the wrongdoings of the past and ensure that those responsible are held to account.
Building on our strengths I said this time last year that the days when global domination mattered more to RBS than great customer service are well and truly over. Well, we are not just talking about being a UK-centred bank; we are a UK-centred bank. 80% of our revenues are generated in the UK. At the time of the 2008 financial crisis this number was 48%. Seven years after the crisis we still have top 3 market positions in the following UK segments: • large corporates and financial institutions (FIs); • Sterling provider in wholesale banking; • SME banking; • Private banking; • Financing for UK infrastructure projects; and
We are building on this strength to manage value for shareholders and deliver the most resilient future returns.
We plan to fully exit our Markets businesses in Central and Eastern Europe, the Middle East and Africa, and substantially reduce our presence in Asia Pacific and the US. We will exit our cash management services outside the UK and RoI. These businesses are not essential to our go-forward client franchise, and their standalone returns are not sufficient to justify an exception.
What I have just outlined will require an enormous amount of effort from our people. And I do not for one second take that for granted. We have a proven track record of delivering change in our business.
Chief Executive’s review charge for the first time. And if we can do more to help customers through both the ups and downs in their finances, it is absolutely our responsibility to do so.
A better bank for shareholders Critical though it is that we build a bank that is safe, in capital strength, in structure and on behaviour, it must also be profitable.
Without sustainable profitability we cannot ensure our future safety; profit is the best form of self-replenishing capital.
Our strategy envisages a capital benefit net of restructuring costs from 2016. We intend to return all capital to shareholders above a CET1 ratio of 13%. This capital return, which remains subject to regulatory approval at the time, will only be made once the significant legacy conduct hurdles are behind us. We see this as another important step towards repaying the support of our shareholders, including the UK tax payer.
Supporting growth Leading market positions in every franchise Lending growth in strategic segments ≥ nominal UK GDP growth
Business model and strategy Our major source of income in our retail and commercial banking businesses is net interest income. This is the difference between the income we earn from the loans and advances we have made to our personal, corporate and institutional customers and on our surplus funds and the interest we pay on deposits placed with us by our customers and our debt securities we have issued. We also earn fees from financial services and other products we provide to our customers as well as rental income from assets we lease to our customers.
We do business in competitive markets but we have strong franchises and good growth opportunities, and we aim to target our investment to maximise these opportunities.
Customer Businesses Our three customer-facing businesses are primarily responsible for defining the strategy and financial plan of their business and ensuring it is aligned with the wider RBS strategy. Teams define and deliver the customer proposition and are accountable for end-to-end customer processes and products. The teams partner with functions to specify functional requirements that deliver on customer needs.
We have a long way to go to be the bank that our customers deserve. But we are in a period of very significant, positive change. We have millions of great customers, tens of thousands of outstanding employees, and a home economy that is getting stronger. By building on this foundation, we can achieve our ambition to be number one for customer service, trust and advocacy in all our chosen markets.
Our overarching ambition is to become the number one bank for customer service, trust and advocacy. We have set out how we track our progress towards this goal on page 15.
People Great place to work 78% 72% Employee engagement index ≥ GFS norm (2)
Capital strength (4) Common Equity Tier 1 ratio 8.6% 11.2% 13% (5)
Our go-forward business is focused predominantly on UK and EMEA. Based on 2014 numbers, around 74% of CIB’s RWAs and 81% of income is generated in these regions.
RWAs (£bn) Income (£m) RWAs (£bn) Income (£m) RWAs (£bn) Income (£m)
Creating a more focused corporate and institutional bank built on existing product/service strengths
Full service to UK and Western European clients/counterparts (9 European sales offices) Distribution and trading hubs in UK, US and Singapore
In 2014, we have seen some positive NPS movements in some of our franchises and our plans for 2015 will help to gather momentum across the bank.
The only NPS improvements in 2014 that are statistically significant are for Business Banking (RBS Scotland) and
(1) Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest England & Wales (3,511) RBS Scotland (547).
RBS Scotland (399). Weighted by region and turnover to be representative of businesses in England & Wales/
(4) Source: PwC Business Banking Tracker. Question: “I would like you to continue thinking about your main business bank and the service they provide. Can you tell me how likely or unlikely would you be to do the following? Again please use a scale of 1 to 10, where 1 is very unlikely and 10 is very likely. How likely are you to recommend them to another business?”.
The year-on-year improvement in RBS customer trust is largely a reversion to its longer-term trend: there were issues in late 2013 that impacted the bank’s reputation and customer trust. There are early signs that customer trust in RBS is stabilising and starting to improve. NatWest has consistently performed competitively, and has shown early signs of improvement.
Customer Trust We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat).
Notes: (6) Source: Populus (2014) and PSB (2013). Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest
Note: (1) Excludes restructuring, conduct and litigation costs, intangible write-off charges as well as the operating costs of Citizens Financial Group and Williams & Glyn.
• A further cost reduction of £800 million (1) in 2015 2013 2014 Long-term target
Efficiency; short, simple chains of command with clear individual accountabilities and empowerment.
We have a clear set of Organisation Design principles that underpin our operating model, structures and accountabilities.
• We prize fairness and diversity and exercise judgement with thought and integrity.
We will stop offering deals to new customers that we are not prepared to offer to our existing customers.
We will also ban teaser rates, including zero per cent balance transfers in our credit card business.
By the end of 2014 we will cut in half the number of personal and SME products on offer.
We will improve the clarity of our language to customers. By the end of 2014 we will be able to explain all of our personal and SME charges on one side of A4.
Progress: Fees and charges are explained on one side of A4 for both our personal and business customers and will be communicated via our internet sites by the end of February 2015. We have a duty to our customers to provide a straightforward breakdown of all charges.
Progress: All customers applying for a personal current account who have the required ID and pass our fraud and credit checks can now open their account the next working day.
We will also improve the process to open a personal current account online so customers can upload their identification, such as their passport, and open their entire account from home.
By the end of 2014, customers will have access to Mobile Banking and Online Banking within one day.
We will put Business Bankers back on the high street. We will have hundreds of Business Bankers help small business people open accounts, apply for loans and get the help they need.
Progress: 82% of Business Banking frontline staff are immediately above/next to our branches. This equates to 1,335 Business Banking specialists in branch today. We are simplifying processes so that Business Bankers can spend more time with customers, providing help and advice in branch or via telephone.
Our Customers Our purpose is to serve customers well and we have moved from seven divisions to three customer businesses, so we can better deliver on this. Each of our businesses share the RBS ambition: to be number one for customer service, trust and advocacy.
We have made a number of customer commitments marking our intent to deliver better service to our customers. RBS is making steady progress towards building a simpler, smaller and fairer bank, and remains focused on delivering the commitments for personal and business customers that we announced on 27 February 2014.
The bank will write to thousands more SMEs setting out clearly how much it is willing to lend to their business.
Progress: By the end of December 2014, more than 350,000 pro-active ‘Statements of Appetite’ had been issued to SME customers, offering in excess of £12.4 billion of new or additional funding.
A dedicated website will be developed to show clearly what information RBS use to make a lending decision and set out simple, clear steps in its lending process.
Progress: The website has been developed and can be found at www.businesslending.natwest. com. Guidance is provided to support you in making a successful application and the types of information used to make a decision.
Progress: In almost all cases, lending decisions are made and communicated to the customer in five days or less.
Progress: Over two thirds of lending decisions are now made locally and by sector specialists.
RBS will start a programme to make all customers whose loan applications are declined aware of the appeals process, and will continue to work with the Independent Appeals Chair to improve the support it provides to customers going though this process.
Progress: A website has been developed and can be found at www.businesslending.natwest.com. The section titled ‘Decision’ explains how to appeal and alternative financing options.
Progress: Staff objectives are focussed on providing a market leading customer experience. Objectives for 2015 have been shared with all staff and include measures to ensure we are providing good customer outcomes.
Progress: We have a milestone plan to achieve these reductions by December 2016. We have achieved our reduction target in 2014 with final quarter complaint volumes 22% lower than average quarterly volumes in 2013 by starting to simplify our processes and empowering our staff to make more decisions at first point of contact with our customers.
Progress: We have reported our progress on www.rbs. com. We will continue to report progress on actions, which are on-going through 2015.
Independent Lending Review actions In 2013, RBS and NatWest launched an Independent Lending Review, led by Sir Andrew Large and management consultants Oliver Wyman. The aim of the review was to identify steps we could take to enhance our support for SMEs. We committed to act and report on the recommendations.
The UK economy performed relatively well in 2014 with GDP expanding by 2.6% compared with the previous year. By contrast the eurozone’s modest recovery struggled to gain traction as growth of just 0.9% was realised. In Q4 2014 UK GDP was estimated to be 3.4% higher than the pre-crisis peak of Q1 2008. Inflation fell over the course of 2014 on the back of falling food and oil prices. The Consumer Price Index rose just 0.5% in December 2014 compared with December 2013.
The UK labour market performed strongly. In October to December 2014, the number of unemployed people was 486,000 lower than a year earlier. The unemployment rate was 5.7% - the lowest level since the summer of 2008. Real wage growth turned positive in late 2014 after falling almost consistently for over six years. However, this was more a reflection of lower inflation rather than a significant uplift in wage settlements. Nominal earnings in the three months to December 2014 were 2.1% higher than in the three months to December 2013, approximately twice the pace of a year earlier but still very low on a historical basis.
The other key economies in which RBS operates are the US and the Republic of Ireland (RoI).
For October to December 2014, regular pay for employees in Great Britain was 1.7% higher than a year earlier and total pay for employees in Great Britain was 2.1% higher than a year earlier.
Being awarded a place on the ePurchasing Card Solution Framework Agreement was a true team effort and we’re proud to play our part in helping the UK Government and wider Public Sector to deliver efficient, transparent payment services for making quick payments to a wide range of their suppliers, often including UK SMEs.
But we know customers still want to speak to a person for those important life decisions, like buying a home or starting a new business.
However, this is just one of the ways we’re taking our service to where our customers want us to be. With the UK’s second largest branch network, a 24/7 telephone banking service, the second largest free to use ATM network in the UK and an extended relationship with the Post Office which means customers can now access our basic services in 11,500 branches, customers have never had more choice about how they do their banking.
RBS is now structured to deliver its ambition by organising itself around the needs of its customers, so as to combine customer groups with similar needs into franchises able to deliver co-ordinated services.
The reorganised bank will be a UK-focused retail and corporate bank with an international footprint to drive its corporate business. The previously reported operating divisions are now realigned into three franchises: Personal & Business Banking
In addition, RBS will continue to manage and report Citizens Financial Group and RBS Capital Resolution separately until disposal or wind down.
• Operating expenses decreased by £279 million or 5%, reflecting lower restructuring and litigation and conduct costs.
• Mortgage balances increased by £2.4 billion or 2%, to £121 billion driven by strong performance as advisor capacity increased.
• removing 0% teaser deals from its offering and introducing the new Clear Rate and cash-back credit cards in 2014. RBS became the first of the main high street banks to ensure all of its savers get the same or better deals as new customers.
In an industry leading move we stopped offering teaser rates to attract new customers and offered our customers the same rates online, through a branch or over the phone. As part of this we became the first bank on the high street to commit to giving all our savers the same rates, including proactively moving our loyal existing customers onto our best rates. We’ve also simplified our products, so it’s easy for our customers to find the right one for their needs – and with all our charges explained on just one page.
Performance overview • CPB recorded an operating profit of £1,440 million compared with £469 million in the prior year.
• Net interest income increased by £112 million or 4%, largely reflecting re-pricing activity on deposits partly offset by the impact of reduced asset margins, a result of the net transfer in of lower margin legacy loans (after the cessation of Non-Core).
• Within Private Banking the business has progressed well against key priorities in 2014. Improvements are evidenced by several industry awards including: ‘Best private bank in the UK’ (PWM/ The Banker) and ’Most innovative digital offering’ (Private Banker International). Coutts continues to be recognised as a leader in philanthropy, with its ’$1 million donors’ report receiving significant media coverage, and its expertise as an adviser for family businesses and existing entrepreneurs remains a strong point of differentiation.
Within Commercial Banking over 120 products were removed from sale and over 400 process improvements implemented.
Helping Hertz The summer season sees a surge in tourists visiting the UK, many of whom want to hire a car.
For leading car rental company Hertz this poses a unique challenge - how to efficiently fund the required increase in its fleet size to meet the demand of the summer months? A Lombard customer for 30 years, Hertz turned to us to help them find an answer.
Chris Cooper, Director of Lombard Strategic Fleet Finance said, “This is an excellent example of us working together and thinking long term for the benefit of both the client and the bank. This deal cements our position as a strategic partner to Hertz and provides a platform for further seasonal support.”
Corporate & Institutional Banking (CIB) serves our corporate and institutional clients primarily in the UK and Western Europe, as well as those US and Asian multinationals with substantial trade and investment links in the region, with debt financing, risk management and trade services, focusing on core product capabilities that are of most relevance to our clients. This business’s strategy has been revised in 2015 (see page 14 for Reshaping our CIB business).
• Net impairment releases totalled £9 million compared with a net impairment charge of £680 million in 2013, reflecting a reduction in latent loss provisions and a low level of new impairments.
• Funded assets fell by 10% reflecting the focus on core product areas including the wind-down of Credit Trading and the US ABP businesses.
• RWAs were managed down by £40.0 billion from £147.1 billion on 1 January 2014 to £107.1 billion on 31 December 2014.
The commitment to customers was demonstrated by the award of The Banker’s Most Innovative Bank in Risk Management in Q3 2014 and by winning IFR magazine’s Sterling Bond House of the year award in Q4 2014.
Commitment to customers was demonstrated by the award of The Banker’s Most Innovative Bank in Risk Management in Q3 2014.
Winner of IFR magazine’s Sterling Bond House of the year award in Q4 2014.
Our long-standing relationship with MAG has seen us support both their £1.5 billion acquisition of London Stansted in 2013, and two bond issuances which raised a total of £810 million. Those funds allowed MAG to refinance the acquisition debt used to buy London Stansted, and gave them a platform to invest in services and facilities at their airports.
A good example of their investment is the multi-million pound upgrade of the terminal at London Stansted. The expansion will double the size of the security space, expand the departure lounge and help create a new lounge area in the terminal building.
• Operating profit increased by $306 million, or 32%, to $1,253 million, reflecting the Q2 2014 gain on the sale of the Illinois franchise. The former Non-Core portfolio is now included and indirect expenses are no longer allocated on a prospective basis from 1 January 2014. On a comparable basis, operating profit excluding the impact of the Illinois sale, $283 million net gain, and restructuring costs, $169 million (2013 - $24 million), was up 16% driven by an increase in net interest income and a decrease in impairment losses partially offset by lower non-interest income.
• Average loans and advances were up 10% driven by the $3.4 billion transfer of assets from Non-Core, commercial loan growth, auto loan organic growth and purchases of residential mortgages and auto loans, which were partially offset by a reduction in home equity loans.
Further share sales are planned in 2015 and RBS intends to fully divest the business by the end of 2016.
Citizens Financial Group, Inc. (CFG) provides financial services primarily through the Citizens and Charter One brands. CFG is engaged in retail and corporate banking activities through its branch network in 11 states in the United States and through non-branch offices in other states.
Performance overview • RCR funded assets were reduced by £14 billion, or 48%, during 2014, driven by disposals and repayments.
RBS Capital Resolution (RCR) became fully operational on 1 January 2014 with a pool of c.£29 billion of funded assets with particularly high long-term capital intensity, credit risk and/or potentially volatile outcomes in stressed environments. RCR brings assets under common management and increases focus on the run down so as to release capital.
Funded assets (£bn) 14.9 28.9 2014 saw many of RCR’s larger deals completed - around 360 of them.
Services Services plays a vital part in building loyalty with every customer interaction we have; from putting money in the ATMs, to keeping our customers safe from fraud, processing trillions of pounds in payments across the world, and making sure the bank’s technology systems are there for our customers when they need them. We keep RBS running, driving efficiency and resilience in everything we do to support our customers 24 hours a day, 365 days a year.
• We upgraded the infrastructure that supports our mobile banking service improving the stability, capacity and availability of this service for customers.
• On ‘Black Friday’ our systems supported high volumes and values across a number of our customer channels in the UK, including record-breaking figures for our mobile banking app.
• We initiated 23 proof of concepts, and generated a pipeline of over 450 ideas, through our innovation scouting network around the world.
• We increased the number of active mobile banking users by around 600,000 customers to 2.9 million, with over 1 billion logins.
