Sources of risk Country risk has the potential to affect all parts of the Group’s portfolio across wholesale and retail activities that are directly or indirectly linked to the country in question.
Governance* The Group’s country risk framework is set by the Executive Risk Forum (ERF). This body delegates authority to the Group Country Risk Committee (GCRC) to decide on country risk matters, including risk appetite, risk management strategy and framework, risk exposure and policy, as well as sovereign ratings, sovereign loss given default rates and country Watchlist colours. The GCRC, which is chaired by the Head of Global Country Risk (GCoR) and includes representatives of divisions with country risk exposures, can escalate issues when necessary to the ERF.
For further information on governance, refer to the Risk governance section on page 175.
Risk management* Risk appetite setting Country risk appetite was re-set for all countries based on the enhanced country risk appetite framework, introduced in late 2012. This framework has “top-down” and “bottom-up” components.
The “top-down” component is guided by the Group’s global risk appetite; each country’s internal sovereign rating and its strategic importance to the Group; the composition of the Group’s portfolio, as defined by tenors and clients; the funding profile and an assessment of the potential for losses arising from possible key country risk events. This component provides a clear structure for the consideration of downside scenarios, the identification of countries that pose material concentration risks to the Group, as well as possible management actions.
“Bottom-up” analysis includes risk/return performance together with reputational and regulatory risk.
A monthly report that summarises and discusses the Group’s key country risks and trends is produced for the Group Board.
Detailed portfolio reviews are conducted to ensure that country portfolio compositions remain aligned with the Group’s country risk appetite, in light of economic and political developments.
Risk measurement* In this section, country exposure includes wholesale and retail onbalance sheet exposure (drawn amounts under lending facilities, mark-tomarket derivatives positions and issuer-risk debt securities positions in the banking book and trading book) together with off-balance sheet exposure (contingent obligations and undrawn commitments).
CDS contracts are used by the Group to hedge either entire portfolios or specific individual exposures. These transactions are subject to regular margining, which usually takes the form of cash collateral. For European peripheral sovereigns, credit protection is purchased from a number of major European banks, mostly outside the country of the reference entity. In a few cases where protection was bought from banks in the country of the reference entity, giving rise to wrong-way risk, this risk is mitigated through specific collateralisation and monitored weekly.
The country of operation is the country where the main operating assets of a legal entity are held, or where its main cash flows are generated, taking account of the entity’s dependency on subsidiaries' activities. Previously, exposures in this section were reported by country of incorporation. The new basis provides a better reflection of the country risks taken by the Group and is more in line with internal risk management. Prior years’ information has been revised.
Countries shown are those which had ratings of A+ or below from Standard and Poor’s, Moody’s or Fitch at 31 December 2013, where the Group’s balance sheet exposure (as defined in this section) to counterparties operating (or individuals residing) in them exceeded £1.0 billion. Also included are selected eurozone countries.
Debt securities - Comprise securities classified as available-for-sale (AFS), loans and receivables (LAR), held-for-trading (HFT) and designated as at fair value through profit or loss (DFV). All debt securities other than LAR securities are carried at fair value. LAR debt securities are carried at amortised cost less impairment. HFT debt securities are presented as gross long positions (including DFV securities) and short positions per country. Impairment losses and exchange differences relating to AFS debt securities, together with interest, are recognised in the income statement. Other changes in the fair value of AFS securities are reported in AFS reserves, which are presented gross of tax.
Derivatives (net) - Comprise the mark-to-market (mtm) value of such contracts after the effect of legally enforceable netting agreements in line with the corresponding regulatory capital models, but before the effect of collateral.
Securities financing transactions (SFT) (net) - Comprise the mtm value of the cash and securities that are due to the Group at a future date under repurchase agreements, reverse repurchase agreements, stock borrowing, stock lending and equity financing transactions, after the effect of collateral intrinsic to the transaction and legally enforceable netting agreements. Counterparty netting is applied as per the corresponding regulatory capital approach. Additional collateral called to offset mtm positions (variation margin) is not included.
Balance sheet - Comprises lending, debt securities, derivatives (net) and SFT (net) exposures, as defined above.
Total - Comprises balance sheet and off-balance sheet exposure, as defined above.
Credit default swaps (CDSs) - Under a CDS contract, the credit risk on the reference entity is transferred from the buyer to the seller. The column ‘fair value’ (or ‘mtm value’) represents the balance sheet carrying value of the resulting exposure. The mtm value of CDSs is included in derivatives against the counterparty of the trade, as opposed to the reference entity. The notional is the par value of the credit protection bought or sold and is included against the reference entity of the CDS contract.
Exposures relating to credit derivative product companies and related hedges as well as Nth-to-default basket swaps have been excluded, as they cannot be meaningfully attributed to a particular reference entity or country. Exposures to CDPCs are disclosed on page 299.
Country exposure Summary of country exposures CDS Lending Debt securities Off- notional Central Other Other Total AFS & HFT Net Balance balance Total less fair Gross Govt banks banks FI Corporate Personal lending LAR (net) Derivatives SFT sheet sheet exposure value Derivatives SFT 2013 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Ireland 39 116 13 319 17,440 17,667 35,594 233 248 900 73 37,048 2,711 39,759 (166) 2,476 2,329 Spain — — 4 15 2,924 318 3,261 4,162 853 989 — 9,265 1,981 11,246 (444) 4,128 2,126 Italy — 22 64 548 968 26 1,628 519 1,240 1,774 — 5,161 1,962 7,123 (734) 7,183 527 Portugal — — — 56 327 6 389 93 43 351 — 876 280 1,156 (163) 418 614 Greece — 1 1 1 110 14 127 — — 260 — 387 38 425 (12) 455 — Cyprus — — — — 183 10 193 — 2 16 — 211 18 229 — 16 — Eurozone periphery 39 139 82 939 21,952 18,041 41,192 5,007 2,386 4,290 73 52,948 6,990 59,938 (1,519) 14,676 5,596
Ireland 42 73 99 395 18,185 17,890 36,684 424 363 1,213 503 39,187 2,855 42,042 (71) 3,244 4,915 Spain — 6 1 73 4,269 340 4,689 4,871 503 1,754 — 11,817 1,592 13,409 (375) 5,694 610 Italy 9 21 222 707 1,533 23 2,515 977 630 2,358 — 6,480 2,669 9,149 (548) 9,653 3 Portugal — — — 128 450 7 585 180 35 514 — 1,314 332 1,646 (126) 618 26 Greece — 7 — 1 180 13 201 — 1 363 — 565 40 605 (31) 609 — Cyprus — — — — 103 14 117 — 4 32 — 153 14 167 — 33 — Eurozone periphery 51 107 322 1,304 24,720 18,287 44,791 6,452 1,536 6,234 503 59,516 7,502 67,018 (1,151) 19,851 5,554
CDS Lending Debt securities Off- notional Central Other Other Total AFS & HFT Net Balance balance Total less fair Gross Govt banks banks FI Corporate Personal lending LAR (net) Derivatives SFT sheet sheet exposure value Derivatives SFT 2011 £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Germany — 18,068 665 311 7,111 156 26,311 14,083 1,684 10,697 165 52,940 7,732 60,672 (2,401) 69,209 6,047 Netherlands 8 7,654 593 1,184 4,510 19 13,968 9,252 641 9,997 197 34,055 12,825 46,880 (1,295) 25,692 6,225 France 481 3 1,267 282 3,742 78 5,853 4,439 3,355 8,700 557 22,904 10,085 32,989 (2,846) 46,223 24,606 Belgium — 8 288 354 555 20 1,225 749 (97) 2,957 51 4,885 1,263 6,148 (99) 8,996 1,949 Luxembourg — — 132 494 1,363 2 1,991 69 61 1,567 41 3,729 1,990 5,719 (404) 2,826 519 Other 121 — 28 77 1,279 12 1,517 624 84 1,891 — 4,116 1,297 5,413 (25) 10,403 977 Total eurozone 671 27,282 3,443 3,715 46,835 19,556 101,502 38,307 5,460 43,277 1,552 190,098 44,726 234,824 (8,426) 202,789 46,238
Key points* • During 2013, the US dollar depreciated by 2.3% against sterling, whereas the euro appreciated by 2.2%, impacting exposures.
• Most of the Group’s country risk exposure was in International
Country risk continued Country exposure continued • Eurozone periphery - despite the appreciation of the euro against sterling, balance sheet exposure decreased to £52.9 billion, a reduction of £6.6 billion or 11%, in nearly all countries, as follows: ° Ireland - exposure decreased by £2.1 billion to £37.0 billion, in all broad product categories. Residential and commercial real estate lending declined slightly to £16.9 billion and £10.3 billion, respectively. Provisions increased by £2.8 billion, most of which related to corporate lending.
• Netherlands - balance sheet exposure decreased from £23.6 billion to £16.1 billion. AFS debt securities issued by non-bank financial institutions declined by £2.8 billion, primarily following repayments. Corporate lending decreased by £0.8 billion, primarily in commercial real estate. Off-balance sheet exposure to corporate clients decreased by £1.1 billion, mainly in the telecommunications, retail and food and consumer sectors.
• France - balance sheet exposure decreased from £19.7 billion to £14.0 billion. The net long HFT position in government bonds declined by £1.9 billion in the course of normal trading in the rates business.
• Japan - balance sheet exposure decreased by £6.0 billion to £5.3 billion. Net HFT and AFS government bonds fell by £5.1 billion and £1.5 billion, respectively, and derivatives exposure, largely to banks, decreased by £0.5 billion. This reflected depreciation of the yen, lower trading flows and a reduction in Japanese bonds held as derivatives collateral. Lending to the central bank increased by £0.8 billion.
• Funding mismatches - the estimated funding mismatch at risk of redenomination for Ireland was £6.5 billion at the end of the year, falling from £9.0 billion a year before due to an increase in provisions and a reduction in assets. The mismatch for Spain was £6.5 billion, up from £4.5 billion as the Group reduced its local funding (and associated cost) given the improved outlook for the country. The net position for Italy fell to £0.5 billion from £1.0 billion. The net positions for Portugal, Greece and Cyprus were all minimal. Overall, perceived risks of redenomination events in the eurozone declined considerably in 2013.
Government 42 — — 127 (23) 79 56 150 2 — 194 2 196 6 — Central bank 73 — — — — — — — — — 73 — 73 — — Other banks 99 — — 191 (6) 18 1 208 694 476 1,477 — 1,477 2,384 3,547 Other FI 395 — — 46 — 325 2 369 140 27 931 552 1,483 471 1,042 Corporate 18,185 11,058 6,226 60 — — — 60 376 — 18,621 1,786 20,407 382 326 Personal 17,890 3,286 1,686 — — — — — 1 — 17,891 515 18,406 1 — 36,684 14,344 7,912 424 (29) 422 59 787 1,213 503 39,187 2,855 42,042 3,244 4,915
Government 45 — — 102 (45) 20 19 103 92 — 240 2 242 102 — Central bank 1,467 — — — — — — — — — 1,467 — 1,467 — — Other banks 137 — — 177 (39) 195 14 358 980 478 1,953 1 1,954 19,090 3,441 Other FI 320 — — 61 — 116 35 142 342 61 865 513 1,378 857 1,181 Corporate 19,098 10,269 5,689 148 3 135 — 283 400 — 19,781 1,817 21,598 416 — Personal 18,855 2,258 1,048 — — — — — 1 — 18,856 539 19,395 1 — 39,922 12,527 6,737 488 (81) 466 68 886 1,815 539 43,162 2,872 46,034 20,466 4,622
Government — — — 44 (3) 1,468 659 853 5 — 858 11 869 10 — Other banks 4 — — 2,801 (221) 77 91 2,787 648 — 3,439 13 3,452 3,718 2,126 Other FI 15 — — 1,317 (225) 103 40 1,380 10 — 1,405 40 1,445 37 — Corporate 2,924 295 152 — — 7 12 (5) 326 — 3,245 1,862 5,107 363 — Personal 318 55 25 — — — — — — — 318 55 373 — — 3,261 350 177 4,162 (449) 1,655 802 5,015 989 — 9,265 1,981 11,246 4,128 2,126
Government — — — 37 (10) 786 403 420 18 — 438 14 452 56 — Central bank 6 — — — — — — — — — 6 — 6 — — Other banks 1 — — 3,169 (634) 100 76 3,193 1,254 — 4,448 8 4,456 5,116 610 Other FI 73 — — 1,661 (540) 96 18 1,739 26 — 1,838 140 1,978 50 — Corporate 4,269 601 246 4 — 36 18 22 456 — 4,747 1,374 6,121 472 — Personal 340 61 27 — — — — — — — 340 56 396 — — 4,689 662 273 4,871 (1,184) 1,018 515 5,374 1,754 — 11,817 1,592 13,409 5,694 610
Government 9 — — 33 (15) 360 751 (358) 35 — (314) 116 (198) 40 — Central bank 3 — — — — — — — — — 3 — 3 — — Other banks 90 — — 4,892 (867) 162 214 4,840 1,620 2 6,552 7 6,559 5,180 122 Other FI 172 — — 1,580 (639) 65 8 1,637 282 — 2,091 169 2,260 1,084 467 Corporate 5,782 1,190 442 9 — 27 — 36 454 — 6,272 2,249 8,521 471 — Personal 362 — — — — — — — — — 362 57 419 — — 6,418 1,190 442 6,514 (1,521) 614 973 6,155 2,391 2 14,966 2,598 17,564 6,775 589
AQ1 AQ2-AQ3 AQ4-AQ9 AQ10 Total Notional Fair value Notional Fair value Notional Fair value Notional Fair value Notional Fair value 2013 £m £m £m £m £m £m £m £m £m £m
Government — — — 428 (43) 4,403 3,218 1,613 63 — 1,676 — 1,676 71 — Central bank 22 — — — — — — — — — 22 — 22 — — Other banks 64 — — — — 40 66 (26) 1,291 — 1,329 7 1,336 6,220 527 Other FI 548 — — 91 — 52 6 137 206 — 891 440 1,331 210 — Corporate 968 88 46 — — 48 13 35 214 — 1,217 1,503 2,720 682 — Personal 26 — — — — — — — — — 26 12 38 — — 1,628 88 46 519 (43) 4,543 3,303 1,759 1,774 — 5,161 1,962 7,123 7,183 527
Government 9 — — 408 (81) 2,781 2,224 965 80 — 1,054 — 1,054 131 — Central bank 21 — — — — — — — — — 21 — 21 — — Other banks 222 — — 125 (8) 42 54 113 1,454 — 1,789 15 1,804 8,428 3 Other FI 707 — — 357 (1) 23 1 379 100 — 1,186 686 1,872 100 — Corporate 1,533 34 5 87 2 85 22 150 724 — 2,407 1,956 4,363 994 — Personal 23 — — — — — — — — — 23 12 35 — — 2,515 34 5 977 (88) 2,931 2,301 1,607 2,358 — 6,480 2,669 9,149 9,653 3
AFS and HFT OffLAR debt AFS debt securities Total debt Net Balance balance Total Gross
Government — — — — — 73 52 21 14 — 35 — 35 14 — Other banks — — — 71 (5) 12 7 76 234 — 310 — 310 301 614 Other FI 56 — — 1 — 17 — 18 40 — 114 29 143 40 — Corporate 327 127 99 21 — — — 21 63 — 411 243 654 63 — Personal 6 — — — — — — — — — 6 8 14 — — 389 127 99 93 (5) 102 59 136 351 — 876 280 1,156 418 614
Government — — — 56 (59) 36 152 (60) 19 — (41) — (41) 25 — Other banks 10 — — 91 (36) 12 2 101 389 — 500 2 502 497 217 Other FI — — — 5 — 7 — 12 30 — 42 192 234 30 — Corporate 495 27 27 42 1 18 — 60 82 — 637 258 895 82 — Personal 5 — — — — — — — — — 5 8 13 — — 510 27 27 194 (94) 73 154 113 520 — 1,143 460 1,603 634 217
Government — — — — — — — — — — — — — 106 — Central bank 1 — — — — — — — — — 1 — 1 — — Other banks 1 — — — — — — — 227 — 228 — 228 316 — Other FI 1 — — — — — — — — — 1 13 14 — — Corporate 110 45 38 — — — — — 33 — 143 16 159 33 — Personal 14 — — — — — — — — — 14 9 23 — — 127 45 38 — — — — — 260 — 387 38 425 455 —
Government — — — — — 9 — 9 17 — 26 — 26 151 — Central bank 7 — — — — — — — — — 7 — 7 — — Other banks — — — — — — — — 299 — 299 — 299 411 — Other FI 1 — — — — — 8 (8) 3 — (4) 12 8 3 — Corporate 180 38 38 — — — — — 44 — 224 19 243 44 — Personal 13 — — — — — — — — — 13 9 22 — — 201 38 38 — — 9 8 1 363 — 565 40 605 609 —
Other risks* Conduct risk Definition Conduct risk is the risk that the behaviour of the Group and its staff towards its customers, or in the markets in which it operates, leads to reputational damage or financial loss or both. The damage or loss could be as a result of breaches of regulatory rules or laws, or of failing to meet customers’ or regulators’ expectations of the Group.
Sources of risk Activities through which conduct risk may arise include: product design; marketing and sales; complaint handling; staff training and competence; and handling of confidential and non-public price sensitive information.
Governance structure Effective conduct risk management is a commercial imperative for the Group: customers, clients and counterparties demand it as a precursor to building trust. It also reflects the developing regulatory environment in the UK, with the establishment of the Financial Conduct Authority, and the increasing focus of overseas regulators on conduct risk.
The Conduct Risk Committee: Operating under delegated authority from the Executive Risk Forum (ERF), it has responsibility for the governance, leadership and strategic oversight of the Group-wide conduct agenda. It can escalate significant issues to the ERF and the Board Risk Committee. (Refer to page 176).
Risk management and measurement The Group has established a defined and measurable appetite for conduct risk to ensure commercial decisions take into account any conduct risk implications.
Placing conduct risk at the centre of the Group’s philosophy promotes a customer oriented culture that informs and challenges business strategy, delivers fair outcomes, and promotes behaviours consistent with regulatory and legal standards across its retail and wholesale markets.
Throughout 2013, the foundations of the Group’s conduct risk framework continued to be delivered. Key milestones included: • The completion of the phased roll-out of the Group’s conduct risk policies, using policy chapters to explain Group-wide conduct responsibilities; • The development and delivery of awareness initiatives and targeted conduct risk training for each policy to assist businesses and executives in embedding the understanding of conduct risk, and to provide the necessary clarity for staff on their conduct risk requirements; • Completion of Group-wide gap analysis and benchmarking exercise with respect to each of the conduct risk policy chapters, recording identified issues and developing and implementing remediation plans; • Establishing a central assurance function in Group Conduct and
• Establishing effective leadership and a supporting governance framework, with the participation of all divisions, to oversee the Group’s conduct agenda.
Pension risk Definition Pension risk is the risk arising from contractual or other liabilities to, or with respect to, the Group’s pension schemes, whether established for its employees or for those of a related company or otherwise. It also means the risk that the Group may make payments or other contributions to, or with respect to, a pension scheme because of a moral obligation, or because it considers that it needs to do so for some other reason.
Governance The main scheme operates under a trust deed. The trustee is responsible for the investment of the main scheme’s assets which are held separately from the assets of the Group. The Group and the trustee must agree on the plan to fund the main scheme. The corporate trustee, RBS Pension Trustee Limited, is a wholly owned subsidiary of The Royal Bank of Scotland plc. The trustee board currently comprises six directors selected by the Group and three directors nominated by members.
Risk management Risk appetite and investment policy for the schemes are defined by the trustee with quantitative and qualitative input from actuaries and investment advisers.
Risk measurement Pension risk reporting is submitted to the Group Board monthly in the RBS Risk Management Report. The report includes an assessment of the sensitivities of the Group’s pension schemes to interest rates and inflation, a breakdown of the assets by class, and measurement of the overall deficit or surplus position based on the latest data.
Throughout 2013, various pension risk stress-testing initiatives were undertaken, focused both on internally defined scenarios and on scenarios to meet integrated PRA stress testing requirements.
Risk mitigation The trustee has taken measures partially to mitigate inflation and interest rate risks both by investing in suitable physical assets and by entering into inflation and interest rate swaps. The main scheme also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes. The assets of the main scheme, which represent 85% of Group pension plan assets at 31 December 2013, are invested in a diversified portfolio of quoted and private equity, government and corporate fixed interest and index-linked bonds, and other assets including property and hedge funds.
Risk is also mitigated in other ways. In October 2006, the main scheme was closed to new employees. In November 2009, the Group confirmed that it was making changes to the main scheme and a number of other defined benefit schemes including the introduction of a limit of 2% per annum (or the annual change in the Consumer Price Index, if lower) to the amount of any salary increase that will count for pensionable purposes.
The table below shows the sensitivity of the Main scheme’s assets and liabilities (measured according to IAS 19 ‘Employee Benefits’) to changes in interest rates and equity values at the year end, taking account of the current asset allocation and hedging arrangements.
Change Change Increase in net in value in value of pension of assets liabilities obligations £m £m £m
Other risks* continued Operational risk Definition Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events.
The Operational Risk function is responsible for the design and maintenance of the operational risk framework. The Operational Risk Policy and associated standards are incorporated in the Group Policy Framework and provide direction for the consistent identification, assessment, management, monitoring and reporting of operational risk.
The Operational Risk Executive Committee, which is a sub-committee of the Group Risk Committee, acts on all operational risk matters. It is responsible for identifying and managing emerging operational risks, and for reviewing and monitoring operational risk profile strategies and frameworks across the Group, ensuring they are in line with risk appetite.
Risk management Risk appetite The Group’s operational risk appetite statement is agreed by the Group Board. It comprises a number of specific measures of risk, including operational risk capital adequacy, earnings volatility based on the relationship between operational risk losses and the Group’s estimated gross income. It also includes metrics covering control environment performance. Further refinement of the appetite measure is planned for 2014.
The objective of operational risk management is not to remove operational risk altogether, but to manage it to an acceptable level, taking into account the cost of minimising the risk against the resultant reduction in exposure. Strategies to manage operational risk include avoidance, transfer, acceptance and mitigation by controls.
The process is designed to confirm that risks are effectively managed and prioritised in line with the stated risk appetite. Controls are tested frequently to verify and validate that they remain fit for purpose and operate effectively. Risk assessments are typically conducted in a workshop environment, bringing together subject matter experts and key stakeholders from across the divisions and key functions.
New product risk assessment The Group’s new product risk assessment process is used to ensure that risks for all new products (and material variations to existing products) are adequately identified and assessed before their launch. The assessment documentation and review includes the requirement to demonstrate that the product provides fair outcomes for customers.
Risk measurement Scenario analysis is used to assess the impact of extreme but plausible operational risks. It provides a forward-looking basis for managing risk exposures, with a structured and consistent approach to scenario scoping and measurement. In 2013, the portfolio of scenarios was further enhanced with greater coverage of the material risks to which the Group is exposed.
Scenario analysis is the frequency and impact assessment of extreme but plausible operational risk exposures, which assess the Group’s vulnerability against future unexpected loss. Scenarios, along with internal and external loss data, are a key input into the capital model and are expected to influence the capital outcome significantly as they drive the tail of the severity distribution.
Risk and control assessments examine the financial and non-financial risk impact. The risk impact is assessed on both an expected and exceptional loss basis for the following 12-month period, and a risk appetite decision made.
Value of events (net loss greater than £10,000) At 31 December 2013, events aligned with clients, products and business practices accounted for 99% of the losses (compared to 91% in 2012). The losses in this category were as a result of new conduct-related provisions, further increased provisions relating to Payment Protection Insurance, Interest Rate Hedging Products, and regulatory settlements.
Other risks* continued Operational risk continued Monitoring and reporting Monitoring and reporting form an integral part of all of the Group’s operational risk management processes, which are designed to ensure that risks and issues are identified, escalated and managed on a timely basis. Exposures for each division are communicated through monthly risk and control reports that are discussed at divisional risk committees. The reports provide detail on the risk exposures and action plans. In 2013 the linkages between different components of the operational risk framework were improved. This has allowed better aggregation, using both qualitative and quantitative inputs from all framework elements to underpin improvements in reporting to senior committees.
Code; • Appropriateness of the risk frameworks, culture and governance structures of each division to help ensure the Group operates within risk appetite; • Adequacy of reporting on the material risks for the business against appetite; and
• Compliance with the Group Policy Framework and key divisional and functional policy standards.
Risk mitigation Where a risk has been deemed to be outside of risk appetite, the business unit must decide whether this is acceptable or not. Where it is deemed unacceptable, an action plan to reduce the exposure is prepared and is monitored to conclusion through the operational risk issues management process.
The objective of the operational risk issues management framework is the adoption of a consistent approach to the management of issues and actions to mitigate risks outside appetite. This element of the operational risk framework continues to be enhanced in areas such as analysis of common issues on an aggregated basis across the Group to identify emerging trends and improvements to the quality of data captured.
Regulatory risk Definition Regulatory risk is the risk of material loss or liability, legal or regulatory sanctions, or reputational damage, resulting from the failure to comply with (or adequately plan for changes to) relevant official sector policy, laws, regulations, or major industry standards, in any location in which the Group operates.
Sources of risk The sources of regulatory risk arise from the Group’s regulatory, business or operating environment and from how the Group responds to them.
Group Board and Executive Committee oversight of changes to regulatory requirements is supported by a Prudential Regulatory Developments Executive Steering Group (ESG), which was formed in early 2010 to provide focus on a range of key regulatory developments and the Group’s responses.
The ESG is augmented by more specialised groups which cover prudential, wholesale market and retail conduct issues as well as by an RBS Americas regional forum. These bodies identify and manage regulatory developments, by cascading information and coordinating activity. Their activity includes: prioritisation, allocation of responsibility, short-term tactical mitigants, longer-term strategic responses, sharing best practice, discussion of policy views, and escalation of the need for implementation projects.
Similarly, the Regulatory Relations Forum, chaired by Regulatory Affairs, has global coverage with representatives from all divisions and regions. It facilitates the sharing of key regulatory engagements and trends across the Group’s operations.
In addition, Regulatory Affairs ensures appropriate governance and reporting of all material regulatory reviews and other regulatory developments worldwide to relevant Group committees. These committees include the Group Board, the Group Audit Committee, and the Board Risk Committee.
Risk management and measurement The Group believes that maintaining a strong regulatory risk framework is fundamental to ensuring sustainable growth, rebuilding its reputation and maintaining stakeholder confidence.
Regulatory Affairs’ two policies are supported by risk appetite statements and by relevant benchmarking activity against the Group's peer banks.
These are framed by the Group’s stated regulatory risk and compliance risk appetite, which says there is no appetite for material or widespread breaches of rules, expectations, regulations or laws, individually or in aggregate. It recognises, however, that genuine errors occur, and so the Group accepts limited, non material regulatory risk and subsequent loss.
The regulatory risk and compliance risk appetite is also reflected in the Group Relationships with Regulators Policy Standard, which states that all significant /material contacts with regulators must be identified and managed effectively and that all information provided to the regulators must be accurate, consistent and delivered within agreed timescales.
The level of regulatory risk remained high during 2013, as policymakers and regulators continued to strengthen regulation and supervision in response to the events of 2007/2008. This can be measured in high levels of interaction with supervisory authorities such as meetings, requests for information, visits and investigations, as well as in policy developments and proposals for new rules. At 31 December 2013 the Group was managing 45 “High Impact” regulatory or legislative policy initiatives, and a further 63 “Medium-High” Impact initiatives. In 2013 as a whole, the Group had also reviewed over 305 consultations in its core markets.
Risk mitigation The early identification and effective management of changes in legislation and regulation, as well as other requirements that may affect the Group, are critical to the successful mitigation of regulatory risk.
RBS Regulatory Affairs also communicates information on regulatory developments and follow-up engagement with client-facing businesses and functions, helping them identify and execute any required mitigating changes to strategy or business models. The key regulatory policies are kept under annual review.
Directors and senior executives are actively engaged in key strategic and transactional decisions that can have a reputational impact, for example
• Key reputational issues associated with the Group’s strategic plans are discussed at Board level.
Other risks* continued Reputational risk continued The Board’s oversight of reputational issues is supported by structures and committees to ensure that key reputational issues are discussed at appropriate levels across the Group: • Each division has reputational filters to provide the “first line of defence” for sensitive transactions or customers. Divisions have also established committees or forums to deliberate on customers, transactions or issues that may present a reputational risk for the division. For example, the remit of the International Banking Global Capital & Sighting Committee includes a requirement to assess key reputational sensitivities associated with client transactions against defined risk appetite.
The monthly risk report to the Group Board contains a view of key risks, including a reputational risk impact assessment of each key risk. In addition, the divisions report on relevant barometers of reputational risk and actions to manage reputational events according to the source. The annual Group Sustainability report also covers progress on the Group’s sustainability principles.
Emerging reputational issues are identified and assessed by a dedicated cross-divisional reputational risk working group, and escalated through the appropriate governance channels where necessary.
Risk management and measurement The Group seeks to minimise its exposure to business risk, subject to its wider strategic objectives.
Business risk is reported, assessed and challenged at every governance level within the organisation. Revenue and costs are reported within divisional business line and divisional finance teams maintain a record of financial performance against plans, reporting this on a regular basis to divisional CFOs and to Group functions. Group Finance challenges divisional financial results and reports performance against plan to the Board and executive committees with a particular focus on revenue generation, cost management initiatives and risk mitigation.
In the planning cycles, expected and potential scenarios for revenues and costs are determined, on a bottom-up basis, through plans reflecting expectations of the external environment and the Group’s strategic priorities. These scenarios are tested against a range of sensitivities and stresses to identify the key risk drivers behind any potential volatility, together with management actions to address and manage them.
Group Risk operates a top-down stress testing process in parallel to the Group’s planning cycles, considering both severe and extreme stress scenarios. The stress test outcomes form a core part of the assessment of earnings and capital adequacy risk appetite and are approved by the Board. The measurement of change in profit and loss of the divisions under stress thereby acts as a measure of business risk. Divisions also conduct their own bottom-up stress testing exercises to assess financial performance of their businesses under stress.
In 2013, the measurement of business risk was further enhanced through greater use of downside scenarios, improved granularity of stress testing, new revenue models in some of the main divisions and the development of an economic capital related business risk measure.
Business risk is incorporated in the Group’s risk appetite target for earnings volatility, and an assessment of volatility in revenues and costs is a key component in determining whether the Group and its underlying businesses are within risk appetite. Each division is responsible for the implementation of its business plan and the management of associated risks within approved risk appetite targets.
During 2013, the Group responded to the business risk challenges that it continues to face, focusing on the management of net interest margin in order to sustain and grow revenues. In addition, it introduced cost management programmes to deliver substantial savings and flexibility in the cost base.
Strategic risk Definition The risk that the Group will make inappropriate strategic choices, or that there will be changes in the external environment to which the Group fails to adapt its strategies.
Sources of risk Strategic risk arises from three principal sources: • Inadequate or inaccurate analysis of current and prospective operating conditions in the Group’s markets including macroeconomic performance, customer and competitor behaviours and actions, regulatory developments and technological impacts; • Inadequate or inaccurate understanding of the Group’s existing capabilities and positioning and ability to implement chosen strategies; and
Failure to manage strategic risk could have a wide-ranging impact on the Group. Effects could include damage to the Group’s customer franchises, and lower revenues, profitability and returns to shareholders. Strategic risk is viewed as material, given the current uncertain economic climate and the potential impact of regulatory changes in the medium term.
Governance structure The Group’s strategic planning process is managed by Group Strategy and Corporate Finance. As part of that process, each division develops a strategic plan for its business within a framework set by the Group’s senior management. Divisional plans are then consolidated at Group level, and both divisional and Group plans are reviewed, challenged and assessed against risk appetite. The consolidated plan is reviewed and formally signed off by the Group Board once a year.
Risk management and measurement The Group seeks to reduce strategic risk by employing a disciplined strategic framework based on five enduring tests (leading customer franchises, returns, risk, sustainable growth, connectivity) and by assigning responsibility for strategy development to line management. Key strategies are scrutinised and approved by the Group Board. This is intended to maximise the capture of market and customer insight while providing independent scrutiny and challenge. Strategic plans contain analysis of current and expected operating conditions, current and targeted competitive and market positioning, key strategic initiatives, financial and customer targets and milestones. Upside and downside risks to the strategic plans are identified.
Responsibility for the management of the bank’s strategic risks resides mainly with the individual divisions. Divisional management tracks progress on the initiatives and action plans to deliver the strategy through a range of key performance indicators such as financial performance, risk metrics, market shares and numbers of customers, satisfaction scores.
A wide variety of financial, risk, customer and market metrics are used to monitor business performance and thus, inter alia, the effectiveness of chosen strategies. Any deviations from the expected values are analysed to determine drivers which could be strategic, environmental or management.
Risk mitigation A full sensitivity analysis of the strategic plan is undertaken at the end of the strategic and financial planning process, to assess the robustness of the plan under stressed conditions represented by a variety of scenarios. In certain cases, following consideration of an opportunity, the Group may decide not to pursue that opportunity as a result of a perceived strategic risk.
Even if the strategy proves to be appropriate, the Group may not succeed in implementing it, particularly as doing so will make additional demands on management at a time of significant regulatory change. Finally, given the rapidity with which technology is changing its competitive environment, the Group may find that its strategy does not go far enough to enable it to compete effectively.
In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the company’s affairs as at 31 December 2013 and of the
Group’s loss for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
Separate opinion in relation to IFRSs as issued by the IASB As explained in the accounting policies the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
Going concern As required by the Listing Rules we have reviewed the directors’ statement on page 96 that the Group is a going concern. We confirm that
• we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Our assessment of the risks of material misstatement Our response to those risks The calculation of the Group’s loan impairment provisions requires management to make significant judgements on whether impairment events have occurred which result in the need for a provision, on the amount of these provisions, and on the estimate of loan losses that have been incurred but not yet specifically identified.
A number of the loans held in GRG and in Ulster Bank require particularly judgemental estimates to be made of the value of collateral assets in illiquid markets.
In November 2013 the Group announced the transfer of approximately £38 billion of assets, predominantly loans, held in Ulster Bank, Non-Core, UK Corporate and International Banking into the RBS Capital Restructuring Group (“RCR”) on 1 January 2014 in order to manage the run-down of those assets on an accelerated timescale. The faster rundown of such loans led to revisions to expected cash flows and an increased impairment charge for the year.
We undertook an assessment of loan impairment provisioning practices across the Group to compare them with the requirements of IFRS and tested the key controls over the processes used to calculate impairment provisions, including testing the controls over the information used in the provisioning processes.
For the collective and latent loan impairment provisions we tested samples of the data used in the models together with the calculations in and the output from the models. We also challenged management on the level of specific provisions by assessing for a sample of loans (including a sample of those being transferred into RCR) whether or not provisions booked had been recognised in accordance with IFRS.
In addition for a sample of transactions the year end valuations were recalculated by our valuation specialists using our own independent models.
For certain claims it is not possible reliably to estimate whether and what amounts will be paid out and in those situations disclosures are provided on the status of these claims and the possible outcomes as set out in Note 32 to the financial statements.
Our application of materiality We apply the concept of materiality both in planning and performing our audit and in evaluating the effect of misstatements on our audit and on the financial statements. For the purposes of determining whether the financial statements are free from material misstatement we define materiality as the magnitude of misstatements that make it probable that the economic decisions of a reasonably knowledgeable person relying on the financial statements would be changed or influenced.
We determined planning materiality for the Group to be £350 million, which was calculated as 0.6% of the total equity of the Group which also represented 4% of the Group’s loss for the year. Our materiality was based on the equity of the Group as this was considered to provide a more normalised basis given the significant volatility over recent years in the Group’s profits and losses.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £10 million, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit Our Group audit scope is based on an analysis of required work in each of the Group’s divisions. Within each division an assessment is made by geography and legal entity of those operations where full scope audits are required and those where the extent of our testing is more limited and focused on the risks of material misstatement in the Group financial statements. As a result of these assessments audit work was undertaken in 19 countries, which accounted for 98% of the Group’s total assets and 85% of its total revenue.
The Group audit team continued to follow a programme of planned visits that has been designed so that the Senior Statutory Auditor or his designate visits each division at least once a year.
Corporate governance statement Under the Listing Rules we are also required to review the part of the Corporate governance statement relating to the company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Kari Hale (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 26 February 2014
Paid-in equity holders 7 49 28 — Ordinary and B shareholders (8,995) (6,055) (2,151)
Per ordinary and equivalent B share (1) Basic and diluted loss from continuing operations 9 (81.3p) (54.5p) (22.7p)
Items that do qualify for reclassification Available-for-sale financial assets (406) 645 2,258 Cash flow hedges (2,291) 1,006 1,424
Total comprehensive loss is attributable to: Non-controlling interests 137 (129) (24) Preference shareholders 349 273 — Paid-in equity holders 49 28 — Ordinary and B shareholders (10,724) (7,269) (756)
Paid-in equity At 1 January and 31 December (1) 979 979 979
Merger reserve At 1 January 13,222 13,222 13,272 Transfer to retained earnings — — (50)
Cash flow hedging reserve At 1 January 1,666 879 (140) Amount recognised in equity (967) 2,093 2,417 Amount transferred from equity to earnings (1,324) (1,087) (993)
Own shares held At 1 January (213) (769) (808) Disposal of own shares 75 441 20 Shares issued under employee share schemes 1 115 19 At 31 December (137) (213) (769)
Operating loss before tax (8,243) (5,277) (1,396) Operating profit/(loss) before tax on discontinued operations 177 (111) 482 Adjustments for: Depreciation and amortisation 1,410 1,854 1,875 Write-down of goodwill and other intangible assets 1,403 518 91 Interest on subordinated liabilities 886 841 740 Charge for defined benefit pension schemes 517 558 555 Pension scheme curtailment and settlement gains (7) (41) — Cash contribution to defined benefit pension schemes (821) (977) (1,059) Gain on redemption of own debt (175) (454) (255) Provisions for impairment losses 8,432 5,283 8,709 Loans and advances written-off net of recoveries (4,090) (3,925) (4,000) Elimination of foreign exchange differences (47) 7,140 2,702 Other non-cash items (947) (1,491) (1,491) Net cash flows from trading activities (1,505) 3,918 6,953 Changes in operating assets and liabilities (28,780) (48,736) (3,444) Net cash flows from operating activities before tax (30,285) (44,818) 3,509 Income taxes paid (346) (295) (184) Net cash flows from operating activities 33 (30,631) (45,113) 3,325
Investing activities Sale and maturity of securities 41,772 49,079 80,093 Purchase of securities (22,561) (22,987) (77,019) Sale of property, plant and equipment 1,448 2,215 1,840 Purchase of property, plant and equipment (626) (1,484) (3,472) Net divestment of/(investment in) business interests and intangible assets 34 1,150 352 (1,428) Net cash flows from investing activities 21,183 27,175 14
Financing activities Issue of ordinary shares 264 120 2 Issue of subordinated liabilities 1,796 2,093 — Issue of exchangeable bonds 330 — — Proceeds of non-controlling interests issued — 889 — Redemption of non-controlling interests (301) (23) (382) Disposal of own shares 44 243 20 Repayment of subordinated liabilities (3,500) (258) (627)
The accompanying notes on pages 391 to 496, the accounting policies on pages 377 to 389 and the audited sections of the Business review: Risk and balance sheet management on pages 174 to 364 form an integral part of these financial statements.