Through our Simplifying Customer Life programme, we implemented over 4,000 ideas, generating improvements covering more than 2.6 million customer interactions.
Our Board The Board has ten directors comprising the Chairman, two executive directors and seven independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director and details of which Board Committees they are members of can be found on pages 46 to 49.
There were a number of changes to the Board’s composition during 2014, details of which can be found in the Chairman’s Statement on pages 6 and 7.
We conducted an internal evaluation of the effectiveness of the Board and its committees in 2014, led by the Chief Governance Officer and Board Counsel. The evaluation has concluded that the Board is operating effectively but has identified some areas for improvement which we will focus on during 2015.
Our Board committees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. The work of the Board committees is discussed in their individual reports.
The Group Nominations Committee report is set out on pages 55 and 56.
The Board Risk Committee report is set out on pages 62 to 68.
During 2015, the Board will continue to focus on our key priorities, including customers, conduct, capital and funding, risk and delivery of the strategic plan.
The Directors’ Remuneration report is set out on pages 73 to 93.
Supports the Chief Executive in managing RBS’s businesses. It reviews and debates relevant items before consideration by the Board. It is responsible for determining and delivering RBS’s strategy and it monitors and manages financial performance, capital allocations, risk strategy and policy, risk management, operational issues and customer issues.
UK Corporate Governance Code Throughout the year ended 31 December 2014, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated September 2012 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
The key factors were: • RCR disposals and run-off in 2014 which led to a reduction in funded assets of £14 billion and in risk-weighted asset equivalent of £38 billion (58% of the RCR start point).
• RCR was established with effect from 1 January 2014 to remove risk from the balance sheet, reduce volatile outcomes in stressed environments and to accelerate the release of capital over a three year period.
• A £40 billion reduction in CIB’s riskweighted assets (RWAs), including an orderly run-down of US asset-backed product business.
Other risk developments • Conduct, regulatory, litigation and reputational risk: RBS continued to be affected by conduct issues. Litigation and conduct costs, including those relating to Payment Protection Insurance, Interest Rate Hedging Products, London Interbank Offered Rate (LIBOR), US mortgage securitisations and foreign exchange trading, have exceeded £9 billion since 2011 and continued to demand significant amount of management attention.
• Liquidity: A strong liquidity position was maintained, with a liquidity portfolio of £151 billion at the end of 2014 covering short-term and total wholesale funding by factors of over five and 1.5 respectively. Liquidity coverage ratio was 112% and the net stable funding ratio was 121% at the end of 2014.
• Market risk: RBS’s traded market risk profile decreased significantly, with market risk limits being reduced across all businesses. Average trading VaR decreasing to £27.8 million, 35% of the 2013 average. Market risk RWAs also decreased by £6.3 billion to £24 billion.
• Country risk: RBS maintained a cautious stance as many clients continued to reduce debt levels. Total eurozone periphery net balance sheet exposure decreased by £10 billion or 25% to £31 billion. Total exposure to Greece was £0.4 billion but only £120 million after taking into account collateral and guarantees.
Macro-economic and other external risks • Risks related to the macro-economy: A number of scenarios could have a significant negative impact on RBS’s revenues and impairments, including a recession in the UK or any of the other major markets in which RBS operates, large falls in UK or Irish property prices, oil prices, a resumption of the eurozone crisis, global deflation or major geopolitical instability. To mitigate these risks, capital, liquidity and leverage ratios have been strengthened, and some higher risk and capital intensive portfolios have been exited.
• An increase in obligations to support pension schemes: If economic growth stagnates, and interest rates remain low, the value of pension scheme assets may not be adequate to fund the pension schemes’ liabilities. The deficit in RBS pension schemes as determined by the most recent triennial valuations has increased, requiring RBS to increase its current and future cash contributions to the schemes as noted above. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the deficit may rise further at the next valuation in 2016. To limit pension risk, defined benefit pension schemes have been closed to new members since 2006 and terms for existing members have been altered in recent years.
• The impacts of past business conduct: Future conduct and litigation charges could be substantial. RBS is involved in ongoing class action litigation, securitisation and mortgage-backed securities related litigation, investigations into foreign exchange trading and ratesetting activities, continuing LIBOR related litigation and investigations, anti-money laundering, sanctions, mis-selling and compliance related investigations as well as a number of other matters. Settlements in relation to foreign exchange may result in additional financial, non-monetary penalties and collateral consequences, which may be material. RBS is embarking on a programme to embed a strong and comprehensive risk and compliance culture.
• Impact of Cyber attacks: Cyber attacks are increasing in frequency and severity across the industry. RBS has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a largescale programme to improve user access controls is in place. Action has also been taken to reduce the number of external websites and tighten management of them, to strengthen anti-virus protections, and to continue the staff education programme on information protection.
The Sustainable Banking Committee has overseen a number of important developments within RBS since it was established in 2010. In 2014 the strategic direction of the Committee was refocused under the themes of bank-wide reputation and trust, Serving Customers and Sustainability/Emerging Issues. For more information see the report of the Committee Chairman on pages 71 and 72.
We will continue to host these sessions to ensure that we understand our stakeholders’ priorities. For more information see the report of the Committee Chairman on pages 71 and 72.
External commitments RBS is a signatory to a number of voluntary sustainability commitments and standards. We understand that implementing commitments is an ongoing process, and we are continuously working to integrate these into how we run our business.
We are a member of the Equator Principle (EP) Association Steering Committee. The EPs are a voluntary set of standards adopted by banks for determining, assessing and managing social and environmental responsibilities in project financing and project related corporate loans. We will not provide project finance where the borrower will not, or cannot, comply with these principles of socially responsible investment.
Sustainability is therefore not just about the many responsibilities and obligations that RBS has, but about taking leadership on a broad range of issues that are important to our stakeholders.” Ross McEwan, Chief Executive
Independent assurance Limited assurance provided by Deloitte LLP over 2014 Scope 1*, 2** and 3 GHG emissions.
Total Scope 1 CO2e emissions (tonnes) 61,114 63,809 61,758 52,277 -14% -15%
Total Scope 1 & Scope 2 CO2e emissions per FTE (tonnes) 4.7 4.5 4.2 4.5 -5% 8%
Emissions of ozone-depleting gases (tonnes) 2,447 9,611 4,758 4,710 93% -1%
Total number of environment incidents, fines and legal non-compliance 0 0 0 0 0 0 * Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles ** Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises
We are also on the Steering Committee of the UK United Nations Global Compact (UNGC) network. The UNGC is the leading platform for the development, implementation and disclosure of responsible policies and practices in the areas of: human rights, labour, environment and anti-corruption.
Each year RBS receives ratings for its environmental and social performance by external indices. RBS has been included in the Dow Jones Sustainability World Index (DJSI) every year since its launch in 1999, maintaining our best ever score of 82 for a second year in 2014. The DJSI ranks companies’ corporate sustainability performance, based on analysis of economic, environmental and social issues like corporate governance, risk management, branding and climate change.
CDP is an independent, investor-driven organisation which facilitates the measurement and disclosure of greenhouse gas emissions for 2,500 organisations in over 60 countries. In 2014, RBS received a disclosure score of 98% and a performance score B.
Transparency and disclosure At RBS, we have a long way to go to rebuild trust after everything that the company has been through. We are taking a very deliberate approach to be as open as possible about our business, including on-going challenges as well as progress. We were therefore particularly pleased in 2014 to have been ranked as the leading UK company in Transparency International’s report on transparency in corporate reporting. In this Strategic Report we present data on our GHG emissions, diversity and our approach to human rights. More sustainability data is contained in our latest Sustainability Report and online at rbs.com/ sustainable.
Managing our impact on the environment We aim to be recognised as a leader among large global financial institutions in managing our own environmental impacts and developing financial services that support sustainable development.
Progress also continues on reducing the environmental impacts of our operations. Data to the end of 2014 showed we had achieved our 2011-2014 targets for energy (15% reduction), water (12% reduction) and waste (10% reduction). However we had not yet met our objective of diverting 70% of our waste away from landfill. New 2020 targets are to be announced in the forthcoming 2014 RBS Sustainability Report.
Note on data: Reported figures for previous years have changed in some instances. These changes are due to calculation methodology changes in line with carbon management best practice and emission factor changes as recommended by the GHG protocol.
Diversity at RBS The bank’s ambition is to be number one for customer service, trust and advocacy in every one of our chosen business areas, supported by a people commitment to make RBS a great place to work. Valuing difference is therefore essential for our customers and colleagues. Our inclusion policy standard applies to all our people globally; and our strategy for diversity and inclusion sits with the RBS Board and Executive Committee.
Our approach during 2014/15 focuses on building inclusion into all stages of the employee lifecycle. In 2014 we started rolling out bank-wide unconscious bias learning for all employees, which will continue across 2015. We’ve introduced a gender target to increase the number of women in senior roles across the bank. And we continue to support our employee-led networks, with membership across the bank at over 15,000 people.
The RBS Code of Conduct ‘Our Code’ sets out the standards we expect our people to work to, including a clear commitment to respecting human rights. We conduct regular consultations with employees on key aspects of their working environment, and operate a confidential helpline facility that allows employees to discuss any matter of concern with regards to their wellbeing.
The hubs will have physical work spaces for up to 80 entrepreneurs and host two intakes each year, with a graduation event bringing together entrepreneurs, investors and business advisors at the end of each programme. Entrepreneurs from any sector will be able to join the hub, creating valuable network building opportunities. Each business will also have the opportunity to pitch to potential investors and apply for growth awards of up to £50,000.
The aim is to help ambitious entrepreneurs take their businesses to the next level, supporting them to create jobs and growth, boosting the UK economy.
43 Letter from the Chairman 45 Our governance structure 46 Our Board 50 Corporate governance 55 Report of the Group Nominations Committee 57 Report of the Group Audit Committee 62 Report of the Board Risk Committee 69 Report of the RBS Capital Resolution (RCR) Board Oversight Committee 71 Report of the Sustainable Banking Committee 73 Directors’ remuneration report 90 Other remuneration disclosures 94 Compliance report 96 Report of the directors 102 Statement of directors’ responsibilities
I am pleased to introduce our Corporate Governance report for the 2014 financial year which outlines the role our Board and Committees have had in shaping and refining the strategic ambition for the business, and providing oversight and challenge.
subsidiary Citizens Financial Group, Inc. (CFG) which represents a significant step towards improving our capital position and helping us create a strong and secure bank that can continue to support the needs of our customers.
Board, particularly in light of the regulatory investigations in relation to the 2012 IT incident which were settled in November 2014. By the end of 2015 we will have invested an additional £750 million in enhancing the security and resilience of our IT systems and many improvements have already been implemented.
Code. The Committee has also exercised close oversight of the effectiveness of the RBS’s control environment, placing particular focus on the remediation of culture and controls in the former Markets division.
Together with the Board Risk Committee, the Group Audit Committee will examine management’s plans to embed an effective three lines of defence model within the new organisational construct. During 2014, the
Group Audit Committee also spent additional time overseeing the tender process for selection of the external auditor for the year commencing 1
Chairman in April 2014. During the year, it has played a key role in the oversight of execution risk arising from RBS’s strategic agenda, most notably the Transformation Programme, and will continue to do so in 2015. The Committee has monitored developments in the internal and regulatory investigations of our activities in foreign exchange markets, including the resulting disciplinary and accountability process. It has also overseen the remediation activity following the IT incident in 2012.
The Board Risk Committee has considered the capital and liquidity position of RBS and related regulatory submissions and dedicated significant additional time to the consideration of internal and external stress testing exercises.
The Group Performance and Remuneration Committee welcomed Sandy as its new Chairman. The Committee has played a vital role in ensuring that our remuneration policy is fair and transparent and supports the work to rebuild a successful and trusted RBS. During 2014 the Committee had oversight of the implementation of a limit of variable pay to no more than 100% of fixed pay and the use of deferral and malus, to deliver fair remuneration outcomes.
Reputation and Trust, Serving Customers and Sustainability/Emerging issues. The Sustainable Banking Committee has overseen the values and conduct work in relation to behavioural and cultural issues and the development of Environmental, Social and Ethical policies, while continuing its commitment to stakeholder engagement.
The RCR Board Oversight Committee has considered RCR’s financial performance, risk reporting, delivery against targets and asset management principles and certain remuneration matters.
There were a number of changes to the Board’s composition during
Ewen Stevenson took over as Chief Financial Officer in May 2014 when
Two of our non-executive directors also retired from the Board in 2014.
Tony Di Iorio stood down in March 2014, having served on the Board since September 2011. Tony made an excellent contribution to the
Morten brings a wealth of experience of the financial services industry and has an especially strong background in risk. This is already evident in the contributions he is making to the Board and the committees he sits on.
Davies as a non-executive director with effect from the end of June 2015 and as Chairman from 1 September 2015.
Board Counsel. The evaluation has concluded that the Board is operating effectively but has identified some areas of improvement that we will focus on during 2015.
Finally, as we reflect on another challenging year, I would like to conclude this letter by recording my sincere thanks towards my fellow Board members. Being a director of RBS requires extensive time and commitment, and the readiness to deal with the unusual challenges of a government controlled listed company. I remain extremely grateful for their continued support and dedication in working towards the recovery of
As announced previously I will be leaving RBS on 31 August 2015.
Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBS’s compliance with approved risk appetite and oversees the operation of
Supports the Chief Executive in managing RBS’s businesses. It reviews and debates relevant items before consideration by the Board. It is responsible for determining and delivering RBS’s strategy, and it monitors and manages financial performance, capital allocations, risk strategy and policy, risk management, operational issues and customer issues.
Provides oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles.
Experience: Previously chairman of J Sainsbury plc and group finance director at Lloyds TSB Group, BT Group plc, BG Group plc, British Gas and British Steel plc, an executive director of Lazards and a non-executive director of RMC Group plc and Belgacom SA. He is also a former chairman of UK Financial Investments Limited, which manages the UK Government’s shareholdings in banks.
Executive for Retail Banking Services for five years. Prior to this he was Executive General Manager with responsibility for the branch network, contact centres and third party mortgage brokers.
Standard Life plc and Chairman of Creative Scotland. He was also previously a director of the Association of
and as managing partner of Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.
External appointment(s): • Non-executive director and member of the audit and compensation committees of
• Non-executive director, and member of the audit committee of Fiserv Inc
Experience: He has 34 years financial services experience and has previously held various roles at
Bank. Robert left UBS to join Evercore Partners, from where he was seconded to the UK Panel on Takeovers and Mergers, as Director General, from 2010 to 2013.
Cola where she held a number of leadership positions, latterly as President, Coca-Cola Great Britain and
Experience: Former global chairman, financial services for KPMG. Previously held senior leadership roles within
Experience: An experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and International Government practices and has been
Lords in 2000 and has served on the Conservative front bench in various roles including as shadow treasury minister between 2003 and May 2010. Previously held non-executive roles on the Court of the Bank of England,
The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the composition of the
Executive Committee and biographies of its members can be found at www.rbs.com>about us>corporate governance>ceo and board>executive committee
The Board has ten directors comprising the Chairman, two executive directors and seven independent non-executive directors, one of whom is the Senior Independent Director.
Biographies for each director and details of which Board committees they are members of can be found on pages 46 to 49. The Board considers that the Chairman was independent on appointment and that all nonexecutive directors are independent for the purposes of the Code.
Davies as non-executive director with effect from the end of June 2015 and as Chairman from 1 September 2015.
The role of Chairman is distinct and separate from that of the Chief
Chairman leading the Board and the Chief Executive managing RBS’s business day to day.
Officer and Board Counsel, ensure that members of the Board receive accurate, timely and clear information, to enable the Board to lead RBS, take sound decisions and monitor effectively the performance of executive management; • ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and
The Chief Executive’s key responsibilities are to: • exercise executive responsibility for RBS’s franchises and functions; • define, drive and deliver the overall strategic direction approved by the Board; • drive and deliver performance against the RBS’s financial plans and budget acting in accordance with authority delegated by the Board; • consult regularly with the Chairman and Board on matters which may have a material impact on RBS; • act as a guardian and champion of the culture and values of RBS, creating an environment where employees are engaged and committed to good customer outcomes; • lead the senior executive team and ensure there are clear accountabilities for managing RBS’s business and managing risk; and
Board Counsel, ensure the Board receives accurate, timely and clear information.
Sandy Crombie, as Senior Independent Director, acts as a sounding board for the Chairman and as an intermediary for other directors when necessary. He is also available to shareholders to discuss any concerns they may have, as appropriate.
Along with the Chairman and executive directors, the non-executive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference. The non-executive directors combine broad business and commercial experience with independent and objective judgement and they provide independent challenge to the executive directors and the leadership team. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBS’s business activities.
The standard terms and conditions of appointment of non-executive directors are available on rbs.com or from RBS Corporate Governance and Secretariat.
• advising on Board skills and composition including induction, ongoing training and professional development; • executive responsibility for Chairman/non-executive Director search and appointment process; • leading on all aspects of corporate governance across RBS; • facilitating good information flows between Board members and the
The Board considers each director’s notification separately on the facts and can impose conditions or limitations as part of the authorisation process. Actual and potential conflicts of interest can be authorised by the Board in accordance with the company’s Articles of Association.
Details of all conflicts of interest are recorded in a register which is maintained by the Chief Governance Officer and Board Counsel and reviewed annually by the Board.
In 2014, nine Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below. One of the
Board meetings took place overseas during the Board’s visit to RBS’s US
In addition to the nine scheduled meetings, 34 additional meetings of the
In advance of each Board meeting, the directors are provided with comprehensive papers. During 2014 there has been an enhanced focus on implementation of the new organisational design, building of capital and developing resilient systems. These have been recurring themes underpinning Board discussions during the year. An overview of the principal activities of the Board during 2014 is shown below.
Officer and the Chief Administration Officer attend Board meetings to present reports to the Board as appropriate. This provides the Board with an opportunity to engage directly with management on key issues and supports the Board’s succession planning activity.
The Board is structured to ensure that the directors provide RBS with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of the RBS’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area, but the
The Chief Governance Officer and Board Counsel advises directors of appropriate external training and professional development opportunities and internal training is also provided which is relevant to the business of
RBS. Business visits are also arranged as part of the Group Audit
During 2014, the directors received updates on a range of subjects to enhance their knowledge, including: • ICB/Ring-fencing
Governance Officer and Board Counsel. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.
In accordance with the provisions of the Code, all directors of the company are required to stand for election or re-election annually by shareholders at the company’s Annual General Meeting and in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders.
These topics have been appropriately addressed and will be kept under regular review as a matter of good practice.
The Chief Governance Officer and Board Counsel undertook a formal evaluation by: • preparing surveys that were completed by each director and holding interviews with each director; • discussing the outcomes and recommendations with the Chairman; and
Amongst the areas reviewed were Board composition, Board meetings and processes, information quality and flows, external relationships and priorities for 2015.
The 2014 performance evaluation concluded that the Board was strong and operated effectively and within its terms of reference throughout 2014. Key strengths identified included: • the Board performed strongly during a challenging 2014, demonstrating alignment with RBS values; • the dynamic between Board members was good and on the whole members worked well together, creating effective challenge, debate and oversight; and
• the Board’s committees operated effectively within their terms of reference throughout the year providing strong support to the Board.
A summary of the key themes arising from the 2014 performance evaluation is set out below, together with an overview of the proposed actions: Key themes included Proposed action
Succession planning Ensure that an effective succession planning process is in place at Board and Executive level.
The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback that had been provided as part of the evaluation process.
Annual Report and Accounts and by providing information in advance of the Annual General Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of RBS at any time throughout the year by letter, telephone or email via rbs.com/ir.
UKFI, the organisation set up to manage the Government’s investments in financial institutions, to discuss the strategy and financial performance of the business. The Chief Executive and
Additionally, the Chairman, Senior Independent Director and chairmen of the Board committees met with the governance representatives of a number of institutional shareholders during the year.
Committee communicate shareholder feedback to the Board. The directors also receive independent analyst notes and reports reviewing share price movements and performance against the sector. Detailed market and shareholder feedback is provided to the Board after major public announcements such as a results release. The arrangements in place are to ensure that directors develop an understanding of the views of major shareholders and that these are considered as part of the annual
The Investor Relations programme also includes communications aimed specifically at its fixed income (debt) investors. The Chief Financial
Officer and/or the RBS Treasurer give regular presentations to fixed income investors to discuss strategy and financial performance. There is also a separate section on the RBS website for fixed income investors which includes information on credit ratings, securitisation programmes and securities documentation. Further information is available at rbs.com/ir.
As Chairman of the Board and Chairman of the Group Nominations
Committee I am pleased to present our report on the committee's activity
Committee are reviewed annually and approved by the Board and are available at rbs.com.
Committee which is chaired by the Chairman of the Board. The RBS
Chairman in 2015. The search for my successor commenced immediately. In line with the Code, I did not chair the Nominations
Howard Davies as a non-executive director with effect from the end of
Sustainable Banking Committee with effect from 1 April 2014; • Baroness Noakes was appointed Chairman of the Board Risk
The Board remains supportive of Lord Davies’ recommendations and currently exceeds the target of 25 per cent female board representation as set out in Lord Davies’ report.
report, the Board operates a boardroom diversity policy and a copy of the
Chairman of the Group Nominations Committee 0-2 years 2-4 years 4+ years
There have been a number of changes to the membership of the Audit
Committee during 2014. I would like to begin by welcoming Sandy
Crombie and Morten Friis, who joined the Committee in April 2014. Both bring a wealth of experience across finance, risk and control matters and have already made valuable contributions to the work of the Committee.
The key priority of the Audit Committee during 2014 has been to monitor the integrity of RBS’s financial statements, focusing in particular on the quality and transparency of disclosure, and to support the ongoing strengthening of the internal control environment.
experienced better than anticipated operating performance during the year. The Audit Committee supported the Board in its decision to release trading statements ahead of the half year and Q3 reporting periods.
The Audit Committee also focused on the effectiveness of internal controls. In 2014, RBS embarked on its journey of transformation to a simpler and more efficient organisation. While the Transformation
Programme will ultimately bring long term benefits, the scale of change is not to be underestimated and the Audit Committee has monitored the short term impact on RBS’s control environment.
Programme (MCRP) during the year. It is anticipated that all aspects of this programme will have been successfully delivered within 2015.
One of the most significant pieces of work for the Audit Committee during 2014 was the tender process to select an external auditor from the year commencing 1 January 2016. Following a competitive tender process, the Committee recommended to the Board that Ernst & Young LLP (EY)
be appointed. A transition period will commence during 2015 to ensure
EY are familiar with RBS’s internal processes. Deloitte will continue as
RBS’s external auditor throughout 2015, and I would like to take this opportunity to formally thank the firm and its partners for its work as auditor of RBS and its subsidiaries over the last 14 years. While the tender process and the transitional period inevitably have involved and will continue to involve considerable work, I firmly believe that the appointment of EY will ensure that RBS continues to receive the highest quality advice and external audit services.
The oversight role and specific business of the Committee in these and other related areas are explained in more detail in the Committee’s full report.
As Chairman of the Audit Committee, I reported after each meeting to the
Board on the principal matters discussed to ensure all directors were informed of the Committee’s work. 2014 has been another challenging year for the Committee. However, I believe that the balance of skills and experience amongst the members has enabled the Committee to strike the correct balance between independent oversight and challenge and support to management. I would like to thank my fellow members for their contribution to the effective Committee performance in 2014.
Report of the Group Audit Committee Meetings and visits A total of seven scheduled meetings of the Audit Committee were held in 2014, including meetings held immediately before the annual and interim financial statements and the quarterly interim management statements were considered by the Board. The Committee also held six ad hoc meetings. Meetings are attended by relevant executive directors, the Internal and External Auditors and Finance, Legal and Risk Management executives. Other executives, subject matter experts and external advisers are also invited to attend, as required, to present and advise on reports commissioned by the Committee. At least twice a year the Audit Committee meets privately with the External Auditors and separately with Internal Audit management.
Membership of the Group Audit Committee The Group Audit Committee comprises four independent non-executive directors. The Chairman and members of the Committee, together with their attendance at scheduled meetings, are shown below.
Former members Tony Di Iorio (3) 3/3 Philip Scott (4) 5/6
Brendan Nelson, Morten Friis and Baroness Noakes are also members of the Board Risk Committee. Philip Scott was also a member of the Board Risk Committee until he stood down from the Board. Sandy Crombie is Chairman of the Group Performance and Remuneration Committee. This common membership helps facilitate effective governance across all finance and risk issues; ensures that compensation decisions reflect relevant finance and risk considerations; and that agendas are aligned and overlap of responsibilities is avoided where possible.
The Board is satisfied that all Audit Committee members have recent and relevant financial experience and that each member of the Group Audit Committee is independent as defined in the SEC rules under the US Securities Exchange Act of 1934 (the “Exchange Act”) and related guidance. The Board has further determined that Brendan Nelson, Committee Chairman, and Baroness Noakes are both ‘financial experts’ for the purposes of compliance with the Exchange Act Rules and the requirements of the New York Stock Exchange. Philip Scott was also deemed to be a ‘financial expert’ for the same purposes, throughout his tenure as a Committee member. Full biographical details of the Committee members are set out on pages 46 to 49.
Performance evaluation An evaluation of the Group Audit Committee’s operation was conducted internally in 2014. Overall the review concluded that the Audit Committee continued to operate effectively. The Committee has considered and discussed the outcomes of the evaluation and is satisfied with the way in which they have been conducted, the conclusions and the recommendations to be taken forward. The evaluation praised the wellrun manner of the Committee and the positive dynamic between members. The allocation of business to the Committee was considered to be appropriate, although it was acknowledged it was a heavy agenda. Recommendations for improvements focused on quality and volume of papers provided to the Committee. This will be addressed via a bankwide programme to refresh the paper format and guidelines for submission to senior Committees and Boards.
The outcomes of the evaluation have been reported to the Board and the Committee will track progress during 2015.
The role and responsibilities of the Group Audit Committee The Group Audit Committee’s primary responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These terms of reference are available on the RBS website www.rbs.com.
Following review, the Committee was satisfied that overall the level of provision held is appropriate and that disclosure is balanced and transparent; • the assessment by management of the adequacy and effectiveness of internal controls over financial reporting which had identified deficiencies in the bank’s privileged user access controls within
Board in reaching their conclusion: • The production of the Annual Report and Accounts is co-ordinated centrally by the Financial Controller with guidance on requirements being provided to individual contributors; • The Annual Report and Accounts is reviewed by the Executive
This process is also undertaken in respect of the half year and quarterly results announcements. In addition, the External Auditor considers the
Remediation of known control issues has remained a focus of the
Chairman, on behalf of the Board the Committee has continued to oversee the Control Remediation Programmes within the Markets division (MCRP) and has challenged management on the prioritisation of issues, delivery of remediation, quality assurance and contingency plans.
Key to the success of the remediation programme will be an effective three lines of defence model. In conjunction with the Board Risk
Root causes of the weaknesses have been identified and remediation programmes have been established to address the underlying issues.
Bi-annual reports were also noted in relation to RBS notifiable event process and alerts on each major event are received by the Chairman of the Committee and the Chairman of the Board Risk Committee.
During 2014 the Committee has received reports on the ongoing work of the Sensitive Investigations Unit. It was also updated on the whistleblowing arrangements RBS has in place for employees to raise concerns and received reports on incidents reported and investigated.
In line with the Committee’s terms of reference, consideration was given to management’s processes for identifying and responding to the risk of fraud.
As discussed in the report of the Board Risk Committee (set out on page 62 to 68), the effectiveness of the Divisional Risk and Audit Committees was considered in 2013. In response to management feedback, consideration was given to alternative mechanisms that could more effectively provide a line of sight into business risk and audit issues. A
revised construct of standardised Business Risk Committees, chaired by business Chief Executives, was created and implemented in 2014, with responsibility for the consideration of all risk issues. These Committees also consider finance and audit issues on a quarterly basis and provide reports to the Board Risk Committee and Audit Committee. A review of effectiveness of the Committees will be undertaken in 2015.
The Committee has considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002, and is satisfied in this respect.
The reporting arrangements for the Chief Audit Executive have remained unchanged in 2014: the role continues to report to the Chairman of the
Audit Committee, with a secondary reporting line to the Chief Executive for administrative purposes. The Chief Audit Executive exercises his right of attendance at Executive Committee meetings, and Internal Audit officers regularly attend relevant business-level meetings as appropriate.
The annual review of the effectiveness of Internal Audit was undertaken externally in 2014. Following a competitive tender process, EY was appointed to perform this. Their report concluded that Internal Audit had operated effectively during the year. Certain recommendations were made to enhance particular practices within the function. These will be implemented during 2015, with progress tracked by the Committee.
Regular reports were received by the Committee on the status of ongoing regulatory investigations. Any significant developments in the relationship with the regulators were noted by the Committee. The Committee members met, individually and together with other Board members, with the PRA and the FCA during the year as part of their regular interaction with the regulator.
During 2014, the External Auditor provided the Group Audit Committee with reports summarising its main observations and conclusions arising from the year end audit, half year review and work in connection with the first and third quarter financial results and any recommendations for enhancements to RBS’s reporting and controls. The External Auditor also presented for approval to the Committee its audit plan and audit fee proposal and engagement letter, as well as confirmation of its independence and a comprehensive report of all non-audit fees.
The Audit Committee undertakes an annual evaluation to assess the independence and objectivity of the External Auditor and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The evaluation sought the views of Committee members and attendees and other key members of management. In assessing the effectiveness of the External Auditor, the
External Auditor, taking account of the outcomes of the annual evaluation carried out. The Board submits the Audit Committee's recommendations to shareholders for their approval at the Annual General Meeting.
The Audit Committee approves the terms of engagement of the External
A competitive tender was undertaken in 2014 to select an auditor for the audit of RBS and its subsidiaries in 2016 (and future periods). Following this, and due consideration by the Audit Committee and the Board, EY
was chosen. A transition period will take place in 2015, during which EY
External Auditor to supply audit and non-audit services, which takes into account relevant legislation regarding the provision of such services by an external audit firm. The Committee reviews the policy annually and prospectively approves the provision of audit services and certain nonaudit services by the External Auditor.
For all other permitted non-audit services, Group Audit Committee approval must be sought in advance, on a case-by-case basis. A
competitive tender process is required for all proposed non-audit services engagements where the fees are expected to exceed £100,000.
Engagements below £100,000 may be approved by the Chairman of the
Group Audit Committee; as an additional governance control all engagements have to be approved by the Financial Controller and
• Provision of a compliance report required to comply with an amendment by the SEC to certain broker-dealer annual reporting requirements. Standard industry practice is for the External Auditor to be appointed to perform this work.
Further details of the non-audit services that are prohibited and permitted under the policy can be found on the website www.rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the
The purpose of this report is to describe how the Committee discharged its responsibilities during 2014 and to provide details of the material and significant issues which it considered and debated during the course of the year. It should provide a sense of the breadth of the Committee’s work, which included focus on conduct risk, credit risk, market risk, operational risk, people risk, regulatory risk and reputational risk. As a reflection of the increased demands on the Committee, the number of scheduled meetings during 2014 was increased from seven to nine. This will be maintained in 2015.
trust and putting customers’ needs at its core. Unfortunately, in 2014 RBS
Committee on action to be taken. The Committee will continue to oversee interactions on this matter with RBS’s other regulators in 2015. Details of other conduct and litigation matters under review of the Committee are set out in the Committee report.
RBS was fined in November 2014 for failing to put in place resilient IT
However, more remains to be done and the Committee will continue to ensure in 2015 that changes are sustained and risks are appropriately identified and escalated.
The Committee has dedicated considerable effort in 2014 to reviewing external and internal stress testing exercises. The Committee reviewed and recommended to the Board the submissions to the European
Equity Tier 1 (CET1) ratio in the EBA stress test results which led to
RBS’s published CET1 stress test ratios being overstated. Independent assurance was sought and the error was corrected. The Committee will continue to closely monitor the actions being taken to avoid a repeat of this error until it is clear that we can deliver against our own and regulatory expectations for stress testing.
Framework; • the capital and liquidity position of RBS and related regulatory submissions; • improvements to risk reporting; and
• assessment of the risk performance of both businesses and individuals and consideration of the accountability and behaviour of individuals in relation to specific matters.
More detailed information on each of these areas is set out in the Board
The report demonstrates the substantial efforts being taken to reduce the level of risk at RBS, under the oversight of the Committee. However, it is important to note that risk reduction remains a work in progress.
Management is continually striving to enhance the safety and soundness of the bank, and will continue to pursue actions to bring RBS within risk appetite. The Board Risk Committee will monitor progress closely and will oversee the quality and quantity of available resources to ensure they are sufficient to achieve real improvement. Other priorities will include risk culture, risk appetite, operational risk management, cyber risk and information security; and the execution risks associated with strategic initiatives.