IAS 27 ‘Separate Financial Statements’ comprises those parts of the existing IAS 27 that deal with separate financial statements. IAS 28 ‘Investments in Associates and Joint Ventures’ covers joint ventures as well as associates; both must be accounted for using the equity method. The mechanics of the equity method are unchanged.
IFRS 12 ‘Disclosure of Interests in Other Entities’ mandates the disclosures in annual financial statements in respect of investments in subsidiaries, joint arrangements, associates and structured entities that are not controlled by the Group.
IFRS 13 ‘Fair Value Measurement’ sets out a single IFRS framework for defining and measuring fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also requires disclosures about fair value measurements.
‘Annual Improvements 2009-2011 Cycle’ also made a number of minor changes to IFRSs.
2. Basis of consolidation The consolidated financial statements incorporate the financial statements of the company and entities (including certain structured entities) that are controlled by the Group. The Group controls another entity (a subsidiary) when it is exposed, or has rights, to variable returns from its involvement with that entity and has the ability to affect those returns through its power over the other entity; power generally arises from holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. A subsidiary is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it through a sale or a significant change in circumstances. Changes in the Group’s interest in a subsidiary that do not result in the Group ceasing to control that subsidiary are accounted for as equity transactions.
3. Revenue recognition Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those measured at fair value are determined using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Financial assets and financial liabilities held for trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss.
Investment management fees - fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised.
Contributions to defined contribution pension schemes are recognised in profit or loss when payable.
For defined benefit schemes, the defined benefit obligation is measured on an actuarial basis using the projected unit credit method and discounted at a rate determined by reference to market yields at the end of the reporting period on high quality corporate bonds of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. The difference between scheme assets and scheme liabilities – the net defined benefit asset or liability - is recognised in the balance sheet. A defined benefit asset is limited to the present value of any economic benefits available to the Group in the form of refunds from the plan or reduced contributions to it.
Actuarial gains and losses (i.e. gains or and losses on re-measuring of the net defined benefit asset or liability) are recognised in full in the period in which they arise in other comprehensive income.
Intangible assets include goodwill arising on the acquisition of subsidiaries and joint ventures. Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration transferred, the fair value of any existing interest in the subsidiary and the amount of any non-controlling interest measured either at fair value or at its share of the subsidiary’s net assets over the Group's interest in the net fair value of the subsidiary’s identifiable assets, liabilities and contingent liabilities. Goodwill arises on the acquisition of a joint venture when the cost of investment exceeds the Group’s share of the net fair value of the joint venture’s identifiable assets and liabilities. Goodwill is measured at initial cost less any subsequent impairment losses. Goodwill arising on the acquisition of associates is included within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Freehold land is not depreciated. The estimated useful lives of the Group’s property, plant and equipment are: Freehold buildings 50 years Long leasehold property (leases with more than 50 years to run) 50 years Short leaseholds unexpired period of the lease Property adaptation costs 10 to 15 years Computer equipment up to 5 years Other equipment 4 to 15 years
Group entities record transactions in foreign currencies in their functional currency - the currency of the primary economic environment in which they operate - at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 24).
Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. Income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to profit or loss on disposal or partial disposal of a foreign operation.
Reinsurance - the Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated on a basis consistent with the outstanding claims provision or settled claims associated with the reinsurer's policies and are in accordance with the related reinsurance contract. A reinsurance bad debt provision is assessed in respect of reinsurance debtors.
14. Tax Income tax expense or income, comprising current tax and deferred tax, is recorded in the income statement except income tax on items recognised outside profit or loss which is credited or charged to other comprehensive income or to equity as appropriate.
Where, in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where the Group’s interest in equity shares following the exchange is such that the Group controls an entity, that entity is consolidated. Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective impairment assessments, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of observable data, to reflect current conditions not affecting the period of historical experience. Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
Impaired loans and receivables are written off, i.e. the impairment provision is applied in writing down the loan's carrying value partially or in full, when the Group concludes that there is no longer any realistic prospect of recovery of part or all of the loan. For loans that are individually assessed for impairment, the timing of write off is determined on a case-by-case basis. Such loans are reviewed regularly and write offs will be prompted by bankruptcy, insolvency, renegotiation and similar events.
• Overdrafts and other unsecured loans: write offs occur within six years.
Designated as at fair value through profit or loss - financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
18. Financial guarantee contracts Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 13. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
21. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
24. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. The Group’s approach to determining the fair value of financial instruments is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Note 11.
25. Associates and joint ventures Associates and joint ventures are entities that the Group does not control but either shares control (joint ventures) or has significant control over its operating and financial policies (associates). Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for post-acquisition changes in the Group’s share of net assets.
26. Share-based compensation The Group operates a number of share-based compensation schemes under which it awards RBSG shares and share options to its employees. Such awards are generally subject to vesting conditions: conditions that vary the amount of cash or shares to which an employee is entitled. Vesting conditions include service conditions (requiring the employee to complete a specified period of service) and performance conditions (requiring the employee to complete a specified period of service and specified performance targets to be met). Other conditions to which an award is subject are non-vesting conditions (such as a requirement to save throughout the vesting period).
27. Cash and cash equivalents In the cash flow statement, cash and cash equivalents comprises cash and deposits with banks with an original maturity of less than three months together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
Critical accounting policies and key sources of estimation uncertainty The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's ’Conceptual Framework for Financial Reporting’. The judgements and assumptions involved in the Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
A pension asset of £214 million and a liability of £3,210 million were recognised on the balance sheet at 31 December 2013 (2012 - asset £144 million; liability £3,884 million; 2011 - asset £188 million, liability £2,239 million).
Tax contingencies - determining the Group’s income tax charge and its provisions for income taxes necessarily involves a significant degree of estimation and judgement. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions. The Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect current and deferred income tax assets and liabilities in the period when the matter is resolved.
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and temporary differences. Deferred tax assets are recognised in respect of unused tax losses to the extent that it is probable that there will be future UK taxable profits against which the losses can be utilised. Business projections indicate that sufficient future taxable income will be available against which to offset these recognised deferred tax assets within eight years (2012 and 2011 - six years). Deferred tax assets of £4,942 million (2012 - £3,827 million; 2011 - £3,246 million) have not been recognised in respect of tax losses carried forward where the availability of future taxable profits is uncertain. Further details about the Group’s deferred tax assets are given in Note 23.
Accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2013 that had effective dates of 1 January 2014 or later.
‘Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)’ applies to investment entities; such entities should measure their subsidiaries (other than those that provide services related to the entity’s investment activities) at fair value through profit or loss.
IAS 36 ‘Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)’ align IAS 36’s disclosure requirements about recoverable amounts with IASB’s original intentions.
IAS 39 ‘Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)’ provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria.
Annual Improvements to IFRS 2010 - 2012 and 2011 - 2013 cycles were issued in December 2013. There are a number of minor changes to IFRS that will not have a material effect on the Group’s financial statements. All amendments are effective for annual periods beginning on or after 1 July 2014.
In November 2009, the IASB issued IFRS 9 ‘Financial Instruments’ simplifying the classification and measurement requirements in IAS 39 in respect of financial assets. The standard reduces the measurement categories for financial assets to two: fair value and amortised cost. A financial asset is classified on the basis of the entity's business model for managing the financial asset and the contractual cash flow characteristics of the financial asset. Only assets with contractual terms that give rise to cash flows on specified dates that are solely payments of principal and interest on principal and which are held within a business model whose objective is to hold assets in order to collect contractual cash flows are classified as amortised cost. All other financial assets are measured at fair value. Changes in the value of financial assets measured at fair value are generally taken to profit or loss.
In November 2013, the IASB published IFRS 9 ‘Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)’. These amendments introduce a new hedge accounting model. The classification of hedges into fair value, cash flow and net investment hedges has been retained. The changes to the current hedge accounting framework include: • Hedge effectiveness testing is prospective only based on the hedging objective.
• A risk component can be designated as the hedged item, for financial items and non-financial items, provided it is separately identifiable and reliably measureable.
• The time value of an option, the forward element of a forward contract and any foreign currency basis spread can be excluded from the designation of a financial instrument as the hedging instrument and accounted for as hedging costs.
• removed from IFRS 9 the effective date of 1 January 2015.
IFRS 9 makes major changes to the framework for financial instrument accounting. The Group is assessing its effect which will depend on the results of IASB's reconsideration of classification and measurement and the final requirements for the impairment of financial assets expected to be published in 2014.
Loans and advances to customers 15,125 16,188 17,827 Loans and advances to banks 430 493 680
Customer accounts: demand deposits 670 853 1,149 Customer accounts: savings deposits 1,367 1,612 1,307 Customer accounts: other time deposits 794 1,026 1,075 Deposits by banks 406 600 982 Debt securities in issue 1,307 2,023 3,371
Credit and debit card fees 1,078 1,088 1,093 Lending (credit facilities) 1,377 1,480 1,707
Other changes in the fair value of financial assets and liabilities designated as at fair value through profit or loss and related derivatives (26) 146 150 Changes in the fair value of investment properties (281) (153) (139) Profit on sale of securities 830 1,146 829 Profit on sale of property, plant and equipment 44 34 22 Profit on sale of subsidiaries and associates 168 95 (30)
Property, plant and equipment (see Note 18) 853 1,097 1,254 Intangible assets (see Note 17) 557 705 585 Depreciation and amortisation 1,410 1,802 1,839
Payment Protection Insurance (PPI) To reflect current experience of PPI complaints received, the Group increased its provision for PPI by £900 million in 2013 (2012 - £1,110 million; 2011 - £850 million), bringing the cumulative charge taken to £3.1 billion, of which £2.2 billion (70%) in redress had been paid by 31 December 2013. Of the £3.1 billion cumulative charge, £2.8 billion relates to redress and £0.3 billion to administrative expenses. The eventual cost is dependent upon complaint volumes, uphold rates and average redress costs.
The Group continues to monitor the level of provision given the uncertainties over the number of transactions that will qualify for redress and the nature and cost of that redress.
Regulatory and legal actions The Group is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. An additional charge of £2,394 million was booked in 2013, primarily in respect of matters related to mortgage-backed securities and securities related litigation following recent third party litigation settlements and regulatory decisions.
Integration costs included in operating expenses comprise expenditure incurred in respect of cost reduction and revenue enhancement programmes.
Staff costs — — 38 Premises and equipment 1 (2) 6 Other administrative expenses 1 2 51 Depreciation and amortisation — — 11
Premises and equipment 112 141 155 Other administrative expenses 177 261 268 Depreciation and amortisation 6 142 —
Divestment costs included in operating expenses comprise: 2013 2012 2011 £m £m £m
Premises and equipment 2 (2) 11 Other administrative expenses 77 62 50
The average number of persons employed, rounded to the nearest hundred, in the continuing operations of the Group during the year, excluding temporary staff, was 117,100 (2012 - 123,500; 2011 - 129,200); on the same basis there were 3,700 people employed in discontinued operations (2012 - 15,000; 2011 - 15,100). The average number of temporary employees during 2013 was 10,300 (2012 - 10,900; 2011 - 11,400). The number of persons employed in the continuing operations of the Group at 31 December, excluding temporary staff, were as follows: US Retail & Commercial 18,700 19,200 20,000
There were no people employed in discontinued operations at 31 December 2013 (2012 - 14,300; 2011 - 15,100).
Notes: (1) Awards are equity-settled unless international comparability is better served by cash-settled awards. (2) All awards have vesting conditions and therefore some may not vest. (3) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Medium-Term Performance Plan. (4) The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days preceding grant date.
The market value of awards exercised in 2013 was £6 million (2012 - £45 million; 2011 - £11 million).
The market value of awards exercised in 2013 was £37 million (2012 - £10 million; 2011 - £5 million). There are vested options over 13 million shares exercisable up to 2019 (2012 - 18 million shares up to 2019; 2011 - 5 million shares up to 2019).
The fair value of options granted in 2013 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historic volatility over a period of up to seven years; expected option lives that equal the vesting period; no dividends on equity shares; and a risk-free interest rate determined from the UK gilt rates with terms matching the expected lives of the options.
Add: current year charge for amounts deferred from prior years 294 355 484 Less: forfeiture of amounts deferred from prior years (37) (56) — Income statement charge for amounts deferred from prior years 257 299 484 Income statement charge for variable compensation (3) 588 716 975
Actual Expected 2015 2011 2012 2013 2014 and beyondYear in which income statement charge is expected to be taken for deferred variable compensation £m £m £m £m £m
Variable compensation deferred from 2011 and earlier 484 414 105 5 — Variable compensation deferred from 2012 — — 199 39 24 Clawback of variable compensation deferred from prior years — (59) (10) (3) — Less: forfeiture of amounts deferred from prior years — (56) (37) — — Variable compensation for 2013 deferred — — — 170 76
Notes: (1) The tables above relate to continuing businesses only. There are no amounts relating to discontinued businesses in 2013 (2012 - £24 million; 2011 - £32 million). (2) Cash payments to all employees are limited to £2,000. (3) Excludes other performance related compensation. (4) Reported operating profit excluding the impact of RCR and before variable compensation expense and one-off and other items.
The Main scheme corporate trustee is RBS Pension Trustee Limited (RBSPT), a wholly owned subsidiary of National Westminster Bank Plc. RBSPT is the legal owner of the Main scheme assets which are held separately from the assets of the Group. The Board of RBSPT comprises four trustee directors nominated by members selected from eligible active staff and pensioner members who apply and six appointed by the Group. The Board is responsible for operating the scheme in line with its formal rules and pensions law. It has a duty to act in the best interests of all scheme members, including pensioners and those who are no longer employed by the Group, but who still have benefits in the scheme.
The Main scheme, accounting for 86% (2012 and 2011 - 85%) of the Group’s retirement benefit obligations, was closed to new entrants in 2006. Since 2009, pensionable salary increases in the Main scheme and certain other UK and Irish schemes have been limited to 2% per annum or CPI inflation if lower. Also, with effect from 1 October 2012, the normal pension age for future benefits was increased to 65 unless members elected to make a contribution to maintain a normal pension age of 60.
The Group’s defined benefit schemes generally provide a pension of onesixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years. Employees making additional contributions can secure additional benefits.
Since October 2006, new UK entrants may join The Royal Bank of Scotland Retirement Savings Plan, a defined contribution pension scheme.
Interim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared at 31 December with the support of independent actuaries, using the following assumptions: Main scheme All schemes 2013 2012* 2011* 2013 2012* 2011*Principal actuarial assumptions
Note: (1) The discount rate and the expected return on plan assets for the Main scheme as at 31 December 2013 is 4.65%.
Discount rate The Group discounts its defined benefit pension obligations at discount rates determined by reference to the yield on ‘high quality’ corporate bonds.
Main scheme All schemes 2013 2012 2011 2013 2012 2011 Major classes of plan assets as a percentage of total
Quoted assets Quoted equities - Consumer industry 4.2 4.2 4.7 4.3 4.4 4.9 - Manufacturing industry 4.0 5.6 5.3 4.1 6.0 5.5 - Energy and utilities 3.6 4.1 2.5 3.6 4.4 2.6 - Financial institutions 3.9 4.1 3.6 3.9 4.4 3.8 - Technology and telecommunications 4.7 4.9 4.8 4.7 5.3 4.9 - Other 3.5 0.5 — 3.7 0.5 1.6 Private equity 4.9 5.4 5.8 4.4 4.7 4.9 Index-linked bonds 29.0 30.7 26.1 28.3 28.7 24.3 Government fixed interest bonds 2.1 1.9 0.9 2.2 2.9 2.8 Corporate fixed interest bonds 19.5 19.5 23.1 19.6 19.5 21.5
4 Pensions continued The assets of the Main scheme, which represent 85% of plan assets at 31 December 2013 (2012 - 85%; 2011 - 84%), are invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including property and hedge funds.
The Main scheme also employs derivative instruments, where appropriate, to achieve a desired asset class exposure or to match assets more closely to liabilities. The value of assets shown reflects the actual physical assets held by the scheme, with any derivative holdings valued on a mark-to-market basis.
The Main scheme’s holdings of derivative instruments are summarised in the table below: 2013 2012 2011 Notional Fair value Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities amounts Assets Liabilities £m £m £m £m £m £m £m £m £m
The investment strategy of other schemes is similar to that of the Main scheme, adjusted to take account of the nature of liabilities, risk appetite of the trustees, size of the scheme and any local regulatory constraints. The use of derivative instruments outside the Main scheme is not material.
Swaps are part of the management of the inflation and interest rate sensitivity of the Main scheme liabilities. They have been executed at prevailing market rates and within standard market bid/offer spreads. The majority of swaps are with The Royal Bank of Scotland plc and National Westminster Bank Plc (the “banks”). At 31 December 2013, the gross notional value of the swaps was £31,664 million (2012 - £28,541 million; 2011 - £22,918 million) and had a net positive fair value of £624 million (2012 - £370 million; 2011 - £431 million) to the scheme.
Collateral is required on all swap transactions with those between the banks and the Main scheme on terms that do not allow the banks to rehypothecate. The banks had delivered £633 million of collateral at 31 December 2013 (2012 - £521 million; 2011 - £375 million).
Longevity at age 60 for future pensioners currently aged 40 (years) Males 28.6 29.4 29.3 Females 30.8 31.0 30.9
Changes in value of net pension deficit* £m £m £m £m £m £m
Statement of comprehensive income - Experience gains and losses 986 (102) (1,088) 1,097 (176) (1,273) - Actuarial gains and losses due to changes in financial assumptions — 562 562 — 589 589 - Actuarial gains and losses due to changes in demographic assumptions — 224 224 — 238 238
Contributions by plan participants and other scheme members — — — 14 14 —
*Restated 2013 2012 2011 Net pension deficit comprises £m £m £m
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 19) (214) (144) (188) Net liabilities of schemes in deficit 3,210 3,884 2,239 2,996 3,740 2,051
The weighted average duration of the Main scheme’s defined benefit obligation at 31 December 2013 is 18.0 years (2012 - 19.2 years; 2011 - 18.2 years).
The Group expects to contribute a total of £785 million to its defined benefit pension schemes in 2014 (Main scheme - £633 million). Of the net liabilities of schemes in deficit, £155 million relates to unfunded schemes.
Fair value of plan assets 24,272 22,441 21,111 19,110 16,603 28,488 26,370 25,086 22,816 27,925 Present value of defined benefit obligations 26,958 25,648 22,955 21,092 18,675 31,484 30,110 27,137 24,999 30,830 Net deficit 2,686 3,207 1,844 1,982 2,072 2,996 3,740 2,051 2,183 2,905
The table below sets out the sensitivities of the pension cost for the year and the present value of defined benefit obligations at 31 December to a change in the principal actuarial assumptions: Main scheme All schemes (Decrease)/increase (Decrease)/increase in pension cost in obligation in pension cost in obligation for year at 31 December for year at 31 December 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 £m £m £m £m £m £m £m £m £m £m £m £m 0.25% increase in the discount rate (66) (66) (65) (1,187) (1,199) (1,019) (80) (80) (75) (1,379) (1,392) (1,181) 0.25% increase in inflation 52 60 59 895 995 911 58 66 65 1,000 1,129 1,040 0.25% additional rate of increase in pensions in payment 42 39 37 758 690 618 48 45 42 844 782 691 0.25% additional rate of increase in deferred pensions 18 20 21 329 297 285 21 23 23 383 342 322 0.25% additional rate of increase in salaries 9 6 6 83 95 56 12 9 9 110 125 79 Longevity increase of one year 35 33 34 728 647 566 39 38 40 801 727 671
Charge for the year (307) (495) (168) Over/(under) provision in respect of prior years 121 (63) 141 (186) (558) (27) Deferred tax Credit/(charge) for the year 375 101 (1,106) (Under)/over provision in respect of prior year (571) 16 58 Tax charge for the year (382) (441) (1,075)
Non-taxable items - gain on sale of RBS Aviation Capital — 26 — - gain on sale of WorldPay (Global Merchant Services) 37 — 12 - other non-taxable items 171 104 242 Taxable foreign exchange movements (25) (1) 4 Losses brought forward and utilised 36 2 2 Reduction in carrying value of deferred tax asset in respect of losses in - UK (701) — — - Australia — (191) — - Ireland — (203) — Adjustments in respect of prior years (2) 251 (47) 199 Actual tax charge (382) (441) (1,075)
Notes: (1) In recent years the UK Government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 21% with effect from 1 April 2014 and 20% with effect from 1 April 2015. The closing deferred tax assets and liabilities have been calculated in accordance with the rates enacted at the balance sheet date. (2) Prior year adjustments include releases of tax provisions in respect of structured transactions and investment disposals and adjustments to reflect submitted tax computations in the UK and overseas.
7 Profit attributable to preference shareholders and paid-in equity holders 2013 2012* 2011 £m £m £m
Notes: (1) Discretionary dividends on certain non-cumulative preference shares and discretionary distributions on certain innovative securities recommenced in May 2012. (2) Between 1 January 2014 and the date of approval of these accounts, dividends amounting to US$107 million and £0.4 million have been declared in respect of equity preference shares for payment 8 Ordinary dividends The company did not pay an ordinary dividend in 2013, 2012 or 2011.
Weighted average number of shares (millions) Ordinary shares outstanding during the year 6,096 5,902 5,722 Equivalent B shares in issue during the year 5,100 5,100 5,100 Weighted average number of ordinary shares and equivalent B shares outstanding during the year 11,196 11,002 10,822 *Restated
Cash and balances at central banks — — — 82,659 82,659 Loans and advances to banks - reverse repos 25,795 — — 721 26,516 - other (1) 9,952 — — 17,603 27,555 Loans and advances to customers - reverse repos 49,897 — — — 49,897 - other (2) 19,170 49 — 364,772 6,834 390,825 Debt securities 56,582 122 53,107 3,788 113,599 Equity shares 7,199 400 1,212 — 8,811 Settlement balances — — — 5,591 5,591 Derivatives 283,508 4,531 288,039 Intangible assets 12,368 12,368 Property, plant and equipment 7,909 7,909 Deferred tax 3,478 3,478 Prepayments, accrued income and other assets — — — — 7,614 7,614 Assets of disposal groups 3,017 3,017 452,103 571 4,531 54,319 475,134 6,834 34,386 1,027,878
Liabilities Deposits by banks - repos 23,127 — 5,523 28,650 - other (3) 19,764 — 15,565 35,329 Customer accounts - repos 52,300 — 4,184 56,484 - other (4) 10,236 5,862 398,298 414,396 Debt securities in issue (5) 8,560 15,848 43,411 67,819 Settlement balances — — 5,313 5,313 Short positions 28,022 — 28,022 Derivatives 281,299 4,227 285,526 Accruals, deferred income and other liabilities — — 1,764 19 14,234 16,017 Retirement benefit liabilities 3,210 3,210 Deferred tax 507 507 Subordinated liabilities — 868 23,144 24,012 Liabilities of disposal groups 3,378 3,378 423,308 22,578 4,227 497,202 19 21,329 968,663
Accruals, deferred income and other liabilities — — 1,684 12 13,105 14,801 Retirement benefit liabilities 3,884 3,884 Deferred tax 1,141 1,141
Notes: (1) Includes items in the course of collection from other banks of £1,454 million (2012 - £1,531 million; 2011 - £1,470 million). (2) The change in fair value of loans and advances to customers designated as at fair value through profit or loss attributable to changes in credit risk was a £5 million credit for the year and cumulatively a credit of £3 million (2012 - £22 million credit, cumulative £44 million credit; 2011 - £31 million charge, cumulative £71 million credit). (3) Includes items in the course of transmission to other banks of £828 million (2012 - £521 million; 2011 - £506 million). (4) The carrying amount of other customer accounts designated as at fair value through profit or loss is £412 million (2012 - £305 million; 2011 - £166 million) higher than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial, measured as the change in fair value from movements in the period in the credit risk premium payable. The amounts include investment contracts with a carrying value of nil (2012 - nil; 2011 - £38 million).
(5) Comprises bonds and medium term notes of £63,959 million (2012 - £88,723 million; 2011 - £129,780 million) and certificates of deposit and other commercial paper of £3,860 million (2012 - £5,869 million; 2011 - £32,841 million).
Liabilities Derivatives 540,622 (262,656) 277,966 (242,836) (20,429) (5,202) 9,499 Repurchase agreements 120,639 (40,658) 79,981 (11,379) — (68,602) — Customer accounts 6,491 (6,491) — — — — — Settlement balances 3,682 (2,672) 1,010 (262) — — 748 671,434 (312,477) 358,957 (254,477) (20,429) (73,804) 10,247
Derivatives 801,606 (373,476) 428,130 (373,906) (34,099) (5,616) 14,509 Reverse repurchase agreements 139,120 (38,377) 100,743 (17,439) — (83,304) — Loans to customers 1,748 (1,460) 288 — — — 288 Settlement balances 3,680 (2,456) 1,224 (345) — — 879 946,154 (415,769) 530,385 (391,690) (34,099) (88,920) 15,676
Liabilities Derivatives 796,991 (373,476) 423,515 (373,906) (24,633) (8,264) 16,712 Repurchase agreements 163,500 (38,377) 125,123 (17,439) — (107,684) — Customer accounts 1,897 (1,460) 437 — — — 437 Settlement balances 4,270 (2,456) 1,814 (345) — — 1,469 966,658 (415,769) 550,889 (391,690) (24,633) (115,948) 18,618
Effect of master after the effect of IFRS netting/similar Cash Other financial netting arrangements
Liabilities Derivatives 1,050,056 (544,491) 505,565 (441,626) (31,368) (8,585) 23,986 Repurchase agreements 150,389 (37,605) 112,784 (15,246) — (97,538) — Settlement balances 2,087 (1,359) 728 (728) — — — 1,202,532 (583,455) 619,077 (457,600) (31,368) (106,123) 23,986
Reclassification of financial instruments In 2008 and 2009, the Group reclassified financial assets from the held-for-trading (HFT) and available-for-sale (AFS) categories into the loans and receivables (LAR) category (as permitted by paragraph 50D of IAS 39 as amended) and from the HFT category into the AFS category (as permitted by paragraph 50B of IAS 39 as amended).
The tables below show the carrying value, fair value and the effect on profit or loss of these reclassifications undertaken by the Group. There have been no further reclassifications.
Reclassified from HFT to AFS (1) Debt securities 311 311 56 — 111 55
Amount recognised in Amount that Reduction/ income statement would have been (increase) in Impairment recognised had profit or loss
Reclassified from AFS to LAR (2) Debt securities 167 90 7 — 7 —
Reclassified from HFT to AFS (1) Debt securities 4,176 4,176 (84) (61) (20) 125 Equity shares — — — — 1 1
Reclassified from AFS to LAR (2) Debt securities 248 229 (11) (13) (24) —
Notes: (1) £113 million (2012 - £171 million; 2011 - £152 million) was taken to AFS reserves. (2) £1 million (2012 - £1 million; 2011 - £24 million) would have been taken to AFS reserves if reclassification had not occurred.
A new IPV quality hierarchy was implemented with detailed classifications linked to the fair value hierarchy principles as laid out in IFRS 13 ‘Fair value measurement’. The new hierarchy classifies IPV differences into fair value levels 1, 2 and 3 with the valuation uncertainty risk increasing as the levels rise from 1 to 3. These differences are then further classified into high, medium, low and indicative depending on the quality of the independent data available to validate the prices. Valuations are revised if they are outside agreed thresholds for each of the levels.
IPV is performed at a frequency to match the availability of independent data. For liquid instruments, the standard is to perform IPV daily. The minimum frequency of review in the Group is monthly for exposures in the regulatory trading book and quarterly for exposures in the regulatory banking book. Monthly meetings are held between the business and the support functions to discuss the results of the IPV and reserves. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Global Pricing Unit (GPU) determines IPV policy, monitors adherence to that policy and performs additional independent reviews on highly subjective valuation issues for Markets and Non-Core.
New products The Group has formal review procedures owned by Group Operational Risk to ensure that new products, asset classes and risk types are appropriately reviewed to ensure, amongst other things, that valuation is appropriate. The scope of this process includes new business, markets, models, risks and structures.
Valuation hierarchy There is a process to review and control the classification of financial instruments into the three level hierarchy established by IFRS 13. Some instruments may not easily fall into a level of the fair value hierarchy and judgment may be required as to which level the instrument is classified.
These initial classifications are reviewed and challenged by GPU and are also subject to senior management review. Particular attention is paid to instruments crossing from one level to another, new instrument classes or products, instruments that are generating significant profit and loss and instruments where valuation uncertainty is high.
Non-modelled products Non-modelled products are valued directly from a price input and are typically valued on a position by position basis and include cash, equities and most debt securities.
• Interest rates - these are principally benchmark interest rates such as the London Interbank Offered Rate (LIBOR), Overnight Index Swaps rate (OIS) and other quoted interest rates in the swap, bond and futures markets.
• Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres.
• Prepayment rates - the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, the Group considers the value of the prepayment option.
• Recovery rates/loss given default - these are used as an input to valuation models and reserves for asset-backed securities and other credit products as an indicator of severity of losses on default. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads.
11 Financial instruments - valuation continued The Group uses consensus prices for the source of independent pricing for some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products. Markets and Non-Core contribute to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services is used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that the Group submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
Valuation reserves When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The valuation framework used to determine the fair value of uncollateralised derivative exposures was refined during the year in line with market developments. The weightings applied to the expected losses and gains in the credit valuation adjustments (CVA) and own credit adjustments (OCA) calculations have been removed. Funding valuation adjustments (FVA) now reflect the counterparty contingent nature of the exposures. FVA is also now considered the primary adjustment applied to liabilities; the extent to which OCA and FVA overlap is eliminated from OCA. The following table shows CVA and other valuation reserves.
The table below analyses CVA relating to other counterparties by rating and sector.
• The decrease in bid-offer reserves during the year reflects risk reduction.
Monoline insurers The Group’s exposure to monolines is predominately credit default swaps (CDSs) referencing ABS held directly or synthetically.
The gross mark-to-market of the CDPC protection is determined using industry standard models. The table above includes valuation adjustments of £34 million relating to certain CDPCs which reflect trade restructuring levels of similar exposures in 2012. For trades facing other CDPCs, the CVA methodology is different to that outlined above for monolines, as there are no market observable credit spreads and recovery levels for these entities. The level of expected loss on these CDPC exposures is estimated with reference to risk mitigation strategies.
Expected losses are determined from market implied probabilities of default and internally assessed recovery levels. The probability of default is calculated with reference to observable credit spreads and observable recovery levels. For counterparties where observable data do not exist, the probability of default is determined from the credit spreads and recovery levels of similarly rated entities. Weightings that were previously applied in the expected losses calculation were removed during 2013 in line with market developments.
Risk data are used as the primary sources of information within bid-offer calculations and are aggregated when they are more granular than market standard buckets. Bid-offer adjustments for each risk factor (including delta (the degree to which the price of an instrument changes in response to a change in the price of the underlying), vega (the degree to which the price of an instrument changes in response to the volatility in the price of the underlying), correlation (the degree to which prices of different instruments move together)) are determined by aggregating similar risk exposures arising on different products. Additional basis bidoffer reserves are taken where these are charged in the market. Risk associated with non-identical underlying exposures is not netted down unless there is evidence that the cost of closing the combined risk exposure is less than the cost of closing on an individual basis.
Funding valuation adjustment (FVA) Funding valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate funding costs and benefits that arise in relation to uncollateralised derivative exposures.
The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserves are stated by conversion of underlying currency balances at spot rates for each period whereas the income statement includes intra-period foreign exchange sell-offs and excludes the impact of the methodology refinements relating to derivative financial liabilities.
The effect of change in credit spreads could reverse in future periods provided the liability is not repaid at a premium or a discount.
Key points • The cumulative OCA decreased during the year due to tightening of
• The cumulative OCA relating to derivatives decreased during the year due to tightening of RBS CDS spreads and the net impact of methodology refinements.
11 Financial instruments - valuation continued Financial instruments carried at fair value - valuation hierarchy The following tables show financial instruments carried at fair value on the Group's balance sheet by valuation hierarchy - level 1, level 2 and level 3.
Equity shares 7.0 1.1 0.7 8.8 13.1 1.3 0.8 15.2 12.4 1.8 1.0 15.2 Derivatives Foreign exchange — 60.6 1.3 61.9 — 61.7 1.4 63.1 — 72.9 1.6 74.5 Interest rate 0.1 216.5 1.4 218.0 0.1 362.7 0.6 363.4 0.2 420.8 1.1 422.1 Credit — 4.5 0.8 5.3 — 9.3 1.7 11.0 — 23.1 3.8 26.9 Equities and commodities — 2.8 — 2.8 — 4.3 0.1 4.4 — 5.9 0.2 6.1 0.1 284.4 3.5 288.0 0.1 438.0 3.8 441.9 0.2 522.7 6.7 529.6 65.1 439.6 6.8 511.5 96.8 644.6 10.4 751.8 127.4 738.4 16.4 882.2
Of which Core 64.9 436.2 4.9 506.0 96.4 637.3 5.6 739.3 126.9 724.5 7.2 858.6 Non-Core 0.2 3.4 1.9 5.5 0.4 7.3 4.8 12.5 0.5 13.9 9.2 23.6 65.1 439.6 6.8 511.5 96.8 644.6 10.4 751.8 127.4 738.4 16.4 882.2
AFS debt securities included above UK government 6.4 — — 6.4 8.0 — — 8.0 13.4 — — 13.4 US government 8.1 4.8 — 12.9 15.5 3.5 — 19.0 18.1 2.7 — 20.8 Other government 5.6 4.7 — 10.3 10.7 5.3 — 16.0 21.6 4.0 — 25.6 Corporate — 0.1 0.1 0.2 — 0.1 0.1 0.2 — 2.3 0.2 2.5 Financial institutions 0.7 21.5 1.1 23.3 0.5 27.1 2.9 30.5 0.2 39.3 5.5 45.0 20.8 31.1 1.2 53.1 34.7 36.0 3.0 73.7 53.3 48.3 5.7 107.3
RMBS — 18.9 0.1 19.0 — 23.3 0.2 23.5 — 30.9 0.2 31.1 CMBS — 3.1 — 3.1 — 2.3 — 2.3 — 0.7 — 0.7 CDO — — 0.3 0.3 — 0.1 0.5 0.6 — 0.2 1.4 1.6 CLO — 0.1 0.6 0.7 — 0.4 1.9 2.3 — 1.0 3.3 4.3 Other — 1.0 0.1 1.1 — 1.3 0.2 1.5 — 2.3 0.7 3.0
Of which Core 21.0 31.5 0.5 53.0 34.9 35.7 0.6 71.2 53.6 46.9 0.6 101.1 Non-Core — 0.2 1.1 1.3 0.1 1.0 2.8 3.9 — 2.7 5.5 8.2 21.0 31.7 1.6 54.3 35.0 36.7 3.4 75.1 53.6 49.6 6.1 109.3
Of which Core 24.0 420.1 4.5 448.6 23.7 634.4 4.7 662.8 34.8 708.9 5.7 749.4 Non-Core — 1.4 0.1 1.5 — 2.1 0.2 2.3 — 6.1 0.6 6.7 24.0 421.5 4.6 450.1 23.7 636.5 4.9 665.1 34.8 715.0 6.3 756.1
Liabilities Deposits by bank 0.1 10 — 0.1 — (20) — — — Customer accounts 0.2 — (10) 0.1 30 (30) — 20 (20)
Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable market data. Where inputs can be observed from market data without undue cost and effort, the observed input is used. Otherwise, the Group determines a reasonable level for the input. Financial instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, majority of CDOs, other mortgage-backed products and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a financial instrument valued using a technique incorporating significant unobservable data.
Key points • Level 3 instruments are primarily in Markets, comprising instruments held in the normal course of business, and Non-Core, relating to legacy securities and derivatives positions.
• Level 3 assets of £6.8 billion represented 1.3% of the total (31
December 2012 - £10.4 billion, 1.4%), a decrease of £3.6 billion. This reflected sales, maturities and amortisation of instruments, particularly securities in Non-Core.
• Level 3 liabilities decreased by £0.3 billion to £4.6 billion primarily related to settlements of instruments.
• Improvements in IPV methodology (see page 412) resulted in £0.4 billion assets and £0.5 billion liabilities, principally derivatives transfers from level 3 to level 2. Transfers from level 2 to level 3 comprised: derivatives (assets £0.9 billion and liabilities £0.5 billion), debt securities in issue of £0.3 billion and debt securities of £0.2 billion relating to securities, primarily ABS, in Non-Core. Market illiquidity towards the end of June was a major cause for the transfers. There were no significant transfers between level 1 and level 2.