2014 was another challenging year for the Board Risk Committee and I
Meetings and visits The Board Risk Committee held nine scheduled meetings and four ad hoc meetings in 2014. The ad hoc meetings were required to consider: the Clifford Chance report into the allegations set out in the Tomlinson Report; the EBA stress test results; risk performance of businesses and individuals; and accountability matters relating to the manipulation of the foreign exchange market.
Membership The Board Risk Committee comprises at least three independent nonexecutive directors. The Chairman and members of the Committee, together with their attendance at scheduled meetings, are shown below.
Notes: (1) Became Chairman of the Committee with effect from 1 April 2014. (2) Became a member of the Committee with effect from 10 April 2014. (3) Became a member of the Committee with effect from 1 April 2014. (4) Stepped down from the Committee on 31 March 2014. (5) Stepped down from the Board on 26 March 2014. (6) Stepped down from the Board on 31 October 2014.
The Committee also considered the risks in specific strategic objectives of the bank, in particular it: • reviewed the progress on the strategic initiative to dispose of the
Williams & Glyn business. It considered the technical complexities inherent in the programme; risks associated with the disposal; regulatory requirements; scope; viability; and threats to delivery.
businesses posed by economic or political events across a number of countries including Thailand, Russia and Ukraine; and
• reviewed the RBS Resolution Plan and recommended it to the
The Committee considered operation of RBS’s Policy Framework and considered management’s plans to improve the accessibility, clarity and ease of implementation of RBS’s policies.
A key priority for the Committee in 2014 was the need to improve and streamline the quality of risk reporting. Following a focus session on Risk
Reporting, good progress has been made in this respect and a revised format risk report, including a ‘top risks’ section, was launched in
The Committee carefully considered various conduct issues and remediation programmes in 2014. A primary concern was the investigation of misconduct within the foreign exchange trading business. The Committee received regular reports as the investigation evolved and was kept abreast of interactions with regulators. In
November 2014, RBS reached a settlement with the FCA and the US
Commodity Futures Trading Commission (CFTC) in relation to failings in the foreign exchange business. RBS fully cooperated with the regulatory investigations and accepted the findings. The Committee has exercised close oversight of the internal investigation into the conduct of current and former employees who had involvement in the foreign exchange area. RBS has announced action taken to date and will provide a further update when the accountability review is complete, which is expected to be in the first quarter. RBS remains in discussion with other governmental and regulatory authorities on these issues, including the
US Department of Justice, and the Committee will continue to give this appropriate focus in 2015.
April 2014. It welcomed the finding that there was no evidence of the serious and damaging allegation that RBS had set out to deliberately defraud its business customers. The Committee will continue to monitor the separate, external investigation into Restructuring, which was commissioned by the FCA under section 166 of the Financial Services and Markets Act. The results of this are anticipated during the first part of 2015, and will be reviewed in detail by the Committee.
A key part of ensuring the correct behaviours are instilled across RBS is articulating and embedding an appropriate risk culture within RBS that is set and cascaded from the top. This needs to be clearly aligned to the
Markets Division. This work has been complemented by that of the
Markets Controls Remediation Programme (MCRP) which has been monitored by the Group Audit Committee. In 2015, MCRP will be succeeded by the Markets Standards Programme. The Markets
Standards Programme will be similar in scale to MCRP, with a greater focus on conduct and culture in addition to controls. It will incorporate remediation of the foreign exchange trading issues; • RBS’s progress in improving its end to end customer complaints management process, in particular its strategic aims to reduce complaint volumes and to resolve issues at the first point of contact or within forty eight hours of receipt. The Committee will receive further updates on progress next year; • reports on Anti-Money Laundering remediation at each of its meetings in the first half of 2014, ahead of the regulatory attestation in June 2014. Reporting has now returned to exception based reporting pending further regulatory review; • initial reports on trade and transaction reporting compliance and collateral management issues within the Corporate and Institutional
Banking business. The Committee will receive more detailed reports on required action and remediation in early 2015; • the status of key litigation cases, in particular the US residential mortgage-backed securities litigation claims; and
Capital Adequacy Assessment Process (ICAAP). An assurance opinion was provided by Internal Audit on the adequacy of the processes supporting the preparation of the submissions.
In response to increased regulatory expectations, the Committee has dedicated considerable effort in 2014 to the oversight of stress testing. It has been actively engaged in discussions on underlying assumptions and scenario selection for the European Banking Authority and Bank of
England ‘UK Variant’ stress-test exercises and recommended the stress test results submissions to the Board. The Committee reviewed the output of stress testing exercises and has been involved in consideration of their announcement to the market. The Committee also made appropriate recommendations to the Board on reverse stress testing thresholds.
Focus on stress testing and reliance upon the outputs is set to increase in 2015 and beyond. It is therefore essential that the business is resourced to meet expectations and that individuals possess the correct skills and are supported by the correct processes and tools. The
Committee will carefully review stress testing capability enhancement plans to ensure that these are fit for purpose and meet regulatory expectations for 2015.
A detailed overview of the Credit Risk portfolio was also provided to the
Thereafter, the Committee will monitor progress as the programme is delivered over the following two years.
The Committee also received reports on: • RBS’s long dated derivatives business and noted the risk and control framework (including limits and collateral requirements)
The Committee received bi-annual reports on cyber threats and responses, covering the threat landscape together with key issues and progress on the bank’s improvements plans in this area. The bank is rebaselining its appetite and approach to cyber risk and is moving to a model of strong detection and response in addition to mitigation. The banking sector will continue to be a prime target for attackers and the
The Committee reviewed RBS’s 2014 Annual Risk and Control Report and was satisfied that RBS had operated its risk management framework in accordance with the requirements of the UK Corporate
during 2014, particularly in light of internal restructuring, market positioning and changes to regulations. This included a review of capital adequacy, earnings volatility and stakeholder confidence. This review is being finalised and a formal risk appetite which reflects the new organisational structure will be approved in the first quarter of 2015.
During the course of two separate visits, the Board Risk Committee reviewed the Risk Management and C&RA operating model to ensure that both functions had the appropriate structures and resources in place to deliver their strategic plans. The bench-strength of the functions was reviewed and consideration was given to succession planning, resource and budget.
The Committee considered in detail the impact of RBS’s transformation programme on the holistic risk management operating model. This included: resourcing levels and quality; changes to risk management’s technology support infrastructure; the impact on RBS’s overall control environment; and alignment with other major change and investment programmes.
Last year, the Committee reviewed the operation of the Divisional Risk and Audit Committees. In response to management feedback, consideration was given to alternative mechanisms that could more effectively provide a line of sight into business risk and audit issues. In early 2014, the Committee agreed that standardised Business Risk
Committee and Group Audit Committee. While the Committees are in their infancy, it is anticipated that these changes will improve the risk governance at a business level and facilitate the escalation of issues as appropriate. A review of effectiveness will be undertaken in 2015.
Aggregation and Reporting, which were due to come into effect from
The Board Risk Committee recognises clear link between conduct, culture and performance management. As part of its work the Committee has continued to work closely with the Group Performance and
The Committee also considered the risk performance of businesses in light of known risk and control issues and under advice from Risk, C&RA
and internal audit functions. It has also reviewed specific accountability cases and made recommendations regarding appropriate adjustments to performance related reward to the Group Performance and
• accelerating the release of capital through management and exit of the portfolio.
The Committee’s responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the
The Committee’s role is to: • oversee the actions of RCR’s management, including implementation of RCR’s strategy; • review and report to the Board on RCR’s progress against and compliance with the primary objective (to eliminate the bank’s exposure to RCR assets) and the asset management principles
The Chairman of the Committee is the Chairman of the Board Risk
The Committee held four scheduled meetings and two ad hoc meetings in 2014. Meetings are attended by relevant executives, and representatives from the risk, finance and human resources functions.
As a newly established Board Committee, the focus at the first meeting was reviewing the Committee’s terms of reference and schedule of business for the year. The Committee also reviewed the governance structure and delegated authorities for RCR. The format of reporting on progress against the primary objective and asset management principles, and the pro-forma for financial reporting were also considered.
Committee has considered financial performance and delivery against targets and asset management principles, and received updates on emerging issues and material transactions. The outlook in relation to capital release and the residual asset pool is also reviewed.
Committee now receives information on a quarterly basis on operational, conduct and people risk.
The Committee recognised that the objective of accelerating disposal of assets carried additional customer and conduct risks. It paid particular attention to the leadership and culture within RCR and reviewed the RCR
The Committee also reviewed and considered certain remuneration matters for RCR and, in conjunction with the Group Performance and
Committee meetings are attended by senior RCR managers and also representatives from the control functions, in particular from the risk function.
An internal review of the effectiveness of the Board and senior committees was conducted during 2014. The Committee has considered and discussed the report on the outcomes of the evaluation and is satisfied with the way in which the evaluation has been conducted.
RBS has a clear ambition to be number one for customer service, trust and advocacy in each of our chosen business areas by 2020. Delivery of this ambition depends in large part on our ability to demonstrate beyond question that we are a responsible company doing business in a sustainable way.
We know that RBS exists in a sector that faces huge challenges and needs to change, and we’re committed to play a leadership role. I’m encouraged that we’ve changed our business practices this year on a range of issues to make banking fairer for our customers and our communities.
Inside the bank we are on a long journey to create a culture that stands apart from the misconduct of the past. We have strong, clear values that guide our decision making, but these are yet to be truly ingrained in our approach to running the bank.
Although we still have a long way to go, some good progress was made in 2014 and the key areas of work during the year included: • Oversight of the values and conduct work intended to address behavioural and cultural issues.
• Ongoing commitment to stakeholder engagement through face to face sessions with advocacy groups on key issues of concern (more details on the next page).
(ESE) policies designed to ensure responsible and sustainable management of risks in sensitive and controversial lending sectors.
• Oversight of progress on people issues including safety and health, wellbeing, diversity and inclusion and employee engagement.
• Transparent reporting through the annual Sustainability Review which describes our performance and approach to making RBS a more sustainable business, one which will support the long-term future of the economy and society.
Transparency International’s latest report on transparency in corporate reporting. We have also successfully retained our place in the Dow Jones
Project disclosure results which assess management of climate risks and opportunities. RBS has also been reselected for inclusion in the
FTSE4Good index which measures the performance of companies against globally recognised responsibility criteria. Turning to people commitments, progress on diversity and inclusion has also been recognised with various gender, race and equality awards. More information on these and our sustainability performance and external commitments can be found on pages 38 to 41.
With an increasing focus on ethics and sustainability, the priority of the
Committee will be to assess and encourage the work of the executive team in building a bank that puts customers’ interests first and embeds sustainable banking into everything that we do. I took over as Chairman of the Committee after the 2014 AGM having served as a member since 2013. My thanks go to the Committee members and attendees for their support and, in particular my predecessor Sandy Crombie for his commitment in steering the work of the Committee. There are significant challenges ahead, but I am confident that we will continue to build on the work that has already been done to embed sustainability into the strategic priorities of RBS.
The Sustainable Banking Committee held six scheduled Committee meetings in 2014 in addition to six stakeholder engagements sessions.
Corporate Services. The Chairman of the Board regularly attends the meetings as well as internal and external specialists who are invited to join for specific items.
• Privacy and the need to balance security against the employee right to privacy
• Climate Change including the latest science on the predicted physical and humanitarian impacts
• Supporting Enterprise and in particular how well RBS supports international trade
• Employee Engagement with focus on people strategy, employee sentiment and balanced leadership
In addition, the programme of UK-based events aimed at individual shareholders continued in 2014 and provided an opportunity for shareholders to meet directors and senior management to learn more about the business.
The Sustainable Banking Committee comprises three independent nonexecutive directors. During the year, new member Robert Gillespie joined existing member Alison Davis, and Penny Hughes took over from Sandy
Crombie as Chairman after the AGM. The Chairman and members of the
Notes: (1) Appointed Chairman of the Committee on 25 June 2014. (2) Appointed to the Committee with effect from 1 April 2014. (3) Stepped down from the Committee on 25 June 2014.
Committee took place in 2014 and overall the review concluded that the
Committee continued to operate effectively. In particular, the stakeholder engagement sessions were regarded as a valuable opportunity to learn how well RBS is aligned to external sustainability priorities and these will continue in 2015. Another key focus will be to embed the changes made in 2014 to the strategic direction of the Committee.
Oversight of: • Management of reputation and delivery of commitments on trust, advocacy and customer service
• Provide challenge on how well RBS is integrating sustainable banking into its business strategy and what is being done to foster a sustainable business for customers
• Receive reports on key reputational risks relating to customer priorities and performance against customer commitments
• Receive reports on how RBS is supporting SMEs and oversee the approach to responsible lending and financial inclusion
• Approve the annual Sustainability Report and receive the external auditors assurance report
• Oversee priorities, targets and reputational challenges on key emerging sustainable banking issues and consider best practice benchmarking
Committee with effect from the 2014 AGM having served as a member since 2009. I would like to thank my predecessor, Penny Hughes, for her leadership of the Committee over the past four years.
The Committee must balance the views of our stakeholders with our duty to reward our people fairly, and our responsibility to ensure that we are running a commercial business with the best available talent. We will do our utmost to make balanced decisions and to explain our approach to our many stakeholders.
I believe we are making genuine progress. RBS has been at the leading edge of reform in bringing down how much we pay and changing the structure of how pay is delivered. Over the last five years bonus pools have fallen by around two thirds across RBS and by nearly 90% within the investment bank. Last year we introduced a simplified pay structure for our executive directors with annual bonuses being discontinued. This means that their variable pay will be delivered entirely in long-term incentive awards, aligning executive directors’ pay more than ever to shareholder value over the long term.
AGM with over 99% of shareholders voting in favour. No changes are being made to the policy at this time. This letter and the accompanying report aim to demonstrate the context in which decisions have been made, the decisions reached for the 2014 performance year and how the
Last year we set out a new strategy that stated our ambition to become the best bank in the UK for customer service, trust and advocacy by 2020. A remuneration policy that supports our business strategy is an essential part of rebuilding a successful and trusted RBS. We made good progress in 2014. Total pay costs and pay per employee have been reduced, while we have been establishing a platform to deliver good customer outcomes and sustainable returns to shareholders. There is a clear need for management to keep the franchise intact while moving the business towards a more normal and stable position. The Committee’s decisions aim to support this process.
One of the main changes during 2014 is that RBS is now operating in a framework that limits variable pay to no more than the level of fixed pay.
This change is in line with the views of our majority shareholder, UK
Financial Investments (UKFI). Often referred to as the ‘bonus cap’, this limit applies to all employees who are considered to be Material Risk
Takers (MRTs) under regulatory requirements, a population that has increased significantly in line with enhanced criteria from the European
MRTs from 1 January 2015 will be subject to clawback for seven years from the date of award. Clawback is the recovery of awards that have vested and been paid to employees. Malus allows the Committee to reduce awards (if appropriate to zero) prior to payment taking place. RBS
Malus has been applied as part of our accountability review process in light of the fines imposed on RBS by regulators relating to misconduct in foreign exchange trading (FX) and the IT incident that occurred in 2012.
In addition to direct action against specific employees under the accountability review process, significant deductions to bonus pools have been made for material conduct events. This includes deductions for
Performance considerations for 2014 2014 has been a year of achievement against a difficult agenda. We are delivering on our plan to make RBS a smaller, safer bank. Citizens
Financial Group, Inc. (CFG) was successfully launched on the New York stock exchange in the biggest bank flotation in US history. Once the remaining stake in the CFG business is sold this will further strengthen our capital position. RBS Capital Resolution (RCR) has managed to accelerate the planned removal of assets from our balance sheet contributing c. 110 basis points to the improvement in the CET1 ratio.
Our financial results show that, underneath the conduct issues, litigation and restructuring charges, there are strong customer franchises that are geared towards delivering sustainable returns for investors. The signs of improvement are there in customer feedback, our capital strength and reduced costs. All of these factors have been considered by the
• Attributable loss to ordinary and B shareholders of £3.5 billion which includes the loss provision of £4 billion associated with the decision to divest CFG
• Cost reduction of £1.1 billion, excluding the effect of currency movements, which has exceeded the target
• RCR run off - assets have been reduced by £14 billion and RWA
The pressures on people working at RBS are considerable. We need to recognise good results by those employees who serve our customers well and deliver excellent individual performance. Having engaged employees and improving RBS as a place to work is critical if we are to achieve our long-term ambitions.
employees. The Corporate & Institutional Banking (CIB) bonus pool is 53% lower than 2013.