DCF Probability of default (5) 2% 7% Conditional prepayment rates (CPR) (7) 0% 7%
Other debt securities 0.4 DCF Credit spreads (3) 99bps 140bps Price based Price (2) 68% 100%
Equities and commodities 0.8 Option pricing model Volatility (6) 16% 40%
DCF based on defaults and recoveries Recovery rates (4) 0% 100%
Notes: (1) Level 3 structured issued debt securities of £1.3 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component. (2) Price and yield: There may be a range of price based information used for evaluating the value of an instrument. This may be a direct comparison of one instrument or portfolio with another or movements in a more liquid instrument may be used to indicate the movement in the value of less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected payouts. Similarly to price, an instrument’s yield may be compared to other instruments either directly or indirectly. Prices move inversely to yields.
(3) Credit spreads and discount margins: Credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(4) Recovery rate: Reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(10) Upfront points: These are similar to credit spreads in that a higher figure is a measure of increased credit risk. A credit derivative price can be quoted on either credit spread or upfront points basis and the two can be considered a near equivalent from a risk perspective. As with credit spreads higher upfront points indicate that the underlying entity has a higher credit risk associated with it.
Active and inactive markets A key input in the decision making process for the allocation of assets to a particular level is liquidity. In general, the degree of valuation uncertainty depends on the degree of liquidity of an input. For example, a derivative can be placed into level 2 or level 3 dependent upon the liquidity of level 3 inputs.
The decision to classify a modelled asset as level 2 or 3 will be dependent upon the product/model combination, the currency, the maturity, the observability and quality of input parameters and other factors. All these need to be assessed to classify the asset.
An assessment is made of each input into a model. There may be multiple inputs into a model and each is assessed in turn for observability and quality. As part of the process of classifying the quality of IPV results the IPV quality classifications have been designed to follow the accounting level classifications, although with a further level of granularity. For example there are a number of different IPV quality levels that equate to a level 2 classification and so on.
The availability and quality of independent pricing information is considered during the classification process. An assessment is made regarding the quality of the independent information. For example where consensus prices are used for non-modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating. However, where an instrument is generally considered to be illiquid, but regular quotes from market participants exist, these instruments may be classified as level 2 depending on frequency of quotes, other available pricing and whether the quotes are used as part of the IPV process or not.
Instruments that cross levels Some instruments will predominantly be in one level or the other, but others may cross between levels. For example, a cross currency swap may be between very liquid currency pairs where pricing is readily observed in the market and will therefore be classified as level 2. The cross currency swap may also be between two illiquid currency pairs in which case the swap would be placed into level 3. Defining the difference between liquid and illiquid may be based upon the number of consensus providers the consensus price is made up from and whether the consensus price can be supplemented by other sources.
A collateral net asset value methodology using dealer buy side price is used to determine an upper bound for super senior CDO valuations. An ABS index implied collateral valuation is also used to provide a market calibrated valuation data point. Both the ABS index implied valuation and the collateral net asset value methodology apply an assumed immediate liquidation approach.
Collateralised loan obligations (CLO) To determine the fair value of CLOs purchased from third parties, the Group uses third party broker or lead manager quotes as the primary pricing source. These quotes are benchmarked to consensus pricing sources where they are available.
Other unique trades are valued using a specialised model for each instrument and the same market data inputs as all other trades where applicable. By their nature, the valuation is also driven by a variety of other model inputs, many of which are unobservable in the market. Where these instruments have embedded optionality they are valued using a variation of the Black-Scholes option pricing formula, and where they have correlation exposure they are valued using a variant of the Gaussian Copula model. The volatility or unique correlation inputs required to value these products are generally unobservable and the instruments are therefore deemed to be level 3 instruments.
Equity derivatives Equity derivative products are analysed into equity exotic derivatives and equity hybrids. Exotic equity derivatives have payouts based on the performance of one or more stocks, equity funds or indices. Most payouts are based on the performance of a single asset and are valued using observable market option data. Unobservable equity derivative trades are typically complex basket options on stocks. Such basket option payouts depend on the performance of more than one equity asset and require correlations for their valuation. Valuation is then performed using industry standard valuation models, with unobservable correlation inputs calculated by reference to correlations observed between similar underlyings.
Other considerations Valuation adjustments CVA applied to derivative exposures to other counterparties and own credit adjustments applied to derivative liabilities (DVA) are calculated on a portfolio basis. Whilst the methodology used to calculate each of these adjustments references certain inputs which are not based on observable market data, these inputs are not considered to have a significant effect on the net valuation of the related portfolios. The classification of the derivative portfolios which the valuation adjustments are applied to is not determined by the observability of the valuation adjustments, and any related sensitivity does not form part of the level 3 sensitivities presented.
Own credit - issued debt For structured notes issued the own credit adjustment is based on debt issuance spreads above average inter-bank rates at the reporting date (at a range of tenors). Whilst certain debt issuance spreads are not based on observable market data, these inputs are not considered to have a significant effect on the valuation of individual trades. Neither the classification of structured notes issued nor any related valuation sensitivities are determined by the observability of the debt issuance spreads.
11 Financial instruments - valuation continued Level 3 movement table Amounts recorded in the
FVTPL (3) Loans and advances - banks 382 (48) — — — — — (19) — (5) 310 (93) 45 - customers 562 (32) — 87 (6) 68 — (66) (446) 5 172 (90) 12 Debt securities 1,938 77 — 198 (64) 521 — (121) (1,613) (30) 906 (42) 87 Equity shares 396 (7) — 25 (64) 52 — (20) (100) 4 286 1 3 Derivatives 3,789 (560) — 897 (253) 413 4 (624) (169) (4) 3,493 (614) 9 FVTPL assets 7,067 (570) — 1,207 (387) 1,054 4 (850) (2,328) (30) 5,167 (838) 156
AFS Debt securities 2,948 66 150 129 (13) 90 — (721) (1,434) (21) 1,194 15 41 Equity shares 390 4 9 54 (1) 32 — (4) (59) (25) 400 (11) — AFS assets 3,338 70 159 183 (14) 122 — (725) (1,493) (46) 1,594 4 41 10,405 (500) 159 1,390 (401) 1,176 4 (1,575) (3,821) (76) 6,761 (834) 197
Of which ABS - FVTPL (3) 1,350 85 — 197 (60) 489 — (121) (1,348) (1) 591 (17) 76 - AFS 2,815 84 152 129 (13) 68 — (719) (1,420) 12 1,108 13 41
Liabilities Deposits 168 (32) — 140 (31) — 11 (2) — (1) 253 (26) — Debt securities in issue 1,363 26 — 277 (192) — 425 (537) — (8) 1,354 (29) 50 Short positions 2 — — 22 — 5 — — (10) (2) 17 (2) 1 Derivatives 3,317 38 — 483 (259) 338 — (701) (202) (7) 3,007 (93) 16 4,850 32 — 922 (482) 343 436 (1,240) (212) (18) 4,631 (150) 67
Amount recorded in the Level 3 transfers Foreign Income statement on At Income exchange At balances at year end 1 January statement (1) SOCI (2) In Out Purchases Issuances Settlements Sales and other 31 December Unrealised Realised 2012 £m £m £m £m £m £m £m £m £m £m £m £m £m
FVTPL (3) Loans and advances - banks 444 5 — 28 (1) — — (64) (30) — 382 5 — - customers 316 3 — 20 (15) 589 — (323) (15) (13) 562 (12) 3 Debt securities 2,243 136 — 619 (81) 1,118 — (188) (1,886) (23) 1,938 (54) 72 Equity shares 573 (26) — 32 (61) 158 — (73) (198) (9) 396 (21) 4 Derivatives 6,732 (2,078) — 425 (495) 441 — (990) (183) (63) 3,789 (1,761) 34 FVTPL assets 10,308 (1,960) — 1,124 (653) 2,306 — (1,638) (2,312) (108) 7,067 (1,843) 113
AFS Debt securities 5,697 100 13 391 (472) 37 — (1,004) (1,808) (6) 2,948 (106) 39 Equity shares 395 74 64 74 — 15 — (1) (218) (13) 390 55 12 AFS assets 6,092 174 77 465 (472) 52 — (1,005) (2,026) (19) 3,338 (51) 51 16,400 (1,786) 77 1,589 (1,125) 2,358 — (2,643) (4,338) (127) 10,405 (1,894) 164
Amount recorded in the Level 3 transfers Foreign Amounts recorded in the
FVTPL (3) Loans and advances - banks 383 3 — 60 — 51 — (36) (18) 1 444 2 - customers 460 (18) — 85 — 650 — (820) (46) 5 316 (13)
Cash and balances at central banks 82,659 — 82,659 79,290 — 79,290 79,269 — 79,269 Loans and advances to banks 53,206 865 54,071 63,143 808 63,951 80,905 2,405 83,310 Loans and advances to customers 169,314 271,408 440,722 197,855 302,280 500,135 197,338 318,268 515,606 Debt securities 19,542 94,057 113,599 26,363 131,075 157,438 45,311 163,769 209,080 Equity shares — 8,811 8,811 — 15,232 15,232 — 15,183 15,183 Settlement balances 5,591 — 5,591 5,741 — 5,741 7,767 4 7,771 Derivatives 45,067 242,972 288,039 51,021 390,882 441,903 60,250 469,368 529,618
Liabilities Deposits by banks 61,108 2,871 63,979 90,704 10,701 101,405 100,499 8,305 108,804 Customer accounts 455,620 15,260 470,880 494,405 26,874 521,279 487,428 15,527 502,955 Debt securities in issue 16,547 51,272 67,819 20,296 74,296 94,592 68,889 93,732 162,621 Settlement balances and short positions 10,490 22,845 33,335 8,573 24,896 33,469 15,248 33,268 48,516 Derivatives 45,385 240,141 285,526 51,503 382,830 434,333 61,734 462,249 523,983 Subordinated liabilities 1,350 22,662 24,012 2,351 24,422 26,773 624 25,695 26,319
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by the Group, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
Held-for-trading assets of £452.1 billion and liabilities of £423.3 billion (2012 - £666.5 billion assets and £628.2 billion liabilities; 2011 - £763.3 billion assets and £708.0 billion liabilities) have been excluded from the following tables in view of their short-term nature.
12 Financial instruments - maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2013 £m £m £m £m £m £m
Liabilities by contractual maturity Deposits by banks 16,867 1,550 1,306 158 944 426 Debt securities in issue 11,457 7,601 16,375 7,356 9,879 4,840 Subordinated liabilities 324 1,982 6,473 6,140 11,376 3,345 Settlement balances and other liabilities 7,074 4 9 4 — 1 Total maturing liabilities 35,722 11,137 24,163 13,658 22,199 8,612 Customer accounts 388,322 9,524 5,889 2,356 698 35 Derivatives held for hedging 130 271 933 1,190 1,732 330 424,174 20,932 30,985 17,204 24,629 8,977
Cash and balances at central banks 79,290 — — — — — Loans and advances to banks 15,592 1,393 272 27 20 62 Debt securities 6,320 4,505 13,330 19,369 25,772 10,644 Settlement balances 5,741 — — — — — Total maturing assets 106,943 5,898 13,602 19,396 25,792 10,706 Loans and advances to customers 73,590 57,403 93,445 65,569 76,682 87,450 Derivatives held for hedging 571 1,878 3,909 1,879 429 67 181,104 65,179 110,956 86,844 102,903 98,223
Liabilities by contractual maturity Deposits by banks 23,363 973 8,336 388 1,091 594 Debt securities in issue 15,072 14,555 23,733 13,118 20,154 4,975 Subordinated liabilities 318 2,979 7,045 3,182 11,134 3,603 Settlement balances and other liabilities 7,560 4 9 1 — 1 Total maturing liabilities 46,313 18,511 39,123 16,689 32,379 9,173 Customer accounts 386,504 24,123 11,791 2,186 1,246 63 Derivatives held for hedging 310 752 1,790 1,262 1,244 684 433,127 43,386 52,704 20,137 34,869 9,920
Liabilities by contractual maturity Deposits by banks 39,139 5,104 5,513 461 1,121 364 Debt securities in issue 66,253 15,756 25,099 17,627 18,833 4,190 Subordinated liabilities 133 1,116 4,392 7,872 8,654 3,488 Settlement balances and other liabilities 9,015 37 36 62 16 15 Total maturing liabilities 114,540 22,013 35,040 26,022 28,624 8,057 Customer accounts 379,692 23,068 12,643 5,389 1,483 779 Derivatives held for hedging 525 788 1,981 1,186 1,101 821 494,757 45,869 49,664 32,597 31,208 9,657
Maturity gap 6,448 (10,984) (11,359) (4,881) 11,376 7,812 Cumulative maturity gap 6,448 (4,536) (15,895) (20,776) (9,400) (1,588)
Guarantees and commitments notional amount Guarantees (1) 24,886 — — — — — Commitments (2) 239,963 — — — — — 264,849 — — — — —
Individually Collectively assessed assessed Latent 2013 2012 2011 £m £m £m £m £m £m
Unwind of discount (recognised in interest income) (260) (131) — (391) (476) (484)
Notes: (1) Includes £63 million relating to loans and advances to banks (2012 - £114 million; 2011 - £123 million). (2) The table above excludes impairments relating to securities.
Loans and advances to customers 8,427 5,292 7,241 Loans and advances to banks (15) 23 — 8,412 5,315 7,241 Debt securities 20 (67) 1,431 Equity shares — 31 35 20 (36) 1,466 8,432 5,279 8,707
Notes: (1) Impairment provisions individually assessed. (2) Impairment provisions individually assessed on balances of £26,939 million (2012 - £26,797 million; 2011 - £29,058 million).
For fair value hedge relationships of interest rate risk, the hedged items are typically government bonds, large corporate fixed-rate loans, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. At 31 December 2013, fixed rate financial assets of £23 billion (2012 - £25 billion; 2011 - £33 billion) and fixed rate financial liabilities of £34 billion (2012 - £39 billion; 2011 - £41 billion) were hedged by interest rate swaps in fair value hedge relationships.
(Losses)/gains on the hedged items attributable to the hedged risk (165) 178 557 Gains/(losses) on the hedging instruments 154 (132) (541) Fair value hedging ineffectiveness (11) 46 16 Cash flow hedging ineffectiveness (64) 26 20 (75) 72 36
Over 0-1 years 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years 10-20 years 20 years Total 2013 £m £m £m £m £m £m £m £m £m
Forecast receivable cash flows 285 259 232 177 138 190 — — 1,281 Forecast payable cash flows (56) (45) (37) (35) (35) (172) (259) (39) (678)
Hedged forecast cash flows affect on profit or loss Forecast receivable cash flows 422 402 355 291 188 265 — — 1,923 Forecast payable cash flows (122) (102) (72) (70) (70) (346) (568) (159) (1,509)
Gross gains of £1,111 million (2012 - £1,883 million; 2011 - £739 million) and gross losses of £353 million (2012 - £901 million; 2011- £60 million) were realised on the sale of available-for-sale securities in continuing operations.
Designated as at fair value through profit or loss 172 228 400 251 282 533 373 401 774
Available-for-sale Gross unrealised gains 73 177 250 58 172 230 69 317 386
Gross gains of £76 million (2012 - £166 million; 2011 - £152 million) and gross losses of £4 million (2012 and 2011 - £2 million) were realised on the sale of available-for-sale equity shares in continuing operations. Gross gains of nil (2012 - £23 million; 2011 - nil) were realised on the sale of availablefor -sale equity shares in discontinued operations.
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. They include capital stock (redeemable at cost) in the Federal Home Loan Bank and the Federal Reserve Bank of £0.6 billion (2012 and 2011 - £0.7 billion) that the Group's banking subsidiaries in the US are required to hold; and a number of individually small shareholdings in unlisted companies. Disposals in the year generated gains of £3 million (2012 and 2011 - £2 million).
Cost At 1 January 25,288 178 830 5,010 31,306 Transfers to disposal groups — — (43) (24) (67) Currency translation and other adjustments (5) 3 2 (14) (14) Additions — — 84 907 991 Disposals and write-off of fully amortised assets (1) (1) (18) (1,321) (1,341)
Net book value at 31 December 10,139 5 113 2,111 12,368 2012 Cost At 1 January 26,843 620 2,432 5,448 35,343 Transfers to disposal groups (984) — (15) (341) (1,340) Currency translation and other adjustments (486) (16) (74) (368) (944) Acquisition of subsidiaries — — — 5 5 Additions — — 39 909 948 Disposals and write-off of fully amortised assets (85) (426) (1,552) (643) (2,706)
Accumulated amortisation and impairment At 1 January 14,419 495 1,951 3,620 20,485 Transfers to disposal groups (444) — (10) (136) (590) Currency translation and other adjustments (289) (13) (55) (356) (713) Disposals and write-off of fully amortised assets (76) (426) (1,542) (638) (2,682) Charge for the year - continuing operations — 20 157 528 705 - discontinued operations — — 1 37 38 Write-down of goodwill and other intangible assets - continuing operations 18 7 94 5 124 - discontinued operations 394 — — — 394 At 31 December 14,022 83 596 3,060 17,761
Impairment testing involves the comparison of the carrying value of a CGU or group of CGUs with its recoverable amount. Recoverable amount is the higher of fair value and value in use. Value in use is the present value of expected future cash flows from the CGU or group of CGUs. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
In the light of downward revisions to its forecast financial performance, goodwill attributable to International Banking (IB) was tested for impairment as at 31 December 2013: recoverable amount was its value in use and the discount rate used in the calculation of value in use was 9.5% (30 September 2012 - 12.2%). The results showed IB goodwill in its entirety was impaired and an impairment loss of £1.1 billion has been recognised in profit or loss.
The Group will accelerate the divestment of RBS Citizens Financial Group, the Group’s US banking subsidiary. A partial initial public offering is now planned for 2014 and the Group intends to fully divest the business by the end of 2016. Notwithstanding this planned course of action, the recoverable amount of the US Retail & Commercial CGU remains its value in use.
The carrying value of goodwill and amount by which it is exceeded by the recoverable amount is set out below by division along with the key assumptions applied in calculating the recoverable amount and sensitivities to changes in those assumptions.
Consequential Consequential impact of 1% impact of 5% Assumptions Recoverable adverse movement in adverse movement Terminal Pre-tax amount exceeded Discount Terminal in forecast Goodwill growth rate discount rate carrying value rate growth rate pre-tax earnings September 2013 £bn % % £bn £bn £bn £bn
18 Property, plant and equipment Long Short Computers Operating Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2013 £m £m £m £m £m £m £m
Accumulated impairment, depreciation and amortisation At 1 January — 852 151 924 3,228 1,122 6,277 Transfers to disposal groups — (6) — (9) (35) — (50) Currency translation and other adjustments — 4 5 (7) (35) (4) (37) Write down of property, plant and equipment — 15 3 — — — 18 Disposals and write-off of fully depreciated assets — (12) (1) (65) (561) (559) (1,198) Charge for the year — 110 11 137 384 211 853 At 31 December — 963 169 980 2,981 770 5,863
Long Short Computers Operating Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2011 £m £m £m £m £m £m £m
At 1 January 4,170 2,938 291 1,832 4,239 9,235 22,705 Transfers to disposal groups — (107) (12) (93) (49) (5,355) (5,616) Currency translation and other adjustments (103) 2 (4) (6) (77) 3 (185) Reclassifications 57 8 (38) (35) 8 — — Additions 1,262 68 46 174 532 1,384 3,466 Expenditure on investment properties 14 — — — — — 14 Change in fair value of investment properties - continuing operations (139) — — — — — (139) Disposals and write-off of fully depreciated assets (793) (54) (10) (49) (174) (1,375) (2,455)
Valuations were carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body; property with a fair value of £985 million was valued by independent valuers.