• Performance measures for long-term incentive awards to be granted in 2015 follow the criteria that applied to awards made in 2014 but incorporating Trust in the Customers & People measure.
The report sets out how pay arrangements will be implemented in the year ahead including the performance targets that will apply to the longterm incentive awards granted in 2015. An overview of our remuneration policy below Board level can be found in the ‘Other Remuneration
The regulatory environment continues to evolve. Further guidance is expected during 2015 from the EBA on the use of allowances as well as the outcome of the PRA’s consultation on extending deferral periods. The
look forward to working closely with all our stakeholders in the year ahead.
Commonwealth Bank of Australia, which was granted subject to RBS performance conditions.
(4) Amount relates to a share award made to replace awards forfeited on leaving Credit Suisse.
• Details of remuneration arrangements for 2015 are set out in the implementation of policy section on page 82.
Full details of the LTI performance conditions are set out on page 83.
Fixed pay elements are intended to provide a level of competitive remuneration for performing the role with less reliance on variable pay in order to discourage excessive risk-taking and with partial delivery in shares to align with long-term shareholder value.
Benefits To provide a range of flexible and market competitive benefits to further aid recruitment and retention of key individuals.
EDs can select from a range of benefits including: • Company car
Further benefits including allowances when relocating from overseas may be provided to secure the most suitable candidate for the role.
To support a culture where good performance against a full range of measures will be rewarded. To incentivise the delivery of stretching targets in line with the
Any variable pay award made will be delivered in the form of a longterm incentive, paid in shares (or in other instruments if required by regulators) and subject to a combination of time and performance-based vesting requirements.
A minimum three year performance period will apply. The award will have an overall five year vest period, vesting in equal tranches in years four and five.
The maximum level of award is subject to any limit on the ratio of variable to fixed pay as required by regulators.
RBS is not seeking any such approval at the 2015 AGM.
The vesting level of the award could vary between 0% and 100% dependent on the achievement of performance conditions.
These or similar measures and weightings will be applied to reflect the strategy going forward.
‘good leavers’ will vest, normally on the original vesting dates, and shares from the fixed share allowance will continue to be released over the applicable five year retention period in order to ensure former EDs maintain an appropriate interest in RBS shares.
• Remuneration for EDs broadly follows the policy for all employees but with a significant element delivered in shares and an appropriate proportion delivered through variable performance-related pay. This is to ensure that total remuneration to EDs is more aligned with the long-term interests of shareholders and dependent on specific performance measures being met.
An accountability review process is operated that allows the Committee to respond in instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year. As a result, malus can be applied to reduce (if appropriate to zero) the amount of any variable pay awards prior to payment taking place. Clawback provisions can also be applied to require repayment of any amounts already paid. Malus and clawback can be applied to current and former employees.
RBS has applied malus provisions to variable pay awards since 2009 and added clawback provisions to awards made in 2014 for a period of six months from the date of any vesting. Any variable pay awards granted to
EDs and other MRTs after 1 January 2015 will be subject to clawback provisions for a period of seven years from the date of grant, in line with new requirements under the PRA/FCA Remuneration Code.
• RBS or the individual’s relevant business unit suffering a material failure of risk management.
Further details of our remuneration policy for all employees are set out on
The Committee has certain discretions that allow it, in appropriate circumstances, to vary the remuneration provided to EDs and other employees. For example, under the rules of the RBS 2014 Employee
Share Plan, the Committee can: determine that awards should vest even where this treatment would not apply as standard under the rules; decide to vest earlier than the normal vesting date; and vary the pro-rating for time elapsed that would normally apply. Such discretions would only be used in exceptional circumstances to ensure a fair outcome for the relevant individual and for shareholders, taking into account the circumstances of departure, the performance of the individual and the need to ensure an orderly transition.
In addition, the Committee retains discretion to apply malus and clawback to awards and also to adjust the vesting outcome in relation to certain long-term incentive awards through the application of an underpin.
Chairman and non-executive directors can maintain appropriate independence, focus on long-term decision making and constructively challenge performance of the executive directors.
The Chairman and nonexecutive directors do not participate in any incentive or performance plan. Fees are reviewed regularly.
The rates for the year ahead are set out in the annual report on remuneration on page 82.
Additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board
Reimbursement of reasonable out-of-pocket expenses incurred in performance of duties. The
Chairman also receives private medical cover in line with the scheme rules.
• The policy on the recruitment of new directors aims to structure pay in line with the framework and quantum applicable to current directors, taking into account that some variation may be necessary to secure the preferred candidate.
• No sign-on awards or payments will be offered over and above the normal buy-out policy to replace awards forfeited or payments foregone. The Committee will seek to minimise buy-outs wherever possible and will seek to ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
Maximum variable pay (long-term incentive award) is calculated in line with the ratio limiting variable to fixed remuneration, including the EBA
March 2015. Further details are set out in the implementation of policy section on page 82.
Treatment in line with the relevant plan rules as approved by shareholders
Existing long-term incentive awards normally lapse on leaving unless the termination is for one of a limited number of specified ‘good leaver’ reasons or the Committee exercises its discretion to prevent lapsing. The Committee may exercise this discretion where it believes this is an appropriate outcome in light of the contribution of the participant and shareholders’ interests. Where awards do not lapse on termination, any vesting will normally take place on the original vesting dates subject to the performance conditions being met and pro-rating to reflect the proportion of the period that has elapsed at the date of termination. Malus and clawback provisions may also apply in accordance with policy.
Philip Hampton is entitled to receive a cash payment in lieu of notice of 12 months’ fees in the event that his appointment is terminated as a result of the majority shareholder seeking to effect the termination of his appointment, or if RBS terminates his appointment without good reason, or if his re-election is not approved by shareholders at a General Meeting resulting in the termination of his appointment.
Notes: (1) This element follows the performance conditions applicable to the overall RBS-wide measures for the 2012 LTIP awards and the assessment is detailed on page 85. (2) The performance measures applicable for UK Retail were based on: Financial targets (weighted 50%) covering risk weighted assets, nominal assets, loan:deposit ratio, notional return on equity, operating profit, cost:income ratio; Customer measures (weighted 10%); People measures (weighted 10%); and Risk measures (weighted 30%). All financial targets were deemed to have been met in full with the customer, people and risk measures ranked as partially met. The Committee also considered recommendations from the Board Risk Committee in determining the final outcome.
Performance requirements with 20% vesting at threshold for the TSR measure and 25%
Conditional share awards subject to stretching performance conditions covering Economic Profit,
Bank and Customers & People. Performance measured over a three year period. See page 85 for further details.
Notes: (1) The number of shares awarded is based on a multiple of salary and an award price of £3.278 calculated based on the average share price over five business days prior to the grant date. (2) The number of shares is based on the value of awards replaced and an award price of £3.270 calculated based on the average share price over five business days prior to the grant date.
Nominations Committee should be increased from £5,500 to £10,000 per annum with effect from 1 April 2014. An additional Board Committee was also established to oversee RBS Capital Resolution and the implementation of its strategy. The fees paid during 2014 are set out below.
Notes (1) Philip Hampton is entitled to private medical cover and the value is shown in the benefits column. (2) Morten Friis was appointed to the Board with effect from 10 April 2014. (3) Robert Gillespie is the RBS nominated director of Citizens Financial Group, Inc. (CFG) and is entitled to fees for the period from 1 August 2014 to 31 December 2014. As part of the compensation plan for directors agreed on the IPO of the business in September 2014, Mr Gillespie is also entitled to restricted stock units in CFG which will vest on the date of the CFG AGM in 2015. The value of the fees and restricted stock is shown in the Benefits and other fees column, converted using an average exchange rate during 2014 of $1.647:£1.
(4) Tony Di lorio became a non-executive director of CFG on 15 January 2014 and the value of fees received for the period to 26 March 2014, the date he retired from the RBS Board, is shown in the Benefits and other fees column, converted using an average exchange rate during 2014 of $1.647:£1.
Long-term incentive award (LTI) calculated in line with regulatory cap (2)
Notes: (1) Fixed Share Allowance will be payable broadly in arrears and the shares will be released in equal tranches over a five year period. (2) The LTI that can be awarded in 2015 is limited to the level of fixed remuneration, on an annualised basis where appropriate. The value at grant incorporates the discount factor for long-term deferral calculated in line with European Banking Authority rules and results in a maximum LTI value of approximately 113% of fixed remuneration. (3) Also receives relocation benefits which include housing and flight allowances, the value of which is disclosed each year in the total remuneration table.
Group Performance and Remuneration Committee (RemCo) and Sustainable Banking Committee (SBC) £30,000
Additional fee for Chairman of the GAC, BRC, RemCo or SBC £30,000
Morten Friis is the RBS Board nominated member of the Steering Group to oversee compliance remediation activities in respect of RBS’s US businesses for which he receives fees of £15,000 per annum.
In line with previous practice, awards granted to executive directors in
March 2015 will be subject to four equally weighted performance categories. For Ewen Stevenson’s award, each performance category can vest up to 100% of base salary, subject to the maximum award under the approved policy. Ross McEwan’s award will be structured in a similar manner but at a lower level in line with the regulatory cap limiting the amount of variable remuneration. Details of the performance measures and the Committee’s rationale for selecting them are set out below.
Cost of Equity. The measure will be based on the ‘go-forward’ business.
Details of the actual targets, and performance against these, will be disclosed retrospectively once the awards vest.
Weighting Performance target Vesting range 25% TSR between median and upper quartile 20 - 100%
RBS’s target to operate at 13% for the period of international network restructuring
The overall vesting under the above categories will be qualified by the
The Committee will also review financial and operational performance against the business strategy and the risk environment prior to agreeing vesting of awards. In assessing this, the Committee will be advised independently by the BRC. If the Committee considers that the vesting outcome calibrated in line with the performance conditions outlined above does not reflect underlying financial results or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the awards allow for an underpin to be used to reduce vesting or lapse the award.
Nathan Bostock ceased to be Group Finance Director on 19 May 2014 and stepped down from the Board on 28 May 2014. He continued to receive payment of salary, pension and benefit funding until his employment ended on 18 August 2014 (a total of £234,952 for the period from 28 May to 18
Relative TSR 25% TSR at median 20% TSR at upper quartile 100% TSR was below
Performance category % vesting Maximum shares (2) Vested shares Value (3) Maximum shares (2) Vested shares Value (3)
Notes: (1) The Committee also considered recommendations from the Board Risk Committee in determining the outcome above. (2) The maximum number of shares is calculated in line with the underlying award structure where each of the four performance categories could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 375% of salary. (3) Based on share price of £3.33 on date of vesting.
Bruce Van Saun's Unfunded Unapproved Retirement Benefit Scheme operates as a cash balance plan. The rate of return on the accrued fund is determined annually to reflect a long-term low risk investment return on an unsecured basis. For 2014 this rate was 4%. His accrued entitlement at the year end is shown below. There is no provision for any additional benefit on early retirement.
Performance conditions for LTIP awards granted in 2012, 2013 and 2014
Awards are due to vest in 2015 to 2017. An assessment of performance of each relevant element is provided by the control functions and PwC
assesses relative TSR performance. The Committee determines overall vesting based on these assessments including consideration of the drivers of performance and the context against which it was delivered. Each of the four performance categories could give rise to shares worth 100% of salary at grant, but with the overall maximum capped at 300% of salary. The assessment is analytical and if any discretion is used in the final assessment, it will be explained.
Economic Profit 25% (£3.5 billion) 25% £1 billion 100% (£1.8 billion) 53%
Relative TSR 25% TSR at median 20% TSR at upper quartile 100% 65th percentile ranking 68%
The table below shows performance assessment in respect of the 2013 and 2014 LTIP awards which are due to vest in March 2016 and March 2017 respectively. The table below represents an early indication of potential vesting outcomes only based on the position at 31 December 2014.
Performance consistent with some level of vesting based on current assessment.
Threshold: 20% vesting if TSR is at median of the comparator group.
For 2013, vesting will be qualified by Committee discretion. Indicative vesting levels are: • Over half of objectives not met: 0%; • Half of objectives met: 25%; • Two-thirds of objectives met: 62.5%; and
The cost:income ratio target remains challenging and is unlikely to be met.
Engagement Index is behind target. Customer and leadership metrics would result in some level of vesting on current assessment.
Net Promoter Score over 2014 would lead to some level of vesting if continued.
As at 31 December 2014 (or date of cessation if earlier)
Notes: (1) Value is based on the share price on 31 December 2014, which was £3.94; for Nathan Bostock the value is based on the share price of £3.43 on 28 May 2014, the date he stepped down from the
Members of the Executive Committee are also subject to shareholding requirements with a target shareholding level of 125% of salary. In line with the requirements of the PRA/FCA Remuneration Code and the RBS Staff Dealing Rules, employees must not engage in any personal hedging strategies to lessen the impact of a reduction in value of unvested share awards, for example if the RBS share price goes down.
Notes: (1) Relates to an award made to Ross McEwan on joining RBS as CEO UK Retail in September 2012 to replace awards forfeited on leaving Commonwealth Bank of Australia. (2) Ewen Stevenson was appointed to the Board on 19 May 2014. Award granted on appointment to replace awards forfeited on leaving Credit Suisse.
Nathan Bostock stepped down from the Board on 28 May 2014. Outstanding share awards under the LTIP (2,151,234 shares), Deferred awards
Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added for comparison. The TSR for the company and the indices have been rebased to 100 at 1 January 2009. Source: Datastream
Note: (1) 2013 remuneration includes Stephen Hester (SH) as CEO for the period to 30 September and Ross McEwan (RM) for the period from 1 October to 31 December 2013. (2) The LTIP vesting for Ross McEwan relates to an award made on appointment to his previous role as CEO UK Retail to replace awards forfeited on leaving Commonwealth Bank of Australia.
The table below shows the percentage change in remuneration for the Chief Executive between 2014 and 2013 compared with the percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary, benefits and annual bonus. Salary Benefits Annual Bonus 2014 to 2013 change 2014 to 2013 change 2014 to 2013 change
Notes: (1) Executive directors are not eligible for an annual bonus. Standard benefit funding for executive directors remained unchanged between 2013 and 2014. The benefits for the Chief Executive excludes the relocation expenses provided to Ross McEwan as part of his recruitment as CEO UK Retail in 2012. The value of relocation benefits is disclosed each year in the total remuneration table. (2) Data represents full year salary costs of the UK based employee population, which covers the majority of RBS employees and is considered to be the most representative comparator group.
The table below shows a comparison of remuneration expenditure against other disbursements. 2014 (1)
The items above have been included as they reflect the key stakeholders for RBS and the major categories of disbursements made by RBS to its key stakeholders, including its ordinary and preference shareholders and Governments in RBS’s operational territories. The amounts included above have been calculated in accordance with applicable accounting standards and reflect the amounts included in RBS’s Income statement.
The Committee is responsible for approving the remuneration policy for all employees and overseeing its implementation. It reviews performance and makes recommendations to the Board in respect of the remuneration arrangements of the executive directors. The Committee is also responsible for approving remuneration arrangements for members and formal attendees of the Executive Committee and employees with total annual compensation which exceeds £1 million. It is also responsible for setting the remuneration framework and principles for MRTs falling within the scope of the PRA/FCA Remuneration Code. A definition of employees deemed to be MRTs along with details of how risk is taken into account in the remuneration process is provided on pages 91 and 92.
In mitigating potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and remuneration advisers are appointed by the Committee rather than management. The terms of reference of the Committee are available on www.rbs.com and these are reviewed at least annually and approved by the Board.
• 2013 performance reviews and remuneration arrangements for members of the Executive Committee, Code Staff and high earners.
• Executive Committee members and attendees half year performance reviews and objectives update.
• External environment including PRA consultation on further changes to the Remuneration Code.
• Consideration of governance issues including delegated authorities and the Accountability Review framework.
The Committee considered the outcomes of the evaluation and is satisfied with the way in which the evaluation has been conducted.
PricewaterhouseCoopers LLP (PwC) were appointed as the Committee’s remuneration advisers on 14 September 2010 following a review of potential advisers, and their appointment was reconfirmed by the
Committee in July 2014 after an annual review of the quality of the advice received and fees charged. PwC are signatories to the voluntary code of conduct in relation to remuneration consulting in the UK.