The fair value of investment properties includes £271 million of depreciation since purchase (2012 - £186 million; 2011 - £146 million).
19 Prepayments, accrued income and other assets 2013 2012 2011 £m £m £m
Prepayments 612 904 1,123 Accrued income 530 526 672 Deferred expenses 42 57 502 Pension schemes in net surplus (see Note 4) 214 144 188 Interests in associates 902 776 344 Other assets 5,314 5,413 8,147 7,614 7,820 10,976
20 Discontinued operations and assets and liabilities of disposal groups The Group sold the first tranche of ordinary shares representing 34.7% of the share capital of Direct Line Insurance Group plc (DLG) in October 2012 via an Initial Public Offering. On 13 March 2013, the Group sold a further 16.8% of ordinary shares in DLG and ceded control. This fulfilled the Group’s plan to cede control of DLG by the end of 2013 and is a step toward complete disposal by the end of 2014, as required by the European Commission. Consequently, DLG is treated as a discontinued operation until 12 March 2013 and as an associate thereafter.
(a) Profit/(loss) from discontinued operations, net of tax 2013 2012 2011 £m £m £m
Other Total income 26 29 42 Operating expenses (1) (3) (5) Profit before impairment losses 25 26 37 Impairment losses — (4) 8 Profit before tax 25 22 45 Tax charge (11) (8) (11)
Businesses acquired exclusively with a view to disposal Profit/(loss) after tax 7 (2) 13 Profit from other discontinued operations, net of tax 21 12 47
(b) Cash flows attributable to discontinued operations Included within the Group's cash flows are the following amounts attributable to discontinued operations: Net cash flows from operating activities 101 (839) (246) Net cash flows from investing activities 45 1,724 (87) Net cash flows from financing activities (346) (775) (115) Net (decrease)/increase in cash and cash equivalents (210) 108 (454)
In addition, disposal groups at 31 December 2013 include the Chicago area retail branches, small business operations and select middle market relationships in the Chicago market which form part of RBS Citizens Financial Group and the interest in associates in DLG. No adjustment was required to the carrying value of these assets and liabilities on reclassification. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, comparatives have not been restated.
Following Santander’s withdrawal from the proposed sale of the UK branch-based businesses in October 2012, the Group concluded that a sale within 12 months was no longer highly probable; accordingly at 31 December 2012 the assets and liabilities of the UK branch-based businesses ceased to be classified as a disposal group. No adjustment was required to the carrying value of these assets and liabilities on reclassification. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, comparatives were not restated.
(d) Direct Line Group assets and liabilities 2013 2012 2011 General insurance business assets and liabilities £m £m £m
Derivatives — 4 — Insurance liabilities — 6,193 6,233 Subordinated liabilities — 529 — Accruals, deferred income and other liabilities — 2,541 2,739 Liabilities of disposal group — 9,267 —
Debt securities - Government 24,661 23,551 32,895 - Other issuers 3,102 3,429 6,164 Equity shares 259 611 1,980 28,022 27,591 41,039 Note: (1) All short positions are classified as held-for-trading.
22 Accruals, deferred income and other liabilities 2013 2012 2011 £m £m £m
Insurance (1) Products (2) redress (3) LIBOR (4) provisions (5) Litigation (6) redress (7) Property (8) Other Total Provisions for liabilities and charges £m £m £m £m £m £m £m £m £m £m
Transfer from accruals and other liabilities — — — 10 10 — — 21 (21) 20 Currency translation and other movements — — (3) (2) — (25) — (2) (2) (34)
Notes: (1) The principal assumptions underlying the Group’s provision in respect of PPI sales are: assessment of the total number of complaints that the Group will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of the Group’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in the FSA policy statements and expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and the calculation rules in the FSA statement.
Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to the Group of administering the redress process. The Group expects the majority of the cash outflows associated with this provision to have occurred by the end of 2014. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs.
22 Accruals, deferred income and other liabilities continued (2) The Group has estimated £1,250 million for its liability in respect of the sale of Interest Rate Hedging Products based on experience, having now agreed a substantial number of outcomes with the independent skilled person appointed to review all decisions. The provision includes redress that will be paid to customers, interest payable on customer redress, the cost to the Group of exiting the hedging positions and the cost of undertaking the review. It does not include provision for any consequential losses that customers may have suffered as the Group is unable to reliably measure any liability it may have for such losses.
Uncertainties remain over the number of transactions that will qualify for redress and the nature and cost of that redress.
(3) The Group has provided for customer redress in relation to certain other retail products. None of these provisions are individually material.
Transfers to disposal groups 1 — — — — — 2 — — — — — 3
Charge/(credit) to income statement - continuing operations 43 (482) 237 (13) 84 25 (18) (15) (128) — 225 (75) (117)
(Credit)/charge to other comprehensive income (352) — — (10) — — 200 — 155 5 (170) — (172) Currency translation and other adjustments — (43) 46 49 (25) 6 7 (10) — — 8 (20) 18
23 Deferred tax continued UK tax losses Under UK tax rules, tax losses do not expire and can be carried forward indefinitely.
The Royal Bank of Scotland plc reported a taxable profit in 2011 and tax losses in 2012 and 2013. The taxable loss for 2012 reflected the reversal of previous own credit gains offset by core banking profitability. In 2013, core profitability remains strong; the UK tax losses of £3 billion are attributable to the loan impairment charges arising from the RCR accelerated recovery strategy recorded in the final quarter of the year and significant regulatory and conduct provisions. The additional restructuring costs anticipated by the latest strategic plan will constrain the utilisation of carried forward tax losses in the near-term. Consequently a reduction in the carrying value of deferred tax assets of £701 million has been recorded in 2013. In addition, deferred tax has not been recognised in respect of excess 2013 UK taxable losses of £750 million, representing an unprovided deferred tax asset of £150 million. The Group expects that the recognised deferred tax asset in respect of tax losses amounting to £8,465 million will be recovered within eight years. A 20% reduction in forecast profits would extend the recovery period by a year.
RBS Citizens Financial Group - a deferred tax asset of £11 million has been recognised in respect of total tax losses of £32 million carried forward at 31 December 2013. Based on the Group’s strategic plan, the losses on which a deferred tax asset has been recognised will be utilised against future taxable profits in 2014. A 20% reduction in forecast profits would not extend the recovery period beyond 2014.
Dated loan capital 17,597 20,210 19,654 Undated loan capital 5,376 5,488 5,549 Preference shares 1,039 1,075 1,116 24,012 26,773 26,319
In March 2012, the Group exchanged certain subordinated debt securities for new subordinated debt securities. The exchanges involving instruments classified as liabilities all met the criteria in IFRS for treatment as the extinguishment of the original liability and the recognition of a new financial liability.
The Group has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBSG 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.
2014 2015 2016-2018 2019-2023 Thereafter Perpetual Total 2013 - final redemption £m £m £m £m £m £m £mv
Currently 2014 2015 2016-2018 2019-2023 Thereafter Perpetual Total 2013 - call date £m £m £m £m £m £m £m £m
Currently 2012 2013 2014-2016 2017-2021 Thereafter Perpetual Total 2011 - call date £m £m £m £m £m £m £m £m
Sterling 15 127 218 855 593 176 171 2,155 US dollar 3,230 3,974 765 1,196 824 1,059 314 11,362 Euro 159 2,714 1,299 1,954 2,863 513 47 9,549 Other 9 1,407 489 1,306 42 — — 3,253 3,413 8,222 2,771 5,311 4,322 1,748 532 26,319
Dated loan capital Capital 2013 2012 2011 treatment £m £m £m
The Royal Bank of Scotland Group plc US$750 million 5% subordinated notes (redeemed November 2013) (1) Lower Tier 2 — 485 522 US$750 million 5% subordinated notes 2014 (1) Lower Tier 2 479 520 558 US$250 million 5% subordinated notes 2014 (1) Lower Tier 2 153 152 163 US$675 million 5.05% subordinated notes 2015 (1) Lower Tier 2 436 463 494 US$350 million 4.7% subordinated notes 2018 (1) Lower Tier 2 243 262 271 US$2,250 million 6.125% subordinated notes 2022 (1) Lower Tier 2 1,226 1,398 — US$2,000 million 6% subordinated notes 2023 (issued December 2013) (1) Lower Tier 2 1,183 — — US$1,000 million 6.1% subordinated notes 2023 (issued June 2013) (1) Lower Tier 2 567 — —
The Royal Bank of Scotland plc continued CHF400 million 2.375% subordinated notes 2015 Lower Tier 2 283 287 295 CHF100 million 2.375% subordinated notes 2015 (callable annually from November 2013) Lower Tier 2 78 84 88 CHF200 million 2.375% subordinated notes 2015 Lower Tier 2 135 134 136 US$229 million (2011 - US$500 million) floating rate subordinated notes 2016 (callable quarterly from October 2011) (2) Lower Tier 2 139 142 324 US$686 million (2011 - US$1,500 million) floating rate subordinated notes 2016 (callable quarterly from April 2011) (2) Lower Tier 2 415 425 971 €227 million (2011 - €500 million) floating rate subordinated notes 2016 (callable quarterly from January 2011) (2) Lower Tier 2 189 185 420 CHF34 million (2011 - CHF200 million) floating rate subordinated notes 2017 (callable annually from December 2012) (2) Lower Tier 2 23 23 138 €100 million floating rate subordinated notes 2017 Lower Tier 2 83 82 84 €102 million (2011 - €500 million) floating rate subordinated notes 2017 (callable quarterly from January 2012) (2) Lower Tier 2 85 84 419 €750 million 4.35% subordinated notes 2017 Lower Tier 2 712 721 723 AUD50 (2011 - AUD450 million) floating rate subordinated notes 2017 (callable quarterly from February 2012) (2) Lower Tier 2 27 32 303 AUD90 million (2011 - AUD450 million) floating rate subordinated notes 2017 (callable quarterly from February 2012) (2) Lower Tier 2 49 58 298 US$450 million (2011 - US$1,500 million) floating rate subordinated step-up notes 2017 (callable quarterly from August 2012) (2) Lower Tier 2 272 279 971 €2,000 million 6.93% subordinated notes 2018 Lower Tier 2 1,996 2,033 2,023 US$125.6 million floating rate subordinated notes 2020 Lower Tier 2 76 78 81 €1,000 million 4.625% subordinated notes 2021 (callable quarterly from September 2016) Lower Tier 2 925 938 948 €300 million CMS linked floating rate subordinated notes 2022 Lower Tier 2 234 272 271 €144.4 million floating rate subordinated notes 2023 Lower Tier 2 109 224 157 AUD883 million 13.125% subordinated notes 2022 (callable bi-annually from March 2017) Lower Tier 2 506 585 — CAD420 million 10.5% subordinated notes 2022 (callable bi-annually from September 2013) Lower Tier 2 246 269 — CHF124 million 9.375% subordinated notes 2022 (callable annually from March 2017) Lower Tier 2 92 90 — €564 million 10.5% subordinated notes 2022 (callable every 5 years from March 2017) Lower Tier 2 511 497 — US$2,132 million 9.5% subordinated notes 2022 (callable annually from March 2017) Lower Tier 2 1,323 1,350 —
24 Subordinated liabilities continued Dated loan capital continued Capital 2013 2012 2011 treatment £m £m £m
National Westminster Bank Plc £300 million 7.875% subordinated notes 2015 Lower Tier 2 341 360 371 £300 million 6.5% subordinated notes 2021 Lower Tier 2 373 410 400
US$400 million 6.375% subordinated notes — — 261 US$350 million 4.150% subordinated notes 2022 Ineligible 211 217 —
MYR200 million 4.15% subordinated notes 2017 (callable annually from June 2012) Ineligible 38 42 42
The Royal Bank of Scotland plc £31 million 4.956% undated subordinated notes Upper Tier 2 31 31 31 £51 million 6.25% undated subordinated notes (callable every five years from December 2012) Upper Tier 2 50 51 53 £56 million 6% undated subordinated notes (callable every five years from September 2014) Upper Tier 2 59 61 62 €176 million 5.125% undated subordinated notes (callable quarterly from July 2014) Upper Tier 2 153 155 161 €170 million floating rate undated subordinated notes (callable quarterly from July 2014) Upper Tier 2 141 138 141 £54 million 5.125% undated subordinated notes (callable every five years from March 2016) Upper Tier 2 60 61 61 £35 million 5.5% undated subordinated notes (callable every five years from December 2019) Upper Tier 2 39 39 37 £21 million 6.2% undated subordinated notes (callable every five years from March 2022) Upper Tier 2 26 46 45 £103 million 9.5% undated subordinated bonds (callable every five years from August 2018) (3) Upper Tier 2 127 137 137 £16 million (2011 - £22 million) 5.625% undated subordinated notes (callable every five years from September 2026) Upper Tier 2 24 24 23 £19 million 5.625% undated subordinated notes (callable every five years from June 2032) Upper Tier 2 21 13 13 £1 million floating rate undated subordinated notes (callable semi-annually from March 2011) Upper Tier 2 1 1 1 CAD474 million 5.37% undated subordinated notes (callable quarterly from May 2016) Upper Tier 2 291 328 347
RBS NV and subsidiaries US$1,285 million 6.025% 2049 (callable any time from July 2008) (2,7,10) Tier 1 730 713 684 US$200 million 6.375% 2033 (callable any time from September 2008) (2,7,11) Tier 1 114 112 108 US$1,800 million 6.2% 2033 (callable any time from February 2009) (2,7,12) Tier 1 1,020 999 958
(3) Preferred securities in issue are: €391 million RBS Capital Trust A, 6.467% non-cumulative trust preferred securities. (4) Preferred securities in issue are: US$486 million RBS Capital Trust B, 6.8% non-cumulative trust preferred securities. (5) Preferred securities in issue are: US$318 million RBS Capital Trust I, 4.709% non-cumulative trust preferred securities. (6) Preferred securities in issue are: US$394 million RBS Capital Trust II, 6.425% non-cumulative trust preferred securities. (7) Unconditionally guaranteed by the Royal Bank of Scotland Group plc (8) Guaranteed by the company. The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest payment. (9) Exchangeable at the option of the issuer into 8.392% (gross) non-cumulative preference shares of £1 each of National Westminster Bank Plc at any time. (10) Preferred securities in issue are: US$1,285 million Trust Preferred V, 5.9% (11) Preferred securities in issue are: US$200 million Trust Preferred VI, 6.25% (12) Preferred securities in issue are: US$1,800 million Trust Preferred VII, 6.08% (13) Except as stated above, claims in respect of the Group's undated loan capital are subordinated to the claims of other creditors. None of the Group's undated loan capital is secured. (14) In the event of certain changes in tax laws, undated loan capital issues may be redeemed in whole, but not in part, at the option of the Group, at the principal amount thereof plus accrued interest, subject to prior regulatory approval. (15) Interest on all floating rate subordinated notes is calculated by reference to market rates.
Non-cumulative convertible preference shares of £0.01 Series 1 £15 million 7.387% (callable any time from December 2010) Tier 1 15 15 15
Non-cumulative preference shares of US$25 Series C US$246 million 7.7628% (callable quarterly from April 2002) (2) Tier 1 145 161 169
25 Non-controlling interests Direct Line Insurance ABN Other Group plc AMRO interests* Total* £m £m £m £m
Losses on available-for-sale financial assets, net of tax — 25 — 25 Equity raised 873 — 2 875 Equity withdrawn and disposals — — (23) (23) Transfer from retained earnings 361 — — 361 At 1 January 2013 1,109 266 395 1,770 Currency translation and other adjustments — (8) 2 (6) Profit/(loss) attributable to non-controlling interests - continuing operations — 95 (12) 83 - discontinued operations 19 18 — 37 Dividends paid — — (5) (5) Losses on available-for-sale financial assets, net of tax — 23 — 23 Equity withdrawn and disposals (1,128) — (301) (1,429)
Allotted, called up and fully paid Number of shares - thousands 2013 2012 2011
Ordinary shares of 25p (2) — — 59,228,412 Ordinary shares of £1 6,203,022 6,070,765 — B shares of £0.01 51,000,000 51,000,000 51,000,000 Dividend access share of £0.01 (1) — — — Non-cumulative preference shares of US$0.01 209,609 209,609 209,609 Non-cumulative convertible preference shares of US$0.01 65 65 65 Non-cumulative preference shares of €0.01 2,044 2,044 2,044 Non-cumulative convertible preference shares of £0.01 15 15 15 Non-cumulative preference shares of £1 54 54 54 Cumulative preference shares of £1 900 900 900
26 Share capital continued Movement in allotted, called up and fully paid ordinary shares - thousands At 1 January 2012 59,228,412 Shares issued (ordinary shares of 25p) 325,907 Share sub-division and consolidation (53,598,887) Shares issued (ordinary shares of £1) 115,333 At 1 January 2013 6,070,765 Shares issued 132,257 At 31 December 2013 6,203,022
During 2013, the company issued 53.7 million ordinary shares of £1 each in connection with employee share schemes.
In December 2013, the company allotted and issued 15.1 million new ordinary shares of £1 each at a subscription price of 331.309 pence each, the gross proceeds being £50 million.
B shares and dividend access share In December 2009, the company entered into an acquisition and contingent capital agreement with HM Treasury. HM Treasury agreed to acquire at 50p per share 51 billion B shares with a nominal value of £0.01 each and a dividend access share with a nominal value of £0.01; these shares were issued to HM Treasury on 22 December 2009. Net proceeds were £25.1 billion.
The dividend access share entitles the holder to dividends equal to the greater of 7% of the aggregate issue price of B shares issued to HM Treasury and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any dividends paid on the B shares and on ordinary shares issued on conversion. Dividends on the dividend access share are discretionary unless a dividend has been paid on the ordinary shares, in which case dividends became mandatory.
Number of shares Redemption Redemption Class of preference share in issue Interest rate date on or after price per share Debt/equity (1)
Non-cumulative preference shares of US$0.01 Series F 6.3 million 7.65% 31 March 2007 US$25 Debt Series H 9.7 million 7.25% 31 March 2004 US$25 Debt Series L 30.0 million 5.75% 30 September 2009 US$25 Debt Series M 23.1 million 6.40% 30 September 2009 US$25 Equity Series N 22.1 million 6.35% 30 June 2010 US$25 Equity Series P 9.9 million 6.25% 31 December 2010 US$25 Equity Series Q 20.6 million 6.75% 30 June 2011 US$25 Equity Series R 10.2 million 6.125% 30 December 2011 US$25 Equity Series S 26.4 million 6.60% 30 June 2012 US$25 Equity Series T 51.2 million 7.25% 31 December 2012 US$25 Equity Series U 10,130 7.64% 29 September 2017 US$100,000 Equity
Non-cumulative convertible preference shares of US$0.01 Series 1 64,772 9.118% 31 March 2010 US$1,000 Debt
Non-cumulative preference shares of €0.01 Series 1 1.25 million 5.50% 31 December 2009 €1,000 Equity
Except as described above, the holders of the non-cumulative preference shares have no right to participate in the surplus assets of the company. Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the non-cumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the three most recent quarterly dividend payments due on the noncumulative dollar preference shares (other than Series U), the two most recent semi-annual dividend payments due on the non-cumulative convertible dollar preference shares and the most recent dividend payments due on the non-cumulative euro preference shares, the noncumulative sterling preference shares, the Series U non-cumulative dollar preference shares and the non-cumulative convertible sterling preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
26 Share capital continued The Group has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBSG and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will be paid subject to, and in accordance with, the terms of the relevant instruments.