PwC also provide professional services in the ordinary course of business including assurance, advisory, tax and legal advice to RBS
subsidiaries. The Chairman of the Committee is notified of other remuneration work that is being undertaken by PwC. In addition, there are processes in place to ensure the advice received by the Committee is independent of any support provided to management. As well as receiving advice from PwC in 2014, the Committee took account at meetings of the views of the Chairman, Chief Executive, Chief Financial
Chief Governance Officer and Board Counsel, the Chief Risk Officer and the Chief Conduct and Regulatory Affairs Officer. The fees paid to PwC
For Against Total votes cast Withheld 2. Annual Report on Remuneration for 2013
Committee, typically involves inviting our largest shareholders to attend either one-to-one meetings or roundtable sessions with relevant shareholder bodies. The process takes place in sufficient time for shareholder views to be considered prior to the Committee making any final decisions on remuneration and variable pay awards.
Shareholders asked a number of questions including how conduct issues and the FX fines would be reflected in the bonus pool. The evolving regulatory environment and EBA guidance on role-based allowances were also discussed. Some shareholders were interested to know whether operating within the 1:1 ratio of variable to fixed remuneration was causing any particular concerns for RBS. The potential impact on recruitment and the importance of employee engagement were also discussed. Another theme was explaining progress on performance measures and it was noted that additional detail on LTIP performance targets would be helpful.
The Chairman of the Committee responded to the questions by explaining how adjustments for risk and conduct events were incorporated into the bonus pool and also confirmed that operating within the 1:1 cap had proved to be manageable to date. Overall, recruitment into specialist roles had not been as difficult as had been anticipated although certain ‘hotspots’ remained. The future pay construct was also discussed and the Chairman acknowledged the need for a fair sharing ratio between rewards to employees and returns to shareholders over the long-term.
The reaction to the consultation process was positive and allowed the
Committee to gain valuable insight into areas that shareholders were likely to support and those areas of concern. Shareholders continue to play a vital role in developing remuneration practices that support the long-term interests of the business and the Committee is grateful and greatly encouraged by their involvement in the process.
During the ten year period to 31 December 2014, awards made that could require new issue shares under the company's share plans represented 4.7% of the company's issued ordinary share capital
(£000s) Executive 1 Executive 2 Executive 3 Executive 4 Executive 5 Executive 6 Executive 7 Executive 8
Long term incentive awards (vested value) 449 211 193 — — 144 196 —
Notes: (1) Remuneration earned in 2014 at RBS for eight members of the Executive Committee. Reported remuneration was lower in 2013 due to: i) pro-rated earnings and no long term incentive award vesting for new hires; and ii) split year earnings of newly promoted Executive Committee members.
(2) Disclosure includes prior year long term incentive awards which vested during 2014. The amounts shown reflect the value of vested awards using the share price on the day the awards vested.
To provide a range of flexible and market competitive benefits. To encourage planning for retirement and long-term savings.
The annual bonus pool is based on a balanced scorecard of measures including customer, financial, risk and people measures. Allocation from the pool depends on performance of the franchise or function and the individual. Individual performance assessment is supported by a structured performance management framework.
Guaranteed awards are only used in very limited circumstances in accordance with the
To support a culture where good performance against a full range of measures will be rewarded. To encourage the creation of value over the long term and to align further the rewards of the participants with the returns to shareholders.
Awards are structured as performance-vesting shares. Performance is typically measured over a three year period.
Employees in certain countries are eligible to contribute to share plans which are not subject to performance conditions.
The Committee is supported in this by the Board Risk Committee (BRC)
Market Risk. The steps we take to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the
For the 2014 performance year, RBS has adopted a multi-step process which is a control function led assessment to determine performance and therefore the appropriate bonus pool by franchise and function.
Chief Executive will make a final recommendation to the Committee informed by all the previous steps in the process and his strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account.
Our Accountability Review process is an important tool in how we manage remuneration and manage adjustments to remuneration. A
• Decisions must take into account not only any financial losses, but also behavioural issues and reputational or internal costs.
January 2015 to extend clawback to seven years from the date of grant. Clawback allows for the recovery of awards that have vested and our policy is in line with the requirement under the PRA/FCA
During 2014 a number of issues and events were considered under the
As part of the annual remuneration governance process we provide details of our approach to pay and how we comply with the Remuneration
Code to the PRA and FCA. As in previous years we have received the required regulatory confirmation in order to conclude our year end remuneration process.
The quantitative disclosures below are made in accordance with Article 450 of the EU Capital Requirements Regulation in relation to employees who have been identified as MRTs. During the year, there were 904 employees identified as MRTs excluding CFG (954 employees including
Aggregate remuneration expenditure in respect of 2014 performance was as follows: CIB £m
Rest of RBS £m 2. Amounts and form of fixed and variable remuneration
The table below includes deferred remuneration awarded or paid out in 2014 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus of prior year deferred awards and long-term incentives.
Unvested at year end 32.3 366.2 4. Sign-on and severance payments
A sign-on award for guaranteed variable remuneration of £190,000 is included in the tables above. This relates to a commitment on recruitment made in respect of one new employee. No severance payments were made outside of contractual payments related to termination of employment such as pay in lieu of notice and benefits.
Employees that earned total remuneration of over €1 million in 2014 represent just 0.1% of our employees. This number reduces to 98 employees if we exclude pension and benefit funding. These employees include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows: • The CEOs responsible for each area and their direct reports.
RBS is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
Financial Reporting Council dated September 2012 (the “Code”) except in relation to provision (D.2.2) that the Group Performance and
Remuneration Committee, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how RBS has applied the main principles of the Code can be found in the Corporate governance report on pages 42 to 93.
The Board is responsible for the system of internal control that is designed to facilitate effective and efficient operations and to ensure the quality of internal and external reporting and compliance with applicable laws and regulations. In devising internal controls, RBS has regard to the nature and extent of the risk, the likelihood of it crystallising and the cost of controls.
A system of internal control is designed to manage, but not eliminate, the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against the risk of material misstatement, fraud or losses.
Sarbanes-Oxley Section 404 and the UK Corporate Governance Code Section C2. The policies that govern these processes, and reports on internal controls arising from them, are regularly reviewed by the Board and meet the requirements of the document entitled “Guidance on Risk
RBS has assessed the effectiveness of its internal control over financial reporting as of 31 December 2014 based on the criteria set forth by the
Based on its assessment, management has concluded that, as of 31 December 2014, RBS’s internal control over financial reporting is effective.
Management's report on the RBS’s internal control over financial reporting will be filed with the Securities and Exchange Commission as part of the 2014 Annual Report on Form 20-F.
As required by US regulations, management (including the Chief Executive and Chief Financial Officer) have conducted an evaluation of the effectiveness and design of RBS’s disclosure controls and procedures (as defined in the Exchange Act rules) as at 31 December 2014. Based on this evaluation, management (including the Chief Executive and Chief Financial Officer) concluded that RBS’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Standards”) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards. RBS is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the applicable NYSE Standards.
Act. The Group Audit Committee complies with the provisions of the NYSE Standards that relate to the composition, responsibilities and operation of audit committees. In May 2014, the company submitted its required annual written affirmation to the NYSE confirming its full compliance with those and other applicable provisions. More detailed information about the Group Audit Committee and its work during 2014 is set out in the Group
Committee are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group Performance and Remuneration Committee and of its compensation committee advisers in accordance with the independence tests prescribed by the NYSE Standards (iii) the NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief Executive’s remuneration. As stated at the start of this Compliance report, in the case of RBS, the Board, rather than the Group
Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Chief Executive.
The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland plc, the principal direct operating subsidiary undertaking of the company. RBS comprises the company and all its subsidiary and associates, including the Royal Bank and NatWest. Details of the principal subsidiary undertakings of the company are shown in Note 8 on page 456.
Following placing and open offers in December 2008 and in April 2009,
In addition to the segments noted above, RBS will continue to manage and report Citizens Financial Group (CFG) and RBS Capital Resolution
RCR became fully operational on 1 January 2014 with a pool of c.£29 billion of assets with particularly high long-term capital intensity, credit risk and/or potentially volatile outcomes in stressed environments. RCR
On 31 October 2014 RBS confirmed it will retain Ulster Bank following completion of the strategic review. Ulster Bank remains a core part of
RBS, offering a good strategic fit with RBS’s focused retail and commercial banking strategy.
The loss attributable to the ordinary and B shareholders of the company for the year ended 31 December 2014 amounted to £3,470 million compared with a loss of £8,995 million for the year ended 31 December 2013, as set out in the consolidated income statement on page 342.
RBS has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBS and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
In the context of prior macro-prudential policy discussions, the Board decided to partially neutralise any impact on Core Tier 1 capital of coupon and dividend payments in respect of 2014 Group hybrid capital instruments through equity issuances of c.£300 million. Consequently, approximately £300 million was raised during 2014 through the issue of new ordinary shares.
The Dividend Access Share (DAS) retirement agreement was approved at the General Meeting of shareholders held on 25 June 2014. The first dividend payment on the DAS of £320 million was made in the third quarter of 2014. The balance of £1.18 billion is to be paid by 31
RBS is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of RBS, including the products and services provided by each of its segments and the competitive markets in which they operate, are contained in the Business review on pages 105 to 107.
The reported results of RBS are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of RBS’s critical accounting policies and key sources of accounting judgments are included in Accounting policies on pages
Holdings N.V. and its banking subsidiary was renamed The Royal Bank of Scotland N.V. (“RBS N.V.”).
In October 2011, RBS completed the transfer of a substantial part of the
UK activities of RBS N.V. to the Royal Bank. Substantially all of the
September 2012. Russia, Korea and the North American businesses were transferred to the Royal Bank in 2013. During 2014, the Thailand business was transferred to the Royal Bank. Certain assets of RBS N.V.
agreed a series of restructuring measures. These include the divestment of Direct Line Insurance Group plc (completed in 2014) the sale of 80.01% of RBS’s Global Merchant Services business (completed in 2010) and the sale of substantially all of the RBS Sempra Commodities joint venture business (largely completed in 2010), as well as the divestment of the RBS branch-based business in England and Wales and the NatWest branches in Scotland, along with the direct SME customers across the UK (“UK branch-based businesses”).
Centerbridge Partners for an investment in these businesses ahead of a stock market flotation. This includes 308 RBS branches in England and
Wales. The new bank will be called Williams & Glyn, the brand RBS used for its branches in England and Wales before 1985. It is intended that
Williams & Glyn will be launched by the end of 2016.
During 2014, RBS completed the disposal of its shareholding in Direct
Line Insurance Group (DLG). This followed earlier disposals of 34.7% of
DLG shares in 2012 and 36.8% of DLG shares in 2013.
Group (CFG) resulting in 28.75% of CFG’s shares being floated. Full disposal of CFG is expected by the end of 2016.
Developing great leaders with the capability to deliver our ambition to be number one for customer service, trust and advocacy is a key priority, aligned to our People and Leadership Standards. In 2014 we rolled out
Every year since 1999, through the Our View survey, people in all our businesses have shared their thoughts about what it’s like to work at
Our Code lets everyone know what to expect of each other, what to do when unsure of a decision, and where to go for advice when needed. It’s available at rbs.com>about us>our values, or without charge, upon request, by contacting Corporate Governance and Secretariat at the telephone number listed on page 516.
RBS is making steady progress towards building a smaller, simpler organisation. In 2014, we defined clear principles and practices around how the organisation would work, and new role accountabilities for the top 150 roles across the RBS, as part of redesigning our operating model.
RBS maintains a strong commitment to providing all our people with the opportunity to grow through learning and development, which in turn helps to achieve business objectives and drive excellent customer service.
RBS’s ambition is to be number one for customer service, trust and advocacy in every one of our chosen business areas by 2020, supported by a people commitment to make RBS a great place to work. Valuing difference is therefore essential for our customers and colleagues. Our inclusion policy standard applies to all our people globally; and our strategy for diversity and inclusion sits with the Board and Executive
This year RBS has been recognised for its work on Equality, Diversity and Inclusion by retaining our Platinum ranking from Opportunity Now
Employers for Women for the eighth consecutive year; and improving upon our ranking in the Stonewall Workplace Equality Index (LGBT).
Employee Assistance Programme. We continue to enhance and promote these services, targeting those issues that we know affect our people’s ability to bring the best of themselves to work. In 2014, Lifematters Online activity improved significantly through promotion via road shows, wellbeing fairs, and internal communications; and the popularity of the
Lifematters App, which was launched in late 2013, continued to grow. In 2014 RBS also signed up to Time to Change: the UK’s biggest programme to challenge mental health stigma.
Sustainability at RBS means building our business around long term thinking and support for our customers and the communities in which they live. Our core responsibility is to obey the law and to ensure that our business is built on safe and secure financial foundations, and we have worked hard in the years since the financial crisis to achieve this position.
This underpins everything that RBS does and enables people to run their daily lives and businesses. Our position as a provider of credit supports economic growth and brings wider benefits to society.
But our ambition is to go further, to shape the world around us in a positive way. We recognise that we still have a long way to go achieve this position across our business. Sustainability is therefore not just about the many responsibilities and obligations that RBS has, but about taking leadership on a broad range of issues that are important to our stakeholders.
The Sustainable Banking Committee is responsible for overseeing and challenging how management is addressing sustainable banking and reputation issues, considering the long term interests of all stakeholder groups.
For more information on our approach and progress read the RBS
RBS’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect RBS’s future results are set out on page 474 to 492. RBS’s regulatory capital resources and significant developments in 2014 and anticipated future developments are detailed on pages 195 to 215. The liquidity and funding section on pages 216 to 230 describes RBS’s funding and liquidity profile, including changes in key metrics, the build up of liquidity reserves and the outlook for 2015.
Details are given in the Corporate governance report on pages 42 to 93.
The Corporate governance report and compliance report (pages 94 and 95) form part of this Report of the directors.
Details of the ordinary and preference share capital at 31 December 2014 and movements during the year are shown in Note 26 on the consolidated accounts.
In addition, the company issued 74 million ordinary shares of £1 each in connection with employee share schemes.
On a show of hands at a general meeting of the company every holder of ordinary shares and cumulative preference shares present in person or by proxy and entitled to vote shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote shall have four votes for every share held.
The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
The cumulative preference shares represent less than 0.014% of the total voting rights of the company, the remainder being represented by the ordinary shares.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment are set out in the company’s Articles of Association. It will be proposed at the 2015 Annual
The rights and obligations of holders of non-cumulative preference shares are set out in Note 26 on the consolidated accounts.
Bank of Scotland Group plc 2001 Employee Share Trust and The Royal
Bank of Scotland Group plc 2007 US Employee Share Trust hold shares on behalf of RBS’s employee share plans. The voting rights are exercisable by the Trustees, however, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation.
A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. All of the company’s employee share plans contain provisions relating to a change of control. Outstanding awards and options may vest and become exercisable on change of control, subject where appropriate to the satisfaction of any performance conditions at that time and pro-rating of awards. In the context of the company as a whole, these agreements are not considered to be significant.
Nathan Bostock stepped down from the Board on 28 May 2014.
Phillip Scott stepped down from the Board on 31 October 2014.
Ewen Stevenson was appointed to the Board on 19 May 2014.
Davies as a non-executive director with effect from the end of June and as Chairman from 1 September 2015.
The interests of the directors in the shares of the company at 31
December 2014 are shown on page 86. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period
In terms of section 236 of the Companies Act 2006 (the “Companies
In accordance with the UK Listing Rules, the company has entered into an agreement with HM Treasury (the ‘Controlling Shareholder’) which is intended to ensure that the Controlling Shareholder complies with the independence provisions set out in the UK Listing Rules. The company has complied with the independence provisions in the relationship agreement and as far as the company is aware the independence and procurement provisions in the relationship agreement have been complied with in the period by the controlling shareholder.
The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company at 31
9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR 9.8.4. (10) and (11) given in Additional
At the Annual General Meeting in 2014, shareholders gave authority under Part 14 of the Companies Act, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2014,
The auditors, Deloitte LLP, have indicated their willingness to continue in office. A resolution to re-appoint Deloitte LLP as the company’s auditors will be proposed at the forthcoming Annual General Meeting.
As discussed in more detail in the Group Audit Committee report, following a tender process, EY will be appointed as the company’s auditors for the financial year ending 31 December 2016, replacing
Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In the Report and Accounts, and unless specified otherwise, the term
‘company’ or ‘RBSG’ means The Royal Bank of Scotland Group plc,
‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to
‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the
US. The abbreviation ‘€’ represents the ‘euro’, the European single currency, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
Although this method may result in some non-trading activity being classified as trading, and vice versa, any resulting misclassification is not expected to be material.