(3) Preferred securities in issue - US$276 million RBS Capital Trust IV, floating rate noncumulative trust preferred securities.
Contingent capital reserve - in December 2009, HM Treasury agreed to subscribe for up to 16 billion B shares of £0.01 each at 50p per share subject to certain conditions including the Group's Core Tier 1 capital ratio falling below 5%. The fair value of the consideration payable by the company on entering into this agreement amounted to £1,458 million to be settled in instalments; of this £1,208 million was debited to the contingent capital reserve. The reserve and £320 million in respect of the final instalment were transferred to Retained earnings on cancellation of the above contingent capital arrangements on 16 December 2013.
Within 1 year 3,513 (300) (44) 3,169 186 After 1 year but within 5 years 6,014 (534) (251) 5,229 341 After 5 years 4,244 (1,481) (428) 2,335 141 Total 13,771 (2,315) (723) 10,733 668
Nature of operating lease assets on the balance sheet Transportation 822 1,501 1,592 Cars and light commercial vehicles 64 435 815 Other 243 267 298 1,129 2,203 2,705
Finance lease contracts and hire purchase agreements Accumulated allowance for uncollectable minimum receivables 197 278 347
28 Leases continued Residual value exposures The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables (see pages 419 to 423) and operating lease assets (see pages 462 to 464).
Year in which residual value will be recovered After 1 year After 2 years
Operating leases - transportation 244 314 187 390 1,135 - cars and light commercial vehicles 458 75 105 2 640 - other 23 21 33 8 85 Finance lease contracts 26 48 147 270 491 Hire purchase agreements — — 1 — 1 751 458 473 670 2,352
Own asset securitisations In own-asset securitisations, the pool of assets held by the SE is either originated by the Group, or (in the case of whole loan programmes) purchased from third parties.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on the Group’s balance sheet.
Held by third Held by the Held by third Held by the Held by third Held by the Assets parties Group (1) Total Assets parties Group (1) Total Assets parties Group (1) Total
29 Structured entities continued Unconsolidated structured entities The Group’s interests in unconsolidated structured entities are analysed below.
Asset backed Asset backed securitisation securitisation vehicles - Investment vehicles - sponsored not sponsored funds Other Total 2013 £m £m £m £m £m
Loans and advances to customers 1 1 — 289 291 Debt securities 203 9,405 176 159 9,943 Equity shares — 1 622 — 623 Derivatives assets 261 142 22 1,334 1,759 Derivatives liabilities (112) — (140) (424) (676)
Liquidity facilities/loan commitments 4 2,630 1 233 2,868 Guarantees — 83 — 9 92
Notes: (1) Income from interests in unconsolidated structured entities includes interest receivable, changes in fair value and other income less impairments that may be required. (2) A sponsored entity is a structured entity established by the Group where the Group provides liquidity and/or credit enhancements or provides ongoing services to the entity. The Group can act as sponsor for its own or for customers’ transactions. (3) In 2013 the Group transferred £2,119 million of assets into sponsored structured entities which are not consolidated by the Group and for which the Group held no interest at 31 December 2013. The income arising from these entities was £192 million.
30 Asset transfers Under IAS 39 a financial asset is transferred if the Group either (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. Following a transfer the financial asset will be derecognised; not derecognised and retained in full on the Group’s balance sheet; or continue to be recognised on the balance sheet to the extent of the Group’s continuing involvement.
Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level. Under standard terms for repurchase transactions in the UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
These interests relate predominantly to mortgage-backed securities which were re-securitised. Retained interests are generally not held to maturity and are typically sold after settlement of the securitisation. Retained interests may be subordinated to other investors' interests. Third party investors and securitisation trusts have no recourse to the Group's other assets for failure of debtors to perform on the securitised loans or securities, effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust. The value of the retained interest varies and is subject to credit, interest rate, prepayment, and other risks of the transferred assets. In the ordinary course of business, the Group does not provide any other financial support to the securitisation trusts other than holding these retained interests.
Transfers that qualify for derecognition but in which the Group has continuing involvement (IFRS 7) The Group has transferred and derecognised certain assets but it has continuing involvement, as defined in IFRS 7, through holdings of debt securities with a carrying value at 31 December 2013 of £389 million and fair value of £345 million (31 December 2012: carrying value - £398 million; fair value - £339 million). Income for 2013 was £11 million (2012 - £13 million).
Loans and advances to banks 10,342 12,784 19,691 Loans and advances to customers 23,594 25,186 52,225 Securities 8,673 24,236 3,713 42,609 62,206 75,629
Liabilities secured by assets Deposits by banks 3,254 12,309 6,369 Customer accounts 2,766 3,000 2,663 Derivatives 42,691 60,434 82,356 48,711 75,743 91,388
31 Capital resources The Group's regulatory capital resources in accordance with PRA definitions were as follows: £m £m £m
Non-controlling interests Non-controlling interests 473 1,770 686 Regulatory adjustments to non-controlling interests — (1,367) (259)
Other Tier 1 capital Preference shares - equity 4,313 4,313 4,313
Tier 1 deductions 50% of material holdings (1) (976) (295) (340) Tax on expected losses less impairment provisions 6 618 915
A number of subsidiaries and sub-groups within the Group, principally banking and insurance entities, are subject to various individual regulatory capital requirements in the UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of the Group to lend money to other members of the Group may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
32 Memorandum items Contingent liabilities and commitments The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2013. Although the Group is exposed to credit risk in the event of non-performance of the obligations undertaken by customers, the amounts shown do not, and are not intended to, provide any indication of the Group's expectation of future losses.
Less than less than less than Over 1 year 3 years 5 years 5 years 2013 2012 2011 £m £m £m £m £m £m £m
Guarantees and assets pledged as collateral security 9,144 3,541 5,802 1,692 20,179 19,164 25,032 Other contingent liabilities 2,840 1,258 582 1,311 5,991 10,697 10,912 11,984 4,799 6,384 3,003 26,170 29,861 35,944
Commitments (1) Undrawn formal standby facilities, credit lines and other commitments to lend - less than one year 77,592 — — — 77,592 83,461 100,092 - one year and over 9,943 44,214 66,174 15,123 135,454 132,347 139,871 Other commitments 2,598 136 44 15 2,793 1,976 2,912 90,133 44,350 66,218 15,138 215,839 217,784 242,875
Notes: (1) Predominantly property leases. (2) Amount related to RBS Aviation Capital which was sold in 2012. Included £486 million due within one year. (3) Of which due within 1 year: £373 million (2012 - £444 million; 2011 - £483 million).
The Group recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of the legal proceedings, investigations and regulatory and governmental matters in which the Group is involved is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory and governmental matters as at 31 December 2013 (see Note 22). The litigation provision reflects in large part the £1.9 billion provision taken in the last quarter of 2013 primarily related to mortgage-backed securities and securities related litigation and investigations. The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that the Group has recognised.
There are also situations where the Group may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, even for those matters for which the Group believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities.
The other three FHFA lawsuits (against Ally Financial Group, Countrywide Financial Corporation and Nomura) name RBS Securities Inc. as a defendant by virtue of the fact that it was an underwriter of some of the securities at issue. Two of these cases are part of a coordinated proceeding in the United States District Court for the Southern District of New York in which discovery is underway. The third case (the Countrywide matter) is pending in the United States District Court for the Central District of California. Two other FHFA lawsuits (against JP Morgan and Morgan Stanley) in which RBS Securities Inc. was an underwriter defendant have been settled without any contribution from RBS Securities Inc.
Other MBS lawsuits against Group companies include three cases filed by the National Credit Union Administration Board (on behalf of US Central Federal Credit Union, Western Corporate Federal Credit Union, Southwest Corporate Federal Credit Union, and Members United Corporate Federal Credit Union) and six cases filed by the Federal Home Loan Banks of Boston, Chicago, Indianapolis, Seattle and San Francisco.
Details of LIBOR investigations and their outcomes affecting the Group are set out under ‘Investigations and reviews’ below.
Credit Default Swap Antitrust Litigation Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action pending in the United States District Court for the Southern District of New York. The plaintiffs generally allege that defendants violated the U.S. antitrust laws by restraining competition in the market for credit default swaps through various means and thereby causing inflated bidask spreads for credit default swaps.
FX antitrust litigation Certain members of the Group, as well as a number of other financial institutions, have been named as defendants in multiple antitrust class action complaints filed in the United States District Court for the Southern District of New York since November 2013. The plaintiffs generally allege that the defendants violated the U.S. antitrust laws, state statutes, and the common law by conspiring to manipulate the foreign exchange market by manipulating benchmark foreign exchange rates.
Madoff In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS N.V.) in New York bankruptcy court. In the operative complaint, filed in August 2012, the trustee seeks to recover US$75.8 million in redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that RBS N.V. allegedly received from its swap counterparties at a time when RBS N.V. allegedly ‘knew or should have known of Madoff’s possible fraud’. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff’s estate. A further claim, for US$21.8 million, was filed in October 2011.
Investigations and reviews The Group’s businesses and financial condition can be affected by the fiscal or other policies and actions of various governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the United Kingdom, the European Union, the United States and elsewhere, on an ongoing and regular basis regarding operational, systems and control evaluations and issues including those related to compliance with applicable anti-bribery, anti-money laundering and sanctions regimes. It is possible that any matters discussed or identified may result in investigatory or other action being taken by governmental and regulatory authorities, increased costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the Group’s business activities or fines. Any of the events or circumstances mentioned below could have a material adverse effect on the Group, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
LIBOR, other trading rates and foreign exchange rates On 6 February 2013, the Group announced settlements with the Financial Services Authority in the United Kingdom, the United States Commodity Futures Trading Commission and the United States Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of the London Interbank Offered Rate (LIBOR). RBS agreed to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the investigations. As part of the agreement with the DOJ, RBS plc entered into a Deferred Prosecution Agreement in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. In addition, on 12 April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen LIBOR and on 6 January 2014, the US District Court for the District of Connecticut entered a final judgment in relation to the conviction of RBS Securities Japan Limited pursuant to the plea agreement. On 12 April 2013, RBS Securities Japan Limited received a business improvement order from Japan’s Financial Services Agency requiring RBS to take remedial steps to address certain matters, including inappropriate conduct in relation to Yen LIBOR.
In December 2013, the Group agreed to pay settlement penalties of approximately EUR 260 million and EUR 131 million to resolve investigations by the European Commission into Yen LIBOR competition infringements and EURIBOR competition infringements respectively.
In addition, various governmental and regulatory authorities have commenced investigations into foreign exchange trading activities apparently involving multiple financial institutions. The Group has received enquiries from certain of these authorities including the FCA. The Group is reviewing communications and procedures relating to certain currency exchange benchmark rates as well as foreign exchange trading activity. At this stage, the Group cannot estimate reliably what effect, if any, the outcome of the investigation may have on the Group.
The Group will provide fair and reasonable redress to non-sophisticated customers classified as retail clients or private customers, who were missold interest rate hedging products. In relation to non-sophisticated customers classified as retail clients or private customers who were sold interest rate products other than interest rate caps on or after 1 December 2001 up to 29 June 2012, the Group is required to (i) make redress to customers sold structured collars; and (ii) write to customers sold other interest rate hedging products offering a review of their sale and, if it is appropriate in the individual circumstances, the Group will propose fair and reasonable redress on a case by case basis. Furthermore, non-sophisticated customers classified as retail clients or private customers who have purchased interest rate caps during the period on or after 1 December 2001 to 29 June 2012 will be entitled to approach the Group and request a review.
Tomlinson Report On 25 November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK government’s Department for Business Innovation and Skills, was published (Tomlinson Report). The Tomlinson Report was critical of the Group’s Global Restructuring Group’s treatment of SMEs. The Tomlinson Report has been passed to the PRA and FCA. On 29 November 2013, the FCA announced that an independent skilled person will be appointed under Section 166 of the Financial Services and Markets Act to review the allegations in the report. On 17 January 2014, Promontory Financial Group and Mazars were appointed as the skilled person. The Group will fully cooperate with the FCA in its investigation.
In response to the Tomlinson Report, the Bank has instructed Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: the Group’s Global Restructuring Group was alleged to be culpable of systemic and institutional behaviour in artificially distressing otherwise viable businesses and through that putting businesses into insolvency. Clifford Chance is due to submit a report to the Board by the end of the first quarter of 2014.
Multilateral interchange fees In 2007, the EC issued a decision that, while interchange is not illegal per se, MasterCard’s multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the EEA were in breach of competition law. MasterCard was required to withdraw (i.e. set to zero) the relevant cross-border MIF by 21 June 2008. MasterCard appealed against the decision to the General Court in March 2008, with the Group intervening in the appeal proceedings. The General Court heard MasterCard’s appeal in July 2011 and issued its judgment in May 2012, upholding the EC’s original decision. MasterCard has appealed further to the Court of Justice and the Group has intervened in these appeal proceedings.
The appeal hearing took place on 4 July 2013 and the Advocate General’s (AG) opinion (which is a non binding opinion and provided to the Court in advance of its final decision) was published on 30 January 2014. The AG opinion proposes that the Court should dismiss MasterCard’s appeal. The Court’s decision is awaited. MasterCard negotiated interim cross border MIF levels to apply for the duration of the General Court proceedings. These MIF levels remain in place during the appeal before the Court of Justice.
In addition, the EC has proposed a draft regulation on interchange fees for card payments. The draft regulation is subject to a consultation process, prior to being finalised and enacted. It is currently expected that the regulation will be enacted by the end of 2014/early 2015 at the earliest. The draft regulation proposes the capping of both cross-border and domestic MIF rates for debit and credit consumer cards, to take place in two phases. The draft regulation also sets out other proposals for reform including to the Honour All Cards Rule so merchants will be required to accept all cards with the same level of MIF but not cards with different MIF levels.
In the UK, the Office of Fair Trading (OFT) has ongoing investigations into domestic interchange fees applicable in respect of Visa and MasterCard consumer and commercial credit and debit card transactions. The OFT has not made a finding of an infringement of competition law and has not issued a Statement of Objections to any party in connection with those investigations. In February 2013 the OFT confirmed that while reserving its right to do so, it does not currently expect to issue Statements of Objections in respect of these investigations (if at all) prior to the handing down of the judgment of the Court of Justice in the matter of MasterCard's appeal against the EC’s 2007 infringement decision.
Personal current accounts/retail banking In July 2008, the OFT published a market study report into Personal Current Accounts (PCAs) raising concerns as regards the way the market was functioning. In October 2009 the OFT summarised initiatives agreed with industry to address these concerns. In December 2009, the OFT published a further report in which it stated that it continued to have significant concerns about the operation of the PCA market in the UK, in particular in relation to unarranged overdrafts, and that it believed that fundamental changes were required for the market to work in the best interests of bank customers. In March 2010, the OFT announced that it had secured agreement from the banks on four industry-wide initiatives designed to address its concerns, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on information sharing with customers, best practice for PCA customers in financial difficulties and incurring charges, and PCA providers to publish their policies on dealing with PCA customers in financial difficulties. The OFT also announced that it would conduct six-monthly reviews and would also review the market again fully in 2012 and undertake a brief analysis on barriers to entry.
32 Memorandum items continued On 13 July 2012, the OFT launched its planned full review of the PCA market. The review was intended to consider whether the initiatives agreed by the OFT with banks to date have been successful and whether the market should be referred to the Competition Commission (CC) for a fuller market investigation.
The OFT’s PCA report was published on 25 January 2013. The OFT acknowledged some specific improvements in the market since its last review but concluded that further changes are required to tackle ongoing concerns, including a lack of switching, the ability of consumers to compare products and the complexity of overdraft charges. However, the OFT recognised at the time it published the report that a number of major developments were expected over the coming months including divestment of branches, improvements in account switching and assistance to customers to compare products and services. Therefore the OFT decided not to refer the market to the CC but said that it expected to return to the question of a referral to the CC in 2015, or before. The OFT also announced that it will be carrying out behavioural economic research on the way consumers make decisions and engage with retail banking service, and will study the operation of payment systems as well as the SME banking market.
Credit default swaps (CDS) investigation The Group is a party to the EC’s antitrust investigation into the CDS information market. The Group is co-operating fully with the EC's investigation and in July 2013 received a Statement of Objections from the EC. The EC has raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges from entering the CDS market. At this stage, the Group cannot estimate reliably what effect the outcome of the investigation may have on the Group, which may be material.
RBS Citizens Financial Group, Inc (RBS Citizens) has not been an issuer or underwriter of non-agency RMBS. However, RBS Citizens is an originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales, RBS Citizens makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of the representations and warranties concerning the underlying loans. Between the start of 2009 and 31 December 2013, RBS Citizens received US$208 million in repurchase demands in respect of loans originated primarily since 2003. However, repurchase demands presented to RBS Citizens are subject to challenge and rebuttal by RBS Citizens.
Although there has in recent times been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner or at all (including as a result of interventions by certain states and local governments), to date, RBS Citizens has not been materially impacted by such disruptions and the Group has not ceased making foreclosures.
RBS Citizens consent orders The activities of RBS Citizens' two US bank subsidiaries - RBS Citizens, N.A. and Citizens Bank of Pennsylvania - are subject to extensive US laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries’ practices with respect to overdraft protection and other consumer products have not met applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to bring their practices in conformity with applicable laws and regulations. In April 2013, the bank subsidiaries consented to the issuance of orders by their respective primary federal banking regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (the Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators’ findings that they had engaged in deceptive marketing and implementation of the bank's overdraft protection programme, checking rewards programmes, and stop-payment process for pre-authorised recurring electronic fund transfers.
The Consent Orders require the bank subsidiaries to pay a total of US$10 million in civil monetary penalties, to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately US$8 million), to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders.
• a plan to improve the U.S. Branches’ compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve,
The Order (which is publicly available) identified specific items to be addressed, considered, and included in each proposed plan or programme. The Group also agreed in the Order to adopt and implement the plans and programmes after approval by the regulators, to fully comply with the plans and programmes thereafter, and to submit to the regulators periodic written progress reports regarding compliance with the Order. The Group has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with the Group's efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for the Group's U.S. operations. The Group continues to test the effectiveness of the remediation efforts undertaken by the Group to ensure they are sustainable and meet regulators' expectations. Furthermore, the Group continues to work closely with the regulators in its efforts to fulfil its obligations under the Order, which will remain in effect until terminated by the regulators.
US dollar processing consent order The Group’s operations include businesses outside the United States that are responsible for processing US dollar payments. On 11 December 2013 the Group and The Royal Bank of Scotland plc announced that they had reached a settlement with the Board of Governors of the Federal Reserve System (Fed), the New York State Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to The Royal Bank of Scotland plc's historical compliance with US economic sanction regulations outside the US. In settlement with the above authorities, The Royal Bank of Scotland plc agreed to pay US$100 million in total, including US$50 million to the Fed, of which US$33 million was deemed to satisfy the OFAC penalty, and US$50 million to DFS.