Union IAS Regulation, the consolidated financial statements of RBS are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB
as adopted by the European Union (together ‘IFRS’). They also comply with IFRS as issued by the IASB.
During 2014, RBS announced a new organisational structure based on three franchises: • Personal & Business Banking, comprising two reportable segments,
• Commercial & Private Banking, comprising two reportable segments, Commercial Banking and Private Banking.
Consistent with the manner in which RBS is managed, operating profit on a non-statutory basis excludes: • Own credit adjustments; • Gain on redemption of own debt; • Write down of goodwill; • Asset Protection Scheme; • Strategic disposals; and
The statutory results include the reconciling items in the appropriate captions in the income statement.
The Royal Bank of Scotland Group plc is the holding company of a large banking and financial services group. Headquartered in Edinburgh, RBS
operates in the United Kingdom, the United States and internationally through its principal subsidiaries, the Royal Bank and NatWest. Both the
Royal Bank and NatWest are major UK clearing banks. In the United
RBS had total assets of £1,051 billion and owners' equity of £57 billion at 31 December 2014. The risk asset ratios at 31 December 2014 were a
Total capital ratio of 13.7%, a Common Equity Tier 1 capital ratio of 11.2% and a Tier 1 capital ratio of 11.2%.
On 27 February 2014, RBS announced a refreshed strategic direction with the ambition of building a bank which earns its customers’ trust by serving them better than any other bank.
The reorganised bank will be a UK-focused retail and corporate bank with an international footprint to drive its corporate business. The previously reported operating divisions are now realigned into three franchises: Personal & Business Banking (PBB) comprises two reportable segments,
UK Personal & Business Banking, including Williams & Glyn, (UK PBB)
and Ulster Bank: • UK Personal & Business Banking (UK PBB) offers a comprehensive range of banking products and related financial services to the personal and small business market. It serves customers through a number of channels including: the Royal Bank and NatWest network of branches and ATMs in the UK, telephony, online and mobile. UK
PBB is committed to serving customers well, making banking easier and convenient whilst ensuring that we do business in an open, honest and sustainable manner.
• Ulster Bank is a leading retail and commercial bank in Northern
Commercial & Private Banking (CPB) comprises two reportable segments, Commercial Banking and Private Banking: • Commercial Banking is a leading provider of banking, finance and risk management services to the commercial, mid-corporate and corporate sector in the UK. It offers a full range of banking products and related financial services through a nationwide network of relationship managers, telephone and internet channels. The product range includes invoice finance through the RBSIF brand and asset finance through the Lombard brand.
Citizens Financial Group (CFG) provides financial services primarily through the Citizens and Charter One brands. CFG is engaged in retail and corporate banking activities through its branch network in 11 states in the United States and through non-branch offices in other states. RBS
RBS will complete the disposal of CFG by 2016. CFG has been reclassified as a discontinued operation, it continues to be presented as reportable segment.
Services 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. 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 RBS’s purchasing power and is the centre of excellence for managing large-scale and complex change. For reporting purposes,
Services costs are allocated to the operating segments above. It is not deemed a reportable segment.
In October 2012, Santander UK plc withdrew from its agreed purchase of the UK branch-based businesses. In September 2013, RBS reached an agreement with an investor consortium led by Corsair Capital and
Wales along with the related direct SME customers across the UK (“UK
branch-based businesses”).The new bank will be called Williams & Glyn, the brand RBS used for its branches in England and Wales before 1985.
In September 2014, RBS completed an initial public offering of 28.75% of
CFG common stock and currently has an interest of 70.5%. It is intended that RBS will cede control of CFG by the end of 2015, with full disposal completed by the end of 2016.
In the personal and small business banking business, the bank competes with a range of providers including UK banks and building societies, major retailers and life assurance companies, as well as the UK
In the UK credit card market large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and digital channels.
evolving channel preferences. Customers have increasingly focused on the use of internet and mobile as sales and service channels for certain types of products. Therefore, competitive position and performance in the sector increasingly depends on the possession of user-friendly, diverse and efficient online solutions. Although conveniently located branches are still important, RBS faces competitive pressure to adjust its branch formats to meet changing customer expectations and to manage its branch footprint as over-the-counter transaction volumes decline. In terms of product offering, the industry trend is to limit the number of products and present the product structure and costs in a clear and transparent manner.
Scotland International competes with other UK and international banks to offer offshore banking services as well as domestic banking services in the Channel Islands, Gibraltar and the Isle of Man. Coutts and Adam &
retains a controlling interest in CFG. CFG competes in the New England,
Banking offers its corporate, not-for-profit and institutional clients a broad range of wholesale banking products and services including treasury services, specialty finance, foreign exchange, capital markets and debt syndication.
Set out below is a summary of certain risks which could adversely affect the Group; it should be read in conjunction with the Capital and risk management section of the Business review (pages 168 to 334). This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included on pages 474 to 492.
Group becoming a safer and more competitive, customer focused and profitable bank. These initiatives include, among other things, the execution of the Group’s strategic plan announced in 2013 and 2014 and which includes the implementation of its new divisional and functional structure (the “2013/2014 Strategic Plan”) as well as a major investment programme to upgrade and rationalise the
Group, Inc. (“CFG”) and the “higher risk and capital intensive assets”
° The implementation of the ring-fence will likely result in considerable operational and legal difficulties as it will require significant restructuring of the Group and its businesses with the possible transfer of a large number of customers between new or existing legal entities. This implementation exercise will be complex, costly, will result in significant changes for the Group’s customers and there is no certainty that the Group will be able to implement the ring-fence successfully or in time to meet the regulatory deadline of 2019.
Group’s corporate structure, the delivery of its business activities in the UK and other jurisdictions as well as the Group’s business model. Although the goals of the Transformation Plan are for the
Transformation Plan is likely to be disruptive and increase operational and people risks for the Group. In addition, the
Group’s structure and business as a result of the implementation of the Transformation Plan, may result in increased competitive pressures on the Group.
° Substantial investments are being made in the Group’s IT and operational structure through targeted investment and rationalisation programmes as part of the IT and Operational
(Banking Reform) Act 2013 in the UK, (the “Banking Reform Act 2013”) including the new Senior Persons Regime, may further hinder the Group’s ability to attract or retain senior management and other skilled personnel. Following the implementation of CRD IV and the Government’s views on variable compensation, there is now a restriction on the Group’s ability to pay individual bonuses greater than fixed remuneration, which may put the Group at a competitive disadvantage. An inability to attract and retain qualified personnel could have an adverse impact on the implementation of the Group’s strategy and regulatory commitments.
Although the Group settled a number of legal proceedings and regulatory investigations during 2014, the Group is expected to continue to have material exposure to litigation and regulatory proceedings in the medium term. The Group also expects greater regulatory and governmental scrutiny for the foreseeable future particularly as it relates to compliance with historical, existing and new laws and regulations.
• The Group’s business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of increasingly stringent regulatory requirements relating to capital adequacy, including those arising out of the implementation of Basel III or future proposals and the uncertainty arising from the consistent implementation of such rules in the various jurisdictions in which the Group operates.
• The Group’s ability to meet its obligations including its funding commitments depends on the Group’s ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a reasonable cost, could adversely affect the Group’s financial condition and results of operations. Furthermore, the Group’s borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and, to a lesser extent the UK Government’s credit ratings.
UK and other jurisdictions in which the Group operates which may result in further legislative changes.
Government of all or a portion of its shareholding in the Company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK
• The Group is required to make planned contributions to its pension schemes and to compensation schemes in respect of certain financial institutions (such as the UK Financial Services
• The deterioration of the prevailing economic and market conditions and the actual or perceived failure or worsening credit of the Group’s counterparties or borrowers and depressed asset valuations resulting from poor market conditions, have adversely affected the
Key financials Non-statutory Statutory for the year ended 31 December £m £m £m £m £m £m
Notes: (1) Total income on a non-statutory basis excludes own credit adjustments, gain on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS MI. (2) Profit/(loss) on a non-statutory basis excludes own credit adjustments, gain on redemption of own debt, write down of goodwill, Asset Protection Scheme, strategic disposals and RFS MI. (3) Cost:income ratio on a non-statutory basis represents operating expenses including litigation and conduct costs and integration and restructuring costs and excluding write down of goodwill and RFS
MI, expressed as a percentage of total income as defined in (1) above. On a statutory basis, cost:income ratio represents operating expenses expressed as a percentage of total income. (4) Adjusted cost:income ratio on a non-statutory basis represents operating expenses excluding litigation and conduct costs and integration and restructuring costs, write down of goodwill and RFS MI, expressed as a percentage of total income as defined in (1) above. (5) Adjusted earnings/(loss) per ordinary and equivalent B share is based on earnings from continuing operations adjusted for own credit adjustments, gain on redemption of own debt, write down of goodwill, Asset Protection Scheme and strategic disposals. Adjusted earnings per ordinary and equivalent B share excludes the participation rights of the dividend access share. (6) Funded balance sheet represents total assets less derivatives. (7) Comprises deposits by banks and customer accounts. (8) Common Equity Tier 1 ratio with effect from 1 January 2014. (9) The results of Citizens on a non-statutory basis are included in the appropriate captions and are included in discontinued operations in the statutory results.
Summary consolidated income statement for the year ended 31 December 2014
Gain on redemption of own debt 20 175 454 — — —
Notes: (1) On a statutory basis, operating profit/(loss) excludes the results of Citizens. (2) Included within Citizens discontinued operations are the results of the reportable operating segment Citizens Financial Group (CFG), the loss provision for CFG on transfer to disposal groups, certain
On a non-statutory basis, operating profit excluding own credit adjustments, gain on redemption of own debt, write down of goodwill, strategic disposals and RFS MI and including the results of Citizens, which is classified as a discontinued operation improved to £3,503 million for 2014, compared with an operating loss of £7,500 million in 2013, benefiting from improved operating results in core businesses together with significant impairment releases in Ulster Bank and RCR.
On a statutory basis, operating profit was £2,643 million compared with a loss of £8,849 million in 2013. This included a reduction of £929 million in goodwill write down. The loss from discontinued operations of £3,445 million reflected a £3,994 million fair value adjustment in relation to the reclassification of CFG to disposal groups.
offset by lower income from trading activities in CIB, in line with its smaller balance sheet and reduced risk profile.
On a non-statutory basis, net interest income increased by 3% to £11,274 million with improvements in deposit margins in PBB and CPB supported by a larger balance sheet in CFG through purchased portfolios, increased investments and organic growth.
On a statutory basis, net interest income increased by 3% to £9,258 million which excluded the impact of CFG.
On a non-statutory basis, non-interest income declined by £1,527 million, or 18%, to £6,923 million, principally reflecting a 46% reduction in income from trading activities in line with CIB’s smaller balance sheet and reduced risk profile and lower gains on the disposal of available-for-sale securities in RBS Treasury which were down £575 million to £149 million
Net fees and commission on both a non-statutory and statutory basis fell by 6% principally reflecting declines in CIB and Commercial Banking.
On a statutory basis, non-interest income declined by £1,828 million or 24% to £5,892 million including lower gains from the redemption of own debt of £20 million compared with £175 million in 2013.
On a statutory basis, operating expenses decreased by £3,607 million or 21% to £13,859 million, including write down of goodwill of £130 million in 2014 compared with £1,059 million in 2013.
(statutory basis - 0.4%) of gross loans and advances to customers
Non-operating items shown separately on a non-statutory basis included a charge of £146 million (2013 - £120 million) for own credit adjustments.
Basic earnings per ordinary and equivalent B share from continuing operations was 0.5p per share compared with a loss of 85.0p per share in 2013. Adjusted earnings per ordinary and equivalent B share from continuing operations was 0.8p per share compared with a loss of 77.7p per share in 2013.
On a statutory basis, operating loss for the year was £8,849 million compared with £6,052 million in 2012. This reflected £4,529 million lower own credit adjustment partially offset by a £1,041 million higher write-off of goodwill.
On a statutory basis, total income increased by 14% to £16,737 million in 2013 primarily reflecting a lower accounting charge for own credit of £120 million in 2013 compared with £4,649 million in 2012.
On a statutory basis, net interest income decreased by 4% to £9,017 million and excluded the impact of Citizens.
On a non-statutory basis, net interest margin improved by 9 basis points to 2.01% and on a statutory basis by 10 basis points to 1.88% This was driven by moves to reprice deposits in a number of segments, partially offset by a roll-off in higher yielding securities.
On a statutory basis, non-interest income increased 44% to £7,720 million from £5,359 million in 2012. This included a loss on own credit adjustments of £120 million (2012 - £4,649 million), net gain on redemption of own debt of £175 million (2012 - £454 million) and movements in the fair value of the Asset Protection Scheme resulting in a £44 million charge in 2012.
On a non-statutory basis, operating expenses increased by £591 million, or 3% to £18,510 million operating expenses excluding conduct and litigation costs and integration and restructuring costs decreased 2% to £14,010 million. This was primarily due to staff costs down 7% as headcount fell by 4% to 114,900, principally in UK PBB, Ulster Bank, CIB
and Non-Core driven by exiting staff and lower central support requirements on run-down partially offset by the write-down of other intangible assets, including software, of £344 million related to CIB.
Litigation and conduct costs of £3,844 million (2012 - £2,191 million), reflected a charge for PPI of £900 million in 2013, a charge of £550 million for redress in relation to certain interest-rate hedging products sold to small and medium-sized businesses classified as retail clients under
FSA rules and charges relating to regulatory and legal actions of £2,394 million, these charges primarily relate to various claims and conduct related matters affecting RBS companies, primarily those related to mortgage-backed securities and securities related litigation.
Integration and restructuring costs were £656 million compared with £1,415 million in 2012 with most of the costs relating to the Retail transformation, a reduction in the size of the CIB segment and programme costs for the EC mandated disposal of certain UK branchbased businesses.
(£4,490 million), impairment losses fell by 25% to £3,942 million with significant improvements in Non-Core, UK PBB and Ulster Bank partially offset by increases in CFG and CIB.
On a non-statutory and statutory basis, loan impairments represented 2.0% of gross loans and advances to customers excluding reverse repos compared with 1.2% (statutory basis 1.1%) in 2012.
On a non-statutory basis, risk elements in lending at 31 December 2013 represented 9.4% (statutory basis 9.5%) of loans and advances excluding reverse repos, compared with 9.1% (statutory basis 9.1%) a year earlier. On a non-statutory and statutory basis, provision coverage was 64% compared with 52% at 31 December 2012.
The Asset Protection Scheme, which the RBS exited from in 2012, was accounted for as a credit derivative and movements in the fair value of the contract included in income from trading activities. The APS fair value charge was £44 million in 2012.
The gain on strategic disposals of £161 million primarily relates to the disposal of RBS’ remaining interest in WorldPay. In 2012 the gain of £113 million primarily related to the disposal of RBS Aviation Capital.
Basic loss per ordinary and equivalent B share from continuing operations was 85.0p per share compared with 58.9p per share in 2012.
Gross yield on interest-earning assets of the banking business (6) 3.04 3.07 3.12 3.03 3.04 3.07
Cost of interest-bearing liabilities of the banking business (1.13) (1.38) (1.49) (1.24) (1.47) (1.57)
Net interest margin of the banking business (8) 2.23 2.01 1.92 2.13 1.88 1.78
Customer accounts: savings deposits - UK 85,649 710 0.83 93,245 1,266 1.36
Total interest-bearing liabilities - banking business (1,2,3,5) 359,907 4,067 1.13 420,090 5,800 1.38
Loans and advances to banks - UK 34,592 216 0.62 42,466 261 0.61
Loans and advances to customers - UK 252,695 10,792 4.27 256,728 11,022 4.29
Total interest-bearing liabilities - banking business (1,2) 312,044 3,879 1.24 374,645 5,523 1.47
Analysis of change in net interest income - volume and rate analysis continued 2013 over 2012 - non-statutory 2013 over 2012 - statutory
Non-interest income Non-statutory (1) Statutory £m £m £m £m £m £m
Note: (1) Non-statutory basis excludes movements in own credit adjustments, gain on redemption of own debt, Asset Protection Scheme, strategic disposals and RFS MI and includes Citizens which is classified as a discontinued operation on a statutory basis.
Net fees and commissions on both a statutory basis and a non-statutory basis fell by 6% principally reflecting declines in CIB and Commercial
On a statutory basis, the decrease in other operating income reflected lower charges in relation to own credit adjustments of £106 million
(2013 - £155 million) and a loss from RFS MI of £18 million (2013 - gain of £111 million).