As part of the settlement, the Group and The Royal Bank of Scotland plc entered into a consent Cease and Desist Order with the Fed (the Order) indicating, among other things, that: (a) the Group and The Royal Bank of Scotland plc lacked adequate risk management and legal review policies and procedures to ensure that activities conducted outside the United States comply with applicable OFAC regulations; (b) from at least 2005 to 2008, certain business lines within The Royal Bank of Scotland plc developed and implemented policies and procedures for processing U.S. dollar-denominated funds transfers through unaffiliated U.S. financial institutions involving parties subject to OFAC Regulations that omitted relevant information from payment messages necessary for the U.S. financial institutions to determine whether these transactions were carried out in a manner consistent with U.S. law; and (c) the Group continues to implement improvements in its oversight and compliance programme for activities involving offices outside the United States that impact the ability of U.S. financial institutions to comply with applicable OFAC sanctions. In the Order (which is publicly available), the Group agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by the Group's global business lines outside of the United States, and to adopt, implement, and comply with the programme. The programme is to be submitted to the Federal Reserve Bank of Boston (Reserve Bank) for approval by 11 March 2014.
It was also announced that the US Department of Justice and the New York County District Attorney’s Office had concluded their parallel criminal investigations and do not intend to take any action against The Royal Bank of Scotland plc.
Operating loss before tax - continuing operations (8,243) (5,277) (1,396) Operating profit/(loss) before tax - discontinued operations 177 (111) 482 Decrease in prepayments and accrued income 300 787 976 Interest on subordinated liabilities 886 841 740 Decrease in accruals and deferred income (889) (3,653) (2,897) Provisions for impairment losses 8,432 5,283 8,709 Loans and advances written-off net of recoveries (4,090) (3,925) (4,000) Unwind of discount on impairment losses (391) (476) (484) Profit on sale of property, plant and equipment (44) (20) (22) (Profit)/loss on sale of subsidiaries and associates (240) (95) 28 Profit on sale of securities (830) (1,235) (882) Charge for defined benefit pension schemes 517 558 555 Pension schemes curtailment and settlement gains (7) (41) — Cash contribution to defined benefit pension schemes (821) (977) (1,059) Other provisions charged net of releases 4,422 2,899 963 Other provisions utilised (2,066) (1,507) (513) Depreciation and amortisation 1,410 1,854 1,875 Gain on redemption of own debt (175) (454) (255) Write-down of goodwill and other intangible assets 1,403 518 91 Elimination of foreign exchange differences (47) 7,140 2,702 Other non-cash items (1,209) 1,809 1,340 Net cash (outflow)/inflow from trading activities (1,505) 3,918 6,953 Decrease in loans and advances to banks and customers 49,314 30,719 15,800 Decrease in securities 29,140 13,537 10,418 (Increase)/decrease in other assets (190) 1,672 4,991 Decrease/(increase) in derivative assets 153,864 88,134 (102,972) Changes in operating assets 232,128 134,062 (71,763) (Decrease)/increase in deposits by banks and customers (84,364) (7,848) 24,096 Decrease in insurance liabilities — (119) (482) Decrease in debt securities in issue (26,868) (68,029) (55,496) (Decrease)/increase in other liabilities (885) (4,022) 1,827 (Decrease)/increase in derivative liabilities (148,807) (89,763) 100,133 Increase/(decrease) in settlement balances and short positions 16 (13,017) (1,759) Changes in operating liabilities (260,908) (182,798) 68,319 Income taxes paid (346) (295) (184) Net cash (outflow)/inflow from operating activities (30,631) (45,113) 3,325 *Restated
34 Analysis of the net investment in business interests and intangible assets 2013 2012 2011 Acquisitions and disposals £m £m £m
At 1 January 45,144 53,520 53,298 26,773 26,319 27,053 Issue of ordinary shares 264 120 2 — — — Net proceeds from issue of subordinated liabilities — — — 1,796 2,093 — Repayment of subordinated liabilities — — — (3,500) (258) (627) Net cash inflow/(outflow) from financing 264 120 2 (1,704) 1,835 (627) Transfer to retained earnings — — (50) — — — Share capital sub-division and consolidation — (8,933) — — — — Ordinary shares issued in respect of employee share schemes 174 437 270 — — — Other adjustments including foreign exchange — — — (1,057) (1,381) (107)
Comprising: Cash and balances at central banks 82,659 79,290 79,269 Treasury bills and debt securities 702 772 3,172 Loans and advances to banks 37,816 52,779 70,214 Cash and cash equivalents 121,177 132,841 152,655
Certain members of the Group are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they operate. These balances are set out below.
UK Retail 3,979 958 4,937 (2,670) — (324) 1,943 UK Corporate 2,874 1,593 4,467 (2,075) (144) (1,188) 1,060 Wealth 674 419 1,093 (839) (4) (29) 221 International Banking 713 1,135 1,848 (1,335) (5) (229) 279 Ulster Bank 631 240 871 (554) — (1,774) (1,457) US Retail & Commercial 1,916 1,073 2,989 (2,026) (160) (156) 647 Markets 157 3,165 3,322 (2,431) (179) (92) 620 Central items 147 114 261 394 (680) (64) (89)
Write-down of other intangible assets — — — (344) — — (344) RFS Holdings minority interest (11) 110 99 1 — — 100 Statutory basis 10,981 8,776 19,757 (18,158) (1,410) (8,432) (8,243)
Reconciling items Own credit adjustments — (4,649) (4,649) — — — (4,649) Payment Protection Insurance costs — — — (1,110) — — (1,110) Interest Rate Hedging Products redress and related costs — — — (700) — — (700) Regulatory and legal actions — — — (381) — — (381) Integration and restructuring costs — — — (1,273) (142) — (1,415) Gain on redemption of own debt — 454 454 — — — 454 Write-down of goodwill — — — (18) — — (18) Asset Protection Scheme — (44) (44) — — — (44) Amortisation of purchased intangible assets — — — — (178) — (178)
UK Retail — — — — 7,048 8,808 UK Corporate — — — — 11,727 12,977 Wealth 3 — — — — — International Banking 4 47 144 51 414 88 US Retail & Commercial 679 3,190 — — — — Markets 74 1 91 2 17 29 Central items 882 1 (74) 1 136 2 Non-Core 773 21 576 808 5,670 1,779 Direct Line Group — — 12,697 9,267 — — RFS Holdings minority interest 602 118 579 41 438 312 3,017 3,378 14,013 10,170 25,450 23,995
Segmental analysis of goodwill is as follows: UK UK International US Retail & Direct Line Retail Corporate Wealth Banking Commercial Markets Non-Core Group Total £m £m £m £m £m £m £m £m £m
Write-down of goodwill - continuing operations (20) (60) — — — — — — (80)
Transfers to disposal groups — — — — — — — (540) (540)
Currency translation and other adjustments — — (3) (24) (169) (1) — — (197) Write-down of goodwill - continuing operations — — — — — (18) — — (18)
UK USA Europe RoW Total 2013 £m £m £m £m £m
Operating (loss)/profit before tax (2,444) (615) (5,262) 78 (8,243) Total assets 747,347 197,789 40,113 42,629 1,027,878 Of which total assets held for sale 915 750 198 1,154 3,017 Total liabilities 692,861 183,549 50,107 42,146 968,663 Of which total liabilities held for sale — 3,210 81 87 3,378 Net assets attributable to equity owners and non-controlling interests 54,486 14,240 (9,994) 483 59,215 Contingent liabilities and commitments 107,500 83,048 41,368 10,093 242,009 Cost to acquire property, plant and equipment and intangible assets 1,086 428 232 10 1,756
Operating (loss)/profit before tax (4,671) 1,821 (2,034) (393) (5,277) Total assets 899,604 305,588 47,966 59,137 1,312,295 Of which total assets held for sale 11,638 291 1,001 1,083 14,013 Total liabilities 835,268 288,005 61,801 56,773 1,241,847 Of which total liabilities held for sale 8,405 129 871 765 10,170 Net assets attributable to equity owners and non-controlling interests 64,336 17,583 (13,835) 2,364 70,448 Contingent liabilities and commitments 105,018 84,788 49,341 8,498 247,645 Cost to acquire property, plant and equipment and intangible assets 1,953 325 186 69 2,533
Net interest income 8,367 2,430 962 544 12,303 Net fees and commissions 3,389 1,365 244 419 5,417 Income from trading activities 661 1,318 508 214 2,701 Other operating income/(loss) 2,950 219 1,079 (18) 4,230 Total income 15,367 5,332 2,793 1,159 24,651
Non-executive directors - emoluments 1,208 1,218 Chairman and executive directors - emoluments 3,632 3,825 - contributions and allowances in respect of money purchase schemes 348 436 5,188 5,479 - amounts receivable under long-term incentive plans — 1,223 5,188 6,702
Compensation of key management The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 30,590 32,540 Post-employment benefits 238 699 Termination benefits 2,033 — Share-based payments 13,003 24,533 45,864 57,772 40 Transactions with directors and key management (a) At 31 December 2013, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £850,762 in respect of loans to seven persons who were directors of the company at any time during the financial period.
The Group enters into transactions with many of these bodies on an arm’s length basis. The principal transactions during 2013, 2012 and 2011 were: Bank of England facilities and the issue of debt guaranteed by the UK Government discussed below and the Asset Protection Scheme which the Group exited on 18 October 2012 having paid total premiums of £2.5 billion. In addition, the redemption of non-cumulative sterling preference shares and the placing and open offer in April 2009 was underwritten by HM Treasury and, in December 2009, B shares were issued to HM Treasury and a contingent capital agreement concluded with HM Treasury (see Note 27). Other transactions include the payment of: taxes principally UK corporation tax (page 404) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (page 393) and FSCS levies (page 473)); together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
• Open market operations - these provide market participants with funding at market rates on a tender basis in the form of short and long-term repos on a wide range of collateral and outright purchases of high-quality bonds to enable them to meet the reserves that they must hold at the Bank of England.
• The special liquidity scheme - this was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills, with fees charged based on the spread between 3month LIBOR and the 3-month gilt repo rate. The scheme officially closed on 30 January 2012.
The Funding for Lending Scheme The Funding for Lending Scheme was launched in July 2012. Under the scheme UK banks and building societies are able to borrow UK treasury bills from the Bank of England in exchange for eligible collateral during the drawdown period (1 August 2012 to 31 January 2014). Borrowing is limited to 5% of the participant’s stock of loans to the UK non-financial sector as at 30 June 2012, plus any expansion in lending from that date to the end of 2013. Eligible collateral comprises all collateral eligible for the Bank of England’s discount window facility. The term of each transaction is four years from the date of drawdown. The price for borrowing UK treasury bills under the scheme depends on the participant’s net lending to the UK non-financial sector between 30 June 2012 and the end of 2013. If lending is maintained or expanded over that period, the fee is 0.25% per year on the amount borrowed. If lending declines, the fee increases by 0.25% for each 1% fall in lending, up to a maximum fee of 1.5%. As at 31 December 2013, the Group had no amounts outstanding under the scheme (2012 - £749 million).
42 Post balance sheet events RBS Capital Resolution In November 2013, the Group announced the creation of RBS Capital Resolution (RCR), to manage a pool of assets with particularly high long term capital intensity and/or potentially volatile outcomes in stressed environments. RCR became operational on 1 January 2014 with a portfolio of £29 billion assets.
Disposal of Structured Retail Investor Products and Equity Derivatives Businesses On 19 February 2014, the Group announced that it had reached agreement with BNP Paribas S.A. for the disposal of assets and liabilities related to its structured retail investor products and equity derivatives businesses, and associated market-making activities. The disposal is subject to competition approval and will be implemented on a phased basis during 2014 and 2015. The consideration is not material.
Strategic review In November 2013, the Group announced that it was undertaking a comprehensive business review of its customer-facing businesses, IT and operations and organisational and decision making structures.
The accounts were approved by the Board of directors on 26 February 2014 and signed on its behalf by: Philip Hampton Chairman
Paid-in equity At 1 January and 31 December 431 431 431
Contingent capital reserve At 1 January (1,208) (1,208) (1,208) Transfer to retained earnings 1,208 — — At 31 December — (1,208) (1,208)
Total comprehensive income/(loss) recognised in the statement of changes in equity is attributable to: Preference shareholders 349 273 — Paid-in equity holders 30 15 — Ordinary and B shareholders 585 (972) (107)
Financing activities Issue of ordinary shares 264 120 2 Issue of subordinated liabilities 2,216 2,747 940 Issue of exchangeable bonds 600 — — Repayment of subordinated liabilities — — (193) Dividends paid (379) (288) — Interest on subordinated liabilities (708) (423) (415) Net cash flows from financing activities 1,993 2,156 334 Effects of exchange rate changes on cash and cash equivalents 14 (50) (55)
Net increase/(decrease) in cash and cash equivalents 348 (886) (474) Cash and cash equivalents at 1 January 997 1,883 2,357 Cash and cash equivalents at 31 December 15 1,345 997 1,883
1 Presentation of accounts The accounts are prepared on a going concern basis (see the Report of the directors, page 99) and 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 (EU) (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006.
The accounting policies that are applicable to the company are included in the Group accounting polices which are set out on pages 377 to 389 of the Group financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investment in its subsidiaries are stated at cost less any impairment.
Dividends received from banking subsidiary 58 58 58 Dividends received from other subsidiaries 19 1,978 12 Profit on disposal of investment in subsidiaries 676 157 — 753 2,193 70 Interest receivable from subsidiaries 1,005 1,097 1,019 Interest payable to subsidiaries (232) (378) (262) Other net interest payable, non-interest income and operating expenses (572) (247) (291) Write-down of investments in subsidiaries — (1,785) (570) Recoveries/(impairments) of loans to Group entities 44 (1,409) — Operating profit/(loss) before tax 998 (529) (34)
Loans and advances to banks (1) - loans and receivables 24,574 24,066 18,368 Loans and advances to customers (1) - loans and receivables 153 1,266 4,056 Debt securities - loans and receivables 1,517 1,522 1,568 Investment in Group undertakings 54,813 54,995 53,871 Derivatives (1) held-for-trading 60 220 1,223 hedging 104 291 279 164 511 1,502 Prepayments, accrued income and other assets - non-financial assets 36 20 25 Assets of disposal groups 842 — — 82,099 82,380 79,390
Liabilities Deposits by banks (2) - amortised cost 1,490 1,455 1,091 Customer accounts (2) - amortised cost 740 838 977 Debt securities in issue - amortised cost 6,862 9,157 8,373 - designated as at fair value through profit or loss 153 153 — Derivatives (2) - held-for-trading 25 7 79 - hedging 37 — — 62 7 79 Accruals, deferred income and other liabilities - non-financial liabilities 49 491 704 Subordinated liabilities - amortised cost 12,426 11,305 8,777 21,782 23,406 20,001 Owners’ equity 60,317 58,974 59,389 82,099 82,380 79,390
4 Financial instruments – valuation Fair value of financial instruments not carried at fair value The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
2013 2012 2011 Carrying value Fair value (1) Carrying value Fair value Carrying value Fair value £bn £bn £bn £bn £bn £bn
Financial liabilities Deposits by banks 1.5 1.6 1.5 1.5 1.1 1.1 Customer accounts 0.7 0.7 0.8 0.8 1.0 1.0 Debt securities in issue 6.9 6.9 9.2 8.9 8.4 7.9 Subordinated liabilities 12.4 12.5 11.3 10.3 8.8 5.6
Note: (1) Fair values determined using techniques based on level 2 inputs.
5 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Liabilities Deposits by banks — 1,490 1,490 320 1,135 1,455 9 1,082 1,091 Customer accounts 14 726 740 838 — 838 977 — 977 Debt securities in issue 1,643 5,372 7,015 5,506 3,804 9,310 3,800 4,573 8,373 Derivatives 10 52 62 — 7 7 25 54 79 Subordinated liabilities 699 11,727 12,426 647 10,658 11,305 121 8,656 8,777
5 Financial instruments - maturity analysis continued On balance sheet liabilities The following table shows by contractual maturity, the undiscounted cash flows payable up to a period of 20 years from the balance sheet date, including future payments of interest.
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 2013 £m £m £m £m £m £m
At 1 January 54,995 53,871 49,125 Currency translation and other adjustments (23) (37) (2) Additional investments in Group undertakings 1,222 3,710 4,607 Additions — — 761 Redemption of investments in Group undertakings — (29) (50) Disposals (1,381) (735) — Impairment of investments — (1,785) (570)
RBS Citizens Financial Group, Inc. Banking US 100% Coutts & Company (2) Private banking Great Britain 100%
RBS Securities Inc. Broker dealer US 100% Ulster Bank Limited (3) Banking Northern Ireland 100% RBS Holdings N.V. (4) Banking The Netherlands 98%
Current tax 22 183 92 Accruals 3 1 — Other liabilities 24 307 612 49 491 704
Dated loan capital 8,797 7,590 6,459 Undated loan capital 2,878 2,946 1,516 Preference shares 751 769 802 12,426 11,305 8,777
Operating profit/(loss) before tax - continuing operations 998 (529) (34) Interest on subordinated liabilities 619 486 419 Increase/(decrease) in accruals and deferred income 22 — (5) (Recoveries)/impairments of loans to Group entities (44) 1,409 — Profit on disposal of investments in subsidiaries (676) (157) — Write-down of investment in subsidiaries — 1,785 570 Elimination of foreign exchange differences (118) (194) (4) Other non-cash items (745) (1) — Net cash inflow from trading activities 56 2,799 946 (Increase)/decrease in loans and advances to banks and customers (225) (4,737) 3,596 Decrease/(increase) in securities 31 46 (114) Decrease in other assets 9 4 5 Decrease/(increase) in derivative assets 347 991 (27) Changes in operating assets 162 (3,696) 3,460 (Decrease)/increase in deposits by banks and customers (63) (585) 328 (Decrease)/increase in debt securities in issue (2,895) 937 (369) Increase/(decrease) in other liabilities 6 (309) (303) Increase/(decrease) in derivative liabilities 55 (72) (152) Changes in operating liabilities (2,897) (29) (496) Income taxes paid (186) (58) (95) Net cash (outflow)/inflow from operating activities (2,865) (984) 3,815
£m £m £m 14 Analysis of changes in financing during the year
At 1 January - cash equivalents 997 1,883 2,357 Net cash inflow/(outflow) 348 (886) (474)
509 Financial summary 519 Exchange rates 520 Supervision 520 Description of property and equipment 521 Major shareholders 521 Material contracts 523 Risk factors
Net interest income 10,981 11,402 12,303 13,782 12,928 Non-interest income (1,2,3) 8,776 6,539 12,348 12,840 14,650 Total income 19,757 17,941 24,651 26,622 27,578 Operating expenses (4,5,6,7,8,9) (19,568) (17,939) (17,340) (17,600) (16,652) Profit before insurance net claims and impairment losses 189 2 7,311 9,022 10,926 Insurance net claims — — — (85) (134)