On a statutory basis, net fees and commissions fell by 8%.
On a statutory basis, income from trading activities increased by £1,112 million to £2,571 million principally due the lower charge in relation to own credit adjustment.
On a non-statutory basis, other operating income decreased £978 million to £1,281 million primarily reflecting losses on disposal and value adjustments in Non-Core. In addition, the disposal of RBS Aviation
Capital in June 2012 resulted in a £392 million reduction in operating lease income.
On a statutory basis, the increase in other operating income predominantly reflected the lower accounting charges for own credit adjustments as RBS’s credit profile strengthened.
Liability management exercises undertaken during 2013 resulted in a net gain of £175 million (2012 - £454 million).
Operating expenses Non-statutory (1) Statutory £m £m £m £m £m £m
Write down of other intangible assets 156 344 106 393 344 106
Staff costs as a percentage of total income 35% 35% 33% 38% 36% 49%
Protection Insurance redress (£650 million) in PBB, potential costs following investigations into the foreign exchange market (£720 million) in
Litigation and conduct costs totalled £3,844 million, compared with £2,191 million in 2012. This included charges of £2,394 million of regulatory and litigation provisions recorded during the year, primarily relating to mortgage-backed and other securities in the US, a charge for
On a statutory basis, operating expenses increased by £1,709 million, or 11%, including the write down of goodwill and other intangible assets of £1,403 million (2012 - £124 million) which included £1,059 million relating to CIB following an impairment review.
Note: (1) Non-statutory basis includes Citizens which is classified as a discontinued operation on a statutory basis.
On a statutory basis, net impairment releases of £1,352 million were recorded in 2014 compared with a net impairment charge of £8,120 million in 2013.
Core loan impairments fell by £482 million (35%) to £882 million, mainly as a result of continued improvement in retail mortgage debt-flow and in recovery trends. UK PBB loan impairments fell by £243 million (33%), primarily from lower default levels.
Excluding the impact of the creation of RCR, Non-Core loan impairments fell by £792 million to £1,528 million, reflecting the continued reduction in the overall portfolio.
The tax charge in the year ended 31 December 2013 reflects losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland), a reduction in the carrying value of the deferred tax asset in respect of
UK losses and the effect of the reduction of 3% in the rate of UK
In order to present a more complete picture of funding, operational and business costs of the franchises and operating segments and to improve the transparency of the operating performance of the segments, the following reporting changes have been implemented: A number of previously reported reconciling items (Payment Protection
As part of its internal reorganisation, RBS has centralised all services and functions. The costs relating to Services and Functions previously reported as direct expenses in the divisions are now reallocated to businesses using appropriate drivers and reported as indirect expenses in the segmental income statements.
RWAs. Previously, notional equity was allocated at 10% of RWAs after capital deductions (RWAe). This has been revised to 12% of RWAs across all businesses.
Operating profit/(loss) on a non-statutory basis includes the results of Citizens which are included in discontinued operations in the statutory results.
Banking - UK PBB) and Ulster Bank reportable segments. PBB supports individuals in managing their personal and business banking, with a full range of financial services and advice. Through the RBS, NatWest, and Ulster Bank brands, PBB serves over 18 million personal and business customers in the UK and Ireland. Customers can choose how they manage their finances through access to branches, online banking, fixed and mobile technology and one of the largest ATM networks in the UK and Ireland.
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Includes £2 million in 2013 pertaining to the creation of RCR and related strategy. (3) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of segmental RWAs); RWAs in 2013 and 2012 are on a Basel 2.5 basis. (4) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £46.6 billion and the return on equity 16%.
Throughout 2014, the business has made steady progress in making banking fairer and simpler for its customers through a number of fair banking initiatives and technology investments. Progress made in 2014 by UK PBB included: Helping customers with their needs: • As the UK’s biggest lender for SMEs, UK PBB continued to offer support to small business customers. Following storms and floods in
February 2014, the business introduced a £250 million interest free loan fund for small business to help them get themselves back on their feet. An additional £1 billion Small Business Fund was launched to support small businesses with fee free, fixed rate loans.
• UK PBB has been able to help more customers in 2014. With additional mortgage advisors recruited (up 18% from 630 to 744), gross mortgage lending increased by 37% year on year. The business’s commitment to helping its customers get on and move up the property ladder has been a success and it has now helped almost 15,000 customers buy their first or next home with the government-backed Help to Buy schemes since their launch in May
• Business banking arrangement fees and surprise overdraft fees have been replaced with fixed rates on new business loans and text alerts when customers are overdrawn to keep them on track.
• RBS became the first of the main high street banks to ensure all of its savers get the same or better deals as new customers. Those deals are available regardless of how customers choose to bank
International awards. UK PBB now has over 6.9 million online and mobile banking users, with the mobile app being used more than 23 million times every week.
• Further improvements have been made to the mobile banking application and personal customers are now able to use the new industry-wide Pay-m application that allows customers to receive payments from customers of other participating banks just by providing their mobile number. Customers will no longer have to divulge their sort code and account number to receive payment.
Net interest income increased by £193 million or 4% with strong improvements in deposit margins and volume growth. This was partly offset by lower asset margins linked to the continued change in the mix of the loan book towards secured lending and lower mortgage margins.
Operating expenses decreased by £174 million or 4%, reflecting lower restructuring and litigation and conduct costs. Excluding these items, expenses declined by £107 million or 3% supported by a 7% reduction in headcount and lower Financial Services Compensation Scheme (FSCS)
Payment Protection Insurance redress (£650 million) and other conduct provisions in respect of legacy investment products and packaged account sales.
RWAs to decline of 16% to £42.8 billion with improved credit quality and lower unsecured balances.
PBB, costs increased primarily because of a higher FSCS levy and other regulatory charges totalling £118 million in the year, conduct-related provisions of £63 million and additional technology investment of £45 million.
Help To Buy scheme. Gross mortgage lending increased to £8.9 billion in
Direct costs increased by 13% due primarily to higher FSCS levy and other regulatory charges. This was partly offset by lower staff costs due to a reduction in headcount of 2,000 in UK PBB. Indirect costs increased by 4%, largely due to investment in technology.
Notes: (1) 31 December 2014 includes £11.4 billion in relation to legacy tracker mortgages. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (3) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January 2014 were £28.2 billion. (4) 31 December 2014 includes £10.7 billion in relation to legacy tracker mortgages.
The transfer of £4.4 billion of gross assets to RCR on 1 January 2014 and subsequent deleveraging has enabled Ulster Bank to focus on the development of its core business. This has had a material impact on the comparison of 2014 financial performance with 2013.
Considerable progress was made to improve Ulster Bank’s service offering and to enhance the customer experience. The bank continued to re-shape its distribution network during 2014 while online and mobile banking services were further developed to support the upward trend in digital transactions, which now represent 57% of total transaction volumes. The bank’s ‘Web Chat’ initiative, launched in 2012, is now handling over 15,000 customer enquiries each month. Ulster Bank in
The investment made to support customers in financial difficulty has resulted in a sustained reduction since Q1 2013 in the number of mortgage customers in arrears of 90 days or more and an increase in the number of business customers returning to mainstream management.
Profit before impairment losses was £241 million, £76 million higher than
PPI and Interest Rate Hedging Products. These benefits were partly offset by higher regulatory charges and levies including a new bank levy introduced in the Republic of Ireland, of £15 million, and the impact of a realignment of costs following the creation of RCR, £44 million.
The transfer of assets to RCR coupled with improved credit quality across key portfolios resulted in a 44% reduction in risk elements in lending.
Provision coverage reduced from 64% to 57% during 2014 reflecting the further de-risking of the balance sheet coupled with the impact of an increase in asset values. RWAs decreased by 22% reflecting an improvement in credit metrics and a reduced loan book.
Excluding the impact of the creation of RCR, operating result improved by £435 million or 38% primarily due to a higher income and lower impairment losses on the mortgage portfolio.
Payment Area, £18 million, an investment of £10 million in programmes to support customers in financial difficulty and an accelerated depreciation charge of £12 million. Litigation and conduct costs were £57m higher in 2013 due to increased provisions made for legacy issues including PPI and interest rate hedging product redress and administration.
Banking’s customers range from UK businesses with an annual turnover of £2 million up to large UK corporations, including real estate and institutional customers.
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Includes £123 million in 2013 pertaining to the creation of RCR and related strategy.
- private sector education, health, social work, recreational and community services 6.9 7.9 7.7 - wholesale and retail trade repairs 6.0 5.8 6.0
Commercial Banking implemented a simplified and delayered management structure in 2014. With over 120 products removed from sale and over 400 process improvements implemented, the segment is becoming easier to do business with.
Tangible progress is being made via a bank-wide strategic lending programme which will transform the end-to-end customer lending experience, ensuring faster decisions and a smoother application process. Over the year there has been an improvement in the Net
Private Banking continues to yield benefits, with a pilot resulting in over 140 referrals between the businesses.
Commercial Banking recorded an operating profit of £1,290 million compared with £530 million in the prior year. This was driven by lower net impairment losses, down £576 million, lower operating expenses, down £131 million and higher income, up £53 million. Adjusted operating profit increased by £663 million to £1,495 million.
Net interest income increased by £79 million or 4%, largely reflecting repricing activity on deposits partly offset by the impact of reduced asset margins, a result of the net transfer in of lower margin legacy loans (after the cessation of Non-Core).
Institutional Banking revenue share income, restructuring fees and the transfer out of commercial cards income to UK Personal & Business
Net impairment losses declined £576 million to £76 million, as 2013 included the impact of the creation of RCR. Excluding the RCR charges, underlying impairments declined by £453 million with fewer individual cases across the portfolio, reduced collectively assessed provisions and higher latent provision releases, reflecting improved credit conditions.
The loan:deposit ratio increased to 98%, from reduced deposits, down 4%, reflecting the rebalancing of the bank’s liquidity position, and a 2%
Operating profit decreased by £218 million to £530 million (a return on equity of 4.9%), driven by lower income, higher impairments and indirect costs partly offset by lower restructuring, litigation and conduct costs.
Net interest income was in line with 2012 as increased income from repricing initiatives and higher average lending volumes offset the impact of the lower rate environment on deposit returns and the non-repeat of 2012 deferred income recognition revisions (£28 million).
The loan:deposit ratio increased by 100 basis points primarily from lower deposit volumes following re-pricing initiatives in line with the wider bank funding strategy.
Key points During 2014, Private Banking has continued to provide excellent service to clients against the background of a major business review and significant organisational change.
Private Banking set out a new vision and strategic direction in August.
Since September, good progress has been made towards the sale of the business outside the British Isles. A primary focus of the transaction is to execute the deal with minimal disruption for clients and staff.
Private Banking has made tangible steps towards working more closely with Commercial Banking, which includes an energetic approach to client cross referrals as well as functional synergies.
Improvements are evidenced by several industry awards including: ‘Best private bank in the UK’ (PWM/The Banker) and ‘Most innovative digital offering’ (Private Banker International). Coutts continues to be recognised as a leader in philanthropy, with its’ $1 million donors’ report receiving significant media coverage, and its expertise as an adviser for family businesses and entrepreneurs remains a strong point of differentiation.
Net interest income increased by £33 million or 5% as improved deposit margin reflected the full year impact of the 2013 deposit re-pricing initiative.
Non-interest income was down £28 million or 7%, with lower transactional and investment activity due to subdued market volatility across the international business.
Operating expenses declined by £173 million or 16% primarily driven by lower restructuring and litigation and conduct costs. Adjusted operating expenses declined by £48 million or 5% to £828 million, reflecting lower technology costs and one-off benefits from the exit of a number of
Assets under management decreased by £1.4 billion or 5% to £28.3 billion, driven by low margin custody outflows.
There was an operating loss of £61 million in 2013 compared with an operating profit of £141 million in 2012, principally driven by an increase in litigation and conduct costs, with lower income offsetting lower direct costs and lower impairments.
Non-interest income fell by 7% to £419 million due to the non-repeat of the disposal of the Latin American, Caribbean and African businesses for a profit of £15 million in the first half of 2012 together with a decline in fee income in the International business.
Total expenses increased by £170 million driven by litigation and conduct costs increase of £199 million, partly offset by lower direct costs as a result of reduced headcount, continued discretionary cost management and the non-recurrence of two regulatory fines totalling £26 million incurred during 2012. This was partially offset by a one-off UK tax treaty charge in the International business.
Client assets and liabilities managed by the division declined by 2%, with a £1.7 billion reduction in deposits following re-pricing initiatives in the UK
in line with the wider bank funding strategy. Assets under management increased by 3% due to positive market movements. Lending was 2%
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of the RWAs; RWAs in 2013 and 2012 are on a Basel 2.5 basis). (3) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £108.9 billion and the return on equity (4.8%).
Total loans and advances to customers (excluding reverse repos) 72.8 68.2 79.6
Net loans and advances to banks (excluding reverse repos) (1) 16.9 20.5 21.4
magazine’s Sterling Bond House of the year award in Q4 2014. The drive to concentrate on core products is evidenced by the 27% fall in RWAs
(compared with 1 January 2014 on a CRR basis) and the 22% year on year fall in adjusted expenses (excluding litigation and conduct costs and restructuring costs).
Total income declined by 21%, reflecting reduced deployment of resources and difficult trading conditions, characterised by subdued levels of client activity and limited market volatility: • Rates suffered from a weak trading performance in Q4 2014. This, combined with subdued client flow and balance sheet de-risking, reduced income.
• Currencies income declined in a highly competitive market as both market volatility and client activity remained subdued for much of the year. Some volatility returned in Q4 2014, boosting income in the
• Income from Global Transaction Services dipped by 7%, primarily as a result of the disposal of the Global Travel Money Service business in Q4 2013. The underlying business was stable.
• Run-off and recovery businesses incurred a loss of £103 million.
Net impairment releases totalled £9 million compared with a net impairment charge of £680 million in 2013, reflecting a reduction in latent loss provisions and a low level of new impairments. This contrasted with 2013 which included substantial impairments related to the establishment of RCR.
Funded assets fell by 10% reflecting the focus on core product areas including the wind-down of Credit Trading and the US ABP businesses
RWAs were managed down by £40.0 billion from £147.1 billion on 1
January 2014 to £107.1 billion on 31 December 2014. The 27% reduction was driven by a sustained programme of risk and business reductions, notably in Credit due to the wind-down of the US asset-backed products business (down £15 billion over the same period to £4 billion).
The reduction in Portfolio income of 14% reflected a smaller balance sheet.
The increase in impairments mainly related to the creation of RCR (£355 million) in addition to a number of single name provisions.
December 2012 and risk weighted assets at £120.4 billion were down £37.4 billion.
Central items not allocated represented a charge of £850 million compared with a credit of £647 million in 2013. The change includes lower gains on the disposal of available-for-sale securities in Treasury, which were down £575 million to £149 million in 2014, along with a £309 million higher restructuring charge relating to the Williams & Glyn franchise. In addition 2014 includes a charge of £247 million write-down of previously capitalised software development expenditure and £134 million lower income from investments in associates. In addition, unallocated Treasury funding costs, including volatile items under IFRS, were £437 million in the year versus £282 million in 2013.
Central items included a property-related impairment of £65 million which was offset by the non-repeat of £175 million costs incurred in 2012 in relation to the technology incident along with income recognised in relation to RBS’s share of profit from its stake in Saudi Hollandi.
Notes: (1) Excluding restructuring costs and litigation settlement. (2) Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of RWAs); RWA’s in 2013 and 2012 are on a Basel 2.5 basis.
Net loans and advances to customers 93.1 83.2 82.4 59.6 50.3 51.0
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) RWAs in 2013 and 2012 are on a Basel 2.5 basis. RWAs on the end-point CRR basis as at 1 January were £60.6 billion ($100.2 billion). (3) From Q1 2015 business segment return on equity will be calculated based on operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 13% of the monthly average RWAes). At 31 December 2014 the RWAes on this basis were £68.6 billion and the return on equity 6.1%.
December 2016, RBS disposed of 29.5% of its interest in Citizens
The results for 2014 are not directly comparable to prior periods; prior year results exclude Non-Core operations and include indirect expenses.
In the context of the planned disposal of Citizens Financial Group, indirect expenses are no longer allocated to the segment.
Operating profit increased by £156 million ($306 million), or 26%, to £761 million ($1,253 million), reflecting the Q2 2014 gain on the sale of the
($24 million)), was up 11% driven by an increase in net interest income and a decrease in impairment losses partially offset by lower non-interest income.